Chairman Yoon Jong-kyoo of KB Financial Group. (Photo:KBFG)

KB Financial Group Inc. reported earnings results for the second quarter and first half of 2018. For the quarter, the company’s net profit was KRW 946.8 billion.

This is a slight decline quarter on quarter due to the one-off gain from the sale of the bank's headquarter building in previous quarter. But on a recurring basis, it was up approximately 7%. Net interest income was KRW 2,196.4 billion, driven by even growth in interest income across subsidiaries, including the bank securities and nonlife insurance.

It was up 2.5% quarter on quarter. For the first half of 2018, the company’s net profit was KRW 1,915,000,000,000, which is up 2.9% year-over-year. Operating profit was KRW 2,551.2 billion. Net interest income was KRW 4,340.2 billion, up 10.8% year-over-year on solid loan growth, which led to a sizable increase in the bank's interest income and higher interest income contributions from the nonbank subsidiaries.

The group's cumulative ROA and ROE in the first half of 2018 recorded 0.85% and 11.24%, respectively.
KB Financial Group (KB)reported KRW946.8bn in 2Q18 net income (-4.4% YoY, -2.2% QoQ), beating the consensus estimate of KRW928.4bn. Stripping off the gain from the bargain purchase of KB Insurance in 2Q17, net income would have increased 7.1% YoY. Core income (interest income plus commission income) climbed 8.3% YoY and 0.7% QoQ. Group NIM slipped by 1bp QoQ (banking NIM flat QoQ). NIM stalled because of: 1) a funding cost increase stemming from interest rate hikes; 2) an increase in time deposits upon sharp loan growth; and 3) sharpened focus on low-risk loan management Meanwhile, loan growth was 2.1% QoQ (household loans +2.1%, business loans +2%). Cumulative loan growth was 4%, already close to the annual loan growth guidance of 5%.

We believe the company will expand NIM moderately in 2H, managing the pace of loan growth. Net commission income rose 16.8% YoY but fell 5.3% QoQ on a decline in trust fees and brokerage commissions.

The credit cost ratio improved by 10bps YoY to 13bps, lower than the guidance of 25bps. The new NPL ratio was only 40bps (-6bps). The strong asset soundness has to do with: 1) a decrease in provision as growth was led by healthy assets; 2) strong provision coverage; and 3) the writeback of provisions for NPLs such as real estate PF.
The Group CET1 ratio remained an industry-high at 14.6%, adding 0.1%p QoQ. Thanks to steady increases in core income and superb asset soundness, KB managed to beat consensus for a sixth consecutive quarter. We maintain BUY and our target price of KRW74,000.

The Group’s key growth strategies are: 1) creating synergies within the Group; 2) digitalization; and 3) globalization. The keywords of the digitalization strategy are “agile,” “customer-centric,” and “efficiency,” with a focus on digital banking and digital platforms.

Internet banking users represent 72% of total customers and KB provides three major apps in addition to three minor apps offering specialized services. For globalization, KB’s subsidiaries have selectively chosen the markets where they are competitive: for example, KB Bank opened branches in India; KB Card and Capital in Vietnam and Myanmar; and digital services in Cambodia. For our target price, we applied 0.87x target P/B to 2018F BPS (COE 11.8%, ROE 10.3%).

KB Financial Group Inc., a financial holding company, provides a range of banking and related financial services to consumers and corporations in South Korea and internationally. It operates through Corporate Banking, Retail Banking, Other Banking Services, Securities Business, Non-life Insurance Business, Credit Card Business, and Life Insurance Business segments.

The company offers deposit and credit products and services, and other related financial services to large, small, medium-sized enterprises and SOHOs, and individuals and households; and engages in trading in securities and derivatives, funding, and other supporting activities.

It also provides investment banking, brokerage, and other supporting services; property and life insurance; and credit sale, cash service, and card loan services.

In addition, the company offers foreign exchange transaction; financial investment; credit card and installment finance; security investment trust management and advisory; financial leasing; real estate trust management; capital investment; collection of receivables or credit investigation; software advisory, development, and supply; investment advisory and securities dealing; claim; management; asset-backed securitization; investment trust; trust asset management; and real estate services.