Good morning and good evening. Thank you all for joining the conference call for the earnings results of KakaoBank. This conference will start with a presentation followed by a Q&A session. If you have a question, please press star and one on your phone during the Q&A. Now, we will begin the presentation on KakaoBank's third-quarter earnings of the fiscal year 2024.
[Foreign Language]
Hello, this is Diana Kang from KakaoBank's IR team. We will now begin KakaoBank's earnings call for the third quarter 2024.
[Foreign Language]
We are joined today by members of management, including our CEO, Daniel Yun, Vice President Jay Kim, Sean Kim, our Chief Operating Officer, Conrad Chin, Chief Technology Officer, Paolo Lee, Chief Business Officer, Vesper Gold, Chief Strategy Officer, and Ellie Lee, Chief Risk Officer.
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The financial results contained in today's call are preliminary unaudited results based on K-IFRS and may be subject to change upon review by an independent auditor.
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I will now hand the call over to Sean Kim, our COO, to present on our third-quarter business highlights and financial results.
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Yes, good morning. This is Sean Kim from KakaoBank. Thanks to all of the investors and analysts joining us today for our third-quarter 2024 earnings conference. Let me take you through our third-quarter 2024 key highlights on page three.
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At KakaoBank, driven by stronger customer engagement, we are seeing continued growth in traffic as well as in our fee and platform business. Third-quarter WAU was 13.52 million, which is a significant increase of 1.18 million year-on-year. Meanwhile, fee and platform revenue was ₩79.1 billion, up 8% YOY. Meanwhile, we continue to shape solid fundamentals driven by continued top-line growth and stable risk management. As a result, we reported operating profit of ₩173.7 billion, up 36% YOY, another record high following on the second quarter.
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Let me now take you through our third-quarter results starting from page four.
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Page four is our customer base.
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As of the end of the third quarter, our customer base totaled 24.43 million. MAU was 18.74 million, WAU 13.52 million, both up significantly quarter on quarter, largely as a result of stronger customer engagement following the launch of our benefits tab in August. We expect this to drive even more traffic growth as we expand services moving forward, helping grow our traffic-driven business further.
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Next, on to page five for our operating revenue.
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Operating revenue in the third quarter totaled ₩746.3 billion, up 2% Q-on-Q, thanks to interest and PN platform revenue growth. Fee revenue saw a significant increase Q-on-Q due to the increase in debit card usage, also reflecting the base effect from one-off settlements in the second quarter. Platform revenue also grew Q-on-Q from growth in our credit loan comparison service. Meanwhile, financial investment revenue also increased Q-on-Q as we made adjustments to our portfolio, mainly increasing allocations to bonds and RPs and call loans while reducing MMFs in response to the changing interest rate environment.
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On to page six for deposits.
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As of the third quarter, our deposit balance totaled ₩54.3 trillion, up 2% quarter-on-quarter, driven by an increase in low-cost funding, with the share of low-cost demand deposits increasing to 57.9%, widening the gap against our banking peers. Our funding cost also went down 5 basis points quarter-on-quarter to 2.26%.
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Page seven provides more detailed performance for group accounts, so please refer to the slides.
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On to loans on page eight.
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In Q3, our loan balance totaled ₩42.9 trillion, up 1% quarter-on-quarter, driven by growth in SOHO and unsecured personal loans. Although the share of mid-credit loans went down by 0.2 percentage points quarter-on-quarter to 32.3%, this was due to the overall increase in our unsecured loan average balance, and in fact, our mid-credit loan average balance continues to see growth. Third-quarter NIM was 2.15%, down 2 basis points from the second quarter from a decline in loan yields amid falling market rates.
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Page nine.
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At KakaoBank, by expanding SOHO loans and our loan platform business, we have established the underlying foundation for continued growth, which allows us to respond flexibly to regulatory conditions. We have seen rapid growth in our SOHO loan balance, driven by growth in guaranteed loans, all the while achieving greater stability in our loan portfolio. As of the end of Q3, our SOHO loan balance grew by more than double versus last year levels, while the share of guaranteed loans in particular increased from 20% - 45%.
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Leveraging our overwhelming unsecured loan traffic, we have reported a monthly average traffic of 1 million now. We've also been diversifying our business model beyond unsecured loans into the loan comparison or loan ad business as well. We will continue to build out our loan platform business by expanding the coverage of our loan comparison services and by launching new products and offerings like joint loan services, which are based on our traffic competitiveness.
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On to page ten for more on our loan platform.
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Our loan comparison service, which was launched for credit loans in December 2023, has continued to grow quickly thanks to ongoing efforts to enhance the competitiveness of our services, such as by creating partnerships. As of the third quarter, the loan comparison execution value and number of executed loans increased by 39% and 43% Q on Q, respectively. As a result, fee revenue increased 30% Q on Q to ₩8.5 billion, becoming the main revenue model for our platform business.
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Yes, please refer to page 11 for further detailed results from our investments, and we'll move on to advertisements on page 12.
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We have been expanding our advertisement business by introducing new ad space and diversifying our products. When we launched our benefits tab in August, we also introduced our AdFit banner product alongside other new offerings like native banners or carousel banners in order to strengthen our lineup. We will continue to increase our ad inventory while engaging in targeted advertising in order to provide well-developed products that better reflect advertiser needs as we seek to strengthen the competitiveness of our ad business and our revenue stream.
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Yes, please refer to pages 13 - 14 for details on our SG&A and operating profit, and we will move on to page 15 on asset quality.
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As it sounded on page 15.
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Third-quarter delinquency held steady at 0.48%, flat quarter-on-quarter, from stable risk management. Credit costs, meanwhile, increased by 4 basis points quarter-on-quarter due to an increase in new loan issuance and write-offs, mostly for unsecured credit loans, which led to increased provisioning. Credit costs on a year-to-date basis, however, was 0.56%, which is a major improvement from the full-year credit cost of 0.75% recorded in 2023.
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This concludes our financial results and business performance highlights for the third quarter of 2024.
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We will now move on to Q&A.
[Foreign Language] . Now, Q&A session will begin. Please press star one, that is star and one if you have any questions. Questions will be taken according to the order you have pressed the number star one. For cancellation, please press star two, that is star and two on your phone. In order to allow as many Q&A chances as possible within the restricted time, we would appreciate only two questions per each participant.
[Foreign Language] The first question will be provided by Siny oung Park from Goldman Sachs. Please go ahead with your question.
[Foreign Language]
Yes, this is Siny oung Park from Goldman. I would like to ask two questions. First is on your platform revenue. In line with our expectations, it seems that the intermediation volume of loans on the platform has increased, but in terms of the fee income, it does not seem significant enough to really make a big impact on your overall platform revenue. So what is your outlook in terms of platform revenue going forward? Do you have a level up strategy to increase the platform revenue size? Second question is on asset soundness. It seems that the delinquency rate on your new issued loans is now appearing more stable. Looking ahead to possible rate cuts or changes to your loan mix, what is your outlook in terms of the credit cost? Also, since COVID, you have been maintaining quite high NPL coverage at above 200%.
So what is your outlook there as well?
[Foreign Language]
Yes, let me address your first question.
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In terms of our loan comparison service, we were actually late to launch our product compared to our competitors. However, if you look at the performance achieved over the last recent one year, we're really seeing quite strong performance above our expectations.
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In terms of the absolute level of the fee income, compared to the initial period when the market was just starting up, as competition becomes more intense going forward, I think there's a high likelihood that fee income will likely see continued downward pressure.
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This is true to the true role of financial institutions as a financial service intermediary. I think the decrease in fee is just a natural phenomenon. We are thinking hard, however, in terms of how to boost the absolute amount of fee income though.
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One of the strategies that we have been thinking of is to increase the scope of partners. We are currently working with just a limited number of financial partners, but by the end of this year and also throughout the first half of next year as well, we want to increase the number of financial institutions, mainly the lenders that we work with, so that more of them can use our services to issue their loans and sell their loan products.
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Another strategy is to further improve the usability and the user experience on our app. Users would no longer have to go to the individual financial company sites to download the application, as we'll provide for greater in-app convenience.
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In terms of our loan comparison service, obviously we only cover credit or unsecured loans at the moment, but gradually we will add on additional services, increasing coverage to home mortgage loans as an example, which is why we expect a significant boost to our revenue.
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Moving on to your question on credit cost.
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Credit cost as of the third quarter is flat relative to the second quarter, and we expect a significant improvement on a full-year basis, somewhere around 0.65%, 0.66% compared to last year.
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Over the two years between 2022 and 2023, we did monitor very closely the loan repayment development as we increased our mid-credit loans significantly, but we're quite positive at the moment as the outstanding loans have been managed quite stably.
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If you look at the current portfolio mix as it stands today, the part of the portfolio that may potentially have a big impact on our credit cost would be our SOHO loans.
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For the SOHO credit loans, since the time of launch, we've not had enough time pass by yet, and as the loans have not reached maturity yet, so we are approaching it with caution and setting our credit cost forecast on a conservative basis.
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For the guaranteed loans that also make up a part of the SOHO loans, a portion of them actually are seeing a higher delinquency rate as they were issued based on mid to low credit loan special regulations. So it may weigh on us in terms of delinquency or credit cost going forward, which is something we're closely monitoring.
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Because we carry a higher exposure to mid-credit loans and individual SOHO credit loans relative to the other commercial banks, I think it is a rational decision for us to carry a higher NPL coverage ratio versus the commercial banks where the biggest part of their exposure is household retail loans.
[Foreign Language] The following question will be presented by Junseop Jeong from NH Investment & Securities. Please go ahead.
[Foreign Language]
Yes, this is Junseop Jeong from NH Investment & Securities. Thank you for the opportunity to ask some questions. Regarding your SOHO loans, I think earlier during your call in the second quarter, you mentioned your full-year net increase target of ₩1 trillion for 2024. At the current pace, I think you are on a good track to achieve that goal this year. But do you anticipate a similar pace of growth for SOHO loans next year as well? You just mentioned how asset soundness is quite key. The proportion of guaranteed backed loans currently is 45%. What is your target percentage going forward? There is talk of the fourth internet bank also moving into or focusing on SOHO loans, other internet banks, and commercial banks because conditions are more difficult for household loans are also focusing more on SOHO loan side.
So what is KakaoBank's differentiation strategy in terms of your SOHO loan product?
[Foreign Language]
Yes, let me take your first question.
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Based on what we're seeing in terms of the pace of growth for the SOHO credit and SOHO guaranteed loans, we expect to be able to achieve a similar rate of growth next year as well.
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One of the reasons why we have a positive view is that for the guaranteed backed loans in particular, compared to before, we're seeing very smooth coordination and collaboration with the regional credit guarantee foundations, and we're seeing improved business relations as well. They have been confirming of growing customer preference for KakaoBank's existing guaranteed backed loan product, and they are very open and quite proactive about involving KakaoBank and our products further.
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Also, as we mentioned in our previous call, we are planning to introduce a new lineup of SOHO loan products, credit loans above ₩100 million, for example, or secured SOHO loan products as well, which is why we think that we will be able to see consistent growth in terms of our SOHO loan balance next year as well.
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Separate from the secured loans, if you look just at the mix or split between the SOHO credit versus SOHO guaranteed loans, we mentioned during the second quarter call that we intend to change the 60/40 split to 50/50 by the end of this year. As we currently stand, as of the third quarter, the split is 55% - 45%. Again, we're on a good track, a good trajectory to achieve that target.
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There are two big sources of competitiveness in our SOHO product.
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First, because our funding cost is, in relative terms, lower than the other lenders, we're able to offer lower lending rates to our customers.
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Second, we've been receiving a very good response from users for our support and assistance in payment of guaranteed insurance premiums. Also, overall, the SOHO customers have been giving us high marks in terms of the ease of the loan process on our app.
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Apart from the competitiveness of the loan product itself and also the convenience and ease of use that we offer, I think more important is the strategic direction of KakaoBank just in terms of how we look at our SOHO borrowers. We do not look at them strictly as our loan users, but we look at them from a broader scope as we anticipate or we hope to build a broader community or platform for the SOHO business owners so that we can serve their various financial needs overall and provide other necessary added services as well.
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If you look at our SOHO user base just in terms of the rate of growth and recent development trends, I would say that we have been able to acquire the SOHO user base more quickly than any other financial firm or the big tech lenders as well. Just in terms of the deposit business, traffic, and engagement, we have been able to boost our market share among SOHO users above and beyond our expectations very quickly.
[Foreign Language] The next question will be presented by Seung-geon Kang from KB Securities. Please go ahead with your question.
[Foreign Language]
Yes, this is Seung-geon Kang from KB Securities. The first question is on your loan asset growth outlook. It seems for SOHO loans you have been achieving meaningful performance, but since various household loan regulations by the government are still ongoing, there are concerns about loan growth next year. What is the company's view or strategy in terms of loan growth for 2025? Second, due to various regulations, compared to your capital, I don't think you're able to deploy as much as you may want because of regulations. I do appreciate the update in the materials on certain deployments, including your investment in a Superbank in Indonesia and the application for virtual banking license in Thailand.
For the Indonesian investment, how long do you anticipate it may take for that to start delivering more meaningful results? What is your outlook in terms of the Indonesian banking market overall? I understand it is dominated mostly by state-owned banks. There are lots of banks, very stiff competition. It's a very difficult market in terms of asset growth and also margins as well. If you could provide more details on your strategy.
[Foreign Language]
Yes, let me address your first question.
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In terms of loan growth, I think the analysts and the market will be very well aware of how the discussions have played out since similar time back in 2023 last year about the banking sector household loan issue.
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From last year, of course, up to December, the individual financial companies, including ourselves, said about establishing our business plan, which was shared with the market through earnings conference call in the month of February. But then following negotiations with the authorities that took place in February and March, these findings actually were reflected to revise the business plan. We already went through this kind of cycle last year.
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I think the situation now versus last year is largely similar, not that different at all. It may be premature for us to, at this point, talk about the outlook for loan growth next year.
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But for certain loans like SOHO or corporate business loans, which are not subject to as much government regulation or discussion compared to household loans, I think our previous guidance on growth actually is still valid.
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And then onto your second question in terms of our overseas advancement.
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Yes, there are significant differences in terms of the financial environment in Indonesia versus here in Korea. But after our grand launch, Superbank actually has shown a very rapid pace of growth for both deposits, loans, and its customer base when compared to any other digital bank.
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I think there were two most effective parts of our early strategy. First is the fact that we leveraged the Grab ecosystem to move into that market was a key part of our success. In terms of the products and services offered by Superbank, actually they are the outcome of very close discussions with KakaoBank. We actually were involved in producing those very products based on our domestic experience. They are, in fact, products that we wanted to test out to see what the response would be when offered on the global market. The response from the customers actually has been very solid, which has been the basis for the good performance today.
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We want to expand on this type of growth strategy as we expand into Thailand as well.
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If we are given the opportunity to do business in Thailand by obtaining the virtual banking license that we have applied for, we actually want to take our strategy to the next level, moving beyond what we are doing now in Indonesia. Just in terms of the front end, the app development work, we actually are thinking of doing that development ourselves based on a strong sense of accountability.
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In terms of our overseas business expansion plan, it will follow this type of order. Again, our involvement in product service planning followed by development of the UI, UX within the necessary extent, of course. Building on this experience, we will look to potentially other markets for further expansion.
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There was last bit a question on our capital. You may have seen our disclosure, but we're planning an analyst meeting on the 26th. There we will explain further details of our ROC or capital efficiency plan on that occasion.
[Foreign Language] The following question will be presented by Jae-woong Won from HSBC. Please go ahead with your question.
[Foreign Language]
Yes, so thank you for delivering strong performance despite the difficult environment. I have two questions. First, in terms of your CIR trend, it's quite impressive to see significant improvement with the CIR going down. Are you targeting perhaps the low 30% range even, or do you anticipate maintaining around current levels in terms of CIR? Second question, it does seem that you have tight control over all in terms of your delinquency, but with the sharp rise in delinquency for the corporate or SOHO loans, we have less of a sense of how well delinquency is being managed. We do not have long time series data yet as they were only introduced last year.
So do you internally have some view? So if delinquency rises to a certain internal threshold, for example, is there that kind of threshold where then you will start moderating the pace of growth and tighten your vigilance?
[Foreign Language]
Yes, let me take your first question.
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As we have repeatedly mentioned on numerous occasions, in terms of the overall trajectory of our CIR trend, we are anticipating continued downside improvement.
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Of course there can be different externalities or variables that can impact that. As we mentioned in the second quarter, KakaoBank is committed to investing in new technologies like AI. Additional technological investments will be made further to provide greater stability or safety of all transactions. We are making early investments to create new businesses or new types of service offerings. Compared to other commercial banks, we have more cost factors.
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Overall, yes, we do anticipate the CIR to go down much lower versus the current level. But in terms of year-to-year trends, it may not translate into a straightforward decrease straightaway each year. But in terms of our three, five-year mid to longer-term expectations, we are expecting very low CIR levels that, in fact, may be unprecedented not just in Korea but globally.
[Foreign Language]
Moving on to your second question.
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Like I said before, it's hard to project what will happen in the future based on the current situation because it's simply not been long enough since we launched our SOHO credit loan products.
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But what is clear is that the delinquency rate for our SOHO unsecured loans actually is trending lower than the broader market average, which as of the third quarter we believe is roughly around 1.1%.
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Yes, and in terms of the SOHO guaranteed loans, the delinquency overall is similar to the market level. There is a portion of our SOHO guaranteed loan portfolio which does have very high delinquency levels. But given the very high 95% guaranteed rate, even if we may see temporarily an uptick in delinquency ratios or provisioning, ultimately it will be paid back through subrogated payments and we will be able to manage the delinquency and also see reversal of the provisioning. Overall, we believe the asset soundness is stable and we believe that we will be able to maintain these stable levels going forward as well.
[Foreign Language]
Yes, with that, we will conclude the third quarter 2024 earnings call for KakaoBank. I thank all the members of media, analysts, and investors. Thank you very much for joining us.