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KB Financial Group Inc  (KB -1.16%)
Q1 2020 Earnings Call
April 23, 2020, 3:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Peter Kwon -- Head of Investor Relations

Greetings. I am Peter Kwon, the Head of IR at KBFG. We will now begin the 2020 Q1 Business Results Presentation. I would like to express my deepest gratitude to everyone for participating in our call.

We have here with us our Group CFO and Deputy President, Kim Ki-Hwan as well as other members from our Group management. We will first hear the 2020 Q1 major financial highlights from our CFO and Deputy President, Kim Ki-Hwan and then have a Q&A session.

I would like to invite our Deputy President to walk us through the 2020 Q1 major financial highlights.

Ki Hwan Kim -- Deputy President, Chief Financial Officer

Good afternoon. I am Kim Ki-Hwan, CFO of KB Financial Group. Thank you for joining KBFG's presentation on Q1 2020 business results. Before moving on to the earnings, let me briefly present on our operational backdrop. In Q1, due to COVID-19 pandemic, global production and consumption slowed, leading to a rapid slugging of global real economy. Investment assets contracted as there was move toward safe assets and liquidity as global equity markets triggered off multiple number of circuit breakers, heightening global financial market uncertainties as ever before.

Korean economy also saw great contractions in consumption, slowing of capex investment and exports as signs of economic depression surfaced. In line with the policy stance to respond to such shock, BOK swiftly moved to cut policy rates by 50 basis points last month. Under such trying business environment, bank's Q1 loans in won increased 4.2% year-to-date, attesting to solid asset growth. Net fee and commission income also continued to expand as KBFG manages to sustain its earnings capacity. However, regrettably, COVID-19 pandemic has triggered index declines, rise in exchange rate and credit risk spread, which generated other operating losses with Q1 results reporting somewhat of an underperformance. We believe such a black swan event like the COVID can happen anytime yet again in the future. And so we are determined to build on strong resilience and fundamentals that can help us ride over any crisis that may arise. To this end, based on our unmatched base of 35 million customers, we will enhance core competitiveness of each of our subsidiaries and further bolster both the non-banking and the global business. Although financial business environment is at its worst due to the unforeseen impact of COVID-19, KBFG will leverage this opportunity to solidify its core fundamentals so as to leap forward as a true leading financial group.

Now, I will move on to Q1 2020 financial highlights. KBFG's Q1 2020 net profit was KRW729.5 billion. In the absence of ERP and other seasonality factors, interest income and fee and commission income growth drove 36.4% Q-on-Q growth. However, there was a 13.7% year-on-year decline, a sub-normal performance driven by steepening volatility of the financial market in the first quarter, which led to other operating losses. Aside from this factor, overall earnings capacity of the Group continues to be robust.

I will now elaborate on each line item in more detail. Group's Q1 net interest income was KRW2,349.2 billion despite interest rate cut and NIM contraction from loan conversion program. Thanks to solid asset growth from the bank and KB Card, NII was up 4.3% year-over-year. A decline in market rate and LOC, line of credit depreciation expense from loan conversion, NII was flat Q-on-Q. Also, bank's loan in won was around KRW280 trillion as of March end, up 4.2% or around KRW11 trillion year-to-date. Group's Q1 net fee and commission income was KRW670.1 billion, up 21.7% year-over-year. This is mainly driven by improvement in brokerage fees and IB business, which led to higher commissions income for the securities business as well as increases in credit card fee income, which is an outcome of cost efficiency effects.

Also, despite difficult operational environment owing to the efforts of all of the affiliates to fully leverage their operating capacity, there was a Q-on-Q increase of 4.9%.

Next is on the Group's other operating income. In Q1, the Group reported KRW277.3 billion of other operating loss. Insurance underwriting profit was KRW78.1 billion, displaying Q-on-Q recovery, driven by overall loss ratio improvement, including the auto insurance. However, market volatility was severe on the back of COVID-19 impacting bank's trust on principal preservation, incurring loss of KRW66 billion and ELS hedging-related loss of around KRW48 billion from KB Securities, leading to sizable securities, derivatives and FX-related losses. I will provide more details later on our strategy against other operating losses, which have been incurred as a result of greater capital market volatilities.

Next is on the Group's G&A expense. Q1 Group G&A expense was KRW1,459.2 billion. With the absence of ERP and A&P expenses and other seasonal costs, there was a sizable decline of 19.6% Q-on-Q. On a Y-o-Y basis, with Q1 2019 ERP impact removed and with the delay in reaching agreement with the labor union on welfare benefit fund, there was 3.6% decline.

For the time being, speed of G&A expense improvement may slow somewhat on the increase of digitalization expenses at the Group level. But we believe this investment is warranted for the Group's future growth. Aside from such investment for future, we will revisit all of the expense items from the zero basis, reorganize our rate schemes of each affiliate so as to tightly control costs as we go forward.

Next is on PCL, provision for credit losses. Credit cost -- Q1 Group PCL was KRW243.7 billion on asset growth and absence of any large write-backs. And on one-off provisioning from securities, there was a slight increase both Q-on-Q and year-over-year. However, credit cost reported 0.25%, sustaining high level of asset quality.

On the next page, I will walk you through key financial indicators. On widened financial market volatility, which triggered marketable securities, derivatives and FX-related losses, Q1 2020 Group ROE reported 7.64%. If eliminating non-recurring factors for the quarter, such as CVA, credit valuation adjustment-related losses, which is an adjustment for counterparty credit risk for OTC derivatives, recurring basis ROE is at 8.66%. Although this quarter's profitability indicators have dipped compared to the historicals due to temporary rise in other operating losses, Group's earning fundamentals continue to be solid as we endeavor to diversify revenue sources and improve cost efficiencies to respond to the low growth and low interest rate environment.

Next is on the growth of the bank's loans in won. As of March end 2020, bank's loans in won was KRW280 trillion, up 4.2% year-to-date or approximately KRW11 trillion. Household loans was KRW152 trillion, driven by Jeonse loans and high-quality unsecured loans reporting 3.2% growth year-to-date. Corporate loans reported KRW128 trillion with a even growth across SMEs and large corporates posting a YTD growth of 5.5% or KRW7 trillion. In particular, large -- as large corporates sought to secure liquidity, demand for loan and loan growth, therefore, was significant with 20.2% year-to-date increase. KBFG will closely monitor for signs of prolonged economic recession and also closely monitor our property market and continue quality-driven growth around prudential soundness and employ flexible loan policies so as to solidify basis for growth.

Next, let's look at the NIM graph on the right. Q1 2020 Group and bank NIM posted 1.84% and 1.56%, respectively. Q1 bank NIM, despite the steady increase of low-cost deposits and funding cost reduction, fell 5 BP Q-o-Q, mainly due to decline of market rates and loan conversion program.

Q1 Group NIM fell 4 BP Q-o-Q, due to card NIM contraction from lower card assets yield in addition to pressure on the bank NIM. Going forward, KBFG, based on superior sales competency, will expand low-cost deposits, including settlement type accounts and corporate customer deposits and improved loan pricing so that we can do our utmost to manage our margin.

Let's go to the next page. First, I will cover our Group's cost-income ratio. Q1 2020 Group CIR marked 53.2%, but excluding non-recurring items in this quarter, including digitalization costs and CVA losses, on a recurring level, Q1 CIR posted a 50% level. CIR on a recurring basis, excluding ERP expenses and other one-offs, has been controlled stably at around the early 50% level over the last four consecutive years, and KBFG will do our best so that we can improve our cost efficiency through HR management and Groupwide cost controls.

Next, I will cover the CCR. 2020 Q1 Group credit cost posted 0.25% and slightly increased due to the absence of large-scale reversals and one-off provisioning, but it's still maintaining a low level. This quarter's rise in credit cost can be seen as a process of being gradually normalized from a sub-normal level with the decrease of large-scale provisioning reversals. Despite the concerns in the market about asset quality due to COVID-19, KBFG has been proving its superior soundness and risk management competency.

Next, I will elaborate on the Group's capital ratio. As of 2020 end March, the Group's BIS ratio posted 14.02% and CET1 ratio posted 12.96%, respectively. Due to increase of RWA following the financial market volatility, including corporate loans and loan growth and FX rate, both slightly contracted year-to-date, but KBFG has been maintaining the highest level of capital buffer in Korea against economic downturns.

Let's go to the next page. From Page 5, I will explain about the background behind the low performance of other operating income and our asset management strategy, responding to the capital market volatility widening. I will also elaborate on our Group's profitability management strategy, responding to the recent financial environment changes.

As aforementioned, in Q1 of 2020, with the COVID-19 pandemic, there was a large shock to the global economy, and in particular, the capital market volatility rapidly rose. In our Group, with the market rate drop in Q1, the bonds in Korean won that we hold incurred valuation gains. But in the case of bonds in foreign currencies and some OTC derivatives, since the credit spread greatly widened and the exchange rate hiked, valuation losses took place. And in the case of securities ELS, hedging losses incurred, meaning losses were recognized mainly in derivative products and FX-related products. Related to this, I would like to cover our asset management strategy responding to the future capital market volatility.

First, out of the foreign currency financial investment that KBFG is currently managing, the bank and securities foreign currency bonds managed is around KRW6 trillion, and more than 80% have A or a higher credit rating and most are investment-grade, highly rated bonds. Since we believe that there is a possibility for the bond market to normalize according to the major countries' fiscal and foreign currency policies, we believe that we will build our strategic position and partially maintain our hold-and-carry strategy.

Next, the valuation losses of some OTC derivatives took place due to CVA losses stemming from third-party credit risk valuation, and this was a result of factors, such as the FX rate hike, leading to temporary increase of exposure in Q1 as well as a great widening of forward credit risk spread compared to the previous quarter. For example, for CVA assessment, in Q1, the bankruptcy rate of companies with an A credit rating went up 6 times year-to-date. We expect then when the FX and credit market become stabilized in the future, a substantial part will be reduced and reversed.

Lastly, I will explain about the ELS hedging losses. Currently, KB Securities ELS hedging position is around KRW3 trillion and around KRW48 billion of losses incurred, influenced by market volatility expansion, including the indices in the market. But we expect that a great amount will be recovered when the financial market is stabilized in the future. In order to minimize our operating loss expansion possibility, following market volatility widening, but also maintain our profitability through flexible product issuance, we will revise our issuance strategy, including rebuilding our hedging strategy for ELS and other derivative operations and change the proportion of underlying indices linked to foreign stock markets, so our performance can be stably managed.

Next, I would like to cover our Group's profitability management strategy responding to the management environment changes. A major topic in the financial industry nowadays is the financial institution's profitability management strategy responding to the management environment changes in an era when a new normal is being set with a low interest rate and low growth regime. Within KBFG, we are also rearranging our Group's mid-to-long-term strategic direction so that we can proactively respond to these changes. And among the many responding methods, we believe the core tasks are to strengthen channel competitiveness, strengthen new business competitiveness and to expand our global entry.

First, KBFG considers our IB and WM business to be our core business to secure our Group's growth drivers since they could best utilize our superior capital competency, funding capability and retail customer bases and will focus on strengthening both. IB is expanding our pre-emptive underwriting so that we can strengthen our dominant market position in ECM and DCM. And we will also, at the same time, uncover new deals related to corporate financial structure improvement, including asset securitization.

In the case of WM, we are focusing on securing product competitiveness that meets customers' needs, including highly recoverable products, including products with low barriers and low knock-in. In addition, KBFG is the leading financial group with the larger sales channel in Korea based on 35 million customers and unmatched sales capability. And we have been strengthening our non-face-to-face sales channels, keeping in step with the untapped trend following the development of digital technology development. In particular, we want to lead the industry in non-face-to-face channel competitiveness by improving our non-face-to-face channel customer convenience centering on loans, WM and card and strengthen channel competitiveness through strengthening our product lineup.

Last but not least, KB Financial Group is working hard to secure mid- to long-term growth momentum through expanding global business. As a result of these efforts, on April 10, we acquired 70% of shares from Cambodia's biggest microfinance company, PRASAC, and incorporated it as our subsidiary company. With the acquisition of PRASAC, the net profit contribution from overseas, which was at a 1.5% level, will be increased to around 4%. Going forward, KBFG will strengthen our Group's profit basis by accelerating our global business expansion. Please refer to the following pages for details regarding the earnings that I have just covered.

With this, I will conclude KBFG's 2020 Q1 business results presentation. Thank you for listening.

Questions and Answers:


Thank you. We will now begin the Q&A session. [Operator Instructions] From Hyundai Motor Securities, Mr. Kim Jin-Sang. Please go ahead.

Kim Jin-Sang -- Hyundai Motor Securities Co. Ltd. -- Analyst

Thank you very much for the detailed presentation. I have three questions. First question with -- is with respect to your outlook. Q1 results were underperforming. Of course, there are multiple reasons behind that. In light of the interest rate environment and holistic directed support, I feel that this year's performance cannot be all that rosy. Basically, consensus is also subject to potential downgrade by around 10%. So I think that we shall take a bit of a more conservative stance. So I would like to understand your understanding of your outlook in terms of loan growth and also guidance on margin.

Now my second question is on Q2, KB Securities. Of course, I do understand that there's been an industrywide difficulty, but KB Securities' performance was very slow and sluggish, and you provided some explanations. I would like to understand how you're going to leverage the strength and also how you're going to overcome the weaknesses so that you can further strengthen your fundamentals. So I'd like to ask you questions on KB Securities.

Third is on dividend policy, potential share cancellation and also the overall shareholder return policy. I would like to understand that the regulators are trying to curve on payout ratio. But KB, you've acquired PRASAC as well as Prudential. So you had instances where you had to actually spend your capital. I know by accelerating the application of Basel III there, you could receive some help in terms of the capital management, but I'd like to see some more color on what your capital plans are for this year.

Unidentified Speaker --

Yes. Thank you for your questions. We will respond to those questions. Please bear with us. One moment.

Mr. Kim Jin-Sang, thank you very much for submitting your questions. You asked three questions. The first and the third question, why don't I respond to those questions? And on the Securities -- the financial results of the Securities, Mr. Park Kang-Hyun [Phonetic] will respond to that question from KB Securities.

In terms of the outlook for this year, as you have pointed out, with the COVID-19 pandemic and the following downturn in economy and also the rate cut, it seems that it's inevitable that we're going to experience some decline in net profit. Interest income inevitably is going to be very stagnant. So for this year, on the non-banking side, including fees and commissions, we wish to exert our efforts to further upgrade that and also do cost control, so that our annual net profit can be incurred above KRW3 trillion that we will endeavor to actually bring that into reality.

So let me look at some of the details. In terms of loan growth, currently, Korea's GDP growth outlook has been downgraded, and companies are now moving to secured liquidity. And so there is growth in the demand for loans. And also with more broadened policy-led loan support, in light of all these environmental factors, we believe that loans in won for the bank, the growth that is, we think that it's going to be slightly higher than our original plan. So we're targeting around [Phonetic] 5% to 6% growth per annum basis.

Household high-quality unsecured loan and also Jeonse loans, we believe that about 3% growth is possible. For corporate loans, if you look at investment-grade SMEs and large companies, we are currently shooting for 7% to 8% growth for corporate lending.

In terms of the NIM outlook, originally, we were expecting NIM at around 1.6%. However, last March, BOK cut rates by 50 basis points, which was a swift move. And therefore, the timing of the rate cut was accelerated and the extent was big as well. And also with COVID-19 pandemic, there's been more extensive support, policy-led financial support. And also, under a very sluggish business operational environment, we -- you would understand that it would be very difficult for us to improve the spread as against our target. So for this year, we think that this year's NIM target is going to be in the early and mid-1.5%.

And in this situation, if you look at interest income, in light of the NIM contraction, things are not going to be all that easy. But through appropriate level of loan growth, we are going to do our best to defend interest income as much as possible and also really secure interest income sources from card and securities, so that we could -- Groupwide so that we could even at least increase interest income even minorly.

And also in order to improve profitability, increasing the non-interest income portion is critical. KB, under us, we have banks, securities and card. All of our affiliates and subsidiaries are really leveraging their operational capabilities so that we can maximize fee and commission income. For insurance, thanks to the improving loss ratio profile, the performance is actually better than we had originally expected, and we think that such loss ratio profile will help with further increasing the non-interest income.

On non-interest income, especially on other operating losses, the index price, FX and the rate movement and volatilities have widened. And so other operating accounts really underperformed. But we believe that starting this quarter, we will be able to stabilize. So we think that going forward, we could recover and regain our footing on other operating loss as well.

On the cost side, for G&A, this year, basically, we have digitalization-related expense and the ERP expense that is in plan. So we wish to control G&A costs within 2% on a per annum basis. And they are a very difficult business environment. Basically, we are going to revisit all of our expense items from zero base, and we are very tightly managing all the expense items.

Recurring basis CIR for the past couple of years was in the early 50% level. Bank and card subsidiaries, we've actually completed IT investment and also the improvement of the headcount organization. Once that impact starts to show, we are quite certain that we could see CIR improve to mid-40%.

For PCL and provisions, based on credit cost, 25 basis points is going to be the level that we control. And so it's a quite steady level. The driver behind that is because currently, we are living in an ultra-low interest rate environment. And also, we've been very pre-emptive in managing our risk. And basically, we have downsized on potentially bad loans, and also our exposure to cyclical sectors have been downsized and also our exposure to high-rated assets have been going up over the months. So on the provisioning side, we think that there's going to be only limited burden.

And lastly, to add, beginning of April, we completed the acquisition of PRASAC, a Cambodian company. And in Q3, our acquisition of Prudential Life is going to come to a close. After the acquisition and if we were to reflect the gains for the duration, we think that there will be a positive impact of KRW100 billion. So we are under a tough situation. So to respond to such deteriorating situation, we're going to focus more on soundness and risk management rather than growth, and we will focus on managing our profitability as well as fundamentals.

To answer your question about dividends and our share -- treasury shares, I would like to answer that question. As you are well aware, with the COVID-19 leading to realization of a global financial crisis, European banks and other countries' central banks have been recommending ending treasury share buyback, and the Korean financial authority also has mentioned this. And now there is a very conservative stance toward a capital policy.

Because we are a global leading -- we are a leading group in Korea, we want to be very conservative and prudent, and we want to respond to the financial policies, but we also want to make use of our ample capital so we want to do our best to actually have shareholder return. Regarding this year's dividend payout ratio, we were going to have a decision based on our shareholders and our BOD members and management, but our 30% level of dividend payout ratio will still stand. So we will have no changes to that.

And we are -- regarding the treasury buyback or cancellation of shares, we are going to be very flexible. And our stance is to have the dividend payout ratio going up to 30%. So that direction will still hold but we will also need to review the direction of the Korean fiscal authorities and decide on the final dividend payout ratio.

Unidentified Speaker --

I will respond to your question about KB Securities and its business result. First of all, I would like to talk about the reason behind this result and how much we could recover as we go forward. In Q1, yes, we underperformed. Due to the COVID-19 impact, global indices all fell, and there was heightened volatility. On S&T and ELS, there was product investment vehicle-related losses. And also second, with line asset management, there were assets that we held and there was valuation losses, and these are the one-off loss that we booked.

On the S&T, basically, there was ELS hedging and also overseas foreign currency bonds. We had around KRW40 billion loss, one-off line asset management-related losses, basically, we had beneficiary certificates and CBs that we hold, and there was a KRW40 billion of valuation losses.

And another is with respect to receivable -- bond receivables, and we have above provisioning. So there was about KRW59 billion of one-off losses that has to do with the intermediary trade-related provisioning. On the NP side, yes, we significantly underperformed. But other than certain elements, our overall business operation, however, posted a positive result. WM, basically, we saw increase of KRW34 billion. OP reporting KRW140 billion. Won-denominated bond, basically KRW35 billion in profit. In IB, including DCM and ECM, we reported market share Number 1. And also under project, profitability went up and total level of operating profit actually went up by KRW25 billion on a year-over-year basis. So these other performances were good.

Yes, the top-line number was bad. But if you look at Q1 losses, main drivers behind those or the elements, we think that once the market recovers, we will be able to recover. FX, once that gets stabilized and FX swap, at settlement, we think that reversal will be possible. And if the equity market recovers, as we are seeing at this point and if government's very strong policy intervention comes into play and effective, in terms of the overseas bonds that we currently hold, they're all investment grade and high graded. So the credit risk is going to go down, and we are looking forward to reversals and write-back. So with the recovery of market, we think that there will be about KRW20 billion positive impact.

Other than these factors, for early repayment period like ELS products that have a shorter repayment period, we want to sell more of that. And in light of the volatility of the interest rate, we are going to adjust the interest rate cushion and also really proactive appropriate products that best befit this environment. We're going to also strengthen WB wealth -- WM-related wealth management product as much as possible and customize those products for the customers so that we could really make up the losses that we have incurred so far.


Thank you very much for the detailed answer. I believe that was a good answer to the question that was posed. And from Samsung Securities, we have Mr. Kim Jaewoo on the line. Sir? Yes. You are on the line sir.

Kim Jaewoo -- Samsung Securities Co. Ltd. -- Analyst

You just mentioned the gains and losses. So could you actually remark on recovery once again for securities and for the bank as well, and give us a breakdown and when do you think it could recover? Thank you.

For asset quality, you mentioned credit cost 25 BP. But compared to last year, I think it hasn't really moved or has gone up. We have the liquidity contraction of SOHOs and export issues. We believe that you will have a higher asset quality burden than you just mentioned. Excluding all of this, can you tell us about the impact that you expect from COVID-19? And how it will impact your asset quality?

And you mentioned about Prudential M&A possibility in Q3, and there will be gain from -- gain on bargain purchase. [Technical Issues] synergy going forward after the M&A is completed? And any changes that you foresee in the future? Thank you very much.


Yes, please, sir, hold, and we will soon give you the answer.

Jong Kyoo Yoon -- Chairman and Chief Executive Officer

Thank you very much, Mr. Kim Jaewoo, for your questions. Regarding the first and second questions, I will answer them. And for the Prudential question, we have Mr. Kim Chang Kwon, who is in charge of strategy, and he will -- Lee Chang Kwon and he will answer your question.

Regarding the underperformance of other operating losses, I would like to answer your question. We mentioned this previously, but the reason why we have underperforming other operating losses is because with the financial market volatility widening, we had a temporary loss that widens. And I believe that we can look at five major contributors. So in the management of securities, for foreign currency bonds, the credit spread suddenly widened. And for foreign currency bonds, we had about KRW45 billion of valuation losses. And for the bank, we have had the trust vehicle-related losses and we had about KRW66 billion of valuation losses.

And for line asset management-related losses, for TRS transactions, we had about KRW40 billion of valuation losses as well. And for derivatives and FX, for OTC derivative products, there was the CVA. And in this assessment, we had the FX rate rising and we had about KRW34 billion of losses -- valuation losses. And in our ELS hedging because of the index volatility, we had about KRW38 billion of losses. So there -- these are the five major contributors, and then we have some portfolio investments such as ETF investments that are minor factors.

To give you an update on our foreign currency valuation losses for the bonds, we had a great impact from the credit spread. And to actually be prepared for this widening, we had such positioning, including the buying of U.S. futures. So future positioning.

And for major countries, CDS and credit spread surged, and as aforementioned, there was about KRW45 billion of losses that incurred. The bonds that we hold, the bank and securities that are investment-grade are about 97%. And the remaining 3% are BBB- grade bonds. So we believe that with the realization of policy measures of different countries and when this becomes visualized, then we will have a rapid recovery. So we will hold our strategic position and maintain our hold-and-carry strategy.

Secondly is the trust vehicle. And we have the principal -- and we have the principal-conserving trust products. And in the bank, there is a need to actually preserve the principal. And ELS or other derivative-related products are actually linked to this, and we had some losses from those. And the global stock market indices and other market factors can stabilize, and we believe that this will recover as well.

For CVA-related losses, with the rise in the foreign exchange rate, we had a risk that went up. And the credit risk spread also steeply rose, and that is why we had the valuation losses. And when the foreign currency market and the credit market stabilize, we believe a great amount can be reversed.

Regarding the ELS hedging management, some indices that were linked actually plummeted and surged and was very volatile. So we had some management losses from this. And a part of this, as mentioned by the CFO of KB Securities, well, we will maintain our own hedging, but we will also be flexible in issuing new products, and we will revisit our hedging strategy, and we will revise our issuance strategy so that we can have better results. This is currently ongoing.

On the whole, because of the widening financial market volatility in Q1, we had a temporary loss of about KRW300 billion. And when we have a downturn of the COVID-19 pandemic and when the credit market and the stock market stabilizes, we believe that if 70% is recovered, then it will be about KRW200 billion of recovery. And if it's just half, then we believe that about KRW100 billion of reversals or write-back could be recovered. So we will be very thorough in our capital market management going forward.

Regarding COVID-19 and impact on our asset quality, as you are well aware, domestic demand is at a downturn. And with the downturn in global trade, we will have a damage to the manufacturing side. So it is true that there are concerns over the asset quality.

Regarding the different industries that are influenced by COVID-19, there are airline companies or travel companies that are directly impacted and there are retail companies or wholesale and retail companies. If COVID-19 pandemic becomes prolonged, then there will be other sensitive industries that we see will be impacted. So we are currently classifying them. And for these sensitive industries, we will look into -- we have actually looked into the impact from COVID-19. And for vulnerable borrowers, we are looking into their situation, and we are looking at how we can actually manage their [Technical Issues] risk management through setting contingency plans for different scenarios.

For the new loans for the sensitive industries, we're going to have a stricter credit officer management scenario going forward. And for credit cards, for these high-risk industries, we're going to have more stringent management. And we are actually possessing action plans that were drawn up before. So we're going to have very sophisticated management of our asset quality that is pre-emptive. And for the asset -- our asset quality indicators, they are very healthy and robust. However, we are seeing a bit of a rise in the receivables for some merchant companies. But other than that, we're vigilantly monitoring the situation. And looking as a whole, for the -- we see more than 80% of our borrowers that have very high credit. And most of the loans are secured loans, including real estate. And for those with low credit ratings, almost 100% of the loans are secure. This means that our asset quality management expertise that we have had leads to less of an impact from COVID-19 pandemic, even when we actually have different scenarios that are acted out.

Regarding rollover of loans, recovery programs and deferment of interest payment for the companies that have -- that received damages, we know that the government is very willing to actually compensate, and they are coming up with different policies. So there -- we believe that there will be an early soft landing, and we believe that we will not have a great amount of provisioning stemming from the COVID-19 pandemic. So we will just have a very limited impact on our asset quality because of COVID-19 pandemic.

And I would like to actually give the microphone to our CSO, Lee Chang Kwon from KB Securities.

Chang Kwon Lee -- Deputy President, Chief Strategy Officer, Head of Global Business Unit

My name is Lee Chang Kwon. I'm in charge of strategy at the KBFG. Your question relates to gains from bargain sale and also acquisition synergies, etc. In terms of gains on bargain purchase, as you know, the gains on bargain purchase basically, you look at the -- if you're acquiring at lower the price compared to the fair value of the asset, then that's when you have those gains. It's a preliminary assessment, and I won't be able to share with you specifics. But we are currently expecting to see gains from bargain purchase.

Fair value is going to be calculated by an outside accounting firm. There will be recalculation done on the fair value of this asset. Of course, we will make the assessment in the most conservative -- taking most conservative assessment so that the one-off impact could be minimized.

So the timing of booking for the gain from bargain purchase, basically, we would have to go through the approval process by the regulator. So it will be difficult to give you a specific timeline, but we think that by the end of August, if we reach closing of this transaction by the end of the year, we will be able to account for and book gains from bargain purchase.

Now after the acquisition, what will be our approach and our business strategy? After acquiring of this entity, our Number 1 priority is to further boost the sales capabilities and also stabilizing of the organization of Prudential Life. That will be our priority task. The business philosophy and also corporate culture, we want to make sure that it stays intact. We want to be able to leverage the strength of this entity and so that they can very naturally and smoothly become part of KBFG. KBFG's resources and capabilities will be utilized so that we can create synergies and really bring about a value upgrade.

In terms of potential merging with KB Life, it will not take place immediately. For about a year or two, Prudential Life is going to be a stand-alone entity. Afterwards, we will consider potential integration.

In terms of the strategy for creating synergies, as you know, Prudential Life is known for its sales organization, its agency channel. And as Prudential Life becomes part of KBFG, therefore, with its sales channel capabilities, we could really bring about synergies. There are four different types of synergies that we can look forward to.

Number one, basically, the prudential agents and their sales capabilities can be further expanded. Prudential has a very strong tied agent organization. And against KB customer base, we can sell Prudential products. And KB subsidiaries, different products can be sold via Prudential Life. So cross-selling opportunities can be maximized. And also Prudential Life customers can become KB customers. Basically, Prudential clients are high income bracket, and there are people working in different professional areas. So we can provide WM-based customized and personalized products to the existing Prudential Life customers.

And number three, we can strengthen asset management capabilities. Basically, we're trying to do integrated asset management of insurance subsidiaries. We believe that with this acquisition, we could achieve economy of scale. We can gain bargaining power. We can do high-quality sourcing and really improve asset management and investment efficiencies.

And number four, we can value our prudential products and they can enter into new business areas, which can bring about additional revenue opportunities. Together with making the existing products more competitive, bancassurance and retirement, annuity products, which really fit the new needs of the customers by adding up on -- adding on top of the existing portfolio of these new products. We think that we can further enhance product competitiveness of Prudential Life. That basically was on the potential synergies regarding Prudential Life acquisition.

Kim Jaewoo -- Samsung Securities Co. Ltd. -- Analyst

Thank you for the answer.


Next question from Deutsche Bank, we have [Indecipherable]. Please.

Deutsche Bank -- -- Analyst

Yes. Good afternoon. Thank you so much for the presentation. I have two questions, please. So one is related to the regulatory treatment of the COVID-19 situation. Has FSS provided or is thinking of providing any regulatory forbearance for banks? For example, allowing delayed recognition of NPLs or maybe reduced risk weights on certain loans or reduced capital buffers. So this is question one.

And the second question is probably two parts. So given the asset quality stress, has KB identified a, let's say, total share of its loan exposures, which is considered high-risk, which are not NPLs yet, but are likely to go into NPL in the foreseeable future? And because of that -- so if you could share any level possible would be good. And because of that, do you feel that the Group is under pressure to issue more subordinated bonds this year, whether Tier 2 or additional Tier 1s? Thank you.

Unidentified Speaker --

[Technical Issues] various supporting measures [Technical Issues] regulations. Loan-to-deposit regulations have been eased and [Technical Issues] of Basel III can be adopted early on from early June. So the bank actually will have less of a burden in providing support to companies. So that is why we -- they are allowing us to have early adoption of Basel III. For SOHO loans, when there are LDR regulations, when we had 100% that was applied like for corporate loans, they will allow us to apply 85%. So the government has many policy measures for the bank to provide supporting measures for companies.

You also asked about the high-risk loan exposure that we have that have not yet been turned into NPLs, but we will actually send you the information as soon as we have it available. You also asked about sub debt or other issuance of capital products. And I believe that I have mentioned our BIS ratio. And in Q1, our BIS ratio was 14.02% tentatively. And this year, we have some global M&As, including Prudential Life on the table, and that is why we are going to have a bit of a burden on our capital. So we are going to have issuance of some products to have the buffer. And we are going to issue sub debt or hybrid bonds going forward, and to manage RWA, there are non-degree exposures that we are going to reduce or we're going to have a reduction of our loan limits so that we can manage our BIS ratio related to RWA. And we have 14.5% of BIS ratio at the end of the year that we always have targeted. So we're going to manage our RWA and have issuance of products so that we can actually maintain our capital adequacy. Thank you very much.

Deutsche Bank -- -- Analyst

Thank you for the detailed answer.

Unidentified Speaker --

Actually, our conference call has been lasting for more than an hour or so. So I believe that we have time for one more question, and then we will conclude our call for today.


From Kiwoom Securities, we have Mr. Seo Young-soo on the line.

Seo Young-soo -- Kiwoom Securities Co. Ltd. -- Analyst

Yes. Can you hear me well? Regarding the government's measures, there has been a six-month delay in the repayment of SME repayments. And according to the FSS, for the banks, there will be about [Technical Issues] that the banks have been giving out as loans for SMEs and for small owners. So can you tell us about the contribution by KB? How are you going to have the future positioning strategy or plan going forward following this?

In the case of U.S., with pre-emptive provisioning, they are, I believe, preparing and -- for any contingencies going forward. KBFG, well, when we compare our banks to other banks, our provisioning ratio is low compared to other countries. So I believe that the banks need to make an effort to have pre-emptive provisioning. So can you tell us what are your plans going forward for pre-emptive provisioning?

Another question is about your loans. I know that your loan growth has been quite high, above 4%, and you have had more than 20% of growth for corporate loans. And is this a temporary growth? Or do you think this growth can be maintained? In April, in the media, it was said that your corporate loans compared to the previous month actually went up. So can you tell us about what you believe the future trend will be? And what are your loan strategies going forward? Thank you.

Unidentified Speaker --

Please bear with us for one moment.

Unidentified Speaker --

Thank you, Mr. Seo Young-soo, for your question. Your first question is amortization or grace period on the repayment of interest. You asked about the size. The government announced a certain figure. And basically, you are asking the percentage that the banks would have to bear. And basically, it's according to that, that it will be allotted or allocated across banks. At this point, I do not have the specific figures. So we will come back to you with that.

In terms of grace period and interest payment and how we're going to do accounting treatment, we haven't yet made the specific decision. It's going to be accounted as interest income. But basically, in the balance sheet, it's going to be part of the provision in the balance sheet as well as accrued interest. So basically, we will have provisioning for accrued interest. That will be the accounting treatment that we will employ. But once again, that is not a final or confirmed method. So provisioning for accrued interest as well as funding costs, these will be the elements that we will look at. And of course, some amount of loss is inevitable, but that amount is going to be quite minor.

And also companies like JPMorgan, they have really reserved quite a bit of provisioning pre-emptively. U.S. banks, I do not know the exact mechanism, but based on the incurred loss, they have been provisioning based on the amount of incurred loss. But as we move to IFRS 9, basically forward-looking approach was taken. So in the U.S., they followed that concept, and they really provisioned significant amount of reserves.

So for us, end of last year, we've made some conservative projections, and we have set aside provisions as well. So for this year, if things go worse than our conservative stance, then we can revisit and reconsider and also we'll make forecast and projections by different scenarios. And we're currently working on that as we speak. So comparing to US companies and the way they reserve for the provision and the way we do it, there is a slight difference.

Now Korea basically have been already provisioning based on the forward-looking approach already at the end of last year. So this is not an apples-to-apples comparison with the U.S. companies. And loan growth was 4.2%, and large corporates was KRW3.6 trillion increase. So large companies are trying to secure liquidity, and that basically is a driver behind the growth of loans. Now, of that, the high-quality companies or highly rated -- credit-rated companies, we want to first satisfy their demand. If there are some potential problems, we want to make sure we limit the origination of loan. And loan review or loan screening process is put in place so that we can continuously expand on offering loans to high-quality companies.

Peter Kwon -- Head of Investor Relations

I believe that we have had a very fruitful and lengthy Q&A session. Please contact the IR team if you have any more questions. We will conclude our Q&A session and our earnings results presentation. Thank you very much.

Duration: 62 minutes

Call participants:

Peter Kwon -- Head of Investor Relations

Ki Hwan Kim -- Deputy President, Chief Financial Officer

Kim Jin-Sang -- Hyundai Motor Securities Co. Ltd. -- Analyst

Unidentified Speaker --

Kim Jaewoo -- Samsung Securities Co. Ltd. -- Analyst

Jong Kyoo Yoon -- Chairman and Chief Executive Officer

Chang Kwon Lee -- Deputy President, Chief Strategy Officer, Head of Global Business Unit

Deutsche Bank -- -- Analyst

Seo Young-soo -- Kiwoom Securities Co. Ltd. -- Analyst

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