Executive Summary / Key Takeaways

• KB Financial Group ($KB) is strategically positioned as a leading South Korean financial institution, leveraging a diversified business portfolio and a robust "Sustainable Value-Up Plan" to enhance shareholder returns and address market undervaluation.
• The company demonstrates strong financial performance, with Q1 2025 net profit reaching KRW1.6973 trillion and a group ROE of 13.04%, supported by a record-low cost-to-income ratio (CIR) of 35.3% and a 42% contribution from non-banking subsidiaries.
• KB Financial Group is making significant investments in digital transformation and AI, allocating ₩320 billion annually to tech projects, including 42 AI/machine learning initiatives, 7 blockchain applications, and advanced platforms like KB Star Banking and Open Pay, enhancing efficiency and customer experience.
• A progressive shareholder return policy, directly linked to a strong CET1 ratio (13.67% in Q1 2025), includes substantial cash dividends and share buybacks, with a commitment to increase total shareholder return (TSR) and prioritize buybacks until the PBR reaches 1.0x.
• Despite macroeconomic uncertainties and potential asset quality risks in real estate project financing, KB maintains a conservative provisioning stance, targeting a manageable mid-40 bps credit cost ratio for 2025, underpinned by proactive risk management and a focus on high-quality asset growth.

KB Financial's Enduring Strength and Strategic Evolution

KB Financial Group Inc. stands as a formidable force in South Korea's dynamic financial services sector, a testament to its strategic evolution since its founding in 1963. The company has meticulously diversified its offerings across retail and corporate banking, credit cards, securities, and insurance, establishing a comprehensive financial ecosystem that extends its reach internationally to markets including the United States, China, and Indonesia. This broad portfolio has been instrumental in solidifying its position as a leading financial group in Korea, recognized for its robust earnings, consistent shareholder returns, and strong ESG performance.

The broader financial landscape in South Korea is characterized by ongoing macroeconomic uncertainties, a persistent rate cut cycle impacting net interest margins, and evolving regulatory frameworks. The government and financial authorities share a common objective to boost the Korean stock market and eliminate the "Korean discount," a sentiment that directly underpins KB Financial Group's strategic responses. Against this backdrop, the company's "Sustainable Value-Up Plan," announced in October 2024, serves as a pivotal strategic initiative. This plan is designed to enhance shareholder value through predictable and sustainable capital distribution, directly addressing market perceptions of undervaluation.

The competitive arena for KB Financial Group is intense, featuring major domestic financial conglomerates like Shinhan Financial Group (SHG), Hana Financial Group (HNFGF), Woori Financial Group (WF), and Industrial Bank of Korea (IBK), alongside agile fintech challengers such as Kakao Bank and Toss Bank. KB differentiates itself through its strong brand recognition, extensive distribution network, and a highly diversified business portfolio. While competitors like Shinhan may exhibit a more aggressive digital strategy, and Hana boasts a stronger international presence, KB's integrated financial solutions and deep domestic market penetration in credit cards and insurance provide a distinct advantage. The company's ability to offer end-to-end financial solutions, aligning traditional banking with innovative asset management and securities trading, creates a seamless customer experience that fosters loyalty.

Technological Differentiation and Innovation

At the heart of KB Financial Group's strategic thrust is a profound commitment to technological innovation and digital transformation, which serves as a critical differentiator in a rapidly evolving financial landscape. The group allocates a substantial ₩320 billion annually to technology projects, underscoring its dedication to enhancing customer experience and operational efficiency. This investment fuels 42 AI and machine learning projects and integrates blockchain technology in seven distinct applications. Specifically, ₩378.6 billion is channeled into digital platforms, ₩126.4 billion into AI initiatives, and ₩92.3 billion into cybersecurity, reflecting a holistic approach to safe and smart financial services.

The tangible benefits of these technological advancements are evident across its operations. The KB Star Banking app, for instance, was significantly improved in 2022, leveraging MySQL Enterprise Edition for enhanced stability and cost-effectiveness. This platform now integrates over 70 services, providing a comprehensive digital banking experience. In its physical branches, AI virtual humans guide customers, while virtual assistants are available within the mobile banking app. The company has also developed a sophisticated chatbot utilizing natural language processing, specialized in financial terminology to handle general tasks, and the KB STA (state of the art) system for text analytics, which converts customer requests into natural language, voice, or text.

KB Financial Group actively fosters external collaboration through its 'KB Open Innovation Program,' established in 2016, which seeks to partner with promising startups to develop next-generation financial services. Recent tasks under this program include developing non-face-to-face channel content for retirement pensions, an automatic real estate pricing model for Indonesian cities, a generative AI service response quality assessment system for securities, and AI-based insurance design coaching solutions. Furthermore, the 'Open Pay Platform' is being enhanced with new technologies, offering overseas payment services without currency exchange fees and integrating an AI-based Fraud Detection System (FDS) for improved reliability. KB Pay itself provides a seamless payment experience across various channels, supported by biometric and simplified authentication.

These technological endeavors are not merely about efficiency; they are foundational to KB's competitive moat, contributing to its brand value, which increased by 35% to USD 7.3 billion, ranking 54th globally in the Banking 500 2025 journal. By continuously investing in digital capabilities and fostering innovation, KB Financial Group aims to secure a leading position in digital finance, attract tech-savvy customers, and drive long-term growth by delivering differentiated, customer-centric solutions.

A Diversified Engine of Profitability: Segmental Performance and Operational Excellence

KB Financial Group's business model is characterized by a well-balanced and diversified portfolio, with non-banking subsidiaries increasingly contributing to overall profitability. In Q1 2025, the contribution from non-bank segments to the group's earnings rose to 42%, underscoring the success of its diversification strategy. This balance has been crucial in maintaining stable profit generation amidst varying market conditions.

The group reported a net profit of KRW1.6973 trillion in Q1 2025, achieving a robust group ROE of 13.04%. This strong performance was supported by a record-high total operating profit of approximately KRW4.6 trillion. Net interest income remained stable at KRW3.2622 trillion in Q1 2025, despite falling market rates, primarily due to effective Asset-Liability Management (ALM) and an increase in core deposits. The bank's Net Interest Margin (NIM) saw a 4 basis point quarter-on-quarter increase to 1.76% in Q1 2025, a testament to cost reduction efforts and strategic repricing of high-interest time deposits.

Non-interest income also showed significant improvement, reaching KRW1.292 trillion in Q1 2025, driven by enhanced securities-related performance as market rates declined. Net fee income consistently exceeded KRW900 billion quarterly since 2023, reaching KRW934 billion in Q1 2025, demonstrating robust fee income generation fundamentals. The securities business, particularly in investment banking, brokerage, and trading, delivered solid results, while the insurance segment, despite some year-on-year decline in Q1 2025 operating profits to KRW437.8 billion, showed a modest recurring increase when excluding base effects.

Operational efficiency is a core focus, with the group's Cost-to-Income Ratio (CIR) reaching a record low of 35.3% in Q1 2025. This improvement reflects ongoing cost rationalization efforts, particularly in recurring expenses, and a strong top-line growth. Management anticipates a continued downward stabilizing trend for the group CIR, driven by sustained cost efficiency initiatives across the organization.

Capital Strength and Shareholder-Centric Strategy: The Value-Up Mandate

KB Financial Group's commitment to shareholder value is explicitly articulated through its "Sustainable Value-Up Plan," which links shareholder returns directly to its Common Equity Tier 1 (CET1) ratio. This policy aims to return surplus capital to shareholders without an upper limitation on the total shareholder return ratio, ensuring that higher CET1 ratios translate into greater shareholder distributions. The group's CET1 ratio stood at an impressive 13.67% at the end of March 2025, a 14 basis point increase quarter-on-quarter, maintaining its position as an industry leader in capital adequacy.

The company's shareholder return strategy is structured in two phases: utilizing capital exceeding 13% CET1 from the previous year for first-half dividends and share buybacks, and then deploying capital above 13.5% CET1 from the first half for additional second-half shareholder returns. In Q1 2025, the Board of Directors approved a quarterly cash dividend of KRW912 per share, a notable KRW108 increase from the previous quarter, projecting an annual total dividend of approximately KRW1.34 trillion. Additionally, a KRW300 billion share buyback and cancellation was resolved, with a total of KRW720 billion in buybacks and cancellations planned for the first half of 2025. Management has stated that total shareholder return (TSR) is expected to rise compared to 2024, with a commitment to prioritize share buybacks and cancellations until the Price-to-Book (PBR) ratio reaches 1.0x, which is expected to accelerate the uplift in Dividends Per Share (DPS).

For 2025, KB Financial Group targets an annual growth rate for risk-weighted assets (RWA) of 4.5%, a deliberate moderation from historical levels to emphasize qualitative growth. This RWA management is integrated into a comprehensive RoRWA (Return on Risk-Weighted Assets) system across all business segments, with performance indicators (KPIs) for employees and executive compensation aligned to these objectives. This strategic alignment ensures that asset growth is pursued from a comprehensive profitability perspective, optimizing capital allocation while maintaining a stable capital ratio.

Managing Headwinds: Asset Quality and Risk Management

Despite its robust performance, KB Financial Group operates within an environment marked by persistent macroeconomic uncertainties, which necessitate a conservative approach to risk management. Concerns over global economic downturns, coupled with domestic challenges like rising SME delinquency rates and volatility in the real estate market, remain key areas of focus. In Q1 2025, the group's provision for credit losses amounted to KRW655.6 billion, resulting in a credit cost of 54 basis points. However, excluding one-off factors, the recurring credit cost was a manageable 45 basis points.

The company expects its annual credit costs for 2025 to be around the mid-40 basis points level, a projection management considers conservative given the delayed economic recovery and potential deterioration in real estate project financing (PF) and overseas commercial real estate (CRE). KB Financial Group has proactively undertaken significant preemptive provisioning, particularly for real estate PF and trust arrangements, which provides an ample buffer against potential future losses. For instance, in Q2 2024, KRW80 billion was set aside for property trust provisioning, and the company has approximately 70% reserves for its KRW300 billion exposure to property trusts with completion guarantees.

Management is actively focused on asset quality recovery and reducing non-performing loans (NPLs), implementing strict limits and warning systems for borrowers, particularly in the card sector. While some reversals from previously accumulated provisions are anticipated, the conservative guidance reflects a readiness for potential future risks, including increasing instances of construction companies seeking court receivership. The company acknowledges that optimism in the property PF market is limited and emphasizes the importance of the government's "soft landing" plans for the sector, including effective restructuring of problematic sites. KB Financial Group's strong capital position and proactive risk management framework are designed to absorb potential shocks and maintain asset quality amidst these challenges.

Conclusion

KB Financial Group stands as a compelling investment proposition, underpinned by its strategic commitment to a "Sustainable Value-Up Plan" that prioritizes both robust profitability and enhanced shareholder returns. The company's diversified business model, with a growing contribution from non-banking segments, has proven resilient in a challenging macroeconomic environment, delivering strong financial performance as evidenced by its Q1 2025 net profit of KRW1.6973 trillion and a leading CET1 ratio of 13.67%.

Crucially, KB Financial Group's significant investments in digital transformation and AI, including its advanced KB Star Banking app and Open Innovation Program, are not merely operational enhancements but fundamental drivers of its competitive edge, fostering efficiency, customer loyalty, and a higher brand value. This technological leadership, combined with a disciplined approach to capital management and a progressive shareholder return policy, positions the company favorably against its domestic and international peers. While the financial sector faces ongoing uncertainties, particularly concerning asset quality in real estate, KB's conservative provisioning and proactive risk management strategies provide a solid foundation. The company's clear guidance for RWA growth and credit costs, coupled with its commitment to increasing total shareholder return, underscores a well-articulated strategy for long-term value creation. Investors seeking exposure to a financially sound, strategically agile, and shareholder-focused financial institution in South Korea should closely consider KB Financial Group's trajectory.