South Korea’s KB Financial Group (NYSE: KB), the owner of South Korea’s largest lender, reported in late July that second-quarter 2012 earnings dropped 33 percent, after booking more provisions for bad debt.

Net income fell to 547.5 billion won (USD481 million) in the three months ended June 30 from 817.3 billion won a year earlier when it booked gains from a stake sale. That said, earnings were in line with analysts’ estimates.
 
These results are relatively positive, given the overall economic slowdown in South Korea, where gross domestic product (GDP) growth is down to 2.4 percent year over year. Also keep in mind, the second quarter is traditionally a weak one for South Korean banks as they purge their books of bad loans.

Net interest income declined by 0.5 percent quarter over quarter, while loan growth was up 2 percent on a quarterly basis. Loans to small businesses and to retail customers were the stars of the quarter, rising 3 percent and 1.4 percent respectively.
 
Management stated that loan growth for the second half of the year should remain relatively healthy given the improving economic environment in Asia. According to a statement made by KB Financial executives:

“When it comes to asset growth, retail loans showed a meager growth during the first quarter, while it grew slightly in the second quarter. However, corporate loans are maintaining stable growth year-to-date. Considering the current real estate market and an uncertain variable macroeconomic environment, the current asset growth trend is likely to persist into 2H.

Therefore, we are looking for a 2 percent to 3 percent growth in retail loans, but a 6 percent to 7 percent growth in corporate loans. All in all, we will be maintaining 4 percent to 5 percent of asset growth in total.”

The second quarter is when KB Financial conducts sales of non-performing loans (NPL). During the second quarter, KB Financial sold USD246 million worth of NPLs, versus none in the first quarter of the year, producing a loss of USD19.5 million. In addition, because of the weakness of the South Korean won against the US dollar, KB Financial also incurred a USD3.5 million foreign exchange translation loss.
 
KB Financial’s asset quality remains solid, with retail banking and credit card operations stabilizing. Provisions for credit losses dropped 6.5 percent quarter over quarter, while credit costs also fell. That said, corporate NPLs edged higher to USD452 million from USD407 million.

KB Financial’s delinquency ratio increased in the second quarter to 1.38 percent, largely driven by the corporate segment. However, the delinquency ratio of credit card receivables declined to 2.4 percent from 2.7 percent in the first quarter of the year. If this trend continues, expect some recovery in its credit card business in the second half of the year.

Finally, KB Financial is trying to expand into the insurance business and has been bidding for the assets of ING (NYSE: ING) in South Korea.

KB Financial remains a good bet, with strong asset quality and an ongoing effort to lower coats. Its shares trade at 0.60 times book value and 5.5 times earnings. In 2008, the stock traded at 0.44 times book value. The bank’s Tier 1 ratio stands at 11 percent, among the highest of its peer group. The KB Financial Group is a buy up to USD40.