Earnings Statement KBC Group, 2Q 2011 and 1H 2011

Regulated information* - 09 August 2011 (07.00 a.m. CEST)
 
Summary: Strong first half profit at 1 154 million euros
 
KBC ended the second quarter of 2011 with a consolidated net profit of 333
million euros, compared with a net profit of 821 million euros in the previous
quarter and 149 million euros in the year-earlier quarter. On a cumulative
basis, this means that the KBC group has generated a net profit of 1 154 million
euros in the first half of 2011, almost double the corresponding figure for
1H2010.
 
Disregarding one-off and exceptional items, the 'underlying' net result for the
quarter under review came to 528 million euros, compared with 658 million euros
in 1Q2011 and 554 million euros in 2Q2010. The underlying result for the first
half of 2011 amounted to 1 186 million euros, compared to 1 097 million euros
for the corresponding period in 2010.
 
Jan Vanhevel, Group CEO: 'The net result for the second quarter of 2011 amounted
to 333 million euros - which when added to the first quarter result - brings the
net result for the first half of 2011 to a very satisfying 1 154 million euros,
almost twice as high as the figure in the corresponding period of 2010. This was
due largely to sustained underlying revenues generated by our Belgium and
Central & Eastern Europe Business Units, combined with well-controlled costs
throughout the group. Loan loss impairment was up after the exceptionally low
level in the first quarter and an impairment of 102 million euros after tax was
also recorded on our Greek government bond portfolio, reducing the underlying
result for this quarter. Our reported IFRS result also included some exceptional
items, including a 0.1-billion-euro markdown on our CDO portfolio and a marked-
to-market change of -0.1 billion euros in the value of our trading derivatives
used for hedging purposes.'
'In mid-July, we announced a substantial change to our strategic plan. The main
change concerned replacing the originally intended IPO of a minority share in
CSOB Bank and K&H Bank by the sale of Kredyt Bank and Warta, our Polish
subsidiaries. This adjustment has since been approved by the European
Commission. We strongly believe this provides us with a solid basis for the
future achievement of the goals set in our strategic refocusing exercise. Our
bancassurance business model remains at the core of our strategy'
 
Financial highlights 2Q2011 (underlying)
 
Jan Vanhevel, Group CEO, summarises the underlying business performance for
2Q2011 as follows:
 
Gross income benefit from sustained net interest income and an improved
technical insurance result.
 
  * Underlying net interest income stood at 1 390 million euros, stable year-on-
    year and up 1% quarter-on-quarter. The net interest margin came to 1.98% for
    the quarter, up from 1.93% in 1Q2011. The net interest margin was also up on
    its 2Q2010 level of 1.87%. In the Belgium Business Unit, credit and deposit
    volumes rose by 2% and 3%, respectively, compared to their 1Q2011 levels.
    Compared to 2Q2010, credit volumes were up by as much as 4% (mortgages by a
    robust 7%) and deposit volumes by 6%. The loan book in the CEE Business Unit
    contracted slightly quarter-on-quarter, shrinking by 1% (but mortgages
    increased by 1%), while the deposit base was stable. Year-on-year, the CEE
    loan book grew by 1% (driven to a large extent by the 4% mortgage book
    growth) and the deposit base remained stable. The loan book in the Merchant
    Banking Business Unit contracted by 8% year-on-year (stable compared to the
    previous quarter), in line with the intention to run down international
    operations. The deposit base in this business unit shrank too, falling by
    7% quarter-on-quarter and 9% year-on-year.
  * Net of technical charges and the ceded reinsurance result, technical
    insurance income came to 123 million euros, up 85% year-on-year and 14%
    quarter-on-quarter. The combined ratio improved substantially from 104% for
    2Q2010 to an excellent 90% for 2Q2011. The year-to-date ratio stood at 87%.
  * The net result from financial instruments at fair value stood at a modest
    102 million euros, lower than in the previous and year-earlier quarters, due
    to the moderate performance turned in by the dealing room in the quarter
    under review.
  * Net fee and commission income amounted to 394 million euros, down 1%
    quarter-on-quarter and 13% year-on-year. The quarter-on-quarter performance
    is to a large extent accounted for by the volume of assets under management,
    which also fell by 1% in the second quarter of this year. Year-on-year, the
    decrease is due to a reduction in the fee business as well, as a result of
    the scaled-down international activities.
  * The other income components came to an aggregate 151 million euros, up on
    the 134 million euros recorded in the previous quarter.
 
Operating expenses lower, impairment impacted by Greece.
 
  * Operating expenses came to 1 155 million euros for the second quarter of
    2011, flat on their year-earlier level but down 6% quarter-on-quarter.
    However, excluding the booking in 1Q2011 of the Hungarian bank tax for full
    year 2011, costs were more or less the same quarter-on-quarter too. All in
    all, costs remain under control.
  * Loan loss impairment stood at 164 million euros in the second quarter, down
    on the 278 million euros recorded a year ago, but up on the low figure
    recorded in the previous quarter (97 million euros). As a consequence, the
    annualised credit cost ratio stood at a favourable 0.32% for the first six
    months of 2011; this breaks down into an excellent 0.10% for the Belgian
    retail book (down from 0.15% for FY2010), a very low 0.53% in Central and
    Eastern Europe (down from 1.22% for FY2010) and 0.58% for Merchant Banking
    (down from 1.38% for FY2010).
  * Other impairment charges relate mainly to the value markdown on Greek
    government bonds (139 million euros before tax, 102 million euros after
    tax).
 
Strong capital position under Basel II.
 
  * At the end of 2Q2011, the KBC group had generated capital of roughly 5.3
    billion euros in excess of the 10% tier-1 target (including the effect of
    divestments for which a sale agreement has been signed to date).
 
Highlights of underlying performance per business unit.
 
·          The Belgium Business Unit contributed  238 million euros to profit in
2Q2011. This was 42 million euros less than in 1Q2011, 30 million euros of which
related  to  the  impairment  on  Greek  government  bonds, with the rest mainly
relating to slightly higher costs and loan loss impairments, despite an increase
in total income.
 
·          The  CEE  Business  Unit  contributed  137 million euros to profit in
2Q2011, compared  to 101 million euros in the  previous quarter. The increase is
due  largely  to  the  full-year  Hungarian  bank  tax being booked in the first
quarter,  though this has been offset  in part by the 26-million-euro impairment
recorded on Greek Government bonds in 2Q2011. The changes in the strategic plan,
as  approved by the European  Commission at the end  of July 2011 (see further),
are not yet reflected in these figures.
 
·          The Merchant  Banking Business  Unit contributed  63 million euros to
profit  in  2Q2011, down  from  the  177 million  euros  recorded in 1Q2011. The
decrease  is due mainly to  much lower gains from  financial instruments at fair
value, driven by the modest level of income generated by the dealing room, lower
net  interest  income  (decreasing  portfolio)  and  somewhat  higher  loan loss
impairments.
 
·          It should be noted that all  planned divestments of the KBC group are
not included in the respective business units, but have been grouped together in
the  Group Centre in order to clearly  indicate the financial performance of the
long-term  activities  and  the  planned  divestments separately. In 2Q2011, the
Group Centre's net result came to 90 million euros, compared to 99 million euros
in  the previous quarter. We  repeat that the changes  in the strategic plan, as
approved  by  the  European  Commission  at  the  end  of July 2011, are not yet
reflected in these figures.
 
Negative value adjustments dominate exceptional items.
 
  * The quarter was also characterised by a number of one-off or exceptional
    items that were not part of the normal course of business and were therefore
    excluded from the underlying results. Their combined impact in 2Q2011
    amounted to a negative 0.2 billion euros.
  * Apart from some smaller items, the main non-operating item in 2Q2011 was the
    valuation markdown of 0.1 billion euros on the CDO exposure, resulting
    mainly from a widening of corporate and ABS credit spreads. Besides this,
    there was a negative 0.1 billion euros marked-to-market change in the value
    of the position in trading derivatives used for hedging purposes, primarily
    because of a widening of government spreads.
 
First six months of 2011: results per heading (IFRS)
 
Explanations  per heading of the IFRS income  statement for the first six months
of 2011 (see summary table on the next page):
 
  * The IFRS net result for the first six months of 2011 (further referred to as
    1H2011) amounted to a strong 1 154 million euros, significantly up on the
    591 million euros recorded in the same period of 2010.
  * Net interest income amounted to 2 801 million euros in 1H2011, down 9% on
    its 1H2010 level. On a comparable basis, credit volumes contracted by 8%
    year-on-year in Merchant Banking and by 11% in the Group Centre, in line
    with our intention to scale down our international loan book. On the other
    hand, the loan book in Belgium grew by 4% year-on-year, with mortgage loans
    up by as much as 7%, while loan volumes in CEE were up by 1% (sizeable
    increases in the Czech Republic and Slovakia), with mortgage loans going up
    by 4%. Year-on-year, customer deposits rose by 6% in Belgium, remained flat
    in CEE and decreased significantly in Merchant Banking and the Group Centre.
    The net interest margin widened from 1.84% in 1H2010 to 1.95% in 1H2011.
  * Earned insurance premiums, before reinsurance, stood at 2 115 million euros
    in 1H2011, 12% down on the figure for 1H2010, due to life insurance. Net of
    technical charges and the ceded reinsurance result, technical insurance
    income came to 238 million euros, up 62% on the year-earlier figure. The
    first half of 2011 was characterised by a relatively low level of claims.
    The combined ratio for the group's insurance companies came to an excellent
    87% for 1H2011, compared to 100% for FY2010.
  * Net fee and commission income amounted to 597 million euros in 1H2011, down
    9% on its 1H2010 level. Sales of commission-based products were subdued in
    the first half of 2011. Assets under management stood at 203 billion euros
    at the end of June 2011, 3% down on their year-earlier level on account of
    negative net entry effects, though partly mitigated by a positive investment
    performance.
  * The net result from financial instruments at fair value (trading and fair
    value income) came to 279 million euros in 1H2011, compared to -733 million
    euros in 1H2010. On an underlying basis (i.e. excluding exceptional items
    such as value adjustments to structured credit, results related to the
    activities of KBC Financial Products that are being wound down, and after
    shifting all trading-related income items to this income statement line),
    trading and fair value income amounted to 361 million euros in 1H2011.
  * The remaining income components were as follows: dividend income from equity
    investments amounted to 53 million euros, the net realised result from
    available-for-sale assets (bonds and shares) stood at 76 million euros and
    other net income totalled 202 million euros. When aggregated, this figure
    was 14% lower year-on-year.
  * Operating expenses amounted to 2 224 million euros in 1H2011, 5% higher than
    in 1H2010. The cost comparison is distorted by the booking (in 1Q2011) of
    the Hungarian bank tax for FY2011 (62 million euros). Excluding this item,
    costs increased by a mere 2% year-on-year. The underlying cost/income ratio
    for banking - a measure of cost efficiency - stood at 56% in 1H2011, in line
    with the figure recorded for FY2010.
  * Impairment stood at 437 million euros in 1H2011. Impairment on loans and
    receivables amounted to 260 million euros, significantly less than the 633
    million recorded in 1H2010. As a result, the annualised credit cost ratio
    for 1H2011 came to a favourable 0.32%, down on the figure of 0.91% for
    FY2010. Other impairment charges totalled 176 million euros in 1H2011 and
    relate mainly to Greek government bonds (139 million euros, pre-tax).
  * Income tax amounted to 411 million euros for 1H2011.
  * At the end of the first half of 2011, total equity came to 19.0 billion
    euros, a 0.3-billion-euro increase compared to the start of the year, due
    mainly to the inclusion of the positive result for the period under review
    (+1.2 billion euros) and partly offset by the dividend and state coupon paid
    (-0.9 billion euros, combined). The group's tier-1 capital ratio - a measure
    of financial strength - stood at a sound 13.9% at end-June 2011. Including
    the effect of sale agreements announced to date (Centea), the pro forma
    tier-1 ratio amounts to approximately 14.3%.
 
Other information
 
Strategy highlights and main events
 
  * KBC posted a good result for the first half of 2011. The group has a sound
    bancassurance business model which is and remains at the core of our
    strategy. The result for the period under review indicates that this
    underlying business strategy is working and reflects the current status of
    the economies in the markets KBC is active in.
 
  * In the first half of 2011, we continued to implement our strategic
    refocusing plan. In March 2011, it was announced that Crédit Agricole
    (Belgium) would acquire Centea. This deal, which was closed on 1 July 2011,
    will free up around 0.4 billion euros of capital for KBC, primarily by
    reducing risk-weighted assets by 4.2 billion euros, which will ultimately
    boost KBC's tier-1 ratio by around 0.4%.
 
* As stated during the previous quarter, we have restarted the sales
        process for KBL EPB.
 
      * In addition to this, Value Partners Ltd., a Hong Kong-based and listed
        asset management firm, reached an agreement with KBC Asset Management
        (KBC AM) in April 2011 for the acquisition of KBC AM's 55.46% stake in
        KBC Concord Asset Management Co. Ltd.
 
* During the second quarter of 2011, KBC Bank and the International Finance
    Corporation (IFC) - the private sector arm of the World Bank Group - signed
    and closed an agreement through which KBC Bank would acquire a large part of
    IFC's 5% stake in Absolut Bank. The sale is the result of the IFC exercising
    the put option it had agreed with KBC Bank in 2007. As a result, KBC Bank
    now holds a 99% stake in Absolut Bank. The transaction did not have any
    impact on KBC's capital position.
 
* Beginning of August, KBC Securities has completed the divestments of its
        operations in Serbia and Romania, reaching an agreement on management
        buy-outs with local management.
 
* A number of companies are still scheduled for divestment as part of the
    planned reduction in the international loan portfolio. The sales process for
    KBL EPB and for Fidea is ongoing, the sales process for KBC Bank Deutschland
    has started, and the files for the sales process for Antwerp Diamond Bank
    are being prepared.
 
  * On 13 July 2011, it was announced that KBC had formally applied to the
    European Commission to amend its 2009 strategic plan. Due to the impact of
    certain changes in the regulatory environment (especially Basel III and
    draft IFRS rules on leases) and the difficulty involved in floating K&H Bank
    in the current circumstances, some measures presented in the initial plan
    had become less effective in achieving the intended aim. KBC and the Belgian
    Authorities formally applied to the European Commission for its approval to
    replace the planned IPOs of a minority stake in CSOB Bank (Czech Republic)
    and K&H Bank (Hungary), as well as the sale and lease back of KBC's head
    offices in Belgium, by the divestment of KBC's Polish banking and insurance
    subsidiaries, Kredyt Bank and Warta (and their subsidiaries), and the sale
    or unwinding of selected ABS and CDO assets. The application was approved by
    the European Commission on 27 July 2011. KBC believes that the amendments
    will help the group achieve its objectives. KBC's main objective is and
    remains to execute the plan within the agreed timeframe and to repay the
    Belgian authorities in a timely manner.
 
  * As a result of the current credit stress on Greek government bonds, KBC
    decided to record an impairment of 0.1 billion euros (post-tax) on its Greek
    government bond exposure (0.5 billion euros, pre-impairment book value). It
    supports the voluntary rollover of Greek debt, as proposed by the IIF.
 
  * Given the current economy and domestic Irish Marketplace has not improved as
    was envisaged and the austerity measures do have a sizeable impact on
    households, challenging credit conditions will remain, fuelled by continued
    downward pressure on asset values and rising interest rates generating
    pressure on borrowers. This might lead to a higher loan loss provisions rate
    in the next quarters.
 
  * KBC Bank (a fully owned subsidiary of KBC Group NV) was subjected to the
    2011 EU-wide stress test conducted by the European Banking Authority (EBA)
    in co-operation with the National Bank of Belgium, the European Central Bank
    (ECB), the European Commission (EC) and the European Systemic Risk Board
    (ESRB). The test seeks to assess the resilience of European banks to severe
    shocks and their specific solvency to hypothetical stress events under
    certain restrictive conditions. The assumptions and methodology were
    established to assess banks' capital adequacy against a 5% Core Tier-1
    capital benchmark and are intended to restore confidence in the resilience
    of the banks tested. The adverse stress test scenario was set by the ECB and
    covers a two-year time horizon (2011-2012). The stress test was carried out
    using a static balance sheet assumption as at December 2010. It does not
    take into account future business strategies and management actions and is
    not a forecast of KBC Bank's profits. As a result of the assumed shock, the
    estimated consolidated Core Tier-1 capital ratio of KBC Bank would change to
    10.0% under the adverse scenario in 2012 compared to 10.5% at year-end
    2010. This result incorporates the effects of the mandatory restructuring
    plans agreed with the EU Commission before 31 December 2010.
 
  * KBC also intends to maintain a regulatory tier-1 capital ratio of 10%, 8% of
    which is core capital, according to Basel II banking capital adequacy rules.
 
  * The financial calendar, including the dates of earnings releases as well as
    analysts and investor meetings, is available at www.kbc.com.
 
* This news item contains information that is subject to the transparency
regulations for listed companies.
 
KBC_Quarterly_report_2Q2011: 
http://hugin.info/133947/R/1536792/469025.pdf
 
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Source: KBC Groep via Thomson Reuters ONE
 
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