Earnings Statement KBC Group, 1Q2011
Regulated information* - 12 May 2011 (07.00 a.m. CEST)
Summary:
Good start to the year - 1Q net profit up 13% to 821 million euros
KBC ended the first three months of 2011 with a net profit of 821 million euros,
compared with a net profit of 724 million euros in the previous quarter and 442
million euros in the corresponding quarter of 2010. The 'underlying' net result
for the quarter under review (after excluding one-off and exceptional items)
came to 658 million euros, compared with 168Â million euros in 4Q2010 and 543
million euros in 1Q2010.
Jan Vanhevel, Group CEO: 'KBC has started 2011 with a satisfyingly high level of
profit. This was driven by good revenues generated by all of our business units,
a controlled cost environment and a substantially lower level of impairment
charges. Our banking and insurance businesses in our Belgian and core Central
and Eastern European home markets turned in a sound performance, while the
Merchant Banking Business Unit bounced back, thanks to robust market activities.
The first quarter results of 821 million euros were characterised by a healthy
level of net interest income, solid net gains from financial instruments at fair
value, and slightly lower net fee and commission income. Costs remained well
under control and loan losses were significantly lower than in the previous
quarter. The most noteworthy exceptional items included in the results for the
first quarter were the positive marked-to-market valuations of our ALM hedges
and the positive value adjustments to our CDO portfolio. Overall, the first
quarter represents a continuation of the solid performance we have recorded in
the past couple of quarters.'
Financial highlights 1Q2011 (underlying)
Jan Vanhevel, Group CEO, summarises the underlying business performance for
1Q2011 as follows:
Gross income benefited from good net interest income, a lower level of insurance
claims and strong dealing room results.
·        Underlying net interest income stood at 1 374 million euros, up 2%
year-on-year (and up by as much as 3%, excluding Secura, which was sold in
4Q2010) but down 6% on the high level of 4Q2010. Compared to 4Q2010, the net
interest margin narrowed, but that was partly due to positive exceptional items
in 4Q2010. Disregarding these factors, interest margins remained roughly stable
in the Belgium and CEE Business Units, as did credit and deposit volumes.
Compared to 1Q2010, customer deposits grew in all the business units, except the
Group Centre (as planned), while the loan book increased in the Belgium Business
Unit, was roughly flat in the CEE Business Unit and contracted in the Merchant
Banking Business Unit, as a result of the intentional reduction in international
lending. Mortgage lending rose substantially year-on-year by more than 6%, with
a significant increase in both the Belgium and CEE Business Units.
·        Net of technical charges and the ceded reinsurance result, technical
insurance income came to 108 million euros, up 51% year-on-year and 5% quarter-
on-quarter. The combined ratio improved substantially, shifting from 100% for
FY2010 to an excellent 85% for 1Q2011.
·        The net result from financial instruments at fair value stood at a
strong 259 million euros, lower than in the year-earlier quarter but more than
double the quarter-earlier figure, thanks to a significantly better dealing room
performance in the quarter under review.
·        Net fee and commission income amounted to 399 million euros, down 4%
quarter-on-quarter and 7% year-on-year. This revenue item is still not at the
level of one year ago, but the quarterly results have been driven primarily by
sales of balanced funds and life insurance contracts.
·        The other income components come to an aggregate 134 million euros,
significantly up on the -50 million euros recorded in the previous quarter,
which was affected by a one-off provision for irregularities at the leasing
business in the UK.
Operating expenses remain under control despite Hungarian bank tax, while
impairment is substantially lower, mainly on account of Ireland.
* Operating expenses came to 1 227 million euros for the first quarter of
2011, up 6% on their year-earlier level but down 6% quarter-on-quarter.
Excluding the booking in 1Q2011 of the Hungarian bank tax for full year
2011, costs were down 11% quarter-on-quarter and roughly flat year-on-year.
The cost-cutting measures taken in the aftermath of the financial crisis
have had their full effect. All in all, costs remain under control.
* Loan loss impairment stood at 97 million euros in the first quarter, down
roughly 70% year-on-year and 80% quarter-on-quarter. As a consequence, the
annualised credit cost ratio stood at an exceptionally favourable 0.24% and
breaks down into an excellent 0.08% for the Belgian retail book (down from
0.15% for FY2010), 0.51% in Central and Eastern Europe (down from 1.22% for
FY2010 - thanks to, inter alia, an exceptional reversal of impairment
related to the sale of part of the consumer finance portfolio in Poland)
 and 0.43% for Merchant Banking (down from 1.38% for FY2010, which had been
impacted by exceptional impairment charges for Ireland).
Excess capital to the tune of 4.8 billion euros.
* At the end of 1Q2011, the KBC group had generated capital of roughly 4.8
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 280 million euros to profit in
1Q2011, up 25 million euros on the 4Q2010 figure, thanks in part to lower
operating expenses, lower impairment and a better technical result in the non-
life insurance business.
·        The profit contribution of the Central and Eastern Europe Business
Unit amounted to 101 million euros in 1Q2011, compared to 131 million euros for
4Q2010. However, the first quarter was adversely impacted by the booking of the
Hungarian bank tax for the full year, which more than offsets the lower
operating expenses in the region. Lower impairment (partly related to a one-off
amount released following the sale of part of the consumer finance portfolio in
Poland), and the generally stable level of total income also contributed to the
good bottom-line figure.
·        The Merchant Banking Business Unit contributed a robust 177 million
euros to profit in 1Q2011, compared to -228Â million euros in the previous
quarter (which had been impacted by 125 million euros (after tax) being set
aside for irregularities at KBC Lease UK and by additional impairment charges to
the tune of 0.3 billion euros being recorded for Ireland). The first quarter
result was also supported by a very strong performance by the dealing room.
·        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 1Q2011, the
Group Centre's net result came to 99 million euros, compared to 11 million euros
in the previous quarter (significant improvement in the contribution to the
results by KBL epb, Absolut Bank, NLB, etc.).
Positive value adjustments dominate one-off 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 1Q2011
amounted to a positive 0.2 billion euros.
* Apart from some smaller items, the main non-operating item in 1Q2011 was the
valuation mark-up of 0.1 billion euros on the CDO exposure, resulting mainly
from a tightening of corporate credit spreads between the end of December
2010 and the end of March 2011. Besides this, there was a marked-to-market
increase of 0.1 billion euros in the value of the trading derivatives used
for hedging purposes, resulting from a tightening of government credit
spreads in the euro area.
First three months of 2011: results per heading (IFRS)
Explanations per heading of the IFRS income statement for the first quarter of
2011 (see summary table on the next page):
* The IFRS net result for 1Q2011 amounted to a very strong 821 million euros,
compared to 442 million euros a year ago and 724 million euros a quarter
ago.
* Net interest income amounted to 1 395 million euros, down 8% year-on-year
and 13% quarter-on-quarter. On a comparable basis, credit volumes contracted
by more than 8% year-on-year in Merchant Banking, in line with our intention
to scale down our international loan book. The loan book in Belgium grew by
4% year-on-year (reflecting the economic recovery) with mortgage loans up by
as much as 8%. Loan volumes in CEE were flat (the decrease in Hungary being
offset by increases in the Czech Republic and Slovakia, among other
factors), with mortgage loans going up by 5%. Customer deposits were up 6%
in Belgium and 3% in CEE. The net interest margin widened from 1.82% at the
end of March 2010 to 1.93% at the end of the first quarter of this year.
* Earned insurance premiums, before reinsurance, stood at 1 141 million euros,
the same level as the previous quarter and down 9% on 1Q2010. Net of
technical charges and the ceded reinsurance result, technical insurance
income came to 112 million euros. The first quarter of 2011 was
characterised by a relatively low level of claims. The combined ratio for
the group's insurance companies came to an excellent 85% for 1Q2011,
compared to 100% for FY2010.
* Net fee and commission income amounted to 300 million euros, down 2%
quarter-on-quarter and 7% year-on-year. Sales of commission-based products
were somewhat subdued in the first quarter of 2011. Assets under management
stood at 205 billion euros at the end of the first quarter, slightly down on
their quarter-on-quarter and year-on-year levels on account of both negative
price and limited net entry effects.
* The net result from financial instruments at fair value (trading and fair
value income) came to 472 million euros, compared to -11 million euros a
year earlier and 429 million in the previous quarter. On an underlying basis
(i.e. excluding exceptional items such as value adjustments to structured
credit, losses 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 259
million euros.
* The remaining income components were as follows: dividend income from equity
investments amounted to 12Â million euros, the net realised result from
available-for-sale assets (bonds and shares) stood at 34 million euros and
other net income totalled 92 million euros. In total, this is in line with
the year-earlier figure.
* Operating expenses amounted to 1 143 million euros in 1Q2011, 7% higher than
in 1Q2010 and 4% down on the previous quarter. The cost comparison is
distorted by the booking in 1Q2011 of the Hungarian bank tax for FY2011 (62
million euros). The underlying cost/income ratio for banking - a measure of
cost efficiency - stood at 55%, in line with the 56% registered for FY2010.
* Impairment stood at 105 million euros, down substantially on its year-on-
year and quarter-on-quarter levels (some 70% and 80%, respectively). As was
the case in the reference quarters, impairment almost entirely related to
loans and receivables. As a result, the annualised credit cost ratio for
1Q2011 amounted to an exceptionally low 0.24%, down on the figure of 0.91%
for FY2010. Other impairment charges totalled 8 million euros in this
quarter and related mainly to available-for-sale assets.
* Income tax amounted to 334 million euros for 1Q2011.
* At the end of the first quarter of 2011, total equity came to 18.5 billion
euros, a small decrease of 0.1 billion euros compared to the start of the
year, due mainly to the inclusion of the positive result for the quarter
(0.8 billion euros), and offset by the dividend and state coupon payments (-
0.9 billion euros, combined) and the change in the revaluation reserve for
available-for-sale assets and cash flow hedges (-0.1 billion euros,
combined). The group's tier-1 capital ratio - a measure of financial
strength - stood at a sound 13.3% at end-March 2011. Including the effect of
sale agreements announced to date (Centea), the pro forma tier-1 ratio
amounts to approximately 13.7%.
Other information
Strategy highlights and main events
* KBC posted a robust result in the first quarter of 2011, reassuring that the
underlying business strategy is working and reflecting the gradual recovery
of the economies in the markets KBC is active in.
* In the first quarter of 2011, we continued to implement our strategic
refocusing plan. At the beginning of March, it was announced that Crédit
Agricole (Belgium) would acquire Centea, one of the strongest savings
banks in Belgium. This deal 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% (impact calculated on 31 December 2010). Finalisation of the deal
depends on the customary approval of the regulator(s) and is likely to
occur in the coming months. 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.
* On 21 May 2010, the KBC group announced that it had reached an agreement
with the Hinduja Group for the sale of its private banking subsidiary,
KBL epb. As is customary, the Hinduja Group had submitted the deal for
approval to the Luxembourg regulator (the CSSF) and the regulators in
the nine other European countries where KBL epb operates. The CSSF
confirmed on 14 March 2011 that it was stopping its evaluation of the
acquisition, after concluding that its decision would have been to
object to it. In practice, this means that the sale of KBL epb to the
Hinduja Group will not go ahead. We have since restarted the sales
process for KBL epb.
* A number of companies are still scheduled for divestment as part of the
planned reduction in the international loan portfolio. The sales process for
Fidea is ongoing, the sale process for KBC Bank Deutschland has started and
the files for the sales process for Antwerp Diamond Bank are being prepared.
* Preparations to float a minority stake in our Czech banking subsidiary are
on track and we are on stand-by to launch the IPO programme once optimal
conditions have been identified for a successful transaction.
* As stated on previous occasions, KBC intends to redeem the core capital
securities issued to the State largely by retaining earnings and releasing
capital currently tied up in non-core assets that are earmarked for
divestment or run-off. KBC also intends to maintain a regulatory tier-1
capital ratio of 10%, 8% of which is core capital, according to the 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 Group Quarterly report 1Q2011:
http://hugin.info/133947/R/1514514/450800.pdf
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Source: KBC Groep via Thomson Reuters ONE
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