Earnings Statement KBC Group, 2Q 2012 and 1H 2012
(Thomson Reuters ONE) -
Regulated information* - 07 August 2012 (07.00 a.m. CEST)
Summary:
Good commercial results surpassed by impairment charges recorded on remaining
divestments.
The IFRS-based net result reported for the quarter under review came to a net
loss of 539 million euros, compared with a net profit of 380 million euros in
the previous quarter and 333 million euros in the year-earlier quarter. This
means the group has generated a total net loss of 160 million euros for the
first six months of 2012, as opposed to a net profit of 1 154 million euros for
the corresponding period of 2011.
Excluding all exceptional and non-operating items, KBC ended the second quarter
of 2012 with an underlying net profit of 372 million euros, compared with 455
million euros in the previous quarter and 528 million euros in the corresponding
quarter of 2011. The underlying results for the first six months of 2012
amounted to 827 million euros, compared to 1 186 million euros for the
corresponding period in 2011.
Johan Thijs, Group CEO:
'The second quarter was marked by a good business performance, considerable
progress on the divestment front, significant derisking and a further
strengthening of our capital and liquidity position. We recorded 372 million
euros in underlying net profit.
Our underlying result has been driven by the good commercial performance of our
strategic banking and insurance business model on our home markets in Belgium
and Central and Eastern Europe. Net interest income contracted somewhat
primarily on account of lower reinvestment yields and higher senior debt costs,
but loans and deposits continued to grow at a good rate in our core markets. Fee
income remained satisfactory and commercial insurance results remained good. The
quarter was also characterised by a low combined ratio and low levels of loan
loss impairments. These impairments included lower, though still significant,
loan loss provisioning in Ireland.
The closure of the sale of Warta positively influenced the second-quarter
earnings by 0.3 billion euros and had a positive impact on capital of 0.7
billion euros, increasing our tier-1 ratio by 0.7%.
Moreover, closure of the sale of KBL European Private Bankers is expected to
release a substantial amount of capital (approximately 0.7 billion euros) for us
in the third quarter of 2012, increasing our tier-1 ratio by 0.7%.
In addition, we closed the previously announced deal with Banco Santander for
the sale of Zagiel, our consumer finance business in Poland, after having
received the necessary regulatory approvals.
On the basis of the progress made in the respective divestment processes, a
thorough assessment was made of the value of the businesses of Absolut Bank
(Russia), NLB (Slovenia), KBC Banka (Serbia), KBC Bank Deutschland (Germany) and
Antwerp Diamond Bank (Belgium). Given our determination to continue with the
divestments, we have decided to reclassify four of these businesses under IFRS5
and record impairment charges for the divestment files. The impact of these
charges on total earnings is 1.2 billion euros, after tax. Given that impairment
is largely related to goodwill, the impact on regulatory capital is
substantially lower at 0.6 billion euros. This negative capital impact will be
reversed entirely at the time these divestments are closed, mainly through the
release of RWAs (5 billion euros in total).
These decisions have further reduced the volatility of our profit and hence the
risk profile of our company.
All of this pushed up our tier-1 capital ratio further, bringing it to 13.6% in
the second quarter of 2012. This ratio amounts to 15.4% on a pro forma basis
when all the agreements that have been signed, but not yet closed, are included.
Our estimated common equity ratio under Basel III at the end of 2013 stands at
9.5% (fully loaded).
We are continuing our efforts to ensure that 4.67 billion euros in state aid
(before any penalty) is reimbursed by the end of 2013, as set out in the
European plan, with the aim to pay back a substantial part before the end of
2012.
We have improved our already strong liquidity position, with a loan-to-deposit
ratio of 83% at the end of June. We have covered all funding needs for 2012 and
have strengthened our funding buffer.
We remain committed to executing our strategic plan with the same diligence and
determination to ensure timely repayment of the state aid and are committed to
playing an active role in the European financial sector, which will benefit our
customers, employees, shareholders and other stakeholders.'
KBC has acted to reduce its exposure to Southern European government bonds by
almost half in the second quarter through a substantial reduction of its
exposure to Spanish and Italian government bonds.
The main exceptional and non-operating items having an impact on the reported
IFRS result for 2Q2012 were:
· Impact of closing the sale of Warta
Closure of the sale of Polish insurance company Warta to Talanx International
AG, which was announced on 2 July 2012, positively influenced the second-quarter
earnings by 0.3 billion euros and had a positive impact on capital of 0.7
billion euros. As a result, core tier-1 capital for the group at the end of
2Q2012 improved by just under 0.7% compared to the previous quarter.
· Impact of impairment charges recorded on companies to be divested
KBC decided to record impairment charges that impact total earnings by -1.2
billion euros, after tax. This relates to the remaining divestment files of
Absolut Bank (Russia), NLB (Slovenia), KBC Banka (Serbia), KBC Bank Deutschland
(Germany) and Antwerp Diamond Bank (Belgium). Given that impairment is largely
related to goodwill, the impact on regulatory capital is substantially lower at
0.6 billion euros. This negative capital impact will be reversed entirely at the
time these divestments are closed, mainly through the release of RWAs (5 billion
euros in total).
The main special item having an impact on the underlying result for 2Q2012 was:
· Ireland
Recent economic indicators point towards resilience in Irish exports, continuing
strength in the pipeline of FDI and progress in reducing the deficit in public
finances. These developments have been reflected in continuing positive
assessments by the EU/IMF. While residential mortgage arrears continue to
deteriorate, the pace of deterioration has slowed markedly compared to 2011,
which is also positively impacting NPL trends. There are tentative early signs
of house prices stabilising, but local confidence remains fragile. Commercial
collateral values continue to suffer as all Irish banks deleverage in an
illiquid market. As a consequence, a loan loss provision of 136 million euros
was recorded in 2Q2012. We estimate that full-year impairment charges at KBC
Bank Ireland will end up between 500 and 600 million euros.
With a pro forma total tier-1 ratio of 15.4% and a core tier-1 ratio of 13.4%
(including the impact of the divestment of Kredyt Bank and KBC epb), solvency
remains solid.
Johan Thijs concludes: 'The second quarter was one in which good commercial
performances were shaded by the impairment charges recorded on the remaining
divestment files. Our focus firmly remains on catering for our customer base in
our core markets in Belgium and Central and Eastern Europe.'
Financial highlights 2Q2012 (underlying)
Johan Thijs, Group CEO, summarises the underlying business performance for
2Q2012 as follows:
Gross income benefits from stable fee and commission income and good commercial
insurance results.
* Underlying net interest income stood at 1 150 million euros, down 17% year-
on-year and 5% quarter-on-quarter. The year-on-year performance was
accounted for partly by the deconsolidation of KBL epb and Fidea, as well as
Centea. Leaving these items out, net interest income was down 10% year-on-
year. The net interest margin came to 1.82% for the quarter under review,
11 basis points lower than in the previous quarter and 18 basis points lower
than the exceptionally high level of a year earlier. This was due primarily
to the sale of high yield Southern European government bonds, as well as
increased senior debt costs. In the Belgium Business Unit, both deposit and
credit volumes were up quarter-on-quarter and year-on-year (credit: +6%
year-on-year and +2% quarter-on-quarter; deposits: +5% both year-on-year and
quarter-on-quarter). The loan book in the CEE Business Unit increased by 4%
year-on-year (thanks to the Czech Republic and Slovakia), and +2% quarter-
on-quarter, while deposits rose by 3% year-on-year and stayed flat quarter-
on-quarter. The loan portfolio in the Merchant Banking Business Unit was up
1% both year-on-year and quarter-on-quarter, while the deposit base shrunk
by 28% year-on-year (primarily in the last quarter of 2011, caused mainly by
reduced short-term deposits in our New York branch and at KBC Bank Ireland),
but was up 2% quarter-on-quarter.
* A very good commercial performance was turned in by both the life and non-
life insurance businesses during the quarter under review. In general, gross
earned premium minus gross technical charges and the ceded reinsurance
result came to 132 million euros, up 6% year-on-year and 12% quarter-on-
quarter. When account is taken of the deconsolidation of Fidea and VITIS,
this result was up 14% year-on-year.
The non-life segment was characterised by a good level of premiums, relatively
low claims and a modest investment result. The year-to-date combined ratio came
to an excellent 89%.
In the life segment and on a comparable basis, there was a 21% quarter-on-
quarter increase in the sale of life insurance products (thanks to higher sales
of unit-linked products). Year-on year, these sales rose by as much as 62%.
It should be noted that the insurance results are also affected by investment
income and charges, as well as by general administrative expenses. Investment
income, in particular, was modest for both the life and non-life businesses in
the quarter under review.
* The net result from financial instruments at fair value amounted to 113
million euros in this quarter, well down on its level in the previous
quarter, but up on its year-earlier level. This item was impacted by a
significant negative CVA adjustment in the second quarter.
* Net realised gains from available-for-sale assets stood at 6 million for the
quarter under review, down on the 42-million-euro average for the last four
quarters. This item was characterised by gains on the sale of shares,
largely off-set by the losses on the sale of bonds.
* Net fee and commission income amounted to 310 million euros, up 1% quarter-
on-quarter but down 21% year-on-year. This was accounted for primarily by
the deconsolidation of KBL epb and Fidea, as well as Centea for the year-on-
year comparison. Leaving these items out, income was down only 4% year-on-
year. Assets under management stood at 150 billion euros (excluding KBL
epb), down 4% on the year-earlier figure and 2% on the figure for the first
quarter of 2012, due to net outflows.
* Other net income came to 53 million euros.
Operating expenses well under control.
* Operating expenses came to 1 016 million euros in the second quarter of
2012, down 8% on their level in the previous quarter and 12% on their year-
earlier level. This was accounted for primarily by the deconsolidation of
KBL epb, Fidea and Centea for the year-on-year comparison. The quarter-on-
quarter performance was also impacted by banking tax items, notably the
full-year Hungarian bank tax charged in the first quarter and the amount
recovered under the Belgian deposit guarantee scheme (partly offsetting the
additional bank tax in Belgium) in the second quarter. Excluding
deconsolidated companies and these tax effects, underlying costs increased
by 1% compared to the previous quarter. The year-to-date cost/income ratio
came to 58%, a clear indication of the ongoing well-controlled cost
environment.
Low credit cost overall, loan loss provisions for Ireland reduced though still
sizeable.
* Loan loss impairment stood at 198 million euros in the second quarter, up on
the 164 million euros recorded a year earlier, but down on the 261 million
euros recorded in the previous quarter. The figure came about largely
because of the loan loss impairment of 136 million euros in Ireland, whereas
the credit cost was low in the other business activities. As a consequence,
the annualised credit cost ratio stood at 0.59% year-to-date; this breaks
down into a very low 0.04% for the Belgian retail book (compared to 0.10%
for FY2011), 0.42% in Central and Eastern Europe (down from 1.59% for
FY2011, which had been affected by Hungary and Bulgaria) and 1.38% for
Merchant Banking (marginally up from 1.36% for FY2011). Excluding Ireland,
the credit cost ratio for Merchant Banking stands at a low 0.14% (down from
0.59% for FY2011).
* Impairment charges on available-for-sale assets came to 24 million euros and
other impairment charges came to 18 million euros in the quarter under
review.
Strong solvency capital position under Basel II.
* The group's tier-1 ratio (under Basel II) increased from 13.4% at 31 March
2012 to a strong 13.6% at 30 June 2012 (core tier-1 ratio of 11.8%).
Including the effect of divestments for which an agreement has been signed
to date (Kredyt Bank and KBL epb), the pro forma tier-1 ratio is as high as
approximately 15.4% (core tier-1 ratio of 13.4%).
* The solvency ratio for KBC Insurance stood at an excellent 314% at 30
June 2012, up from 248% at the end of the previous quarter.
Highlights of underlying performance per business unit.
* The Belgium Business Unit contributed 226 million euros to profit in
2Q2012, compared to 266 million euros in the previous quarter. The quarter
was characterised by lower net interest income, due to lower reinvestment
yields, good insurance sales, significantly increasing fee income, a low
level of loan impairment and a high level of realised gains on shares, but
was also affected by losses realised on government bonds. Another factor
that had an impact was the recovery of an amount under the Belgian deposit
guarantee scheme.
* The CEE Business Unit (Czech Republic, Slovakia, Hungary and Bulgaria)
posted a profit of 188 million euros in 2Q2012, compared to 118 million
euros in the previous quarter. The results for the second quarter were
essentially driven by a low level of loan impairment.
* The Merchant Banking Business Unit recorded a loss of 65 million euros in
2Q2012, compared to a profit of 42 million euros in 1Q2012. The negative
result is attributable in part to the high - though decreasing - level of
impairment in Ireland, as well as to the negative CVA at KBC Bank Belgium.
Excluding KBC Bank Ireland, net profit for the Merchant Banking Business
Unit in 2Q2012 would be 27 million euros.
* It should be noted that all planned divestments in 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 2Q2012,
the Group Centre's net result came to 23 million euros, compared to 30
million euros in the previous quarter. This result was largely driven by
Kredyt Bank, Absolut Bank, NLB and Warta.
Impairment charges on divestment files dominate exceptional items.
* The quarter was also characterised by a number of exceptional items that
were not part of the normal course of business and were therefore excluded
from the underlying results. Their combined impact in 2Q2012 amounted to a
negative 0.9 billion euros. Apart from some smaller items, the main non-
operating items in 2Q2012 were:
o Closure of the sale of Polish insurance company Warta to Talanx
International AG, which was announced on 2 July 2012, had a positive impact on
the second-quarter earnings of 0.3 billion euros, after tax.
o After a thorough assessment of the value of the businesses of Absolut Bank
(Russia), NLB (Slovenia), KBC Banka (Serbia), KBC Bank Deutschland (Germany) and
Antwerp Diamond Bank (Belgium), and given the progress made in the divestment
processes, KBC decided to record impairment charges for these divestment files.
The impact of these charges on total earnings is 1.2 billion euros, after tax.
1H2012: results per heading (IFRS)
Explanations per heading of the IFRS income statement for the first half of
2012 (see summary table on the next page):
* The IFRS net result for 1H2012 amounted to -160 million euros, compared to
1 154 million euros a year ago.
* Net interest income amounted to 2 451 million euros compared to 2 801
million euros a year earlier. The decline was caused primarily by the
deconsolidation of KBL epb, Fidea and Centea. Year-on-year, credit volumes
grew by 3%. Customer deposits expanded by 5% in Belgium and by 3% in Central
Europe, while the deposit base at Merchant Banking contracted by 28%
(primarily in 4Q2011). The net interest margin contracted to
1.82%, 18 basis points lower than the exceptionally high figure a year ago.
* Gross earned premium minus gross technical charges and the ceded reinsurance
result came to 251 million euros, up 5% year-on-year.
For the non-life activities, the year-to-date combined ratio came to an
excellent 89% (87% in Belgium, 95% in CEE), an improvement on the 92% for
FY2011.
For the life activities and on a comparable basis, there was a 44% year-on-year
increase in the sale of life insurance products (thanks to higher sales of unit-
linked products).
It should be noted that the insurance results are also affected by investment
income and charges, as well as by general administrative expenses. Investment
income, in particular, was modest for both the life and non-life businesses in
the quarter under review.
· Net fee and commission income amounted to 613 million euros in the
first half of 2012, up 3% on its level a year ago, thanks, inter alia, to the
successful sale of unit-linked products. Assets under management stood at
150 billion euros (excluding KBL epb), down 4% on the year-earlier figure, due
to net outflows.
· The net result from financial instruments at fair value (trading and
fair value income) came to 103 million euros in the first half of 2012, compared
to 279 million euros a year earlier. On an underlying basis (i.e. excluding
exceptional items such as value adjustments to structured credit, fair valuing
of our own debt, 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 439
million euros in1H2012, significantly up by 22% on its level a year earlier, due
to the very good performance turned in by the dealing room, especially in the
first quarter.
· The remaining income components were as follows: dividend income from
equity investments amounted to 27 million euros, the net realised result from
available-for-sale assets (bonds and shares) stood at 41 million euros and other
net income totalled 441 million euros, accounted for primarily by the capital
gain realised on the closure of the Warta divestment.
· Operating expenses amounted to 2 165 million euros in 1H2012, 3% lower
than the year-earlier figure. This was caused by the divestments in 2011, but
mitigated somewhat by such factors as inflation and wage indexation. The
underlying cost/income ratio for banking - a measure of cost efficiency - stood
at 58% at the end of June 2012, an improvement on the 60% recorded for FY2011.
· Total impairment stood at 1 746 million euros for the first half of
2012. Impairment on loans and receivables amounted to 459 million euros, up on
the 260 million euros recorded in 1H2011, essentially due to the high level
recorded for Ireland. As a result, the annualised credit cost ratio for 2012
came to 0.59%, which is still an improvement on the figure of 0.82% for FY2011.
Impairment on available-for-sale assets stood at 79 million euros. Impairment on
goodwill totalled 414 million euros and other impairment charges 794 million
euros. These three impairment charges were accounted for by the planned
divestment files, primarily NLB, Absolut Bank, Antwerp Diamond Bank, KBC Banka
and KBC Bank Deutschland.
· Income tax amounted to 202 million euros for the first half of 2012.
At the end of the first half of 2012, total equity came to 16.7 billion euros -
unchanged on its level at the start of the year - due mainly to the inclusion of
the net loss for 1H2012 (-0.2 billion euros), the substantial change in the
available-for-sale revaluation reserve (+0.8 billion euros), as well as the
deduction of the coupon on non-voting core capital securities subscribed by the
Federal and Flemish governments (-0.6 billion euros). The group's tier-1 capital
ratio - a measure of financial strength - stood at a sound 13.6% at 30 June
2012.
Other information
Strategy highlights and main events
* KBC's core strategy remains centred around bancassurance in Belgium and a
selection of countries in CEE (Czech Republic, Slovakia, Hungary and
Bulgaria). In line with its strategic plan, the group has made considerable
progress in the sale or run-down of a number of (non-core) activities (see
below).
* In 2Q2012, we successfully continued to implement our strategic refocusing
plan:
o On 11 May 2012, the Management Boards of Kredyt Bank and Bank Zachodni WBK
signed the Merger Plan and motion to the Financial Supervisory Commission for
its approval of the banks' merger. An exchange parity was established at 6.96
Bank Zachodni WBK shares for 100 Kredyt Bank shares. The merger is subject to
the approval of the Financial Supervisory Commission. The merger plan was
approved by the shareholders of both companies on 30 July 2012.
o On 14 May 2012, Business Lease Group, a leading expert in full operational
service leasing and mobility services in the Netherlands and Central Europe
(Poland, the Czech Republic, Slovakia and Hungary) acquired KBC Autolease Polska
Sp. z o.o., a wholly-owned subsidiary of KBC Lease Belgium NV. Given the size
and nature of the activities involved, the sale had no material impact on KBC
Group's earnings and capital.
o On 2 July 2012, the closure of the sale of Polish insurance company Warta to
Talanx International AG was announced. This positively influenced the second-
quarter earnings by 0.3 billion euros and had a positive impact on capital of
0.7 billion euros. As a result, core tier-1 capital for the group at the end of
the second quarter of 2012 had improved by just under 0.7%, compared to the
previous quarter.
o On 2 July 2012, after very careful and thorough consideration and in
consultation with all relevant parties, KBC decided not to participate in the
capital increase proposed by NLB and the Republic of Slovenia.
o On 31 July 2012, KBC finalised the sale, announced on 10 October 2011, of
its private banking subsidiary KBL European Private Bankers to Precision Capital
S.A. for a total consideration of approximately 1 billion euros. The sale is
expected to release a substantial amount of capital (approximately 0.7 billion
euros) for KBC, increasing its tier-1 ratio by 0.7 % in the third quarter of
2012.
o On 31 July 2012, after having received all the necessary regulatory
approvals, KBC Bank finalised the sale of 100% of the shares of Zagiel, its
consumer finance business in Poland, to Santander Consumer Finance S.A., the
Polish consumer finance subsidiary of Santander Group, for a total purchase
price of 10 million Polish zloty.
o A number of companies are still scheduled for divestment. The divestment
processes for KBC Bank Deutschland, KBC Banka, Antwerp Diamond Bank and Absolut
Bank are in progress.
o On the basis of the progress made in the respective divestment processes, a
thorough assessment was made of the value of the businesses of Absolut Bank
(Russia), NLB (Slovenia), KBC Banka (Serbia), KBC Bank Deutschland (Germany) and
Antwerp Diamond Bank (Belgium). Given our determination to continue with the
divestments, we have decided to reclassify four of these businesses under IFRS5
and record impairment charges for the divestment files. The impact of these
charges on total earnings is 1.2 billion euros, after tax. Given that impairment
is largely related to goodwill, the impact on regulatory capital is
substantially lower at 0.6 billion euros. This negative capital impact will be
reversed entirely at the time these divestments are closed, mainly through the
release of RWAs (5 billion euros in total).
* Other main events in 1H2012:
* On 2 January 2012, KBC repaid 500 million euros in state aid (plus a
15% penalty) to the Belgian Federal Government.
* KBC's main objective in this respect is and remains to implement the
strategic plan approved by the European Commission within the agreed
timeframe and to repay the Belgian authorities in a timely manner. KBC
works toward repaying a substantial part of the federal government state
aid before the end of this year and to maintain a regulatory tier-1
capital ratio of 11%, according to Basel II banking capital adequacy
rules.
o Recent economic indicators point towards resilience in Irish exports,
continuing strength in the pipeline of FDI and progress in reducing the deficit
in public finances. These developments have been reflected in continuing
positive assessments by the EU/IMF. While residential mortgage arrears continue
to deteriorate, the pace of deterioration has slowed markedly compared to 2011,
which is also positively impacting NPL trends. There are tentative early signs
of house prices stabilising, but local confidence remains fragile. Commercial
collateral values continue to suffer as all Irish banks deleverage in an
illiquid market. As a consequence, a loan loss provision of 136 million euros
was recorded in 2Q2012. We estimate that full-year impairment charges at KBC
Bank Ireland will end between 500 and 600 million euros.
As has been the case in previous quarters, KBC has acted to reduce volatility in
its results. We almost halved our exposure to Southern European government bonds
in the second quarter by reducing our exposure to Spanish and Italian government
bonds.
* This news item contains information that is subject to the transparency
regulations for listed companies.
Quartely report 2Q2012 EN:
http://hugin.info/133947/R/1632105/523425.pdf
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originality of the information contained therein.
Source: KBC Groep via Thomson Reuters ONE
[HUG#1632105]
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Datum: 07.08.2012 - 07:09 Uhr
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