KBC Group : KBC exceeds ECB's asset quality review and stress test thresholds and maintains strong buffer
(Thomson Reuters ONE) -
Press Release
Outside trading hours - Regulated information*
Brussels, 26 October 2014 (12.01 p.m. Central European Time)
KBC exceeds ECB's asset quality review and stress test thresholds and maintains
strong buffer
KBC notes the announcements made today by the European Central Bank (ECB) and
National Bank of Belgium regarding the results of the comprehensive assessment
carried out by the ECB.
The impact of the stress test on the Common Equity Tier-1 ratio (CET1 ratio)
under the adverse scenario in 2016 caused the CET1 ratio to fall by 2.6
percentage points. The impact of the asset quality review (AQR) was limited,
reducing the CET1 ratio by 0.6 percentage points.
The combined impact of the repayment of state aid, as agreed with the European
Commission, during the 3-year stress test horizon (1.8 billion EUR including
penalties and coupon), the AQR and the pure stress test, resulted in a CET1
ratio of 8.3%, which represents a considerable buffer of 2.8 percentage points
(2.8 billion EUR) above the ECB-imposed threshold of 5.5%, showing KBC's
resilience.
Johan Thijs, KBC Group CEO welcomed today's announcements as follows: 'KBC
acknowledges the outcome of the ECB's comprehensive assessment, which proves
that KBC comfortably meets these stringent solvency requirements and also
provides a reassuring signal to all stakeholders placing their trust in our
institution. It also demonstrates the capacity to continue repaying the state
aid received. KBC will continue to ensure that appropriate capital levels are
maintained and that the focus remains on sustainable growth in core markets and
activities. The result is also illustrative of KBC's strong fundamentals in the
form of a healthy client-driven bank-insurance business model, a robust
liquidity position supported by a very solid and loyal customer deposit base in
our core markets of Belgium and Central Europe, and a comfortable level of
solvency that enables us to continue increasing our lending to clients and to
actively support the communities and economies we are active in.'
Content
1. What was the objective of the comprehensive assessment?
2. What are the components of the comprehensive assessment?
3. What was the scope of the assessment for KBC?
4. How did KBC perform?
5. What is KBC's conclusion after having successfully passed the tests?
1. What was the objective of the comprehensive assessment?
A contribution to restoring trust.
The comprehensive assessment is an important step towards bringing greater
transparency to banks' balance sheets and creating more consistent supervisory
practices in Europe, with the ultimate aim of restoring trust in financial
institutions.
. ahead of the European Central Bank taking control of supervision
130 banks in the euro area were subject to this exercise, carried out prior to
the European Central Bank (ECB) assuming full responsibility for supervision,
i.e. on 4 November 2014. The comprehensive assessment was led by the ECB in
collaboration with the National Bank of Belgium, and was supported at all levels
by independent third parties. A level playing field has been endeavoured to be
put in place through, for instance, rigorous quality assurance and the use of
stringent methodology.
2. What are the components of the comprehensive assessment?
A two-pillar exercise incorporating a strict methodology
The exercise consisted of a review of the books ending on 31 December 2013 (an
asset quality review or AQR) and a stress test over a 3-year horizon (2014-
2016). The stress test started from the AQR-adjusted balance sheet as of year-
end 2013 and hence includes conservative adjustments.
° The AQR was held to enhance the transparency of banks' balance
sheets by reviewing the quality of their assets, including the adequacy of asset
and collateral valuations and related provisions.
The AQR is a prudential exercise: the review 'challenges' the
balance sheet of an institution, departing from a conservative point of view.
The approach at times is asymmetric, meaning that some 'positives' are not
accounted for, whereas 'negatives' are.
The approach does not necessarily correspond with an accounting
view. The outcomes of the assessment, therefore, should not and cannot be
transposed directly and in full to the published accounts under International
Financial Reporting Standards (IFRS) or General Accepted Accounting Principles
(GAAP).
° The stress test was performed in close cooperation with the European
Banking Authority (EBA), using common methodology. It examined the resilience of
banks' balance sheets and earning power to stress scenarios.
The stress test incorporates the simulated impact of two scenarios over a 3-year
period: a baseline scenario and an adverse scenario. Both scenarios are based on
a number of assumptions (e.g., a constant balance sheet) and hence are
hypothetical, which is inherent to any stress test.
Moreover, the (measurement of) the impact of these scenarios has been subject to
a number of constraints and simplifications. As with the AQR, some 'positives'
could not be accounted for in the stress test, whereas 'negatives' had to be.
Even the outcome of the stress test for the baseline scenario, therefore, is not
an appropriate prediction of KBC's performance in the years to come.
3. What was the scope of the comprehensive assessment for KBC?
Whereas the comprehensive assessment targets KBC Group NV, only the consolidated
accounts of KBC Bank have been subject to the book review (AQR).
The same holds true for the stress test: the impact of scenarios on the banking
activities (not the insurance business) was calculated. The capital position
(CET1 ratio), however, is measured at the level of KBC Group NV[1].
4. How did KBC perform?
Starting from the solid CET1 ratio of 13.3% at the end of 2013, both the sole
impact of the AQR and the combined impact of the AQR and the stress test leave
KBC with a considerable buffer above the ECB-imposed thresholds (i.e. floors
triggering capital measures: a CET 1 ratio of 8% for the AQR, 8% and 5.5% for
the stress tests after the AQR):
* 4.3 billion EUR for the AQR alone;
* 4.1 billion EUR for the stress test after AQR adjustment in the baseline
scenario;
* 2.8 billion EUR for the stress test after AQR adjustment in the adverse
scenario.
Graphs in annex
The combined result reflects three major impacts, as illustrated in the above
graph:
* an adjustment resulting from the prudential asset quality review (AQR),
* which translates into a 0.58-percentage-point reduction of the CET1
ratio as of 2013;
* the pure stress test,
* which adds 1.7 percentage points to the CET1 ratio by 2016 under the
baseline scenario, yet
* which absorbs 2.6 percentage points of the CET1 ratio by 2016 under the
adverse scenario;
* the amount of repayment of state aid, as agreed with the European
Commission, during the 3-year horizon of the stress test (1.84 billion
EUR[2]), which further reduces the CET1 ratio
* by 2.0 percentage points in the baseline scenario
* by 1.8 percentage points in the adverse scenario[3].
The main driver of the total gross[4] AQR adjustment of 0.6 billion EUR is the
Irish mortgage book, which represents 0.3 billion EUR of that gross figure.
Therefore, this portfolio accounts for half (51%) of the total AQR adjustment.
Further to the new EBA guidelines in respect of the definition of default and
forbearance[5], the Irish mortgage portfolio had already undergone a major
reclassification from the end of 2013 (over 2 billion EUR was reclassified to
'default'), with corresponding additions to provisions (see communication of 14
November 2013 at www.kbc.com). KBC acknowledges that a conservative view in the
AQR exercise unavoidably results in a prudential adjustment.
KBC has continued to apply the EBA definitions in 2014. Over 700 million EUR's
worth of Irish mortgage loans were migrated to 'default' status in the first
half 2014, as individual impairment triggers were met (for example, receipt of
multiple forbearance). KBC has seen a continued reduction in arrears in 2014.
There has also been a strong improvement in the underlying fundamentals in
Ireland over the year to date, including robust GDP growth and rising house
prices.
Given the above, KBC is able to confirm its prior total Irish loan loss
provisioning, i.e. at the high end of the 150 to 200 million EUR range and at
50 to 100 million EUR for both 2015 and 2016.
Prudential gross adjustments in respect of the 6 other loan portfolios included
under the scope of the AQR came to 0.2 billion EUR, most of which was accounted
for by large corporate Belgian files including foreign branches (124 million
EUR). KBC will use this information to re-assess individual files and possibly
adapt its loan provisioning on a case-by-case basis. We expect these individual
re-assessments to have a non-material impact on provisions.
Prudential gross adjustments resulting from the other work blocks of the AQR
(e.g. the valuation of derivatives), were less than 0.1 billion EUR.
There are obviously many drivers impacting the outcome of the stress test. The
scenarios impact both the earning power (and hence available capital, i.e. the
numerator of the CET1 ratio) and the risk weighted assets (the denominator).
More insight into the main drivers is given in a number of slides at
www.kbc.com.
5. What is KBC's conclusion after having successfully passed the tests?
Johan Thijs, KBC Group CEO concludes: 'Over the last 12 months, we have worked
hard and cooperated in a very constructive manner with the ECB. We understand
that the ECB had to find an equilibrium and, therefore, could not take into
account all the nuances for every specific institution, including KBC. On this
basis, KBC acknowledges the outcome of the ECB's comprehensive assessment.
Meanwhile, 2014 has been a crucial year for KBC. A year in which KBC has
continued to collapse all remaining legacy CDOs, substantially reduced the risk
profile of the group, and completed the entire divestment plan agreed with the
European Commission back in November 2009. KBC is now ready to face the
challenges that lie ahead. Achieving sustainable and profitable growth through
bank-insurance and superior client satisfaction is and remains our strategic
focus.'
KBC repeats what it announced at its Investor Day in June 2014:
KBC wants to build on its strengths and be among the best-performing, retail-
focused financial institutions in Europe. This aim will be achieved by:
- strengthening in a highly cost-efficient way its bank-insurance business model
for retail, SME and mid-cap clients in its core markets;
- focusing on sustainable and profitable growth within the framework of solid
risk, capital and liquidity management;
- creating superior client satisfaction via a seamless, multi-channel, client-
centric distribution approach.
By achieving this, KBC wants to become the reference in bank-insurance in its
core markets.
Notes to editors:
Further details on the results of the AQR and stress test under the baseline and
adverse scenarios, as well as information on credit exposures and exposures to
central and local governments, are provided in the disclosure tables based on
the common format provided by the ECB and EBA. They can also be found on the
websites of the ECB and EBA: http://www.ecb.europa.eu/ssm/assessment and
www.eba.europe.eu
The methodology underlying the comprehensive assessment exercise was outlined by
the ECB prior to its announcement to ensure consistency across all the banks in
the EU banking system that were involved in the exercise. For more details, see
the ECB website: http://www. ecb.europa.eu.
This information is provided for comparison purposes only and should not in any
way be directly compared to banks' other published information.
For more information, please contact:
Wim Allegaert, General Manager, Investor Relations, KBC Group
Tel.: +32 2 429 50 51 - E-mail: wim.allegaert(at)kbc.be
Viviane Huybrecht, General Manager, Corporate Communication/Spokesperson, KBC
Group
Tel.: +32 2 429 85 45 - E-mail: pressofficekbc(at)kbc.be
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KBC Group NV
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[1] As agreed with the ECB, entities already earmarked for divestment at the end
of 2013 have been kept out of scope. The impact of this exercise was very
limited.
[2] 1 billion EUR in capital plus the 50% penalty and a 8.5% coupon.
[3] In the baseline scenario, Risk Weighted Assets (RWA), i.e. the denominator
of the CET1 ratio, are lower than in the adverse case. This explains why exactly
the same amount of repayment causes a higher percentage point reduction of the
CET1 ratio in the baseline scenario than in the adverse scenario.
[4] Before offsetting the tax impact.
[5] A forbearance measure is a concession in respect of a loan (e.g., repayment
alleviation) granted to a client in financial difficulties.
KBC Press release dd 26-10-2014:
http://hugin.info/133947/R/1865832/655288.pdf
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(ii) they are solely responsible for the content, accuracy and
originality of the information contained therein.
Source: KBC Groep via GlobeNewswire
[HUG#1865832]
Unternehmensinformation / Kurzprofil:
Datum: 26.10.2014 - 12:01 Uhr
Sprache: Deutsch
News-ID 346936
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