Earnings Statement KBC Group, 1Q 2009

5/14/2009, 8:06 AM (Source: GlobeNewswire)

KBC-0.82%

57.92
Chart for: KBC
Regulated information* - 14 May 2009 (8.00 a.m. CEST)

Encouraging underlying profit trends, measures to contain further
structured credit exposure

For the first quarter of 2009, KBC achieved an underlying net profit
of 465 million euros. This is significantly better than the level of
176 million euros realised in the difficult previous quarter.
Operating trends have turned positively across the business units.
Business margins recovered significantly and the operating cost level
was reduced, while loan impairment charges also remained well within
expectations and even below the previous quarter level.
When also taking asset value adjustments and other exceptional items
into account, the reported net result came to -3.6 billion euros. It
was decided to increase the provision coverage against MBIA, the US
monoline credit insurer, whose creditworthiness deteriorated
markedly. Moreover, worsening market conditions were discounted in
the value of the remaining super senior CDO investments which brings
further down their risk profile. All non super senior CDO investments
had already been written down in 2008. KBC was also able to buy an
insurance coverage that largely reduces future mark-to-market impacts
on CDO exposure.

Financial highlights - 1Q 2009

The financial highlights for 1Q 2009 can be summarised as follows:
- On an underlying basis, interest income grew by 7% quarter-on
quarter. While loan growth has slowed, a significant margin recovery
was achieved. On a like-for-like basis, the loan book grew by 1%
during the quarter. The net interest margin, banking came to 1.80%,
up from 1.68% for the previous quarter, including a 0.35% margin
increase in Belgium.

- Excluding currency effects, the operating expense level remained
stable compared to the year-earlier quarter since normal cost
inflation was offset by the effect of the downsizing of merchant
banking activities, the agreed staff remuneration reduction plan in
Belgium and various cost containment measures elsewhere. On an
underlying basis, the cost/income ratio, banking for the quarter was
58%, compared with 64% achieved for the year 2008.

- Loan losses remained very moderate in Belgium, while, as
anticipated, it increased in some Eastern European markets,
especially in Hungary and Russia and also somewhat in Poland. For the
non-domestic loan book outside Belgium and Eastern Europe, the loss
fell compared to the previous quarter, including in Ireland. The loan
loss ratio stood at 0.70%, annualised, which is the same level as
that for the entire 2008 financial year. The non-performing loan
ratio currently is 2.5%. Since the economic cycle has not bottomed
out yet, the loan loss trend is expected to be upwards for the
quarters to come.

- Weak equity market performance during the first quarter continued
to have an adverse impact on investment management fees and
triggered, in line with stress tests results disclosed earlier,
impairment of the equity portfolio of the insurance division to the
tune of 0.3 billion euros. Given the earnings sensitivity, it was
decided to further reduce the investment position in shares. During
the first three months of the year, the value of the share portfolio
was reduced by 0.6 billion to 2.1 billion euros. Another 0.5 billion
euros worth of share holdings were sold in the course of April.

- Although sales and trading activities on money and debt securities
markets performed well, merchant banking income was adversely
impacted by a value adjustment of -3.8 billion euros on CDO exposure.
Deteriorating economic conditions were discounted for determining the
book value of the remaining super senior CDO investments. Moreover,
it included the increase of the provision amount to cover the
increased counterparty risk against MBIA, the US monoline insurer
providing CDO protection, after it announced its restructuring plans.
KBC has also bought a financial guarantee from the State to largely
mitigate further CDO losses.

- Including all capital enhancement support received, the (pro forma)
Tier-1 ratio for banking activities stands at 11.0% (8.3% core
Tier-1). For the insurance division, the (pro forma) solvency margin
stands at 158%.


Structured credit relief measures


KBC achieved an agreement with the Belgian Government about an asset
relief solution. Luc Philips, recently appointed Chief Financial and
Risk Officer: "Our structured credit portfolio is largely performing,
but illiquid and therefore difficult-to-value. That is one of the
reasons that create uncertainty and earnings volatility.
Participation to a state-sponsored asset relief program, whereby
exposure is guaranteed, is our best option to reduce uncertainty.
Such scenario also preserves the solvency level for the future." With
the promulgation of a law on 14 April, the Belgian Parliament had
taken the initiative to create a legal framework to enable an asset
relief program for systemic banks in Belgium.
The announced arrangement for KBC relates to a notional amount of
20.0 billion euros (of which 5.3 billion euros was marked down
against revenue), including::

* 5.5 billion notional value of super senior CDO investments;

* 14.4 billion notional value of counterparty risk on MBIA, the US
monoline insurer that had written credit protection to KBC.

Against payment of a premium KBC buys a guarantee from the State
covering 90% of the default risk beyond a set first loss. The
transaction is structured as follows:
* The first loss tranche is set at 3.2 billion euros, notional (all
credit loss to be borne by KBC, however, without net profit impact
since covered by markdowns made in the past)
* Losses incurred in a second layer of 2.0 billion euros above the
set first loss tranche, are compensated by the State at 90% (10%
risk retained) via the subscription to new KBC shares at market
value. KBC has, however, the option to opt out of the equity
guarantee.
* All further losses (up to 14.8 billion euros) are compensated by
the State in cash to the level of 90% (10% risk retained by KBC).

As a result, the potential negative impact on future earnings and
solvency deriving from the exposure will be largely eliminated. The
remaining downside impact relates to the marking-to-market of the
retained 10% risk tranche. If market values were to rise
substantially, reversals of earlier markdowns would be booked.
The guarantee premium amounts to 1.2 billion euros, fully provided
for up front, and an additional commitment fee of 30 million per
quarter, pre tax, is payable. The premium combined with a positive
value adjustment of 0.4 billion (best effort estimate), the upfront
net profit impact of the transaction is estimated at a negative 0.8
billion euros. This will be booked in the second quarter.
Risk-weighted assets that are freed up amount to 6.3 billion euros.
Earlier in the first quarter, KBC secured a capital back-up facility
of 1.5 billion from the Flemish Regional Government of Belgium. To
complement the credit relief solution, KBC intends to draw upon the
facility by issuing core capital securities to be subscribed by the
Region.
Including all capital enhancement support received, the (pro forma)
Tier-1 ratio for banking activities stands at 11.0% (8.3% equity
Tier-1). For the insurance division, the (pro forma) solvency margin
has decreased to 158%.
As a normal procedure, all measures need to be approved by the
competent regulatory authorities.

Strategy highlights and future developments
While the environment in the second half of 2008 was very difficult,
operating performance improved since the start of the year. A
group-wide cost containment project is being implemented and
underwriting criteria remain tight for lending in non-home markets
and for such areas as, for example, unsecured consumer credit,
unhedged foreign-currency lending, leasing and real estate financing.
KBC is committed to maximally safeguard its lending capacity to core
customers in home markets.
As long as the economic cycle has not bottomed out, worldwide
non-performing loan trends are expected to remain upwards.
Developments in Central and Eastern Europe (including Russia) and
also Ireland are particular areas of attention in this respect. Loan
losses may also rise on the Asset-backed Securities portfolio that
was reclassified to 'loans & receivables' at the end of 2008.
KBC also announced earlier that it has put various derivatives-based
activities within the KBC Financial Products entity on run-off
status. In the past two quarters unwinding losses were recognised.
KBC is a major player in offering investment solutions to its retail,
corporate and private banking customers. It takes care that
customers are adequately informed and that products are sold
according to their risk profile. Moreover, capital protection is
embedded in a significant part of investment products for retail
customers. In the current environment, when asset values have fallen
significantly, customer complaints throughout the sector have been
increasing. KBC has not changed its policy stating that if in
individual cases shortcomings on behalf of KBC have been established,
it assumes its responsibility.


* This news item contains information that is subject to the
transparency regulations for listed companies.


This announcement was originally distributed by Hugin. The issuer is
solely responsible for the content of this announcement.

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