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 168 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  -228 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 12 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




This announcement is distributed by Thomson Reuters on behalf of 
Thomson Reuters clients. The owner of this announcement warrants that: 
(i) the releases contained herein are protected by copyright and 
    other applicable laws; and 
(ii) they are solely responsible for the content, accuracy and 
     originality of the information contained therein. 
    
Source: KBC Groep via Thomson Reuters ONE

[HUG#1514514]