Earnings Statement KBC Group, 4Q 2010 and FY 2010

Regulated information* - 10 February 2011 (07.00 a.m. CET)



Summary:
4Q net profit of 724 million euros
on the back of a strong core-market position.

KBC ended the last three months of 2010 with a net profit of 724 million euros,
compared with a net profit of 545 million euros in the previous quarter and 304
million euros in the corresponding quarter of 2009. As a result, net profit came
to 1 860 million euros in full-year 2010, as opposed to a net loss of 2 466
million euros in 2009 (which included a significant CDO-related loss in the
first quarter of 2009).

The 'underlying' net result for the quarter under review (after excluding one-
off and exceptional items) came to 168 million euros, compared with 445 million
euros in 3Q 2010 and 218 million euros in 4Q 2009.

Jan Vanhevel, Group CEO: 'The high level of profit recorded for the last quarter
of 2010 was driven by strong revenues generated by our strategic banking and
insurance business model in our Belgian and Central and Eastern European home
markets, as well as by the divestments we have made. At 724 million euros, the
fourth-quarter result was characterised by stronger net interest income and
higher fees and commissions. However, it was also affected by additional loan
loss provisioning in Ireland and a one-off provision for a case of
irregularities at the leasing business in the UK. Nevertheless, our core markets
have been the main contributors to our quarterly result, with a good performance
being turned in by Belgium and a solid performance recorded by our operations in
Central and Eastern Europe. The most noteworthy exceptional items were the
capital gains on two of our divestment projects, as well as positive value
adjustments on our CDO portfolio.

Over the whole of 2010, KBC generated net profit of 1 860 million euros, a clear
break from the results of the previous two years. After two loss-making years,
we have again recorded a positive result. Our earnings per share amounted to
3.72 euros, after taking into account the coupon to be paid on the core-capital
securities sold to the Belgian State and the Flemish Region. We will duly
propose to the Annual General Meeting of Shareholders that a dividend of 0.75
euros be paid.'



Financial highlights 4Q 2010


Jan Vanhevel, Group CEO, summarises the underlying business performance for
4Q 2010 as follows:



Gross income benefited from higher net interest income and fee and commission
income.

·          Underlying net interest  income stood at  1 459 million euros, up 4%
both  year-on-year and quarter-on-quarter. Compared to 3Q 2010, the net interest
margin  held up  in Belgium  and continued  to grow  in CEE.  Credit and deposit
volumes  both  expanded  nicely  in  Belgium.  Customer  deposits  in  CEE  also
increased,   while   the   loan   book   remained  unchanged.  Merchant  Banking
intentionally continued to reduce its international loan book.

·          Net fee and commission income  amounted to 417 million euros, up 14%
quarter-on-quarter  but down 7% year-on-year. Although still not at the level of
one  year ago, the  satisfying quarterly results  have been primarily boosted by
good sales of life insurance contracts in October and November, on the back of a
successful  marketing campaign.  Shifts in  the portfolio  mix also added to the
result, thanks to the improving investment climate.

·          The  net  result  from  financial  instruments  at  fair value, which
includes  dealing room activities, stood at  124 million euros, more than double
the year-earlier figure, but down 53% quarter-on-quarter.

·          Net of technical charges and  the ceded reinsurance result, technical
insurance income came to 103 million euros, up 94% year-on-year and 14% quarter-
on-quarter.  Since claims were lower for  the group, the combined ratio improved
substantially quarter-on-quarter from 103% to 98%.

·          Other  income  was  affected  by  a  one-off  provision for a case of
irregularities  at  the  leasing  business  in  the  UK,  leaving this item at a
negative 96 million euros for the quarter.



Operating expenses remain under control, impairment impacted by provisioning for
Ireland

·         Operating expenses came to 1 311 million euros for the fourth quarter,
up  6% compared their  year-earlier figure  and 8% quarter-on-quarter.  The cost
measures  we took in the  aftermath of the financial  crisis have had their full
effect.  Compared  to  Q3  2010, however,  there were some end-of-year marketing
costs (investment campaign) and additional ICT expenses.

·         Loan loss impairment stood at 492 million euros, down 25% year-on-year
and  up 38% quarter-on-quarter. The full-year credit  cost ratio stood at 0.91%
and  breaks  down  into  an  excellent  0.15% for  the Belgian retail book (flat
compared  to  2009), 1.22% in  Central  and  Eastern Europe (down from 1.70% for
2009) and  1.38% for Merchant Banking (up  from 1.19% for 2009). As announced on
6 January  2011, an additional loan  loss provision was  set aside in the fourth
quarter,  caused  by  the  revised  scenario  for  the  Irish  economy after the
financial aid package had been approved by the EU and the IMF.



Excess capital to the tune of 4.5 billion euros

·         At the end of the fourth quarter, the KBC group had generated capital
of roughly 4.5 billion euros in excess of the 10% tier-1 target (including the
effect of all divestments for which a sale agreement has been signed to date).



Headlines of underlying performance per business unit

·         The profit contribution of the Belgium Business Unit amounted to 255
million euros in 4Q 2010, up 35 million euros on the 3Q 2010 figure due
primarily to higher net interest income, increased net fee and commission
income, as well as higher net realised gains on AFS assets. This positive result
was not offset by the rise in operating expenses.

·          The profit  contribution of  the Central  and Eastern Europe Business
Unit  amounted to a solid 131 million  euros in 4Q 2010, 78 million euros higher
than the figure for 3Q 2010, which had been adversely impacted by the booking of
the  bank tax  for the  full year  in Hungary.  This substantial increase in the
quarterly  result was thanks  to the good  performance of the non-life insurance
business,  a healthy decline in operating expenses,  as well as a sharp decrease
in impairment on loans and receivables.

·         The profit contribution of the Merchant Banking Business Unit amounted
to a negative 228 million euros in 4Q 2010, down 384 million euros on the figure
for  the previous quarter, due mainly to a provision of 125 million euros (after
tax)  being set aside  for a case  of irregularities at  KBC Lease UK. Moreover,
impairment  charges for Ireland in 4Q 2010 came to 0.3 billion euros as a result
of the additional one-off impairment calculated on the effect of the bail-out in
that  country. Finally,  the dealing  room results  were weak,  in line with our
peers

·          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 4Q 2010, the
Group Centre's net result came to 11 million euros, compared to 16 million euros
in the previous quarter.



Divestment gains and 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
4Q 2010 amounted to a positive 0.6 billion euros.

·         Apart from some smaller items, the main non-operating items in
4Q 2010 were the capital gains realised on the divestment of Secura and the
Global Convertible Bond and Asian Equity Derivatives businesses of KBC Financial
Products. The combined effect of these two transactions generated a capital gain
of 0.2 billion euros.

·         The other most important impacting factor was the valuation mark-up of
the CDO exposure in the amount of 0.3 billion euros, resulting mainly from a
tightening of corporate credit spreads between the end of September 2010 and the
end of the year.



Full-year 2010: results per heading

Explanations  per heading of the IFRS  income statement for FY 2010 (see summary
table on the next page):

·         The net result for 2010 amounted to a positive 1 860 million euros, as
opposed to a net loss of 2 466 million euros in 2009, which was heavily impacted
by  losses related to CDOs and shares, among other things. Excluding exceptional
items,  the underlying net result  for 2010 totalled 1 710 million euros, almost
equal to the figure for 2009.

·          Net interest income  amounted to 6 245 million  euros, up 7% year-on-
year.  On  a  comparable  basis,  credit  volumes  contracted,  in line with our
intention  to scale down our  international loan book. The  loan book in Belgium
grew  by 5%, reflecting the gradual economic recovery. Customer deposits were up
by  6%, with  Belgium  posting  8% growth  and  CEE  3%. The net interest margin
increased from 1.84% in 2009 to 1.92% in 2010.

·          Earned insurance premiums, before reinsurance, stood at 4 616 million
euros, 5% lower than in 2009. Net of technical charges and the ceded reinsurance
result,   technical   insurance  income  came  to  347 million  euros.  2010 was
characterised  by a  relatively high  level of  claims, due  to factors  such as
flooding  in  Central  and  Eastern  Europe  and  adverse  weather conditions in
Belgium.  The combined ratio for the group's insurance companies came to 100.3%
for  the year, compared to 100.1% for 2009. There  was a vast improvement in the
after-tax result for the insurance business, turning a loss of 140 million euros
in  2009 to a  profit of  675 million euros  for 2010, primarily because of good
financial results.

·          Net fee and commission income amounted to 1 224 million euros, up 8%
year-on-year.  In 2010, sales of  commission-based products were  higher than in
2009, which was still very much impacted by the adverse effects of the financial
crisis. Assets under management grew from 205 billion euros to 209 billion euros
over the year on account of positive net entry effects.

·          The net result from financial  instruments at fair value (trading and
fair value income) came to -77 million euros, compared to -3 485 million euros a
year  earlier. On an underlying basis  (i.e. excluding exceptional items such as
value  adjustments on  structured credits,  losses related  to 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 855 million euros, down 9% year-on-year.

·          The remaining income components were as follows: dividend income from
equity  investments amounted to 97 million euros  (compared to 139 million euros
in  2009), the  net  realised  result  from available-for-sale assets (bonds and
shares)  stood at 90 million euros (224 million  euros a year earlier) and other
net income totalled 452 million euros (427 million euros a year earlier).

·          Operating expenses amounted to -4 436 million euros in 2010, 7% lower
than  in 2009. The  cost decrease  is clearly  related to  the strategic refocus
programme  where non-core  activities are  being wound  down, as  well as to the
continued  effects of rigorous  cost control measures  throughout the group. The
2010 figure  included negative items such as  the Hungarian bank tax and Belgian
deposit  guarantee  scheme.  The  underlying  cost/income  ratio for banking - a
measure of cost efficiency - stood at 56%, in line with last year's number.

·          Impairment charges stood at -1  656 million euros, down a substantial
39% year-on-year.  This decrease  was most  pronounced in  relation to loans and
receivables,  where  we  recorded  -1  483 million  euros, compared to -1 901 in
2009. As a result, the annualised credit cost ratio for 2010 amounted to 0.91%,
down  on the  figure of  1.11% for 2009. Other  impairment charges totalled -173
million  euros in 2010 and  related mainly to  available-for-sale assets (shares
and bonds) and goodwill on subsidiaries and associated companies.

·          Income tax  amounted to  82 million euros,  payable in the year under
review.  This figure includes a positive deferred tax asset of 0.4 billion euros
booked in the second quarter of the year.

·          The net  post-tax result  from discontinued  operations amounted to a
negative 254 million euros. This comprises the results and impairment related to
the  sale agreement for KBL  EPB, which are regrouped  in this single line under
IFRS accounting rules (reference figures were adjusted accordingly).

·         At year-end 2010, total equity came to 18.7 billion euros, an increase
of 1.5 billion euros compared to the start of the year, due predominantly to the
inclusion  of the positive result for 2010 and  to a decrease in the revaluation
reserve  for  available-for-sale  assets.  The  group's tier-1 capital ratio - a
measure  of financial strength - stood at a sound 12.6%. Including the effect of
all  sale agreements announced to date (such  as KBL EPB), the pro forma tier-1
ratio amounts to approximately 13.5%.



Other information

Strategy highlights and main events

·          KBC posted a strong result in 2010, thus resuming profitability after
the  results  of  the  previous  two  years  had been negatively impacted by the
financial  crisis. Pre-impairment underlying income  is comparable to the levels
recorded  in the years before the financial  crisis, which reassures us that our
underlying business strategy is working.

·           In  the  fourth  quarter  of  2010, we  continued  to  implement our
strategic  refocusing plan. The divestment of Secura, which was sold to QBE, and
of  the Global Convertible  Bond and Asian  Equity Derivatives businesses of KBC
Financial  Products,  which  was  sold  to  Daiwa,  have been closed in the last
quarter  of 2010, generating a capital gain  of 0.2 billion euros. Evenly so the
divestment  of KBC  Peel Hunt,  KBC Asset  Management Ltd  in Ireland,  the Life
Settlement Portfolio of KBC Financial Products and KBC Business Capital have all
seen their closing in the last quarter of 2010.Closure of the remaining files is
expected  to  follow  in  the  months  to come. The reduction in (risk-weighted)
assets  continued  in  the  fourth  quarter  (primarily in the activities at KBC
Financial  Products) and also went according to  plan. A number of companies are
still  scheduled  for  divestment  as  part  of  the  planned  reduction  in the
international  loan portfolio.  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.  The  sales  process  for  our Belgian supplementary sales channels
(Centea and Fidea) is ongoing, and proceeding according to plan.

·          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%, of which  8% is core capital,  according to the  Basel II banking
capital adequacy rules.

·          On account  of the  changing economic  situation in Ireland after the
financial  aid package  was given  the green  light by  the EU  and IMF, KBC has
decided  to take additional impairment charges  for its Irish operations. Taking
account  of the  current economic  scenario and  the revised  model for our loan
book,   fourth-quarter  loan  impairment  provisions  for  Ireland  amounted  to
approximately  0.3 billion euros (net), bringing  the total to 0.5 billion euros
for 2010.

·          During  the  fourth  quarter,  internal  controls  at  KBC  Lease  UK
identified  irregularities in some of the  contracts between that KBC entity and
third parties. The maximum net (potential) amount of the irregularities has been
estimated  at 125 million euros. A provision  for this upper boundary amount has
been  set  aside.  KBC  has  taken  certain  preventive  legal measures it deems
necessary  to protect  its interests  and to  recover as  much of this amount as
possible. It has also filed an insurance claim aimed at recovering the amount at
risk.

·           Concerns   continued  during  the  fourth  quarter  about  financial
institutions' exposure to certain government bonds. In this respect, it is worth
mentioning  that following a  further reduction in  both the banking and trading
book,  KBC's exposure to Greek sovereign  bonds had dropped to 0.6 billion euros
as  at 31 December 2010. More information on  KBC's sovereign bond exposure to a
selection  of  Southern  European  countries  and  Ireland  is  provided  in the
'Consolidated financial statements' section of the quarterly report.
·         At the next Annual General Meeting (AGM) to be held on 28 April 2011,
it  will be  proposed to  shareholders that  a dividend  of 0.75 euros per share
(before taxes) be paid for financial year 2010 (subject to AGM approval).




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






KBC_Quarterly_Report_4Q2010: 


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