KBC Group N.V. - Improved Results, even with Irish Prov. in 4Q; Ratings Unchanged after 3Q; A URN

DBRS, Inc. (DBRS) has today commented on KBC Group N.V.’s (KBC or the Group) 3Q13 results. DBRS rates KBC’s Senior Long-Term Debt & Deposits at “A” and KBC Bank’s Senior Long-Term Debt & Deposits at A (high). These ratings are Under Review with Negative implications. The removal of the floor rating of A (high) for Belgian CIBs on October 11, 2013 triggered a review of the ratings of KBC Group and KBC Bank. KBC is considered to be a Critically Important Banking organisation (CIB) in Belgium, and has been benefiting from DBRS’s rating floor of A (high) for banks and “A” for bank holding companies with short-term ratings of R-1 (middle).

Now with EUR 250 billion in assets, the Group has completed much of its restructuring. KBC has reduced risk weighted assets by 42% to EUR 90.2 billion since end-2008. It has created a new organisation with three business units that is showing stability versus the Group’s many moving parts during the restructuring. In its Belgium business unit (BU), results held up well, with growth in net interest income and a lower cost of risk than in 3Q12. The Czech Republic BU also posted improved results on the back of higher lending volume, lower operating expenses and a lower level of impairments. In the International Markets BU, however, losses in Ireland continue to outweigh positive results in other countries. Overall, with some one-time items weighing on results, KBC reported net income attributable to equity holders of the parent of EUR 272 million in 3Q13, as compared to EUR 531 million in 3Q12 and EUR 517 million in 2Q13.

Excluding one-off items in each quarter, KBC posted EUR 457 million net income on an underlying basis in 3Q13, above EUR 373 million in 3Q12, a good result bearing in mind that the Group’s perimeter has changed with the completion of its divestment program, but below EUR 485 million in 2Q13, reflecting seasonal effects. In 3Q13, one-off items combined for losses after tax of EUR -184 million, which reflected EUR -231 million losses mostly linked to the divestment process including Antwerp Diamond Bank (EUR -73 million) and KBC Banka (EUR -38 million). The negative impact of the Group’s own debt was marginal in this quarter.

KBC continues to benefit from the strength of its core franchise in Belgium, reported EUR 1.2 billion adjusted net income in 9M13, as well as its successful operations in Czech Republic, which posted EUR 436 million adjusted net income in 9M13. But, International Markets are not profitable yet, due primarily to the elevated level of provisioning that persists in its bank in Ireland, which the Group does not expect to be profitable until 2016. While 3Q13 was generally a good commercial quarter for KBC, its Irish bank subsidiary remains a burden that will impact more severely the Group’s 4Q13 results as the Group is reviewing its Irish loan portfolio to address the European Banking Authority’s paper on forbearance and non-performing loans, and the asset quality review to be performed in 2014. Reflecting this review, the Group projects impairments to reach EUR 775 million in 4Q13, driven by additional provisions due to reclassification of restructured residential mortgages from performing into impaired categories, as well as additional provisions for corporate loans. KBC does not anticipate any significant impact on its other operations.

DBRS views positively KBC’s efficiency level, which compares well with European retail banks. For the Group’s banking business, the cost-to-income ratio on an underlying basis improved to 56% year-to-date from 60% in 2011. Excluding all one-offs, expenses declined by 2% year-on-year and quarter-on-quarter pro-forma.

KBC’s overall non-performing loan (NPL) ratio remains elevated. Now at 5.8%, up from 5.5% at 3Q12, the increase in NPL ratio is driven primarily by the Irish bank subsidiary. The NPL ratio in Ireland reached a new high of 25.9% in 3Q13 relative to 22.5% in 3Q12, and 24.9% in 2Q13. Specific and portfolio-based loan impairments for performing and non-performing loans were 63% at 3Q13, down from 66% at end-2012. Provisions of EUR 363 million absorbed 43% of the Group’s income before provisions and taxes (IBPT) of EUR 847 billion in 3Q13, compared to EUR 302 million absorbing 32% in 3Q12. The one-off provision of EUR 775 million expected for 4Q13 is sizeable, but appears manageable at 91% of 3Q13 IBPT and compares to IBPT of about the same level in 4Q12.

DBRS views KBC’s funding profile as solid. Funding from customers represents roughly 75% of total funding at 3Q13, up from 73% in 2012. KBC has available liquid asset of EUR 60.1 billion, covering 388% of net short term funding at 3Q13. While deleveraging reduces KBC’s need for wholesale funding, Group’s medium- and long-term (MLT) maturities for 2014 are about EUR 6 billion according to SNL data. The Net Stable Funding Ratio (NSFR) and Liquidity Coverage Ratio (LCR) are above Basel III liquidity requirements at 3Q13.

Adding to its buffer over regulatory minimums, KBC’s common equity ratio (CET1) reached 12.5% at 3Q13 under fully loaded Basel III, up 170 basis points (bps) from end-2012. Improved capitalization in 3Q13 was achieved mainly through internal capital generation and further disposal of legacy assets. The Group’s fully loaded Basel III leverage ratio is estimated at 3.8% at 3Q13 at KBC Bank consolidated (as applied by KBC), putting it above the 3.0% regulatory target for 1 January 2018. Remaining State aid is included in CET1 as agreed by local regulators. KBC’s capital level was further improved by approximately 70 bps following the sale of shares by KBC’s main shareholders and the concomitant reimbursement of intragroup loans.

Notes:
All figures are in euros (EUR) unless otherwise noted.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]