DBRS: KBC’s Core Franchise Is Resilient, but Irish Provisions Drive Down 4Q13 Results

Summary
•KBC’s core franchise showed its resiliency in 2013, as KBC posted increased net income, even with significant provisioning for Ireland that drove negative net income in 4Q13. Improvement was evident in KBC’s main business unit, Belgium. The Group generated stable results in Czech Republic and International Markets ex Ireland.
•With strong deposit franchises in Belgium and Czech Republic, KBC benefits from a strong funding and liquidity profile. The Group is also maintaining solid capitalisation, even as it makes progress in reducing State aid and changes the accounting for its insurance operations.
•DBRS rates KBC Group N.V.’s (KBC or the Group) Senior Long-Term Debt & Deposits at A (low) and the Senior Long-Term Debt & Deposits of KBC Bank N.V. (KBC Bank), KBC’s principal banking subsidiary, at “A”. The trend for all ratings is Stable.

From DBRS Inc.’s (DBRS) perspective, the 4Q13 and full year 2013 results show the resiliency of KBC’s core franchise. Income before provisions and taxes (IBPT) of EUR 3.6 billion was up 5% from 2012. Provisions of EUR 1.9 billion in 2013 absorbed 53% of IBPT on a consolidated basis. Even with elevated provisioning for Ireland, this was below the 72% absorbed in 2012. Delivering relatively stable results in 4Q13, KBC’s IBPT of EUR 755 million was not sufficient to absorb total provisions of EUR 942 million of which the EUR 773 million provisions booked in Ireland in 4Q13. This provisioning was in line with KBC’s prior communication. In 2013, the Irish subsidiary generated about EUR 1.1 billion or 55% of total provisions. Nevertheless, overall in 2013, KBC posted about EUR 1.0 billion net income, well up from EUR 612 million in 2012. DBRS views this as a good result, given the provisions for Ireland and the reduction in the Group’s perimeter with the completion of its divestment program.

KBC’s focus on its three core business units is demonstrating its stability versus the Group’s many moving parts during the restructuring. In its Belgium business unit (BU), KBC successfully sustained the level of its earnings with EUR 1.6 billion net income in 2013, up from EUR 1.4 billion in 2012. While lending was down due to the reduction of the Group’s foreign branches, KBC improved its net interest margin (NIM) to 1.80% in 4Q13, up from 1.71% in 4Q12. Confirming the Group’s solid positioning in Czech Republic, this BU generated a relatively stable EUR 0.6 billion in net income in 2013. In the International Markets BU, however, losses in Ireland continued to outweigh positive results in other countries. Net losses for this BU totaled EUR -0.8 billion in 2013, and EUR -0.2 billion in 2012.

While the Group’s perimeter has been reduced, total customer deposits continue to grow in several countries, reporting growth in deposits in Czech Republic and Slovakia in 4Q as in 2013, but also in Belgium, Hungary and Ireland on an annual basis. KBC maintains strong funding and liquidity profile supported by its customer driven sources of funding. Overall, total deposits from customers increased by 2.8% to EUR 164.1 billion at end-2013. Strong liquidity is shown by KBC’s net stable funding ratio (NSFR) was at 111% and liquidity coverage ratio (LCR) at 131% at end-2013. The Group maintains capitalisation at a solid level even with repayment of State aid that was accelerated in January 2014 and a switch to the Danish compromise method to account for its insurance operation. The Group reported a solid pro-forma common equity ratio (CET1) of 12.5% at end-2013. This takes into account the divestments for which agreements have been signed, Antwerp Diamond Bank and KBC Bank Deutschland and the repayment of State aid in January 2014.

DBRS rates KBC Group N.V.’s (KBC or the Group) Senior Long-Term Debt & Deposits at A (low) and the Senior Long-Term Debt & Deposits of KBC Bank N.V. (KBC Bank), KBC’s principal banking subsidiary, at “A”. The trend for all ratings is Stable.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the European Banking Authority, and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Approver: Alan G. Reid
Initial Rating Date: June 3, 2010
Most Recent Rating Update: January 8, 2014

For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.