DBRS: KBC’s 3Q14 Net Income Up; Divestment Plan Fully Completed

Summary
• Net income was EUR 591 million in 3Q14, up from EUR 272 million in 3Q13. The jump is driven by a positive EUR 132 million divestments one-off in the quarter.
• Performance improves too on an adjusted basis YoY and QoQ.
• Divestment plan agreed with the EC in 2009 is now entirely completed.
• Basel III fully loaded common equity (CET1) ratio increased to 13.7% including remaining State aid of EUR 2 billion and based on Danish compromise.
• DBRS rates KBC’s principal banking subsidiary, at “A” with a Stable trend.

From DBRS Ratings Limited’s (DBRS) perspective, KBC’s 3Q14 results confirm its capacity to generate solid earnings, with good commercial momentum in the Group’s core markets as well as a reduction in the cost of risk. Excluding the net gain of EUR 132 million in divestments based mainly on a reversal of the impairment recorded on Antwerp Diamond Bank (ADB), net income was EUR 459 million, which is above the EUR 412 million quarterly average for 2013. With the closing of the sale of KBC Germany, KBC’s divestment plan agreed with the EC in 2009 is now entirely completed.

Overall, KBC’s net interest income (NII) and net fee and commission contribution continued to be on an upward trend in this quarter. In Belgium, KBC’s largest contributor to earnings, NII has been trending up reaching EUR 735 million up 10% year-on-year (YoY) and 5% quarter-on-quarter (QoQ). This was achieved thanks to improved net interest margin (NIM) combined with loan growth YoY and QoQ. NIM in Belgium increased further, up 23 basis points (bps) YoY to 2.04% in 3Q14, benefiting from better margins on deposits and on the loan book, and lower wholesale funding costs. The negative mark to market valuations in ALM derivatives, which tends to distort the revenues trend, was much reduced in this quarter. The net contribution of Insurance operations stabilised. On the other hand, the net contribution from the Czech Republic is lower than the quarterly average for the past four quarters; at the same time NII was flat pro-forma YoY. The International Markets Business Unit (BU) is profitable again in contrast with previous quarters, when Ireland but also Hungary were more of a drag. While the Hungarian bank fully absorbed the negative changes in the Hungarian law on consumer loans in 2Q14, Ireland remains a negative contributor.

Adjusted for the impact of legacy activities (remaining divestments, CDOs) and of the valuation of own credit risk, the Group’s income before provisions and taxes (IBPT) was EUR 848 million in 3Q14 compared to EUR 867 million in 3Q13, and provisions were down to EUR 183 million from EUR 208 million in 3Q13, absorbing 22% of IBPT compared to 24% the previous year. Contributing to the improving position, KBC’s credit cost improved in Ireland in particular. Of note, Group’s credit cost was down to 41 bps in 3Q14 from 121 bps at end-2013; Ireland’s credit cost was down to 140 bps in 3Q14 from 672 bps at end-2013 (large provisions were taken in 2013 ahead of the Asset Quality Review). At the same time, KBC’s overall non-performing loan ratio is stabilizing around 6.0% with a coverage of 53.6%. In this quarter, the extensive ECB stress-test based on year-end 2013 data indicated that KBC has the ability to withstand a severe stress scenario. Also, DBRS views positively that KBC collapsed the last two CDOs in its portfolio.

The Group is maintaining its capitalisation at a solid level. KBC reported a solid Basel III fully loaded CET1 ratio of 13.7% including remaining State aid of EUR 2 billion (based on Danish compromise), up 90 bps since end-2013; its leverage ratio was 4.74% at KBC Bank based on current CRR legislation. DBRS notes that, at the beginning of 2014, KBC accelerated the repayment of EUR 0.33 billion (including penalties) of State aid, and that shareholder stability was ensured thanks to the extension of the “KBC Group anchoring agreements” made by Cera, KBC Ancora, MRBB and the other shareholders.

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.