Earnings statement KBC Group, 4Q 2009

Regulated information* - 11 February 2010 (07.00 a.m. CET)

Summary

KBC  ended the three  months to December  2009 with a net  profit of 304 million
euros.  In the corresponding quarter of 2008, when the then financial crisis was
gaining momentum, a significant loss of 2.6 billion euros was posted.

Jan  Vanhevel, Group CEO: 'The economic recovery continued to gather pace during
the  fourth quarter and that  has made us cautiously  more optimistic for 2010,
even  though  we  all  know  the  economic  and  financial  environment  remains
vulnerable. As anticipated, our quarterly profit was affected by additional loan
loss  provisioning due to the fact that the improved quality of credit typically
lags  behind  the  upturn  in  the  economic  cycle.  The  revenue  generated by
securities trading was also distinctly light. The core earnings trends, however,
remained  solid. When excluding the effects  of both cyclically higher loan loss
provisioning  and the low level of  revenue from capital market activities, core
earnings  numbers were  similar to  previous quarters.  On top  of that,  we are
making   good  progress  on  our  flagship  projects  to  refocus  the  business
portfolio.'

For  the entire 2009 financial year, the net result was -2.5 billion euros, on a
par  with  the  year-earlier  level  and  significantly  impacted  by  losses on
investments recorded in the first half of the year. On an underlying basis (i.e.
excluding exceptional items), the net result was a positive 1.7 billion euros.

Financial highlights - 4Q 2009
Jan Vanhevel, Group CEO summarises the underlying business performance for
4Q 2009 as follows:

  * 'Core earnings trends remained solid. When exceptional income and dealing
    room revenue are excluded, the pre-credit provision result stood at 0.9
    billion euros, similar to the previous quarter and almost double the level
    recorded at the bottom of the crisis in 4Q 2008.'
  * 'On an underlying basis, interest income continued to grow and came in at
    11% above the year-earlier level. While volume growth in core markets is
    sluggish and exposure to non-core markets is intentionally being reduced,
    the net interest margin has continued to recover. The average net interest
    margin for the banking operations came to 1.94%, up from 1.86% for the
    previous quarter.'
  * 'Fee and commission income was up 13% on the previous quarter due to a
    marked rebound of asset-management-driven fees. Sales of life insurance
    products also received a boost, especially in Belgium, on the back of
    improved investment sentiment and seasonally higher marketing efforts.'
  * 'We have been fully benefiting from our efforts to cut costs over the past
    two years, which explains why they were down 25% compared to the fourth
    quarter of 2008. Operating costs ended 1% higher than the previous quarter
    and included some 48 million euros of restructuring expenses. The cost trend
    has been bottoming out and we expect costs to further increase from this
    point.'
  * The results for sales and trading on money and capital markets were driven
    by weak activity levels. From a methodological point of view, the value of
    the trading portfolio was also adjusted to include the market-wide increased
    counterparty risks and lower liquidity of the past year, notably in the
    fixed-income segment. The investment bank's underlying total income came in
    at 28 million euros compared with a quarterly average of around 200 million
    euros.'
  * 'At year-end, we added 652 million euros to the loan loss provisions,
    pushing up the ratio of loan loss provisions to non-performing loans
    outstanding from 68% to 75%. The share of the non-performing part of the
    loan portfolio increased only marginally from 3.3% to 3.4% during the
    quarter. The non-performing ratio came down in Belgium, while new
    non-performing loan formation decreased in both the Central & Eastern Europe
    and the merchant banking business units. The 2009 loan loss charge came to
    1.1% of total loans. In Central & Eastern Europe, the full-year loan loss
    ratio was 2.1%. A major impact area in this regard in the fourth quarter was
    the unsecured consumer finance unit in Poland, which will be discontinued.
    In the Czech Republic, where the largest loan portfolio in the region is
    held, loan losses were roughly stable again. In Belgium, loan loss
    provisioning came to 0.2% at year-end, while it was 1.3% for the loan book
    in the Merchant Banking Business Unit. We are encouraged by signs that the
    economy is improving and that we are therefore heading towards a turn in the
    credit cycle. Our 2010 base case scenario sets out that losses will visibly
    decline compared to financial year 2009.'
  * 'We look to the future with confidence. In line with our objectives, we are
    successfully shrinking our non-core activities. In the final quarter of the
    year, 1.5 billion worth of CDO holdings were sold and risk-weighted assets
    were reduced by almost 5 billion euros on an organic basis. Our divestment
    projects have aroused considerable interest to date. We hope to close a
    number of smaller transactions soon and enter negotiations for flagship
    projects.'

Headlines of underlying performance per business unit:
  * In Belgium, the earnings accruing from the combined solid performance for
    lending, deposit taking, asset management and insurance activities was
    offset by somewhat higher loan loss provisions (up from a very low level)
    and non-life claim charges related to the winter weather. At 271 million
    euros, the contribution to net profit remained at a high level, bringing the
    year-to-date return on equity allocated to this business unit to 32%.
  * For Central and Eastern Europe, the average net interest margin improved,
    benefiting from higher average loan spreads. The net result for the region
    came in at -79 million euros, cyclically impacted by additional loan
    impairment charges, bringing the year-to-date loan loss ratio to 2.1%
    (within the anticipated 2.0%-2.3% range). Seasonally higher operating costs
    were also posted.
  * In merchant banking, high year-end additions to corporate loan loss
    provisions and weak trading income (including portfolio value adjustments)
    were reported. As a result, the business unit reported a net result just
    below break-even. With a loan loss ratio of 96 basis points, the Irish
    business contributed 92 million euros to net profit for FY 2009.
  * In the European private banking business, fee and commission income
    continued to improve. Net results came in somewhat light at 24 million
    euros, burdened by decreasing treasury income and restructuring charges.
    Over the entire financial year, a return of 29% was achieved on the equity
    employed.

The  quarter was also characterised  by a number of  one-off items that were not
part  of the  normal course  of business  and were  excluded from  the presented
underlying  results (combined  net impact:  +0.1 billion  euros). The main items
were:
  * A valuation mark-up of CDO exposure in the amount of 0.6 billion euros, net,
    resulting from the further improvement of market prices for corporate credit
    risk and the release of reserves following further refinement of model
    parameters;
  * Impairment on the value of goodwill outstanding to the tune of 0.3 billion
    euros, net, largely related to acquisitions made in late 2007 and in early
    2008 (mainly in newly entered markets in Eastern Europe);
  * A trading loss of -0.2 billion euros, net, related to 'legacy' structured
    derivatives positions within the KBC Financial Products unit (Merchant
    Banking Business Unit). Similar losses cannot be excluded for the first
    quarter of 2010, while risk exposure is being unwound.


Financial performance - Full year 2009

Explanations  per heading of the income  statement for the entire 2009 financial
year (see summary tables on next few pages):
  * The net result for the 2009 financial year amounted to -2.5 billion euros.
    This figure includes exceptional items totalling -4.2 billion euros, net,
    such as value losses on CDO investments, the fee paid for the guarantee
    bought to cover the remaining CDO-linked exposure and position losses in
    respect of discontinued trading activities. Adjusted for those items,
    (underlying) profit came to a positive 1.7 billion euros, generating a
    return on shareholder's equity of 16%.
  * Net interest income came to 6.1 billion euros, up 21% year-on-year (+12% on
    an underlying basis). While volume growth slowed down at the start of 2009,
    margins recovered significantly. On an organic basis, the customer loan book
    (excluding reverse repos) at 31 December 2009 was 4% below the year-earlier
    level (up 3% in Belgium, but down 6% in Central & Eastern Europe, notably in
    Russia and Hungary, and down 7% in Merchant Banking). The underlying net
    interest margin for the banking activities came to 1.84%, up from 1.68% for
    the 2008 financial year.
  * Gross earned premiums in insurance stood at 4.9 billion euros, up 6% on the
    year-earlier figure. Net of technical charges and the ceded reinsurance
    result, income came to 356 million euros. For the non-life insurance
    activities, the combined ratio came to 98% (95% for 2008); the claims
    reserve ratio improved from 165% to 181%.
  * Dividend income from equity investments amounted to 145 million euros,
    markedly lower than the 259 million euros reported for 2008, as corporate
    dividend payouts were generally lower and because the equity investment
    portfolio was reduced in size. At year-end, investments in equity
    instruments totalled 2.4 billion euros compared with 3.6 billion euros a
    year-earlier.
  * Net gains from financial instruments at fair value came to -3.4 billion
    euros. Although sales and trading activities on the money and debt
    securities markets were relatively good, this income heading was strongly
    impacted by net negative value adjustments on structured credit exposure
    (including the cost of the acquired guarantee) and the marking down of
    discontinued derivative positions. On an underlying basis, this income
    heading came to +0.9 billion euros, on a par with the previous year's level.
  * Net realised gains from available-for-sale assets were 273 million euros,
    markedly higher than over the previous year when significant losses were
    posted on the sale of equity holdings. During 2009, low gains on share sales
    were complemented by gains realised on bonds whose value increased on the
    back of falling interest rates.
  * Net fee and commission income amounted to 1.5 billion euros. This is 13%
    lower than the year-earlier level, due largely to the lower income from
    asset management activities consequent on the adverse investment climate
    that prevailed until the first half of 2009.
  * Other net income ended at 428 million euros, down on the year-earlier figure
    of 618 million euros, largely because some (divestment) gains were recorded
    in relation to non-strategic participations in 2008.
  * Operating expenses came to 5.3 billion euros, down 5% year-on-year (as much
    as -13% on an underlying basis, i.e. when excluding exceptional items). The
    cost level benefited from cost containment measures initiated in 2008. The
    underlying cost/income ratio for banking - a measure for cost efficiency -
    stood at 55%, compared to 64% for 2008.
  * Total impairment charges stood at 2.8 billion euros, 1.9 billion euros of
    which related to loans and receivables. By the end of the year, the ratio of
    non-performing loans and receivables as a share of total loans and
    receivables had risen to 3.4%, up from 1.8% in December 2008. During 2009,
    the total loan portfolio was impaired by 1.1%. Available-for-sale investment
    securities (mainly shares) were impaired to the tune of 350 million euros on
    the back of falling share prices throughout 2008 and up to the end of the
    first quarter of 2009. An impairment loss of 509 million euros was
    recognised on the value of goodwill outstanding, related inter alia to
    acquisitions made in late 2007 and in early 2008 in Bulgaria, Russia and
    Slovakia.
  * As pre-tax results were negative, a deferred income tax credit of 234
    million euros was recognised.
  * The result attributable to minority interests amounted to a negative 82
    million euros (including the gain realised on the repurchase of hybrid
    capital securities in the third quarter of 2009).
  * At year-end 2009, total equity came to 17.2 billion euros, up 1.8 billion
    euros on the figure at the start of the year, due to the fact that the
    negative result (-2.5 billion) and the effect of buying back non-State
    hybrid equity securities (-0.6 billion) was offset by the positive impact of
    the issue of non-voting core equity securities to the State (Flemish Region
    of Belgium, +3.5 billion euros) and the positive market value adjustments on
    assets (+1.6 billion euros). The group's tier-1 capital ratio - a measure of
    financial strength - stood at a sound 10.8% of risk-weighted assets (9.2%,
    when excluding non-state hybrid tier-1 instruments).



Strategy highlights and future developments

  * In the course of 2009, KBC reviewed its strategy in order to lower its risk
    profile while still maintaining its core earnings power and organic growth
    potential. Jan Vanhevel, Group CEO: 'It was reassuring to observe that our
    core business model remained largely untouched by the past turbulence in the
    financial sector. However, the need was made clear to accordingly reduce our
    risk profile and the scope of activities to which we allocate capital.'
  * The new strategy, announced in December 2009, focuses on growing
    bancassurance on an organic basis in Belgium and selected Central and
    Eastern European markets, targeting retail and SME customers, including
    local mid-caps. Exposure to non-domestic corporate lending and non-core
    capital market activities will be largely reduced and KBL European private
    bankers will be divested. This will be complemented by some additional
    capital optimisation measures. Jan Vanhevel: 'We are ready for the future.
    We have a clear vision for the mid-term that is supported by a strong
    business case. Implementation of the strategy is progressing well and this
    is being tightly monitored.'
  * Fully aware of the demands for accountability placed on it by many elements
    of society, KBC remains committed to its ongoing process of improving the
    way its business is conducted. Jan Vanhevel: 'Customer satisfaction,
    employee professionalism and a deep connectedness with local markets are key
    objectives for me'. In order to align remuneration principles with long-term
    stakeholders' interests, KBC implemented a new group-wide remuneration
    policy aligned with the most recent international standards. Moreover, KBC
    Group Executive Committee members have foregone their remuneration bonus for
    the 2009 financial year, just like they did for the previous year.
  * KBC intends to redeem the core capital securities that were issued to the
    State largely by retaining earnings and releasing capital currently tied up
    in non-core assets. KBC also has the intention to maintain a regulatory
    tier-1 capital ratio of 10%, of which 8% core capital (in a first phase, the
    core capital includes the core capital securities issued to the State).
  * At the next Annual General Meeting (AGM) to be held on 29 April 2010, it
    will be proposed to shareholders not to pay out a dividend over the 2009
    financial year. KBC, however, intends to resume cash dividend payment as of
    2011, based on 2010 earnings (subject to AGM approval).



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



[HUG#1381844]





    FULL 4Q REPORT FINAL: 

http://hugin.info/133947/R/1381844/341907.pdf