Earnings Statement KBC Group, 1Q 2010

Regulated information* - 12 May 2010 (07.00 a.m. CEST)

 Summary

KBC ended the three months to March 2010 with a net profit of 442 million euros,
compared  with a net profit of 304 million euros in the previous quarter. In the
corresponding  first  quarter  of  2009, when  the  financial  crisis was at its
height,  a significant  loss of  3.6 billion euros  was posted. On an underlying
basis,  i.e. excluding non-operational items, net profit amounted to 543 million
euros in the quarter under review.

Jan Vanhevel, Group CEO: 'Against the backdrop of a modest European economic
recovery, KBC continued to focus on its core markets. In the first quarter, the
progress started last year continued without major disruption. Our quarterly
profit was up on the previous quarter due to stable business development
combined with generally lower loan loss provisioning. The core earnings trends
remained solid. In addition, we are making good progress on our flagship
projects to refocus the business portfolio.'


Financial highlights 1Q 2010


Jan Vanhevel, Group CEO, summarises the underlying business performance for
1Q 2010 as follows:

  *   'Underlying, net interest income from the core deposit-taking and lending
    business stood at 1 344 million euros. The average net interest margin for
    the banking operations came to 1.82%, compared to 1.94% in the previous
    quarter. Deposit and credit spreads remained healthy. The tightening of the
    interest margin is mainly due to, for prudency reasons,  an increased focus
    on short-term assets for the reinvestment of savings deposits'.
  * 'Fee and commission income stood at 429 million euros, up 31% on the
    year-earlier quarter, when the financial crisis was at its height, thanks to
    increased income from the sale and management of investment products, on the
    back of improved investment sentiment. Compared to 4Q 2009, fee and
    commission income fell by 5%, partly related to seasonal effects.'
  * 'Net gains from financial instruments at fair value, which includes among
    other things the result from the dealing room activities, stood at 320
    million euros. This strong performance was in line with the market trend'.
  *  'We are continuing our tight cost control. Following our efforts to cut
    costs over the past two years, our operating expenses were down 6% on the
    previous quarter and also 6% less than in the first quarter of 2009. The
    cost trend has been bottoming out and we expect costs to increase from this
    point.'
  * 'We think we may have seen a turn in the credit cycle. Our base case
    scenario for 2010 is that losses will visibly decline compared to the 2009
    financial year. At the end of the first quarter, we added 355 million euros
    to the loan loss provisions, significantly down on the 652 million
    registered in the previous quarter. The 1Q 2010 credit cost charge came to
    0.84% of total loans for the whole group. In Central & Eastern Europe, the
    first-quarter credit cost was 1.20%, down from 1.70% for the full year
    2009. In Belgium, loan loss provisioning came to practically nil, while the
    credit cost ratio came to 1.47% for the loan book of the Merchant Banking
    Business Unit.'
  * 'During the first quarter, an excess of 1.5 billion euros of regulatory
    capital was built up over the 10% tier-1 target'



Headlines of underlying performance per business unit:

  * It should be noted that the Group Centre now also includes all planned
    divestments of KBC Group. The aim here is to clearly indicate the financial
    performances of the long-term activities and the planned divestments
    separately.
  * In Belgium, a strong cost performance combined with virtually no loan loss
    charges and stable revenues led to a higher net result.
  * Central and Eastern Europe generated a slightly higher total income, as a
    result of a stable net interest margin, higher gross earned insurance
    premiums, increased trading and fair value income and slightly lower fees
    and commissions compared to the previous quarter. The main drivers for the
    better quarter-on-quarter net result of this business unit were
    substantially lower expenses and, even more importantly, much lower
    impairment on loans and receivables (around
    -50%). As a result, the bottom line for this business unit came to 110
    million euros.
  * In Merchant Banking, very good dealing room results added substantially to
    the bottom line. Due to the intentional run-down of the loan book, net
    interest income was down on the previous quarter. Given the difficult
    outlook for the Irish economy, we have enhanced loan loss provisions there
    by 142 million euros. However, the total amount of impairment booked for
    this business unit still fell by some 14% compared to the previous quarter.
    In total, the business unit reported a net result of 85 million euros.

 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 underlying
results (combined net impact: 0.1 billion euros). The main items were:

  * A valuation mark-up of CDO exposure in the amount of 0.2 billion euros,
    resulting mainly from the further improvement of the credit environment;
  * A trading loss of 0.1 billion euros, related to 'legacy' structured
    derivatives positions within KBC Financial Products (Merchant Banking
    Business Unit). Additional limited losses cannot be excluded for the next
    few quarters of 2010, while risk exposure is continuously being unwound.

 1Q 2010 results per heading


 Explanations  per heading of the IFRS income statement for the first quarter of
2010 (see summary tables on the next few pages):
  * The net result for the first three months of the 2010 financial year
    amounted to 442 million euros, compared to ‑3.6 billion euros a year
    earlier, which included significant losses related to CDOs and shares. The
    underlying net result for the quarter under review totalled 543 million
    euros.
  * Net interest income came to 1 560 million euros, up 6% year-on-year (-1% on
    an underlying basis). While volume growth remained sluggish in the quarter,
    the average net interest margin of 1.82% was more or less unchanged from
     the first quarter of 2009 (1.80%).
  * Gross earned premiums in insurance stood at 1 249 million euros, down 5% on
    the year-earlier figure. Net of technical charges and the ceded reinsurance
    result, technical insurance income came to 72 million euros. The claims
    level continued to be relatively high because of factors such as the storm
    Xynthia, leading to an 11% year-on-year hike in gross technical charges in
    the Non-Life segment.
  * Dividend income from equity investments amounted to 17 million euros.
  * Net (un)realised gains from financial instruments at fair value came to -3
    million euros. On an underlying basis, this figure was significantly higher,
    at 320 million euros. Good sales and trading activities on the money and
    debt securities markets were recognised, in line with the market.
  * Net realised gains from available-for-sale assets stood at 26 million euros,
    markedly lower than in the previous quarter.
  * Net fee and commission income amounted to 420 million euros. This is 32%
    higher than the year-earlier level. Commission-based business continues to
    recover in volume terms after the historical low levels we have seen due to
    the financial crisis.
  * Other net income totalled 101 million euros, down on the year-earlier figure
    of 152 million euros.
  * Operating expenses came to 1 181 million euros, down 4% year-on-year (-6%,
    underlying). The cost level continued to benefit from cost containment
    measures initiated in 2008 but, going forward, costs are expected to move
    upwards. The underlying cost/income ratio for banking - a measure of cost
    efficiency - stood at 50%, compared to 55% for the whole of 2009.
  * Total impairment charges stood at 383 million euros, 46% lower than the
    year-earlier quarter, and attributable primarily  to loans and receivables.
    In 2009, the credit cost ratio had risen to 1.11%, but the ratio fell during
    the first quarter of 2010, to 0.84%. While impairment charges went down in
    all business units, the decline was most pronounced in Central & Eastern
    Europe. In Merchant Banking, part of the decrease in impairment on the
    international loan books was set off by higher impairment in KBC Bank
    Ireland.
  * Income tax amounted to 177 million euros in the quarter under review.
  * At the end of the first quarter of 2010, total equity came to 18.2 billion
    euros, up 1 billion euros on the figure at the end of 2009, mainly due to
    the inclusion of the positive quarterly result (+0.4 billion euros) and an
    increase of the revaluation reserve for available-for-sale assets (+0.6
    billion euros). The group's tier-1 capital ratio - a measure of financial
    strength - stood at a sound 11.0% of risk-weighted assets (9.5%, when
    excluding non-state hybrid tier-1 instruments).

 Strategy highlights and future developments

  * After reviewing its strategy in 2009, the Group clearly committed to
    lowering its risk profile while still maintaining its core earnings power
    and organic growth potential. Jan Vanhevel, Group CEO: 'Our assessment
    indicated plainly that our core business model remained largely untouched by
    the turbulence in the financial sector. However, it became obvious that we
    had to reduce our risk profile and the scope of activities to which we
    allocate capital. We, therefore, took our decision on strategy in accordance
    with this assessment.'
  * The new strategy, announced in November 2009, is focused 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.'
  * In line with the above strategy, all the activities earmarked for divestment
    have been regrouped, for reporting purposes, in the Group Centre. The
    results of the other business units hence exclude these companies. Jan
    Vanhevel: 'This makes it very easy to assess what activities are core to KBC
    and what their financial status is, allowing the investment community an
    even better insight into our financial strengths.'
  * The refocus process has made substantial progress and a number of divestment
    transactions have already been signed in 1Q10, such as for the US reverse
    mortgage portfolio and the Japanese cash equity operations. Moreover, a
    significant reduction of the group's credit derivatives, as part of the
    restructuring of KBC Financial Products, was initiated in the first quarter
    of 2010 as well. The other divestments scheduled for 2010 remain on track.
  * At the end of April, the Belgian tax ruling office ruled positively that a
    waiver of intercompany debt, related to CDO-linked losses incurred in past
    years, is tax deductible, provided certain conditions are met. In practice,
    this means KBC will be able to book a positive deferred tax income of 0.3
    billion euros in the second quarter of 2010, partly compensating the losses
    it has suffered in previous periods.
  * 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 intends to maintain a regulatory tier-1 capital
    ratio of 10%, of which 8% core capital, according to the so-called Basel II
    banking capital adequacy rules (in a first phase, the core capital also
    includes the core capital securities issued to the State).
  * KBC's exposure to Greek sovereign bonds is limited to 1.9 billion euros (of
    which 0.6 billion in the trading book). More information on KBC's sovereign
    bond exposure to Southern Europe is provided in the Consolidated Financial
    Statements part of the quarterly report.

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



[HUG#1414325]





    KBC Quarterly report 1Q 2010.pdf: 

http://hugin.info/133947/R/1414325/366121.pdf