Quarterly Report • Aug 6, 2020
Quarterly Report
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Brussels, 6 August 2020 (07.00 a.m. CEST)
| KBC Group – overview (consolidated, IFRS) | 2Q2020 | 1Q2020 | 2Q2019 | 1H2020 | 1H2019 |
|---|---|---|---|---|---|
| Net result (in millions of EUR) | 210 | -5 | 745 | 205 | 1 175 |
| Basic earnings per share (in EUR) | 0.47 | -0.04 | 1.76 | 0.43 | 2.75 |
| Breakdown of the net result by business unit (in millions of EUR) | |||||
| Belgium | 204 | -86 | 388 | 119 | 564 |
| Czech Republic | 77 | 88 | 248 | 165 | 425 |
| International Markets | -45 | 35 | 104 | -11 | 175 |
| Group Centre | -26 | -43 | 4 | -68 | 11 |
| Parent shareholders' equity per share (in EUR, end of period) | 44.9 | 43.8 | 42.8 | 44.9 | 42.8 |
The quarter under review started with the society in lockdown due to the coronavirus crisis. Over and above the human suffering caused by the pandemic itself, this also triggered unprecedented economic consequences. Even though society is now gradually reopening, it is clear that the coronavirus crisis will have a significant impact, especially in particular sectors. However, the various relief measures implemented in our home countries may help contain the overall impact going forward. Obviously, the long-term impact on the economy also depends on the occurrence and intensity of new outbreaks of the virus now and in the coming months.
Since the start of the coronavirus crisis, we have been working hard with government agencies to support all customers impacted by coronavirus, by efficiently instituting relief measures – including loan deferrals – and adapting or extending these measures where necessary. In these difficult times, we have also managed to continue providing our customers in all our home markets with a high level of service, thanks in the main to the efforts and investments we have made over the past few years on the digital transformation front, in combination with the expertise and commitment of our employees in all our home countries. Meanwhile we will continue to work on solutions to proactively make life easier for our customers. The interaction between human and machine, between branch and digital app, supported by artificial intelligence and data analysis, plays a prominent role here. We will be communicating on this and other topics in more depth during a strategy update session on 12 November.
We believe that the world emerging from the coronavirus crisis will have to be a more sustainable one and we are working tirelessly to contribute to such a scenario. With that in mind, we successfully launched our second green bond in June for the amount of 500 million euros. By issuing green bonds, we aim to create a closer link with socially responsible investors, to provide finance to customers directly involved in sustainable projects and to contribute to the development of a liquid and efficient green bond market, which would help to finance the transition to a low-carbon economy.
As regards our financial results, we generated a net profit of 210 million euros in the second quarter of 2020. The result was significantly impacted by the recording of 845 million euros in loan loss impairment charges, the bulk of which related to the potential economic consequences of the coronavirus crisis. In this regard, we wish to reiterate our guidance for full-year 2020, i.e. an estimated 1.1 billion euros in loan loss impairment charges. As expected, net interest income and net fee and commission income fell in the second quarter, while our non-life insurance result, on the other hand, was very solid and our life insurance business witnessed strong sales in the second quarter. What's more, our trading and fair value result, which had been hit hard during the first quarter of the year, recovered to a large extent in the quarter under review. Last but not least, our strict cost control measures, together with the additional cost savings announced when the first-quarter results were published, helped reduce our operating expenses (excluding bank taxes) by 6% quarteron-quarter and by 8% year-on-year.
Our solvency position remained very strong, with a common equity ratio of 16.6% on a fully loaded basis, well above the current minimum capital requirement of 7.95%. Our liquidity position remained solid too, with an LCR of 136% and an NSFR of 142% at the end of June 2020. As a result, our current capital and liquidity buffers allow us to face today's challenges with confidence. It should also be noted that, in line with the recent ECB recommendation, we cannot execute our usual dividend policy. As a consequence, no interim dividend will be paid out in November 2020.
In closing, I would like to take this opportunity to explicitly thank all those stakeholders who have continued to put their trust in us. I can assure you that, in these challenging times, we remain fully committed to maintaining our position as the reference in bank-insurance in all our home markets.
Johan Thijs, Chief Executive Officer
The result of the quarter under review was significantly impacted by the recording of loan loss impairment charges related to the pandemic. That aside, costs were reduced significantly, the non-life insurance result was excellent and trading & fair value income recovered following the initial drop in the first quarter. Net interest income and fee and commission went down compared to the previous quarter.
| Consolidated income statement, IFRS KBC Group (in millions of EUR) |
2Q2020 | 1Q2020 | 4Q2019 | 3Q2019 | 2Q2019 | 1H2020 | 1H2019 |
|---|---|---|---|---|---|---|---|
| Net interest income | 1 083 | 1 195 | 1 182 | 1 174 | 1 132 | 2 278 | 2 261 |
| Non-life insurance (before reinsurance) | 255 | 185 | 229 | 192 | 174 | 440 | 335 |
| Earned premiums | 435 | 443 | 441 | 440 | 425 | 879 | 840 |
| Technical charges | -180 | -258 | -212 | -248 | -251 | -439 | -505 |
| Life insurance (before reinsurance) | 6 | 0 | 2 | -5 | 1 | 6 | -2 |
| Earned premiums | 276 | 297 | 364 | 291 | 317 | 574 | 668 |
| Technical charges | -271 | -297 | -363 | -297 | -316 | -568 | -669 |
| Ceded reinsurance result | -13 | -7 | -11 | -9 | 1 | -21 | -5 |
| Dividend income | 17 | 12 | 17 | 14 | 39 | 30 | 51 |
| Net result from financial instruments at fair value through P&L1 Net realised result from debt instruments at fair value through |
253 | -385 | 130 | -46 | -2 | -132 | 97 |
| other comprehensive income | 2 | 0 | 0 | 5 | 0 | 3 | 2 |
| Net fee and commission income | 388 | 429 | 445 | 444 | 435 | 816 | 845 |
| Net other income | 53 | 50 | 47 | 43 | 133 | 102 | 192 |
| Total income | 2 043 | 1 479 | 2 041 | 1 813 | 1 913 | 3 522 | 3 775 |
| Operating expenses | -904 | -1 338 | -1 045 | -975 | -988 | -2 242 | -2 283 |
| Impairment | -857 | -141 | -82 | -26 | -40 | -997 | -109 |
| Of which: on financial assets at amortised cost and at fair value through other comprehensive income2 |
-845 | -121 | -75 | -25 | -36 | -966 | -103 |
| Share in results of associated companies & joint ventures | -3 | -3 | -1 | 0 | 4 | -7 | 8 |
| Result before tax | 279 | -3 | 912 | 812 | 889 | 276 | 1 392 |
| Income tax expense | -69 | -2 | -210 | -200 | -144 | -71 | -217 |
| Result after tax | 210 | -5 | 702 | 612 | 745 | 205 | 1 175 |
| attributable to minority interests | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| attributable to equity holders of the parent | 210 | -5 | 702 | 612 | 745 | 205 | 1 175 |
| Basic earnings per share (EUR) | 0.47 | -0.04 | 1.66 | 1.44 | 1.76 | 0.43 | 2.75 |
| Diluted earnings per share (EUR) | 0.47 | -0.04 | 1.66 | 1.44 | 1.76 | 0.43 | 2.74 |
| Key consolidated balance sheet figures KBC Group (in millions of EUR) |
30-06-2020 | 31-03-2020 | 31-12-2019 | 30-09-2019 | 30-06-2019 | ||
| Total assets | 317 388 | 301 451 | 290 735 | 294 830 | 289 548 | ||
| Loans and advances to customers, excl. reverse repos | 157 563 | 158 364 | 155 816 | 154 863 | 154 169 | ||
| Securities (equity and debt instruments) | 72 131 | 67 176 | 65 633 | 65 122 | 63 746 | ||
| Deposits from customers & debt certificates, excl. repos | 210 811 | 208 293 | 203 369 | 205 270 | 199 138 | ||
| Technical provisions, before reinsurance | 18 775 | 18 816 | 18 560 | 18 549 | 18 652 | ||
| Liabilities under investment contracts, insurance | 12 505 | 11 979 | 13 610 | 13 456 | 13 381 | ||
| Parent shareholders' equity | 18 710 | 18 220 | 18 865 | 18 086 | 17 799 | ||
| Selected ratios KBC group (consolidated) |
1H2020 | FY2019 | |||||
| Return on equity | 2%3 | 14% | |||||
| Cost/income ratio, banking (when excluding certain non-operating items and spreading bank taxes evenly throughout the year) |
66% (59%) |
58% (58%) |
|||||
| Combined ratio, non-life insurance | 83% | 90% | |||||
| Common equity ratio, Basel III Danish Compromise, fully loaded [transitional] | 16.6% [16.6%] | 17.1% | |||||
| Common equity ratio, FICOD fully loaded [transitional] | 15.4% [15.5%] | 15.8% | |||||
| Leverage ratio, Basel III fully loaded [transitional] | 6.0% [6.0%] | 6.8% | |||||
| Credit cost ratio | 0.64% | 0.12% | |||||
| Impaired loans ratio | 3.4% | 3.5% | |||||
| for loans more than 90 days past due | 1.9% | 1.9% | |||||
| Net stable funding ratio (NSFR) | 142% | 136% | |||||
| Liquidity coverage ratio (LCR) | 136% | 138% |
1 Also referred to as 'Trading and fair value income'.
2 Also referred to as 'Loan loss impairment'.
3 4% when bank taxes are spread evenly throughout the year.
We provide a full overview of our IFRS consolidated income statement and balance sheet in the 'Consolidated financial statements' section of the quarterly report. Condensed statements of comprehensive income, changes in shareholders' equity, as well as several notes to the accounts, are also available in the same section. As regards the (changes in) definition of ratios, see 'Details of ratios and terms' in the quarterly report.
2 043 million euros
Total income Total income increased by 38% quarter-on-quarter, due almost entirely to the recovery of our trading and fair value income, following the huge drop in the previous quarter that had been caused by the initial financial market turmoil after the outbreak of the pandemic. All other income items combined fell slightly quarter-on-quarter, with the decrease in net interest income and in net fee and commission income being partly offset by higher technical insurance income and seasonally higher dividend income.
Net interest income amounted to 1 083 million euros in the quarter under review, down 9% on the figure recorded in the previous quarter and 4% year-on-year. In both cases, the decrease was mainly related to the effect of interest rates being cut by the CNB in the Czech Republic, the depreciation of the Czech koruna and Hungarian forint against the euro, low reinvestment yields in general, lower portfolio lending margins in most core countries (except Belgium), the lower netted positive impact of ALM FX swaps, and the fact that the previous quarter had included a positive one-off item. In the year-on-year comparison, these negative effects were partially offset by good loan volume growth (see next paragraph), the beneficial effect of ECB tiering, lower funding costs, a larger bond portfolio (also quarter-on-quarter) and the full consolidation of ČMSS since June 2019 (ČMSS was consolidated for the full three months in the second quarter of 2020, but for just one month in the second quarter of 2019 – this impact is referred to as the 'ČMSS impact' elsewhere in this publication).
The total volume of customer lending (158 billion euros) was more or less stable quarter-on-quarter but went up by 4% year-on-year, with year-on-year growth recorded in all business units. Customer deposits including debt certificates (211 billion euros) were up 1% quarter-on-quarter and 7% year-on-year, again with year-on-year growth in all business units. Excluding debt certificates, deposits were even up 5% quarter-on-quarter and 11% year-onyear. The net interest margin for the quarter under review amounted to 1.82%, 15 and 12 basis points down on the figures recorded in the previous quarter and year-earlier quarter, respectively.
Technical income from our non-life insurance activities (earned premiums less technical charges, plus the ceded reinsurance result) contributed 247 million euros to total income, up 43% quarter-on-quarter and 40% on the corresponding year-earlier quarter. The quarter-on-quarter increase came about primarily because of lower technical charges (the quarter under review included the positive effect of the lockdown on claims, whereas the previous quarter had included the significant impact of storms in Belgium), which more than offset the slight decrease in earned premiums. The year-on-year increase was due mainly to a combination of lower charges (a lower level due to lockdown in the quarter under review, whereas the reference quarter had been negatively impacted by storm-related claims and a re-assessment of claims provisions) and a slight increase in premium income, despite a lower ceded reinsurance result. Overall, the combined ratio for the first half of 2020 came to an excellent 83%, compared to 90% for full-year 2019.
Technical income from our life insurance activities (earned premiums less technical charges, plus the ceded reinsurance result) amounted to 1 million euros, compared to 4 million euros in the previous quarter and 0 million euros in the year-earlier quarter. Sales of life insurance products in the quarter under review (561 million euros) were up 32% and 22% on the level recorded in the previous and year-earlier quarters, respectively (thanks to increased sales of unit-linked products in Belgium due to the launch of new products), which more than offset lower sales of guaranteed-interest products. Overall, the share of unit-linked products in our total life insurance sales increased to 58% in the quarter under review, with guaranteed-interest products accounting for the remaining 42%.
In the quarter under review, net fee and commission income amounted to 388 million euros. Compared to the previous and year-earlier quarters, this represented a significant drop of 10% and 11%, respectively. In both cases, the decrease was caused primarily by the effects of the coronavirus pandemic on asset management-related fees (a decline in entry fees due to decreased sales and margins, and a decline in management fees due to the lower average level of assets under management in combination with lower margins). Moreover, fees related to banking services also fell (payment services fees, for instance, decreased due in part to the generally lower level of activity following lockdown). These negative items were only partially offset by the lower level of distribution fees paid (quarter-on-quarter) and the ČMSS impact (year-on-year). At the end of June 2020, our total assets under management amounted to 202 billion euros, up 4% quarter-on-quarter but down 4% year-on-year. The quarter-onquarter increase was due to a recovery in asset prices (+5%) in the second quarter, combined with a limited net
outflow of assets (-1%). The year-on-year decrease resulted from a combination of lower asset prices (-1%) and net outflows (-3%).
The net result from financial instruments at fair value (trading and fair value income) amounted to a positive 253 million euros, as opposed to -385 million euros in the previous quarter (which had been impacted by the initial market turmoil following the outbreak of the coronavirus crisis) and -2 million euros in the year-earlier quarter. The trading and fair value results for the quarter under review recovered largely from their level of the previous quarter, as they were positively impacted by rising stock markets and decreasing counterparty credit spreads and KBC funding spread, partly offset by lower long-term interest rates.
The other remaining income items included dividend income of 17 million euros, up on the figure recorded in the previous quarter (as the second quarter of the year traditionally includes the bulk of received dividends), but down on the year-earlier figure as a consequence of generally lower dividend payments due to the coronavirus crisis. The remaining income lines also include 53 million euros in net other income. This is in line with the normal run rate for this item, but down on the figure recorded in the year-earlier quarter, which had benefited from an 82-million-euro revaluation gain on the stake in ČMSS that had been triggered by the acquisition of the remaining participation in that company in that quarter.
Operating expenses Excluding bank taxes, operating expenses in the second quarter were down 6% on the previous quarter, thanks to strict cost containment. The cost/income ratio for the first half of 2020 amounted to 66%, or 59% when certain non-operating items are excluded and bank taxes are spread evenly through the year.
Operating expenses in the second quarter of 2020 amounted to 904 million euros. The quarter-on-quarter comparison is distorted by the upfront recognition in the first quarter of most of the bank taxes for the full year (27 million euros in the second quarter of 2020; 407 million euros in the first quarter of 2020; 30 million euros in the second quarter of 2019). Excluding bank taxes, expenses decreased by 6% quarter-on-quarter and by 8% yearon-year, thanks in essence to the announced cost savings, which led to, inter alia, a decrease in accruals for variable remuneration, a reduction in FTEs, lower marketing, travel, facilities and event costs (these four cost items were directly related to the effects of lockdown), as well as to the depreciation of the Czech koruna and Hungarian forint against the euro. These items largely offset the negative impact of items such as wage drift and the ČMSS impact (year-on-year).
The cost/income ratio of our banking activities came to 66% for the first half of 2020, but was distorted by most of the bank taxes being recorded in the first quarter. Excluding certain non-operating items and spreading bank taxes evenly throughout the year, the ratio amounted to 59%, compared to 58% for full-year 2019.
845-million-euro charge
Loan loss impairment We recorded a net loan loss impairment charge of 845 million euros, up on the 121 million euros recorded in the previous quarter. Almost 90% of the loan loss impairment in the second quarter related to collective impairment charges for the effects of the coronavirus crisis. The credit cost ratio for the first half of the year went up to 0.64%.
In the second quarter of 2020, we recorded an 845-million-euro net loan loss impairment charge, compared with a net charge of 121 million euros in the previous quarter and 36 million euros in the second quarter of 2019. 746 million euros of that 845 million euros related to collective impairment charges for the coronavirus crisis. Of this amount, 596 million euros related to an expert-based calculation ('management overlay' based on certain stress assumptions depending on country, segment, sector and probability-weighted macroeconomic scenarios) and 150 million euros was captured by the ECL models through updated macroeconomic variables. A detailed calculation and background information regarding this calculation can be found in Note 1.4 of the 'Consolidated financial statements' section of the quarterly report. It should be noted that the full collective expected credit losses for the coronavirus crisis – based on the assumptions at the end of the second quarter - have already been recorded in the first half of 2020.
Broken down by country, loan loss impairment charges in the second quarter of 2020 came to 458 million euros in Belgium, 170 million euros in the Czech Republic, 41 million euros in Slovakia, 55 million euros in Hungary, 23 million euros in Bulgaria and 97 million euros in Ireland. For the entire group, the credit cost ratio increased to 0.64% for the first half of 2020 (0.20% excluding the amount recorded for the coronavirus pandemic), up from 0.12% for full-year 2019.
The impaired loans ratio was down slightly on its level at the start of the year. At the end of June 2020, some 3.4% of our total loan book was classified as impaired (stage 3), compared to 3.5% at year-end 2019. Impaired loans that are more than 90 days past due amounted to 1.9% of the loan book, comparable to the figure recorded at year-end 2019.
For an indication of the expected impact of loan loss impairment for full-year 2020, see 'Guidance' on page 10 of this publication.
Impairment on assets other than loans amounted to 12 million euros, compared to 20 million euros in the previous quarter and 4 million euros in the second quarter of 2019. The figures for the quarter under review and the previous quarter relate principally to the accounting treatment of various payment moratoria in our home countries.
| Net result | Belgium | Czech Republic | International Markets | Group Centre |
|---|---|---|---|---|
| by business unit | ||||
| 204 million euros |
77 million euros |
-45 million euros |
-26 million euros |
Belgium: the net result (204 million euros) increased by 290 million euros quarter-on-quarter. Excluding bank taxes (the bulk of which are recorded in the first quarter and hence distort the quarter-on-quarter comparison), the net result still went up by 75 million euros (58%), as the strong rebound in trading and fair value income (following the huge drop in the first quarter of the year), higher technical non-life insurance result (lower claims) and lower costs more than offset the negative impact of the significant increase in loan loss impairment charges (most of which related to the impact of the coronavirus crisis) and lower net fee and commission income and net interest income.
Czech Republic: the net result (77 million euros) was down 12% on its level for the previous quarter. Excluding bank taxes (the bulk of which are recorded in the first quarter) and the effect of the depreciation of the Czech koruna against the euro, the net result was down 32% quarter-on-quarter, as significantly higher loan loss impairment charges (primarily related to the impact of the coronavirus crisis) and lower net interest income (following the CNB's rate cuts, among other things) more than offset the rebound in the trading and fair value result (following the decline in the first quarter) and the reduction in costs.
International Markets: the -45-million-euro net result breaks down as follows: -6 million euros in Slovakia, 16 million euros in Hungary, 14 million euros in Bulgaria and -70 million euros in Ireland. For the business unit as a whole, the net result was down 80 million euros quarter-on-quarter, or 127 million euros excluding bank taxes. The latter decrease came about mainly on account of higher loan loss impairment charges (in all countries; largely related to the impact of the coronavirus crisis), which were only partially offset by increased trading and fair value income and lower costs.
Group Centre: the net result (-26 million euros) was up 17 million euros quarter-on-quarter, thanks essentially to higher trading and fair value income and increased net interest income, which more than offset the absence of loan loss impairment reversals in the quarter under review and the lower ceded reinsurance result.
| Belgium | Czech Republic | International Markets | |||||
|---|---|---|---|---|---|---|---|
| Selected ratios by business unit | 1H2020 | FY2019 | 1H2020 | FY2019 | 1H2020 | FY2019 | |
| Cost/income ratio, banking (excluding certain non-operating items and spreading bank taxes evenly throughout the year) |
58% | 60% | 48% | 47% | 68% | 68% | |
| Combined ratio, non-life insurance | 85% | 89% | 86% | 94% | 78% | 88% | |
| Credit cost ratio* | 0.63% | 0.22% | 0.62% | 0.04% | 0.82% | -0.07% | |
| Impaired loans ratio | 2.4% | 2.4% | 2.2% | 2.3% | 7.8% | 8.5% |
* A negative figure indicates a net impairment release (positively affecting results). See 'Details of ratios and terms' in the quarterly report.
A full results table is provided in the 'Additional information' section of the quarterly report. A short analysis of the results per business unit is provided in the analyst presentation (available at www.kbc.com).
| Equity, solvency and liquidity |
Total equity |
Common equity ratio (fully loaded) |
Liquidity coverage ratio |
Net stable funding ratio |
|---|---|---|---|---|
| 20.2 billion euros | 16.6% | 136% | 142% |
At the end of June 2020, total equity amounted to 20.2 billion euros, comprising 18.7 billion euros in parent shareholders' equity and 1.5 billion euros in additional tier-1 instruments. Total equity was down 0.2 billion euros on its level at the end of 2019, owing to the combined effect of a number of items, including the profit for the halfyear period (+0.2 billion euros), a decrease in the revaluation reserves for equity instruments of the insurance company (the so-called 'insurance overlay approach'; -0.1 billion euros), translation differences (-0.3 billion euros, due largely to the depreciation of the Czech koruna and Hungarian forint in the period under review) and a number of other minor items. We have provided details of these changes in the 'Consolidated financial statements' section of the quarterly report (under 'Consolidated statement of changes in equity').
At 30 June 2020, our fully loaded common equity ratio (Basel III, under the Danish compromise) amounted to a solid 16.6%, compared to 16.3% at 31 March 2020 and 17.1% at the end of 2019. Our fully loaded leverage ratio (Basel III, fully loaded) came to 6.0%, compared to 6.8% at the end of 2019. The solvency ratio for KBC Insurance under the Solvency II framework was 198% at the end of June 2020, compared to 202% at the end of 2019.
Our liquidity position remained excellent too, as reflected in an LCR ratio of 136% and an NSFR ratio of 142% at the end of the quarter under review (compared to 138% and 136%, respectively, at the end of 2019).
| Net result | The net result for the first half of 2020 amounted to 205 million euros, compared to 1 175 million euros in the corresponding period of 2019. The decline was largely accounted for |
|---|---|
| 205 million euros |
by the impact of the coronavirus lockdown and related economic turmoil, which pushed up loan loss impairments from 103 million euros in the first half of 2019 to 966 million euros in the period under review. Moreover, net fee and commission income, trading and fair value income, dividend income and net other income were all down on their reference period levels. On the positive side, net interest income increased slightly and the technical insurance result rose, while costs fell compared to the first half of 2019. |
Highlights (compared to the first half of 2019):
(988 million euros) were up by 1%, with the increase in sales of unit-linked products being partly offset by a decrease in sales of guaranteed-interest products.
As we are mainly active in banking, insurance and asset management, we are exposed to a number of typical risks for these financial sectors such as – but not limited to – credit default risk, counterparty credit risk, concentration risk, movements in interest rates, currency risk, market risk, liquidity and funding risk, insurance underwriting risk, changes in regulations, operational risk, customer litigation, competition from other and new players, as well as the economy in general. KBC closely monitors and manages each of these risks within a strict risk framework, but they may all have a negative impact on asset values or could generate additional charges beyond anticipated levels.
At present, a number of items are considered to constitute the main challenges for the financial sector. These stem primarily from the impact of the coronavirus crisis on the global economy and, in particular, the financial sector
(including credit, market and liquidity risks and the impact of persisting low interest rates on our results). These risks come on top of risks relating to macroeconomic and political developments, such as Brexit and trade conflicts, all of which affect global and European economies, including KBC's home markets. Regulatory and compliance risks (including anti-money laundering regulations and GDPR) remain a dominant theme for the sector, as does enhanced consumer protection. Digitalisation (with technology as a catalyst) presents both opportunities and threats to the business model of traditional financial institutions, while climate-related risks are becoming increasingly prevalent. Finally, cyber risk has become one of the main threats during the past few years, not just for the financial sector, but for the economy as a whole.
We provide risk management data in our annual reports, quarterly reports and dedicated risk reports, all of which are available at www.kbc.com.
Global economic growth suffered in the second quarter from the coronavirus (Covid-19) pandemic shock, leading to an unprecedented fall in quarterly GDP growth in the euro area and the US. Belgium followed the general euro area trend, whereas Ireland outperformed it, relatively speaking. Central and Eastern European countries were severely hit, too. During the second quarter, however, most advanced economies reopened their economies after intensive lockdown periods, initiating a strong recovery. This rebound became visible in all major economies, with China leading the way and returning to positive growth levels in the second quarter. Sentiment indicators and other data point to a similarly strong recovery in the euro area and the US. Nevertheless, caution is warranted, as the path to recovery could turn out to be a long and bumpy one, and will be heavily reliant on how the Covid-19 situation pans out. New virus outbreaks will undoubtedly slow down the recovery. The other main risk factors include the resurgence of the US-China trade and economic conflict and ongoing Brexit negotiations. Our base-case scenario assumes a steady but gradual path to recovery in both Europe and the US. We forecast for the European and US economy a strong recovery in the third and fourth quarter of 2020 and a continued recovery in 2021. However, risks are tilted to the downside. New outbreaks of Covid-19 followed by partial or full lockdowns may temporarily disrupt the course of recovery. We expect real GDP levels in the euro area to recover to their pre-coronavirus levels by the end of 2023 at the earliest.
Despite the expected recovery, the economic damage caused by the pandemic will be substantial. However, some negative effects have been postponed thanks to the temporary unemployment schemes and temporary moratoria on loans that mitigated the initial impact of the Covid-19 crisis. We expect European unemployment rates to go up in the second half of 2020 and in 2021. Moreover, we expect bankruptcies among European firms to increase, but the effect will be spread over a number of years. Hence non-performing loan ratios will gradually climb.
The recovery is strongly supported by monetary and fiscal stimuli. We expect the ECB – and the Czech and Hungarian National Banks – to keep their policy rates unchanged in the years to come. Additional monetary stimulus measures by the ECB are likely, in the form of additional quantitative easing, in particular by extending the Pandemic Emergency Purchasing Programme. These market interventions will also guarantee low longer-term interest rates and compressed intra-EMU spreads in the coming years, despite country-specific risks (particularly in Southern Europe) and a structural upswing in public deficits and public debt ratios across Europe. Moreover, the ECB will continue to support European financial institutions through the TLTROs and the tiered deposit rate instrument. In recent months, fiscal stimuli have been extended substantially, both at EU level and by the EU member states. The 'Next Generation EU' instrument, launched by the European Commission and approved by the European Council, creates a tool for financial solidarity within the EU and has clearly succeeded in calming the financial markets. Moreover, the number and span of fiscal stimulus initiatives launched by national EU governments continue to increase. Combined monetary and fiscal stimulus will underpin the recovery in Europe, similar to the policy initiatives launched in the US.
The recent recovery of the euro against the US dollar should be seen as market optimism towards the economic recovery in Europe and the policy initiatives to support this trend. We expect the euro to continue its gradual appreciation against the dollar, although the rate at which it appreciates may slow down. Central European currencies have also recovered from their Covid-19 crisis dips. In particular, we expect the Czech koruna and Hungarian forint to remain relatively stable around their current levels in the near future. Bulgaria's accession to the ERM-II is a welcome and expected step towards euro area membership, though that is not expected anytime in the next three years.
| Upcoming events | 3Q2020 results and strategy update: 12 November 2020 4Q2020 results and update of new long-term guidance & capital deployment plan: 11 February 2021 |
|---|---|
| More information on | Quarterly report: www.kbc.com / Investor Relations / Reports |
| 2Q2020 | Company presentation: www.kbc.com / Investor Relations / Presentation |
| Detailed impact of | Quarterly report, Note 1.4 in 'Consolidated financial statements according to IFRS' |
| coronavirus crisis | Company presentation, section 2 on 'Covid-19' |
| Definitions of ratios | 'Details of ratios and terms at KBC Group level' in the last section of the quarterly report. |
Kurt De Baenst, General manager Investor Relations, KBC-group Tel +32 2 429 35 73 - E-mail: [email protected]
Viviane Huybrecht, General Manager, Corporate Communication/Spokesperson, KBC Group Tel +32 2 429 85 45 - E-Mail: [email protected]
| KBC Group NV | |
|---|---|
| Havenlaan 2 – 1080 Brussels | Press Office |
| Viviane Huybrecht | |
| General Manager | |
| Corporate Communication /Spokesperson | |
| Tel. +32 2 429 85 45 | |
Tel. +32 2 429 65 01 Stef Leunens Tel. +32 2 429 29 15 Ilse De Muyer Tel. +32 2 429 32 88 Pieter Kussé E-mail: [email protected]
KBC press releases are available at www.kbc.com or can be obtained by sending an e-mail to [email protected]
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