Earnings Release • Nov 16, 2017
Earnings Release
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Brussels, 16 November (07.00 a.m. CET)
Against the background of sustained economic expansion, only moderately rising inflation, a stronger euro and stable low interest rates, KBC turned in a strong performance in the third quarter of 2017, posting a net profit of 691 million euros. In the quarter under review, our core businesses once again performed well, while costs remained under control and the level of loan loss impairment remained very low. Moreover, the recently acquired Bulgarian companies also contributed positively to net profit. Adding the third quarter result to the similarly very good results for the first two quarters of the year brings the net result for the first nine months of 2017 to 2 176 million euros, significantly up on the 1 742 million euros recorded in the corresponding period of 2016. Our solvency and liquidity positions remained strong too. In line with our dividend policy, we will pay an interim dividend of 1 euro per share on 17 November 2017.
UBB/Interlease. The net interest margin came to 1.83%, down 3 basis points quarter-on-quarter and 7 basis points year-on-year.
Johan Thijs, our group CEO, comments:
'We have delivered yet another strong performance in the third quarter. A number of factors were instrumental in achieving this, including growth of net interest income, solid net fee and commission income and a high level of insurance income thanks in part to some releases of provisions. Moreover, our costs remained under control, and loan loss impairment charges continued to be very low. On top of that, our recently acquired Bulgarian entities UBB and Interlease contributed 14 million euros to this quarter's result. Moreover, the quarterly result was also influenced by an ongoing industry wide review of the tracker rate mortgage products originated in Ireland before 2009, for which a negative 54 million euros in this quarter has been booked.
All this resulted in 691 million euros of net profit being posted in the quarter under review. Combined with the 630 million euros recorded in the first quarter, and the exceptionally strong 855 million euros in the second quarter, this brings our net result for the first nine months of 2017 to 2 176 million euros, up 25% on the figure for the corresponding period of 2016.
We continued to work relentlessly on executing our strategy, which has proven very successful to date. We are on track as regards our digital agenda, and are working on further developing our bank-insurance
business and on supporting the local economies and clients in the countries in which we operate. We are ahead of our agenda on the operational integration of the recently acquired UBB and Interlease entities in Bulgaria, which will make us a leading player in that core country too.
We are truly grateful for the trust that our clients place in our company and our employees, and remain fully committed and focused in our efforts to become the reference in client-centric bank-insurance in all our core countries.'
| Overview KBC Group (consolidated, IFRS) | 3Q2017 | 2Q2017 | 3Q2016 | 9M2017 | 9M2016 |
|---|---|---|---|---|---|
| Net result (in millions of EUR) | 691 | 855 | 629 | 2 176 | 1 742 |
| Basic earnings per share (in EUR) | 1.62 | 2.01 | 1.47 | 5.11 | 4.07 |
| Breakdown of the net result by business unit (in millions of EUR) | |||||
| Belgium | 455 | 483 | 414 | 1 240 | 993 |
| Czech Republic | 170 | 183 | 145 | 534 | 465 |
| International Markets | 78 | 177 | 106 | 370 | 289 |
| Group Centre | -12 | 12 | -36 | 32 | -5 |
| Parent shareholders' equity per share (in EUR, end of period) | 40.6 | 39.8 | 36.2 | 40.6 | 36.2 |
Our core strategy remains focused on providing bank-insurance products and services to retail, SME and mid-cap clients in our core countries of Belgium, Bulgaria, the Czech Republic, Hungary, Ireland and Slovakia.
Our strategy consists of four interacting cornerstones:
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.
| Consolidated income statement, IFRS KBC Group (in millions of EUR) |
3Q2017 | 2Q2017 | 1Q2017 | 4Q2016 | 3Q2016 | 9M 2017 |
9M 2016 |
|---|---|---|---|---|---|---|---|
| Net interest income | 1 039 | 1 028 | 1 025 | 1 057 | 1 064 | 3 091 | 3 201 |
| Non-life insurance (before reinsurance) | 188 | 179 | 187 | 178 | 164 | 554 | 450 |
| Earned premiums | 378 | 369 | 360 | 363 | 357 | 1 107 | 1 047 |
| Technical charges | -190 | -190 | -173 | -185 | -193 | -553 | -597 |
| Life insurance (before reinsurance) | -3 | -24 | -28 | -44 | -34 | -55 | -107 |
| Earned premiums | 282 | 267 | 312 | 413 | 336 | 861 | 1 163 |
| Technical charges | -284 | -291 | -341 | -457 | -370 | -916 | -1 271 |
| Ceded reinsurance result | 16 | -10 | -4 | -15 | -1 | 2 | -23 |
| Dividend income | 11 | 30 | 15 | 19 | 12 | 55 | 58 |
| Net result from financial instruments at fair value through P&L | 182 | 249 | 191 | 224 | 69 | 622 | 317 |
| Net realised result from available-for-sale assets | 51 | 52 | 45 | 8 | 26 | 148 | 181 |
| Net fee and commission income | 408 | 430 | 439 | 376 | 368 | 1 277 | 1 074 |
| Other net income | 4 | 47 | 77 | 101 | 59 | 128 | 157 |
| Total income | 1 896 | 1 980 | 1 946 | 1 903 | 1 727 | 5 822 | 5 308 |
| Operating expenses | -914 | -910 | -1 229 | -963 | -895 | -3 053 | -2 985 |
| Impairment | -31 | 71 | -8 | -73 | -28 | 32 | -127 |
| on loans and receivables | -15 | 78 | -6 | -54 | -18 | 57 | -71 |
| on available-for-sale assets on goodwill |
-6 0 |
-2 0 |
-1 0 |
-4 0 |
-7 0 |
-9 0 |
-51 0 |
| other | -11 | -5 | 0 | -15 | -3 | -16 | -5 |
| Share in results of associated companies and joint ventures | 8 | 3 | 5 | 5 | 9 | 16 | 22 |
| Result before tax | 959 | 1 144 | 715 | 871 | 814 | 2 818 | 2 218 |
| Income tax expense | -268 | -288 | -85 | -186 | -184 | -641 | -476 |
| Net post-tax result from discontinued operations | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| Result after tax | 691 | 855 | 630 | 685 | 629 | 2 176 | 1 742 |
| attributable to minority interests | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| attributable to equity holders of the parent | 691 | 855 | 630 | 685 | 629 | 2 176 | 1 742 |
| Basic earnings per share (EUR) Diluted earnings per share (EUR) |
1.62 1.62 |
2.01 2.01 |
1.47 1.47 |
1.61 1.61 |
1.47 1.47 |
5.11 5.11 |
4.07 4.07 |
| Key consolidated balance sheet figures | |||||
|---|---|---|---|---|---|
| 30-09-2017 | 30-06-2017 | 31-03-2017 | 31-12-2016 | 30-09-2016 | |
| KBC Group (in millions of EUR) | |||||
| Total assets | 296 885 | 296 479 | 287 293 | 275 200 | 266 016 |
| Loans and advances to customers | 140 466 | 139 350 | 135 304 | 133 231 | 131 973 |
| Securities (equity and debt instruments) | 69 273 | 70 898 | 72 329 | 73 262 | 72 774 |
| Deposits from customers and debt certificates | 190 824 | 189 938 | 181 722 | 177 730 | 170 425 |
| Technical provisions, before reinsurance | 18 696 | 18 905 | 19 234 | 19 657 | 19 745 |
| Liabilities under investment contracts, insurance | 13 294 | 13 339 | 13 128 | 12 653 | 12 506 |
| Parent shareholders' equity | 17 003 | 16 665 | 16 506 | 15 957 | 15 135 |
| Selected ratios for the KBC group (consolidated) | 9M2017 | FY2016 | 9M2016 |
|---|---|---|---|
| Profitability and efficiency | |||
| Return on equity | 19% | 18% | 18% |
| Cost/income ratio, banking (between brackets: when evenly spreading the bank taxes and excluding certain non operating items) |
54% (54%) | 55% (57%) | 57% (57%) |
| Combined ratio, non-life insurance | 83% | 93% | 94% |
| Solvency | |||
| Common equity ratio according to Basel III Danish Compromise method (phased-in/fully loaded) | 16.1%/15.9% | 16.2%/15.8% | 15.1%/15.3% |
| Common equity ratio according to FICOD method (fully loaded) | 15.2% | 14.5% | 13.6% |
| Leverage ratio according to Basel III (fully loaded) | 5.8% | 6.1% | 6.2% |
| Credit risk | |||
| Credit cost ratio* | -0.05% | 0.09% | 0.07% |
| Impaired loans ratio | 6.6% | 7.2% | 7.6% |
| for loans more than 90 days overdue | 3.7% | 3.9% | 4.2% |
| Liquidity | |||
| Net stable funding ratio (NSFR) | 130% | 125% | 123% |
| Liquidity coverage ratio (LCR) | 150% | 139% | 137% |
* Negative figure indicates a net impairment release (with positive impact on results).
The net result for the quarter amounted to 691 million euros, compared to 855 million euros in the previous quarter and 629 million euros in the corresponding quarter a year earlier.
Note: the results of the recently acquired UBB and Interlease entities in Bulgaria are included in the group's results as of the third quarter of 2017 (net result of 14 million euros). Please note that UBB and Interlease were already included in the balance sheet at 30 June 2017.
Our total income was down 4% on the figure for the previous quarter, as higher technical insurance income and net interest income were offset by lower trading and fair value income, a negative item in other net income and a seasonal drop in some other income items.
Net interest income (1 039 million euros) was up 1% on its level in the previous quarter, but down 2% on its year-earlier level. Net interest income benefited from lower funding costs and continued loan volume growth – see below – and from the first-time inclusion of UBB/Interlease in the figures, which accounted for 28 million euros of net interest income. These positive items were offset in part by a more negative level of interest income generated by the dealing rooms, the continued effect of low reinvestment yields, lower prepayment fees on mortgage
loan refinancing (mainly year-on-year) and loan margin pressure in most core countries. As a result, our net interest margin came to 1.83% for the quarter under review, down 3 and 7 basis points, respectively, on the figure recorded in the previous and year-earlier quarters. As already mentioned, interest income continued to be supported by loan volume growth: our total volume of lending rose by 1% quarter-on-quarter and by 6% year-on-year, with growth in all business units. Deposits remained flat quarter-on-quarter and went up 12% year-on-year with increases in all business units. Excluding UBB/Interlease, the year-on-year organic growth of loans would have been 4% and the year-on-year growth of deposits some 10%. Technical income from our non-life and life insurance activities (earned premiums less technical charges, plus the ceded reinsurance result) stood at a high 201 million euros in the quarter under review. Non-life insurance activities contributed 202 million euros to this technical insurance income figure, 19% and 23% more than in the previous and year-earlier quarters, respectively, thanks to increased non-life premium income in almost all core countries, a higher reinsurance result and a one-off release of non-life provisions in Belgium (26 million euros). Consequently, our combined ratio for the first nine months of 2017 came to an exceptionally good 83% (86% excluding the one-off provisions release), compared to 93% for full year 2016. Technical insurance income from our life insurance activities stood at -1 million euros, an improvement on the -25 million euros recorded in the previous quarter and the -35 million euros posted in the year-earlier quarter, due to the fact that it also benefited from a release of life-related provisions in Belgium (23 million euros), among other things. Sales of life insurance products were 3% lower than in the previous quarter, and were down 10% on the year-earlier quarter, with most of the decline occurring in the sale of guaranteed interest products in Belgium (related to the low interest rate environment). Consequently, the share of guaranteed interest products in total sales of life insurance products dropped to 54% in the third quarter of 2017, with unit-linked products accounting for the remaining 46%.
Net fee and commission income – at 408 million euros – remained robust. Year-on-year, it was up 11%, thanks mainly to the contribution made by our asset management activities in Belgium, and, to a lesser extent, to higher payment service fees in a number of countries and to the first-time inclusion of UBB/Interlease in the figures (accounting for 12 million euros). Compared to the previous quarter, however, there was a decrease of 5% which partly reflects the effect of the holiday season (lower entry fees due to a drop in sales of funds and lower securities-related transactions, etc.). At the end of September 2017, our total assets under management stood at 217 billion euros, up 1% quarter-on-quarter and almost 4% yearon-year, due in both cases mainly to the positive price performance.
All other income items amounted to an aggregate 248 million euros, compared to 378 million euros in the previous quarter and 166 million euros in the year-earlier quarter. The figure for the third quarter of 2017 included a relatively high 51 million euros in gains realised on the sale of available-for-sale securities (predominantly on shares), 11 million euros in dividend income (down on the figure for the second quarter of 2017, when the bulk of dividends is usually received) and 4 million euros in other net income (down quarter-on-quarter and year-on-year since it includes an additional provision of 54 million euros related to an ongoing industry wide review of the tracker rate mortgage products originated in Ireland before 2009). It also included the 182-million-euro net result from financial instruments at fair value (trading and fair value income). The latter was up on the 69 million euros recorded in the year-earlier quarter, but down on the very high 249 million euros recorded in the previous quarter, due principally to the lower mark-to-market value change of derivatives used for asset/liability management purposes (partly related to CZK swaps) and a decrease in dealing room income.
At 914 million euros, operating expenses were flat quarter-on-quarter and up 2% year-on-year (disregarding UBB/Interlease, expenses were even down 2% quarter-on-quarter and flat year-on-year). The flat level of costs quarter-on-quarter – despite the 20-million-euro impact of UBB/Interlease – was attributable mainly to lower staff expenses, professional fees, facilities expenses and ICT costs, among other things. The 2% yearon-year increase in costs, on the other hand, resulted from an increase in staff expenditure (wage drift), ICT
costs, depreciation and the impact of UBB/Interlease, partly offset by decreases in professional fees, facilities expenses and marketing costs.
As a result, the cost/income ratio of our banking activities stood at a solid 54% in the first nine months of 2017, compared to 55% for full year 2016. When the bank taxes are evenly spread throughout the year and certain non-operating items are excluded (mark-to-market of derivatives used for asset/liability management purposes, the impact of legacy legal cases, the effect of the liquidation of group companies, etc.), our adjusted cost/income ratio for the first nine months of 2017 also amounted to 54%, compared to 57% for full year 2016.
In the third quarter of 2017, there was only a very small increase in loan loss impairment (15 million). There had been a net impairment release (with a positive impact on the results) of 78 million euros in the previous quarter and an increase of 18 million euros in the year-earlier quarter. The low level of impairment in the quarter under review was attributable to the combination of a 26-million-euro impairment release in Ireland (which came about mainly because of the positive movement in the 9-month average house price index and an improvement in the portfolio of non-performing loans), and a relatively low level of additional impairment charges in all other core countries: 21 million euros in Belgium (quarter-on-quarter increase due to one large corporate loan), 1 million euros in the Czech Republic, 7 million euros in Slovakia, 0 million euros in Hungary, 7 million euros in Bulgaria (almost entirely relating to the UBB portfolio) and 6 million euros in the Group Centre.
Consequently, annualised loan loss impairment for the entire group in the first nine months of 2017 accounted for an extremely low -0.05% of the total loan portfolio (a negative figure indicates a positive impact on the results).
Loan quality improved further: at the end of September 2017, some 6.6% of our loan book was classified as impaired, with 3.7% being 'impaired and more than 90 days past due'. This compares with 7.2% and 3.9%, respectively, at year-end 2016.
Impairment on assets other than loans stood at 17 million euros, compared to 7 million in the previous quarter and 10 million euros in the third quarter of 2016. The figure for the third quarter of 2017 mainly related to available-for-sale shares, facilities assets and ICT, among other things.
Our quarterly profit of 691 million euros breaks down as follows:
455 million euros for the Belgium Business Unit.
The net result was down 6% quarter-onquarter. This was due to a partly seasonal decline in net fee and commission income and dividend income, lower net interest income, a decrease in trading and fair value income following the very high level in the previous quarter, higher
– but still low – loan loss impairment and an increase in impairment on other assets. This was offset by a number of items, including significantly better technical insurance
income (thanks in part to one-off releases of provisions), increased other net income, and lower operating expenses.
| Belgium | Czech Republic | International Markets | ||||
|---|---|---|---|---|---|---|
| Selected ratios per business unit | 9M2017 | FY2016 | 9M2017 | FY2016 | 9M2017 | FY2016 |
| Cost/income ratio, banking (between brackets: when evenly spreading bank taxes and excl. certain non-operating items) |
53% (52%) | 54% (55%) | 41% (42%) | 45% (46%) | 68% (67%) | 64% (66%) |
| Combined ratio, non-life insurance | 80% | 92% | 97% | 96% | 92% | 94% |
| Credit cost ratio* | 0.10% | 0.12% | 0.04% | 0.11% | -0.74% | -0.16% |
| Impaired loans ratio | 2.8% | 3.3% | 2.5% | 2.8% | 22.4% | 25.4% |
* Negative figure indicates a net impairment release (with positive impact on results).
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).
At the end of September 2017, our total equity stood at 18.4 billion euros (17.0 billion euros in parent shareholders' equity and 1.4 billion euros in additional tier-1 instruments), up 1.0 billion euros on its level at the beginning of the year. The change during the first nine months of the year resulted from the inclusion of the profit for that period (+2.2 billion euros), the payout of the final dividend for 2016 in May and the decision to pay an interim dividend for 2017 in November (an aggregate -1.2 billion euros), changes in the available-for-sale and cash flow hedge reserves (-0.1 and +0.2 billion euros, respectively) and a number of minor items.
At 30 September 2017, our fully loaded common equity ratio (Basel III, under the Danish compromise) stood at a strong 15.9%. Our leverage ratio (Basel III, fully loaded) came to 5.8%. The solvency ratio for KBC Insurance under the Solvency II framework was a sound 221% at 30 September 2017.
Our liquidity position remained excellent too, as reflected in an LCR ratio of 150% and an NSFR ratio of 130% at the end of September 2017.
The net result for the first nine months 2017 amounted to 2 176 million euros, compared to 1 742 million euros in the corresponding period of 2016.
Note: the result for the first nine months of 2017 includes the net result of 14 million euros generated by the recently acquired UBB and Interlease entities in Bulgaria in the period July through September.
Highlights (compared to 9M2016):
million euros for Hungary (roughly unchanged), 63 million euros for Slovakia (-17%) and 31 million euros for Bulgaria (+94%, due to the inclusion in the figures of UBB/Interlease as of the third quarter of 2017).
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. Although we closely monitor and manage each of these risks within a strict risk framework containing governance and limits, 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 in general and, as a consequence, are also relevant to us. Regulatory uncertainty regarding capital requirements is a dominant theme for the sector, besides enhanced consumer protection. Another ongoing challenge remains the low interest rate environment, despite the recent uptrend, particularly for longer maturities, combined with the increased risk of asset bubbles. The financial sector also faces the potential systemic consequences of political and financial developments like Brexit or protectionist measures in the US, which will have an impact on the European economy. EU political risks receded earlier this year following the outcome of the Dutch and French elections, but the situation in Catalonia might develop into a new source of uncertainty. In addition, concerns remain on the banking sector in certain countries. Financial technology is an additional challenge for the business model of traditional financial institutions. 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.
On the macroeconomic front, the strong momentum of global economic growth continued in the third quarter of 2017. This favourable environment allowed the Fed to start its balance sheet normalisation programme at the beginning of October. Economic growth in the euro area remained well above its longterm potential rate, leading to further improvements on the European labour market. Oil prices rose during the third quarter, which caused a modest increase in headline inflation compared to its second quarter level. Core inflation, however, remained broadly stable at a low level. Both the US and German long-term government bond yields ended the third quarter virtually unchanged at low levels. Meanwhile, intra-EMU sovereign yield spreads remained generally stable, with the notable exception of Spain (slightly higher due to political events in Catalonia), and Portugal (significantly lower due to its sovereign debt rating being upgraded). On balance, the strong economic performance in the euro area caused the euro to appreciate markedly against the US dollar. The euro peaked at the end of August, before depreciating again somewhat as a result of the Fed's determination to pursue its normalisation path.
Risk management data is provided in our annual reports, quarterly reports and dedicated risk reports, all of which are available at www.kbc.com.
Our view on interest rates and foreign exchange rates: the ECB will continue its QE programme until at least September 2018. From January 2018 on, the volume of these net monthly purchases will be reduced to 30 billion euros. The ECB will only raise its policy rate in 2019. In the meantime, we expect the Fed to carry out another policy rate hike in 2017 and three more in 2018 (each time by 25 basis points). Consequently, we believe that the US dollar will appreciate against the euro in 2017 and in early 2018, as it will benefit from short-term interest rate support. The euro will start appreciating again after this period. Given the low
inflation environment and still highly accommodating global monetary policies, German and US long-term bond yields are expected to rise only modestly in the period ahead. Unlike the dovish stance of the ECB, the Czech National Bank has already begun to tighten its monetary policy and is expected to continue to do so in the coming year. We forecast two more rate hikes for next year so that the repo rate will be at 1% by the end of 2018. However, given the economic and inflationary developments together with possible fiscal stimulus by the new government, a more aggressive policy is possible.
Our view on economic growth: the economic environment in the euro area is favourable and, as a result, the consumer sector remains solid. The unemployment rate is steadily falling, which will further support consumption in the period ahead. The most significant risks continue to stem from the trend of deglobalisation and from geopolitical concerns, which could create additional uncertainty and hence affect economic sentiment.
Notice to the holders of the 1 billion USD contingent capital note ('CoCo') of KBC Bank NV:
• we intend to call the CoCo in January 2018. Hence, the capital value of the CoCo has already been excluded from Tier-2 capital. The impact of calling the CoCo has largely been offset by the successful issue of a 500-million-euro tier-2 benchmark in September 2017.
We repeat our guidance:
Wim Allegaert, General Manager, Investor Relations, KBC Group Tel. +32 2 429 50 51 - E-mail: [email protected]
Viviane Huybrecht, General Manager, Corporate Communication/Spokesperson, KBC Group Tel. +32 2 429 85 45 - E-mail: [email protected]
* This news item contains information that is subject to the transparency regulations for listed companies.
KBC Group NV Havenlaan 2 – 1080 Brussels Viviane Huybrecht General Manager Corporate Communication /Spokesperson Tel. +32 2 429 85 45
Press Office Tel. +32 2 429 65 01 Stef Leunens Tel. +32 2 429 29 15 Ilse De Muyer E-mail: [email protected]
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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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