KBC: Strong Operating Performance, Clouded By Non-cash Items

KBC Groep (KBC.BR) Regulated information* - 7 August 2008 (7 a.m. CEST)

Net profit (IFRS) for the quarter ending 30 June was 493 million euros, bringing net profit for the first half of the year to 1 047 million euros. Underlying net profit - i.e. excluding exceptional items - for the second quarter of 2008 came to 510 million euros, a 42% drop compared with the very strong year-earlier quarter. While business cash flows remained highly resilient throughout the quarter, non-cash factors had a significant negative impact on the results reported today.

According to André Bergen, Group CEO, 'During the second quarter, operating performance showed clear evidence of resiliency. Lending and deposit-gathering trends remained solid, while capital market activities also performed well. Especially Eastern Europe continued to do very well. On the other hand, the adverse equity and credit markets in June resulted in the recognition of additional markdowns at the end of the quarter. If the effect of these were stripped out, the underlying quarter profit would have exceeded 800 million euros, well above the previous quarter and the quarterly average delivered over the last year.'

Financial highlights - 2Q 2008

André Bergen, Group CEO, summarised the financial highlights for 2Q 2008, as follows: 'The operating performance was strong. Loan growth and deposit-gathering remain highly encouraging. The size of the loan book in Belgium was 10% up on the year-earlier level, while customer loans in Central and Eastern Europe grew organically by 23% over the same period. On an organic basis, underlying net interest income increased by 13% in Belgium and 24% in Central and Eastern Europe compared with the second quarter of 2007. Income from investment banking rebounded well following weak institutional sales and a poor trading performance in the previous quarter. With an underlying net profit contribution of 76 million euros, the investment banking unit was on a par with the quarterly averages of the last few years. Delinquencies on customer debt are on the rise from very low levels. The loan loss ratio for the first half-year came to 19 basis points. Credit conditions showed signs of worsening, especially in the commercial banking book, while remaining virtually unchanged in the Belgian retail and Central and Eastern European markets. Although no defaults were recognised, the value of our structured credit investments portfolio was marked down further. An after-tax earnings impact of 161 million euros was posted, including an increase in the provision for exposure towards monoline credit insurers, while the additional impact on shareholders' equity was -71 million euros. Fee income from fund management started the quarter strong, but investor sentiment turned towards the end of May, becoming depressed again in June. Moreover, adherence to conservative impairment rules led to further impairment of 138 million euros on the back of the adverse equity market climate in June, mostly on proprietary equity holdings of the Belgian insurance division. We are in a comfortable position in terms of capital. Our solvency levels are amongst the best in the financial sector. The Tier-1 ratio for the banking activities came to 8.8% and 9.3%, according to Basel I and Basel II capital adequacy rules, respectively, while the solvency ratio for the insurance activities amounted to 210%.'

Financial highlights - 1H 2008

Net profit for the six months ending 30 June 2008 amounted to 1 047 million euros according to IFRS. This figure includes a net amount of -36 million euros for items that do not occur during the normal course of business. Excluding this charge, underlying net profit amounted to 1 083 million euros.

Net interest income came to 2 474 million euros, up 20% on the year-earlier figure (+15% on an underlying basis) thanks to solid volume growth achieved across all markets. Moreover, the net interest margin in the Central & Eastern Europe and Russia Business Unit was increased.

Gross earned premiums, insurance, stood at 2 245 million euros, up 33% compared to the first half of 2007. Net of technical charges, the income was 63 million higher (+25%). The combined ratio, non-life, amounted to 90%.

Dividend income from equity holdings amounted to 159 million euros, similar to the year-earlier figure (166 million ).

Net gains from financial instruments at fair value came to a mere 8 million euros (59 million euros on an underlying basis). Trading income was negatively impacted by the adverse capital market climate, especially in the first quarter of the year. The line item for the first half of 2008 also included a valuation markdown of 456 million euros on asset-backed securities and collateralised debt obligations (255 million euros after tax).

Gains from available-for-sale assets were realised in the amount of 260 million euros (mostly on shares), 164 million euros down on the year-earlier figure.

Net fee and commission income amounted to 914 million euros. This is 10% below the year-earlier level, mainly due to lower customer investment activities as a result of the high volatility in equity markets.

Other net income stood at 225 million euros, 35 million euros below the year-earlier level.

Operating expenses came to 2 588 million euros. Compared to the year-earlier period, the 3% growth in costs is explained by new acquisitions and currency appreciations. Excluding these factors, the cost level was down 3%, largely on the back of lower bonus accruals due to the lower trading revenue.

Impairment charges stood at 430 million euros, 170 million euros of which related to the loan portfolio (loan loss ratio: 19 basis points). Impairment of 250 million euros was taken on the available-for-sale share portfolio (held mainly by the insurance business) due to the fall of around 25% in European equity markets.

The contribution from associated companies amounted to 24 million euros, while taxes and the share in the result attributable to minority interests were 264 million euros and 54 million euros, respectively.

As at the end of June 2008, parent shareholders' equity came to 15.5 billion euros (45.5 euros per share). Shareholders' equity was down on the start of the year as profit for the period (+1.0 billion euros) was more than offset by dividends paid out and treasury shares repurchased (-1.3 and -0.3 billion euros, respectively) and a decrease in the revaluation reserve for available-for-sales assets (-1.6 billion euros).

Future developments

André Bergen: 'While overall economic activity is slowing, the quality of our overall franchise remains strong, with our Central and Eastern European operations and Russian driving growth. KBC has the clear ambition to double its net earnings in the region in the foreseeable future. Furthermore, we have recently enhanced our cost discipline throughout the group to cope adequately with increased cost inflation. We are also happy to see that our balance sheet is robust. Asset quality has proven to be quite solid across asset classes, while our solvency position is amongst the most secure in the financial sector.'



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



LINK: http://hugin.info/133947/R/1241135/266545.pdf

KBC Groep

http://www.kbc.com

ISIN: BE0003565737

Stock Identifier: XBRU.KBC

US: KBC.BR

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