KBC Bank

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KBC Bank

  1. 1. KBC Bank & Insurance Group Analysts meeting Foto gebouw
  2. 2. Overview of earnings headlines Performance, banking Performance, insurance Performance, areas of activities Outlook
  3. 3. Proud to deliver strong earnings Q avg ‘02-’03 (269) 1H 04 profit : 869 m EUR + 44% year-on-year ROE : 18.5 % Net profit m EUR 316 259 300 304 287 152 280 256 Especially strong momentum in banking Banking: 786 m EUR Holding: - 12 m EUR Insurance: 95 m EUR 1H04 profit contribution 392 476 Highlights — Banking — Insurance — Areas of activity — Outlook
  4. 4. Key points 2 nd quarter 2004 <ul><li>Net profit (476 m) at very high level, up 59% y-o-y and 21% q-o-q </li></ul><ul><li>Strong operating result (+26% y-o-y) driven by robust top-line growth (+10%) (especially in banking) and strict cost control (+1%) </li></ul><ul><li>Operating result up 5% q-o-q on the back of lower expenses (-3%) and the very low claims ratio in non-life (57%) </li></ul><ul><li>Record level in life premium income in Belgium (1 030 m) </li></ul><ul><li>Sustained low credit risk charges (77 m), including Poland (8 m) </li></ul><ul><li>Strong rebound of the profit contribution from CEE operations (up 51% q-o-q and multiple 6 y-o-y, bringing ROAC for the quarter to 18 %) </li></ul><ul><li>In line with previous quarter: highly satisfying return of asset management, corporates and financial markets. Return of retail activities in Belgium somewhat less favourable than in previous quarters. </li></ul><ul><li>Exceptional write-back of provisions (52 m), mainly thanks to a favourable court’s decision on a tax-issue </li></ul>Highlights — Banking — Insurance — Areas of activity — Outlook
  5. 5. Key points 1 st half 2004 <ul><li>Substantial increase in profitability - n et profit (869 m) up 44% y-o-y </li></ul><ul><li>Very strong underlying revenue growth, especially in banking </li></ul><ul><ul><li>Top-line growth in banking: +8% </li></ul></ul><ul><ul><li>Organic premium growth in insurance: +11%, but pressure on investment yields </li></ul></ul><ul><li>Expenses well under control and risk charges low </li></ul><ul><ul><li>Cost/income ratio, banking at 59% </li></ul></ul><ul><ul><li>Loan loss ratio, banking at 21bp </li></ul></ul><ul><ul><li>Combined ratio (non-life) at 94% </li></ul></ul><ul><li>No net support impact of ‘exceptional items’ </li></ul><ul><ul><li>Extraordinary income (51 m), mainly the capital gain on ‘Belgacom’ </li></ul></ul><ul><ul><li>Significant provisioning for various ‘other liabilities and charges’ (net -28 m after write-back of ‘tax provision‘ in Q2) </li></ul></ul><ul><ul><li>In insurance: impairments on equity portfolio (net -25 m after use of provision for financial risks and gains on investment securities) </li></ul></ul><ul><li>Well on track to deliver on all our financial targets </li></ul>Highlights — Banking — Insurance — Areas of activity — Outlook
  6. 6. Key points 1 st half 2004 High profitability Efficiency Controlled risks Solid solvency Tier-1, banking Solvency, insurance Loan loss ratio, banking Claims ratio, non-life Cost/income, banking Expense ratio, non-life Return on equity Growth in EPS 9.4% 322% 0.21% 63% 59% 31% 18% +40% 1H 04 9.5% 316% 0.71% 66% 65% 30% 13% +8% 8.0% 200% 58% 16% +10% FY 03 Target Highlights — Banking — Insurance — Areas of activity — Outlook
  7. 7. Impact of consolidation changes <ul><li>Main changes in scope of consolidation: </li></ul><ul><li>Full consolidation of WARTA Insurance (Poland) as of 1Q 2004 (previously equity method) </li></ul><ul><ul><li>Premium income: 195 m EUR(1H04),4/5 non-life (22% of non-life total of the Group) </li></ul></ul><ul><ul><li>Impact on Group top-line (1H04): + 1.9% </li></ul></ul><ul><ul><li>Impact on bottom-line (1H04): - 0.6% </li></ul></ul>Highlights — Banking — Insurance — Areas of activity — Outlook
  8. 8. Overview of earnings headlines Performance, banking Performance, insurance Performance, areas of activities Outlook
  9. 9. Solid quality of banking earnings 459 m Underlying revenue growth +10% Expenses - 1% Capital gains - 26% + 275 m - 48 m Net profit 1H 2003 Year-on-year comparison Positive impact of operational items: + 249 m EUR + 22 m Highlights — Banking — Insurance — Areas of activity — Outlook 1H 2004
  10. 10. Strong growth of operational income <ul><li>Total 1H04 income up 8% y-o-y : </li></ul><ul><ul><li>Interest income up 7%, driven by increased deposit spreads. Net interest margin up y-o-y from 1.63% to 1.73 % </li></ul></ul><ul><ul><li>Sustained high commission income (+4%), partly on the back of income growth out of corporate finance and investment management </li></ul></ul><ul><ul><li>Robust trading revenue (+43%) after somewhat depressed 2003 numbers </li></ul></ul><ul><ul><li>Capital gains on investments (4% of total) down 26% y-o-y </li></ul></ul><ul><li>Q2 lower than Q1 mainly due to seasonal effect for commissions and lower trading income </li></ul>Highlights — Banking — Insurance — Areas of activity — Outlook 1H 2004 1452 1416 1364 1424 Quarterly income (m EUR) 1522 1572
  11. 11. Asset growth <ul><li>Accelerating growth of customer loan book: ytd up 5% * (=> 10% annualised) </li></ul><ul><li>Sustained considerable growth in mortgages: ytd up 8% </li></ul><ul><ul><ul><li>Belgium + 4% </li></ul></ul></ul><ul><ul><ul><li>Hungary +21% </li></ul></ul></ul><ul><ul><ul><li>Czech Rep. +18% </li></ul></ul></ul><ul><ul><ul><li>Poland +11% </li></ul></ul></ul><ul><li>Sound growth in corporate lending, in line with economic cycle: ytd up 4% * (o/w in CEE: Hungary and C/SR: both +8%, Poland –9%) </li></ul><ul><li>Risk-weighted assets (97 bn) ytd up 2% </li></ul>* excl. reverse repo’s Customer loans (in bn EUR) 90 98 98 Highlights — Banking — Insurance — Areas of activity — Outlook
  12. 12. Development of interest margins Interest margin, Group Spread on new loans, Belgium Highlights — Banking — Insurance — Areas of activity — Outlook
  13. 13. Sensitivity to changes in interest rates ALM TRANSFORMATION POSITION Basis-Point-Value 0 10 20 30 40 50 60 70 80 90 May 02 Jul 02 Sep 02 Nov 02 Jan 03 Mar 03 May 03 Jul 03 Sep 03 Nov 03 Jan 04 Mar 04 May 04 (in mln. EUR) Risk Quarterly averages Limit <ul><ul><li>The BPV is the expected change in the market value of the banking book if interests were to fall by 10 bp across the entire curve </li></ul></ul>The interest rate sensitivity has been greatly reduced over time Highlights — Banking — Insurance — Areas of activity — Outlook
  14. 14. <ul><li>The interest rate risk of the customer loan book is fully (macro) hedged </li></ul><ul><li>The interest rate is mainly related to the “excess liquidity” (the excess of the customer funding base that is not invested in loans). This deposit base (without notice) is cyclically re-invested in bonds (duration: 3 years). </li></ul><ul><li>The impact of an increase in interest rates (0.25% parallel shift of the yield curve): </li></ul><ul><ul><li>On the value of the banking book (BPV): -37 m </li></ul></ul><ul><ul><li>On the unrealized gains of the bonds portfolio in the banking book: -284 m </li></ul></ul><ul><ul><li>On the P/L: highly dependent on the need for repricing of the savings deposits (pricing quite inelastic to changes of market rates) </li></ul></ul>Sensitivity to changes in interest rates Highlights — Banking — Insurance — Areas of activity — Outlook
  15. 15. Expenses well under control <ul><li>1H04 cost basis down 1% y-o-y (-23 m) </li></ul><ul><li>Q2 lower than Q1, though mainly on the back of lower trading income </li></ul><ul><li>In Belgium: 1H04 -3% y-o-y (-34 m). Headcount continued to reduce at 440 FTE ytd (y-o-y -860 m or -7%) </li></ul><ul><li>CEE: 1H04 -1% y-o-y (-7m). 80% of planned headcount reduction achieved in CR and >100% in Poland </li></ul><ul><li>Elsewhere: 1H04 +7% (+18 m), mainly related to trading bonuses </li></ul><ul><li>Cost/income ratio significantly improved to 59% from 65% </li></ul>Highlights — Banking — Insurance — Areas of activity — Outlook 1H 2004 929 931 897 938 Quarterly expenses (m EUR) 910 928
  16. 16. <ul><li>Up front investment charge : </li></ul><ul><ul><li>+ procurement of core system, customisation & plug-in </li></ul></ul><ul><ul><li>+ staff redundancy </li></ul></ul><ul><ul><li>- cost saving for development of own platform </li></ul></ul>The joint venture with Rabobank Recurring cost savings: 15-20 m per year Expected payback period of 2-3 yr Highlights — Banking — Insurance — Areas of activity — Outlook Shared platform for securities processing
  17. 17. Headcount development in Belgium <ul><li>Since end 2001 till mid 2004 : ‘zero hiring’ policy: </li></ul><ul><ul><li>In principle, no new entrants </li></ul></ul><ul><ul><li>Exception made for IT and very specific jobs: (111 in ‘02, 58 in ‘03 and 21 in ‘04) </li></ul></ul><ul><ul><li>Headcount down with 2 200 FTE without forced redundancies </li></ul></ul><ul><li>As of 2005 : </li></ul><ul><ul><li>New hirings: 300-400 p.a. (to start gradually as of Oct-’04) </li></ul></ul><ul><ul><li>Trend to increased part-time employment and ‘longer’ (higher age) employment (gradual closing down of ‘early retirement concept’) </li></ul></ul><ul><ul><li>Headcount expected to remain more or less stable </li></ul></ul>Highlights — Banking — Insurance — Areas of activity — Outlook
  18. 18. Limited loan provisioning <ul><li>Loan loss provisions in 1H04 at very low level, , down 45% y-o-y (charge of 21 bp versus 71 bp for FY03) </li></ul><ul><li>Very low loan loss charges again in Belgium (16 bp), in C/SR (13 bp, excl. recuperation of written-off loans) and in the international corporate loan book (18 bp) </li></ul><ul><li>Loan losses in Poland only 12 m (charge of 64 bp, below market average) </li></ul><ul><li>Somewhat higher loan loss charge in Hungary (83 bp, excl. the write-back of a general provision), on the back of a small number of problem loans (no general deterioration of asset quality expected) </li></ul>Net specific provisions to average gross customer loans 79 141 204 Highlights — Banking — Insurance — Areas of activity — Outlook 252 … 43 Quarterly loan provisions (m EUR) 1H 2004 77
  19. 19. Overview of earnings headlines Performance, banking Performance, insurance Performance, areas of activities Outlook
  20. 20. Continued fast growth of premiums <ul><li>Sustained robust growth in Life (mainly in Belgium) </li></ul><ul><ul><li>In organic terms, up again in 1H04: +13% y-o-y (record level of 1.9 bn EUR) </li></ul></ul><ul><ul><li>Higher interest for linked products in Q1 reversed in Q2 (38% of 1H total) </li></ul></ul><ul><ul><li>Belgian life market expected to continue to outgrow GDP driven by ageing population </li></ul></ul><ul><li>Non-life: in organic terms up 5% </li></ul><ul><ul><li>Primary (direct) business: +8% </li></ul></ul><ul><ul><li>Drop in re-insurance: -8% </li></ul></ul><ul><ul><li>32% of premium volume is currently realized in CEE </li></ul></ul>1H 2004 Quarterly premium income (m EUR) 712 599 1219 957 1245 1373 Highlights — Banking — Insurance — Areas of activity — Outlook
  21. 21. Favourable underwriting performance in non-life <ul><li>1H04 combined ratio at good level (94%) </li></ul><ul><li>Combined ratio down 2 pp y-o-y on the back of lower claims charges, especially in CEE and R/I </li></ul><ul><ul><li>Claims ratio CEE down y-o-y to 62% from 75% </li></ul></ul><ul><ul><li>Claims ratio R/I down to 66% from 76% </li></ul></ul><ul><li>Much more favourable claims environment in Q2, strong driver for q-o-q insurance earnings growth: </li></ul><ul><ul><li>In Belgium: claims charges q-o-q down 29 m (ratio 56% vs 69%) </li></ul></ul><ul><ul><li>In CEE (esp. CR and Poland): claims charges q-o-q down 12 m (ratio 55% vs 76%) </li></ul></ul>1H 2004 94% 95% 106% 107% 104% 99% Highlights — Banking — Insurance — Areas of activity — Outlook
  22. 22. Enhancing cross-selling of insurance products in Belgium Banking Insurance 22% 66% 12% Cross-selling small business customers Premium income non-life (1999 = 100) <ul><li>Untapped potential, especially for SME customers (cross-selling ratio at 22 % versus 40 % for individuals) </li></ul><ul><li>Non-life growth via banking network materially higher than traditional channels (though impact on market share still moderate) </li></ul>KBC- bank branches Total market - traditional network Total market - bank branches * 6 months 2004 Highlights — Banking — Insurance — Areas of activity — Outlook
  23. 23. Insurance business suffering from low investment yields Investment return down to 5.4% from 6.0% * Corresponds for 2004 with 7.3% of the market value of the portfolio (= 10 years’ adjusted average) 6.7% 7.7% Return on shares * 5.4% 6.0% Total 4.9% 5.3% Interest yield 1H 04 1H 03 Highlights — Banking — Insurance — Areas of activity — Outlook
  24. 24. Insurance business suffering from impairments on equity portfolio <ul><li>Adverse P/L-impact (-163 m) partly compensated by write-back of provision for financial risks (+93 m) and capital gains (+44 m) </li></ul><ul><li>Additional impairment of 44 m expected in H2 (mainly in Q3) (market level of Aug 2004) </li></ul>Total non-recurring result Other Non-recurring capital gains Transfer from financial provision Value adjustments, shares In m EUR +44 -163 +93 -25 - 1H 04 Highlights — Banking — Insurance — Areas of activity — Outlook
  25. 25. Investment strategy,insurance business Portfolio Belgium = 75% of total 9% A ± 6 yr Duration : 94% 90% Listed : 30% 31% Financials 64% Governments Issuer : 4% - USD 91% 99% EUR Currency : 0% Below BBB 3% BBB 58% AA 30% AAA Rating : 0.3 bn 3 bn 9 bn Outstanding, EUR Real estate & other Shares Fixed-income Asset allocation, outstanding portfolio Highlights — Banking — Insurance — Areas of activity — Outlook
  26. 26. Investment strategy, insurance business Tactical over/underweighting typically within 5-10% deviation margin. Further limits are related to currency, type and rating of counterparty, type and liquidity of security, … Inflow Belgium = 80% of total 5% 32% 63% Non-life 0% 10% 90% - single premiums 5% 20% 75% - periodic premiums Non-linked life Real Estate Equity Fixed-income Basic asset allocation new premium inflow Highlights — Banking — Insurance — Areas of activity — Outlook
  27. 27. Overview of earnings headlines Performance, banking Performance, insurance Performance, areas of activities Outlook
  28. 28. Areas of activity Areas of activity Retail CEE AM Corporate Markets Highlights — Banking — Insurance — Areas of activity — Outlook 1H 2004 (% yoy) +75% +136% +8% +313% -5% Net profit, group share (m) 129 193 71 149 226 (% yoy) + 7% -2% - +2% +6% Risk-weighted assets (bn) 10.9 31.9 - 15.4 34.2 ROAC 23% 20% - 15% 15% (% yoy) +2% - 1% - +12% +9% Allocated capital (bn) 1.1 2.0 - 2.4 3.1 (% yoy) +30% +17% +1% +46% +13% Net operating income (m) 181 286 85 227 402 (% yoy) +18% +9% +1% +19% +4% Gross operating income (m) 453 476 115 812 1 352
  29. 29. Robust performance in Belgian retail <ul><li>1H profit contribution: 226 m (ROAC 15%), down 5% due to a 55% drop in contribution from insurance </li></ul><ul><li>Banking profit up 57% y-o-y driven by strong income growth (+9%), maintained cost control (C/I down from 80 % to 74 %) and sustained low level of problem loans (loan loss ratio 5 bp). Contribution from subsegment ‘private banking’ up from 10 to 20 m. </li></ul><ul><li>Although strong premium income, pressure on insurance contribution due to higher claims ratio (63% vs 60% in 1H 03), especially in Q1, and lower investment yields </li></ul><ul><li>Q2 less favourable in banking (partly seasonal), but much better in insurance (low claims charges) </li></ul>Highlights — Banking — Insurance — Areas of activity — Outlook Profit contribution (m EUR) 122 117 108 125 124 1H 2004 1H04 at a glance : Revenue Expenses Credit risk 102
  30. 30. <ul><li>CR & SR : strong contribution to Group profit driven by a) robust revenue growth in retail and treasury (improved ‘interest-rate environment’) and b) the sustained low loan loss ratio (13 bp, excl. recuperation of written-off loans) </li></ul><ul><li>Hungary : strong return on the back of favourable revenue development (but also including a one-off positive impact from a credit provision write-back) </li></ul><ul><li>Poland : &quot;in black again&quot; thanks to a) progress in the cost reduction program, bringing expenses down 6%* y-o-y and b) much lower loan losses (12 m) </li></ul>Expanded horizons in CEE paying off Contribution to group: profit excl. minority interests, excl. return on excess capital and incl. allocated Group overhead. Highlights — Banking — Insurance — Areas of activity — Outlook * Adjusted for currency effect Banking results – 1H04 - 7% 21% 19% Return on allocated capital 3% 4% 16% 13% Return on invested capital 19 13 43 119 Stand-alone net profit - 10 Poland + 35% 6 Slovenia 18 92 Contribution to Group + 25% + 17% Contribution % yoy Hungary CR / SR In m EUR
  31. 31. Expanded horizons in CEE paying off CEE CSOB K&H KB NLB Insurance Highlights — Banking — Insurance — Areas of activity — Outlook 1H 04 (m EUR, % chg yoy) ROAC 10% - 7% 21% 19% Profit contribution to Group 22 (n.r.) 6 (+35%) 10 (n.r.) 18 (+25%) 92 (+17%) Minorities -3 -13 -2 -12 -11 Adjustments, o/w yield on excess capital +4 - -1 -13 -16 Stand-alone profit 21 19 (+37%) 13 (n.r.) 43 (+42%) 119 (+12%) Taxes -1 - 2 -8 -45 Provisions - -12 -1 +5 General Expenses -92 -121 (-6%) -134 (+11%) -233 (+7%) Gross operating income 115 148 (-5%) 186 (+15%) 392 (+17%)
  32. 32. <ul><li>Profit contribution : 71 m (after allocation of distribution fee to retail business), up 8% thanks to higher AUM, cost control and (structural) lower tax pressure </li></ul><ul><li>Assets (97 bn) up 14% y-o-y (of which ½ net inflow) </li></ul><ul><ul><li>Mutual funds (47 bn) : +13% </li></ul></ul><ul><ul><li>Private assets (17 bn) : +20% </li></ul></ul><ul><ul><li>Institutional assets (21 bn) : +13% </li></ul></ul><ul><ul><li>Group assets (11 bn): +11% </li></ul></ul><ul><li>Assets in 2Q04 up 3 % q-o-q (of which 85% net inflow) and in 1H04 up 9 % ytd (of which 60% net inflow) </li></ul>Performing asset management activities Highlights — Banking — Insurance — Areas of activity — Outlook Profit contribution (m EUR) Belgium : 86 % CEE : 5 % 35 31 34 42 34 1H 2004 1H04 at a glance : Revenue Expenses 37
  33. 33. <ul><li>1H profit contribution: 193 m, up 136% (ROAC 20%) mainly driven by lower loan loss provisions (and increased revenue) </li></ul><ul><li>Turnaround in banking (started in 2H03): </li></ul><ul><ul><li>Substantially lower cost of risk (21 bp in 1H04 versus 65 bp in 1H03) </li></ul></ul><ul><ul><li>Gross income margin up y-o-y from 2.4% to 2.7% (increased fee business) </li></ul></ul><ul><ul><li>Cost/income down from 39% to 36 % </li></ul></ul><ul><ul><li>Profit increase most remarkable in ‘ME/corporate Belgium’, ‘corporate US’ and the global structured finance activities. </li></ul></ul><ul><li>Better return in re-insurance thanks to improved underwriting performance (CR 92 % versus 100% in 1H03) </li></ul>Corporate activities stepping up Profit contribution (m EUR) 39 62 90 100 43 Highlights — Banking — Insurance — Areas of activity — Outlook 1H 2004 1H04 at a glance : Revenue Expenses Credit risk 93
  34. 34. <ul><li>1H04 profit contribution: 129 m, up 75% (ROAC 23%) mainly driven by strong income growth </li></ul><ul><li>Sustained strong performance in M/CM </li></ul><ul><li>Strong rebound in in equity derivatives business (up 153% y-o-y) driven by significant growth in trading income, the non-recurrence of negative MtM (for long derivatives taken in 2003) and additional commission income out of (structured) investment management </li></ul><ul><li>In line with strategic focus, modest profit amount for cash equity business (7 m) </li></ul><ul><li>Q2 profit apparantly similar to Q1, though thanks to a 15 m ‘exceptional’. Underlying trend down –35% q-o-q to 51 m (lower income in 2nd half of Q2) </li></ul>Good performance in ‘financial markets’ Profit contribution (m EUR) 41 33 41 7 64 Highlights — Banking — Insurance — Areas of activity — Outlook 1H 2004 1H04 at a glance : Revenue Expenses 66
  35. 35. Overview of earnings headlines Performance, banking Performance, insurance Performance, areas of activities Outlook
  36. 36. Outlook 2004 <ul><li>Strong 1H04 revenue momentum is likely to slowdown in 2H04 </li></ul><ul><li>2H04 loan loss level expected to be much lower than in 2H03 </li></ul><ul><li>Commitment to sustained strict cost and underwriting discipline in 2H04 </li></ul><ul><li>On balance, FY04 net earnings are expected to be at least 20% higher than FY03 </li></ul><ul><ul><li>If the current economic and financial climate proves to be more or less sustainable </li></ul></ul><ul><ul><li>Assuming stable stock exchange levels </li></ul></ul>Highlights — Banking — Insurance — Areas of activity — Outlook
  37. 37. KBC Bank & Insurance Group Analysts meeting Foto gebouw

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