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KBC Bank & Insurance Group
Company presentation Autumn 2004
www.kbc.com
2
Table of contents
1. Company profile
2. Strategy and earnings drivers
3. Financial highlights year-to-date
4. Additional information
Company profile
Foto gebouw
1
4
Top-20 player in Euroland banking
1 BNP Paribas (35 bn) 1 BNP Paribas (45 bn) 1 BNP Paribas (43 bn)2 BSCH (31bn) 2 BSCH (45 bn) 2 BSCH (37 bn)3 BBVA (29 bn) 3 Deutsche Bank (38 bn) 3 BBVA (36 bn)4 Deutsche Bank (26bn) 4 BBVA (35 bn) 4 Société Générale (30 bn)5 ABN AMRO (25bn) 5 Société Gén. (31 bn) 5 Deutsche Bank (30 bn)6 Société Gén. (24 bn) 6 ABN AMRO (30 bn) 6 Crédit Agricole (29 bn)7 Unicredit (24 bn) 7 Crédit Agricole (28 bn) 7 ABN AMRO (28 bn)8 Fortis (22 bn) 8 Unicredit (27 bn) 8 Unicredit (24 bn)9 Crédit Agricole (14 bn) 9 Fortis (21 bn) 9 Fortis (23 bn)
10 Dexia (14 bn) 10 Intesa BCI (18 bn) 10 Intesa BCI (17 bn)11 Intesa BCI (12 bn) 11 Dexia (16 bn) 11 Dexia (16 bn) 12 Allied Irish Banks (12bn) 12 Sanpaolo IMI (15 bn) 12 KBC (15 bn)13 Bank of Ireland (10 bn) 13 KBC (11 bn) 13 Sanpaolo IMI (13 bn)
14 KBC (9 bn) 14 Bco Popular (11 bn) 14 Allied Irish Banks (11 bn) 15 SanPaolo IMI (9 bn) 15 Allied Irish Banks (11 bn) 15 HVB (10 bn)16 Banco Popular (8 bn) 16 Bank of Ireland (11 bn) 16 Commerzbank (8 bn)17 HVB (7 bn) 17 HVB (10 bn) 17 Erste Bank (8 bn)18 Mediobanca (6 bn) 18 Commerzbank (9 bn) 18 Bank Austria (8 bn)19 Bca MPS (6 bn) 19 Mediobanca (7 bn) 19 Mediobanca (7 bn)20 Bco Popular (5 bn) 20 Bca MPS (6 bn) 20 Bca MPS (6 bn)
Dec 2002 Dec 2003 Aug 2004
DJ Euro Stoxx Banksconstituents
Market cap ranking
5
Top-3 bancassurer in Belgium
Market share: 31% (1st) 19% (2nd ) 13% (3rd)
Mutual funds
Mortgages Business loans Non-life insurance
Market share: 24% (2nd) 22% (2nd) 9% (4th)
Individual Life Savings deposits
6
8.7
13.2
13.5
14.3
19.0
21.6
23.5
24.6
28.6
29.0
0 5 10 15 20 25
ING (NL)
OTP (HU)
Citibank (US)
Intesa BCI (IT)
Société Générale (FR)
RZB (AT)
HVB / BA-CA (GE/AT)
UniCredit (IT)
Erste Bank (AT)
KBC (BE)
Top-3 player in the CEE region
10 largest international banks in CEE (total assets) :
* KBC limits its presence to the 5 new EU-countries of CEESource: RZB – assets as at 31 Dec 03, ownership structure as at 30 Jun 04
*
7
Business model extended to CEE-5
Bank branches
986 1 039
Belgium CEE
Approx. 3.6 bn EUR of capital invested in the region in building a prominent position, especially in banking
Substantial untapped potential in a fast-growing market with roughly 65 m inhabitants
Bank ranking on the basis of total assets
Bank ranking
Belgium 3 rd
CEE:- Czech Rep. - Slovakia- Hungary- Poland- Slovenia
1 st
1 st
4 th
2 nd
8 th
1 st
Workforce
Belgium CEE
Customers (m)bottom = banking,
top = insurance
3.35.9
1.4
2.8
Belgium CEE
18 842
26 765
8
Group profile
Credit portfolio incl. corporate bonds and loans to banks, excl. reverse repos.Gross revenue from CEE excl. profit on excess capital, gross profit in AM after distribution fee allocated to retail division
CEE18 bn
Other8 bn
W. Europe20 bn
US4 bn Belgium,
retail40 bn
Belgium, ME & corporates15 bn
Asset managment3 %
Other11 %
CEE23 %
Belgium, retail38%
Belgium, ME & corporates8%
Financial markets13 %
International corporate6 %
Breakdown per business segment
Credit portfolio Gross revenue1H 200430 Jun 04
Besides the core businesses in Belgium and CEE, activities include also selected areas of corporate and investment banking. These activities have been gradually scaled down, as investments in CEE have increased.
9
Key business strengths
Prominent market positions in home markets, both in Belgium and in CEE
Successful bancassurance concept and highly performing retail asset manager
Growth and cost efficiency potential in CEE
Good Group profitability track record
Geographical and business diversification and all main franchises within the EU
Adequately provisioned balance sheet
Stable core shareholders (long term) and availability of capital
10
Solid group performance
Profitability
Efficiency
SolvencyTier-1, banking
Solvency, insurance
Cost/income, banking
Combined ratio,insurance
Return on equity
Growth in EPS
8.8%
320%
65%
101%
13%
Dec 02
+1%
9.5%
316%
65%
95%
13%
Dec 03
+8%
Combined ratio, excluding reinsurance. Solvency insurance including unrealized gains.
9.4%
322%
59%
95%
18%
+40%
Jun 04
=
=
+
=
+
+
Trend
Improving profitability. Solid solvency.
11
Stable shareholder structure
Cera GroupOther stable shareholders MRBB
Almanij
StockMarket
Gevaert Private equity
KBC Bank & Insurance
KBLPrivate bank
± 17%± 16%± 38%
± 79%
100%
± 67%
± 30%
± 31%
• Almanij is an investment company of which KBC constitutes ± 75% of the assets. It is committed to supporting KBC in the long run and aims to remain a majority shareholder.
• Core shareholders include Cera (a co-operative with close to half a million individual holders), a syndicate of industrialist families and a farmers association (MRBB). These were shareholders in the companies that merged to form KBC.
• Almanij promotes a culture of no interference in business management.
12
Steadily growing dividend
Policy of paying a steadily growing dividend
Dividend up 9 % per year over the past 5 years
Average cash payout : 40-45%
Payout may be raised to maintain dividend in case of drop in profit
98 99 00 01 02 03
Payout 41% 38% 36% 44% 44% 45%
Yield 1.8% 2.1% 3.1% 3.6% 4.2% 4.9%
Yield = gross DPS versus average share price. Figures for 2000 excl. capital gain on CCF
2.69
3.26
3.90
3.39 3.423.68
1.42 1.48 1.52 1.64 1.23 1.09
1998 1999 2000 2001 2002 2003
EPS DPS
13
Attractive shareholder return, outperforming market indexes
Return at end July 2004, dividend reinvested
26%
-5%
14%
-12%
4%11%
-7%
12%21%
37%
18%
8%
45%
20%
-2%
-22%
1 year 3 year 5 year 7 year
BEL-20DJ Euro Stoxx DJ Euro Stoxx BanksKBC
14
Valuation still not too demanding related to other CEE exposed banks
Situation at 15 August, 2004
P/E 04-05
CEE banks (1) 12.4
Euro zone banks (2) 11.8
CEE exposed banks (3) 11.7
KBC 10.1
BEL banks (4) 9.3Unweighted IBES data :(1) OTP, Komercni, Pekao, BPH PBK, BRE(2) Top 20 of DJ Euro Stoxx banks (3) BA-CA, Erste, Unicredito, Soc Gen, Intesa BCI(4) Fortis, Dexia
Key figures : Share price : 46.8 EUR Net Asset Value : 37.2 EUR EPS 2003: 3.68 EUR
Analysts estimates : EPS 2004 consensus : 4.44 EPS 2005 consensus : 4.78 P/E forward 2 years : 10.1
Recommendations : Positive : 41% Neutral : 32% Negative : 27%
Valuation relative to peer group :
EPS consensus forecasts for KBC: KBC (2004) and I.B.E.S. (2005)
Strategy and earnings drivers
Foto gebouw
2
16
Strategy and earnings drivers
1. From an international perspective, Belgium is a somewhat underestimated market
2. The expanded horizons in ‘emerging/converging’ Europe will fuel top-line growth at acceptable risk
Multiple OPPORTUNITIES to unlock value
17
Savings rate (15%) and personal financial assets/capita (77 000 EUR) amongst the highest in Europe/the world
Consolidated banking market facilitating more adequate pricing than in the past and margins at
fairer levels
Market highly ‘receptive’ to bancassurance, allowing intensive cross-selling of insurance products
A
C
Underestimated potential in Belgium
Cost-to-income levels still somewhat on the high side, allowing for further improvement in efficiency
Sustained inflows of long-term savings money, driven
by ageing population (private pension funding)
GDP to slightly outpace euro zone average in 2004-05
B
D
E
F
Belgianmarket
environment
18
Historicalpresence in CEE:
• Niche markets
• Minority stakes
• Acquisitions in 5 markets, leveraged onEU accession
• Domestic mergers
• Management
• Technology
• Asset quality and risk management
• Bancassurance model
• Cost efficiency
• Transfer of knowhow
• Add-on acquisitions
• Organic growth
• Cross-selling
• Refinement of consolidation/efficiencyprograms
• Cross-border integration/ synergies
• Profit growth
Leading bancassurerdelivering superior levels of
return
Consolidation
Creation of newbusiness platform
Realisation full potential
Achieved Advanced
Started
Promising potential in CEE
19
5%6% 6%
10% 10%
21%
0%
5%
10%
15%
20%
25%
Deposits Loans Personal loans
Euro area CEE (8)
Loans/deposits, in EUR (% growth ‘99 to ‘03 p.a.)
Source: BA-CA
-20%
-10%
0%
10%
20%
30%
40%
50%
Promising potential in CEE
GDP per capita, in EUR(% growth ‘99 to ’03)
Ac EU
EU-15
LatAm
Asia (ex China)
China
US
20
1.3
4.8
2.62.3
3.1
3.7
2.8
3.4
2.0
3.52.9
3.53.9
3.4
5.2
1.1
3.8
1.1
2.3
0.70.6 0.5
1.6 1.8
0.9
0
2
4
6
2001 2002 2003 2004 (F) 2005 (F)
Czech Hungary Poland Belgium EMU
Source : KBC Outlook, August 2004
Favourable trend in core markets
GDP, real growth
21
Core targets:
Combined ratio excl. re-insurance
Cost/income ratio, banking 58%
Combined ratio, non-life insurance 95%
EPS growth (4y CAGR) 10%
Return on equity, group 16%
Return on allocated capital:
- Retail in Belgium 16%
- Central and Eastern Europe 17%
- Corporates 12%
- Financial markets 18%
Tier-1, banking 8%
Solvency margin, insurance 200%
Demanding financial objectives
Minimumtargets for 2005
Financial highlights,year-to-date
Foto gebouw
3
23
Overview of earnings headlines
Performance, bankingPerformance, banking
Performance, insurancePerformance, insurance
Performance, areas of activitiesPerformance, areas of activities
OutlookOutlook
24
1Q 02 2Q 02 3Q 02 4Q 02 1Q 03 2Q 03 3Q 03 4Q 03 1Q 04 2Q 04
Banking Insurance
Q avg‘02-’03(269)
1H 04 profit : 869 m EUR+ 44% year-on-year
ROE : 18.5 %
Proud to deliver strong earnings
Net profit m EUR
316
259300304287
152
280 256
Especially strong momentum in banking
Banking: 786 m EUR
Holding:- 12 m EUR
Insurance:95 m EUR
1H04 profit
contribution392
476
Highlights — Banking — Insurance — Areas of activity — Outlook
25
Key points 2nd quarter 2004
Net profit (476 m) at very high level, up 59% y-o-y and 21% q-o-q
Strong operating result (+26% y-o-y) driven by robust top-line growth (+10%) (especially in banking) and strict cost control (+1%)
Operating result up 5% q-o-q on the back of lower expenses (-3%) and the very low claims ratio in non-life (57%)
Record level in life premium income in Belgium (1 030 m)
Sustained low credit risk charges (77 m), including Poland (8 m)
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 %)
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.
Exceptional write-back of provisions (52 m), mainly thanks to a favourable court’s decision on a tax-issue
Highlights — Banking — Insurance — Areas of activity — Outlook
26
Key points 1st half 2004
Substantial increase in profitability - net profit (869 m) up 44% y-o-y Very strong underlying revenue growth, especially in banking
Top-line growth in banking: +8% Organic premium growth in insurance: +11%, but pressure on investment
yields Expenses well under control and risk charges low
Cost/income ratio, banking at 59% Loan loss ratio, banking at 21bp Combined ratio (non-life) at 94%
No net support impact of ‘exceptional items’ Extraordinary income (51 m), mainly the capital gain on ‘Belgacom’ Significant provisioning for various ‘other liabilities and charges’
(net -28 m after write-back of ‘tax provision‘ in Q2) In insurance: impairments on equity portfolio (net -25 m after use of
provision for financial risks and gains on investment securities) Well on track to deliver on all our financial targets
Highlights — Banking — Insurance — Areas of activity — Outlook
27
Key points 1st half 2004
High profitability
Efficiency
Controlled risks
Solid solvencyTier-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
Highlights — Banking — Insurance — Areas of activity — Outlook
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 03Target
28
Impact of consolidation changes
Main changes in scope of consolidation:
Full consolidation of WARTA Insurance (Poland)as of 1Q 2004 (previously equity method)
Premium income: 195 m EUR(1H04),4/5 non-life (22% of non-life total of the Group)
Impact on Group top-line (1H04): + 1.9% Impact on bottom-line (1H04): - 0.6%
Highlights — Banking — Insurance — Areas of activity — Outlook
29
Overview of earnings headlinesOverview of earnings headlines
Performance, banking
Performance, insurancePerformance, insurance
Performance, areas of activitiesPerformance, areas of activities
OutlookOutlook
30
459 m
Solid quality of banking earnings
Underlyingrevenuegrowth+10%
Expenses- 1%
Capitalgains- 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
31
Strong growth of operational income
Total 1H04 income up 8% y-o-y : Interest income up 7%, driven by
increased deposit spreads. Net interest margin up y-o-y from 1.63% to 1.73%
Sustained high commission income (+4%), partly on the back of income growth out of corporate finance and investment management
Robust trading revenue (+43%) after somewhat depressed2003 numbers
Capital gains on investments (4% of total) down 26% y-o-y
Q2 lower than Q1 mainly due to seasonal effect for commissions and lower trading income
Highlights — Banking — Insurance — Areas of activity — Outlook
1H 2004
719 773 826 800 806 796
610 587 520 570 708 653
123
5873
54
0
200
400
600
800
1 000
1 200
1 400
1 600
1Q03 2Q03 3Q03 4Q03 1Q04 2Q04
Interest income Non-interest income Capital gains
1452 1416 13641424
Quarterly income (m EUR)
15221572
32
* excl. reverse repo’s
Asset growth
Accelerating growth of customer loan book: ytd up 5%* (=> 10% annualised)
Sustained considerable growthin mortgages: ytd up 8%
• Belgium + 4%
• Hungary +21%
• Czech Rep. +18%
• Poland +11%
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%)
Risk-weighted assets (97 bn) ytd up 2%
13 610
62 59 62
23 25 26
2002 2003 30/06/04 Business lending Private lending Reverse repo's
Customer loans (in bn EUR)
909898
Highlights — Banking — Insurance — Areas of activity — Outlook
33
1.40%
1.45%
1.50%
1.55%
1.60%
1.65%
1.70%
1.75%
1.80%
1.85%
1.90%
1Q 03 2Q 03 3Q 03 4Q 03 1Q 04 2Q 04
3.5%
4.0%
4.5%
5.0%
5.5%
Interest margin, Group (left)10 y EUR T-bonds (right)
Development of interest margins
Interest margin, Group Spread on new loans, Belgium
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
jul/02 jan/03 jul/03 jan/04 jul/04
Investment credit, Belgian SME loan book
Corporate bond spread, A-rating
Highlights — Banking — Insurance — Areas of activity — Outlook
34
ALM TRANSFORMATION POSITIONBasis-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
. EU
R)
Risk Quarterly averages Limit
Sensitivity to changes in interest rates
The BPV is the expected change in the market value of the banking bookif interests were to fall by 10 bp across the entire curve
The interest rate sensitivity has been greatly reduced over time
Highlights — Banking — Insurance — Areas of activity — Outlook
35
The interest rate risk of the customer loan book is fully (macro) hedged
The interest rate risk 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).
The impact of an increase in interest rates (0.25% parallel shift of the yield curve): On the value of the banking book (BPV): -37 m On the unrealized gains of the bonds portfolio in the
banking book: -284 m On the P/L: highly dependent on the need for repricing of
the savings deposits (pricing quite inelastic to changes of market rates)
Sensitivity to changes in interest rates
Highlights — Banking — Insurance — Areas of activity — Outlook
36
Expenses well under control
Highlights — Banking — Insurance — Areas of activity — Outlook
1H 2004
546 527 540
241 255 258 239 249
552 553 548
253
1Q 03 2Q 03 3Q 03 4Q03 1Q04 2Q04
Belgium CEE Rest o/t World
929 931 897 938
Quarterly expenses (m EUR)
910928
1H04 cost basis down 1% y-o-y (-23 m)
Q2 lower than Q1, though mainly on the back of lower trading income
In Belgium: 1H04 -3% y-o-y (-34 m). Headcount continued to reduce at 440 FTE ytd (y-o-y -860 m or -7%)
CEE: 1H04 -1% y-o-y (-7m). 80% of planned headcount reduction achieved in CR and >100% in Poland
Elsewhere: 1H04 +7% (+18 m), mainly related to trading bonuses
Cost/income ratio significantly improved to 59% from 65%
37
The joint venture with Rabobank
Up front investment charge :+ procurement of
core system, customisation & plug-in
+ staff redundancy
- cost saving for development of own platform
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
38
Headcount development in Belgium
Since end 2001 till mid 2004 : ‘zero hiring’ policy: In principle, no new entrants Exception made for IT and very specific jobs:
(111 in ‘02, 58 in ‘03 and 21 in ‘04) Headcount down with 2 200 FTE without forced redundancies
As of 2005 : New hirings: 300-400 p.a. (to start gradually as of Oct-’04) Trend to increased part-time employment and ‘longer’ (higher age)
employment (gradual closing down of ‘early retirement concept’) Headcount expected to remain more or less stable
Highlights — Banking — Insurance — Areas of activity — Outlook
39
Net specific provisions to average gross customer loans
25 27
28
139
175
12
41
35
38
36 12 25 31
6126
49
40
1Q 03 2Q 03 3Q 03 4Q03 1Q04 2Q04
Belgium CEE Other
Limited loan provisioning
Loan loss provisions in 1H04 at very low level, , down 45% y-o-y (charge of 21 bp versus 71 bp for FY03)
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)
Loan losses in Poland only 12 m (charge of 64 bp, below market average)
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)
79
141
204
Highlights — Banking — Insurance — Areas of activity — Outlook
252
…43
Quarterly loan provisions (m EUR)
1H 2004
77
40
Overview of earnings headlinesOverview of earnings headlines
Performance, bankingPerformance, banking
Performance, insurance
Performance, areas of activitiesPerformance, areas of activities
OutlookOutlook
41
1H 2004
Continued fast growth of premiums
Highlights — Banking — Insurance — Areas of activity — Outlook
301
850
218 307
401
775 384
116
122 141
477
255272
366
343253
259
264
0
200
400
600
800
1 000
1 200
1 400
1 600
1Q03 2Q03 3Q03 4Q03 1Q04 2Q04
Life, non-linked Life, unit-linked Non-Life
Quarterly premium income (m EUR)
712599
1219
957
12451373
Sustained robust growth in Life (mainly in Belgium) In organic terms, up again in
1H04: +13% y-o-y (record level of 1.9 bn EUR)
Higher interest for linked products in Q1 reversed in Q2 (38% of 1H total)
Belgian life market expected to continue to outgrow GDP driven by ageing population
Non-life: in organic terms up 5% Primary (direct) business: +8% Drop in re-insurance: -8% 32% of premium volume is
currently realized in CEE
42
75% 74% 72% 67% 66% 63%
32% 32%32% 30% 31%
32%
6M 99 6M 00 6M 01 6M 02 6M 03 6 M04
Claims Expenses
Favourable underwriting performance in non-life
1H04 combined ratio at good level (94%)
Combined ratio down 1 pp y-o-y on the back of lower claims charges, especially in CEE and R/I Claims ratio CEE down y-o-y
to 62% from 75% Claims ratio R/I down to 66%
from 76%
Much more favourable claims environment in Q2, strong driver for q-o-q insurance earnings growth: In Belgium: claims charges q-o-q
down 42 m (ratio 56% vs 69%) In CEE (esp. CR and Poland):
claims charges q-o-q down 12 m (ratio 55% vs 69%)
Highlights — Banking — Insurance — Areas of activity — Outlook
1H 2004
94%95%106%107%
104% 99%
43
Enhancing cross-selling of insurance products in Belgium
Banking Insurance
22%66% 12%
1999 2000 2001 2002 2003 2004*
Cross-sellingsmall business customers
Premium incomenon-life
(1999 = 100)
Highlights — Banking — Insurance — Areas of activity — Outlook
Untapped potential, especially for SME customers (cross-selling ratio at 22 % versus 40 % for individuals)
Non-life growth via banking network materially higher than traditional channels (though impact on market share still moderate)
KBC- bank branches
Total market -traditional network
Total market - bank branches
* 6 months 2004
44
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
4Q02
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
Effective interest yield, bonds 10 y EUR market rate, T-bonds
1H 03 1H 04
Interest yield 5.3% 4.9%
Return on shares * 7.7% 6.7%
Total 6.0% 5.4%
Investment return downto 5.4% from 6.0%
* Corresponds for 2004 with 7.3% of the market value of the portfolio (= 10 years’ adjusted average)
Highlights — Banking — Insurance — Areas of activity — Outlook
Insurance business suffering from low investment yields
45
Adverse P/L-impact (-163 m) partly compensated by write-back of provision for financial risks (+93 m) and capital gains (+44 m)
Additional impairment of 44 m expected in H2 (mainly in Q3)(market level of Aug 2004)
In m EUR 1H 04
Value adjustments, shares -163
Transfer from financial provision +93
Non-recurring capital gains +44
Other -
Total non-recurring result -25
Highlights — Banking — Insurance — Areas of activity — Outlook
Insurance business suffering from impairments on equity portfolio
46
Investment strategy,insurance business
Highlights — Banking — Insurance — Areas of activity — Outlook
Asset allocation,outstanding portfolio
Fixed-income Shares Real estate
Outstanding, EUR 9 bn 3 bn 0.3 bn
Rating: AAA 30%AA 58%A 9%BBB 3%Below BBB 0%
Currency: EUR 99% 91%
USD - 4%
Issuer: Governments 64%Financials 31% 30%
Listed: 90% 94%Duration: ± 6 yr
Portfolio Belgium = 75% of total
47
Investment strategy, insurance business
Basic asset allocation
new premium inflow
Fixed-income
Equity Real Estate
Non-linked life
- periodic premiums 75% 20% 5%
- single premiums 90% 10% 0%
Non-life 63% 32% 5%
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
Highlights — Banking — Insurance — Areas of activity — Outlook
48
Overview of earnings headlinesOverview of earnings headlines
Performance, bankingPerformance, banking
Performance, insurancePerformance, insurance
Performance, areas of activities
OutlookOutlook
49
1 352 812 115 476 453 Gross operating income (m)
+4% +19% +1% +9% +18% (% yoy)
402 227 85 286 181 Net operating income (m)
+13% +46% +1% +17% +30% (% yoy)
226 149 71 193 129 Net profit, group share (m)
-5% +313% +8% +136% +75% (% yoy)
34.2 15.4 - 31.9 10.9 Risk-weighted assets (bn)
+6% +2% - -2% + 7% (% yoy)
3.1 2.4 - 2.0 1.1 Allocated capital (bn)
+9% +12% - - 1% +2% (% yoy)
15% 15% - 20% 23% ROAC
Areas of activity
Areas of activity
Retail CEE AM Corporate Markets
Highlights — Banking — Insurance — Areas of activity — Outlook
1H 2004
50
Revenues ExpensesProvisions
73 50
45
23
38
58 64
80
101
49 56
61
1Q 03 2Q 03 3Q 03 4Q 03 1Q 04 2Q 04
Banking Insurance
Robust performance in Belgian retail
Highlights — Banking — Insurance — Areas of activity — Outlook
Profit contribution (m EUR)
122 117108
125 124
1H 2004
1H04 at a glance :RevenueExpensesCredit risk
102
1H profit contribution: 226 m (ROAC 15%), down 5% due to a 55% drop in contribution from insurance
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.
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
Q2 less favourable in banking (partly seasonal), but much better in insurance (low claims charges)
51
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)
Hungary : strong return on the back of favourable revenue development (but also including a one-off positive impact from a credit provision write-back)
Poland : "in black again" thanks to a) progress in the cost reduction program, bringing expenses down 6%* y-o-y and b) much lower loan losses (12 m)
Contribution to group: profit excl. minority interests, excl. return on excess capital and incl. allocated Group overhead.
In m EUR
Stand-alone
net profit
Contribution to Group
Contribution% yoy
Return onallocated capital
Return on invested capital
CR / SR 119 92 + 17% 19% 13%
Hungary 43 18 + 25% 21% 16%
Poland 13 10 - 7% 4%
Slovenia 19 6 + 35% - 3%
Highlights — Banking — Insurance — Areas of activity — Outlook* Adjusted for currency effect
Expanded horizons in CEE paying offBanking results – 1H04
52
CEE
CSOB K&H KB NLB Insurance
Expanded horizons in CEE paying off
Highlights — Banking — Insurance — Areas of activity — Outlook
1H 04 (m EUR, % chg yoy)
392(+17%)
186(+15%)
148(-5%)
115 Gross operating income
-233(+7%)
-134(+11%)
-121(-6%)
-92 General Expenses
+5 -1 -12 - Provisions
-45 -8 - 2 -1 Taxes
119(+12%)
43(+42%)
13(n.r.)
19(+37%)
21 Stand-alone profit
-16 -13 -1 - +4 Adjustments, o/w yield on excess capital
-11 -12 -2 -13 -3 Minorities
92(+17%)
18(+25%)
10(n.r.)
6(+35%)
22(n.r.)
Profit contributionto Group
19% 21% 7% - 10% ROAC
53
Revenues Expenses
1Q 03 2Q 03 3Q 03 4Q 03 1Q 04 2Q 04
Highlights — Banking — Insurance — Areas of activity — Outlook
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
Assets (97 bn) up 14% y-o-y (of which ½ net inflow) Mutual funds (47 bn) : +13% Private assets (17 bn) : +20% Institutional assets (21 bn) : +13% Group assets (11 bn): +11%
Assets in 2Q04 up 3 % q-o-q (of which 85% net inflow) and in 1H04 up 9 % ytd (of which 60% net inflow)
Performing asset management activities
Profit contribution (m EUR)
Belgium :86 %
CEE : 5 %
35
3134
42
34
1H 2004
1H04 at a glance :RevenueExpenses
37
54
Revenues ExpensesProvisions
58 83 88 91
72
43 39
11
1Q 03 2Q 03 3Q 03 4Q03 1Q04 2Q04Banking Insurance
1H profit contribution: 193 m, up 136% (ROAC 20%) mainly driven by lower loan loss provisions (and increased revenue)
Turnaround in banking (started in 2H03): Substantially lower cost of risk (21 bp
in 1H04 versus 65 bp in 1H03) Gross income margin up y-o-y from
2.4% to 2.7% (increased fee business)
Cost/income down from 39% to 36 % Profit increase most remarkable in
‘ME/corporate Belgium’, ‘corporate US’ and the global structured finance activities.
Better return in re-insurance thanks to improved underwriting performance (CR 92 % versus 100% in 1H03)
Profit contribution (m EUR)
Corporate activities stepping up
39
62
90100
43
Highlights — Banking — Insurance — Areas of activity — Outlook
1H 2004
1H04 at a glance :RevenueExpensesCredit risk
93
55
Revenues
Expenses
32
19
38 41
24
33 31
25
10 9
1Q 03 2Q 03 3Q 03 4Q03 1Q04 2Q04
Equity-related activities
Money and capital markets
1H04 profit contribution: 129 m, up 75% (ROAC 23%) mainly driven by strong income growth
Sustained strong performance in M/CM
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
In line with strategic focus, modest profit amount for cash equity business (7 m)
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)
Profit contribution (m EUR)
Good performance in ‘financial markets’
41
33
41
7
64
Highlights — Banking — Insurance — Areas of activity — Outlook
1H 2004
1H04 at a glance :RevenueExpenses
66
56
Overview of earnings headlinesOverview of earnings headlines
Performance, bankingPerformance, banking
Performance, insurancePerformance, insurance
Performance, areas of activitiesPerformance, areas of activities
Outlook
57
Outlook 2004
Strong 1H04 revenue momentum is likely to slowdown in 2H04
2H04 loan loss level expected to be much lower than in 2H03
Commitment to sustained strict cost and underwriting discipline in 2H04
On balance, FY04 net earnings are expected to be at least 20% higher than FY03 If the current economic and financial climate proves to be more or
less sustainable Assuming stable stock exchange levels
Highlights — Banking — Insurance — Areas of activity — Outlook
Additional information
Foto gebouw
4
59
To improve quality of customer
relationships
To increase commercial productivity
Core targets : Key action plans : Major achievements :
Cross-selling of insurance products
Product simplification (program to reduce product range)
Co-sourcing (economies of scale)
Encouraging use of electronic channels
Better CRM and strengthening of commercial processes
Customer care program
Amount of outstanding deposits/loans per FTE up 13% y-o-y (end ‘03)
Premium income per FTE non-life up 19% y-o-y (end ‘03)
Customer facing time: 34% of time available in branch network, up from 23% in 1H03
Enhancing performance in Belgian retail
60
BE
No of KBC Rabo
Trades p.a. ± 3 m ± 5 m
Accounts ± 620 000
± 640 000
Shared processingplatform for securities
& derivatives
NE
Capitalresources(50% KBC)
Management& knowhow (50% KBC)
Systems:- development by external provider- servicing by KBC
Staff : 160 FTE
(50% KBC)
1H 2005 1H 2006
Platform and capital structure open for third-parties
Including confirmation, settlement, custody and reconciliation, excluding commercial clearing and processing of securities in physical form
Headcount KBC to be reduced with ± 280 FTE in 2006
Belgian banking activities
Enhancing cost efficiency in Belgium
The joint venture with Rabobank
61
Developments in 1H Enhanced performance going forward Strengthening top management
in KB, WARTA, NLB Planned headcount reductions
completed in Poland (ahead of plan) and at 80% in CR
Further efforts for cost control in CR and Hungary
Sale of KB Ukraïne and of KB Lithuania (pending), focus on domestic market
Capital increase in KB (Poland) Upstream of super dividend of
190 m (at CSOB in which 1.6 bn invested)
Closing of EU’s initial probe on state aid in CR
High economic growth
Increasing penetration of financial products driven by rising purchasing power
Enhanced commercial clout
Better cross selling of insurance products
Further focus on operational efficiency
Intensified quest for Group synergies (leveraging cross border our scale in CEE)
Expanded horizons in CEE paying off
Central Europe2nd home market
62
Update on the restructuring in Poland
Customer retention program Segmentation of the branch network Intensified transfer of KBC product know-how Acceleration of bancassurance with WARTA
Centralization of business processes and back-office functions
Outscourcing of cash handling and other “non core” functions
Workforce reduction (1 200 FTE) completed
Clear responsibilities for new ‘bad bank’ division Close monitoring of loan portolio
Closing of capital increase (130 m) Credit recovery acceleration Divesture of non-core assets (Ukraine, Lithuania)
Key achievements in 1H 04:
Profitabilityturnaround
+ Volumes
- Costs
- Risk
+ Capital
63
Market value of securities portfolio significantly above book value
In m EUR * Book value
Market value
Non-realised
Fixed-income 49 593 50 724 1 131
- Banking 40 680 41 514 834
- Insurance 8 913 9 210 297
Equity 4 746 5 099 353
- Banking 1 636 1 808 172
- Insurance 3 110 3 291 181
30 June 2004
A parallel interest rate rise of 25 bp has an adverse impact on the market value of bonds of 375 m of which 284 m in the banking book.
* Excluding trading portfolio
64
Non-audited simulation based on 31/12/2003 figures. Impact partly to be reported in opening balance sheet per 1 Jan 2004 and partly per 1 Jan 2005. For more detailed information, visit www.kbc.com
Simulated impact on own equity at Dec 2003 m EUR
Profit appropriation + 498
Value adjustment of financial instruments (IAS 32 / 39) +272
Reversal of provisions (IAS 4 / 37) + 215
Correction of depreciations of tangible assets and capitalisation of internally generated software (IAS 16/38)
+ 34
Inclusion of special purpose vehicles in consolidation scope + 10
Reclassification from operational to financial leasing (IAS 17) + 9
Adjustment of deferred tax assets and liabilities (IAS 12) + 3
Impairment testing of goodwill (IAS 36) - 0
Translation differences - 2
Underfunding of defined benefit pension plans (IAS 19) - 402
Total equity correction + 637
Impact of IFRS
65
Impact from Basle II regulation
Updated quantitative impact simulation – 1st half 2004 :required capital compared with current required capital level :
Approach Credit risk Total risk IRB Foundation 89 % 96 %
Strong positive impact from the lower weight of retail/SME credit portfolio
Capital requirement for CEE still need to be re-verified
66
Emile CelisChristian DefrancqJan Vanhevel Guido Segers
Herman AgneessensAndré BergenWilly Duron Frans Florquin
Senior management
67
•Group CEO•Head of insurance business
•Deputy Group CEO•Head of banking business
•Co-ordination CEE
•Retail bancassurance
•HRM and Communication
•Group CFRO•Transaction processing
•Non-life & reinsurance
•Claims management
•Corporate banking•West-European,US & SE Asian bank network
•Retail credit
• Information technology
• Insurance subsidiaries
•Treasury & markets•Asset Management• International credit
Emile CelisChristian DefrancqJan Vanhevel Guido Segers
Herman AgneessensAndré BergenWilly Duron Frans Florquin
Senior management