Delivering Sustainable Risk-Adjusted Growth Morgan Stanley Investor Conference, March 2011
+44 20 7162 0177 Until 26 February +32 2 290 14 11 +44 20 7031 4064 +1 334 420 4905 (code: 855994)
1 Contact information
Investor Relations Office e-mail: [email protected] Go to www.kbc.com for the latest update
2 Important information for investors
This presentation is provided for informational purposes only. It does not constitute an offer to sell or the solicitation to buy any security issued by the KBC Group.
KBC believes that this presentation is reliable, although some information is condensed and therefore incomplete. KBC can not be held liable for any damage resulting from the use of the information This presentation contains non IFRS information and forward-looking statements with respect to the strategy, earnings and capital trends of KBC, involving numerous assumptions and uncertainties. There is a risk that these statements may not be fulfilled and that future developments differ materially. Moreover, KBC does not undertake any obligation to update the presentation in line with new developments.
By reading this presentation, each investor is deemed to represent that it possesses sufficient expertise to understand the risks involved.
3 Content
1 Company profile and strategy
2 FY 2010 financial highlights
3 Asset Quality
4 Solvency and Liquidity
5 Wrap up
6 Additional data set
4 Section 1 Company profile and strategy Business profile
Breakdown of allocated capital as of 31 December 2010 per business unit
Central and Eastern Europe 25%
Retail, SMEs and Private Banking Belgium 24% 34% Merchant Banking (incl. Belgian corporates, Ireland and International activities)
17% Group Centre
• KBC is a leading player in Belgium and our 5 core countries in CEE (retail bancassurance, private banking, commercial and local investment banking); 75-80% of revenue is generated in markets in which the company has a leading market share • In the past, niche strategies were developed for international merchant banking (these activities are currently being downsized) and European private banking (the sale of KBL EPB has already been announced) 6 KBC’s geographical presence
KBC’S CORE MARKETS
Belgium (Moody’s Aa1) Total assets: 180bn EUR
Czech Republic (A1) Total assets: 36bn EUR
Hungary (Baa1) Total assets: 12bn EUR
Poland (A2) Total assets: 12bn EUR
Slovakia (A1) Total assets: 6bn EUR
Bulgaria (Baa3) Total assets: 1bn EUR
Real GDP growth outlook for core markets Source: KBC data, February 2011
% of assets 2010a 2011e 2012e
PL 4% +3.8% +4.0% +4.0%
SK 2% +4.2% +3.2% +3.5%
BE 56% +2.0% +1.9% +2.0%
CZ 11% +2.2% +2.1% +3.0%
BG 1% +0.2% +2.8% +3.8%
HU 4% +1.0% +2.5% +2.9% 7 Market shares of KBC in core markets
Market shares, as of end-2010**
Czech Belgium Republic Slovakia Hungary Poland Bulgaria (Inhabitants) (10 million) (10 million) (5 million) (10 million) (39 million) (8 million)
Loans and deposits 21% 23%* 10% 9% 4% 3%
Investment funds 39% 32% 11% 20% 5% -
Life insurance 17% 9% 5% 3% 8% 13%
Non-life insurance 10% 5% 2% 4% 9% 12%
* Including the joint venture with CMSS. Excluding this, the market share would amount to roughly 20%-21% ** Market shares are based on preliminary figures
8 A successful core strategy
• Strategic review November 2009 • Core earnings power in Belgium and CEE largely intact • Our business model generates consistently high returns in core geographies (cyclical loan provision charge of 1.7% was the main swing factor in CEE in 2009)
Return on allocated capital - Belgium* Return on allocated capital - CEE*
46% 25% 25% 25% 39% 36% 37% 21% 17% 31% 29%
7%
2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010 • Remaining asset risks manageable, so capital buffer sufficient • Reimbursement of the State capital will be based on internal capital generation from retained earnings and RWA reduction combined with divestment of non-core assets
9 * excl. non-operating items (incl. investment markdowns). Note change in business unit reporting as of 2008. 2010-2013 Business Plan
• Generate capital by leveraging our successful business model in 1. Leverage core markets (retained earnings) Earnings Power
• Free up capital by: • Reducing international lending & capital market activities 2. Shrink RWA • Divesting European Private Banking, complementary channels in Belgium By 25% (giving up 1-2% market share) and non-EU CEE (Russia and Serbia, post (2008-2013) 2011) • IPO of minority of CSOB (Czech bank, book value of 2.6bn EUR at end 2010) • Certain additional measures
• Accumulated capital will be sufficient to reimburse the State, 3. Pay Back State Capital & whilst maintaining sound solvency (10% tier-1 target) and steady Continue organic growth Growth 10 Key strengths
• Well-developed bancassurance strategy and strong cross-selling capabilities
• Strong franchise in Belgium with high and stable return levels
• Exposure/access to growth in ‘new Europe’, with mitigated risk profile (most mature markets in the region)
• Successful underlying earnings track record
• Solid liquidity position and satisfactory capital buffer
11 Section 2 FY 2010 Financial highlights FY 2010 Group profit
Net reported profit 3,430 3,281 • 1.9bn EUR net reported profit, a clear 1,860 break from the results of the previous 2 years
-2,484 -2,466 • 1.7bn EUR net underlying profit, in line FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 with 2009
Excluding • Good revenue generation (both NII and exceptional net F&C) Net underlying profit items • Strict cost management 3,143 Lower impairments 2,548 • 2,270 Despite items such as bank tax and 1,724 1,710 • one-off provisions for Ireland and KBC Lease UK
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 13 Amounts in m EUR Solid core earnings power
Reported net profit Amounts in EUR million 3,430 3,281 1,860
-2,484 -2,466
FY06 FY07 FY08 FY09 FY10
Excl. exceptional items and cyclical effects of Excl. exceptional items credit provisions
Underlying net profit Underlying gross operating income (pre- impairments)
4,317 4,223 3,762 3,912 3,143 3,581 2,548 2,270 1,724 1,710
FY06 FY07 FY08 FY09 FY10 FY06 FY07 FY08 FY09 FY10
Underlying gross operating income (core earnings) in FY09 and FY10 is roughly in line with the pre-crisis FY06 and FY07 level (when trading income was still much higher) 14 Revenue keeping up well based on healthy margin environment
• Net interest income from lending and deposit-taking rose 2% in 2010 on account of healthy credit spreads and shift to higher-margin deposit products. The NIM increased 8bps y-o-y to 1.92%, partly thanks to some technical items • Loan volumes fell 2% yoy in FY10, while deposit volumes rose 6% in FY10. Loan volume growth in Belgium was offset by the scaling down in Central Eastern Europe and international corporate loan book, in line with the strategic focus
Underlying net interest income Net interest margin
Amounts in EUR million +2% +8bp +16bp +12% 5,603 -4bp 1.92% 5,497 1.84% +10% 4,910 1.72% 1.68% 4,459
FY07 FY08 FY09 FY10 FY07 FY08 FY09 FY10
15 15 Continued tight cost control, loan loss provisions significantly lower
• Even after the 13% y-o-y reduction in operating expenses realised in 2009, operating costs remained very well under control (-1% y-o-y in 2010), reflecting strong cost management, despite the Belgian and Hungarian bank tax. We still believe that costs in 2011 on a like-for-like basis will start to increase somewhat going forward • In 2010, loan loss provisions were significantly lower (-20% y-o-y): consistently low in Belgium BU and substantially lower in the CEE and Group Centre BUs Underlying operating expenses Underlying loan loss provisions Amounts in EUR million Amounts in EUR million +8% -20% 5,591 -13% 1,883 5,164 -1% 4,888 4,832 1,481
+194%
641 +146%
185
FY07 FY08 FY09 FY10 FY07 FY08 FY09 FY10
16 16 Loan loss experience at KBC
FY 2010 FY 2009 Average Peak credit cost ratio credit cost ratio ‘99 –’10 ‘99 –’10 Belgium 0.15% 0.15% 0.16% 0.31% CEE 1.22% 1.70% 1.05% 2.75% Merchant 1.38%* 1.19% 0.55% 1.38%* Group Centre 1.03% 2.15% Total 0.91% 1.11% 0.45% 1.11%
Credit cost ratio: amount of losses incurred on troubled loans as a % of total average outstanding loan portfolio * This high credit cost ratio level at Merchant Banking is fully attributable to KBC Bank Ireland
17 Highlights underlying full year 2010 results
• Net underlying profit of 1.7bn EUR • Rising net interest income thanks to a higher net interest margin (1.92% in 2010 vs 1.84% in 2009) • Increased sales of unit-linked products, offset by lower sales of ‘guaranteed interest’ products; combined ratio stable at 100% • Strong recovery in net fee and commission income, reflecting the gradually improved investment climate • 9% lower trading and fair value income • Lower operating expenses (-1% y-o-y), reflecting strong cost management, despite the Belgian and Hungarian bank tax • Significantly lower loan loss provisions: consistently low in Belgium BU and substantially lower in the CEE and Group Centre BUs • Solid capital (4.5bn EUR surplus capital) and liquidity position 18 Section 3 Asset Quality Credit quality
Total Assets
Tangible & intangible fixed assets • Customer loan book: 151bn EUR at end 2010 • 41% residential mortgages • 3% consumer finance
• 12% other retail loans 1. Credit quality (esp. in CEE) • 44% SME/corporate loans
• Largely sold through own branches Loan book • Total NPL at 4.1% at end 2010 (5.6% in CEE) (loans & advances to customers) • The NPL formation has stabilised
• NPL cover ratio at 76% at end 2010 (77% in CEE) 4.5 4.0% 4.1% 4.0 3.6% 3.7% 3.4% 3.5 3.3% 2. Trading exposure 3.0 2.8% Trading assets 2.5% 2.5 1.8% 3. ‘Toxic’ assets 2.0 1.5 1.0 0.7% 0.5% 4. Sovereign bonds 0.5 0.3% 0.3% Investment portfolio 0.1% 0.2% 0.1% 0.1% 0.0 FY08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
NPL ratio NPL formation
Other (incl. interbank loans) 20 20 Focus on NPL trends in Ireland
Irish loan book – key figures December 2010 302m EUR loan impairments charged in 4Q10 (525m Loan portfolio Outstanding NPL NPL coverage EUR in FY10) Owner occupied mortgages 9.8bn 7.4% 29% NPL rose to 10.3% in 4Q10 (9.0% in 3Q10), reflecting Buy to let mortgages 3.3bn 10.9% 33% the continued difficult economic conditions in Ireland. The outstanding portfolio has been reduced from SME /corporate 2.3bn 7.3% 55% Real estate investment 1.3bn 15.2% 42% 18.0bn EUR at the end of 2009 to 17.2bn EUR at the Real estate development 0.6bn 50.4% 76% end of 2010 17.2bn 10.3% 42% Proportion of High Risk and NPLs
73% of the outstanding portfolio remains low or 16.2% 15.2% medium risk 16 14.8% 13.0% 14 11.9% 12 10.3% 9.7% The increase in mortgage provisions reflected weaker 10 9.0% 8.1% 7.7% 6.9% 6.9% market conditions in Ireland through 2010 8 6.3% 6.4% 5.6% 6 4.7% 4.6% 3.8% 2.7%2.9% The NPL coverage ratio has risen to 42% (from 29% in 4 2.1% 1.5% 3Q10). NPL coverage ratio reflects predominance of 2 0.5%0.6% residential mortgages (and the relatively low exposure to real estate development) 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 High Risk (probability of default > 6.4%) Local tier-1 ratio was 10.3% at the end of 4Q10 (10.6% Non-performing at the end of 3Q10) 21
Trading activities Net (un)realised gains from FIFV within the subdivision ‘Market Activities’, ‘05-’10 Total Assets (on a pro forma basis)
Tangible & intangible fixed assets 10.8% 9.8% 8.3% 7.4% 6.7% 1. Credit quality 5.9% (esp. in CEE)
Loan book (loans & advances to customers)
2005 2006 2007 2008 2009 2010
Underlying net (un)realised gains from FIFV within Trading assets 2. Trading exposure ‘Market Activities’ (on a pro forma basis) as a % of group underlying total income 3. ‘Toxic’ assets
Investment portfolio 4. Sovereign bonds Less dependency on net (un)realised gains from FIFV within the subdivision ‘Market activities’ (part of MEB), and more in particular of the dealing room results Other (incl. interbank loans) 22 22 Investment portfolio
Total Assets
Tangible & intangible fixed assets CDO exposure (bn EUR) Notional Outstanding markdowns - Hedged portfolio 14.9 -1.2 - Unhedged portfolio 7.7 -4.8 TOTAL 22.5 -6.0*
Amounts in bn EUR Total 1. Credit quality Loan book Value adjustments (since start crisis) -6.0 “Effective” loss (i.e. expect. losses based on claimed credit events) * -1.9 - Of which impact of settled credit events -1.1
* Excl. impact on equity and junior CDO pieces
• The total notional amount decreased by roughly 2.2bn EUR as a result of the first maturity in the CDO book Trading assets 2. Trading exposure • At end of 2010, outstanding value adj. amounted to 6.0bn 3. Toxic assets EUR vs. 1.9bn EUR effective cash losses (excl. impact on equity and junior CDO pieces) 4. Sovereign bonds Investment portfolio 4. Sovereign bonds • Within the scope of the sensitivity tests, the value adjustments reflect an 17% cumulative loss in the underlying corporate risk • Reminder: CDO exposure largely written down or covered by a State guarantee Other (incl. interbank loans) 23 23
Investment portfolio (cont’d)
Total Assets
Tangible & intangible fixed assets • Around 60bn investment in government bonds (excl trading book), primarily as a result of significant excess liquidity position and the reinvestment of insurance reserves into fixed income instruments
End 2010 1. Credit quality Greece * Netherlands * Loan book Austria * Ireland * Germany ** Portugal * No material non-EU Spain 2% sovereign exposure Other 4% France 4% 5% Trading assets 2. Trading exposure 4% 45% Belgium Italy 10% 5% 3. Toxic assets 2% Investment10% portfolio Slovakia** 4% 4. Sovereign bonds Hungary 5% 13% Poland 14% Other (incl. interbank loans) Czech Rep. (*) 1%, (**) 2% 24 Section 4 Solvency and Liquidity Solvency and liquidity position
Total Liabilities & Equity
With core tier-1 ratio of 10.5% at KBC Shareholders’ equity
Bank (excl. KBL EPB) and 10.9% at KBC Capital Group, KBC is well positioned to pursue adequacy organic growth
With loan-to-deposit ratio at 81%, limited
needs for refinancing in the market Liquidity position compared to peers Funding & deposit base
Based on a preliminary analysis, funding & solvency seem to be manageable in light of the new ‘Basel’ proposals
26 26 Overview total (Core) tier-1 composition
KBC Bank KBC Group
Total tier I capital: 13,809 (12.4%) Total tier-1 capital: 16,656m EUR (12.6%)
Hybrid capital Hybrid capital 2,103 2,287m
Capital funded by State Securities Yield Enhanced 7,000m Securities 5,500
Capital guarantee Capital guarantee 446m 354 Core tier I capital: 11,706m EUR Core tier I capital: Shareholders' equity (net of (10.5%) Shareholders' 14,369m EUR State Securities equity (net of (10.9%) and capital Basic own funds YES and capital Basic own funds guarantee) 7,369m EUR guarantee) (look through) 11,147m (5.6%) 7,693 6,206 (5.6%)
Deductions Deductions - 1,841 -4,224m
27 Basel III impact for KBC Group (1)
“Basel III” pro forma common equity ratio is estimated at roughly 8.0% at end 2013
10.4% 8.0% 9.2% 7.2%
4.9% 4.3% 5.2%
2008 2009 9M10 2013e
Core tier-1 ratio including State capital Common equity ratio Core tier-1 ratio excluding State capital
28 Liabilities funding mix: stable & retail-based
3% 100% 7% 7% 14% 7% 8% 5% 5% 7% 9% 10% 8% 5% 8% 8% 8% 7% 13% 8% 7% 8% 7% 7% 21% 20% 19% 20% 19%
47% 45% 46% 45% 49%
-3% -4% FY06 FY07 FY08 FY09 FY10
Net unsecured interbank funding Certificates of deposit Net secured funding Funding from corporates Debt issues placed at institutional relations Funding from retail customers Total equity 29 Short term funding needs fully covered by central bank eligible collateral
ST funding versus available Collateral for KBC Bank 80 400% 361% 70 350% 327% 60 306% 300% 300% 50 250% 250% … and healthy LTD ratios
40 200%
Billions 174% 30 150% LTD ratio 90.0% 87.7% 20 100% 81.0% 10 50%
0 0% Dec-08 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 ST Funding Collateral COLL/ ST Funding
FY08 FY09 FY10
30 Section 5 Wrap-up Wrap up
• Well-developed bancassurance strategy and strong cross-selling capabilities. 75%-80% of revenue is generated in markets with leading market share
• Strong franchise in Belgium with high and stable return levels (ROAC of 37%)
• Access to growth in ‘new Europe’, with mitigated risk profile given most mature markets in the region
• Successful underlying earnings track record, as reconfirmed by the solid 1.7bn EUR net underlying profit in 2010
• Thanks to RWA reductions, disposals of non-core assets and strong earnings power, KBC Group is well on track to reimburse the government support
• Stable shareholder structure
• Solid liquidity position, with a 81% LTD ratio and a large portfolio of unencumbered government bonds
• A very favourable funding profile with relatively low (re)financing needs in 2011-2014 of 5bn-7bn EUR as well as a deep pool of liquidity in KBC’s retail client base
• Comfortable level of CT1 and T1 at the end of 2010: 10.9% and 12.6% respectively. The “Basel III” pro forma common equity ratio is estimated at roughly 8.0% at end 2013 32 32
Section 6 Additional Data-set Analysts’ coverage
Bank/broker Ana lyst Contact details Rating Target price Upside ABN Amro Robin van den Broeck [email protected] - 27 -11% Autonomous Britta Schmidt [email protected] - 27 -11% Barclays Capital Kiri Vijayarajah [email protected] + 41 36% BOFA Merrill Lynch Patrick Leclerck [email protected] + 40 32% Cheuvreux Hans Pluijgers [email protected] - 27 -11% Citi Investment Research Andrew Coombs [email protected] + 37 22% Deutsche Bank Brice Vandamme [email protected] Exane BNP Paribas François Boissin [email protected] - 33 9% Evolution Securities Fabrizio Bernardi [email protected] - 32 6% Goldman Sachs Frederik Thomasen [email protected] = 37 22% ING Albert Ploegh [email protected] = 28 -7% JP Morgan Securities Paul Formanko [email protected] + 40 32% Keefe, Bruyette & Woods Jean-Pierre Lambert [email protected] = 30 -1% Kepler Benoit Petrarque [email protected] + 35 16% Macquarie Thomas Stögner [email protected] = 27 -11% Mediobanca Riccardo Rovere [email protected] + 40 32% Morgan Stanley Thibault Nardin [email protected] = 30 -1% Natixis Securities Alex Koagne [email protected] + 38 26% Petercam Matthias de Wit [email protected] + 36 19% Rabo Securities Cor Kluis cor.kluis@rabobank.com + 46 52% Royal Bank of Scotland Thomas Nagtegaal [email protected] = Societe Generale Sabrina Blanc [email protected] = 32 6% UBS Omar Fall [email protected] = 28 -7% 34
Situation as of 4 February, based on the share price of 30.21 EUR