Wim Allegaert – Investor Relations
Johan Thijs – Group Chief Executive Officer
Luc Popelier – Group Chief Financial Officer
Benoit Petrarque – Kepler Cheuvreux
Anton Kryachok – UBS
Jean-Pierre Lambert – Keefe, Bruyette & Woods
Albert Ploegh – ING
KBC Groupe SA (OTCPK:KBCSF) Q4 2013 Earnings Conference Call February 13, 2014 3:30 AM ET
Thank you for standing by and welcome to the announcements KBC Q4 Results conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. (Operator Instructions) I must advice you that this conference is being recorded today, Thursday the 13th of February, 2013. And I would now like to turn the conference over to your speaker today, Mr. Wim Allegaert. Please go ahead sir.
Good morning, everyone in Brussels, today is February 13, 2014 and we are hosting the conference call on last year’s fourth quarter results of KBC. My name is Wim Allegaert. I am taking care of Investor Relations.
Today we have the company of Johan Thijs, Group CEO; and Luc Popelier, Group CFO and they will both elaborate on the results and add some add some additional insights. We will take roughly 40 minutes to guide you through the presentation for the analysts, which can be found at our corporate website, kbc.com. After this, there is of course time for questions until around 10:30 our time.
The conference call is taped and can be replayed until the 27th of February. Investor Relations and our CFO, are organizing a sell-side Analyst Meeting in London Friday morning at our offices in the city, Old Broad Street 111. This meeting starts at 8:30 local time, and we would be pleased to have you over for an hour for a more detailed discussion on our businesses and of course there will be plenty of coffee and tea. And now I give the floor now to Johan Thijs.
Thank you, Wim also from my side good morning and we will guide you through the slides which are on our KBC.com website and which are reflecting the results of the fourth quarter and the results of the full year 2013.
Let me flip you to slide 3 which is actually giving us key takeaways of the fourth quarter 2013. First of all, this is a very particular quarter. The quarter is a quarter which is – has ended with a negative result of €249 million with adjusted net result coming to minus €340, but this is fully due to the fact that we have taken the additional impairments related to that AQR in Ireland but also in Hungary.
This was already announced in November last year when we guided the market that the impact on Ireland was €775 million and that also the other countries were having a vertical non-material impact now we disclosed today that the impact for Hungary is €21 million for the related to the AQR and both of them together are taken into this quarter and obviously I would guide that the impact on the quarter is significant.
Now if you would make a section of these impairments and then the results is completely different and as a result announced the €394 million as adjusted results, so the result of our the bank insurance business is to the tune of €348 million which is good definitely if you compare them with the fourth quarters of the previous years.
Good results coming from, this is fully due to a very strong commercial bank insurance franchise first of all which is also – by good interest margins, good fee and commission business and also good technical charges in the insurance company.
The cost income ratio was very good with a 52 full year 2013 but we will elaborate on that later on and we also saw that even if we make some extractions, if we make abstractions of the AQR impact on Ireland and Hungary, there is some slight increase in the impairments on mainly the business in Belgium activity – the Belgium business unit, sorry. There is actually foreign branches,
Now if you wrap up it is good results for the full year and you take into our account our capital position previously and to pull payback of the €0.5 billion which was due this year I am talking about 2014 and we already deducted some of our capital position then our outcome in terms of capital common equity ratio Basel 3 fully loaded under the Danish Compromise stands at 12.5% which is a very strong, also our liquidity position remains solid as it was in the previous quarter even improved and today also, but we will elaborate in more detail later on.
We have some disclosures on our dividend policy for the next coming years, for the next two years actually.
A bit in detail now, I am on page 6 where you can see the difference between the adjusted results and the net results which is as we said also in previous occasions, only €46 million of its coming to a more normal positioning. This is mainly due to the revaluations of our CDO book and the structured credit portfolio in general.
Our divestments which are only related to minus €10 million and mark-to-market on our credit derivatives, sorry on our credit risks.
On page 7 you see the each business split up between the bank and insurance company. Obviously, the bank has now completely negative picture and therefore the split up is actually not that relevant. If you were to correct to the year the one-off adjustments for Ireland and Hungary then we would have a €320 million profit in the bank and if you compare that with the previous quarters and you can see that’s actually a good result.
Now a bit more detail is provided on pages 8 and following. And on net interest income, actually what we conclude from this quarter is that in terms of quarter-to-quarter we saw this quite flattish.
We had also provided for the first time the split up between the net interest income provided by the insurance activities which is the purple block on the slide and the light blue block is actually the net interest income related to banking activities.
And there you can see definitely on a year-to-year basis, that net interest income was increasing and this is fully related to actually the improvement of our margins which completely offset the lower reinvestment yields which is related as you know to the divestments which we have been doing on our bond portfolio.
The net interest margin, I already referred to has further increase it is now 180 basis points which is 3 basis points up compared to the previous quarter and which is 9 basis points up compared to it the same quarter last year which is fully reflecting the ability of KBC to reprice and to actually increase their margins.
On page 9, also there we do see once again a pickup in the fee and commission income. This is related to a strong savings campaign and the commercial campaign in the business unit Belgium, but also in the business activity in Hungary things were doing this was backed very well even the – for the total Group, the assets under management were increasing, as well as you can see at the bottom end of page 9 and this is due to the fact that pricing kicked in but also this was related to the net entries and definitely if you compare year-on-year, with the fourth quarter of 2012.
Also on the transactions, first of all on the premium income where we talk about gross premium, that is split up between non-life and life, life we are talking about the guaranteed interest products. There we can see that the pickup in the life business is substantial more than 60%, but also in the non-life business we do see some increase that is not relevant on a quarterly basis.
As you know, it’s only relevant on a year basis for the whole Group for the whole year we do see an increase in the non-life business of 4% which has given the circumstances a very good number.
Also in terms of quality, the business has performed in non-life very well. We have a combined ratio of 94% which is one point percent improvement compared to last year despite the fact that 2013 was characterized by some natural catastrophes and planning in Czech Republic and some windstorms, I would say over the Europe but also definitely in Belgium.
On the next page, on page 11, you can see the split up of premium in terms of written premium and also for non-life I am not going to elaborate on that because it’s quite similar to what I just said and the comparisons for quarter-on-quarter doesn’t make that much sense.
But the more important is the life side where you can see the split up between unit-linked and interest guaranteed products, interest guaranteed products were significantly up 49% quarter-on-quarter 6% year-on-year whereas the unit-linked production was improved – compared to previous quarter was significantly down compared to last year.
We already explained this in the previous – all the press conferences on the previous quarters. This is fully related to the fact that we have not been launching that many new products and new tranches in unit-linked, but also the main driver I think even is tax impact which was imposed this type of product at the beginning of the year in Belgium.
In terms of the fair value gains, we do see a bit of a pickup in 2013 fourth quarter, €13 million plus which is primarily driven by real estate projects in London which have been evaluating. If you compare to year-on-year then the number is quite flattish it’s plus 3% and it is mostly fourth quarter influenced by the ALM derivatives and the mark-to-markets of the ALM derivatives.
In terms of available for sale assets this quarter was rather a poor quarter in terms of realization of those gains on – which was actually split up between bonds €10 million and shares in €19 million and definitely if you compare this with previous quarter or same quarter last year, then the impact is serious.
Last quarter was primarily due to the realization of these gains on bonds due to the expectation of increased interest rates. On the – other net income, we are – I would say more or less at a kind of a runrate with €47 million.
This is due to the fact that we have been realizing some more gains on some legal cases, but also in some small activities which we have in essence company KBC – but as I just said, more or less the runrate which we can expect for the future.
Important is the positioning on the operating expenses also here in the slide a small adjustments. We have included now in the purple blocks, the banking tax which we are due in all our countries which we are present and if you compare the total amount of operating expenses included in the banking tax and you see that there is a pick up compared to the previous quarter. The pickup is fully due to some one-off tax which are related to FX, in fact and to some restructuring charges mainly in Czech Republic.
If you would exclude the tax then the same pick up is there and it’s also reflecting – is also related to the points I just mentioned. And if you compare with the previous year, we have a completely different picture there. We have a quite significant decrease of the costs which is fully reflecting the fact that the operating costs are fully under control, despite the fact that we have to pay more banking taxes.
KBC was due and we have a slide in the pack, at the end of the pack as a group paid in 2013 €327 million, banking taxes, which is a quite significant number.
Costs, then the cost/income ratio of KBC stands at 52% for the full year of 2013 which is very good results. This is a bit distorted by the posted one-off the mark-to-market of the ALM derivatives and if you would exclude those, then the cost/income ratio would go to 53.6% or a rounded number in this slide 54% which is actually better than our target and which reflects the fact that our cost are under control.
On page 14, we do see the asset impairments, these are obviously completely distorted by the AQR impact which we have taken into account on both Ireland €671 million was AQR related and Hungary where we took into our books for this quarter €21 million and if you would exclude those, we would end up at €258 which is a bit more than the previous quarter which is substantially down compared with the fourth quarter of last year.
The comparison with the previous quarter is the increases, it’s fully due to the fact that we have some excellent impairments on the legacy portfolio. In KBC Finance Ireland also in KBC Germany and some foreign branches we did see some increase foreign branches as you know are accounted for in the Belgium business units.
So in that respect, the full distortion is due to the AQR impact in Ireland and Hungary, if you would exclude only – last four quarter alone single filed in the foreign branches then this cost – credit cost ratio would drop to 45 basis points which is as we compared with the previous years, a very good result.
Non-performing loans, because what we have been doing in Ireland, it rose to 5.9% which is pretty logical taking into account the AQR impact and the actions which we have taken currently.
In terms of the business units, I will hand over the floor to Luc Popelier who will guide you through these numbers.
Thank you Johan and good morning everyone. I will first prefer to slide 17, Belgium business units where you see a net result slightly down by about 4%, but up compared to last year.
I will go into different items in a minute. I just want to highlight also the volume trends where total loans are down both quarter-on-quarter and year-on-year, but it’s specifically due to the – first of all delivered reduction of our loan portfolio in the foreign branches and secondly the sale of the shareholder loans that we experienced to the tune of €700 million in the fourth quarter.
If you would exclude those, then you will still see a slight increase in the loan portfolio in Belgium. Mortgages up year-on-year and slightly up you can’t see here its slightly up quarter-on-quarter – went up year-on-year but quarter-on-quarter down but that’s primarily due to deposits, certificates of deposits which were down in the institutional markets underlying if you look at our core businesses the deposits were still slightly up. Assets under management and life reserves are slightly up as well.
If you then look at the different P&L items, first of all net interest income, quarter-on-quarter was 2% up, by €10 million despite the fact that we still have lower investment yields particularly on the KBC insurance bond portfolio the increase that the element has been completely offset and more than offset by better margins across all products, both on the assets and liabilities side.
If we look year-on-year, net interest income is slightly down. This is due to the fact that there were highly accretive costs related to the branch 23 products and also quite important lower net interest income from the bond portfolio in KBC insurance where we have lower investment yields, but also volumes which came down because of the shift from interest guaranteed products into unit-linked and as you know unit linked, interest income on unit-linked is not accounted for under this item.
Year-on-year we also had interest income pressure because of the further reduction of the loan portfolio in the foreign branches. But that was partly offset by better margins compared to last year, better margins on virtually all products, saving accounts, current accounts term deposits mortgage loans and investment loans and as you saw also higher volumes. So, underlying even a good performance.
Interest margin with due to the higher margins on all the different products up 6 basis points quarter-on-quarter and 8 basis points year-on-year. You can also see that’s illustrated on next slide 19 where you see new production margins going up and that as a result, the whole bank b book the interest margin on whole bank book continues to further increase.
Fee and commission income, on page 20, you see stable fee and commission income quarter-on-quarter but actually, hides the fact that we have actually a very good performance on the asset management side with higher entry fees and higher management fees due to the savings campaigns that Johan has explained. But that was offset by a number of elements.
First of all, higher costs on payment carts, lower fees on some financial services, but also importantly and actually a positive one also higher commissions paid to insurance agents and that is due to the successful campaigns on the interest rate guaranteed insurance products which were sold.
If you look year-on-year, you see fee and commission income down by about 5% despite much higher management fees. This is due to two items, significantly lower fees on unit-linked products whereas you see later on the volumes have dropped significantly compared to last year but also to the higher commissions as I said before the higher commissions paid to insurance agents due to the successful sales campaigns on class 21 in particular.
Assets under management, the same trends as you see for the group, plus 2% primarily a price effect quarter-on-quarter. There are slight net entries still and on year-on-year there certainly is further increase of more than €2 billion net entries but the biggest driver year-on-year is the price effect by about almost 4%.
If we then look at slide 21, non-life sales, gross written-premium down quarter-on-quarter but that’s seasonal and if you look at earned premiums we actually see it flattish by the fact that third quarter usually is better for example because of travel policy insurance, year-on-year you see a further increase of premiums 1% combined ratio 93%, very strong, despite the fact that we had higher claims and storms in Belgium in the fourth quarter.
Life sales on slide 22, the same trend as Johan has explained. I am not going to in detail. You see exactly the same trend, so very strong sales in the fourth quarter particularly class 21. Slide 23, fair value gains, up quarter-on-quarter by about €42 million, again the same thing as Johan mentioned, primarily driven by recovery on a real estate project or revaluation of a real estate project in London but also better mark-to-market of ALM derivatives and a stable dealing room income.
Year-on-year the dealing room income has come down but that is because the fourth quarter of last year was exceptionally high. But that was compensated by – more than compensated by strong increase in mark-to-market of ALM derivatives and also the recovery on the revaluation of real estate project as I mentioned before. So that means that the fair value gain still went up by about €31 million fourth quarter last year against fourth quarter of 2013.
Gains realized on AFS assets were down. We primarily made gains on shares not on bonds, that was a liberal choice we made and to safeguard the net interest income for the future. Then, other net income was explained by Johan as well this quarter we didn’t had a lot of exceptionals.
There was some but very limited whereas in the third quarter of 2013 we had high exceptional income particularly on moratorium interests from a case we won and some sale of property. This quarter is more closer to the normal runrates coming from revenues from KBC lease and our power systems and real estate companies.
Operating expenses in Belgium on slide 24, down quarter-on-quarter actually quite a good set of results because this is down despite the fact that we always have seasonal effects and indeed in the fourth quarter we still have higher marketing costs and higher SAP costs.
So these typical effects are there, but these are more than offset by lower facility costs, payment costs and so on and lower staff expenses which is also important to underline, so actually very good operational expenses control in the Belgium business unit.
It still went up 1% year-on-year obviously due to some wage inflation on the one hand, but primarily driven by the increase in both employment benefits, pension costs went up entirely due to a lower discount rate which is applied and that accounts for €70 million,
So that was the biggest driver of that increase. For the rest, we saw that costs were very good, under control as a result of which in Belgium units you have cost income ratio of 47% rather for the full year 2013, although a little bit inflated by the mark-to-market of ALM derivatives. It’s closer to 45% , sorry 54% if you excluded one-offs in the revenue line or the volatile elements I should say in the revenue line.
Asset impairments, loan quarter-on-quarter looks more or less flat, €6 million actually down, but it hides the fact that loans and receivable impairments were actually up due – for some part model changes on the SME side but there were a number of larger files on the SME side where we saw some higher impairments particularly in the agriculture sector.
We also saw increased impairments in foreign branches particularly in France, but on the corporate side for the larger corporates we did see some releases. Why is it then still coming down is because, in the third quarter, we had an impairment on the real estate properties in KBC insurance and therefore the third quarter was actually inflated that number €65 million by about €20 million.
And, year-on-year we see quite a big drop in impairments, that is due to the fact that the last year in the fourth quarter 2012 I should say the Belgium suffered a lot from high impairments on the corporate side both in Belgium and in the business unit Belgium’s foreign branches. So that hasn’t repeated itself in this – well in the fourth quarter of 2013.
Credit cost ratio as a result stands at 37 basis points for the full year 2013 which is up compared to 28 basis points in 2012 that is driven by the deterioration in the SME and corporate portfolio as we’ve explained in the last two quarters. NPL ratio is around 2.5%.
If we then look at, we really jump to slide 27 and then look at the Czech Republic, where the quarter-on-quarter results were down driven by a lower net interest income, lower fair value income higher operational expenses and slightly higher impairments. But compensated by better fee and commission income and lower claims in non-life.
Before I go to the next slide, also highlight still continuing good growth in Czech Republic both on loans and deposits, which is something that continues to underpin our good franchise.
On slide 28, you see the net interest income despite a good growth in the loan portfolio, still down, but that is mainly driven by – on the one hand of foreign exchange impacts, so the Czech Crown which has depreciated quite considerably in the fourth quarter on the one hand, and secondly there is a technical adjustment which explains most of that drop that – adjustment has to do with the way that we have to amortize the commissions that we receive on the sale of mortgage loans.
And if you exclude the foreign exchange impact and the technical adjustment, there would only be a very slight decrease in net interest income primarily driven by slight pressures on the margin on deposit side and the lower investment yields.
If we go year-on-year compared to the fourth quarter of 2012, we see the same elements foreign exchange impact more than half – explains more than half of the drop and then almost all the rest is explained by the technical adjustment, underlying we see actually a slight increase in net interest income year-on-year due to better volumes and on the loan side, slightly better margins although on the retail side, the margins were a bit down.
But, so underlying net interest income actually increased. The NIM as you see slightly down 5 basis points it excludes the adjustment I just mentioned that is due to the fact that margins on loans remained flat quarter-on-quarter, but deposits still underwent some margin pressure and there was also some lower investment yields on the insurance side.
Year-on-year also minus 5 basis points. There you have two different things margins on loans further increased were offset by margin decrease of deposits and lower investment yield on the insurance side.
Slide 29 gives you an overview of fee and commission income in Czech Republic where you see fee and commission income actually very good results went up by 7% and if you exclude the foreign exchange impact the depreciation of the Czech crown, then increased actually 10% and across the board you see good fee income, fee income on payment cards, fees on financial markets.
But also entry fees in mutual funds for example, so it’s a good performance and year-on-year you see actually an increase of 29% despite the fact that we had a 7 percentage points impact of the foreign exchange. This is – for the half of it’s due to technical elements in the fourth quarter of 2012 where there was a write-off of deferred acquisition costs on the pension funds. If you would exclude that technical adjustment then you’ll still see a fee and commission income underlying of more than 15% growth.
Again, across the board entry fees in mutual funds, fees on payment cards, loan fees and so on and so on. So quite a good performance across the board.
Assets under management quarter-on-quarter went down slightly. This was primarily due to the negative impact of the Czech crown year-on-year we see an increase of about 6% mainly driven by price effects and despite the foreign exchange negative foreign exchange impact.
If you then look at slide 30 on the insurance side, gross earned premium went up by about 8% quarter-on-quarter and 7% year-on-year. That is despite the fact that we have negative foreign exchange impact, growth was particularly strong in life insurance particularly unit-linked insurance, but also excluding foreign exchange impact you saw an increase in non-life by about 2% quarter-on-quarter and 1% year-on-year.
Combined ratio 96%, so very strong and we had a very good fourth quarter with mild weather and not lot of claims so 84% even in the fourth quarter. Operating expenses on slide 31, Czech Republic, you see plus 6% that is mitigated by the foreign exchange impact, underlying it was 9% increase. Seasonal effects primarily due to higher marketing fees, higher marketing fees but the unit matched to keep ICT costs down this quarter.
Actually still a very good result, because if you look at the fourth quarter of 2012, you see a significant decrease year-on-year, minus 16%. Of course that’s due – on the one hand to the foreign exchange impact, if exclude that, then the decrease would still be 11% with lower variable remuneration, lower ICT expenses and lower marketing expenses. So I think also there a good performance.
Assets impairments went up quarter-on-quarter, but this is due to the fact that the third and also the second quarter of 2013 where cosmetically low because of one-off items, a release of provisions to the tune of €8 million in the third quarter 2013 and they were model adjustments. We had a positive effect release of provisions of €11 million. So if you would write those back into those quarters then actually impairments would be lower than the quarters third and second quarter.
The credit cost ratio for the full year 2013 is 25 basis points. So a very strong performance for the full year, but if you compare particularly with the last few years which was also quite low at an NPL ratio of about 3%.
If you then look at international markets, and I am on slide 33, obviously – significantly down to €731 million driven entirely by the large impairments which are AQR rated in Ireland and in Hungary to the tune of €688 million. If you would exclude those, then you see a net result of minus €43 million that is driven primarily by further provisions in large corporate files in Hungary.
If you look at the volume trends, I would prefer to look at slide 34. There you see better country-by-country. Total international markets, loans went down by 5% to 7% quarter-on-quarter and year-on-year driven by Ireland and Hungary. You still see growth in Slovakia and in Bulgaria.
On the positive side, good growth year-on-year 9% but down 2% in international markets driven by lower deposits in Hungary. Then on net interest income, the interest was down quarter-on-quarter, but that is driven entirely by a technical effect namely in Ireland where due to the impairments and the following capital increase as a result of that, we had a breakage costs in shadow costs on a shadow cost basis, breakage costs to terminate loans inter-company or inter-group loans early, that has an impact of almost – more than €11 million.
And that has the main driver of that decrease. So if you would exclude that, then actually net interest income would be higher driven by Slovakia with stable volumes and stable NIM. Hungary has stable NIM and Bulgaria higher volumes and slightly down on NIM.
If we then look year-on-year, slightly down by 1%, of course, it’s driven entirely by that effect in Ireland I just explained, because Slovakia had very good volume growth year-on-year and net interest margin which went up as well.
And if you then look at net interest margin on the graph below, minus six basis points driven again by Ireland. The NIM was, as I said before, stable in other countries and year-on-year, there was a strong increase in net interest margins in Slovakia and in Hungary.
Then on slide 36, if you look at fee and commission income, strong increase, 36% entirely driven however by Hungary where across the board fees were higher, payment transaction fees, booking fees, bank card fees, but also asset management and unit-linked fees went up quite well. So, I think a good performance there and also year-on-year 79% higher fee and commission income again entirely driven by Hungary.
Assets under management went down slightly. We saw a little bit of outflows in quarter-on-quarter. Year-on-year, however it only went down by 1%.
On life, very quickly we see – sorry on insurance, you see on slide 37, premiums, virtually flat I would say with life quarter-on-quarter a good performance offset by slightly negative performance on non-life and year-on-year slightly down particularly in Slovakia, but in Bulgaria the income particularly in life was good.
Combined ratio 95%, also again a good performance and that is virtually across the different countries. Slovakia and Hungary below 100% and Bulgaria has improved its cost income ratio quite considerably in 2013.
Operating expenses on slide 38, quarter-on-quarter went up 11% driven by Ireland in particular where we had higher marketing expenses and more FTEs due to the new bank, but also due to the fact that we further increased the number of FTEs in the real estate unit.
In the other countries we saw some seasonal effects with higher marketing and higher ICT expenses particularly in Hungary and Slovakia. If we look year-on-year, 6% increase, but that is mainly driven by the increased banking tax – sorry by the foreign transaction levy which was imposed in Hungary. You can see that the bank tax actually went up from €7 million to €24 million year-on-year.
Overall a market – the operational expenses excluding those bank taxes were well under control as you can see year-on-year.
Assets and impairments obviously driven by the AQR related impairments in Ireland and Hungary. If you look at the Hungarian loan book, what I would just mention here is the further deterioration in the retail foreign exchange mortgage book.
I would then like you to go to Ireland on slide 43, you see still a slight deterioration in non-performing loans, but an increase in high-risk as you can see on the graph that is driven primarily by model adjustments, given the experience that we had, the shift from performing to non-performing loans in the fourth quarter. That element is taken up in our models and therefore the whole performing book BDs are coming down.
I would then like, because I think on Ireland we’ve already mentioned quite a lot in the third quarter release numbers and everything you see here is completely in line with what we said before. So I wouldn’t want to spend much time on this and maybe leave with that for questions.
Then I would like to go to slide 52 to look at risk-weighted assets, risk-weighted asset have gone – you see, have gone down over the years, if you look quarter-on-quarter, risk-weighted assets have only increased by about €300 million. You can’t see it here, that's about €300 million only and different elements there. The Belgium business unit’s risk-weighted assets increased by €2 billion, driven by the increased risk weights for Belgian mortgage is about 5% extra risk-weighted asset percentage, added that’s €1.5 billion.
We also had model reviews for SMEs and corporates which increased our risk-weighted assets for – to the tune of €700 million, but, on the other hand, some repayment of shareholder loans which also had a positive effect.
Czech Republic risk-weighted assets went down by €600 million due to the Czech depreciation, Czech crown depreciation and in terms of markets, Ireland’s risk-weighted assets only went up by €200 million, less than we anticipated with an increase for the mortgage portfolio, but the decrease of risk-weighted assets on the commercial portfolio.
And then last but not least, operational risk-weighted assets went also down quite considerably almost €1 billion that is due to the fact that risk-weighted assets for operational risk are calculated on a three year average and with divestments rolling out of that calculation.
Then on slide 53, CDO exposure, fourth quarter remained more or less stable in terms of CDO exposure, but obviously the outstanding markdowns improved by about almost €200 million due to the further decrease of credit spreads.
I should also mention that we’ve recently collapsed further one CDO to the tune of – it’s a nominal amount of €2 billion, with a decrease in risk-weighted assets of around €700 million, which mean that the volatility of our P&L to these CDOs went down even beyond the €92 million you see there on the graph. So that I think it’s a good evolution.
On capital, perhaps last important points, we have been asked by the national bank to apply the Danish Compromise and what you see here in the Basel 3 ratios at right-hand side, the common equity ratios, fully loaded on basis of Danish Compromise.
Pro forma, that common equity ratio on a basis 12.5% pro forma means after repayment of the stay date of €330 million capital plus the penalty. So it’s €500 million in total. And after the sale of KBC Germany and the Diamond Bank, that’s a pro forma basis 12.5%, which I think is a very strong ratio.
I should mention that the Danish Compromise means that we have the consolidated KBC insurance and weighted the participation that the group has in the insurance which means that the revaluation reserves which are mainly in the insurance company are also taken out of that calculation and if you take the 12.5% and you deduct the AFS gains, we still have in that number that is only around roughly €300 million or 0.3%.
So if we then calculate the common equity ratio excluding AFS gains, that would be around 12.2% compared to the minimum of the National Bank of 9.25%. So in the same calculation basis.
Leverage ratio 4.4% strong improvements. This is again based on the strictest interpretation of the current CRR legislation. It means, for example, fully loaded basis, we only take into account the common equity tier-1 ratio in that calculation. Otherwise if we would ask we could on a phased approach include 81s it would be above 5%.
I would then like to just mention liquidity position, strong, still very strong within NSFR ratio of 111% and LCR of 131% and then would like to leave the floor again to Johan.
Thank you, Luc. This brings us to the dividend proposal. As you know, KBC has – in its agreement with the Flemish authorities for the State Aid a contract where we have to pay a coupon of 8.5% on our outstanding State Aid which is today still €2 billion.
Now, in that agreements for paying the coupon, the agreement says that we only have to coupon fee out of fee years, but we can’t skip two consecutive years, This has been already discussed in the markets several occasions and we also said a year ago that there was no intention to pay dividend over 2013, why because, the skipping of the coupon is directly related to not paying a dividend and in doing so, we could save the early coupon payment.
We already announced this for 2013 where we said that we would look further into optimization of the coupon payments and thus the saving of the coupon payment for the future and today we disclosed that indeed are going to apply this optimization for 2015 as well.
Now in doing so, we align with that contract with the Flemish State Aid and we still have a return for that Flemish region of more than 10% over the full holding period of that State Aid now.
Having said this, we also disclosed today that we are going to pay a –or the intention is definitely clear that we are going to propose to our AGM – Annual General Meeting a payout of a dividend up to €2 per share out of the profits generated in this accounting year 2014. For the future, then I am talking about 2016, it is clearly the intention to resume to a regular and a normal dividend policy.
Now the precise dividend policy which this will be disclosed at the KBC Investor Day which will follow later this year. Obviously, when we are making these statements today, as you all know, any dividend payments is always subject to the approval of the regulator involved.
As a wrap up, and then I am going to slide 60, as a wrap up for the fourth quarter of 2013 I can say, despite the fact that the fourth quarter is negative, if you abstraction of the impact of the AQR which we have taken into our books on Ireland and Hungary, it was actually a very good quarter.
It once again proves our underlying and very successful earnings track record both in banking and insurance franchises in all of our countries and definitely Belgium and Czech Republic are very solid in that respect and we also have taken our precautions on Ireland and Hungary in terms of the AQR.
On the full year 2013, obviously, the impacts of Ireland and the impact of AQR in Ireland and Hungary, kicks in significantly. This is explained on slide 62 and also there and I am just going to briefly walk you through these slides, because in essence, most of the things have been said over quarter four and those things can be repeated for the full year.
We have – I am on slide 62 now. We have for the full year, adjusted result of €1.15 billion. We have a – sorry, reported net result of €1.15 billion and an adjusted result of €960 million which is 60% more than last year. If we take into account the distortion by the AQR impact on Ireland and Hungary and we would exclude those then those two amounts would respectively go to €1.7 billion for the net result and €1.65 billion for the adjusted results.
And also there I can ask that these numbers are underpinned by good commercial results in our core markets, in our core activities and all the things which we have been saying over the fourth quarter are going back. So good margin, net interest margin I am talking about, a good fee and commission income which was up 15%. So very significantly savings for the assets under management.
We have been realizing more gains on the sale of assets. The life insurance part definitely on the interest guaranteed went up. We had a good quality in terms of our non-life business with a growth, which is above market average. We have our operational expenses stabilized year-on-year, which leads us to a very – cost income ratio of 52% and if you adjust those for the one-off effects, then you still are at €53.6 million which is below our target.
And last but not least we have seen over the full year if you exclude Ireland and – the AQR on Ireland and Hungary, we have seen lower impairments on our loan books. So, in essence, and that is what Luc just already said, both our mitigating actions we are taking over the year and the de-risking the good commercial performance have strengthened further again our common equity ratio.
This time, we are publishing a number under the Danish Compromise to a 12.5%. Our liquidity position is strong and as I just indicated, we proposed a dividend over the year 2014 of €2 per share.
So in this respect, I can conclude that 2013 was a year where we dealt significantly and for the last time in our legacy we turned back into profitability. So in this respect, we have now our eyes fully focused on the future, fully focused on serving our clients well which means fulfilling their needs and their dreams and this in a very solid profitable manner.
And this is also something which we have expressed on slide 63 where we have a forward-looking approach, the forward-looking approach repeats what we have said earlier. We expect solid returns in Belgium and Czech Republic like we have been doing over the last quarters.
We do expect that the international markets business unit is going to return to profitability in the mid-term and at latest by 2015 and we do expect also for Ireland to return to profitability from 2016 onwards. Our common equity ratio NIM stands at 10% and our ratios in terms of liquidity are at LCR 100% and NSFR at 105% as of 2015.
So in this respect, we keep it there in terms of the pure results, but also we have been looking in the last months to our organization and we have been concluding that due to the fundamentally reduced sites of our group. We have been shrinking the balance sheet with 42% divesting more than 25 entities.
As you know, we came to a conclusion that we could also reconsider the composition of our executive committee and restructure that executive committee to maintain a structure which is a very transparent one and fully reflecting our business ambitions and this is mentioned on slide 65.
On that slide, you can see that we actually have been reducing the number of executives in our executive committee by two, which means that, Marko Voljc and Danny De Raymaeker will be leaving our Company.
We also – Pavel Kavanek, who is the CEO of the business unit in Czech Republic is retiring by 1st of May and he will be – the successor will be John Hollows, who was currently – who is currently the CRO of our Group and in that respect, John Hollows on his turn, is succeeded by Christine Van Rijsseghem as of the 1st of May.
Last but least, we have been merging two business units – the former business unit international market which contains that four countries, Hungary, Bulgaria, Slovakia and Ireland, together with the business unit international markets which consist – was composed amongst others of the markets dealing rooms and securities, asset management also, trade finance, consumer finance.
And so on and those activities are now merged under one single business unit which is called business unit international markets and in that respect this will be led by Mr. Luc Gijsens as of the 1st of May .
This new structure fully reflects the reduced size of our group and is fully reflecting the focus on business because we will have three business units which actually if you add them up – business unit Belgium, Czech Republic and international markets, compose the full results of KBC Group.
I would keep it there and we are all happy to answer your questions.
Indeed, the floor is now open for questions. We roughly have still 15 minutes left, so feel free to ask questions and please allow for two questions per person. Thank you.
Thank you sir. (Operator Instructions) Your first question today comes from the line of Benoit Petrarque. Please ask your question.
Benoit Petrarque – Kepler Cheuvreux
Yes, it’s Benoit from Kepler Cheuvreux. Good morning. I would like to come back on the decision not to pay the dividends in 2015. Obviously, the capital build-up will be extremely strong in 2015 despite the €2 per share in 2014. It looks like you will above 12.5% core tier-1 ratio on the Basel 3, excluding state support at the end of 2015.
So what can we expect in 2016 on the dividend? Are you considering paying a – kind of higher dividend like you will do in 2014 to catch up? And more generally, on the strategy with such high core tier-1 ratio end of 2015 I mean, does that mean that you will kind of accelerate as from now the loan growth?
I mean, it looks like Czech is growing extremely fast and you are much more aggressive today than a year ago. So, can we kind of expect a much stronger growth of risk-weighted assets in the coming two years? And while the price for that will be a dividend cut in 2015?
That's the first question and then the second question is on the Danish Compromise. Obviously, your insurance solvency is not optimized. You have no leverage at all in the ratio and by the way, the ratio is close to 300%, which is extremely high versus peers.
So are you considering actually upstreaming dividend to the Bank or to the holding, i.e., decrease the equity allocated to the insurance, try to optimize it in order to get a lower risk-weighted assets under the Danish Compromise? Thanks very much.
Thank you, Benoit. I will take the first one. The dividend for 2016, as we already said during the presentation, we will give you some more guidance on that during Investor Day which is upcoming in the remaining part of this year. But let’s be clear about what we have been doing now in terms of 2014 and 2015 because 2013 we already announced.
The business pick up which we have seen in Czech Republic amongst others because you see some of the things in Slovakia and all the other countries where we really are focusing on. We had a bit of a slow demand in general which is true for all those international sector.
We had a bit of slow demand in Belgium, but still all these pickups and the growth of our businesses is not of such a kind that had good impact seriously our risk-weighted assets as you have seen the assets even have been shrinking because of other elements in the fourth quarter of 2013. So in this respect, we cannot or we are not expecting that this will hamper our position in terms of risk-weighted assets way forward.
The only thing and that the only reason why we have been announcing what we have announced on the dividend today is actually just an optimizing of coupon savings which are quite substantial in amount as you know and therefore we have been using to the full extent the possibilities which were part of our contract and which we have been using optimally.
So in that respect, no coupon over 2015 means no dividend and up to €2 for 2014 and it will not be hampered by risk-weighted asset growth which would be former and exceptional as your question was indicating.
Then on the second question on the Danish Compromise and whether we could optimize the capital in insurance. Yes it’s true that our insurance company has strong solvency ratios and that we are not using any hybrids at this point in time in the insurance company unlike many of our peers.
We obviously are looking constantly to see what the best solution is for the group and but we do take into account what effects are coming to work as in terms of solvency two and what rating impact would be if we would optimize further. So that is constantly under review and so far nothing has been decided.
Benoit Petrarque – Kepler Cheuvreux
Thank you and your next question today comes from the line of Anton Kryachok. Please ask your question.
Anton Kryachok – UBS
Thank you very much for taking the questions. I just had a couple of questions on the operating trends in Belgium. Clearly, they have been quite strong in terms of margin developments and as you mentioned on the call, the cost control has been robust.
So I was wondering whether you could share a little bit more color on the actions that you are planning to take on the deposit re-pricing side in Belgium or perhaps might have taken in the first couple of months of this year already and whether you see deposit re-pricing in Belgium as a potential tailwind to your margin there?
And the second question is on operating costs in Belgium. You have talked about robust cost control. I was wondering whether you see scope for declining total costs in Belgium on an year-on-year basis in 2014? Thank you.
Coming back to your first part of your question, what about the liability side of our books for the deposits and so on, what are the potential actions? As you know we are striving in our approach to customers to have a full offer and that full offer definitely have been talking about the investment side is always an offer which is composed of several products not only the deposit side.
So in terms of offering, we are offering the whole pack, which is composed the traditional banking products, let’s call it like that, so the deposit side, long-term deposits and so on. But also asset management products and then last but not least the life products as well.
Also for – if we have clients with a more complicated profile, more dynamic profile, then we are offering on top of that market products for less – let’s just set those aside. So in terms of deposits, we are constantly – as you have been seeing and as you have been seeing I was doing so.
We are constantly monitoring the position of our internal rates but also the composition of the rate of the European Central Bank and we adjust this accordingly. We are currently at a very low level, 0.45 basis points sorry, 45 basis points plus 15 basis points loyalty premium and what we have been seeing that despite the fact that we have been cutting our rates.
We do still see income on these deposits from our customers in Belgium. Because our policy is to offer the full pack, we do also see and this is one of the core strengths of KBC that we are able to sell to our customer’s alternatives for this deposit side.
And these alternatives have been picking up quite significantly in the fourth quarter as you can know that is the sale of asset management products and life products and we will continue to do so in the near future.
In terms of costs and in terms of the robustness of those costs and further decline, I can interpret the word decline in two ways. Let’s say that like this. First of all, it is our ambition, our cost ratio in Belgium is already quite much better than some of our peers. We have a cost income ratio, which is outperforming in that respect and this is due to the general philosophy that what we try to do, we do try to do as efficient as possible.
So this philosophy will be applied for the next coming quarters and next coming years and we will continue to do so in full effort. On top of what we are going to do is, use part of those proceeds of that cost saving and that continued efforts on being as efficient as possible to span some money on, what we call the digitalization within KBC Group.
We are currently working very hard on establishing a strategy on digitalization. As you know, we have been winning a lot of prizes in the recent past in terms of mobile banking and for loans, but this goes beyond this. And this was also be part of the announcements that we are going make in the Investor Day coming up in the remainder of the year.
But, yes, if the focus will remain on cost efficiency and yes we will spend some money and that is of course cost-related, spend some money on the digitalization strategy which we are going to pursue in the next coming quarters.
Anton Kryachok – UBS
Okay, very clear; thank you very much.
Thank you and your next question today comes from the line of Jean-Pierre Lambert. Please ask your question.
Jean-Pierre Lambert – Keefe, Bruyette & Woods
Yes, hello. Good morning. I would like to ask two questions. The first one is related to fees and commissions. In Belgium they were relatively flat compared to the third quarter. What kind of outlook do you have in terms of growth rate after the exceptional performance in 2013 do you expect a stabilization or you see still momentum coming your way? That's the first question.
The second question is about the compatibility of capital support from the Flemish region with potential acquisitions you may have under consideration. Is that an exclusion or is that compatible? Can you have both at the same time; a support from the Flemish region and proceed with acquisitions? Thank you very much.
Jean-Pierre, I will start with the first – sorry the second question. We have in our state support acquisition band until the 18th included – the 18th of November of 2014. So as of the 19th of November we can do some acquisitions if any, if there will be some interest.
So know there is no – in that respect there is actually no further link between the date and the acquisitions if any. Why do I say this so explicitly, I mean, if we would be, and I am talking about would, if we would be interested in doing an acquisition before we are there, after the date – I mean, then we will definitely at the 19th of November. So, no there is – yes it is a link, but in practice there is no link anymore.
Doing acquisition is something else. We are not actively pursuing any of those acquisitions as I have been stating in previous occasions, we are now in a position with our capital ratio of 12.5% to look into different options and if the different options are amongst others, and acceleration of a repayment of the State Aid, which is still a possibility.
And as you know that is always subject to approval of the regulator or an option that is looking to an interesting opportunity which arises if any and that opportunity will always be related to our core countries. But, we – as we are studying this – well let’s call a geographical strategy and that’s always needs to be approved by the Board that will also be part of our Investor Day upcoming in the remainder of the year.
Jean-Pierre Lambert – Keefe, Bruyette & Woods
If I may just ask a follow-up question, the skipping of dividends for the year 2015, is that an indication that you don't intend anymore to accelerate the reimbursements of the capital support?
No, on the contrary, I mean it’s skipping of the dividend is actually triggered by not having to pay the coupon, because saving of the coupon and we are talking about a substantial amount that’s related obviously to an early repayment, but still is due to – it’s subject to the fact if you pay a dividend, yes or no, if we pay dividend we have to pay the coupon. So it is not related at all with an acceleration of a repayment of the State Aid, not at all.
Jean-Pierre Lambert – Keefe, Bruyette & Woods
Thank you. Thank you very much.
And then, on the momentum where you were referring to 2013 in terms of the fee and the commission business, and what we do expect for the future, obviously we don’t give guidance on the individual product lines, but what we have been seeing indeed in the fee and commission business and that was very strong in the beginning of 2013.
That was a serious pick up and that is fully related obviously with the risk appetite of customers in general and that general sentiment is reflected in our sales obviously.
It is and it will be a policy which we are going to follow for the next coming quarters, next coming years to drive our customers to a product management investments which is suitable to their profiles.
And the fee and commission business – actually mutual funds and sorry, the interest guaranteed products and the unit-linked products are part of that and will definitely a policy which we will actively pursue for the future as well.
Jean-Pierre Lambert – Keefe, Bruyette & Woods
Thank you very much.
Thank you and your next question today comes from the line of Flora (Inaudible) Please ask your question.
Yes, good morning. The first question I have is actually on the NII in the Czech Republic. So I understand on the points you made on the €9 million one-off and the FX impact. I also see that you mentioned that the deposit war seems to be continuing and you say although we have just lowered the savings rate recently. So maybe if you could elaborate a little bit on the NII in the Czech Republic or how you see developing?
Should we consider Q4 performance as a new basis for the future? And given the high impact on FX here, whether you have any hedging in place or which you could put in place?
And then the second question is actually on the dividend guidance, which I think is actually being a bit negatively received today by the markets. I understand that you don't want to pay the coupon in 2015; there is the pari passu rule, so that's the reason why you chose not to pay a dividend in 2015.
Now, to clarify on 2014, you mentioned up to €2, so do you intend to pay €2 or is that going to be the maximum and it could be any number within zero to €2? And just on the thinking that you've had here, I'm a bit surprised to see a higher dividend than expected in 2014 which means cash outflows for you and later repayment on the State Aid. You could have chosen basically, to repay the State Aid in early 2015 and then be free to pay a higher dividend in 2015 so just to explain the thinking? Thank you.
I’ll take the first question on the net interest income in Czech Republic. I don’t think you should see the new trend emerging in the Czech Republic. Obviously, your first part of the technical adjustment, if you exclude that, yes there is still a slight reduction in net interest margins, very much driven by the deposit margins. Yes, no, whether there is increased competition or not and that fluctuates.
For example in 2013, we had ups and downs, sometimes more competition, sometimes less, particularly by the smaller institutions. We don’t think there is a trend, but it’s something to watch carefully. On the other hand, we think there is room to have further improvements on the composition of net interest margins of the various products.
As you may know, we for example, are also carefully looking at increasing our market share in SMEs and in consumer finance. These carry higher margins. So if there would be further deposit margin pressures, there are also other dosing effects which could mitigate those.
And referring to your second question, indeed the definition of up €2 is – it is definitely the intention that we are going to pay €2 out of our profit of 2014. The up €2 is reflecting indeed the fact that we are not giving any guidance on our profitability for the year 2014, but unanimously I can stand for indeed €2.
In terms of the impact of this €2 and then the reasoning would be, wouldn’t be accelerate, fully accelerate the repayment of the State Aid by early 2015 as we were referring, that’s indeed an option.
Now, let’s be a bit realistic, we have a buffer indeed compared to what we have announced ourselves we have a buffer compared to what the National Bank in Belgium has announced as their minimum, that’s 925 plus the exclusion of the –gains which we have explained under the Danish Compromise is about 0.3%. So, we do have a buffer according to that reference.
Now, what we all know is that the AQR is upcoming and definitely also after the very tough statements made by the new leader of the FSM earlier this week, I can imagine that some regulators are a bit nervous to approve without knowing what would be the full impact and not knowing literally what would be actually the full detail of that AQR exercise allowing us to payback early the full amount, because if you start to make the calculations, yes it will be possible, but could be tight too.
So in this respect, I think it is quite unrealistic to assume that regulators will approve given the uncertain circumstances, AQR, the definitions of the AQR and – in order to so. But, having this announcement made on the dividend for 2014 which is entirely driven by the optimization of the coupon payments, our position currently allows us to look to all options.
That is a further acceleration of the repayment of the State Aids following and then I am talking about both timing-wise and both nominal – in nominal terms-wise, and looking into options if they will be of great interest in terms of acquisitions, at this instance we are pursuing any, but it is an option that we are pursuing and what we now have it announcing keeps all these options open and that’s actually not more than that.
Thank you and your next question today comes from the line of Albert Ploegh. Please ask your question.
Albert Ploegh – ING
Yes, good morning gentlemen. One question on the risk-weighted assets. The model change this was about €2 billion in the fourth quarter, but more than offset by basically reduction on some other loan books. And what can we expect for model changes still coming for 2014 and mainly reporting of course towards further increases in risk-weighted assets should we expect anything meaningful or not?
And maybe to come back on the earlier statements just made on all the options that are open. Clearly, I understand that the regulators and probably yourselves also want to await the AQR outcome. But do you fully rule out then a repayment earlier in 2014? Or could there still be a window, let's say, somewhere in November, December on a partial further repayments?
And finally, on the AQR, you have not taken yet anything on the Belgium business; probably, it will be a Q1 event. In Q3, you mentioned to expect not a meaningful impact outside Ireland. So, are you still comfortable that the impact for Belgium by itself will be less than €100 million? Thank you.
Because Luc has elaborated a bit on risk-weighted assets during the presentation, he will give you the full answer on model changes and so on. I will answer the second part of your question referring to the AQR and then also referring to the optionality for further acceleration in 2014.
First of all, the AQR which we have been – what we have been announcing in November of last year the impact on AQR on Ireland first of all and secondly, on the – let’s call it non-Irish part of our group. So, in essence, Hungary, Bulgaria, Slovakia and Belgium, we actually are confirming today that will be announced in November is indeed a given, so we are quite comfortable with what we know today on the AQR for Ireland.
We have disclosed today, at that time we disclosed the non-Irish part non-material which means, let’s say €100 million-ish. We have announced today that for Hungary it will be €21 million and we confirm also today that some of the parts will be lowered than €100 million for the remaining countries.
So in this respect it is a full confirmation of what we said in November and we feel comfortable with that. Then the second part, there is the AQR which is upcoming now, – us from accelerating further any repayment of the Flemish State Aid in 2014. What I just said on the question of one of your colleagues was about – a full repayment that she was referring to.
So the €2 billion plus the €50 billion, as 50% penalty, totaling €3 billion, the AQR will not hamper us considering a further early repayment, but this is one of the options, what I just mentioned and this is obviously always subject to an approval of the regulator.
And so we have experienced in the recent past that making statements about this does not always ease our position in terms of negotiation with the regulator as we will not make bold statements, but it is clear that it is one of the options, yes, indeed, despite the AQR giving our buffer which we currently have.
Albert Ploegh – ING
Very clear. Thank you.
Then on the risk-weighted assets, yes there will be some further model changes. In Belgium, there will be some further model changes on the various assets, actually these are continuous elements and that may have some negative impacts in Hungary.
We also may have to look at what the new model changes taking into account the effects that we experienced last year 2013 both on the AQR-related impairments, but also on the larger corporate files.
And there is also the elements of the weighting of government bonds obviously, have we – if and have we have to weigh those and then last but not least I should also mention this may be positive, but some countries maybe a negative is that some countries still have to move from IB Foundation to IB Advanced.
Thank you. There are no further questions at this time. Please continue.
Okay, thank you very much we will be ending the call here for the sake of timing. Thank you very much for attending the call and we hope to see as many of you tomorrow at 8:30 at KBC London. Thank you and good bye.
Thank you much. That does conclude our conference for today. Thank you for participating. You may all disconnect.
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