KBC Net Tops Estimates on Insurance Gains, Loan Provisions

KBC Groep NV, Belgium’s biggest bank and insurer by market value, reported a smaller-than-estimated drop in profit on capital gains in the Belgian insurance unit and lower loan losses in all regions except Ireland.

First-quarter net income declined to 380 million euros ($492 million) from 821 million euros a year earlier, the Brussels-based company said today in a statement. That beat the 264 million-euro average of 11 analyst estimates compiled by Bloomberg. The shares climbed as much as 15 percent in Brussels trading, the most in five months.

KBC didn’t unveil plans to reimburse more state aid this year after the bank agreed to repay 4.67 billion euros, net of penalty payments, by December 2013. KBC, which is still waiting for the Belgian central bank to set stricter capital rules under Basel III, has until the end of this year to repay a remaining 3 billion euros of federal government funds before the penalty rate increases to 20 percent from 15 percent.

“Results came in better than our and consensus forecast, explained by markedly lower impairment charges and strong dealing room activity,” Albert Ploegh, an analyst at ING Groep NV in Amsterdam, wrote in a note today. “We expect KBC to announce a detailed roadmap with the second-quarter results.”

KBC advanced 89 cents, or 6.7 percent, to 14.09 euros by 1:05 p.m. on Euronext Brussels, extending gains so far this year to 45 percent. That’s the best performance among the 48 companies in the Stoxx 600 Banks Index, which lost 0.3 percent in the same period.

Core Tier 1

Retained earnings and KBC’s unwinding of two collateralized debt obligations, as well as sales of other asset-backed securities, boosted its core Tier 1 ratio, a regulatory measure of a bank’s ability to absorb losses, to 11.4 percent at the end of March from 10.6 percent in the fourth quarter.

Adding the gains and balance-sheet reductions of disposals pending completion and the planned merger of Kredyt Bank SA with Banco Santander SA’s Bank Zachodni WBK SA in Poland, the core Tier 1 ratio would be 13.6 percent.

Profit for common stockholders, after accounting for interest due on government rescue funds, fell to 71 cents a share from 1.98 euros a share a year earlier. Shareholders’ equity, which includes 6.5 billion euros of state aid, increased to 32.20 euros a share from 28.70 euros at the end of last year.

Own Debt

An accounting charge stemming from a rule that requires banks to book a loss if the price of their own debt rises cut first-quarter profit by 340 million euros. Narrowing credit spreads led to a 189 million-euro revaluation of CDOs.

Profit from the insurance business in Belgium jumped 21 percent to 128 million euros and included 34 million euros of capital gains. The insurance business accounted for almost half of the Belgian unit’s profit in the quarter. Trading revenue from the Brussels dealing room climbed to 160 million euros from 122 million euros a year earlier, Chief Financial Officer Luc Popelier told reporters on a call today.

Net interest income, KBC’s biggest source of revenue, fell 12 percent to 1.21 billion euros in the quarter. Adjusting for the divestments of Fidea NV and KBL European Private Bankers SA, the drop was 4.3 percent as the difference between what the bank pays for funds and what it charges for loans narrowed two basis points to 1.93 percent.

Spanish Bonds

KBC’s net interest margin shrank the most in its eastern European business unit after customers of its Hungarian bank unit K&H repaid 636 million euros worth of foreign-exchange loans, which carried higher margins on average. KBC also continues to reduce investments in higher-yielding bonds in southern Europe and sold an additional 1.6 billion euros of Spanish government bonds in April at a loss of 34 million euros after tax.

The bank set aside 261 million euros to cover loan losses in the quarter, most of which in Ireland, where it gave its banking unit an additional 75 million euros of capital to keep the Tier 1 ratio at more than 11 percent.

The loan-loss provisions in the quarter were smaller than the 335 million-euro average of nine analyst estimates compiled by the company and compare with a quarterly average of 333 million euros last year.

The first-quarter loan-loss ratio of 0.66 percent “will not be sustainable,” Popelier said on a conference call with analysts today. “We still believe that we have an advantage now, an advantage in the first quarter.” The loan-loss ratio was 0.82 percent last year.

Ireland, LTRO

KBC Bank Ireland Plc took an additional 400 million euros of three-year loans from the European Central Bank in March to replace loans from its parent. It already took 3.2 billion euros in the first such operation at the end of December.

The Irish banking unit would have taken more in March should it have had more eligible collateral available at the time, KBC Chief Executive Officer Johan Thijs said on the call.

KBC also spent 1.3 billion euros of the total 8.67 billion euros in so-called LTRO-loans it took to buy more Belgian government bonds, Popelier said on the call. KBC holds more than 23 billion euros of Belgian bonds, making it the biggest owner of the country’s debt.

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