KBC Profit Beats Estimates as Funding Costs Drop, Fees Increase

KBC Groep NV, Belgium’s biggest bank and insurer by market value, reported fourth-quarter profit that beat analyst estimates as lower funding costs halted a slide of its interest margin and sales of fee-generating products rose.

Underlying profit in the three months that ended Dec. 31 increased to 309 million euros ($414 million) from 161 million euros a year earlier, the Brussels-based company said today in a statement. That beat the 281.3 million-euro average of eight analyst estimates compiled by Bloomberg. KBC proposed a dividend of 1 euro a share, the most since it first sought state aid five years ago.

KBC’s net interest margin widened 3 basis points from the preceding three-month period, the first increase after five quarters of declines, as the bank increased margins on mortgage and corporate lending and reduced the interest on 12-month deposits in Belgium by 25 basis points in November, which boosted sales of mutual funds and unit-linked products in the insurance business. Additional issuance of covered bonds backed by residential mortgages should reduce funding costs further and KBC forecast Irish loan-loss provisions will decline by as much as 45 percent this year.

“The results are solid, with net interest margin stable and a solid increase in fee income,” Albert Ploegh, an analyst at ING Groep NV in Amsterdam, wrote in an investor note. “Reassuring asset quality trends, with better than expected guidance in Ireland and a surprising dividend proposal.”

Best Performance

KBC gained as much as 5.9 percent to 30 euros in Brussels trading, the highest intraday value since March 2011, and traded at 29.80 euros, up 1.47 euros, by 11:25 a.m. local time. The shares have gained 75 percent in the past year, the best performance in the Stoxx 600 Banks Index.

The bank is already taking additional steps to protect its interest margin as it announced an additional cut in the Belgian deposit rate this week and repaid three-year loans from the European Central Bank, which were drawn in December 2011 to replace group funding at its Irish banking unit.

The bank’s loan-to-deposit ratio fell to 78 percent from 82 percent at the end of September and KBC will receive about 1 billion euros of cash, including group funding, upon completion of the sale of its Russian subsidiary Absolut Bank ZAO, earmarked for the second quarter.

By saying it won’t pay a dividend next year, KBC will be able to avoid paying 8.5 percent interest on the remaining Flemish government rescue funds outstanding at the end of 2013.

Reimbursement Premium

The bank reiterated it plans to repay 1.17 billion euros of the remaining 3.5 billion euros in the first half, plus a mandatory 583 million-euro reimbursement premium. Profit this year should help to offset the repayment, boosting KBC’s common-equity ratio under fully loaded Basel III capital rules to about 11 percent by year-end from about 10.8 percent last year.

KBC is also seeking to transfer about 500 million euros of shareholder loans to KBC Ancora CVA and CERA as these loans will gradually need to be deducted from capital under Basel III, Chief Executive Officer Johan Thijs said on a conference call.

As the 2012 dividend covers more than two years of interest expenses to be paid by KBC Ancora, the payout should make it easier to find a solution, according to Ploegh.

KBC forecast provisions for Irish loan losses will decline to about 350 million euros, plus or minus 50 million euros, this year. The Belgian bank has set aside more than 1.5 billion euros in the past three years to cover losses at KBC Bank Ireland Plc, and provisions now cover 46 percent of non-performing loans.