KBC Profit Tops Estimates as CDO Unwinding Frees More Capital

KBC Groep NV, Belgium’s biggest bank by market value, reported profit that beat estimates and cut its remaining risk linked to collateralized debt obligations almost by half, freeing more capital for reimbursement of state aid.

Net income of 517 million euros ($690 million) in the three months through June, which compares with a loss a year earlier, surpassed the 402 million-euro average of six analyst estimates compiled by Bloomberg. Revenue on an adjusted basis rose 5.1 percent to 1.83 billion euros and included a 126 million-euro gain in the value of hedges used in asset and liability management, Brussels-based KBC said today in a statement.

KBC, which spent 1.75 billion euros last month to repay a first portion of the Flemish government rescue funds it got in 2009, almost made up for the loss in capital by unraveling several CDOs and lowering the loss-provisioning rate for insurance bought from MBIA Insurance Corp. to 60 percent. KBC’s common equity ratio, as defined by a full application of Basel III rules, was 11.8 percent after the reimbursement compared with about 12 percent before. That gives KBC about 1.6 billion euros of excess capital it could use for further state aid reimbursements.

“We were impressed by the CDO size reduction,” Cor Kluis, an analyst at Rabobank International in the Dutch city of Utrecht, wrote in an investor note. “This increases expectation of an additional government payback.”

Shares Rise

KBC climbed as much as 5.8 percent to 35.50 euros on Euronext Brussels, the highest intraday value since September 2010, and traded 1.675 euros higher at 35.23 euros by 9:27 a.m., extending gains so far this year to 35 percent.

The bank’s net interest margin, the difference between what the bank pays for funds and what it charges for loans, was unchanged from the preceding three-month period at 1.72 percent. The margin widened two basis points to 1.19 percent in Belgium after KBC Bank lowered the interest rate on savings accounts in May and contracted three basis points to 3.04 percent in the Czech Republic.

Provisions for loan losses increased to 217 million euros on an adjusted basis, including 88 million euros for Ireland, and covered 65 percent of loans for which payments were at least three months late at the end of the quarter, down from 67 percent at the end of March. The proportion of loans in arrears rose the most in Slovakia and Ireland during the quarter. It fell in Hungary.

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