Regulated information* - 14 February 2008 (7 a.m. CET)
KBC closed the fourth quarter of 2007 with a net profit of 708 million euros. Underlying profit - i.e. net profit excluding exceptional items - came to 676 million euros, up 13% quarter-on-quarter and 20% year-on-year.
For the entire 2007 financial year, the group realised a net profit of 3 281 million euros. On an underlying basis, this amounted to 2 938 million euros, leading to a return on equity of 18.5%. Underlying net earnings per share came to 8.47 euros, an increase of 18% on the 2006 financial year. The proposed dividend for 2007 was set at 3.78 euros per share, gross, subject to approval by the Annual General Meeting.
According to André Bergen, Group CEO, 'The 2007 financial year was marked by a strong performance, even given the more unsettled market environment in the second half. We are happy to see that the business trends in Belgium and Central and Eastern Europe were solid. We also reiterate our view that, apart from temporary negative mark-to-market revaluations of investments, the ultimate impact of the US sub-prime crisis is expected to be limited.'
Financial highlights - 4Q 2007
André Bergen, Group CEO, summarises the financial highlights for 4Q 2007 as follows:
'We believe we performed very well in the last quarter of the year. Excluding exceptional items, profit was up 20% on the year-earlier quarter, notwithstanding the difficult climate on the financial markets.
Lending growth remained sound. Especially in our Central and Eastern European markets, organic loan growth remained strong at 23% year-on-year, reflecting the beneficial economic environment in the region and our ability to outperform in a number of fields.
Overall, the declining trend in the net interest margin was reversed. In Belgium, the shift from basic savings accounts to time deposits came to an end. As a result of the equity market downturn, savings money flowed into traditional banking deposits and sales of guaranteed-interest life insurance were up.
On a like-for-like basis, the cost level was down 3% year-on-year, reflecting the planned more stable use of cost budgets throughout the year. There were also lower expenses in the dealing rooms. Again, customer loan quality did not show any sign of deterioration.
Our exposure to US sub-prime mortgages through investments in collateralised debt obligations (CDOs) is very limited. The bulk of the CDO underlying collateral is diversified (synthetic) corporate debt. Moreover, we invested only in CDO notes with a high level of risk subordination to lower-rated tranches. None of these have been downgraded by the credit rating agencies. This is despite the massive wave of downgrades in the market. For the CDO notes held, a negative 70 million euros after tax was posted in the fourth quarter due to their revaluation at market value, while an additional 23 million euros, net, was set aside to cover counterparty risk in respect of credit insurers.
Our solvency remains robust. At the end of December, the Tier-1 ratio for the banking activities came to 8.7% according to the new Basel II capital adequacy regulations, more than twice the legal minimum. The solvency ratio for the insurance activities amounted to 265%, as much as 2.5 times the legally required level.'
Exceptional items during the quarter under review:
In the last quarter of 2007, 32 million euros, net, were recorded for items not related to the normal course of business. Primarily, this concerned the mark-to-market gains on ALM hedging derivatives (after tax impact: +24 million euros), an additional accrual charge for staff health insurance coverage (-42 million euros) and settlement proceeds from historical litigation.
Financial highlights - full 2007 financial year
Net profit: 3 281 million euros or, excluding exceptional items, 2 938 million euros. This was 15% higher than the figure for the previous year.
Main exceptional items: divestment gains (after tax impact: 272 million euros) and mark-to-market gains on ALM hedging derivatives (112 million euros). A large part of the divestment gains related to the sale of the non-strategic participation in Intesa San Paolo (207 million euros).
Higher net underlying profit for most business units: Belgium +20%, Central & Eastern Europe and Russia +45% and European Private Banking +7%. Although market conditions for professional trading activities were very difficult in the second half of the year, the underlying profit of the Merchant Banking Business Unit held up very well. Its contribution to group profit ended only 3% lower than the previous year's figure.
Continuing business growth: year-on-year, customer loans and customer deposits went up by 15% and 6%, respectively (on a like-for-like basis). Assets under management grew by 11%, while life insurance reserves ended the year 7% higher.
Favourable trend in core income items: on an underlying basis, net interest income was up by 10% year-on-year, net fee and commission income by 7% and gross earned insurance premiums by 20%. On the other hand, net gains from financial instruments at fair value (mostly professional trading income) were down by 21%.
Sound cost control: the underlying cost increase came to 4%, 2 percentage points of which were due to new acquisitions and currency appreciations. The underlying cost/income ratio, banking, stood at 58%.
A solid underwriting result in insurance: the combined ratio for the non-life business came to 96%, 2 percentage points of which were accounted for by the Kyrill storm in the first quarter.
Limited loan losses: the loan loss ratio came to 13 bps, at the same level as for the 2006 financial year.
Underlying return on equity: 18.5%, on a par with the targeted level.
Shareholders' equity: 17.3 billion euros as at 31-12-2007 (50.7 euros per share). Shareholders' equity was up slightly on the start of the year (+0.1 billion euros), as profit for the financial year was largely offset by the dividends paid out, the repurchase of treasury shares and a decrease in the revaluation reserve for available-for-sale assets.
Developments in 2008
André Bergen: 'We see a lot of pessimism in the financial economy, which we cannot fully reconcile with business reality in our core markets. There is obviously a cyclical impact on our performance and, going forward, we are taking somewhat higher cost inflation into account. But, on the other hand, we currently do not see customer credit risk increasing and we feel comfortable with our limited exposure to mortgage-linked investments. Throughout the cycle, we remain highly confident given our business model and strategy.'
* This news item contains information that is subject to the transparency regulations for listed companies.
