Half-Year Report - 1H2015. Interim Report KBC Bank 1H2015 p. 1

Transcription

1 Half-Year Report - 1H2015 Interim Report KBC Bank 1H2015 p. 1

2 Company name KBC or KBC Bank as used in this report refer to the consolidated bank entity (i.e. KBC Bank NV including all companies that are included in the scope of consolidation). KBC Bank NV refers solely to the non-consolidated entity. KBC Group or the KBC group refers to the parent company of KBC Bank (see below). Difference between KBC Bank and KBC Group KBC Bank is a subsidiary of KBC Group. Simplified, the KBC Group's legal structure has one single entity KBC Group NV in control of two underlying companies, viz. KBC Bank and KBC Insurance. Forward-looking statements The expectations, forecasts and statements regarding future developments that are contained in this report are, of course, based on assumptions and are contingent on a number of factors that will come into play in the future. Consequently, the actual situation may turn out to be (substantially) different. Investor Relations contact details Investor.relations@kbc.com KBC Bank NV Investor Relations Office (IRO) Havenlaan 2 BE-1080 Brussels Belgium Management certification I, Luc Popelier, Chief Financial Officer of KBC Bank, certify on behalf of the Executive Committee of KBC Bank NV that, to the best of my knowledge, the abbreviated financial statements included in the interim report are based on the relevant accounting standards and fairly present in all material respects the financial condition and results of KBC Bank NV including its consolidated subsidiaries, and that the interim report provides a fair overview of the main events, the main transactions with related parties in the period under review and their impact on the abbreviated financial statements, and an overview of the main risks and uncertainties for the remainder of the current year. Glossary of ratios used Common equity ratio: [common equity tier-1 capital] / [total weighted risks]. Cost/income ratio: [operating expenses] / [total income]. Cover ratio: [specific impairment on loans] / [outstanding impaired loans]. For a definition of impaired, see Impaired loans ratio. Where appropriate, the impairment charges and impaired loans in the formula may be limited to more than 90 days overdue. Credit cost ratio: [net changes in impairment for credit risks] / [average outstanding loan portfolio]. Note that, inter alia, government bonds are not included in this formula. Impaired loans ratio: [impaired loans] / [total outstanding loan portfolio]. Impaired loans are loans for which full (re)payment of contractual principal and interest is deemed unlikely. This corresponds with KBC s Probability-of-Default classes These loans are equivalent to nonperforming loans under the (new) definition used by the European Banking Authority. Leverage ratio: [regulatory available tier-1 capital] / [total exposure measures]. The exposure measure is the total of non-risk-weighted on and off-balance sheet items, based on accounting data. Liquidity coverage ratio (LCR): [stock of high-quality liquid assets] / [total net cash outflow over the next 30 calendar days]. Net interest margin: [net interest income] / [average interestbearing assets]. To more closely reflect the scope of business, the definition has been reworked since 2014 (and applied retroactively) to exclude all divestments and all volatile short-term assets used for liquidity management. Net stable funding ratio (NSFR): [available amount of stable funding] / [required amount of stable funding]. Interim Report KBC Bank 1H2015 p. 2

3 Contents Report for the first six months of Summary 3 Business highlights 4 Overview of results and balance sheet 5 Statement of risk 8 Consolidated financial statements according to IFRS 9 Consolidated income statement 10 Condensed consolidated statement of comprehensive income 11 Consolidated balance sheet 12 Consolidated statement of changes in equity 13 Condensed consolidated cash flow statement 14 Notes on statement of compliance and changes in accounting policies 14 Notes on segment reporting 15 Other notes 18 Report of the statutory auditor 28 Other information 30 Overview of the loan portfolio 31 Solvency 32 This report contains information that is subject to transparency regulations for listed companies. 28 August 2015, 8 a.m. CEST. Interim Report KBC Bank 1H2015 p. 1

4 Report for the first six months of 2015 KBC Bank Interim Report KBC Bank 1H2015 p. 2

5 Summary: First half of 2015 generates a firm 895 million euros of profit. Liquidity and capital bases remain strong. Thanks to increasing client confidence, lending and deposit volumes went up in almost all of the countries where we operate. Income generated by our investment and asset management activities remained firm, as well. Against an economic background of low interest rates, a gradual economic recovery and political challenges for Europe, KBC Bank ended the first half of 2015 with a very good net profit of 895 million euros, considerably higher than the 439 million euros recorded in the first half of Moreover, our liquidity position remains strong and our capital position has strengthened further. Financial highlights for the first half of 2015, compared with the first half of 2014: All core markets and core activities turned in a strong performance. We granted more loans in Belgium (+4%), the Czech Republic (+10%), Slovakia (+9%) and Bulgaria (+9%), while clients increased their deposits with us in all our countries: Belgium (+12%), the Czech Republic (+7%), Hungary (+6%), Slovakia (+10%), Bulgaria (+16%) and Ireland (+26%). Our net interest income remained firm (+7%), and the net interest margin widened from 2.01% to 2.08%. Due to clients further increasing their assets managed by KBC, total assets under management of the group came to 204 billion euros. Our net fee and commission income remained very strong, rising by 19%. Increasing interest rates had a beneficial effect on the valuation of the derivatives we use for asset/liability management purposes. Excluding special bank taxes, costs were up just 1%. The cost/income ratio stood at a favourable 55% year-to-date, or 52% when adjusted for specific items. Loan loss impairment decreased. The cost of credit amounted to 0.30% of our loan portfolio. Our liquidity and capital positions remained robust. LCR, NSFR and common equity ratio (fully loaded, Basel III), stood at 130%, 126% and 12.8%, respectively. Key data, KBC Bank (consolidated, in millions of EUR) 1H2014 1H2015 Net result by business unit: Belgium Czech Republic International Markets Group Centre Balance sheet and solvency Total assets Total equity Common equity ratio (Basel III, fully loaded) 12.1% 12.8% IFRIC 21 (Levies) was approved by the European Union in June 2014 and became effective on 1 January The main consequence of IFRIC 21 in 2015 is that certain levies have to be recognised in advance, which adversely impacted the results for the first half of As it needs to be applied retroactively, KBC restated the comparable interim figures for This relates solely to movements between interim periods and does not affect full-year figures. Interim Report KBC Bank 1H2015 p. 3

6 Business highlights in the period under review The strategy of KBC Bank is fully embedded in the strategy of its parent company, KBC Group. KBC Group s core strategy remains focused on providing bank-insurance products and services to retail, SME and mid-cap clients in Belgium, the Czech Republic, Slovakia, Hungary and Bulgaria. In KBC Group, KBC Bank is essentially responsible for the banking business, and KBC Insurance for the insurance business. In this context, the group continued to work on achieving its strategic objectives. An acquisition in Slovakia marked KBC s ambition to grow both externally and organically in its core markets. On 1 July 2015, ČSOB Leasing and Volksbank Leasing International reached agreement for ČSOB Leasing to acquire all the shares of Volksbank Leasing Slovakia and its insurance brokerage subsidiary, Volksbank Sprostredkovatel ska. Volksbank Leasing Slovakia is a universal leasing company ranked 7th on the Slovak leasing market with a market share of approximately 6% and a balance sheet total of approximately 170 million euros. KBC is the clear leader on the Slovak leasing market through ČSOB Leasing. The deal, which is expected to close in the third quarter of 2015, will have no material impact on KBC Bank's earnings and capital. In Belgium too, KBC continued to implement its strategy. For instance, the new and autonomous management team of KBC Brussels was unveiled on 1 March It is composed of experts from KBC and CBC who recently made the switch to KBC Brussels. They will manage the branch and agency network of KBC Brussels, draw up their own commercial policy for that entity and form the backbone of its operational structure. In March 2015, KBC was informed by the European Central Bank of its decision regarding the establishment of prudential requirements (which set minimum requirements for capital and liquidity for KBC Group and its main banking entities). For KBC Bank, this implies that among other things it must maintain a minimum common equity tier-1 ratio (CET1) of at least 10.5% on a fully loaded CRD IV basis. KBC Bank currently easily exceeds this new target. On the macroeconomic front, the economic indicators pointed to a gradual recovery of the global economy in the second quarter after the weak performance of the first quarter. Euro area confidence indicators extended their uptrend in the second quarter and exporters continued to enjoy the competitive advantage of the relatively weak euro that resulted from the ECB s accommodative monetary policy and the monetary divergence with the US. We have fine-tuned our guidance for impairment charges on loans and receivables for Ireland towards the lower end of the previously stated range of 50 to 100 million euros for both 2015 and We again took a number of initiatives on the corporate sustainability and responsibility front. As part of its financial education programme Ready, Steady, Money!, K&H in Hungary organised targeted financial awareness courses in March During the Week van de Zorg a campaign week in March that focuses on care provision KBC in Belgium organised several workshops for senior citizens about online banking and the use of banking apps. Client centricity is also at the heart of KBC s approach in Ireland and its Voice of the Customer programme. In the Czech Republic, ČSOB s Era Helps the Regions won the Grand Prix Internet Effectiveness Award for the 2014 campaign supporting the grant programme and related activities focusing on support to individual fundraising. KBC in Belgium organised a stakeholder debate in May 2015, when it presented the KBC Report to Society for In June, ČSOB likewise organised a stakeholder debate and had the unique opportunity to discuss CSR and its approach to socially responsible products and services with a variety of relevant stakeholders. It also published its Sustainability Report for 2014 at the beginning of May. CIBANK and DZI (a subsidiary of KBC Insurance) presented their report at a round-table event entitled What Makes Financial Institutions Socially Responsible, which was organised jointly with a number of other organisations, including the United Nations Global Compact Network Bulgaria. Interim Report KBC Bank 1H2015 p. 4

7 Analysis of the result and balance sheet A full overview of the IFRS consolidated income statement and balance sheet is provided in the Consolidated financial statements section of this interim report. Condensed statements of comprehensive income, changes in shareholders equity and cash flow, as well as several notes to the accounts, are also available in the same section. Consolidated income statement, KBC Bank (in millions of EUR) 1H2014 1H2015 Net interest income Interest income Interest expense Dividend income 7 13 Net result from financial instruments at fair value through profit and loss Net realised result from available-for-sale assets Net fee and commission income Fee and commission income Fee and commission expense Other net income Total income Operating expenses Impairment on loans and receivables on available-for-sale assets -2-2 on goodwill 0 0 on other -8-6 Share in results of associated companies and joint ventures Result before tax Income tax expense Result after tax attributable to minority interests* attributable to equity holders of the parent Breakdown of result after tax, attributable to equity holders of the parent Belgium Czech Republic International Markets Group Centre IFRIC 21 (Levies) was approved by the European Union in June 2014 and became effective on 1 January The main consequence of IFRIC 21 in 2015 is that certain levies have to be recognised in advance, which adversely impacted the results for the first half of As it needs to be applied retroactively, KBC restated the comparable interim figures for This relates solely to movements between interim periods and does not affect full-year figures. * Primarily the 48% stake that KBC Group holds in KBC Asset Management. Highlights, consolidated balance sheet, KBC Bank (in millions of EUR) Total assets Loans and advances to customers Securities (equity and debt instruments) Deposits from customers and debt securities Risk weighted assets (Basel III, fully loaded)* Total equity of which parent shareholders equity * Drop largely related to the decision of the NBB to lift regulatory add-ons and Loss Given Default (LGD) floors for KBC s IRB advanced models. Interim Report KBC Bank 1H2015 p. 5

8 KBC Bank ended the first six months of 2015 (1H2015) with a net profit of 895 million euros, compared with a net profit of 439 million euros in the first six months of 2014 (1H2014 ) Up to 2014, we provided not only figures according to IFRS, but also so-called adjusted figures. In these figures, we extracted the impact of legacy activities (remaining divestments and CDOs) as well as the impact of the valuation of own credit risk, and rearranged trading income under Net result from financial instruments at fair value. As these legacy activities have become immaterial (divestments have been finalised and there is no longer any exposure to CDOs) and in order to simplify reporting we have now stopped providing adjusted results. Note: the year-on-year performance was partly affected by the deconsolidation of KBC Bank Deutschland and by a number of other minor changes. These items will be disregarded to enable a meaningful comparison to be made ( on a comparable basis ). Analysis of the major components of our profit and loss account: Net interest income stood at million euros in 1H2015, up 7% year-on-year (or 9% on a comparable basis). The net interest margin came to 2.08% year-to-date, 7 basis points higher than the level of a year earlier. The increase in net interest income was driven mainly by substantially lower (subordinated) funding costs, as well as higher lending-related interest income, though it was somewhat mitigated by hedging losses related to prepaid mortgages in Belgium. Moreover, volumes increased in both deposits and credit facilities: deposits from customers and debt certificates, excluding repos, went up by 8%, and loans and advances to customers, excluding reverse repos, by 3% year-on-year (percentages calculated after elimination of transactions between KBC Group companies). As regards deposits, volumes increased in every country (Belgium +12%, Czech Republic +7%, Slovakia +10%, Hungary +6%, Bulgaria +16% and Ireland +26% following the successful retail campaign there). Lending went up in Belgium (+4%), the Czech Republic (+10%), Slovakia (+9%) and Bulgaria (+9%), but decreased in Ireland (-4%, as matured and impaired mortgage loans surpassed new production and the corporate loan portfolio continued to be deleveraged) and Hungary (-3%, due mainly to large repayments in the corporate loan portfolio). Net fee and commission income amounted to million euros in 1H2015, an increase of 19% (unchanged on a comparable basis) on its 1H2014 level. The increase was largely related to robust asset management activity, thanks to a buoyant client investment climate. Overall, assets under management of KBC Group stood at 204 billion euros at the end of June 2015, up 18% year-on-year, half of which related to net entries and half of which to the investment performance. Belgium (189 billion euros) accounted for the bulk of the assets under management, the Czech Republic for 8 billion euros and the other countries combined for 7 billion euros at the end of June All other income items combined amounted to 396 million euros in 1H2015. Dividend income stood at 13 million euros, up 6 million compared to 1H2014. Realised gains on the sale of bonds and shares came to 52 million euros (40 million euros on the sale of bonds, 11 million euros on the sale of shares), up 18 million euros on their level of 1H2014. The net result from financial instruments at fair value amounted to 238 million euros, up 178 million euros on 1H2014, due primarily to the change in marked-to-market valuation in respect of derivative instruments used for ALM purposes (from a negative 134 million euros in 1H2014 to a positive 92 million euros in 1H2015). Lastly, other net income came to 93 million euros in 1H2015, a strong increase compared to -89 million euros in the year-earlier period, which had been affected to the tune of -231 million euros by provisioning for the new Hungarian act on retail loans ( Resolution of certain issues related to the Supreme Court s (Curia) uniformity decision on consumer loan agreements concluded by financial institutions ), while 1H2015 included the positive impact of a partial reversal of that provision (25 million euros, pre-tax). Interim Report KBC Bank 1H2015 p. 6

9 Operating expenses came to million euros in 1H2015, up 7% on their year-earlier level (8% on a comparable basis). Note that the reference figures for 1H2014 were adjusted in view of comparability following the (retroactive) application of IFRIC 21, which requires the booking of a significant proportion of the full-year special bank taxes in the first quarter of the year. The year-on-year increase in operating expenses was essentially due to higher special bank taxes (up from 237 million euros in 1H2014 to 329 million euros in 1H2015). Excluding all special bank taxes, costs were only slightly up (+1%) for a number of reasons, including somewhat higher staff expenses. As a result, the year-to-date cost/income ratio came to 55% in 1H2015 (compared to 58% for FY2014). Adjusted for specific items (mainly the marked-to-market valuations of ALM derivatives, the impact of the new act on retail loans in Hungary, and the (more evenly spread) special bank taxes), the sustainable cost/income ratio stood at 52%, compared to 54% in 1H2014. Loan loss impairment stood at 211 million euros in 1H2015, down somewhat on the 239 million euros recorded a year earlier. This improvement was mainly due to lower loan loss impairment charges at KBC Bank Ireland (23 million in 1H2015, as opposed to 110 million in 1H2014), somewhat offset by higher loan loss provisions in Belgium (129 million euros as opposed to 68 million euros). In general, 34 million euros extra provisions in 1H2015 are due to parameter adjustments to the IBNR-models. The annualised credit cost ratio hence stood at 0.30% year-to-date (0.42% in FY2014). Performance by business unit: The Belgium Business Unit (encompassing all activities in Belgium) generated a net result of 565 million euros in 1H2015, compared with 449 million euros in 1H2014. The period under review included higher net interest income, a significantly higher net result from financial instruments at fair value (caused by the positive marked-to-market valuations of ALM derivatives, as opposed to a negative amount in the reference period), somewhat higher gains on the sale of available-forsale assets, increased net fee and commission income and lower other net income. Costs excluding special bank taxes went up slightly, leading to a year-to-date cost/income ratio of 50% (same level as in FY2014), and impairment charges increased, leading to an annualised credit cost ratio of 0.29% in 1H2015 (0.23% in FY2014). The Czech Republic Business Unit (encompassing all activities in the Czech Republic) generated a net result of 259 million euros in 1H2015, compared with 265 million euros in 1H2014. The period under review included lower net interest income and increased net fee and commission income, gains from available-for-sale assets, trading and fair value income and other net income. Costs excluding special bank taxes remained well under control with a cost/income ratio of 48% (in line with FY2014), while loan loss impairment remained at a relatively low level, leading to an excellent annualised credit cost ratio of 0.18% in 1H2015 (the same level as in FY2014). The International Markets Business Unit (covering activities in Ireland, Hungary, Slovakia and Bulgaria) generated a net result of 81 million euros in 1H2015, as opposed to -216 million euros in 1H2014. When broken down by country, the net result was as follows: 0 million euros for Ireland (compared to -99 million euros in 1H2014; a significant improvement thanks primarily to lower loan loss impairment and higher interest income); 40 million euros for Slovakia (compared to 30 million euros in 1H2014, with most income items up and loan loss impairment down), 9 million euros for Bulgaria (compared to 5 million euros in 1H2014), and 31 million euros for Hungary (significantly better than the -152 million in 1H2014, which had been impacted by -183 million euros (post tax) related to the Hungarian act on retail loans (Curia provision). For the business unit as a whole, the cost/income ratio stood at 70% in 1H2015 (compared to 92% for FY2014, which had been impacted by the booking of the Curia provision) and the annualised credit cost ratio amounted to 0.35% (as opposed to 1.06% for FY2014). The Group Centre s net result amounted to -9 million euros in 1H2015, compared with -59 million euros in 1H2014. The Group Centre includes certain capital and liquidity management-related costs, costs related to the holding of participations and the results of the companies or activities that are earmarked for divestment or are in run-down. It also includes the results of legacy businesses (CDOs and divestment results, both immaterial as of 2015) and the valuation of own credit risk. Equity, solvency and liquidity: At the end of June 2015, our total equity came to 13 billion euros, down 0.3 billion euros on its level at the start of the year. The change in 1H2015 resulted from the inclusion of the 1H2015 result (+1 billion euros, including minority interests), the dividend paid to KBC Group for financial year 2014 (-1.6 billion euros), and a number of smaller changes (an aggregate +0.3 billion euros). Our common equity ratio (Basel III, fully loaded) stood at 12.8% at 30 June The leverage ratio (Basel III, fully loaded) stood at 4.8%. Our liquidity position remains excellent, as reflected in an LCR ratio of 130% and an NSFR ratio of 126% at the end of June Interim Report KBC Bank 1H2015 p. 7

10 Ratios FY2014 1H2015 Cost/income ratio 58% 55% Common equity ratio (Basel III, fully loaded) 12.1% 12.8% Credit cost ratio 0.42% 0.30% Impaired loans ratio 9.9% 9.3% for loans more than 90 days overdue 5.5% 5.3% Net stable funding ratio (NSFR) 123% 126% Liquidity coverage ratio (LCR) 120% 130% Statement of risk As we are mainly active in banking and asset management, we are exposed to a number of typical risks for these financial sectors such as but not limited to credit default risk, counterparty credit risk, concentration risk, movements in interest rates, currency risk, liquidity and funding risk, changes in regulations, operational risk, customer litigation, competition from other and new players, as well as the economy in general. Although KBC closely monitors and manages each of these risks within a strict risk framework containing governance and limits, they may all have a negative impact on asset values or could generate additional charges beyond anticipated levels. At present, we consider a number of items to constitute the main challenges for the financial sector in general and, as a consequence, are also relevant to KBC Bank. Increasing capital requirements are a dominant theme for the sector and regulatory initiatives are expected on such topics as risk models, floors on risk weighted assets, systemic and other capital buffers and minimum requirement of eligible liabilities and own funds (MREL). Besides these factors, the financial markets have been characterised by relatively low levels of liquidity for fixed income investments and the potential threat of asset bubbles, given the low interest rate environment. The latter also remains a challenge in itself, as illustrated in part by substantial prepayments of mortgages, particularly in Belgium, although this has abated somewhat recently. Finally, operational risk and particularly cyber risk have become one of the main threats during the past few years, not just for the financial sector, but overall. Risk management data are provided in the annual and interim reports of KBC Bank and KBC Group, and dedicated risk reports, all of which are available at As regards macroeconomic trends, in the absence of a new negative economic shock, the Western economies are expected to grow above their potential pace in the coming quarters. Emerging markets, on the other hand, are suffering from weak commodity prices and the expected reversal of the US Fed s interest rate policy. Indeed, the anticipation of the likely first rate hike by the Fed later this year is already having a negative impact on international capital flows to emerging markets, particularly those with severe macroeconomic imbalances, such as large external deficits. In the event of a Fed s rate hike, bond yields in the US and Europe are likely to be pushed up. However, we believe this movement will probably be more subdued than in 1994 because of the extremely accommodative monetary policies in the rest of the world, in particular in the Euro Area and Japan. We expect the ECB s Extended Asset Purchase Programme to last until at least September 2016, as planned, limiting upward pressure on European government bond yields and the euro exchange rate. After the recent agreement on a third bailout programme for Greece during the next three years, the threat of a Grexit to the European economic recovery has been eliminated for the time being, but we expect the Greek debt issues to emerge again in the longer term. The latest weaker economic data in China are to a large extent still the result of weak private consumption growth. Nevertheless, economic growth is expected to remain well above 6% per year. Moreover, the recent correction of the Chinese stock market should also be put in perspective of the solid gains in the previous years. Interim Report KBC Bank 1H2015 p. 8

11 Consolidated financial statements according to IFRS, KBC Bank 1H2015 Reviewed by the statutory auditor Interim Report KBC Bank 1H2015 p. 9

12 Consolidated income statement In millions of EUR Note 1H H 2015 Net interest income Interest income Interest expense Dividend income Net result from financial instruments at fair value through profit or loss Net realised result from available-for-sale assets Net fee and commission income Fee and commission income Fee and commission expense Net other income TOTAL INCOME Operating expenses Staff expenses General administrative expenses Depreciation and amortisation of fixed assets Impairment on loans and receivables on available-for-sale assets on goodwill on other Share in results of associated companies and joint ventures RESULT BEFORE TAX Income tax expense RESULT AFTER TAX Attributable to minority interest Attributable to equity holders of the parent The figures for 2014 have been restated due the application of IFRIC 21: See Note 1a for more information. Interim Report KBC Bank 1H2015 p. 10

13 Condensed consolidated statement of comprehensive income In millions of EUR 1H H 2015 RESULT AFTER TAX attributable to minority interest attributable to equity holders of the parent Other comprehensive income - to be recycled to P&L Net change in revaluation reserve (AFS assets) - Equity Net change in revaluation reserve (AFS assets) - Bonds Net change in revaluation reserve (AFS assets) - Other 0 0 Net change in hedging reserve (cash flow hedge) Net change in translation differences 0 91 Other movements Other comprehensive income - not to be recycled to P&L Net change in defined benefit plans TOTAL COMPREHENSIVE INCOME attributable to minority interest attributable to equity holders of the parent Interim Report KBC Bank 1H2015 p. 11

14 Consolidated balance sheet ASSETS (in millions of EUR) Note Cash and cash balances with central banks Financial assets Held for trading Designated at fair value through profit or loss Available for sale Loans and receivables Held to maturity Hedging derivatives Fair value adjustments of hedged items in portfolio hedge of interest rate risk Tax assets Current tax assets Deferred tax assets Non-current assets held for sale and assets associated with disposal groups Investments in associated companies and joint ventures Investment property Property and equipment Goodwill and other intangible assets Other assets TOTAL ASSETS LIABILITIES AND EQUITY (in millions of EUR) Note Financial liabilities Held for trading Designated at fair value through profit or loss Measured at amortised cost Hedging derivatives Fair value adjustments of hedged items in portfolio hedge of interest rate risk Tax liabilities Current tax liabilities Deferred tax liabilies Provisions for risks and charges Other liabilities TOTAL LIABILITIES Total equity Parent shareholders' equity Additional Tier-1 instruments included in equity Minority interests TOTAL LIABILITIES AND EQUITY Interim Report KBC Bank 1H2015 p. 12

15 Consolidated statement of changes in equity Changes in equity in 1H2015 include a dividend payment to KBC Group of approximately 1.6 billion euros. In 1H 2015, the revaluation reserves (AFS assets) decreased by 137 million euros, -159 million euros of which related to bonds (due to increasing interest rates) and +22 million euros to shares (thanks to higher equity markets). There was a positive effect likewise for a large part linked to increasing interest rates of +306 million euros on hedging reserves (cash flow hedges) and of +140 million euros on defined benefit plans.. In millions of EUR Issued and paid up share capital Share premium Revaluation reserve (AFS assets) Hedging reserve (cashflow hedges) Remeasurement of defined benefit obligations Reserves Translation differences Parent shareholders' equity Additional Tier- 1 instruments included in equity Balance at the beginning of the period ( ) Net result for the period Other comprehensive income for the period Total comprehensive income Dividends Issue of additional Tier-1 instruments included in equity Change in minorities Change in scope Total change Balance at the end of the period of which revaluation reserve for shares 69 of which revaluation reserve for bonds 427 of which revaluation reserve for other assets than bonds and shares 0 of which relating to equity method Balance at the beginning of the period ( ) Net result for the period Other comprehensive income for the period Total comprehensive income Dividends Change in minorities Total change Balance at the end of the period of which revaluation reserve for shares 128 of which revaluation reserve for bonds 401 of which revaluation reserve for other assets than bonds and shares 0 of which relating to equity method Minority interests Total equity Interim Report KBC Bank 1H2015 p. 13

16 Condensed consolidated cash flow statement In millions of EUR 1H H 2015 Net cash from (used in) operating activities Net cash from (used in) investing activities Net cash from (used in) financing activities Change in cash and cash equivalents Net increase or decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the period Effects of exchange rate changes on opening cash and cash equivalents Cash and cash equivalents at the end of the period Notes on statement of compliance and changes in accounting policies Statement of compliance (Note 1a in the annual accounts for 2014) The consolidated financial statements of KBC Bank have been prepared in accordance with the International Financial Reporting Standards (IAS 34) as adopted for use in the European Union ( endorsed IFRS ). The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the annual financial statements as at 31 December Due to the application of IFRIC 21 (Levies) as from 1 January 2015, the reference figures of the consolidated income statement have been restated (relates solely to movements between interim periods and has no impact on the figures for the full year). The main consequence of the application of IFRIC 21 is that certain levies are recognised upfront, which has negatively impacted the first half results in For more information, see Note 9 Operating Expenses. Summary of significant accounting policies (Note 1b in the annual accounts for 2014) A summary of the main accounting policies is provided in the annual financial statements as at 31 December Interim Report KBC Bank 1H2015 p. 14

17 Notes on segment reporting Segment reporting according to the management structure of the group (Note 2a in the annual accounts for 2014) For a description on the management structure and linked reporting presentation, please refer to Note 2a in the annual accounts for As of 2015, the presentation of adjusted results has been discontinued following the completion of the divestment programme (the last file, Antwerp Diamond Bank, has been put in run-off following the decision of 19 September 2014) and the fact that the exposure to CDOs was reduced to virtually zero. The rationale for calculating an adjusted result i.e. excluding these non-operating items largely disappeared and as a consequence, KBC will no longer provide fully adjusted figures (reference figures for 2014 adjusted accordingly). Moreover, an additional adjustment to the IFRS accounts was made in relation to trading activities. In the IFRS accounts, income related to trading activities is split across different components: while trading gains are recognised under Net result from financial instruments at fair value, funding costs and commissions paid in order to realise these trading gains are recognised under Net interest income and Net fee and commission income, respectively. Moreover, part of the Dividend income, Net realised result on available-for-sale assets and Other net income items also relate to trading income. In the net result of the Belgian Business Unit (KBC Bank Belgium), all trading income components within investment banking used to be recognised under Net result from financial instruments at fair value until the end of This adjustment was also discontinued as of 2015 (reference figures for 2014 restated accordingly). Interim Report KBC Bank 1H2015 p. 15

18 Business Business unit unit Czech Belgium Republic Business unit International Markets of which: Hungary of which: Slovakia of which: Bulgaria of which: Ireland Group Centre (incl intersegment eliminations) In millions of EUR 1H 2014 Net interest income Dividend income Net result from financial instruments at fair value through profit or loss Net realised result from available-for-sale assets Net fee and commission income Net other income TOTAL INCOME Operating expenses Impairment on loans and receivables on available-for-sale assets on goodwill on other Share in results of associated companies and joint ventures RESULT BEFORE TAX Income tax expense RESULT AFTER TAX Attributable to minority interests NET RESULT H 2015 Net interest income Dividend income Net result from financial instruments at fair value through profit or loss Net realised result from available-for-sale assets Net fee and commission income Net other income TOTAL INCOME Operating expenses Impairment on loans and receivables on available-for-sale assets on goodwill on other Share in results of associated companies and joint ventures RESULT BEFORE TAX Income tax expense RESULT AFTER TAX Attributable to minority interests NET RESULT KBC Bank Interim Report KBC Bank 1H2015 p. 16

19 In the table below, an overview is provided of a number of balance sheet items broken down by segment. In millions of EUR Business unit Belgium Business unit Czech Republic Business unit International Markets of which: Hungary of which: Slovakia of which: Bulgaria of which: Ireland Deposits from customers & debt certificates excl. repos Loans & advances to customers excluding reverse repos Term loans excl. Reverse repos Mortgage loans Current accounts advances Finance leases Consumer credit Other Deposits from customers & debt certificates excl. repos Loans & advances to customers excluding reverse repos Term loans excl. Reverse repos Mortgage loans Current accounts advances Finance leases Consumer credit Other Group Centre KBC Bank Interim Report KBC Bank 1H2015 p. 17

20 Other notes Net interest income (Note 3 in the annual accounts for 2014) In millions of EUR 1H H 2015 Total Interest income Available-for-sale assets Loans and receivables Held-to-maturity investments Other assets not at fair value 3 21 Subtotal, interest income from financial assets not measured at fair value through profit or loss Financial assets held for trading Hedging derivatives Other financial assets at fair value through profit or loss Interest expense Financial liabilities measured at amortised cost Other Subtotal, interest expense for financial liabilities not measured at fair value through profit or loss Financial liabilities held for trading Hedging derivatives Other financial liabilities at fair value through profit or loss Net interest expense on defined benefit plans Net realised result from financial instruments at fair value through profit and loss (Note 5 in the annual accounts for 2014) In 1H2015, the result from financial instruments at fair value through profit or loss was influenced by the valuation of derivatives used for ALM purposes, as fair value changes (due to marked-to-market accounting) for a large portion of ALM hedging instruments (that are treated as held-for-trading instruments) appear under Net result from financial instruments at fair value, whereas most of the related assets are not recognised at fair value. In 1H2015, the net realised result from these financial instruments at fair value through profit or loss amounted to 92 million euros (pre-tax), as opposed to -134 million euros (pre-tax) in 1H2014, as long-term interest rates increased during 1H2015. Net realised result from available-for-sale assets (Note 6 in the annual accounts for 2014) In millions of EUR 1H H 2015 Total Breakdown by portfolio Fixed-income securities Shares 1 11 Interim Report KBC Bank 1H2015 p. 18

21 Net fee and commission income (Note 7 in the annual accounts for 2014) In millions of EUR 1H H 2015 Total Fee and commission income Securities and asset management Commitment credit Payments Other Fee and commission expense Commission paid to intermediaries Other Other net income (Note 8 in the annual accounts for 2014) In millions of EUR 1H H 2015 Total Net realised result following The sale of loans and receivables 2-1 The sale of held-to-maturity investments 0 1 The repurchase of financial liabilities measured at amortised cost 0-8 Other: of which: Income concerning leasing at the KBC Lease-group Realised gains or losses on divestments 11-7 Legal settlement in 2Q14 of an old credit file 31 0 New law on retail loans (Hungary) Deconsolidation real estate companies 0 18 Operating expenses (Note 9 in the annual accounts for 2014) The operating expenses for 1H2015 include 329 million euros related to special bank taxes. Note that, in that respect, IFRIC 21 (Levies) came into force on 1 January The main consequence of the application of IFRIC 21 is that certain levies are recorded upfront in expenses for the first quarter of 2015 (a total amount of 222 million euros, 62 million euros of which related to the estimated contribution to the European Single Resolution Fund (ESRF)). For nearly all group entities, 70% of the contribution to the ESRF is booked in the first quarter (estimated actual cash out), whereas the remaining 30% is considered as an irrevocable payment commitment (booked off balance as a contingent liability). For K&H in Hungary and ČSOB in Slovakia, the entire ESRF contribution is recorded in the first half of the year due to local legislation. Based on European market practice, KBC has furthermore aligned the accounting treatment of the annual deposit guarantee scheme levy in 1H 2015 and as a result, the second quarter of 2015 includes a 22-million-euro charge related to the upfront recognition in Belgium. Excluding the latter, the 2014 reference figures of the consolidated income statement have been restated (relates solely to movements between interim periods and has no impact on the figures for the full year). Interim Report KBC Bank 1H2015 p. 19

22 Impairments income statement (Note 11 in the annual accounts for 2014) In millions of EUR 1H H 2015 Total Impairment on loans and receivables Breakdown by type Specific impairments for on-balance-sheet lending Provisions for off-balance-sheet credit commitments 18 5 Portfolio-based impairments Breakdown by business unit Business unit Belgium Business unit Czech Republic Business unit International Markets of which: Hungary of which: Slovak ia of which: Bulgaria of which: Ireland Group Centre Impairment on available-for-sale assets Breakdown by type Shares Other 0 0 Impairment on goodwill 0 0 Impairment on other Intangible assets, other than goodwill 0 0 Property and equipment and investment property Held-to-maturity assets 1 0 Associated companies and joint ventures 0 0 Other In the second quarter of 2015, adjustments to the emergence period were made to the IBNR models based on annual back-testing. This resulted in an increase of portfolio-based impairment of approximately 34 million euros mainly in the Belgian and Czech Business Units. Income tax expense (Note 13 in the annual accounts for 2014) In 1H2015, income tax expense was positively influenced by 49 million euros of Deferred Tax Assets (DTA). The high level of AFS reserves, which came about as a result of low interest rate levels, triggered a review of the DTA position at KBC Credit Investments. It is unlikely that KBC Credit Investments will pay taxes on these AFS reserves and, therefore, Deferred Tax Liabilities (DTL) have been offset by DTA on the balance sheet. It is important to mention that the accounting treatment is asymmetrical as DTA is recognised through the profit-and-loss account and the DTL on the AFS reserves is directly recorded through equity. Interim Report KBC Bank 1H2015 p. 20

23 Financial assets and liabilities: breakdown by portfolio and products (Note 14 in the annual accounts for 2014) (In millions of EUR) FINANCIAL ASSETS, Held for Designated at trading fair value Available for sale Loans and receivables Held to maturity Hedging derivatives Measured at amortised cost Loans and advances to credit institutions and investment firms a Loans and advances to customers b Excluding reverse repos Trade receivables Consumer credit Mortgage loans Term loans Finance leasing Current account advances Securitised loans Other Equity instruments Debt securities issued by Public bodies Credit institutions and investment firms Corporates Derivatives Other Total carrying value a Of which reverse repos b Of which reverse repos FINANCIAL ASSETS, Loans and advances to credit institutions and investment firms a Loans and advances to customers b Excluding reverse repos Trade receivables Consumer credit Mortgage loans Term loans Finance leasing Current account advances Securitised loans Other Equity instruments Debt securities issued by Public bodies Credit institutions and investment firms Corporates Derivatives Other Total carrying value a Of which reverse repos b Of which reverse repos Total In 1H 2015, 0.5 billion euros worth of debt instruments were reclassified out of the Available for sale category into the Held to maturity category. Interim Report KBC Bank 1H2015 p. 21