KBC Bank Half-Year Report - 1H2017. Interim Report KBC Bank 1H2016 p. 1

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1 KBC Bank Half-Year Report - 1H2017 Interim Report KBC Bank 1H2016 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. Glossary of ratios used See separate section at the end of this report. Investor Relations contact details Investor.relations@kbc.com KBC Bank NV Investor Relations Office (IRO) Havenlaan 2 BE-1080 Brussels Belgium Management certification I, Rik Scheerlinck, 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. Check this document's authenticity at Interim Report KBC Bank 1H2016 p. 2

3 Contents Report for the first six months of Summary 3 Business highlights 4 Analysis of the results and balance sheet 5 Statement of risk 8 Our view and guidance 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 16 Report of the statutory auditor 26 Other information 28 Overview of the loan portfolio 29 Solvency 30 Details of ratios and terms 31 This report contains information that is subject to transparency regulations for listed companies. 31 August 2017, 8 a.m. CEST. Interim Report KBC Bank 1H2016 p. 1

4 Report for the first six months of 2017 KBC Bank Interim Report KBC Bank 1H2017 p. 2

5 Summary: Profit of million euros generated in first half of Against the background of strong economic growth, low inflation, an appreciating euro and low interest rates, KBC Bank delivered an excellent performance in the first half of 2017, posting a net profit of million euros, 29% higher than the 923 million euros recorded in the year-earlier period. The period under review included robust total income and significant loan loss impairment releases. Moreover, our lending and deposit volumes continued to grow and our solvency and liquidity positions remained strong. Financial highlights for the first half of 2017, compared with the first half of 2016: Net interest income our main source of income was down 3% year-on-year. The net interest margin came to 1.87%, down 8 basis points year-on-year. On a comparable basis, lending to and deposits received from our clients increased by 4% and 8%, respectively, with increases recorded in all business units. Our net fee and commission income was strong in the period under review. Year-on-year, it went up 19%, thanks mainly to our asset management services. Our other income items combined rose 34% year-on-year, thanks primarily to high trading and fair value income. Our operating expenses increased by 2% year-on-year. As a consequence, our cost/income ratio for the first half of 2017 stood at 56%. When the bank taxes are evenly spread throughout the year and certain non-operating items are excluded, the adjusted cost/income ratio stands at a comfortable 53%. The six months under review included 72 million euros in net loan loss impairment releases. This was due essentially to the 137 million euros impairment release in Ireland combined with a generally very low impairment level in most other countries. Consequently, our cost of credit amounted to a to a very favourable -0.10% in the first half of 2017 (a negative figure indicates a positive impact on profit). Our liquidity position remained strong, as did our capital base, with a fully loaded common equity ratio of 13.8%. Key data, KBC Bank (consolidated, in millions of EUR) 1H2017 1H2016 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) 13.8% 14.3% Interim Report KBC Bank 1H2017 p. 3

6 Business highlights in the period under review (1H2017) 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, Bulgaria, the Czech Republic, Hungary, Ireland and Slovakia. In KBC Group, KBC Bank is essentially responsible for the banking business, and KBC Insurance for the insurance business. The period under review marked some important developments on the strategic front. First of all, we finalised the acquisition of United Bulgarian Bank (UBB) and Interlease in mid-june 2017 for a total consideration of 0.6 billion euros. The acquisition which was announced on 30 December 2016 was approved by the relevant regulatory authorities and received antitrust approval. Together, UBB-CIBANK and DZI will seek to become the reference in bank-insurance in Bulgaria, one of KBC s core markets, boasting strong macroeconomic fundamentals and offering attractive potential for further development of financial services. Following this acquisition, KBC will also become active in leasing, asset management and factoring in Bulgaria, offering its clients a full range of financial services. The operational integration of the business entities will be gradually introduced in the coming 18 months. Secondly, we presented KBC Group s updated strategy at an Investor Visit event in Dublin in June 2017 and also provided an update of the capital deployment plans and financial guidance. As before, KBC Group will focus on strengthening its integrated bank-insurance business model in its core markets in a highly cost-efficient way. It will also concentrate on achieving sustainable and profitable growth within the framework of solid risk, capital and liquidity management and on creating superior client satisfaction via a seamless, multi-channel, client-centric distribution approach. As we find ourselves in an ever changing environment and are faced with shifting client behaviour and expectations, changing technology and digitalisation and a challenging macroeconomic environment, we will adapt the way we implement this strategy. Clientcentricity the core of our strategy will be further fine-tuned into think client, but design for a digital world. However, it is the client who will drive the pace of action and change. KBC Group intends to invest a further 1.5 billion euros group-wide in digital transformation between 2017 and year-end We have translated this updated strategy into a new capital deployment plan and updated our guidance on certain financial parameters at KBC Group level (see the press release and presentation of 21 June 2017 at We also redeveloped the strategy of our Irish bank and presented this on the Investor visit event. As Ireland has become one of the group s core markets recently, KBC Bank Ireland will now strive to achieve at least a 10% share of the retail and micro-sme markets and will plan to develop the bank-insurance model there too. In its Digital First client-centric strategy, KBC Bank Ireland will accelerate its efforts and investments in expertise and resources to evolve fully into a digital-first client-centric bank, while continuing to carefully and efficiently manage its legacy portfolio for maximum recovery. It will facilitate always-on 24/7 accessibility in terms of distribution and service. To digitalise and innovate faster, the bank will intensify its collaboration with other KBC Group entities and leverage proven innovations and learnings from other KBC core markets. Moreover, its new core banking system with an open architecture will allow KBC Bank Ireland to tap into opportunities offered by the fintech community and provide services from and to other market players, thus broadening the value proposition to its own clients and playing a frontrunner role for KBC Group. In May 2017, we already had reflected the importance we attach to innovation in the composition of our top management: our Executive Committee now includes a Chief Innovation Officer (Erik Luts) who will specifically manage KBC Group s innovation and digitalisation agenda. We also welcomed Rik Scheerlinck as the new Group CFO. He succeeded Luc Popelier who became the CEO of the International Markets Business Unit, replacing Luc Gijsens who left the Executive Committee after a much-appreciated 40-year career with our group. At its Global Awards for Excellence ceremony in London in early July, Euromoney one of the UK's leading professional magazines in the financial sector honoured KBC with the 'World s Best Bank Transformation Award 2017'. This award illustrates that the redefinition and repositioning of KBC is appreciated on the international stage and regarded as a major strategic strength. KBC also received the 'Best Bank Transformation Award in Western Europe' and the award for 'Best Bank in Belgium'. Earlier this year, ČSOB won the Euromoney award for Best Private Bank in the Czech Republic. These multiple awards are recognition that KBC, more than ever, is a reference in the area of client-oriented bank-insurance. Interim Report KBC Bank 1H2017 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) 1H2017 1H2016 Net interest income Dividend income 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 Other net income Total income Operating expenses Impairment on loans and receivables on available-for-sale assets 0 0 on goodwill 0 0 on other -4-2 Share in results of associated companies and joint ventures 6 11 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 * 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 Selected ratios (consolidated) 1H2017 FY2016 Efficiency Cost/income ratio (between brackets: when evenly spreading the bank taxes and excluding certain non-operating items) 56% (53%) 54% (57%) Solvency Common equity ratio according to Basel III (phased-in/fully loaded) 14.0%/13.8% 14.6%/14.3% Leverage ratio according to Basel III (fully loaded) 4.7% 5.1% Credit risk Credit cost ratio* -0.10% 0.09% Impaired loans ratio 6.9% 7.2% for loans more than 90 days overdue 3.9% 3.9% Liquidity Net stable funding ratio (NSFR) 130% 125% Liquidity coverage ratio (LCR) 141% 139% * Negative figure indicates a net impairment release (with positive impact on results). Interim Report KBC Bank 1H2017 p. 5

8 KBC Bank ended the first six months of 2017 (1H2017) with a net profit of million euros, compared with a net profit of 923 million euros in the first six months of 2016 (1H2016) Note: while the recently acquired UBB and Interlease entities in Bulgaria are included in the group s balance sheet and solvency figures as of 2Q2017, their results contribution will only be consolidated as of the next interim period. Analysis of the major components of our profit and loss account Net interest income stood at million euros in 1H2017, down 3% year-on-year. The net interest margin came to 1.87% year-to-date, 8 basis points lower than the level recorded in 1H2016. Net interest income in the period under review benefitted from lower funding costs and strong loan volume growth (see below), as well as the positive effect of enhanced ALM management. These positive items were offset by a lower level of interest income generated by the dealing rooms (including a shift to trading and fair value income), the continued effect of low reinvestment yields, lower prepayment fees on mortgage loan refinancing and loan margin pressure. On a comparable basis (i.e. excluding UBB/Interlease) both lending and customer deposit volumes increased: deposits from customers and debt certificates, excluding repos, went up by 8%, and loans and advances to Net interest income Breakdown of the 1H2017 net result (in millions of EUR) customers, excluding reverse repos, by 4% year-on-year (percentages calculated after elimination of transactions between KBC Group companies). As regards deposits, volumes increased in Belgium (+8%), the Czech Republic (+12%), Slovakia (+2%), Hungary (+7%), Bulgaria (+20%) and decreased in Ireland (-4%). Lending went up in Belgium (+3%), the Czech Republic (+9%), Slovakia (+9%), Hungary (+7%) and Bulgaria (+13%), but decreased in Ireland (-3%, mainly due to the continued deleveraging of the corporate loan portfolio there). Net fee and commission income was strong in the period under review: it amounted to million euros in 1H2017, up significantly (19%) on its 1H2016 level. The overall strong performance of this income line was largely attributable to the contribution of entry and management fees generated by our asset management activities. At the end of June 2017, the total assets under management of the KBC-group stood at 215 billion euros, up almost 4% year-on-year, thanks mainly to a positive price performance Net fee and commission income 590 Other income Operating expenses 67 Impairment 6 Other -273 Income taxes Group share 89 Net result Minority interests All other income items combined amounted to 590 million euros in 1H2017. Dividend income stood at 15 million euros, compared to 12 million a year earlier. Realised gains on the sale of bonds and shares came to 50 million euros, down on the 119 million euros recorded in 1H2016, which had included the gain on the sale of Visa Europe shares (99 million euros). The net result from financial instruments at fair value (trading and fair value income) amounted to a high 443 million euros, up 76% on 1H2016, mainly thanks to the higher value of derivatives used for asset/liability management purposes and stronger dealing room results. Lastly, other net income came to 82 million euros in 1H2017, up 44% on 1H2016 as it included some positive one-off items. Operating expenses came to million euros in 1H2017, up 2% on their year-earlier level. Operating expenses also include the banking tax charge (361 million euros in 1H2017, marginally down on the level recorded a year earlier). The overall year-on-year increase of operating expenses related to higher staff costs (wage drift, pension expenses etc.), increased professional fees (related to closure of the deal to acquire UBB/interlease, among other things), higher ICT expenses, etc. As a result, the cost/income ratio stood at 56% in the first half of When the bank taxes are evenly spread throughout the year and certain non-operating items are excluded (mark-to-market of derivatives used for asset/liability management purposes, the impact of legacy legal cases, the effect of the liquidation of group companies, etc.), the adjusted cost/income ratio for the first half of 2017 came to a solid 53%, compared to 57% for full year 2016 In 1H2017, we released 72 million euros of loan loss impairments (leading to a positive impact on results). This compares with a net impairment addition (with negative impact) of 54 million euros in the year-earlier period. The net impairment release in the period under review was due essentially to Ireland, where there was a 137 million euros net release thanks mainly to the increase of the 9 month average house price index, some model changes and an improvement in the portfolio of non-performing loans. In all other core countries combined, there was a generally low level of loan loss impairment (a release of 10 million euros in Hungary, and impairment additions of 54 million euros in Belgium, 6 million Interim Report KBC Bank 1H2017 p. 6

9 euros in the Czech Republic, 2 million euros in Slovakia, 4 million euros in Bulgaria and 7 million euros in the Group Centre). Consequently, the annualised loan loss impairment for the entire group in the first half of 2017 accounted for an extremely low -0.10% of the total loan portfolio (a negative figure indicates a positive impact on the result). Loan quality further improved: at the end of June 2017, some 6.9% of our loan book (which for the first time includes the UBB loans) was classified as impaired, with 3.9% being impaired and more than 90 days past due (compared to 7.2% and 3.9%, respectively, at the beginning of 2017 and 7.8% and 4.4%, respectively, at the end of June 2016). Impairment on assets other than loans stood at 4 million euros, compared to 2 million in the year-earlier period. Performance by business unit The Belgium Business Unit (encompassing all activities in Belgium) generated a net result of 505 million euros in 1H2017, compared with 400 million euros in 1H2016. The year-on-year increase was mainly thanks to stronger net fee and commission income and significantly higher trading and fair value income, despite lower net interest income, lower realised gains on the sale of financial assets (owing to the sale of Visa Europe shares in 1H2016), somewhat higher costs and increased loan loss impairment. The Czech Republic Business Unit (encompassing all activities in the Czech Republic) generated a net result of 350 million euros in 1H2017, compared with 309 million euros in 1H2016. The period under review included higher net interest income, significantly increased trading and fair value income, higher other net income (thanks to a one-off element, among other things) and slightly lower loan loss impairment charges, while realised gains on the sale of financial assets were lower (owing to the sale of Visa Europe shares in 1H2016) and costs were slightly higher. The International Markets Business Unit (covering activities in Ireland, Hungary, Slovakia and Bulgaria) generated a net result of 276 million euros in 1H2017, as opposed to 172 million euros in 1H2016. When broken down by country, the net result was as follows: 166 million euros for Ireland (up on the 53 million euros recorded in 1H2016, thanks essentially to the significant loan loss impairment releases in 1H2017); 41 million euros for Slovakia (compared to 52 million euros in 1H2016, which had benefitted from gains on the sale of Visa Europe shares, among other things); 7 million euros for Bulgaria (compared to 8 million euros in 1H2016) and 63 million euros for Hungary (compared to 59 million in 1H2016) The Group Centre s net result amounted to 55 million euros in 1H2017, as opposed to 42 million euros in 1H2016. 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. Belgium Czech Republic International Markets Selected ratios per business unit 1H2017 FY2016 1H2017 FY2016 1H2017 FY2016 Cost/income ratio, banking (between brackets: when evenly spreading bank taxes and excl. certain non-operating items) 56% (52%) 54% (55%) 41% (40%) 45% (46%) 66% (64%) 64% (66%) Credit cost ratio* 0.11% 0.12% 0.06% 0.11% -1.10% -0.16% * Negative figure indicates a net impairment release (with positive impact on results). Equity, solvency and liquidity At the end of June 2017, our total equity came to 15.0 billion euros (13.3 billion euros in parent shareholders equity, 0.2 billion euros in minority interests and 1.4 billion euros in additional tier-1 instruments), up 0.8 billion euros on its level at the beginning of the year. The change during the first six months of the year resulted from the inclusion of the profit for that period (+1.3 billion euros, including minority interests), changes in the available-for-sale and cash flow hedge reserves (an aggregate +0.1 billion euros), dividends paid to KBC Group for financial year 2016 (-0.5 billion euros as the final dividend, following the 0.6 billion euros for the interim dividend paid in 2016), and a number of smaller changes. Our common equity ratio (Basel III) stood at 14.0% (phased-in) or 13.8% (fully loaded) at 30 June The leverage ratio (Basel III, fully loaded) stood at 4.7%. Our liquidity position remains excellent, as reflected in an LCR ratio of 141% and an NSFR ratio of 130% at the end of June Interim Report KBC Bank 1H2017 p. 7

10 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, market 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, a number of items are considered to constitute the main challenges for the financial sector in general and, as a consequence, are also relevant to us. Regulatory uncertainty regarding capital requirements is a dominant theme for the sector, besides enhanced consumer protection. Another ongoing challenge remains the low interest rate environment, despite the recent uptrend, particularly for longer maturities. The financial sector also faces the potential systemic consequences of political and financial developments like Brexit or protectionist measures in the US, which will have an impact on the European economy. EU political risks have receded following the outcome of the Dutch and French elections, but concerns remain about the banking sector in certain countries. Financial technology is an additional challenge for the business model of traditional financial institutions. Finally, cyber risk has become one of the main threats during the past few years, not just for the financial sector, but for the economy as a whole. On the macroeconomic front, the strong momentum of economic growth worldwide continued in the second quarter of Against this background, the Fed raised its policy rate as planned by another 25 basis points in June Economic growth in the euro area remained well above its long-term rate, leading to further improvements on the European labour market. On balance, oil prices fell slightly during the second quarter, keeping a lid on headline inflation. Core inflation remained low in the euro area, partly as a result of subdued wage growth. Global long-term government bond yields were overall broadly unchanged, remaining at low levels with German yields slightly higher and US yields slightly lower. Meanwhile, the intra-emu sovereign yield spreads narrowed, while the euro continued to strengthen against the US dollar, reflecting the strong momentum of growth in the euro area. Risk management data is provided in KBC Group s and KBC Bank s annual reports, interim reports and dedicated risk reports, all of which are available at Our view and guidance Our view on interest rates and foreign exchange rates: from early 2018 on, we expect the ECB to gradually phase out its QE programme and to end it by mid It will probably only raise its policy rate in In the meantime, we expect another policy rate hike by the Fed in 2017 and three more in 2018 (each time by 25 basis points). As a result, we believe that the US dollar will appreciate against the euro in 2017, as it will benefit from short-term interest rate support. Given the low inflation environment and still highly accommodating global monetary policies, German and US long-term bond yields are expected to rise only moderately in the period ahead. Our view on economic growth: the economic environment in the euro area is favourable and, as a result, the consumer sector there remains solid. The unemployment rate is steadily falling, which will further support consumption in the period ahead. The most significant risks stem from the trend of de-globalisation and from geopolitical concerns which could create additional uncertainty and hence affect economic sentiment. For Ireland, our guidance for loan impairment is for a net release of 160 to 200 million euros for full year The planned reform of the Belgian corporate income tax regime announced on 26 July 2017 would impact KBC mainly because of the intended gradual decrease in the tax rate from 33.99% to 29.58% (as of accounting year 2018) and to 25% (as of accounting year 2020). We expect this to have a recurring positive impact on the income statement from 2018 onwards, a slightly positive one-off impact on the common equity ratio in the second half of 2017, and an estimated one-off negative upfront impact on the income statement in the second half of 2017 (estimated at -0.2 billion euros, related to a reduction in the amount of deferred tax assets). More information in this regard is provided under the note on post-balance sheet events in the Consolidated financial statements. Interim Report KBC Bank 1H2017 p. 8

11 Consolidated financial statements according to IFRS, KBC Bank 1H2017 Reviewed by the statutory auditor Interim Report KBC Bank 1H2017 p. 9

12 Consolidated income statement (in millions of EUR) Note 1H H 2016 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 Impact acquisition UBB/Interlease: there is no impact yet on the income statement (except for some acquisition-related costs included in General administrative expenses ) as the closing date (on which the control was transferred to KBC) was very close to 30 June For more information see note Main changes in the scope of consolidation (note 6.6) further in this report. Interim Report KBC Bank 1H2017 p. 10

13 Condensed consolidated statement of comprehensive income The largest movements in other comprehensive income (1H 2017 vs. 1H 2016) were: (in millions of EUR) 1H H 2016 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 Net change related to associated companies & joint ventures 1-2 Other movements Other comprehensive income - not to be recycled to P&L Net change in defined benefit plans Net change on own credit risk - liabilities designated at FV(T)PL Net change related to associated companies & joint ventures 0 0 TOTAL COMPREHENSIVE INCOME attributable to minority interest attributable to equity holders of the parent Net change in revaluation reserve (AFS assets) Equity: the -15 million euros in 1H 2017 can be explained for a large part by a transfer to net result (gains on disposal) partly compensated by positive stock exchange movements, while the -118 million euros in 1H 2016 was affected by transfers to net result (gains on disposal) and negative fair value movements. In 1H 2017 an increase in long-term interest rates drives the following impacts: o Net change in revaluation reserve (AFS assets) Bonds: -37 million euros o Net change in hedging reserve (cash flow hedge): +164 million euros o Net change in defined benefit plans: +46 million euros In 1H 2016 a decrease in long-term interest rates drives the following impacts: o Net change in revaluation reserve (AFS assets) Bonds: 57 million euros o Net change in hedging reserve (cash flow hedge): -467 million euros o Net change in defined benefit plans: -184 million euros Interim Report KBC Bank 1H2017 p. 11

14 Consolidated balance sheet ASSETS (in millions of EUR) Note Cash, cash balances at central banks and other demand deposits 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 In order to align with the consolidated financial reporting framework (FINREP) of the European Banking Authority, the presentation of the balance sheet has been slightly changed: Cash and cash balances includes as of 2017 also other demand deposits with credit institutions and consequently has been renamed Cash, cash balances at central banks and other demand deposits from credit institutions. The reference figures have been restated accordingly (shift of 563 million euros mainly from Loans and receivables). The balance sheet as at includes UBB/Interlease: for more information see note Main changes in the scope of consolidation (note 6.6) further in this report. Interim Report KBC Bank 1H2017 p. 12

15 Consolidated statement of changes in equity Issued and paid up share capital Share premium Revaluation reserve (AFS assets) Hedging reserve (cashflow hedges) Remeasurement of defined benefit Own credit risk obligations (through OCI) Retained earnings Parent shareholders' Translation differences equity Additional Tier- 1 instruments included in equity In millions of EUR Total equity Balance at the beginning of the period ( ) Net result for the period Other comprehensive income for the period Total comprehensive income Dividends Coupon additional Tier-1 instruments Change in minorities Change in scope Total change Balance at the end of the period of which revaluation reserve for shares 105 of which revaluation reserve for bonds 484 of which revaluation reserve for other assets than bonds and shares 0 of which relating to equity method Minority interests Balance at the beginning of the period ( ) Net result for the period Other comprehensive income for the period Total comprehensive income Dividends Coupon additional Tier-1 instruments Change in minorities Total change Balance at the end of the period of which revaluation reserve for shares 106 of which revaluation reserve for bonds 574 of which revaluation reserve for other assets than bonds and shares 0 of which relating to equity method As an advance payment of the total 2016 dividend, KBC Bank paid in November 2016 an interim dividend to KBC Group of 604 million euros. In 2017, it paid a final dividend of 531 million euros (deducted from retained earnings and is accounted for in 1H 2017). Interim Report KBC Bank 1H2017 p. 13

16 Condensed consolidated cash flow statement 1H H 2016 Cash and cash equivalents at the beginning of the period Net cash from (used in) operating activities Net cash from (used in) investing activities Net cash from (used in) financing activities Effects of exchange rate changes on opening cash and cash equivalents Cash and cash equivalents at the end of the period Cash and cash equivalents increased substantially in 1H 2017 mainly thanks to the higher amount of reverse repos and cash balances at central banks. This was largely generated out of net cash from operating activities, thanks largely to higher deposits. Impact acquisition UBB/Interlease: for more information see note Main changes in the scope of consolidation (note 6.6) further in this report. Notes on statement of compliance and changes in accounting policies Statement of compliance (Note 1.1 in the annual accounts for 2016) The condensed interim financial statements of KBC Bank for the first 6 months ended 30 June 2017 have been prepared in accordance with IAS 34, Interim financial reporting. The condensed interim financial statements should be read in conjunction with the annual financial statements for the year ended 31 December 2016, which have been prepared in accordance with the International Financial Reporting Standards as adopted for use in the European Union ( endorsed IFRS ). The same accounting policies, methods of computation and presentation have been followed in its preparation as were applied in the most recent annual financial statements, except for the following items: For financial liabilities, IFRS 9 changes the presentation of gains and losses on own credit risk for financial instruments designated at fair value through profit or loss. KBC early adopts this aspect of IFRS 9 with effect from 1 January 2017 and the gains and losses on own credit risk go through other comprehensive income from now on. The impact of early adoption is minimal given the limited effect of own credit risk. In order to align with the consolidated financial reporting framework (FINREP) of the European Banking Authority, the presentation of the balance sheet has been slightly changed: Cash and cash balances includes as of 2017 also other demand deposits with credit institutions and consequently has been renamed Cash, cash balances at central banks and other demand deposits from credit institutions. The reference figures have been restated accordingly (shift of 563 million euros mainly from Loans and receivables). Summary of significant accounting policies (Note 1.2 in the annual accounts for 2016) A summary of the main accounting policies is provided in the annual financial statements as at 31 December Interim Report KBC Bank 1H2017 p. 14

17 Notes on segment reporting Segment reporting according to the management structure of the group (Note 2.2 in the annual accounts for 2016) For a description on the management structure and linked reporting presentation, please refer to Note 2.1 in the annual accounts for In millions of EUR 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 KBC Bank 1H 2017 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 2016 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 Interim Report KBC Bank 1H2017 p. 15

18 Other notes Net interest income (Note 3.1 in the annual accounts for 2016) In millions of EUR 1H H 2016 Total Interest income Available-for-sale assets Loans and receivables Held-to-maturity investments Other assets not at fair value 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 3.3 in the annual accounts for 2016) The result from financial instruments at fair value through profit or loss in 1H 2017 is 191 million euros higher compared to 1H 2016, which is for a large part explained by: a higher level of dealing room income higher results for MtM ALM derivatives Net realised result from available-for-sale assets (Note 3.4 in the annual accounts for 2016) In millions of EUR 1H H 2016 Total Breakdown by portfolio Fixed-income securities 19 6 Shares Interim Report KBC Bank 1H2017 p. 16

19 Net fee and commission income (Note 3.5 in the annual accounts for 2016) In millions of EUR 1H H 2016 Total Income Expense Breakdown by type Asset Management Services Income Expense Banking Services Income Expense Distribution Income Expense Presentation change to the note Net fee and commission income: in view of a more transparent breakdown of the net fee and commission income, the following breakdown is provided as of 2017 (reference figures were restated accordingly): Asset management services: include the income and expense relating to management fees and entry fees Banking services: include the income and expense relating to credit/guarantee related fees, payment service fees and securities related fees. Distribution: include the income and expense relating to the distribution of mutual funds, banking products and insurance products The substantial increase in 1H 2017 of the fee and commission income as well as expense within banking services is related to stock lending: the income includes dividends received on borrowed shares, while the expense includes the transfer of this dividend to the lender of the shares. Other net income (Note 3.6 in the annual accounts for 2016) In millions of EUR 1H H 2016 Total Of which net realised result following The sale of loans and receivables 2 0 The sale of held-to-maturity investments 6 1 The repurchase of financial liabilities measured at amortised cost 0-7 Other: of which: Income concerning leasing at the KBC Lease-group Settlement of an old legal file 14 0 Operating expenses (Note 3.7 in the annual accounts for 2016) The operating expenses for 1H 2017 include 361 million euros related to bank levies (367 million euros in 1H 2016). The application of IFRIC 21 (Levies) has as a consequence that certain levies are taken upfront in expense of the first half of the year. Interim Report KBC Bank 1H2017 p. 17

20 Impairments income statement (Note 3.9 in the annual accounts for 2016) In millions of EUR 1H H 2016 Total Impairment on loans and receivables Breakdown by type Specific impairments for on-balance-sheet lending Provisions for off-balance-sheet credit commitments Portfolio-based impairments Breakdown by business unit Business unit Belgium Business unit Czech Republic Business unit International Markets of which: Hungary 10 3 of which: Slovak ia of which: Bulgaria of which: Ireland Group Centre Impairment on available-for-sale assets 0 0 Breakdown by type Shares 0 0 Other 0 0 Impairment on goodwill 0 0 Impairment on other Intangible assets, other than goodwill 0-1 Property and equipment and investment property Held-to-maturity assets 0 0 Associated companies and joint ventures 0 0 Other Income tax expense (Note 3.11 in the annual accounts for 2016) In 1H 2017, the income tax expenses were positively influenced by 66 million euros of deferred tax assets (DTA) related to the liquidation of IIB Finance Ireland at KBC Bank NV. According to Belgian tax law, the loss in paid-in capital that KBC Bank sustained as a result of the liquidation of IIB Finance Ireland is tax deductible for the parent company on the date of liquidation, rather than at the time the losses were incurred. Interim Report KBC Bank 1H2017 p. 18

21 Financial assets and liabilities: breakdown by portfolio and products (Note 4.1 in the annual accounts for 2016) The impact of the acquisition of UBB/Interlease on the financial assets and liabilities by product is shown in an additional pro forma column Total excluding UBB/Interlease for informational purposes in order to provide a transparent view on the evolution of the financial assets and liabilities excluding this acquisition. For more information: see note Main changes in the scope of consolidation (note 6.6) further in this report. In millions of EUR FINANCIAL ASSETS, Loans and advances to credit institutions and Held for trading Designated at fair value Available Loans and for sale receivables Held to maturity Hedging derivatives Total Total excluding UBB/ Interlease 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 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 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 Interim Report KBC Bank 1H2017 p. 19

22 In millions of EUR FINANCIAL LIABILITIES, Held for Designated at trading fair value Hedging derivatives Measured at amortised cost Total Total excluding UBB/ Interleaase Deposits from credit institutions and investment firms a Deposits from customers and debt certificates b Excluding repos Demand deposits Time deposits Saving accounts Special deposits Other deposits Certificates of deposit Customer savings certificates Non-convertible bonds Non-convertible subordinated liabilities Derivatives Short positions in equity instruments in debt instruments Other Total carrying value a Of which repos b Of which repos FINANCIAL LIABILITIES, Deposits from credit institutions and investment firms a Deposits from customers and debt certificates b Excluding repos Demand deposits Time deposits Saving accounts Special deposits Other deposits Certificates of deposit Customer savings certificates Non-convertible bonds Non-convertible subordinated liabilities Derivatives Short positions in equity instruments in debt instruments Other Total carrying value a Of which repos b Of which repos 309 Interim Report KBC Bank 1H2017 p. 20