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KBC: Q1 2020 Loss on COVID-19 Related Provisions and Hit in Financial Instruments

KBC Group NV (KBC or the Group) reported a net attributable loss of EUR 5 million in Q1 2020, compared to a net attributable profit of EUR 430 million in Q1 2019. This was mainly driven by ex-ante provisions to cover the expected deterioration in economic conditions as a result of the Coronavirus Disease (COVID-19) and its impact on revenues from financial instruments at fair value. This was partly offset by strong core revenue growth and cost control. DBRS Morningstar expects the COVID-19 crisis to continue to impact the Bank’s profitability and asset quality in coming quarters.

The crisis has affected the Bank's cost of risk, which doubled YoY to EUR 141 million compared to EUR 69 million in Q1 2019. The impact of COVID-19 on the cost of risk was EUR 43 million, mainly due to provisions for expected losses. Despite this, the cost of risk at group level remained low at 27 bps compared to 12 bps in 2019, incorporating the future deterioration in economic conditions. Within this, provisions driven by the COVID-19 pandemic were equivalent to 10 bps. KBC´s NPL ratio stood at 3.3%, down 20 bps QoQ. Nonetheless, we expect to see asset quality deterioration in coming quarters. The Bank expects impairments for the full year 2020 to reach EUR 1.1 billion, under its base scenario (sharp drop in GDP of around 9% followed by a rebound of around 6% in the countries where the Group is present).

The Group's revenues deteriorated by 20.6% YoY to EUR 1.5 billion, mainly due to a EUR 385 million loss on financial instruments at fair value, as a result of the very challenging market conditions induced by the COVID-19 crisis. Nevertheless, this was partly offset by strong core revenue growth. Net Interest Income (NII) was up 6% YoY, driven by strong volume growth, lower funding costs, higher margins in Belgium, higher rates in the Czech Republic and the consolidation of ČMSS since June 2019. Net fees and commissions were up 5% YoY, thanks to strong business levels both in Asset Management and traditional banking activities. Despite lower gross earned premiums YoY, the performance in the insurance business remained good, with a combined ratio at 90%.

Operating expenses were up 3.2% YoY as a result of higher bank taxes and the integration costs of ČMSS. Excluding these, underlying operating expenses were down 0.5% YoY and the underlying cost-to-income ratio for the banking activities deteriorated to 69% from 58% in 2019. Nevertheless, the Group expects underlying operating expenses to decrease this year thanks to extra cost savings.

The Bank continued to report strong capital ratios, with a fully loaded CET1 ratio under the Danish compromise at 16.3% at end-March 2020, down 80 bps quarter-on-quarter (QoQ). This was mainly due to the EUR 3.3 billion increase in risk-weighted assets, of which EUR 1.5 billion resulting from the COVID-19 crisis. Nevertheless, this still provides the Bank with an ample cushion of around 830 bps over the revised regulatory requirements incorporating the announced ECB and National Bank of Belgium measures.

The full implications of the COVID-19 crisis for the medium to long-term will depend on the evolution of the outbreak, the length of the economic shutdown, as well as the transition phase of the recovery. DBRS Morningstar’s view is that the COVID-19 crisis will continue to impact KBC's profitability and asset quality in coming quarters. Nevertheless, DBRS Morningstar also takes into account the Group's strong and well-established and diversified franchise, its solid funding and liquidity profile and strong capital base. In addition, the Group's earnings profile should provide some room to maneuver through this period of crisis. We will continue to monitor the performance of KBC during this period of stress.