KBC Group hikes Q1 provisions over looming Ukraine war risks

KBC Group NV expects its 2022 credit costs to be higher than previously projected because of the economic impact of the war in Ukraine, CEO Johan Thijs said May 12 during an earnings presentation.

The Belgian bank's first-quarter profits fell to €458 million from €557 million a year earlier, and it booked higher net interest and net commission income over the same period. The group's first-quarter earnings beat analyst expectations.

KBC's stock was trading up 1.31% at €55.84 around noon on Euronext Brussels.

KBC set aside a €223 million provision over geopolitical and emerging risks directly linked to the Russian invasion of Ukraine.

The group expects the impact of the war on European economies to weigh on its financial performance in 2022, with operating costs exceeding its previous full-year target of €4 billion. Higher interest rates should support total income growth throughout the year, which will help KBC retain a positive cost-income ratio, the bank said.

The credit cost ratio will also surpass KBC's original target of 10 basis points as the group prepares for the impact of high energy prices, supply bottlenecks and planned interest rate hikes on client portfolios, Thijs said.

KBC has taken a "very conservative approach" by front-loading provisions for secondary risks related to the war, the CEO noted. "The most important thing is that, as we speak, the effect [of the war on group operations] is zero," Thijs said.

KBC has a negligible direct credit exposure to Russia of roughly €55 million. This mostly consists of commercial exposure to Russian banks, which cannot increase any further, according to the Belgian group.

The group has no subsidiaries in either Russia, Ukraine or Belarus and has no direct exposure to Russian sovereigns, according to its earnings report.

At €168 million, the bulk of the war-related provision is based on expected indirect effects on KBC's client portfolios. The group has estimated that exposure to clients that are vulnerable to higher commodity prices, future rate hikes and surging inflation could result in an earnings hit of €135 million.

A deep dive into counterparties with material exposure to Russia, Ukraine or Belarus shows another potential earnings hit of €33 million. These are essentially counterparties generating more than 20% of either their sales, their cost or their profit in those three markets.

KBC expects the Ukraine war to drag on for at least several more months but not to escalate, Thijs said.

The bank will continue to monitor the situation closely and will update its 2022 full-year guidance as well as its longer-term outlook for 2024 with the release of its second-quarter earnings, it said.