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KBC rides currency wave to 'exceptionally strong' Q2

KBC Group NV's profit surge in the second quarter was in large part attributable to currency trading on its own account and writing back loan loss provisions in key markets, CEO Johan Thijs told analysts Aug. 10.

KBC reported second-quarter profit after tax of €855 million, a result Thijs characterized as "exceptionally strong" and up from €721 million in the same period of 2016. First-half profit of €1.49 billion was up 33% on the previous year, with return on equity standing at 20% for the six months.

"We have been further working and arbitraging on the difference between the euro and the dollar. So we have been playing on that [card] and we have been taking positions in that respect to further boost our total profit," Thijs said, adding that gains from issuing certificates of deposits in dollars and swapping them into euros amounted to €15 million in each of the two quarters of 2017.

So-called "dealing room" activities in relation to the unpegging of the Czech koruna from the euro in April helped the bank earn another €73 million in the second quarter, Thijs said. "In the Cezch Republic the impact of the de-pegging of the Czech koruna and the positions which we have taken have played a significant role. We have benefited extremely well from this event."

An uptick in the economies of the countries where KBC is active — most notably Ireland, where the company struggled for years — led to an improvement in asset quality and a consequent write-back of provisions. The bank released €87 million in Ireland from reserves against borrowers who have started to repay their outstanding loans after a period of default, and from recovering housing prices that allowed it to increase the estimated value of repossessed homes.

"Ireland as a country is performing quite well," said Thijs. "We do see that reflected in the number of customers which were not performing in the past and which now are returning to performing."

In Belgium KBC wrote back €4 million and in Hungary €9 million.

At group level, write-backs totaled €78 million in the second quarter, although Thijs warned that this level of reversals is "not sustainable" and advised the audience to treat the figure as a one-off.

Meanwhile, taxes on corporate profits in Belgium, the group's home country, are set to go down to 29% in 2019 and 25% in 2020 from the current level of 34%. Although this will eventually benefit KBC's bottom line, in the short run the company suffers because of the effect on the value of deferred tax assets.

The firm expects the legal change to reduce fourth-quarter income by €230 million and boost its common equity Tier 1 ratio by about 20 basis points, owing among other things to a reduction of risk-weighted assets because of the decrease in outstanding deferred tax assets.

"The €230 million will be obviously recuperated over time as a function of profitability and as of 2018 we will stand to benefit from the lower corporate tax rate," Thijs said.

KBC had a fully loaded CET1 ratio of 15.7% as of June 30, including the Danish compromise that affects the treatment of insurance-related assets.