Comments on business and financial results
The published data are from unaudited consolidated results under IFRS (International Financial Reporting Standards).
BUSINESS PERFORMANCE OF KB GROUP
Komerční banka has recorded signs of reviving loan demand from businesses and entrepreneurs in the third quarter, and also the demand for mortgages was sound. The total volume of loans provided by KB Group as at the end of September 2010 increased by 1.7% to CZK 389.0 billion compared to the same date in 2009. Growth in lending was at around 2.5% after adjusting for the effects of writing off from the Bank's balance sheet long overdue non-performing loans fully covered by provisions in the amounts of CZK 1.8 billion in November 2009, CZK 1.2 billion in May 2010, and CZK 0.2 billion in August 2010.
The volume of mortgages to individuals expanded by 8.4% to reach CZK 106.4 billion. As a result of the usually less active holiday period, mortgage sales in the third quarter were slightly behind those from the second quarter of 2010, but quarterly sales year on year were much better. The volume of new mortgages for the first nine months of 2010 also increased slightly. The loan portfolio at Modrá pyramida, which mainly finances housing needs of its customers, grew by 10.8% year on year to CZK 48.7 billion. Partly due to the write-off of old loan receivables, the volume of consumer loans provided by KB and by the consumer finance company ESSOX decreased by 6.6% to CZK 28.3 billion. Adjusted for impact of the write-off, the decline was approximately 2.9%.
Despite recorded growth in the third quarter, the overall volume of business loans decreased by 1.2% in a year-on-year comparison to CZK 203.4 billion. The total volume of loans to small businesses declined by 1.8% to CZK 25.0 billion. Loans to corporations (provided by Komerční banka and Komerční banka Bratislava) declined by 0.8% to CZK 176.5 billion.
The consolidated volume of deposits increased by 2.0% year on year to CZK 535.3 billion. The most dynamic growth in deposits was recorded at the building society Modrá pyramida, representing an increase of 7.1% to CZK 69.0 billion. Clients’ pension assets at Penzijní fond KB increased by 5.3% to CZK 28.2 billion. Deposits of business clients at KB and KB Bratislava grew by 1.4% to CZK 280.7 billion. In contrast, deposits from individuals at KB slightly decreased by 1.6% to CZK 151.3 billion.
Total insurance premiums written by Komerční pojišťovna rose by 121.0% year on year to CZK 7.2 billion. From this total, premiums for life insurance amounted to CZK 7.0 billion. With a market share of 13.9%, KP is the second largest insurance company on the Czech life insurance market (according to data from the Czech Insurance Association).
The entire KB Group served 2.7 million clients. Standalone KB registered 1,595,000 clients, of which 1,324,000 were individuals. The remaining 271,000 customers comprised entrepreneurs, businesses and corporations (including municipalities and associations). Modrá pyramida was serving 701,000 customers and the number of pension insurance participants at Penzijní fond KB was 498,000. The services of ESSOX were used by 320,000 customers.
As at the end of September 2010, the clients had at their disposal 393 Komerční banka branches, 675 ATMs, and full-featured direct banking channels supported by two call centres. The number of clients using at least one direct banking channel, such as internet or telephone banking, came near one million - 996 000 customers represented 62% of the total number. Customers held 1,672,000 active payment cards, of which 229,000 were credit cards. The number of active credit cards issued by ESSOX exceeded 159,000, and consumer financing at ESSOX was available through its network of 3,300 merchants. Modrá pyramida’s customers had at their disposal 255points of sale and 1,434 advisors.
The most important innovation introduced in the third quarter, MojeOdměny, is a new concept to reward clients for their behaviour and activity that is at one and the same time convenient for the clients and brings additional valuable business volume for the Bank. As the first component since January 2011, every client will obtain one free withdrawal from a KB ATM for every payment made at a retailer using his or her payment card. Thereby, clients may readily obtain all withdrawals free of charge. Additional rewards will follow during 2011.
Komerční banka has expanded its offer of consumer loans especially for the more affluent clients. The new Premium Loan is an unsecured any-purpose cash loan of up to CZK 2.5 million. Moreover, it comes with an attractive interest rate. The loan can be repaid early at any time and with no penalties while clients receive payment protection insurance for the loan free of charge. In addition, KB now offers an option to make an extraordinary repayment of up to 20% of the initial amount of the Flexibilní hypotéka mortgage free of charge every 12 months. Following upon the great success of the Zajištěný fond Forte 3, KB in July came up with a new guaranteed fund KB Akcent 2. The new fund seeks the best growth potential among stocks in Europe, Asia, America and commodities.
Especially corporate clients appreciate an extension of foreign payments services since July. KB can execute standard payment orders in 160 countries of the world in 110 currencies.
FINANCIAL PERFORMANCE OF KB GROUP
Total net banking income for the first nine months of 2010 decreased by 0.6% year on year to CZK 24,296 million. All the major components of income were stronger by comparison, the exception being profit from financial operations, which had reached an extraordinary value at the beginning of last year.
Net interest income was adversely affected by the continued low level of market interest rates and also by the increase in the statutory contribution to the Deposit Insurance Fund. Therefore, it grew by just a slight 0.9% to CZK 15,982 million year on year even despite the faster growth in loans and deposits. Net interest margin stood at 3.3% comparing to the previous period at 3.4%.
Net income from fees and commissions was supported by the reviving economic activity and increased by 2.4% to CZK 5,943 million. The main contributor to the growth was a gain in income from loan fees in the corporate segment, reflecting larger demand for bank guarantees and fees from syndicated loans. Increased use of payment cards had a positive effect, as did the increasing sales of life insurance at Komerční pojišťovna. On the contrary, account maintenance fees dropped by 7% and due to lower customer activity in the first months of the year the income from transaction fees was lower by 1%.
Net profit from financial operations for the first three quarters declined by 16.0% to CZK 2,301 million. In the second half of the period, however, the Bank recorded a year-on-year increase supported by the increasing demand from businesses for financial risk hedging associated with the improved outlook for foreign trade.
Komerční banka has reached an extraordinary level of operational efficiency. Rigorous control of operating costs has led to a further reduction in total operating costs by 4.5% year on year to CZK 9,487 million. Personnel costs declined by 4.9% to CZK 4,584 million, while the average number of employees decreased by 2.5% to 8,624. Optimisation of administrative expenses has allowed these to decline by 6.7% to CZK 3,737 million. As a result of implementing new software, depreciation and amortisation of fixed assets increased by 5.0% to CZK 1,166 million.
Gross operating income rose in the first three quarters of 2010 compared to the same period of last year by 2.1% to CZK 14,809 million.
The slight improvement in the macroeconomic situation, together with the continuous fine-tuning of risk management standards at KB has led to a reduction in the cost of risk. Net creation of provisions decreased by a significant 38.4% to CZK 2,401 million. Improvement in the corporate segment supported by revived dynamics in export and industrial production was evident. However, improvement of the risk profile in loans to individuals remains fragile. The total cost of risk in terms relative to the average volume of loans and off balance sheet irrevocable commitments amounted to 56 basis points, which compares with 91 basis points in the first nine months of 2009.
Income tax increased by 8.6% to CZK 1,980 million.
KB Group’s net profit for the first three quarters of 2010 reached CZK 10,025 million, which is 17.8% higher than in the previous year. From this amount, CZK 62 million is attributed to the minority interest holders and the profit attributable to the Bank’s shareholders was CZK 9,963 million (up 18.1% year on year).
The comparison period in the balance sheet under IFRS is the end of the previous year. Therefore, the following text provides a comparison with the end of 2009, unless otherwise indicated.
The volume of KB Group’s total assets as of 30 September 2010 increased by 0.3% relative to the end of 2009 to CZK 697.4 billion.
Amounts due from banks declined by 26.4% to CZK 96.7 billion. The largest component of this item is represented by loans provided to central banks as part of reverse repo operations, which diminished by 42.8% to CZK 54.5 billion.
Financial assets at fair value through profit or loss increased by 72.9% to CZK 42.3 billion. The portfolio comprises proprietary trading positions of the Group.
Total net loans and advances increased by 0.6% to CZK 374.6 billion. The gross amount of client loans and advances increased by a slight 0.8% to CZK 389.0 billion. The share of standard loans within that total represented 89.8% (CZK 349.2 billion), while the proportion of watch loans was 3.7% (CZK 14.5 billion) and loans under special review (substandard, doubtful, loss) comprised 6.5% of the portfolio with volume of CZK 25.2 billion. The volume of provisions created reached CZK 14.5 billion, which is 5.1% greater than at year’s end.
The portfolio of securities available for sale increased by 4.9% to CZK 119.7 billion, the major part of which portfolio consists of debt securities. The book value of shares and participation securities in the portfolio totalled just CZK 0.7 billion.
The volume of securities in the held to maturity portfolio decreased by 2.3% to CZK 6.6 billion. That entire portfolio consists of bonds.
The net book value of tangible fixed assets diminished by 6.4% to CZK 7.2 billion, and intangible fixed assets grew by a slight 0.5% to CZK 3.7 billion. Total goodwill, which primarily derives from the acquisition of Modrá Pyramida, remained at the same level of CZK 3.6 billion.
Total liabilities declined by 1.1% to CZK 619.5 billion. Reflecting seasonality, amounts due to customers decreased by 3.0% to CZK 535.3 billion. The volume of securities issued rose by a slight 0.6% to CZK 18.3 billion. The Group’s liquidity as measured by the ratio of net loans to deposits reached a strong 70.0%. The balance of the subordinated debt (excluding the accrued interest) remained unchanged at CZK 6.0 billion.
Shareholders’ equity grew by 13.3% to CZK 78.0 billion through 2010’s first nine months. The main reason for the increase was the net profit creation and also growth in the book value of hedging derivatives by CZK 4.8 billion. Revaluation of the portfolio of securities available for sale reached a positive value of CZK 0.7 billion. On the other hand, shareholders’ equity decreased due to the dividend payment of CZK 6.5 billion in the second quarter.
Regulatory capital for the capital adequacy calculation reached CZK 52.5 billion as at the end of September 2010. KB Group’s capital adequacy under Basel II standards reached a high level of 14.9%, while the core Tier 1 capital ratio climbed to 13.6%.
Return on average equity reached 18.4% for the first nine months of 2010 and return on average assets was 1.9%.