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
In the fourth quarter of 2010, Komerční banka took several steps in its effort to reinforce its benchmark status on the Czech banking market. It decided to acquire a new office building in Prague that will offer better working conditions to employees brought together from various locations in the city and improve the efficiency of its operations. KB Group rearranged its capacities in Slovakia so that it can focus on providing first-class service to its corporate clients there. Several projects were launched whose implementation in the coming periods will improve clients’ experience with KB, increase efficiency of processes, and capture new business opportunities.
The fourth quarter of 2010 confirmed the improvement in loan demand from businesses and entrepreneurs. The demand for mortgages also revived. The total volume of loans provided by KB Group as of the end of 2010 increased year on year by 3.5% to CZK 399.7 billion.
Year-on-year growth in the volume of mortgages to individuals reached 9.0%, bringing the total to CZK 109.3 billion. New sales of mortgages in 2010 increased by 14.5% in comparison with the previous year. At building society Modrá pyramida, the loan portfolio expanded by the same 9.0% to reach CZK 49.7 billion. In 2010, Modrá pyramida became the second largest building society according to volume of loans. For the sixth time in a row, the quality of Modrá pyramida’s products and services was recognised with the title ‘Building Society of the Year’. Reflecting uncertainty about jobs and the economic outlook still affecting the attitudes of consumers, the volume of consumer loans provided by KB and by the consumer finance company ESSOX decreased by 3.4% to CZK 28.3 billion.
The consolidated volume of deposits totalled CZK 538.1 billion, which is 2.5% lower compared to the end of 2009. The decline was driven mainly by the decrease in deposits from business clients, where signs of improvement were recorded only in the second part of the year. The solid growth of 5.6% in the volume of clients’ assets registered with Penzijní fond KB brought its total to CZK 28.8 billion. Deposits at the building society Modrá pyramida grew at a steady 2.9% pace to CZK 69.0 billion. In contrast, deposits from individuals at the Bank were stable at CZK 153.7 billion. Deposits of business clients at KB and KB Bratislava declined by 4.8% to CZK 281.1 billion.
Sales performance at Komerční pojišťovna was very successful, as the total insurance premiums written rose by 86.2% year on year to CZK 9.0 billion. From this total, premiums for life insurance amounted to CZK 8.7 billion. Data from the Czech Insurance Association confirm that in 2010 Komerční pojišťovna was the second largest insurance company on the Czech life insurance market, with a market share of 12.3% by premiums written.
As of the end of December 2010, the KB Group in its entirety was serving 2.5 million clients. The number of pension insurance participants at Penzijní fond KB crossed the half million threshold in the fourth quarter and reached 501,000. Standalone KB recorded 1,590,000 clients, of which 1,321,000 were individuals. The remaining 269,000 customers comprised entrepreneurs, businesses and corporations (including municipalities and associations). Modrá pyramida was serving 691,000 customers, and the services of ESSOX were being used by 316,000 active clients.
Komerční banka’s clients had at their disposal 395 banking branches, 677 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, also crossed an important milestone of 1 million and reached 1,003,000 at the end of the year. That represented 63% of all clients. Customers held 1,670,000 active payment cards, of which 226,000 were credit cards. The number of active credit cards issued by ESSOX exceeded 162,000, and consumer financing from ESSOX was available through the network of 3,200 merchants. Modrá pyramida’s customers had at their disposal 219 points of sale and 1,470 advisors.
KB prepared a new concept MojeOdměny of rewarding clients for their behaviour and activity that at one and the same time is convenient for the clients and brings additional valuable business volume to the Bank. As a component of the new concept, since January 2011 every client obtains one free withdrawal from a KB ATM for every payment made at a retailer using his or her payment card. Additional rewards will be introduced during 2011.
Komerční banka endeavours to make its services readily accessible to all clients. A new design of the www.kb.cz site made the web page easier to view and implemented a clear and consistent structure for the broad range of information presented there. At the same time, the upgraded website enabled better accessibility for visually handicapped and motion-impaired users.
In co-operation with Komerční pojišťovna, KB launched a new addition to the Vital Invest product range: the Zajištěný fond Forte 4 guaranteed fund. The fund offered clients an opportunity to share in the growth of equity and commodity markets while limiting loss in the case of their downturn.
FINANCIAL PERFORMANCE OF KB GROUP
Total net banking income for 2010 increased by 1.5% from 2009 to reach CZK 32,662 million. All the major components of income contributed to that growth.
In spite of the low interest rate environment and increased statutory contribution to the Deposit Insurance Fund, net interest income grew by a slight 0.9% to CZK 21,431 million. The gain was supported by the growth in loans and non-term deposits, and in September market interest rates began rising again. The average net interest margin in the whole of 2010 remained at 3.3%.
Growth in net income from fees and commissions by 2.5% to CZK 8,038 million was driven by dynamic sales of added-value products and services in the corporate clients segment. These included, among others, trade finance products, loan syndications, custody services and credit line commitments. In retail segments, the fee income decreased as clients increasingly took advantage of more advantageous account packages and direct banking channels. On the other hand, income from use of payment cards recorded solid growth and the rise in fees from cross-selling was very dynamic, especially as a result of Komerční pojišťovna’s excellent sales performance.
Net profit from financial operations increased by 2.4% to CZK 3,098, which was a positive result given the high comparative base from the first half of 2009. Investment banking revenues were underpinned by clients’ increased demand to hedge interest rate and foreign exchange risks, and the share of client business from investment banking in the overall income more or less returned to the level usual before the crisis.
Komerční banka’s operating efficiency was boosted further by optimisation and rigorous control of operating costs. In addition, the Bank recorded for 2010 extraordinary savings in the area of personnel costs. This related to the release of reserves for social and health insurance and for restructuring in the total amount of CZK 164 million. The line “Depreciation, impairment and disposal of fixed assets” was influenced by a CZK 71 million positive result from sales of unused buildings, although that amount was less than the CZK 122 million in 2009. Total reported operating costs declined by 4.3% year on year to CZK 12,942 million. Personnel costs were reduced by 5.6% to CZK 6,076 million, while the average number of employees decreased by 2.2% to 8,619. General administrative expenses were cut by 6.7% to CZK 5,242 million. Depreciation and disposals of fixed assets increased by 10.6% to CZK 1,624 million, mainly as a result of implementing new software.
Gross operating income rose in 2010 by 5.6% to CZK 19,720 million.
A reduction in the cost of risk, by 39.0% to CZK 3,100 million, was enabled by continuously improving risk management standards as well as by gradual improvement in the Czech Republic’s macroeconomic situation. The progress was less significant in retail segments, which were affected by a persisting high unemployment rate and subdued real estate market. The development in the corporate segment, on the other hand, confirmed that a solid performance by the export industries had contributed to stabilising and reviving activity in the broader economy. As a result of the aforementioned developments, the total cost of risk in terms relative to the average volume of loans and off balance sheet irrevocable commitments amounted to 55 basis points. That compares with 88 basis points in 2009. Nevertheless, KB is cognizant of a number of risks to the economic growth, including sovereign debt problems of some European countries, impacts of public budget austerity measures in the Czech Republic and abroad, and rising prices for commodities and food.
Income taxes rose by 8.6% to CZK 2,665 million.
KB Group’s net profit for 2010 reached CZK 13,410 million, which is 20.9% higher than in the previous year. From this amount, CZK 80 million was attributed to the minority interest holders and the profit attributable to the Bank’s shareholders was CZK 13,330 million (up 21.1% year on year).
The volume of KB Group’s total assets as of 31 December 2010 increased by 0.4% relative to the end of 2009 to CZK 698.0 billion.
Amounts due from banks declined by 14.5% to CZK 112.2 billion. The largest component of this item is represented by loans provided to central banks as part of reverse repo operations, which diminished by 25.4% to CZK 71.0 billion.
Financial assets at fair value through profit or loss increased by 39.1% to CZK 34.0 billion. The portfolio comprises proprietary trading positions of the Group.
Total net loans and advances increased by 3.3% to CZK 384.6 billion. The gross amount of client loans and advances grew by 3.5% to CZK 399.7 billion. The share of standard loans within that total represented 90.3% (CZK 360.9 billion), while the proportion of watch loans was 3.3% (CZK 13.0 billion) and loans under special review (substandard, doubtful, loss) comprised 6.5% of the portfolio with volume of CZK 25.8 billion. The volume of provisions created reached CZK 15.3 billion, which is 10.5% more than at the end of 2009.
The portfolio of securities available for sale increased by 2.1% to CZK 116.4 billion. The major part of this 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 1.1% to CZK 6.7 billion. That entire portfolio consists of bonds.
The net book value of tangible fixed assets diminished by 8.5% to CZK 7.1 billion, and intangible fixed assets grew by a slight 0.9% to CZK 3.8 billion. Goodwill, which primarily derives from the acquisition of Modrá Pyramida, remained at the same level of CZK 3.6 billion.
Total liabilities declined by 0.7% to CZK 621.9 billion. Amounts due to customers decreased by 2.5% to CZK 538.1 billion. The volume of outstanding securities issued was down by 4.1% to CZK 17.4 billion. The Group’s liquidity as measured by the ratio of net loans to deposits reached a strong 71.5%. The balance of subordinated debt remained unchanged at CZK 6.0 billion.
Shareholders’ equity rose by 10.6% to CZK 76.1 billion. The growth was driven by retained earnings from 2009, higher generation of net profit in 2010, and a positive change in fair value of hedging derivatives by CZK 1.5 billion. On the other hand, revaluation of the portfolio of securities available for sale had a negative value of CZK 1.2 billion. KB also paid out the dividend of CZK 6.5 billion in the second quarter of 2010.
Regulatory capital for the capital adequacy calculation reached CZK 52.4 billion as of the end of 2010. KB Group’s capital adequacy under Basel II standards reached a high level of 15.3%, while the core Tier 1 capital ratio climbed to 14.0%.
Return on average equity in 2010 reached 18.7% and return on average assets was 1.9%.