Belgian banking and insurance group KBC today reported a greater improvement than expected in third-quarter net profit due to a strong earnings recovery at its merchant banking unit.
KBC, which has received €7 billion in state aid to help it through the global financial crisis, said underlying net profit rose 15 per cent year-on-year to €631 million. A Reuters poll of 12 analysts had produced an average forecast of €418 million.
The Irish arm of its business contributed €68 million to the group's profit, after loan impairment of €101 million, Irish business contributes 68m to group profit. The company said 4.3 per cent of the loan portfolio had been restructured, and although conditions were worsening, the majority of its loan portfolio - 84 per cent - was considered to be low or medium risk.
Its commercial real estate development exposure was limited to 4 per cent of the portfolio, the company said.
The Belgian business performance fared slightly better than expected, but that of central and eastern Europe was worse because of additional loan provisions totalling €28 million for Russian corporations and consumer finance in Poland.
The principal outperformer was the merchant banking unit, which produced earnings of 281 million euros, more than double those of a year earlier and well above the average expectation of 51 million euros.
KBC said falling corporate loan provision charges helped the unit.
Britain's top two banks Barclays and HSBC signalled on Tuesday that bad debts may be past their peak, and strong investment banking underpinned profits at both.
Losses on bad debts have soared for banks around the world this year as unemployment rises and economies slow, replacing writedowns on toxic assets as the main worry.
KBC chief executive Jan Vanhevel said in a statement that volume trends remained sluggish for now, but business margins were resilient and charges for problem loans lower.
"The operating environment further gradually improved during the third quarter and leading indicators are signalling that we are past the bottom of the economic cycle," he said.
KBC provided no new details on its plans to restructure and sell a number of assets. It has said it will unveil its new strategy at the beginning of December.
KBC has submitted its plans to the European Commission, the European Union's executive arm. The group hopes to remain in banking and insurance in Belgium and emerging Europe, where it is the fifth-largest bank by assets.
"We believe that we have entered a final stage of our discussions with the EU and we remain confident about our business case," Mr Vanhevel said.
Two sources familiar with the situation said European Union regulators would next week approve the restructuring.
"The Commission's decision on KBC's restructuring plan is due on Wednesday," one of the sources told Reuters.
"The key message is that KBC has kept its bancassurance model. That is important in the current situation," the source said. Dutch bancassurer ING last month said it would spin off its insurance activities to sooth EU competition concerns after its bailout by the Dutch government, marking the lender's return to its retail savings bank roots.
KBC's overhaul agreed with the EU's executive Commission will be less drastic than that of ING, the source said.
"It will need to shrink its balance sheet by 20 to 25 per cent," the source said. The bank will sell its private banking unit KBL European Private Bankers, its domestic insurance unit Fidea and Belgian retail bank Centea.
"KBC's operations in the Czech Republic and Hungary may be partly listed. There are a number of alternative options to raise capital and this is one of them," the source said.