arkadin managed calls - belfius · 2014. 3. 21. · 26-28 hammersmith grove / london w6 7pe tel:...
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Arkadin Managed Calls
Event: Investors’ Conference Call Regarding The 2013 Year Results
Date: 13 March 2014
Speakers: Johan Vankelecom - Chief Financial Officer
Call Duration: 01:12:08
Conference Ref No: Not known
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Thursday, 13 March 2014
OPERATOR: Ladies and gentlemen, welcome to the Investors’ Conference Call regarding the
2013 year results of Belfius. I am pleased to present Johan Vankelecom, Chief
Financial Officer. For the first part of this call let me remind you that all participants
are in listen-only mode and afterwards there will be a question and answer session.
I would now like to hand over to Mr Johan Vankelecom. Sir, please begin.
JOHAN VANKELECOM: Thank you very much. Welcome to everybody around the call. A very warm
welcome from my side. I am very happy to hear that again a lot of people are
interested in the good performance of Belfius in 2013. You have received the
presentation, everybody that is normally present at the call, so I will browse you
through this presentation. It’s the same format as we used to present already a
couple of quarters and a couple of semesters before, since the separation from the
Dexia Group. So, as it is the same format, you will be able to clearly make the
comparison with former presentations that we have made in the past.
I will start on slide number 2 with the highlights for this year. First of all, of course,
I’m very pleased to announce to you that we had a strong performance in the year
with Belfius with a net income group share of €445 million. That net income is partly
thanks to the bank with €230 million and partly thanks to Belfius Insurance - our
insurance company - that contributed in that result €215 million.
In the next part of our presentation we will go also a little bit more into detail, in
terms of the net result of our commercial activities - of our commercial franchise as
we call it - where we will show you that we have a net result for the year 2013 of
€508 million and that the legacy is impacting the accounts of 2013 as legacy
activities, the activities we manage in runoff and in practical de-risking. Those
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activities are impacting our results for €63 million negative, and so we come to the
total consolidated net income group share of €445 million.
We have also totally executed our role in the Belgium economy. We have since
2012 invested €20 billion in that economy. Investments meaning financing of the
investments of our clients, of projects of our clients, and that is for actors that are
active in the Belgium economy.
A third highlight and very important point is of course the solid solvency and the
solid equity position of Belfius. That was a clear focus of management. Since we
have been separated from the Belfius Group we clearly said that we were going to
reinforce our solvency situation and that we were going to prepare, in a very strict
manner, the implementation of Basel III and so we are very proud to announce our
solvency situation, as at the end of 2013, with a core tier 1 ratio under the former
Basel II format of 15.4%, and then with a phased in Basel III capital requirements
regulation, government equity ratio of 13.5% as at 1 January 2014. Meaning we are
already applying the 20% deductions as required by the phasing in of Basel III. And
then under the fully fledged formats, meaning we implement all the Basel III rules
that will be implemented as of 2019. We implement them on a pro forma basis on
the accounts of 2013. And then we have a common equity tier 1 ratio of 11.7% at
the end of 2013 pro forma. The same goes for our insurance company. There we
have also further reinforced the solvency situation and there we have a Solvency II
ratio at the end of 2013 of 223%. Even though Solvency II is not yet applicable for
the insurance companies, we think it will become applicable beginning in 2016, but
it is already a very important management indicator that shows the strong solvency
situation of our insurance company.
The fourth highlight of 2013 is that we have continued our tactical de-risking and
that, at the end of 2013, we can say that tactical de-risking results in a very sound
track record and we have demonstrated the track record in that de-risking. In total
in our investment portfolio, since December 2011, we have done tactical de-risking
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for an amount of €7.5 billion of nominal bonds that have been de-risked, of which
within that amount we have €3.4 billion of tactical de-risking executed in 2013.
Then an important element of course for Belfius and for its shareholders, the net
asset value, meaning the total shareholders’ equity, the accounting element that we
report here and that we have already reported some time before. The net asset
value of Belfius in the consolidated balance sheet has been doubled to €6.6 billion,
starting from an amount of €3.3 billion at the end of 2011 just after the acquisition by
the Belgium state of Belfius from the Dexia Group. So we have doubled that net
asset value over the last two years.
A small word on slide 3 on our ambitions for the coming years because, as you can
see, the sound position that we have created at the end of 2013 creates the
opportunity to move forward with a lot of ambitions, I would say, to focus even more
than before on the development of our commercial franchise. And so we have
defined some key indicators that will be monitored going forwards, some financial
key indicators and some key indicators linked to ambitions that we will express
towards the global society in Belgium. First of all, the financial indicators. A net
income group share, we target an amount above €500 million. I will come back to
that later on during the presentation. We also target a Basel III common equity
ration phased in to stay above 13% during the coming years. We also target to
have a Solvency II ratio within our insurance company that is between a range of
160% and 200%. We also have a very clear change programme that has been set
up in order to substantially improve our cost income ratio in the coming years, and
cost income ratio is clearly a ratio. It is both on the income side and on the cost
side and then, last but not least, we want to further create some shareholder value
like we have done in the last two years.
In terms of ambitions towards the society, we of course continue to play our role in
the Belgium economy and, as we have done in the past two years, we will continue
to invest the savings that we collect within the Belgium society. We will continue to
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invest them also in the Belgium economy over the next three years and at the same
pace, so approximately €10 billion each year. And then a clear ambition that we
have in order to support our commercial activities, in order to support the results
that we want to make out of those commercial activities, is that we want to target a
customer satisfaction in different segments where Belfius is active in customer
satisfaction above 95%. That is something that is more than only marketing but it is
something that we will monitor, and we will monitor that normally within our
segments every month, and it is something wich will be in the DNA of everybody
within Belfius.
Slide 4 is an overview of the different teams that we will discuss. Like I have said,
we have kept the same format as before. We will talk about our commercial
activities, then we will show you some details about the financials and then we will
talk about our risk profile that was a focus at the beginning of the journey with
Belfius which is now a very sound starting base for the coming years. And then we
will also focus a little bit on where we are in our diversification strategy, in terms of
collection of institutional funding.
First of all, I am always pleased to start with commercial activities because that
clearly on slide 6 shows that we have a stable and up and running franchise. The
change of the brand name into Belfius was very important for that, and it already
shows up in the figures. First of all, in our retail and commercial banking activity, at
the left-hand side of the slide you see outstanding savings and investments. What
we call assets under management that are put under management by our retail and
commercial banking clients, both on the balance sheet of the bank and on the off
balance sheet in terms of investments, into mutual funds, into equity, into corporate
bonds, into insurance products, branch 21 and branch 23 or branch 44. That is the
scope of that slide, and that clearly shows that we are increasing our franchise in
terms of assets under management within the retail and commercial banking
customer base. We are at the end of 2013 at €93.7 billion. We have a slight
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decrease in the on balance sheet and that is of course due to the fact that in
Belgium we had a slight pickup in consumption, especially in the second half of
2013. And then also the low interest rate environments, combined with some higher
tax rates on some on balance sheet products for the client, that resulted in less
appetite for those products and the client is also looking for yields, a little bit more
yield than what the low interest rate environment is promising. That is why they go
more to off balance sheet products, like mutual funds or equity or corporate bonds
issued by some entities, and that is why our off balance sheet is increasing in a nice
way and that is creating a sound basis for a fee income for the bank, which is in a
low interest environment. Always a very good diversification that we have into our
P&L.
In terms of outstanding loans, I will come back to that later on. We have decreased
our balance sheet in an important way the last two years, but we did not do the
same in our commercial balance sheet. Our commercial balance sheet has been
kept safe from that de-risking, from that tactical de-risking and from that runoff
management in our total balance sheet, and our commercial balance sheet has not
decreased at all during that period. So the outstanding loans also in retail and
commercial banking activities have remained approximately stable. Perhaps one
additional point that is worthy to note is that within that segment we have had the
largest increase in savings accounts during the year 2013 in the Belgium market.
We had within that segment an increase of €1.9 billion that was deposited in
savings accounts, and that was the largest increase in the Belgium banking market
in 2013.
The second commercial activity, public and wholesale banking, there we have a
little bit the same statistics. We have assets under management, savings and
investments, and there we have also then the asset side of the balance sheet, the
loans and the commitments that we give to these customers. I think everybody is
aware that we are the preferred partner of the public and social profit sector in
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Belgium. We have a tremendous market share in those segments, and we have a
very good client intimacy and we know very well their needs and we know very well
their legal framework and that’s why we have such a good position within that
segment.
Total assets under management stood at €26 billion at the end of the year. It is a
little bit lower than what was the case end 2012, but that is a very temporary effect.
At he end of the yea . we had some federal social security related clients that
withdrew some money for some days, and that is linked to the management of the
debt of the Belgium state and that is money -- that is cash deposited- that already
came back in the first week of January. That is why I have shown on the same
graph the situation at the end of January 2014 to demonstrate to you that it was
only a very temporary effect, the decrease in balance sheet deposits at the end of
2013 for some days.
In terms of outstanding loans in public and social banking, we have further
increased a bit while the outstandings in the corporate segment decreased and that
is mainly due to lower market demand. I think it is a little bit the same everywhere.
In Belgium also the corporates are tapping into other funding sources for funding
their low level of investments that they are doing today. For example, if they have
cash on their own accounts then they are inclined to use that cash first instead of
asking for loans of working capital to the banks. That said it is still amazing to see
that our new production in loans, long term loans, for the corporate segment in 2013
was €1.6 billion which is approximately double the production that we did in 2012.
And I can assure you that we don’t do that with a decrease of the margins. We do
that together with a sound commercial margin that we get on those long term loans.
So meaning that the decrease that we have on the on balance sheet loans given to
the corporate segment is more in the short term sector of those loans, and it is also
due to the fact that in 2012 the new production of long term loans was rather
subdued and has picked up since then. In 2013 we are double the amount.
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In terms of off balance sheet commitments those who have been on these
conference calls for some time now know that we have a continuous clean up of
those off balance sheet commitments. Where the client does not have value for
those off balance sheet commitments, and those off balance sheet commitments do
not have value for the bank, there is a win/win to clean up those off balance sheet
commitments. And so we are at the end of 2013 at €16.3 billion in off balance sheet
commitments to the public and wholesale banking segment. I think we are a little bit
at the end of that clean up exercise for the coming quarters for the coming years.
The third commercial activity - I am on slide 8 now - is our insurance business. First
of all, I want to say that the insurance business these days, especially the life
insurance business, is done in a rather difficult macroeconomic environment,
because of the low interest rates and because of the higher tax that people have to
pay on life insurance premiums that they pay and that they want to invest. That
means that people are looking for other products, so people are looking for other
ways with higher yields. That is driving a little bit the decrease of the gross written
premiums in life insurance contracts also for Belfius Insurance, which is in line with
the market in Belgium. So the life insurance written premiums were 18% lower
compared to the ones in 2012.
It is worthwhile to note that we have launched a new product with Belfius in the
second half of 2013, which is called Branch 44 life insurance product, which is a mix
between a Branch 21, which gives some guaranteed yield, and a Branch 23 where
the investment risk is taken by the client. 21 plus 23 makes 44. That is why we call
it Branch 44 and it has been a great success in the Belgium markets within Belfius.
We have a dollar production in 2013 of €580 million in that new Branch 44 product.
In the non-life business there we have a nice increase of non-life insurance
premiums more or less in line with the Belgium market, with an increase of
premiums written of 2.5% compared to 2012. It is worthwhile to note that in terms
of capital allocation our strategy and the tendency of the client appetite, which is
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more tilted towards Branch 23 and Branch 44, is in terms of capital need and capital
allocation, a good thing because Branch 21 and Branch 26 products require a little
bit more capital to be set aside by our insurance company compared to branch 23.
And so that strategy and the tendency within the client appetite is already showing
up a little bit for the first time in our reserves at the end of 2013. The technical
reserves, insurance reserves are increasing for Branch 23 where they are
decreasing a little bit for Branch 21 and Branch 26 products.
Let’s go now to some financials, slide number 10. I have told you that we were
going to tell you a little bit more on what in our result is stemming from the true
commercial activities and what is then still the weight of our side of our legacy
business. This is shown on slide number 10, where for 2013 you can see our
commercial activities for the total franchise of Belfius, meaning the retail and
commercial banking, the public and wholesale banking and also our insurance
activities, have had a good result for 2013 with €508 million of net result, which is an
increase of 64% compared to the same amount -- to the same indicator in 2012,
which was at the level of €310 million.
Just a small reminder, we have made a pro forma of the 2012 accounts because of
the fact that the IAS19 accounting norm has been changed at the beginning of 2013
and we had published our results of course based on the IAS19 norm that was
applicable in 2012. Those results for Belfius at the consolidated level were €415
million and the pro forma that we made for the change in the IAS19 norm led to a
pro forma result for 2012 of €421 million for Belfius consolidated.
So, starting from €508 million for the commercial franchise, where does that nice
increase come from? Well it is mentioned on the slides. Like I have said, our
clients are more tilted towards off balance sheet products and that is creating a nice
increase of fee income especially at the bank level. Then we have a strong
financial performance of our insurance business. I will come back to that too. Of
course we have already launched last year a very strict cost control programme and
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that is bearing its first fruits in 2013 already. We will see some more benefits from
that cost control programme in the coming years. There are of course also some
one-off benefits that pop up already in our accounts 2013 according to some
accounting norms, but clearly our cost control programme is already bearing some
first fruits in our commercial net income. Then of course we have a cost of risk also
in our commercial franchise which is standard for banking business, but there too
we have rather low impairment charges in our business lines compared to historical
norms. That also leads to a very good net result in our commercial activities.
On the side activities, meaning everything that we have inherited from the Dexia
times and that we manage in runoff and in tactical de-risking, the impact of the side
activities has been well controlled, has been well limited to approximately €63
million of loss. But together we arrive at €445 million of net income for Belfius
Consolidated. Why do we have a loss in our side business in 2013? Well, we still
do some tactical de-risking and some tactical de-risking on some bonds that are in
our balance sheet. On the sale of those bonds we had some losses but we can
recuperate some provisions, some reserves that we have historically put aside in
the past also and that mitigates, of course, those losses. And secondly, that is also
because of the fact that we have to finance that portfolio and the funding costs to
finance that portfolio is analytically here, between side and franchise, a little bit
higher than the margin that we get on that bond portfolio. That leads to the loss that
we have to book on that side business in 2013. In 2012 it was a positive
contribution from the side business, mainly due to the fact that we have done a
large liability management exercise in 2012. That generated a big profit in 2012
that we only partially used for de-risking purposes, and another part has been used
to further reinforce the solvency situation of Belfius.
Okay, then the next slide some more details for those who want to have some more
aligns in the profit and loss in the statement of income and the consolidated
accounts of Belfius. That is slide 11. So these really are the consolidated figures
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for the bank and Belfius Insurance, and not only on the commercial franchise
activities but also including the side activities. So let’s first start with the income. In
the income we see an important decrease from €2.5 billion to €1.8 billion. We will
see later on in the presentation that it is totally coming from the side activities. It’s
not coming from the commercial franchise activities. And why is that? Of course, if
we do some tactical de-risking our balance sheet decreases and so the volume on
which we earn net interest income, for example, is decreasing. We are
continuously improving our liquidity profile of the bank. Improving the liquidity
profile is done at a certain cost and thirdly there is also an impact from the low
interest rate environments of course. But the underlying interest margin in our
commercial activities, in our commercial book, they are steadily increasing, steadily
improving, and that is the very good news of things.
In terms of net fee and commission income, we have a nice increase. As I already
explained, the clients are more interested in off balance sheet investments. We
have also a nice growth in mandates for private banking clients. We have had a
growth of €1.2 billion in mandates for private banking clients in 2013, which is also a
very good thing that underpins the net fee and commission income. And then the
net income on investments is still positive. Why? Well there, for example, we have
booked in that line the profit that we have made on the repurchase of the profit
sharing certificates that we have done at the beginning of this year, which was a
capital gain of €61 million in the first half of 2013.
In 2012 there you see a very important amount and, as explained already, that is
mainly due to the liability management transaction that we have done in 2012.
Operating expenses are very important to underline, €1.6 billion approximately in
2012. They have decreased to €1.4 billion approximately in 2013, which is a
decrease of €160 million, a decrease of 10%, which is a tremendous effort within
Belfius especially within Belfius Bank. That is of course thanks to the cost reduction
plan of the bank that I have already commented and that has an impact on all sorts
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of costs. It has an impact on the commission cost that we pay to our distribution
channels. It has an impact of course on the personnel costs, in terms of salaries
that we pay. Each member of the staff of Belfius has contributed to that. It stems
from the change that we have done in the pension plans. We changed from defined
benefit to defined contribution pension plans for the future, meaning that on that
front there is also an important upfront one-off impact from that change due to the
accounting methods IAS19. So it’s also stemming from general administrative
expenses that have decreased, so it’s a contribution in all expense lines for debts,
An important decrease in expenses.
And then further down the line we have the cost of risk, and there you see a positive
contribution of the cost of risk. I have already said that the commercial franchise
has a rather low cost of risk in 2013. Still it’s a negative figure for the commercial
franchise and the positive figure for the cost of risk is stemming from what I have
said earlier on the tactical de-risking. When we de-risk some bonds we have a loss
in the income line on the sale of that bond but we have a reversal of historically put
aside provisions reserves for those bonds, and that translates into a positive cost of
risk line in total for the Belfius Group of €109 million in 2013. And then at the end
we arrive at the €445 million net income group share.
On the balance sheet side, slide 12, there I demonstrate that we have done a
tremendous tactical de-risking effort and it’s also shown in the decrease of the size
of the balance sheets of Befius, so Belfius consolidated, including our insurance
company, where we started at the end of September 2011approximately at the
moment of the acquisition by the Belgium Federal State of Belfius from Dexia. We
started at €245 billion. At the end of 2013 we stand at the balance sheet side of
€183 million, and again this without impediment to the commercial balance sheet
which has been rather stable throughout the period. So the total balance sheet
decreased further, thanks to our tactical de-risking, thanks to the management of
our runoff of the side portfolio, mainly stemming from reduced funding that we give
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to Dexia entities. We will come back to that later on. The de-risking that we have
done in the legacy portfolios and also we are a little bit assisted - helped - by the
impact of interest rate movements, which have moved up between end of 2012 and
end 2013,I think on the ten-year swap rate ,between those two end of year periods,
it was -- on the ten-year swap rate, it was approximately a 40 basis point difference.
That translates into a decrease of the fair values of derivatives on our balance sheet
and also a decrease of the collateral to post and the collateral receipts on our
balance sheet, so twice an impact on the decrease of our balance sheet.
Then the net asset value, as I have said it’s an accounting figure. It’s a total
shareholders’ equity that we show there. We started at the end of September 2011
at a net asset value of €3.9 billion. We went through a dip at the end of 2011 and
that was at the height of the crisis, especially the Greek crisis, where we stood then
at that time at €3.3 billion of net asset value, and then the weigh up started. At the
end of December 2013 we are at €6.6 billion of net asset value. And why did we
achieve that important increase in net asset value? Well mainly two elements are
the reason for that. First of all, in 2012 and 2013 we made a nice profit and
accumulated profit is approximately €900 million - it is €866 million to be precise -
during those two years and we did not pay any dividend on those profits, so that has
been included in the reserves of Belfius. The second important element, in that net
asset value we also include accounting-wise the unrealised net losses that are
reflected in the other comprehensive income reserve, and those unrealised net
losses have improved tremendously thanks to de-risking of course, thanks to
maturing of some bonds that were formerly included but also thanks to positive
market evolutions where the credit spreads have decreased within important
amounts over that period. At the end of 2011 we had unrealised net losses of €3.3
billion included in that net asset value of 3.3. At the end of 2013 we are a little bit
below €900 million of unrealised net losses included in that €6.6 billion of net asset
value.
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Slide 13 is the detail on the commercial franchise net results. As I said before, the
income did not increase in these parts of the results. You see there an increase in
the income. That is thanks to steadily improving interest margins - as I have
already said - on the commercial books, an increase in the fee income thanks to
client interest in off balance sheet products and the nice offer that we have in those
products. It is also thanks to some capital gains that we have in group center life,
for example. I talked about the profit shares and the €61 million of capital gains that
we made on the buyback of those profit shares. That on the other hand has been
partially offset by the higher costs that we have to book on banking levies. Also in
Belgium the higher cost for deposit guarantee system, the higher costs for the
subscription taxes compared to before, so that is of course offsetting the positive
evolution in the income. And then we did some additional CVA, credit value
adjustment provisions on non-collateralised derivatives that we have with some
customers in our commercial franchise, especially in the public and the wholesale
banking segments where it is common practice to have derivatives which, for the
customer side, do not have to be collateralised. And we have done some
refinement on the calculation of those CVA provisions.
Expenses have decreased in line with the bank-wide cost control programme. Of
course, in our commercial franchise we have also the benefit of the cost control
programme. The cost of risk - as I have said - is in line with 2012 and is a little bit
below what we could expect for a banking business with the size of Belfius. So we
have a cost of risk of €58 million. Meaning, well, that we have in our books
commercial assets, commercial activities, activities which are well controlled in
terms of risk management. So, in total, we achieve a net income group share for
the commercial franchise of €508 million. In that amount, and in the amount of
€445 million under consolidated net income for Belfius on slide 14 you have the
contribution of our insurance business - Belfius Insurance - where we have a
contribution for 2013 of €215 million. You see that is already importantly higher
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than the contribution in 2012, meaning that our integrated bank insurance approach
is already bearing its fruits. Also, of course, one should note that in 2012 we have
done an important asset and liability management reshuffling within our insurance
company where we have sold off some bonds, portfolios, some assets, that were
considered having a high risk profile. And with the cash we invested more in the
Belgium economy especially in Belgium government debt on one side, within loans
given to the public sector and also in mortgages within the retail and commercial
banking sector in Belgium. That is leading to a very sound financial situation for our
insurance company and that is creating that sound position as of 2013, and as I can
expect in the coming years also. You see that in the middle of the slide you have
the diversified asset allocation, and so if you compare that asset allocation with the
asset allocation we had before mid-2012 you will see it is an important difference in
terms of asset allocation of the reserves of our insurance company.
The financial return has not been lowered that much because of that asset and
liability management reshuffling. The financial return on those outstanding
investments for the life insurance business is still above 4%. That is clearly
showing the sound financial margin that we are making in our insurance company
compared to the guaranteed interest rates that we have to give to the clients on
those life insurance products.
It is important to note also that we have a very important cost control programme on
the bank side within Belfius and it is already showing its first results. On the
insurance business, Belfius Insurance is already the most efficient insurance
company in the Belgian market. That is shown with some key ratios that we show
on the slides with costs on outstanding life reserves. The costs on premium in the
non-life business and the economic combined ratio all are rather well positioned and
show that Belfius Insurance is already the most efficient insurer in the Belgian
market, and that combined with a very high customer satisfaction. Customer
satisfaction targets for Belfius Group I have mentioned that for 2016 has been put at
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95% or better, and we can always do better if we want. In Belfius Insurance it is
already at 95%, so they already achieve that very high customer satisfaction.
Meaning that of course a customer who is satisfied is inclined to do even more
business with the company than before, which underpins the importance of that
indicator.
Slide 15 has the same financials as we have shown on the franchise now for the
side before the business that we manage in runoff and under tactical de-risking. So
there we see that in 2012 we had a net income still positive of €111 million. In 2013
it turns into a loss of €63 million. It is of course very much linked to the decrease in
the income line, where we have an impact from the decrease of our balance sheet.
Lower outstanding volumes in that segment lead of course to lower income. We
have tactical de-risking and here we have here also done some refinement on CVA
provisions and we have set aside a little bit more CVA provision that we had in the
past. In terms of cost of risk, there we have the phenomenon that I have described
before. When we do some de-risking it results in a loss in the income line, but we
can take back some provisions of the past and that results in a positive cost of risk
in that line. As a result we have €63 million of loss, a well controlled loss for the
side activities of Belfius.
Slide 16, another good news for Belfius. We have always said that reinforcing our
solvency was one of the key priorities for Belfius going forward, to be well prepared
for Basel III, to be well prepared for the future. And the figures, there are not that
many figures that are given here but the figures are very important and are very
material for Belfius and show that we have done a very important reinforcement of
our solvency situation. If we look to the former Basel II format, which was
applicable to the end of 2013, we have a core tier 1 ratio of 15.4% compared to a
core tier 1 ratio at the end of 2011 of 11.8% under the same Basel II format. And
that is even despite a change in the calculation of that solvency ratio, a change for
the treatment of our participation in Belfius insurance where before, for example, in
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the figure of 2011 debt participation did not have an impact on our core tier 1 ratio.
It was deducted from additional capital and it only impacted total capital ratios. In
2013 we had to change that and we had to deduct 50% of our participation in
Belfius Insurance from our core tier 1 capital. So for 50% it already impacted our
core tier 1 ratio in 2013, even despite that fact we have tremendously improved our
solvency ratio under the Basel II format. And that is of course, as you can see
below, also thanks to the tremendous decrease in weighted risks which is linked to
our runoff which is linked to our de-risking, which is linked to the fact that we have
decreased the Dexia exposure with important amounts.
So we come to weighted risks which were at the end of 2011 €53 billion, end of
2013 €43 billion under the Basel II format. For Basel III under the capital
requirements regulation we show both phased in ratio as of 1 January 2014 and the
fully fledged pro forma at the end of 2013. There we have a common equity ratio of
13.5% phased in and 11.7% under the fully fledged ratio. For our insurance
company - that is on the bottom of the slide - the solvency ratio is shown there and
there we have the same tendency, an important reinforcement of the solvency
situation of our insurance company with a Solvency I ratio - the one that is
applicable today in Belgium - at 186% at the end of 2013, and with a management
indicator that we start to monitor more and more, the Solvency II which stands at
223% at the end of 2013.
The third part of our presentation is about our improving risk profile. I am on slide
18. So there we have the same presentation that we present always. It is the total
investment portfolio that we have put in the Belfius Group, which is split into three
parts. We have a standard ALM investment portfolio, both at the bank side and on
the insurance side. On the insurance side it is the reinvestment of the reserves. On
the bank side it is more a bond portfolio which is there to manage our liquidity
management, our liquidity profile, and then the third part of course is within the side
business is our legacy bond portfolio. In total we started at €41.2 billion at the end
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of 2011. I always said the ALM parts - both insurance and bank - should not
decrease. That is not the intention but we still have a decrease in our insurance
business in our bond portfolio. That is because do not forget we have done the
ALM reshuffling in 2012 and we have, amongst others, bought some mortgage
loans which are not any longer in the investment portfolio of the ALM insurance
book. The ALM bank book did not decrease. It increased a little bit, so that is the
normal standard liquidity management bond book of the bank, and then the bond
book debts we managed under the runoff and in tactical de-risking is a legacy bond
portfolio book and there we managed in a decrease from €18.3 billion end 2011 to
€12.4 billion end 2013. Of course part of that is due to natural amortisation. If we
take only the evolution of 2013 versus 2012, we have a decrease of approximately
€3.5 billion in that portfolio and we have a decrease of €4.5 billion in the total
portfolio. That is a result of natural amortisation of €1.6 billion and further tactical
de-risking - as I have said earlier on in the conference call - of €3.4 billion. That can
be split between the bank and insurance company: €2.7 billion in the bank and
approximately €700 million in the insurance company. As a whole our investment
portfolio decreased by 23%, in total a €9.5 billion decrease of which €7.5 billion is
due to tactical de-risking. That is what we call very proudly our demonstrated track
record in tactical de-risking.
On the next slide we have given you some details on what segments we executed
the tactical de-risking the last couple of years, and so we have a decrease of the
legacy bond portfolio of €5.9 billion since 2011 of which 2/3 is approximately de-
risking and 1/3 is natural amortisation. The tactical de-risking has been mainly
executed in three asset categories. It is bonds issued by financial institutions. It is
asset backed securities and also international non-Belgian sovereign and public
sector bonds. On the right-hand side you have a picture of the credit risk quality
presented by the rating of the remaining portfolio. To demonstrate to you that we
did not do the wrong bias in the tactical de-risking the remaining portfolio is still a
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very good credit quality with 92% investment grade, so above -BBB which is a very
good statistic; a very good figure.
In terms of asset quality on the commercial loan book, there we have on slide 20
two indicators. We have the asset quality ratio in terms of impaired loans and
advances to customers divided by loans and advances to customers, the gross.
And there we see, despite a rather challenging economic environment, a further
improvement of our asset quality ratio. And since 2011 we have moreover
increased the coverage ratio within Belfius Bank, with specific impairments divided
by impaired loans and advances to customers which moved up from 39% end 2011
to 53.6% end 2013. That is mainly thanks to a decrease of the denominator
impaired loans and advances to customers, and a rather stable amount - a little bit
lower but not that much - a rather stable amount in specific impairments compared
to the end of 2012. So a very nice coverage ratio of 53.6%.
The last part is about the strategy that we started at the early onset of the Belfius
journey, in terms of diversifying our funding sources. As I have explained already
many times, we are a universal bank with a very sound liquidity profile within our
commercial balance sheet, with a loan to deposits ratio which is still very sound at
93%, and in excess funding at the end of 2013 and the end of 2012 which is still
very sound. We have also put the same figures in terms of commercial liabilities at
the end of January in order to demonstrate that we had a slight decrease - only
temporary - at the end of 2013 of deposits that already flew back in the early days of
January 2014 to the bank. You have on the slide also the different volumes in the
different products within our commercial balance sheet.
We try to complement that funding strategy within our commercial activities with a
strategy in order to tap very different funding sources, in order to diversify the
investor base of Belfius, and we are continuing that execution of our development of
different stable funding sources alongside our CB and PWB deposits, insurance
reserves, bond issues for our clients, our CB clients. Alongside that we have public
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benchmark issues and senior unsecureds. We have also of course public
benchmark issues in covered bonds. We will show you some figures later on. And
we are also more and more active in the institutional private unsecured market.
That is a clear institutional funding strategy that we continue to execute.
And the next slide - slide 24 - is giving you some more details of the different issuing
programmes that we have mainly in our institutional format, for which you have
already outstanding amounts at the end of February 2014 here mentioned in the
slide. Just to give you an idea of some comparisons with the stock we had at the
end of February 2013 - the same period approximately last year - for example, for
the Belfius Euro commercial paper programme at that time we were at
approximately €200 million outstanding. If I am not mistaken, at the end of
February 2014, we are close to €1 billion of outstanding Euro commercial paper
programme. So for those who did not buy such a paper yet it is time to start
thinking about that. On the other hand you see the different amounts there: Belfius
CD programme €1.2 billion. The mortgage Pandbrieven programme, a very
successful programme for Belfius and for our colleagues in Belgium also where we
have outstanding €3.6 billion at the end of 2014, and the same outstanding was
approximately €2 billion at the end of February 2013. So that is clearly one of the
key development focus areas of Belfius. The EMTM programme €3.2 billion
outstanding, and the Belfius notes issuance programme, which is more for the retail
and private banking customers, is standing at a stock of €10.5 billion.
Slide 25 is the same slide that we always show and now you have perhaps some
more details on the redemption profile of, for example, our covered bonds which
arrive at important amounts. And what does it show? Well, it shows that we have a
very good diversified redemption profile especially if you consider the fact that retail
funding is something which is renewed and reinvested by the client in a normal and
traditional way. And so on the institutional front we have a very well diversified
funding profile, well spread over the coming years, and so we are well positioned for
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issuing a very important amount but still very well acceptable for Belfius in the
coming years and the coming quarters in the institutional market.
The last slide, a small wrap up of the key messages I tried to give to you as
investors. We are 100% Belgian. A large fully integrated banking insurance
company. So we have started our journey being Belfius by saying, well, there is
some cross-selling potential between insurance and the bank. We are going to
build a true bank insurer and we are on the right path to doing that, and we are
active over the whole country, which is not always the case for competitors within
the Belgian markets. 2013 saw a very strong performance in terms of commercial
income, in terms of commercial activities, in terms of net income for Belfius and we
have a solid solvency and equity position at the end of 2013 with significant
improvement of solvency ratios, both under the former Basel II format and under the
new Basel III capital requirements regulation format. Thirdly, very important also for
management and for our shareholders, the net asset value. The total shareholders’
equity has been doubled since 2011 to €6.6 billion, which is a very sound
achievement in terms of net asset value. And then lastly a reminder of our
ambitions. Towards 2016 we will target to remain a sound, sustainable bank insurer
within the Belgian economy with the highest commitment to the Belgian society.
We would like to target to become the most customer-centric bank insurance
company through the customer satisfaction which will be a key management
indicator going forward, and an operational efficiency, a further improvement of our
cost income ratio, which is built upon that customer satisfaction and geared towards
the customers. And of course we will continue what we have demonstrated during
the last two years. We will continue to demonstrate to you that we have a high level
of expertise in financial and risk management of Belfius.
For me that is all in terms of an introductory comments for the presentation of the
results of Belfius 2013. I would now like to open the floor to some questions that
you might have.
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OPERATOR: Thank you very much. Ladies and gentlemen, we are now ready to take your
questions. If you wish to ask a question please press 01 on your telephone keypad
now; 01 on your telephone keypad to ask a question.
And there are no questions in queue, ladies and gentlemen. Let me remind you
that you can still ask a question by pressing 01 on your telephone keypad.
JOHAN VANKELECOM: A question costs €10. No, a question is for free. So please feel free to ask a
question. It’s not obligatory but please feel free.
OPERATOR: Thank you very much, 01 to ask a question; 01 on your telephone keypad. And it
seems that we are having a question from an identified participant. Your line will be
open now. Please say your first name, last name and company name.
NICOLAS BAUDOUIN: Hi, this is Nicolas Baudouin from Citigroup. I have a question on the tax expense
and I was wondering whether you could give us an explanation on the development
of the tax expense at the group level, and also for the franchise business?
JOHAN VANKELECOM: The tax expense is of course the result not only of cash taxes but it is also the
result of the deferred tax element, deferred tax assets and deferred tax liabilities.
So that’s why it’s always a little bit difficult to make the comparison with the
standard tax rates, corporate tax rates in Belgium. So, on the full year we have a
tax expense line of €73 million compared to net income before taxes of €518 million.
So why is that? I could imagine that you think that it’s a little bit low. Well, that is
because we formerly had done a DTA impairment for important(?) amounts and that
we have recognised now that DTA, so we have reversed the DTA impairment in
2013 at the level of group center, this impacted franchisefor an important amount
and that is an important explanation why the tax expense line is rather low in 2013.
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I think the other question was on the franchise. I’m looking for the figure there for
the franchise account. I think it’s the same explanation there because the reversal
of the DTA impairment that we have done has been done in Group Centre. Group
Centre is a part of our franchise results, so that also positively impacts the tax
expense line in 2013.
NICOLAS BAUDOUIN Thank you, and could you give us a view of what will be the normalised tax rate for
the franchise business, going forward?
JOHAN VANKELECOM: It’s not something I have already computed. In the franchise business you have
insurance. You have insurance business which in Belgium normally has got a
standard normalised tax rate a little bit lower than the standard corporate tax rate of
34%. So I would imagine that there it’s a little bit lower, more in the region of 20%
or 15% tax rate, because certain investments and returns on certain investments
are less taxed in Belgium than other investments and returns on investments within
the insurance environment. Then of course we have in Belgium the notional
interest deduction system that is still applicable. So it’s difficult to say what will be
the lifetime of that system and what will be then the remaining impact of that system
on the tax expense line for Belfius. So I would imagine that going forward we will
still be below 34% corporate income tax rate, but for how long and for how much it’s
difficult to say.
NICOLAS BAUDOUIN: Thank you very much.
OPERATOR: Thank you. There is still room for questions. You can still press 01 on your
telephone keypad to ask a question.
And we have a question from Jess Tanribi with ING. Please go ahead, your line is
open. Please go ahead your line is open.
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JESS TANRIBI: Yes, thank you. My question refers to your slide 18 where you comment about the
decreasing investment portfolio, and on this slide we see that the portfolio allocated
to the bank amounts to €7.2 billion and my comment is the following. It looks like
very small for the bank and I was wondering how you can face the regulatory
liquidity with such a small investment portfolio.
JOHAN VANKELECOM: Well, what would you say would be a good level of bond portfolio for a bank like
Belfius?
JESS TANRIBI Let’s say, let’s just say that I would have expected something a little bit higher.
JOHAN VANKELECOM: But you have to know that in terms of liquidity management, liquidity profile, it’s
not because the portfolio that we monitor closely and manage for liquidity purposes
and booked within the ALM segment is only €7.2 billion but within the legacy bond
portfolio all those bonds are not liquid or part of those bonds are not liquid and are
not usable for liquidity management purposes. Part of those legacy bonds are also
of course eligible for liquidity purposes. I can imagine that going forwards, if we
continue to decrease our legacy bond portfolio and we generate some cash, that we
will have an increase in our bond portfolio that is booked within the asset and
liability management segment, and that is I think answering your question a little bit.
We have a larger bond portfolio then 7.2 to manage our liquidity risk. Within the
legacy bonds part of it is also a very good liquidity quality and so, going forwards,
there will be a shift out of the runoff and side business towards a standard ALM
bank portfolio.
JESS TANRIBI Okay. Thank you.
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OPERATOR: Thank you. And we have a next question from an unidentified participant. Please
go ahead and ask your question and please mention your first name, last name and
company name.
ALEXANDER DEVILLE: Hello?
OPERATOR: Your line is open.
ALEXANDERDEVILLE: Hello, hi, Alexandre Deville(?) from Ivor Investment Group. Good afternoon.
Congratulations on a very solid set of results. I have three questions.
JOHAN VANKELECOM: Thank you.
ALEXANDERDEVILLE: Yeah, thank you. Three questions for you. The first one is could you share with
us your thoughts on what should we expect for the performance of a side segment,
in terms of a net income group share going forward, where should it normalise
adjusted for the de-risking we’ve had for the past three years?
A second question is could you share with us your thoughts on the trajectory of a
cost reduction, what should we expect in terms of - the evolution of expense minus
10% was very strong - what could we see in the upcoming years?
And finally, could you share your thoughts or your shareholders’ intentions for the
bank again in the next two to three years? Do you expect to stay in public hands or
could Belfius be returned to the private investors?
JOHAN VANKELECOM: You know those questions they cost more than €10, eh? That’s why you started
by congratulating us I suppose. I am not going to give answers on every element,
but I will try to do my best to give you some insight on my personal thoughts. First
of all, on the side. We have shown that our ambition for Belfius consolidated for
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2016 is to have a net income consolidated about €500 million and that has been
translated and we have made some estimates of that, that has been translated in a
contribution that we would expect to achieve €600 million out of our commercial
franchise, out of our commercial activities. Meaning that we have estimated that
potentially our side business could contribute for a negative €100 million in 2016.
So why that negative impact in our side business? That’s because of course in that
side business we have also some transactions that are still going on with Dexia and
those transactions will arrive at maturity early 2015, meaning that in the figures of
2016 they are not contributing and they are contributing for the time being positively
to the P&L of the side business. They are not contributing positively any more.
That’s why we think that we would be close to the negative impact of €100 million,
which is the result mostly from the higher funding costs, the higher refinancing costs
that we have to bear for funding the assets that are booked in that side segment.
That is the answer on the first question. I think that answer already is worth €10.
Then the second on the trajectory in terms of cost reduction. Of course we are not
going to do a cost reduction of 10% again in 2014. I think that would be a
tremendous achievement being CFO. I have said our focus is on improving the
costs income ratio. It’s about improving the efficiency within the bank and cost
income ratio. There are two elements in there. It’s about improving income and it’s
about managing and controlling the costs. And improving income is very much
linked to what we have put forward as an ambition in terms of customer satisfaction,
because a satisfied customer will do more business with the bank and normally we
do business with a positive contribution to the bottom line, and so that will improve
our income going forward. I am not going to disclose what is the intended trajectory
in terms of cost income but it’s clear that we want to improve our cost income ratio
going forwards, and for important amounts.
The third question is a question you should put forward to our shareholders, what is
the shareholders’ intention with Belfius going forward? I always answer the same.
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We have received a mandate to manage Belfius as a standalone entity, as a
commercial bank and insurance company, and we have received a mandate to
make sure that our shareholders have all options open within this and a certain
timeframe, in order to make sure that the shareholder can decide whatever he
wants at that time with Belfius Bank and Insurance. And that’s all I’m going to say
about the intentions of somebody else. I’m not going to look into the mindset of
somebody else. You should try to ask that question to our shareholders.
ALEXANDRE DEVILLE: Okay. Thanks a lot.
JOHAN VANKELECOM: Thank you.
ALEXANDRE DEVILLE: Bye bye.
OPERATOR: Thank you very much. And there are no further questions in queue for the moment.
There is -- we have a new question, please go ahead, your line is open and please
mention your first name, last name and company name.
ALEXIS: Hi, good afternoon, it’s Alexis from ROP Capital. Okay, I’ve got a very simple
question. Could you give us a short view on the main drivers of the decrease in the
NPO ratio by 40 basis points and also on the increase in the coverage ratio?
JOHAN VANKELECOM: So the increase in the coverage ratio is due to the fact that the impaired loans,
stock of impaired loans and advances to customers has decreased because the
stock of specific impairments - I think there are some details in the annexes about
that - did not decrease too much. On the impaired loans and advances to
customers. What is the result? Well, of course we have done some de-risking
elements that were included in that stock of impaired loans and advances to
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customers and for that we have taken back provisions that were booked on that
front. For the rest, it’s also sometimes some clients that pay back their loans and
that they are not impaired anymore and that we can then of course decrease the
stock of impaired loans and advances to customers in many segments. So, in all,
the risk profile in our commercial loan book is a rather sound risk profile, which
enjoys a rather sound coverage ratio.
ALEXIS: Thank you.
OPERATOR: Thank you very much. There are no further questions in queue and as there are no
further questions I would like to return the conference call to you, Mr Vankelecom.
JOHAN VANKELECOM: Okay. Well, I would like to thank again everybody who was present at our
investor call. I would like to thank you for the interest that you show in Belfius and I
would hope to think that we will continue to work with you on this basis, and that you
will continue to work with us as investors in the near future. Thank you very much
and I hope to see you perhaps personally or, for our teams, in the road shows that
are starting as of next Monday throughout Europe. Thank you very much.
OPERATOR: Thank you very much, ladies and gentlemen, this concludes today’s conference.
Thank you all for attending and have a good day. You may now disconnect your
lines.