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.

Arkadin Managed Calls - Belfius · 2014. 3. 21. · 26-28 Hammersmith Grove / London W6 7PE Tel:...

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Transcript of Arkadin Managed Calls - Belfius · 2014. 3. 21. · 26-28 Hammersmith Grove / London W6 7PE Tel:...