KBC Group. Financial reporting adjustments in 2006 January 2006. Introduction. This presentation gives an overview of some of our views on our financial reporting formats. It covers some methodological issues regarding segment reporting, reporting on hedging instruments and EPS reporting.
Financial reporting adjustments in 2006January 2006
Reminder: current segment reporting mix
1. Primary segmentation by business segment
2. Additional breakdown by area of activity
KBC Group NV
European Private Banking
European private banking
Although KBC’s financial reporting is considered to be comprehensive and highly reliable, the performance analysis of the indivdual areas of activity is complicated by, among other things:
the use of different segmentation criteria;
the periodic restatements of previous-year figures in order to to assure consistency for internal management purposes;
the ‘normalization’ of segment equity levels;
the volatile ‘group center’ items and unclear reconciliation of individual P/L lines (except the bottom line);
terminology topics (e.g. ‘corporate’ is largely ‘SME’);
These problems are mostly related to the fact that the ‘area of activity’ reporting is primarly set up as a MIS (e.g. with impact on internal remuneration schemes). The methodological approach differs from the financial accounting system.
In order to further increase its financial transparency, KBC will….:
build its segment reporting around the financial accounting databases (separate from the MIS);
discontinue to use its current matrix reporting format and use its new business unit structure as the major segment reporting criterion (i.e.: Retail & PB Belgium, CEE, European private banking, merchant banking, Group Center); 1
no longer have to restate historical time series since the link with the MIS will be cut;
disclose its segment results in a full P&L format (incl. breakdown of income, which previously was not the case);
allocate the results of each subsidiary fully to a single segment (e.g. KBC Lease’s activities will be allocated entirely to the merchant banking division, whereas previously part of the results – although predominantly ‘corporate’ – had been recognized in the ‘retail’ division); 2
stop imputing the impact of capital ‘normalization’ adjustments on the segment bottom-line 3 . In return, the funding costs of the equity participations (e.g. in CEE) will be allocated to the relevant segments (recognized as ‘NII’);
considerably limit the number of ‘group center’ items.
1 In the annexes to the accounts, sufficient disclosure on KBC Bank and the insurance and asset management activities will be provided in order to, among other things, ensure transparancy towards holders of KBC Bank NV bonds.2 An exception has to be made for KBC Bank NV Belgium’s activities.3 However, for calculating the return on allocated capital, the current capital allocation methodology (8% Tier-1 etc.) will be left unchanged.
The ‘group center’ items will be limited to the following areas:
The results of the holding company and the non-allocated expenses of KBC Bank NV that can be considered holding company overheads (e.g. strategic consultancy fees, BoD expenses, ‘group-level’ operating provisions, etc.)
The results of the co-sourcing vehicles (such as Fin-Force and Orbay) and special purpose funding vehicles. As a rule, within these entities, expenditure is covered by the services’ users and, barring timing differences, the bottom-line therefore tends to be immaterial;
Results of non-core equity holdings, such as Agfa Gevaert (as long as it belongs to the Group) and the equity investment portfolio of KBC Bank NV.
Valuation (volatility impact)
Amortized cost (no impact from volatility)
Fair Value (adjustments in shareholders’ equity)
Fair Value (adjustments in P&L)
Mortgages, Consumer & Corporate loans
Loans and Receivables
Held To Maturityinstruments (HTM)
Bonds & Equity
Available For Sale instruments (AFS)
Trading portfolios & hedging derivatives
Held For Trading instruments (HFT)
Financial Instruments at Fair Value (FIFV)
Bonds & Equity
1 Mandatory convertible bonds are considered to be shareholders’ equity. As a consequence, the interest charge and related tax are not recognized in P&L and the number of MCBs has to be included in the (adjusted) number of shares for the calculation of earnings per share.