Limited revenue growth in a turbulent market

Press release 28 August 2008

  • Rising interest income and stable commission income generate 6% growth in revenue
  • Profit excluding exceptional items €14.5 million (2007: €15.6 million), the product of reduced client activity, lower market prices and expenses in line with expectations
  • Exceptional expense due to impairment loss of €5.0 million on shareholding in NYSE/Euronext (2007: +€13 million). No further impairment of the bond portfolio (2007: €1.1 million) expected in the current market conditions
  • High BIS ratio of 16% as at 30 June (year-end 2007: 14%), reflecting strong focus on risk management
  • Recently completed acquisition in Germany has strengthened our independent market position and will have a slight effect on our 2008 result

Key figures
H1 2008 H1 2007 Change
Operating profit EUR 14.5 miljoen 15.6 miljoen -7%
Profit after taxation EUR 9.4 miljoen 42.3 miljoen -78%
Operating profit per share EUR 0.97 1.04 -7%
Profit per share EUR 0.63 2.83 -78%
Interim dividend EUR 0.45 0.45 -


Chairman's statement
‘Given the difficult market conditions, KAS BANK performed well in the first half of 2008,’ says Albert Röell, chairman of the bank’s Managing Board. ‘Our market position in our core markets has improved and the bank’s risk profile has stayed low. This is reflected, for example, in our high BIS ratio of 16%, which is the product of our risk-averse approach and our strong balance sheet. The slightly lower operating profit compared with the first half of 2007 is due to the effects of lower market prices and a lower level of client activity in response to the unsettled financial markets. Expenses turned out in line with expectations.

KAS BANK has focused exclusively on wholesale securities services for corporate and institutional clients since 2007. That focus and our independent position are a guarantee of neutrality and avoid conflicts of interest such as settling transactions for broker/dealers while trading oneself or measuring investment results for pension funds while investing oneself. The acquisition of Delta Lloyd Investment Managers GmbH in Germany, which was completed in July, is entirely consistent with that strategic focus and strengthens our independent position in Europe.’

Outlook
One effect of the unsettled climate that has prevailed since 2007 on the financial markets is to increase liquidity and credit risk for the bank’s investments. If this trend continues, it may result in additional impairment losses in the second half of 2008. In view of this uncertainty, the Managing Board prefers not to give a forecast of the full-year results for 2008.

Interim dividend
With the approval of the Supervisory Board, it has been decided as in the past to distribute an interim dividend of €0.45 (H1 2007: €0.45) per KAS BANK ordinary share, to be paid in cash.

Financial targets
The annual financial targets, which the Managing Board set in 2005, are as follows:

Target H1 2008* 2007*
Growth in non-interest income ≥ 10% -1% 15%
Efficiency ratio 70-77% 73% 76%
Return on equity ** 5-8 points above
10-year interest rate		 13% 12%
Growth in earnings per share >8% -7% 22%
Dividend payout 60-80% - 76%
BIS-ratio (average) ≥ 12,5% 14% 16%***
*) excluding exceptional income and expenses
**) 10-year interst rate 2007: 4.3%, 2008: 4.2%
***) under Basel 1

Results
Excluding exceptional items, operating profit was 7% lower at €14.5 million (H1 2007: €15.6 million). Despite the market turbulence, reduced transaction volumes and lower market prices, rising interest income coupled with stable commission income resulted in 6% higher operating income. In line with expectations, operating expenses were 11% higher in the first half of 2008, reflecting the investment in IT, product development and improving the quality of the bank’s services, but were 6% lower than in the second half of 2007.

Profit after taxation, including exceptional items, in the first half of 2008 amounted to €9.4 million (H1 2007: €42.3 million). An exceptional item in the first half of 2008 was an impairment loss on the shareholding in NYSE/Euronext, which reduced profit after taxation by €5.0 million (H1 2007: €13.0 million positive effect on profit of exceptional item). The market value of the other shares in the available-for-sale investment portfolio is well above the historical cost.

After careful assessment, it has been established that, apart from the impairment in respect of the NYSE/Euronext shareholding, there are no other exceptional impairment losses on shares or bonds.

KAS BANK has no material positions in high-risk bonds such as CDO and MBS investments.

The ratings (according to Moody’s) of the bonds and money market paper in the available-for-sale investment portfolio are as follows:

euro million 30.06.2008 Percentage
of portfolio		 31.12.2007 Percentage
of portfolio
Aaa t/m Aa3 569 68% 870 63%
A1 t/m A3 35 4% 21 2%
Baa1 t/m Baa3 9 1% 10 1%
P1 t/m P2 193 23% 425 31%
Shares 31 4% 43 3%
Total available-for-sale
investments		 837 100% 1,369 100%


The decrease of almost 40% in the portfolio of available-for-sale investments compared with year-end 2007 is mainly due to liquidated investments having been reinvested on very short interest terms to take advantage of high short-term interest rates and improve the bank’s liquidity.

Excluding exceptional items, the return on equity in the first half of 2008 was 13% (H1 2007: 16%) and the efficiency ratio was 73% (H1 2007: 69%). For 2007 as a whole, again excluding exceptional items, the return on equity and the efficiency ratio were 12% and 76%, respectively. Thanks to KAS BANK’s strong focus on risk management and its success in maintaining a low risk profile, its capital adequacy ratio remained relatively high in the first half of 2008, at an average of 14% based on the Basel 2 rules which came into effect in 2008 (H1 2007 under Basel 1: average 15%). As at 30 June 2008, the BIS ratio stood at 16%, which was 2% higher than the BIS ratio under Basel 2 as at year-end 2007 (14%) and well above the target of 12.5%.

Income
Total income, excluding exceptional items, was 6% higher in the first half of 2008 at €71.0 million (H1 2007: €67.3 million).

Compared with the first half of 2007, interest income was up 43% at €13.2 million (H1 2007: €9.2 million), mainly due to the significant growth in funds entrusted and the improvement in the interest margin.

Commission income increased marginally to €49.4 million (H1 2007: €49.2 million). Commission income is analysed in the table below.

euro million H1 2008 H1 2007 verschil %
Custody and Investment Management Services 14.0 16.3 -2.3 -14%
Clearing and settlement 19.6 21.1 -1.5 -7%
Securities lending 13.0 8.6 4.4 51%
Other 2.8 3.2 -0.4 -13%
Total 49.4 49.2 0.2 1%


The reduction in income from custody and investment management services was mainly due to lower custody fee income, reflecting the decrease in the value of the assets in custody due to lower market prices.

Income from clearing and settlement was 7% lower at €19.6 million, reflecting the lower transaction volumes.

Income from securities lending increased sharply by €4.4 million (51%) to €13.0 million. As in past years, securities lending activity peaked in the second quarter.

Other commission income was down €0.4 million, chiefly because this item in 2007 included the first-quarter private banking income.

Excluding exceptional items, trading and investment income was modestly lower, down €0.3 million to €8.2 million (H1 2007: €8.5 million). The trading results last year included an exceptional item of €16.3 million in respect of the conversion of Euronext shares to NYSE/Euronext shares.

Other income for the first half of 2007 included the proceeds of €22.2 million from the transfer of he private banking operations.

Expenses
Total expenses, excluding exceptional items, were 11% higher at €51.6 million (H1 2007: €46.4 million). Operating expenses in the first half of 2008 were 6% lower than in the second half of last year (H2 2007: €55.1 million).

Staff costs, excluding exceptional items, rose 17% to €34.4 million (H1 2007: €29.5 million), reflecting the increase in staffing levels in connection with the investments in IT, product development and raising the quality of the services.

Other administrative expenses were up 13% at €13.6 million (H1 2007: €12.0 million), mainly due to higher IT costs.

Depreciation expenses were €1.3 million lower at €3.6 million (H1 2007: €4.9 million). This was related to some extent to the increase in IT expenses because, given the nature of the new contracts that have been entered into, more of the software costs are accounted for as IT expenses instead of depreciation expenses.

An exceptional impairment of €3.2 million in respect of immovable property was recognised in the first half of 2007.

KAS Investment Servicing
As previously announced, KAS BANK acquired Delta Lloyd Investment Managers GmbH in Wiesbaden (Germany) on 1 July 2008. This acquisition will help to advance KAS BANK’s growth strategy in Western Europe. Under the name ‘KAS Investment Servicing GmbH’, this new KAS BANK subsidiary will provide fund accounting services for institutional investors, pension funds and insurance companies, together with a comprehensive range of risk management and reporting services. The cost of this acquisition, including related expenses, was €19 million. The new entity has equity of approximately €6 million. KAS Investment Servicing’s results will be included in KAS BANK’s consolidation as from July 2008.

Summary of results
The figures are explained in more detail in the report for the first half of 2008, which will be posted on this website soon.

Profile KAS BANK N.V.
KAS BANK is a European specialist in wholesale securities services. As an independent bank, we connect professional financial institutions both within Europe and across the globe.

We focus on providing added-value services to national and international organisations active in the pensions and securities industries. We view the market from the perspective of our clients – tailor-made services and complete transparency are paramount in helping them to meet their business objectives.

We are established in Amsterdam, London, Frankfurt and Wiesbaden.

The figures in this press release are not audited by an external auditor.

Annexes: