UPDATE 3-KBC to raise $1.6 bln in share sale as repays state aid
* To repay remaining 3 bln euros of aid to Belgium in Dec
* To repay 1.17 bln euros to Flemish region in H1 2013
* Issues 1.25 bln euros of shares at 9.5 pct discount, 750 mln capital note
* Belgium says should help keep debt ratio below 100 pct/GDP
BRUSSELS, Dec 10 (Reuters) - Belgian banking and insurance group KBC is selling 1.25 billion euros ($1.6 billion) of new shares to shore up its capital position as it pays back state aid to Belgium.
KBC, which received 7 billion euros from Belgium and the region of Flanders during the 2008-2009 financial crisis, said on Monday it would pay the 3 billion euros outstanding to Belgium along with a 450 million euro premium on Dec. 17.
The group said it was committed to maintaining a capital ratio of 10 percent of risk-weighted assets under tough new Basel III regulations and so had decided to raise 1.25 billion euros from selling new shares to investors on Monday.
It sold shares at 21.25 euros each, a discount of 9.5 percent to Friday's closing price. They have risen in value by 141 percent since the end of 2011.
"This is a clear testimony of the trust institutional investors place in KBC's fundamentals and bank-insurance business model," Chief Executive Johan Thijs said in a statement.
Issuing new stock dilutes earnings per share for existing investors.
However, Matthias De Wit, banking analyst at Petercam, said the share price surge had made such a move an attractive option for KBC, even if it had indicated previously it would not do so.
"I can understand it. It's logical. There might even be some relief because it removes uncertainty," he said.
Core shareholders owning 54.1 percent of the stock said they supported the move.
For Belgium, the money will arrive at a useful time, given it has committed to paying 2.92 billion euros for a third bailout of Franco-Belgian group Dexia.
"This should help with our efforts to keep Belgium's debt-to-GDP ratio under 100 percent," a finance ministry spokesman said. The ratio was 97.8 at the end of 2011, according to the central bank.
KBC also plans to issue a non-dilutive capital note of about 750 million euros in the first quarter of 2013.
KBC, which repaid 500 million euros plus a 15 percent premium to the Belgian state a year ago, said it would also be giving back 1.17 billion euros of aid to Flanders, along with a 50 percent premium, or 580 million euros, in the first half of next year.
The transfers would see the group fulfil its pledge to repay 4.67 billion euros of principal, plus penalties, by the end of 2013. It would then still owe Flanders 2.33 billion euros.
KBC said it would continue its dialogue with the European Commission regarding further asset sales.
It also referred to two negative items that would impact its fourth quarter results.
The first, based on a change in Belgian legislation, would be a hit of 50 million euros for income tax expenses. The second, based on current market conditions, was a net 100 million euros of non-recurring items.
Separately on Monday, the head of KBC Bank Ireland told Irish media that mortgage arrears there had dropped for the first time in five years during October and November, although the decline was small.
"We expect things to moderate in '13 and we're looking forward then in '14 and '15 to reverting to substantial profitability as a business," John Reynolds told Irish state broadcaster RTE at the opening of its first retail branch in Ireland on Monday.
JP Morgan Securities is joint global coordinator and joint bookrunner for KBC's share offering, while Nomura International is joint bookrunner and KBC Securities joint global coordinator and co-bookrunner.