KBC Group will dispose of its private banking arm, scale
back merchant banking interests, sell a private equity unit and
retreat from a number of markets to focus on Belgium and five
Eastern European countries as the price of receiving state aid. But
its bancassurance model remains intact, reports
Douglas
Blakey.
Go deeper with GlobalData
Belgium’s KBC is to shrink its
balance sheet by around one-fifth, having agreed the terms of a
restructuring plan with the European Commission Competition
Commissioner Neelie Kroes as the penalty for receiving state
aid.
But the deal, regarded by analysts as
less onerous than that imposed on Benelux rival ING, which had to
agree to sell its insurance business as part of its restructuring
deal (see RBI 621), enables the group to retain its
bancassurance model.
Under the agreement, KBC will repay
the €7 billion ($10.4 billion) bailout received from the Belgian
and Flemish regional governments during the financial crisis by
2013 and reimburse a €3.5 billion guarantee from the Belgian State
relating to CDO exposure.
Other elements of the restructuring
plan include:
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By GlobalData• The sale of its private banking
unit;
• Exiting a number of international
markets, including Serbia and Russia;
• A focus on its core markets of
Belgium and five countries in Central & Eastern Europe (CEE) –
the Czech Republic, Hungary, Bulgaria, Poland and Slovakia;
• A partial flotation of its Czech
Republic subsidiary CSOB;
• An undertaking to pay no dividend
before 2011 at the earliest; and
• A promise to make no acquisitions
in the medium term.
In all, the group estimates
risk-weighted assets of around €39 billion have been earmarked to
be run-off or sold over the 2009-2013 period, with the largest
element, €23 billion, coming from KBC’s merchant banking unit. The
disposal of the KBL European Private Bankers arm is likely to
reduce risk-weighted assets by around €6 billion.
Originally set up as a private
banking facility in Luxembourg 20 years ago, KBC’s private banking
unit manages around €47 billion of customer assets from nine
European locations. But it is now regarded by KBC as offering a
“lower than average level of synergy” with its wider bancassurance
strategy.
KBC has also undertaken to divest two
Belgian-based units – Centea, a retail bancassurance network, and
insurer Fidea – plus Polish-based consumer finance operation
Zagiel.
According to KBC, the two Belgian
units represent a market share of only about 1 percent to 2 percent
of total loans, deposits and insurance in the country, while Zagiel
has a market share of around 3 percent of the Polish unsecured
consumer finance market. While small, the three businesses have
been profitable, however, contributing a combined average annual
net profit of €130 million over each of the past five years.
In a generally positive note to
clients, analyst Jean Pierre Lambert at investment bank Keefe,
Bruyette & Woods said the €10.5 billion of reimbursements due
by KBC could be met by: an estimated €4.6 billion of total profits
in the period to 2013; €2.4 billion from the sale of assets; €1.7
billion of capital savings thanks to a fall in risk weighted
assets; €1.4 billion of capital efficiency measures; and €300
million of current excess capital.
As for the future, KBC forecasts its
Belgian unit together with the five core Eastern European countries
will contribute 82 percent of group net profit by 2013, more than
double the 40 percent figure derived from the same units in 2008
(see bar chart below).
Supported by a strong Belgian
market
Despite Belgium’s reputation as an
unremarkable and mature market, KBC expects its domestic retail
unit, comprising an 867-branch-strong network and 555 insurance
agencies serving 3.9 million retail customers, to continue to
report solid growth.
In the period since 2004, the Belgian
arm has posted a compound annual growth rate for lending of 8
percent and 6 percent for deposits; in the same period, the bank
has produced a strong cross-selling performance, with more than 80
percent of KBC mortgage loans sold together with its insurance
policies.
And despite the economic crisis, its
Belgian arm is on course to return to pre-crisis profitability
levels of €300 million to €400 million net profit per quarter.
Credit costs for the unit remain
modest, amounting to only €11 million in the third quarter (down
from €20 million and €18 million in the previous and year earlier
quarters respectively), resulting in a credit cost ratio of 12
basis points for the first three quarters.
At the end of the third quarter, only
1.8 percent of the Belgian retail loan book was non-performing,
unchanged from three months ago and up only marginally from 1.7
percent in fiscal 2007.
While the bank punches below its
weight in terms of market share for non-life insurance with only 10
percent, it had 24 percent and 20 percent of the domestic mortgage
and retail savings markets, respectively, in the first half and 36
percent of unit-linked life insurance.
Of the bank’s five core Central &
Eastern European markets, its Czech Republic interests via
subsidiary CSOB is by far the strongest. It has a 22 percent of the
retail banking market and a 10 percent share of the life insurance
sector.
Elsewhere in the region, retail
banking market shares range from 3 percent and 4 percent in
Bulgaria and Poland, respectively, to 9 percent in each of Slovakia
and Hungary.
In total, KBC’s CEE distribution
network following the restructuring will amount to 1,400 branches
and 12,000 insurance agencies serving 8.5 million retail
customers.
In contrast to a number of its peers,
KBC’s CEE subsidiaries have weathered the storm better than
anticipated with significant liquidity surpluses in every country
except for Poland and Russia; overall the bank’s loan-to-deposit
ratio in its CEE markets was 86 percent at the end of third
quarter.
CSOB IPO to raise around €1.5bn
Jan Vanhevel, KBC chief executive,
told analysts that the bank would aim to offer a minority stake in
CSOB in 2010.
“CSOB has a leading market position
in what is currently one of the best markets in the region. Its net
asset value amounts to around €2.1 billion while it has realised an
average net annual profit of €360 million over the last five
years,” he said.
Vanhevel added that KBC will decide
about a possible listing of a stake in its Hungarian subsidiary
K&H Bank, the country’s second-biggest after OTP, in the light
of the CSOB listing, expected to be the biggest such sale in the
Prague bourse’s history, with analysts forecasting it will raise in
the region of €1.5 billion.
KBC also continues to seek a buyer
for its non-strategic 31 percent stake in Slovenian lender NLB.
While the bank is throwing in the
towel by selling up in Serbia (the 93-branch-strong KBC Banka has
assets of only €200 million) and Russia (the 74 branch Absolut Bank
has total assets of €4.2 billion), Vanhevel said he would not be
presiding over a hurried fire sale.
“We are lucky to have the capital
flexibility not to have to divest today, because the timing for
that would not be on our side anyway,” he explained. “The difficult
local economic conditions would mean any deal would take place at a
distressed price and would destroy considerable value.”
The only international market in
which KBC remains undecided about the future is Ireland where it
said it would retain and review its local subsidiary.
Vanhevel said its Irish unit was not
a “strategic fit” for the overall group but added it remained
profitable, contributing around 10 percent of group profits in the
first three quarters despite difficult domestic economic
conditions, and had not been earmarked for disposal.
RESULTS
Improved margins help KBC back into the black
Belgian bancassurer KBC reported a
net loss of €2.8 billion ($4.2 billion) for the first nine months
of 2009 against a net profit of €224 million for the same period
last year.
But by contrast, a third quarter net
profit of €419 million compared favourably to a net loss of €876
million for the corresponding period in 2008.
Among third-quarter highlights, the
bank’s net interest margin rose to 1.86 percent from 1.57 percent
in the same quarter last year.
A year ago, interest rates for
traditional savings products in Belgium stood at historically high
levels but have been decreasing continuously since, in line with
consecutive cuts in the European Central Bank base rate, combined
with a shift towards deposit products with a higher margin for the
bank.
This all contributed to net interest
income for the first three quarters of €4.5 billion, up 21 percent
year-on-year.
The group also reported success in
cost-cutting, with operating expenses down 4 percent year-on-year
helping to reduce the banking business’ cost-income ratio for the
first nine months to 55 percent compared to 64 percent for fiscal
2008.
The bank’s Belgium business unit
generated underlying profit of €289 million for the third quarter,
up 35 percent from €215 million in the same quarter last year, with
loan volumes down by only 1 percent while deposits increased by 2
percent.
Less positive was the net result at
its Central & Eastern Europe unit which was impacted by
additional loan impairments made for Russia (€15 million higher,
mainly related to corporate credit) and Poland (€13 million higher,
mainly related to consumer finance).
Net fee and commission income of €400
million for the third quarter was down 7 percent compared to a year
ago but up 2 percent on the previous quarter.
Jan Vanhevel, group CEO, said: “The
operating environment further gradually improved during the third
quarter and leading indicators are signalling that we are past the
bottom of the economic cycle. However, we are not back to a normal
situation just yet.”
