Belgium’s KBC Group has announced on Wednesday that the European Commission has cleared its new business plan that will enable the company to repay a state aid in full and on its own. KBC said the key lesson it learnt from the crisis is that it needs to focus more on core businesses and reduce risk levels. As part of its new strategy, KBC intends to make a public offering of a minority stake in its Czech subsidiary CSOB that will be listed on the Prague Stock Exchange in 2010. It also said a similar transaction can be set up in the future for selected other Central and Eastern European subsidiaries, such as K&H in Hungary. 2009.11.18 12:19
European Commission nods on KBC relief, Belgian group to float Czech unit and possibly Hungary´s K&H Bank 
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Highlights - Crisis lesson learnt: more focus on core businesses, risk levels to be reduced
- Core bancassurance model largely untouched by crisis, growth options in Eastern Europe maintained
- Non-dilutive exit from State liabilities, predominantly based on earnings accrual and reduced scope of international activities (and some divestments)
- Group total risk-weighted assets to be reduced by 25%
- Aim to resume dividend payout as of 2011
- Plan cleared by European Commission
- Institutional investor conference (Investor Day) scheduled for tomorrow, 19 November (London)
Core business strategy Until the credit crisis started, KBC’s performance track record had been solid. Its strategy to invest in Central and Eastern European growth markets added great value and its distinctive retail bancassurance business model proved to be highly effective.
"When analysing the effects of the crisis, it is reassuring to note that our core business model remained largely untouched and that the strategic
rationale remained valid for our Central and Eastern European presence," commented Jan Vanhevel, Group CEO.
"Unlike many of our peers, our high deposit-to-loan ratio means that our future growth will not be constrained by funding concerns. Moreover, customer and employee surveys show that loyalty levels have remained sound," he added.
Past market turbulence, however, has shown the need to markedly
reduce the risk profile of the group and, accordingly, to reduce the scope of activities and geographic markets to which KBC allocates capital, the bank added in a statement.
The refocus project will also free up capital sources that will contribute to redeeming the capital securities subscribed by the State.
Vanhevel said that KBC, while reducing business risk, will focus on a set of core activities where it has a "strong value proposition".
KBC’s priority will be to build on its existing bancassurance platforms within Belgium, Bulgaria, the Czech Republic, Hungary, Poland and Slovakia, where it will "continue to target local retail and SME customers, including local mid-caps."
"We will
significantly reduce exposure to non-domestic corporate lending and capital market activities and will divest KBL European Private Bankers," Vanhevel added.
Organic growth w/o big buys "Over the next years, organic growth will be pursued, without major acquisitions," KBC said, adding that in order to achieve the refocus objectives set, a number of assets need to be divested.
It noted it has opted for assets that can be monetised today at a fair valuation so as to have the business plan’s execution risk minimised.
Reduction of scope of international lending and capital market activities As previously announced, KBC decided to markedly reduce the scope of its Merchant Banking Business Unit, mainly in relation to the international corporate loan book (outside Belgium and Central and Eastern Europe) and capital market activities.
Through a mostly European network of corporate branches and corporate banking subsidiaries, KBC has an international loan portfolio amounting to EUR 42 billion.
The corporate and market activities that are to be discontinued (excl. Ireland) represent some EUR 23 bn worth of risk-weighted assets (position as at 31 December 2008). Over the last five years, these activities contributed on average roughly EUR 150 m net annually to group net profit (some EUR 400 m as best annual performance, -150 million euros as worst annual performance).
New strategic partner for KBL European Private Bankers Given KBC’s lower than average level of synergy with the bancassurance strategy, it has been decided to look for a new strategic partner for this activity.
This business line was originally set up as a private banking activity in Luxembourg, but has diversified over the last 20 years to manage currently some EUR 47 billion in customer assets from nine European locations, the CEO said.
The network operates under the umbrella of KBL European Private Bankers, a Luxembourg-based 99.9% subsidiary of KBC group.
Over the past five years, it generated some EUR 175 m in net profit annually (corresponding to a net average contribution to group profit, after funding costs, of EUR 125 m). At the start of the year, it represented some EUR 6 b worth of risk-weighted assets.
The KBC-branded private banking activities in Belgium and Central and Eastern Europe remain unchanged.
Business portfolio adjustments in core markets The core countries are Belgium, the Czech Republic, Poland, Hungary, Slovakia and Bulgaria. In these markets (all within the European Union), KBC owns banking, insurance and asset management operations and has a platform for sustainable organic growth.
"In order to unlock capital in a way that enhances value, KBC intends to make a
public offering of a minority stake in its Czech subsidiary CSOB that will be listed on the Prague Stock Exchange in 2010.
CSOB has net asset value of EUR 2.1 bn, while it has realised an average annual net profit of EUR 360 m over the last five years (corresponding with a group profit contribution of some EUR 300 m, net of funding costs).
"This listing on the local stock market also supports our home market strategy for that market. A similar transaction can be set up in the future for selected other Central and Eastern European subsidiaries, such as
K&H in Hungary," Vanhevel said.
Recently KBC also made inroads in banking in a number of non-EU markets, such as Russia and Serbia. With market shares of less than 1%, its presence in these countries is still limited and strategy synergies are ’early phase'. Nevertheless, KBC does not intend to start a divestment process soon.
"The situation will be reviewed in due time when market conditions permit, also taking into account how the risk/return profiles of these activities develop. We would also repeat that KBC’s non-strategic 31% stake in NLB in Slovenia remains for sale," the CEO added.
In order to be able to strengthen its capital base, KBC intends to divest the activities of
Centea (retail banking, Belgium),
Fidea (insurance, Belgium) and
Zagiel (consumer finance, Poland).
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