Equity 23 November 2015, 2:53pm

Hungarian KBC arm K&H Bank posts record high Q3 profit

Portfolio

KBC's Hungarian unit K&H Bank saw a 12% year-on-year decline in Q3 operating revenue despite increasing business activity indicated by the fact that K&H extends one in six mortgages and one in five business loans offered via the Funding for Growth Scheme. Yet the bank has surprised the market with the highest Q3 net income in 5 years at HUF 12.8 billion, thanks to reduced loan losses and reversals.

After a strong Q3 that yielded HUF 12.8 billion net income, K&H Bank's after-tax profit totaled HUF 28.7 billion in the 9 months to September, CEO Hendrik Scheerlinck said in a press conference on Monday.

The improved result is primarily due to a more favourable position on the loan loss provision line. This is not simply the result of a very high-quality corporate loan portfolio; the reversal of retail loan loss reserves has also been a contributing factor, CFO Attila Gombás said at the press conference. In Q2 and Q3 combined, reversals totaled approximately HUF 5 billion owing to the fact that the conversion of foreign currency mortgages into forint debt restored almost 1,500 clients who had previously been in default to liquidity.

K&H continued to conduct brisk business in Q3, and was definitely among the more active banks in Hungary, the CEO said, mentioning the following highlights:

The negative impact of settlement of foreign currency loans and conversion into forint debt was compensated for by increased revenue in certain segments, lowered risk costs, and stringent cost management.
New loans totaling HUF 164 billion were extended in Q1, Q2 and Q3 combined.
The bank added HUF 49.4 billion in new mortgage loans, an increase of 80% year-on-year, thereby gaining a market stake of 16.5%. K&H had a 34% market stake in mortgage refinancing.
New business loans extended to SME's totaled HUF 38 billion in the nine months to September, boosting the bank's stock of SME loans by 8%. In Phase 2 of the Funding for Growth Scheme, K&H loaned out HUF 190.3 billion, thus carving out a market stake of 18.8%.
Despite these efforts, the corporate loan portfolio has shrunk, yet the bank managed to increase its overall market share.
The assets in deposits and investments grew HUF 297 billion year-on-year.

In response to a question from Portfolio.hu, Scheerlinck gave the following assessment of the National Bank of Hungary's Funding for Growth Scheme:

The K&H management is supportive of any government programmes that ease the progress of SME lending (K&H increased its exposure in this market segment by 28% in the past 1.5 years).
As a commercial bank, K&H welcomes the fact that the government is paying more and more attention to stimulus for lending in the SME sector.
No specific decision has been made regarding the size of K&H's 2016 corporate lending commitment to the NBH.

Scheerlinck declined to disclose what the bank's expectations for the pending "Quaestor Law" ahead of the actual act of legislation, another issue raised by a staff member of Portfolio.hu.

K&H's Q3 operating revenue declined 12% year-on-year despite brisk business activity, due to a shrinking loan portfolio (as a result of settlement and conversion of loans, as well as governmental takeover of the municipal loan portfolio), lower interest rate levels (as a result of the settlement), and narrower margins. Transaction type revenues have infinitesimally increased.

Two interesting piece of data to demonstrate the impact of the mandatory settlement with borrowers and the conversion of foreign currency loans into forint debt at K&H:

The loan-to-deposit ratio has decreased from 62.3% to 50.7% year-on-year - the latter seems extremely low.
The cost-to-revenue ratio has risen from 61.0% to 69.0% year-on-year, indicating deteriorating efficiency.

The bank saw costs rise almost 2% in the 9 months to September. Without transaction tax and extraordinary payment obligations into the Investor Protection Fund (Beva) as well as into the newly launched Consolidation Fund, costs would have actually been 2% lower than a year earlier.

Commenting on the performance of K&H Insurance in the first 9 months of the year, new CEO Nik Vincke highlighted the following:

In the non-life segment, premium income grew 20%, as third-party automobile insurance remains the leading product (with almost 1 million clients), however, the stock of home insurance contracts also grew almost 10%.
In the life insurance segment, managed assets increased 13% to HUF 91.9 billion in just a year, with regular premium insurance contracts up 12%.
K&H Insurance had HUF 1.8 billion profit in Q1 to Q3, which is 9.4% less than a year earlier.