Regulated information* - 18 November 2009 (12.00 a.m. CET)
While the global economy gradually recovers from its worst downturn
in decades, KBC has been working on a strategic review to enhance its
position in the post-crisis period. The new business plan will enable
KBC to continue to act as a solid European regional player that is
attractive for its customers, employees, shareholders and the
communities in which it operates. The strategy will also generate
enough capacity to redeem the capital securities that were issued to
the State. The strategic plan, which was the basis for a
restructuring plan as requested by the European Commission, was
cleared by European regulatory authorities today.
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. Jan
Vanhevel, Group CEO: '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. 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.'
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 refocus project will also free up capital sources that
will contribute to redeeming the capital securities subscribed by the
State.
Jan Vanhevel: 'While reducing business risk, we will focus on a set
of core activities where we have a strong value proposition. Our
priority will be to build on our existing bancassurance platforms
within Belgium and five selected Eastern European markets, where we
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. This will be complemented by some
additional capital optimisation measures in core markets.'
As regards asset management activities, the geographic focus will be
on KBC's core markets, offering best-in-class products - mainly
retail funds - through KBC distribution channels.
Over the next years, organic growth will be pursued, without major
acquisitions. In terms of size, KBC positions itself as a European
regional player. KBC believes that a strategy of 'refocus' is a
competitive advantage for its core business and that size,
international presence or ability to make large acquisitions in
themselves do not necessarily lead to better performance.
In order to achieve the refocus objectives set, a number of assets
need to be divested. KBC has opted for assets that can be monetised
today at a fair valuation, while avoiding ending up in a position of
forced selling at distressed prices. By doing so, the business plan's
execution risk is minimised, which is important given the still
uncertain economic environment.
Fully aware of the increasing demands for accountability placed on it
by many actors in society, KBC is also committed to continue its
ongoing process of improving the way it conducts its business. KBC's
business model is geared towards direct and service-oriented
relationships with its customer base. Employee professionalism and a
deep connection with local markets are key contributors to such a
strategy. Jan Vanhevel, Group CEO: 'Offering value-adding solutions
for customers, while building strong ties with employees and
contributing to the development of our local economies. That is our
commitment. That's how we create sustainable value for both
shareholders and for the community at large.'
In order to align remuneration principles with long-term
stakeholders' interests, KBC has approved a new group-wide
remuneration policy, including high level principles, internal
guidelines and a governance framework, aligned with most recent
international standards. Moreover, KBC Group Executive Committee
members have decided to forego their remuneration bonus for the 2009
financial year, just as they did last year.
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 42 billion euros. While one of the aims is to service
the financial needs of domestic corporate customers abroad, a large
part of the lending activity is oriented towards local foreign
corporate customers or to certain specific areas such as global
project finance. Jan Vanhevel, Group CEO: 'The new business plan
encompasses the refocus on that part of the business for which a
natural link exists with our customer base in our core markets. Some
parts of the portfolio without such a link will become available for
sale, while others will be run off at maturity and will not be
renewed.'
As regards the capital market activities, it has already been
announced that KBC had put its derivatives-based structured products
business within KBC Financial Products on run-off status. In
addition, a number of other lines of international capital market
business with a low level of synergy with the core strategy have been
earmarked for divestment. On the other hand, KBC will continue to act
as a major player in the securities markets in Belgium and Central
and Eastern Europe, with a complete set of capabilities to give
domestic corporate customers access to capital markets and capital
market products.
The corporate and market activities that are to be discontinued
(excl. Ireland) represent some 23 billion euros' worth of
risk-weighted assets (position as at 31 December 2008). Over the last
five years, these activities contributed on average roughly 150
million euros net annually to group net profit (some 400 million
euros as best annual performance, -150 million euros as worst annual
performance).
New strategic partner for KBL European Private Bankers
Through a cluster of local brands, KBC also has a pure play private
banking business outside Belgium and Central and Eastern Europe.
Given its lower than average level of synergy with the bancassurance
strategy, it has been decided to look for a new strategic partner for
this activity. In the meantime, KBC will ensure that it continues to
grow the value of the business and to offer superior customer
service.
Jan Vanhevel, Group CEO: '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 47 billion euros in
customer assets from 9 European locations.' 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 175 million euros in net profit annually
(corresponding to a net average contribution to group profit, after
funding costs, of 125 million euros). At the start of the year, it
represented some 6 billion euros' 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. Jan
Vanhevel: 'CSOB has a leading market position in what is currently
one of the best markets in the region.' Its net asset value amounts
to 2.1 billion euros, while it has realised an average annual net
profit of 360 million euros over the last five years (corresponding
with a group profit contribution of some 300 million euros, 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.
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. Jan Vanhevel: '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. The difficult local
economic conditions would mean any deal would take place at a
distressed price and would destroy considerable value.' 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.
In various core regions, KBC uses complementary distribution channels
in addition to its core bancassurance platform. Operating under a
different brand name, a differentiated product and service offer is
made to customers through independent resellers. 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). This step does not undermine the
strength of the primary business model in the respective markets.
Centea and Fidea represent a market share of around 1 to 2% for total
loans, deposits and insurance in Belgium. Zagiel has a market share
of around 3% in the Polish unsecured consumer finance market.
Over the past five years, these last three companies generated a
combined average annual net profit of some 130 million euros
(contribution of 110 million euros to group profit, after funding
costs). Jan Vanhevel: 'We had to make choices in order to ensure the
future strength of the group. We believe these companies can be even
more valuable for new strategic partners which can add new
competences and create development opportunities for staff members.
KBC is also strongly committed to keeping customer service levels
high during the transfer period.'
Financial highlights
KBC wants to position itself as a well-capitalised and risk-aware
group. This is reflected in the regulatory capital target ratio
(group tier-1 ratio) of 10%, of which 8% is core tier 1. On
30 September 2009, the group tier-1 ratio stood at 10.2%, of which
8.8% core tier 1. The core capital base includes the 7 billion euros'
worth of capital securities subscribed by the State. KBC intends to
offload most of the State securities by 2013.
The main sources of capital formation for the years ahead will be
operating earnings combined with gains realised on divestment
transactions, on the one hand, and freeing up capital by reducing
non-core activities and listing the Czech subsidiary CSOB, on the
other. A total of 39 billion euros of risk-weighted assets have been
earmarked to be run-off or sold over the 2009-2013 period,
corresponding with 25% of the group total (combined for banking and
insurance, as at 31 December 2008). At 23 billion euros, the largest
decrease of risk-weighted assets will be realised in the Merchant
Banking Business Unit. The divestment of KBL European Private Bankers
will reduce risk-weighted assets by 6 billion euros, while
divestments in Belgium (related to subsidiaries Centea and Fidea) and
Central and Eastern Europe (activities in Russia and Serbia) will
reduce them by a further 10 (or 2 times five) billion euros.
Besides repaying the State securities, the above-mentioned capital
inflows will enable KBC to continue solid organic growth in its core
geographies.
Stretching performance goals will be set for each individual line of
business in accordance with the various stages of development.
Moreover, adequate cost management principles will be consistently
applied throughout the group, resulting in a 'low fifties'
cost/income ratio as soon as economic conditions reach a fair level
of normalisation (post 2010).
There is enough flexibility in place to absorb the effects of a
prolonged recessionary environment causing more sluggish market
growth and customer debt servicing problems. Jan Vanhevel: 'From a
cautious point of view, the business plan enables us to deal with a
loan provision charge in Central and Eastern Europe markedly above
our historic through-the-cycle loan loss experience.'
Capital will also be boosted by additional financial optimisation
measures, such as value gains to be realised on real estate property,
the optimisation of risk-weighted assets recognition and modelling
and the sale of treasury shares. Jan Vanhevel, Group CEO: 'A large
share issue is not our preferred scenario. We prefer to earn our way
out of the crisis. If the cautious macro outlook that we used for
budgeting purposes were to materialise, we would sell our stock of
18 million treasury shares'.
KBC aims to resume cash dividend payments as of 2011 (based on 2010
earnings). Also the payment of coupons on all hybrid capital
instruments outstanding will be continued. KBC has no immediate
intention to call hybrid capital instruments on call dates.
Jan Vanhevel: 'From a shareholder's perspective, it is also good to
understand that the change in business mix being pursued not only
includes lower risk, but - all other things remaining equal - also
includes an improved average return level. Since the share of
'below-average-margin' merchant banking assets is being significantly
reduced, a positive mix effect is working its way through to the
average return on capital ratio.'
Approval from the European Commission
In order to avoid distortion of competition within the European Union
and to ensure that the temporary stimuli received by KBC from both
the Belgian Federal and Flemish Regional Governments have been
adequately financially remunerated, the European Commission needed to
approve these transactions. Final approval from the Commission was
granted on 18 November 2009.
Jan Vanhevel: 'Discussions with the European Commission were not
always easy since difficult trade-offs had to be made. But we
appreciated the open and constructive way these discussions were
held. The same holds true for our discussions with lead
representatives from both the Belgian Federal and Flemish Regional
authorities.'
Investor Day, 19 November
A conference for capital market participants on the renewed strategy
is scheduled for tomorrow, 19 November 2009 in the financial centre
of London (advance registration is required and can be done today).
All PowerPoint presentations, including financial details, will be
published on www.kbc.com at the start of the event (9.30 a.m.
GMT/10.30 a.m. CET). The conference will also be webcast live. In
order to avoid (apparent) selective disclosure, no additional
quantitative information will be made available between the end of
today's analysts' conference call and the start of the conference.
Conclusion from the CEO
Jan Vanhevel: 'We are ready for the future. We have a clear vision
for the years ahead supported by a strong business case. We will
start executing the plan immediately and will closely follow this up.
We will make sure that change processes are professionally managed
and internal dialogue remains unambiguous and respectful, in line
with our corporate culture.
The decisions on divestment were not taken lightly. We will work
carefully to manage the divestment process in a way that will support
the success of our business in the interests of our customers,
employees and shareholders alike.
In addition, several of the intended measures are conditional on the
approval or advice of the relevant works councils and local
regulatory authorities.'
* This news item contains information that is subject to the
transparency regulations for listed companies.
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