KBC confirms position as solid bancassurance player in core markets.
To repay State liabilities in f
(Thomson Reuters ONE) - Regulated information* - 18 November 2009 (12.00 a.m. CET)While the global economy gradually recovers from its worst downturnin decades, KBC has been working on a strategic review to enhance itsposition in the post-crisis period. The new business plan will enableKBC to continue to act as a solid European regional player that isattractive for its customers, employees, shareholders and thecommunities in which it operates. The strategy will also generateenough capacity to redeem the capital securities that were issued tothe State. The strategic plan, which was the basis for arestructuring plan as requested by the European Commission, wascleared 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 strategyUntil the credit crisis started, KBC's performance track record hadbeen solid. Its strategy to invest in Central and Eastern Europeangrowth markets added great value and its distinctive retailbancassurance business model proved to be highly effective. JanVanhevel, Group CEO: 'When analysing the effects of the crisis, it isreassuring to note that our core business model remained largelyuntouched and that the strategic rationale remained valid for ourCentral and Eastern European presence. Unlike many of our peers, ourhigh deposit-to-loan ratio means that our future growth will not beconstrained by funding concerns. Moreover, customer and employeesurveys show that loyalty levels have remained sound.'Past market turbulence, however, has shown the need to markedlyreduce the risk profile of the group and, accordingly, to reduce thescope of activities and geographic markets to which KBC allocatescapital. The refocus project will also free up capital sources thatwill contribute to redeeming the capital securities subscribed by theState.Jan Vanhevel: 'While reducing business risk, we will focus on a setof core activities where we have a strong value proposition. Ourpriority will be to build on our existing bancassurance platformswithin Belgium and five selected Eastern European markets, where wewill continue to target local retail and SME customers, includinglocal mid-caps. We will significantly reduce exposure to non-domesticcorporate lending and capital market activities and will divest KBLEuropean Private Bankers. This will be complemented by someadditional capital optimisation measures in core markets.'As regards asset management activities, the geographic focus will beon KBC's core markets, offering best-in-class products - mainlyretail funds - through KBC distribution channels.Over the next years, organic growth will be pursued, without majoracquisitions. In terms of size, KBC positions itself as a Europeanregional player. KBC believes that a strategy of 'refocus' is acompetitive advantage for its core business and that size,international presence or ability to make large acquisitions inthemselves do not necessarily lead to better performance.In order to achieve the refocus objectives set, a number of assetsneed to be divested. KBC has opted for assets that can be monetisedtoday at a fair valuation, while avoiding ending up in a position offorced selling at distressed prices. By doing so, the business plan'sexecution risk is minimised, which is important given the stilluncertain economic environment.Fully aware of the increasing demands for accountability placed on itby many actors in society, KBC is also committed to continue itsongoing process of improving the way it conducts its business. KBC'sbusiness model is geared towards direct and service-orientedrelationships with its customer base. Employee professionalism and adeep connection with local markets are key contributors to such astrategy. Jan Vanhevel, Group CEO: 'Offering value-adding solutionsfor customers, while building strong ties with employees andcontributing to the development of our local economies. That is ourcommitment. That's how we create sustainable value for bothshareholders and for the community at large.'In order to align remuneration principles with long-termstakeholders' interests, KBC has approved a new group-wideremuneration policy, including high level principles, internalguidelines and a governance framework, aligned with most recentinternational standards. Moreover, KBC Group Executive Committeemembers have decided to forego their remuneration bonus for the 2009financial year, just as they did last year.Reduction of scope of international lending and capital marketactivitiesAs previously announced, KBC decided to markedly reduce the scope ofits Merchant Banking Business Unit, mainly in relation to theinternational corporate loan book (outside Belgium and Central andEastern Europe) and capital market activities.Through a mostly European network of corporate branches and corporatebanking subsidiaries, KBC has an international loan portfolioamounting to 42 billion euros. While one of the aims is to servicethe financial needs of domestic corporate customers abroad, a largepart of the lending activity is oriented towards local foreigncorporate customers or to certain specific areas such as globalproject finance. Jan Vanhevel, Group CEO: 'The new business planencompasses the refocus on that part of the business for which anatural link exists with our customer base in our core markets. Someparts of the portfolio without such a link will become available forsale, while others will be run off at maturity and will not berenewed.'As regards the capital market activities, it has already beenannounced that KBC had put its derivatives-based structured productsbusiness within KBC Financial Products on run-off status. Inaddition, a number of other lines of international capital marketbusiness with a low level of synergy with the core strategy have beenearmarked for divestment. On the other hand, KBC will continue to actas a major player in the securities markets in Belgium and Centraland Eastern Europe, with a complete set of capabilities to givedomestic corporate customers access to capital markets and capitalmarket products.The corporate and market activities that are to be discontinued(excl. Ireland) represent some 23 billion euros' worth ofrisk-weighted assets (position as at 31 December 2008). Over the lastfive years, these activities contributed on average roughly 150million euros net annually to group net profit (some 400 millioneuros as best annual performance, -150 million euros as worst annualperformance).New strategic partner for KBL European Private BankersThrough a cluster of local brands, KBC also has a pure play privatebanking business outside Belgium and Central and Eastern Europe.Given its lower than average level of synergy with the bancassurancestrategy, it has been decided to look for a new strategic partner forthis activity. In the meantime, KBC will ensure that it continues togrow the value of the business and to offer superior customerservice.Jan Vanhevel, Group CEO: 'This business line was originally set up asa private banking activity in Luxembourg, but has diversified overthe last 20 years to manage currently some 47 billion euros incustomer assets from 9 European locations.' The network operatesunder the umbrella of KBL European Private Bankers, aLuxembourg-based 99.9% subsidiary of KBC group. Over the past fiveyears, it generated some 175 million euros in net profit annually(corresponding to a net average contribution to group profit, afterfunding costs, of 125 million euros). At the start of the year, itrepresented some 6 billion euros' worth of risk-weighted assets.The KBC-branded private banking activities in Belgium and Central andEastern Europe remain unchanged.Business portfolio adjustments in core marketsThe core countries are Belgium, the Czech Republic, Poland, Hungary,Slovakia and Bulgaria. In these markets (all within the EuropeanUnion), KBC owns banking, insurance and asset management operationsand has a platform for sustainable organic growth.In order to unlock capital in a way that enhances value, KBC intendsto make a public offering of a minority stake in its Czech subsidiaryCSOB that will be listed on the Prague Stock Exchange in 2010. JanVanhevel: 'CSOB has a leading market position in what is currentlyone of the best markets in the region.' Its net asset value amountsto 2.1 billion euros, while it has realised an average annual netprofit of 360 million euros over the last five years (correspondingwith a group profit contribution of some 300 million euros, net offunding costs). This listing on the local stock market also supportsour home market strategy for that market. A similar transaction canbe set up in the future for selected other Central and EasternEuropean subsidiaries, such as K&H in Hungary.Recently KBC also made inroads in banking in a number of non-EUmarkets, such as Russia and Serbia. With market shares of less than1%, its presence in these countries is still limited and strategysynergies are 'early phase'. Nevertheless, KBC does not intend tostart a divestment process soon. Jan Vanhevel: 'We are lucky to havethe capital flexibility not to have to divest today, because thetiming for that would not be on our side anyway. The difficult localeconomic conditions would mean any deal would take place at adistressed price and would destroy considerable value.' The situationwill be reviewed in due time when market conditions permit, alsotaking into account how the risk/return profiles of these activitiesdevelop. We would also repeat that KBC's non-strategic 31% stake inNLB in Slovenia remains for sale.In various core regions, KBC uses complementary distribution channelsin addition to its core bancassurance platform. Operating under adifferent brand name, a differentiated product and service offer ismade to customers through independent resellers. In order to be ableto strengthen its capital base, KBC intends to divest the activitiesof Centea (retail banking, Belgium), Fidea (insurance, Belgium) andZagiel (consumer finance, Poland). This step does not undermine thestrength of the primary business model in the respective markets.Centea and Fidea represent a market share of around 1 to 2% for totalloans, deposits and insurance in Belgium. Zagiel has a market shareof around 3% in the Polish unsecured consumer finance market.Over the past five years, these last three companies generated acombined average annual net profit of some 130 million euros(contribution of 110 million euros to group profit, after fundingcosts). Jan Vanhevel: 'We had to make choices in order to ensure thefuture strength of the group. We believe these companies can be evenmore valuable for new strategic partners which can add newcompetences and create development opportunities for staff members.KBC is also strongly committed to keeping customer service levelshigh during the transfer period.'Financial highlightsKBC wants to position itself as a well-capitalised and risk-awaregroup. This is reflected in the regulatory capital target ratio(group tier-1 ratio) of 10%, of which 8% is core tier 1. On30 September 2009, the group tier-1 ratio stood at 10.2%, of which8.8% core tier 1. The core capital base includes the 7 billion euros'worth of capital securities subscribed by the State. KBC intends tooffload most of the State securities by 2013.The main sources of capital formation for the years ahead will beoperating earnings combined with gains realised on divestmenttransactions, on the one hand, and freeing up capital by reducingnon-core activities and listing the Czech subsidiary CSOB, on theother. A total of 39 billion euros of risk-weighted assets have beenearmarked to be run-off or sold over the 2009-2013 period,corresponding with 25% of the group total (combined for banking andinsurance, as at 31 December 2008). At 23 billion euros, the largestdecrease of risk-weighted assets will be realised in the MerchantBanking Business Unit. The divestment of KBL European Private Bankerswill reduce risk-weighted assets by 6 billion euros, whiledivestments in Belgium (related to subsidiaries Centea and Fidea) andCentral and Eastern Europe (activities in Russia and Serbia) willreduce them by a further 10 (or 2 times five) billion euros.Besides repaying the State securities, the above-mentioned capitalinflows will enable KBC to continue solid organic growth in its coregeographies.Stretching performance goals will be set for each individual line ofbusiness in accordance with the various stages of development.Moreover, adequate cost management principles will be consistentlyapplied throughout the group, resulting in a 'low fifties'cost/income ratio as soon as economic conditions reach a fair levelof normalisation (post 2010).There is enough flexibility in place to absorb the effects of aprolonged recessionary environment causing more sluggish marketgrowth and customer debt servicing problems. Jan Vanhevel: 'From acautious point of view, the business plan enables us to deal with aloan provision charge in Central and Eastern Europe markedly aboveour historic through-the-cycle loan loss experience.'Capital will also be boosted by additional financial optimisationmeasures, such as value gains to be realised on real estate property,the optimisation of risk-weighted assets recognition and modellingand the sale of treasury shares. Jan Vanhevel, Group CEO: 'A largeshare issue is not our preferred scenario. We prefer to earn our wayout of the crisis. If the cautious macro outlook that we used forbudgeting purposes were to materialise, we would sell our stock of18 million treasury shares'.KBC aims to resume cash dividend payments as of 2011 (based on 2010earnings). Also the payment of coupons on all hybrid capitalinstruments outstanding will be continued. KBC has no immediateintention to call hybrid capital instruments on call dates.Jan Vanhevel: 'From a shareholder's perspective, it is also good tounderstand that the change in business mix being pursued not onlyincludes lower risk, but - all other things remaining equal - alsoincludes an improved average return level. Since the share of'below-average-margin' merchant banking assets is being significantlyreduced, a positive mix effect is working its way through to theaverage return on capital ratio.'Approval from the European CommissionIn order to avoid distortion of competition within the European Unionand to ensure that the temporary stimuli received by KBC from boththe Belgian Federal and Flemish Regional Governments have beenadequately financially remunerated, the European Commission needed toapprove these transactions. Final approval from the Commission wasgranted on 18 November 2009.Jan Vanhevel: 'Discussions with the European Commission were notalways easy since difficult trade-offs had to be made. But weappreciated the open and constructive way these discussions wereheld. The same holds true for our discussions with leadrepresentatives from both the Belgian Federal and Flemish Regionalauthorities.'Investor Day, 19 NovemberA conference for capital market participants on the renewed strategyis scheduled for tomorrow, 19 November 2009 in the financial centreof London (advance registration is required and can be done today).All PowerPoint presentations, including financial details, will bepublished 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. Inorder to avoid (apparent) selective disclosure, no additionalquantitative information will be made available between the end oftoday's analysts' conference call and the start of the conference.Conclusion from the CEOJan Vanhevel: 'We are ready for the future. We have a clear visionfor the years ahead supported by a strong business case. We willstart executing the plan immediately and will closely follow this up.We will make sure that change processes are professionally managedand internal dialogue remains unambiguous and respectful, in linewith our corporate culture.The decisions on divestment were not taken lightly. We will workcarefully to manage the divestment process in a way that will supportthe success of our business in the interests of our customers,employees and shareholders alike.In addition, several of the intended measures are conditional on theapproval or advice of the relevant works councils and localregulatory authorities.'* This news item contains information that is subject to thetransparency regulations for listed companies.http://hugin.info/133947/R/1355541/329225.pdfThis announcement was originally distributed by Hugin. The issuer is solely responsible for the content of this announcement.
Datum: 18.11.2009 - 12:00 Uhr
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To repay State liabilities in f"
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