Belgian bancassurer KBC is betting that Central
and Eastern Europe will remain a hotbed of retail banking and
consumer finance growth over the next decade. While the Czech
Republic and Poland will remain its biggest markets in the CEE
region, it argues Russia will come to the fore, driven by an
ever-wealthier middle class.
Belgium’s KBC is putting branches and bancassurance sales income at
the heart of its three-year plan to double its Central and Eastern
European business.
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The group, now present in eight CEE markets including Russia,
Bulgaria, Serbia and Romania (see RBI
592), is increasing the number of branches in its more
established markets of Poland, Hungary, the Czech Republic and
Slovakia by 45 percent by 2009 as it looks to increase the
contribution the CEE region makes to group profits from 23 percent
in 2007 to nearer 30 percent.
The CEE business unit has recorded average annual earnings
growth of 32 percent over the past six years, and according to
Andre Bergen, KBC Group CEO, the region’s earnings growth in 2007
represented half of that of the entire group.
“The Central and Eastern European and Russian region is expected
to remain the group’s growth engine over the next few years,”
stated Bergen.
€600 million on technology
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By GlobalDataHaving spent €7.4 billion ($11.47 billion) on acquisitions since
1999, KBC is now investing €600 million to upgrade technology in
order to harmonise group-wide business processes and IT
applications. During the first phase (2009-2011), Bergen admitted
this will impact the results (€70 million in 2010, for example),
but in the long term, the investment is expected to have an annual
positive impact in excess of €200 million by 2016.
“[The plan is] to introduce new product lines, to implement a
cross-border shared operations approach and to acquire additional
companies to strengthen current market shares,” Bergen stated. “In
the years ahead, KBC will focus on developing existing markets,
including selected ‘plug-in’ acquisitions in these markets. We are
convinced we have the capacity to generate substantial growth and
return.”
The Czech Republic, in which KBC operates under the CSOB brand,
and Poland will remain the group’s two largest CEE markets (2007
profit of €389 million and €145 million, respectively), but Bergen
said that Russia, a market KBC moved into in April 2007 with the
€704 million purchase of Absolut Bank, is set to contribute €100
million in income by 2010.
The main retail banking priority in the country will be mortgage
loans, a product in which Absolut has stolen a lead on foreign
rivals in Russia such as Raiffeisen and UniCredit, according to
KBC’s own figures, though retail asset management and insurance
lines will also become critical.
The value of Absolut’s retail loan book, which includes
mortgages, consumer finance and credit cards, shot up 223 percent
in 2007 to €804 million, while retail deposits grew 116 percent to
€417 million – though this growth was accompanied by a 14
percentage point increase in the bank’s cost-income ratio to 63
percent. Nikolaj Sidorov, CEO of Absolut Bank, added that the aim
is to become one of Russia’s top 15 banks in terms of total
assets.
KBC’s marketing strategy in Russia is focused on turning Absolut
into what Sidorov calls a “family bank”. The middle class (a group
with a monthly income between $500 and $3,000) is becoming the
fastest growing segment in the country, and this is the group KBC
is planning to focus its strategy on.
Sidorov said: “We are targeting the middle-class segment with
traditional family values, aiming to build long-term relationships
with clients throughout their life cycle and to become a ‘family
bank’ in terms of the range and quality of products and
services.”
Overall, KBC’s CEE unit is targeted to grow profits from €600
million to €1.1 billion by 2010. Bergen said that although there is
“still some work to do, for example, completing the expansion of
the sales network”, the execution risk was manageable. The return
on investment for KBC’s four established CEE markets (Czech
Republic, Poland, Hungary and Slovakia) stood at 15 percent in 2007
and is “growing”, said Bergen.
A number of risks
However, Jan Vanhevel, CEO of KBC’s CEE operation, talking at
the same KBC Investor Day as Bergen and Sidorov on 5 June, did warn
that there are a number of risks that could hinder the group’s
ambitious plans for the region.
The main risk would be an unexpected downturn in the economic
cycle across the region, with a consequential adverse impact on
volume growth.
On a more country-by-country basis he warned that the “fight for
deposits” in Poland (which has strong growth in household loans) or
Hungary (slow growth in household savings) could impact margins as
could an “unexpected loss of management focus” in Slovakia due to
the integration of Istrobanka, a local bank it snapped up on 20
March this year for €350 million.
