Awards for Excellence 2019
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Despite the talk of how poorly European banks are performing compared with the Americans – and the relative environment has indeed got worse over last year – there are some banks in the region that can match and even beat those in the US in terms of their business models and financial results.
Western Europe’s best bank, KBC, is the foremost of this small group of European banks and performance of the firm led by chief executive Johan Thijs would be impressive in any region and any industry.
The bank’s return on equity has been in the high teens for each of the last three years, a level almost unheard of elsewhere in Europe. Understandably, it trades at the region’s highest stock valuation, 1.5 times book value, and beats most US banks on this measure, according to Berenberg.
What is most impressive is how sustained its strong financial performance has been this decade, as steadily rising net income has allowed it to outperform most banks around the world in terms of longer-term shareholder returns.
This is also a bank for which western Europe still represents the majority of its business; something that cannot be said of many other relatively successful Europe-based banks, such as HSBC. That focus may be changing, as the 2017 acquisition of United Bulgaria Bank from National Bank of Greece shows.
The UBB integration is now well advanced, with the legal merger of UBB and KBC’s existing Bulgarian brand, Cibank, closing last year.
But investors have appreciated the discipline with which KBC has approached the acquisition opportunities afforded by its relatively robust capital ratio. While it has ringfenced a 200 basis point chunk of capital for M&A, to ensure it can act on opportunities without endangering its financial standing, it has steered clear of the riskier options presented in the markets where it operates.
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| Johan Thijs |
In fact, KBC’s relative capital strength is something that it targets more closely than return on equity.
“We want to be among the best performing banks in terms of capital,” says Thijs. “Capital needs to be strong and stronger than our European peers.”
At 14% common equity tier-1 (CET1), or 16% including the acquisition buffer, that goal is achieved. It is well above the bank’s fully loaded 10.7% regulatory minimum.
As a result, investors’ trust in the bank has given it better protection against European banks’ interest margin-squeeze, so it can match healthy loan growth with lower funding costs – underpinning retained profit in a virtuous circle. A relatively low cost-to-income ratio and a commitment to fee-generating bancassurance have completed the winning formula.
“Because we’re integrated, it’s highly efficient in capital and costs, and delivers a one-stop-shop opportunity that’s a huge advantage,” says Thijs, explaining the appeal of its bancassurance model to its clients and investors.
This level of trust among investors is also matched by relatively strong customer satisfaction, something else it embeds in its performance targets, and which is being boosted by digitalization. Partly thanks to shifting to a more flexible three-tier structure in its IT infrastructure 10 years ago, it is comfortably ahead of peers in a ranking of Belgian banks’ digital customer experience by France’s publicly funded D-Rating agency. Moreover, this is being achieved in a country where its main competitors – ING and BNP Paribas – are among the best digital banks in Europe.
KBC’s clients can use its app not just for banking but also to buy meals or train or parking tickets, putting the bank ahead in the shift to platform banking.
