Peter Roebben, a lifer with Belgian financial giant KBC Group who was dispatched in April last year to run its Irish unit, wants to clear something up.
"My mission is not to look for mergers and acquisitions," says the 54-year-old chief executive of KBC Bank Ireland, clearly tired of the fact that the lender is, along with Permanent TSB and Ulster Bank, the subject of perennial tie-up speculation. "That's not what I'm paid for as CEO."
All manner of combinations have taken up the time of analysts, bankers, Government officials and regulators – not to mention media columns – for more than a decade, as lenders struggle with low profit returns on shareholders’ money following the financial crisis.
The real race that's going on is about who can define a sustainable, financial services model with digital at the core
The coronavirus pandemic has rattled the industry further. Even after the five banks in the State deal with a fresh surge in bad loan losses – guided by the sector at as much as €3.6 billion for 2020 – they face a squeeze from lower-for-longer interest rates and muted loan growth. For Roebben, plotting consolidation is the wrong obsession.
“Just looking at the sector as the competition between banks is a very narrow view. I feel the heat from the fintechs. I feel the heat from the niche players [selling one financial product]. I feel the heat from big tech. Big time,” Roebben says.
“The real race that’s going on is about who can define a sustainable, financial services model with digital at the core. Who can make that work? Because that’s what the customers are asking for.”
The pandemic has resulted in an acceleration in the shift of financial activity to online. And as traditional banks continue to deal with the legacy of the last crisis and invest billions to overhaul creaking IT systems, the likes of Google, Facebook, Apple and Amazon, which have all entered the financial arena with differing strategies in recent years, are threatening the old model.
Still, KBC Bank Ireland, which grew out of KBC's 1978 purchase of Irish Intercontinental Bank (IIB), before going on to build up a 10 per cent share in the mortgage market before the 2008 property crash, thinks it might have the right formula.
After pumping €1.4 billion into the Irish unit to keep it afloat during the financial crisis and reviewing options, including an exit, the Brussels-based group affirmed its commitment to Ireland in early 2017 – focusing on developing a digital-first bank with a minimal network of 16 branches, or “hubs” as it likes to call them.
The company has built up customer numbers by 30 per cent since then to 314,000. It offers a mobile app, a virtual wallet that offers customers access to the likes of Apple Pay and Fitbit Pay, and free day-to-day banking to those who deposit €2,000 a month into their current account.
These products are loss leaders for a bank that still makes most of its money from its subscale €10 billion mortgage book. Put simply, KBC needs its new customers to do more business.
It’s hoping that a move this year to become a fully fledged bank and insurance group with pensions and life product offerings from a local branch of its Belgian insurance unit will give it an edge. It launched in May with an initial digital pension product that promises to “take the complexity out of pensions” and give savers “full control of their financial future based on their own personal circumstances”.
With only a third of private sector workers in Ireland currently paying into pension plans, according to Government figures, and auto-enrolment coming down the tracks, the opportunity is clear.
Belgian blueprint
The Belgian blueprint, which will see KBC Bank Ireland exit its existing relationship as an intermediary for Irish Life, replicates its parent group's own "bancassurance" model. The group itself emerged from a 1998 tie-up between two Belgian lenders and an insurance company and is one of the few among a wave of such combinations in the decade leading up to the 2008 crash to survive.
Credit Suisse, Royal Bank of Scotland, Allianz and ING all tried variations of an insurance-banking combination but, for different reasons, ended up unwinding the two businesses. More locally, the 1999 merger of Irish Life and the Irish Permanent Building Society – to create Irish Life & Permanent – would be reversed less than a decade and a half later, as the Government sought to recoup its €4 billion bailout of the banking side of the group.
The bancassurance model should work well in theory, as each part has different business cycles. At the moment, the insurance arm is propping up the profits of KBC Group, as banks globally set aside large provisions for an expected spike on loan losses resulting from Covid-19.
“But there has to be a very careful balancing [between both arms] in terms of incentivising cross-selling,” says Roebben.
The move into the life and pensions business is “significant” and “underlines the strategic commitment” of the group in Ireland, he says.
Aside from the enormous losses racked up in the Irish market during the financial crisis, KBC has found the going tough here in recent times. In late 2018 its Dublin headquarters and two branches were subject to arson attacks after it moved to repossess a farm in Co Roscommon, almost a decade after it took proceedings to recover money owed. The farming family condemned the incidents.
Last November, KBC Group chief executive Johan Thijs was forced to apologise for "insensitive" comments on the country's tracker-mortgage scandal, which had drawn censure from Minister for Finance Paschal Donohoe and consumer activists. Thijs had criticised the Central Bank of Ireland on a conference call with financial analysts for its continued focus on the scandal, and said this "nitty-gritty stuff" was holding the industry back.
“When it happened, I immediately [realised] this was not going to be a good day for me,” recalls Roebben. “It’s sometimes very hard for people from the outside to understand what really happened here [with trackers] … how deep the wound is, how big the rupture in trust between banks and the Irish people. And we’re still not over that. It’s still very raw.”
Central Bank investigation
KBC Bank Ireland has set aside €14 million for a likely fine, as the Central Bank continues enforcement investigations against the country’s banks for their role in the debacle. Roebben says he hopes the regulator will complete its investigation into his bank this year.
We haven't won this race. But I think we're running the right race
Meanwhile, KBC Bank Ireland, which reported a €55 million loss for the first half of the year as it booked €95 of loan impairment charges, has also had to put off handing over a dividend on 2019 earnings to its Belgian parent, as regulators discourage payouts during Covid-19.
Does the bank, which has only returned €410 million of its €1.4 billion crisis-era parental bailout, expect to ever repay the bill in full?
“It’s not an obsession of the shareholder to get the €1.4 billion back fast,” says Roebben. The pressure, he says, is to roll out digital innovation being developed across the KBC Group, to build up a sufficient customer base of 400,000-500,000 customers and to convince them to share enough of their business.
“When you get into that level, we will have achieved a model that gives us sufficient return on capital costs,” he says. “We haven’t won this race. But I think we’re running the right race. There is a real good opportunity for us to make it work – to carve out a profitable niche.”
