Question mark around KBC Bank Ireland's future

KBC Bank Ireland could be in line for a potential tie-up with either Permanent TSB or Ulster Bank, following comments on Thursday that its Belgian parent could look to divest its Irish operations once the bank returns to profitability in 2016.

Announcing its second quarter results, KBC Bank said it remains on track to return to full-year profit in 2016, as it reported a second quarter profit of €18 million after tax and impairment costs for its Irish arm, up from a loss of €34 million in the same period in 2014.

However, in a group statement, KBC Bank repeated that once it reaches this goal of profitability, it will then consider its options for its Irish operation, which it says could be to “organically grow a profitable retail bank, build a captive bank-insurance group or sell a profitable bank”.

Commenting on the group's possible plans, Wim Verbraeken, chief executive of KBC Bank Ireland, was keen to distinguish between the intentions of the group and the operations of the bank in Ireland.

“We in Ireland have a mission to return the bank to profitability and we’re on track to do so and to be commercially successful,” he said, noting that it’s then “up to the group to come to its own determination”.

However, he added that: “The group has been committed to Ireland for 40 years and I’m not in a position to doubt that.”

John Cronin, head of financials research with Investec, nonetheless noted that there is a “question mark” around the shape of KBC’s future in Ireland.

“We wonder about the group’s long-term commitment to Ireland,” he said, pointing to a further comment in the group results about its core bank-insurance business “in Belgium, the Czech Republic, Slovakia, Hungary and Bulgaria”.

Given that of the three options cited by KBC, an Irish retail bank doesn’t fit in with the group’s aforementioned “core bank-insurance business”, Mr Cronin said it’s more likely that the bank will either look to acquire another bank or business in the Irish market and build up a bancassurance operation here, or look for a sale which might create that much vaunted “third banking force”.

“It’s most likely that they will progress one of those two options,” he said.

If it’s the latter, a possibility could be a merger with either Permanent TSB or Ulster Bank’s Republic of Ireland operations, or even both, to create a third force.

An international acquirer is another possibility. While Mr Cronin notes that larger international banks are typically retrenching from non-core markets rather than expanding, it could be a possibility in time.

“What will drive an international entrant is a bet on continued Irish macroeconomic strength, having now moved beyond the recovery phase,” he said.

Results

KBC said on Thursday that it is now forecasting loan impairments of about €50-€100 million for its Irish operation for 2015 and 2016.

KBC reported a “good level of impairment charges” at its Irish operation in the three months to June 30th, with loan loss provisions of some €16 million during the quarter, down from €62 million in the same period in 2014, but up from €7 million in the first quarter, although the first quarter performance was driven by a €14 million write-back on one significant impaired corporate loan. As such KBC said it has “ fine-tuned” its impairment guidance for Ireland towards the lower end of the €50 million to €100 million range for both financial year 2015 and 2016.

Of the bank’s €12 billion retail loan book, some €4.5 billion remains impaired, with 70 per cent of the bank’s €2.4 billion corporate loan book impaired.

KBC Bank reduced its total loan book in Ireland by 4 per cent in the year to June 30th, with mortgages down by 1 per cent, although the bank grew its mortgage market share to 15 per cent.

Of the Central Bank’s new mortgage rules, which were in operation during the second quarter, Mr Verbraken said he was not concerned about the impact of the restrictions on mortgage growth.

“We don’t see anything that is specifically negative coming out of this yet,” he said.

Deposits rose by 26 per cent to €3.8 billion, thanks to some of the most competitive rates in the market, as the bank added more than 31,500 customer accounts for the first half of the year. Mr Verbraeken said that the bank has deposit retention rates in the range of 90 per cent.