Thursday 23 November 2017

KBC Bank: Should we stay or should we go?

Wim Verbraeken, chief executive of KBC Bank Ireland Photo: Maxwell Photography
Wim Verbraeken, chief executive of KBC Bank Ireland Photo: Maxwell Photography
Richard Curran

Richard Curran

Whenever someone announces a strategic review of a business, it usually means they are going to sell it.

When KBC Bank Ireland’s chief executive Wim Verbraeken said there would be a review on the future of the bank later this year, we automatically tend to think it will be put up for sale.

Mr Verbraeken did emphasise that they would look at all available options, including growing it organically, growing through acquisition or selling it. The review is being triggered sooner than expected by a return to profit a full year earlier than previously envisaged — another reason to think a sale is on the cards.

KBC Bank in Ireland has done a good job in turning itself around since the worst days of the crash. Results published during the week showed that it had enjoyed a huge upturn last year with a profit of €75m compared to a loss of €91m the previous year.

Impairments were down. It attracted 74,000 new customers and enjoyed what it called strong growth in its mortgage business. KBC might just as easily not have stayed in the Irish market at all, after being bailed out by its Belgian parent company to the tune of €1.3bn.

But it now accounts for 14pc of the mortgage market, has 1,000 staff and is providing some decent competition in the banking sector.

However, a closer look at its figures shows a similar pattern to the rest of banking in Ireland. KBC’s parent group accounts show that it enjoyed a “considerable rise in NIM (net interest margin) in Ireland mainly as a result of lower allocated liquidity and funding costs.

Banks’ profit margins are benefiting from a lower cost of funding which isn’t necessarily being fully passed on to customers. Accounts for the parent group say its credit cost ratio in Ireland has fallen from 6.7pc in 2013 to 0.34pc last year. This represented a significant drop in funding costs for KBC.

Banks are conducting their battles to keep mortgage customers through fixed rate offers instead of variable rates. 

KBC is offering a very competitive rate to customers for both mortgages and deposits and is far from being the worst culprit in squeezing mortgage customers on variable rates. But like other banks, it still has a certain price to pay for the mistakes of the past.

For example, despite increasing customer deposits by 26pc and growing its new mortgage business, KBC’s total loan book shrunk by 4pc.

In an economy growing at 6.9pc per year, just like the other Irish banks, it was still seeing more old loans paid off, than new ones being taken out.

Of its remaining €9.1bn in owner occupier loans, €3.1bn was still impaired. It has €2.6bn in buy-to-let mortgages, of which €1.8bn is impaired. Around 60pc of its €1.16bn SME loan book is impaired and 100pc of its €300m in loans for land development.

These are old soars on its balance sheet that are slowly going away but not yet gone.

Further progress dealing with impaired loans and a fair economic wind in 2016 should see the bank build on that €75m profit this year. The Belgians might then feel it is time to get their €1.3bn back and fold up the tent.

Dairying post-EU quotas is no bonanza

Many dairy farmers must feel like they are running to stand still at the moment. Dairy prices have fallen by around 40pc since 2014, the year when so many of them ramped up capacity ahead of the end of EU quotas.

The ICMSA estimates that around €800m has been wiped off the value of the sector in the last two years. Many businesses are cyclical and farmers will know they may have to face a tough period, but the omens are not good.

Milk prices are expected to fall further from their current 24c to 26c per litre levels. This is exactly the price range at which many dairy farmers break even before labour costs.

Knuckling down to a low milk price might have been tough but acceptable in the past, but many of our dairy farmers have got themselves into huge debt in preparation for the post-quota era.

They are producing the extra milk, but not getting a profitable price for it. Banks, which were throwing money at farmers in recent years, will now have to show patience. 

Bank of Ireland put together a €1bn agri lending fund while AIB had set aside at least €500m for the sector. Not all of this would have gone on dairy, but a lot would have. In fact €25 of every €100 lent to small business in 2014 went to the agri sector.

Dairy farmers are the most indebted within the sector. Seven out of ten of them had borrowings in 2013 and of those with outstanding debt, the average at the end of 2013 was €93,778. That figure had doubled since 2002.

These borrowing levels seem low compared to Denmark, where the average debt level on a dairy farm is over €2m, but then again they are bigger and more profitable businesses. Some individual loans here will be a lot more than €93,778, as Ulster Bank was offering loans of up to €2m.

Studies of the New Zealand success story warn of the dangers of heavy borrowing by dairy farmers there. No Capital Gains Tax, high milk prices, expansion and greater efficiency all contributed to the business case for lending a lot of money to New Zealand farmers.

Irish banks have offered interest-only repayment periods for up to two years. This year will see some farmers re-finance or even re-structure their bank loans as the low milk price puts many of them behind their original business plan.

Irish farms have gone gangbusters for the post-quota regime and are generating a lot more milk. Despite accounting for less than 4pc of the total EU milk pool, Ireland produced a third of the 1.7 million tonnes of the extra milk output from the region in the first eight months of 2015.

As recently as last September, banks stress tested some dairy farm loan applications on a worst case scenario of 25c per litre. It looks like that is about to arrive.

Who is driving Ireland’s motor sector recovery?

Our roads have got a lot busier in recent years. It isn’t just down to more people working. In the four years from 2011 to 2015, there were an additional 145,000 vehicles registered. 

Nearly 100,000 of those were private cars. It has been an extraordinary boom for motor retailers with much of it driven by cheap credit in the form of personal contract plans (PCPs) which provide access to a car but not necessarily ownership.

Volkswagen alone lent €350m for car purchases in Ireland last year, up 53pc on 2014.

The motor industry can’t believe its luck but neither can the government. The exchequer raked in €1.1bn last year in VRT and Vat — up a staggering €330m in just three years.

With PCPs customers borrow money from the motor manufacturer or a bank to drive away in a new car. The state collects VRT and Vat on the deal but the customer may never actually own the car — just hand it back and go again after three years. Sounds like a win/win that might be too good to be true.

Is it a financial merry-go-round? Brendan Howlin seemed to get things the wrong way round recently when he said: “The motor industry has been a key driver in the recovery of the Irish economy with car sales alone contributing over €1bn to the Irish Exchequer.”

Surely buying more cars from each other should reflect the recovery, not drive it.

Sunday Indo Business

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