KBC to recoup €1.4bn Irish unit bailout with market exit

Belgian financial services giant KBC Group is poised to release about €1 billion of expensive capital tied up in its Irish operation as it sells its loans and deposits to exit the market, according to an analysis by a European brokerage.

Combined with more than €400 million of dividends that KBC Bank Ireland has passed on to its parent since 2017, the total would match the unit's entire €1.4 billion crisis-era bailout cost.

"We estimate that this transaction can release about €1 billion in capital, which would, based on their capital return policy, [be] fully returned back to shareholders," said Cor Kluis, an analyst with ABN Amro-Oddo BHF in Amsterdam.

Loans

Mr Kluis said he expected the planned sale of KBC's almost €9 billion of performing loans and €5 billion of deposits to Bank of Ireland, as well as the disposal of €1.4 billion of non-performing loans, to be completed in the first half of next year.

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He said the “high quality” of the loan book, 93 per cent of which is made up of owner-occupier mortgages and 6 per cent buy-to-let loans, would make it “easy to sell”.

A spokeswoman for KBC Bank Ireland declined to comment on the analysis.

KBC Group, which entered the Irish market through the purchase of Irish Intercontinental Bank (IIB) in 1978, issued a surprise announcement on Friday that it planned to exit the Republic, eight weeks after UK lender NatWest decided to put its Ulster Bank unit into an orderly wind-down over the coming years.

"Both had circa 12-13 per cent shares of the mortgage market and Ulster Bank also had an estimated 16-18 per cent of the SME market, but the headwinds of negative interest rates, high costs and the requirement for significant investment in transformation/digital all translated into minuscule ROEs [returns on equity]," said Eamonn Hughes, an analyst with Goodbody Stockbrokers, referring to the profit returns that the banks are making on shareholders' capital.

The low returns were compounded by the fact that banks in Ireland have to hold much higher levels of expensive capital against mortgages than the average European lender as a legacy of the property crash and subsequent arrears crisis.

The fear among consumer advocates is that the consolidation of the banking market, with Permanent TSB and AIB in talks to acquire much of Ulster Bank's €20 billion loan book, will mean reduced competition among mainstream banks, leading to higher interest rates.

Review

KBC Group carried out a strategic review into its Irish operation in 2016 and early 2017, before concluding at the time that it should remain in a recovering economy.

The bank has also invested significantly on technology and introduced a life insurance and pensions offering last year from a local branch of its Belgian insurance unit. The spokeswoman declined to give a figure for technology expenditure in recent years.

The Financial Services Union has been pressing KBC Bank Ireland and Bank of Ireland to clarify whether employees at the Belgian-owned bank will be able to transfer as it prepares to sell its performing loans to the State's largest bank.

Neither lender has provided confirmation as to whether so-called Transfer of Undertakings (Protection of Employment) regulations allowing employees to move on existing terms under a business or assets sale will apply to the planned disposal of KBC Bank Ireland loans and deposits to Bank of Ireland.

KBC has about 1,300 employees and 12 branches, or hubs, in the Republic, after moving last year to close four locations.