Irish Life will invest for growth at K & H

Irish Life and Kredietbank will have to invest a further £60 million in the Hungarian bank, Kereskedelmi es Hitelbank (K&…

Irish Life and Kredietbank will have to invest a further £60 million in the Hungarian bank, Kereskedelmi es Hitelbank (K&H), over the next couple of years to boost its earnings potential, according to Irish Life chief executive, Mr David Kingston.

He says that, with further investment, Hungary's third largest bank can grow substantially and generate significant earnings for the consortium.

The Irish Life/Kredietbank consortium's $90 million (£60 million) bid for a 56 per cent stake in K&H was accepted by the Hungarian privatisation and state holding company over a rival bid from Bank of Ireland this week. With the celebrations out of the way, Mr Kingston is confident its foray into Eastern Europe will yield Irish Life a handsome profit.

K&H, which has assets of $2.5 billion, has the potential to grow by up to five-fold over the next five to seven years, he believes. Expansion of its banking business, together with the addition of a complementary life assurance business, will drive the bank's profitability strongly ahead, sending its profits up from current levels of $18 million to around $50 million, Mr Kingston forecasts. "We would be very disappointed in five years time if K&H wasn't making a significant contribution to the group."

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The move to Eastern Europe is a new direction for Irish Life, which in recent years has been primarily focused on the US economy as a region that could deliver growth. The group acted on an approach by the Hungarian authorities, which asked it to consider taking an interest in K&H.

At the same time, it separately approached Kredietbank in Belgium and the two groups, which have a long history of working in joint ventures, decided to get together, he says. "We never would have bought a bank on our own. While we have the distribution know-how and expertise in life assurance, Irish Life has no experience in banking."

Irish Life sees its stake in K&H as a "controlled risk" in a rapidly growing emerging market. "Hungary is a very stable economy. Like Ireland, its economic policies seem to be broadly the same regardless of which parties are in power."

The group also hopes to use K&H as a base to expand into other Eastern European economies in the future. Shareholders will hope its experience in this region will be more successful than some of its other European investments.

In Norway, it bought the insurance group DAVID for £19.7 million in 1991, only to sell it in 1994 for just £12 million after a series of setbacks.

Mr Kingston lays the blame for this debacle on the Norweigan government's indecision on the future of the private pensions market and other operating difficulties in that market, stressing that the company itself was the right business for Irish Life to buy. Meanwhile, in France, its small subsidiary, Xaar, has consistently made a loss. Irish Life has indicated it is now actively looking to dispose of Xaar and is currently in advanced negotiations with a potential buyer.

Mr Kingston hopes a deal can be concluded by the end of the year, but Irish Life will leave the French market at a financial loss. "In France we have ended up with a specialised motor insurance company which we believe would now be more attractive for someone else."

The US, which accounts for around a third of Irish Life's business, continues to be profitable and growing, but Mr Kingston says the group is not looking for any further acquisitions there in the short-term.