In August, Belgium’s KBC Group published its results for the first half of 2017, and yet again Europe’s leading bank-insurance institution managed to record an all-round stellar performance. Indeed, over the last few years, KBC has delivered consistent excellence, as represented by steady income growth, strong profits and exceptional profitability. The bank’s feats are even more impressive when one considers the myriad of challenges faced by the European banking sector in recent times.
Operating under a unique, integrated bank-insurance model, KBC has grown to become a leading financial institution across banking, insurance and asset management during the 19 years since its formation. This has given it the advantage of being able to offer its customers a much fuller and more diversified range of financial products than its peers. Its presence as a leader within its six core markets—Belgium, the Czech Republic, Slovakia, Hungary, Bulgaria and Ireland—drives much of this growth, and today the group can boast of a network that comprises more than 12 million customers, 1,600 bank branches and more than 40,000 employees.
Mr. Johan Thijs, CEO of KBC Group
Today, we are joined by KBC’s CEO, Johan Thijs, who discusses some of the key ingredients of KBC’s winning recipe, including its culture, specific business strategies and its approach to technology.
Mr. Thijs, welcome…
I’d like to begin by discussing those outstanding results. The first half of 2017 saw KBC record 23 percent return on equity. How does the bank manage to consistently deliver such strong profitability?
There are a multitude of reasons why we have such a strong return on equity. One of the main drivers of our good performance over the last three years is the fact that our bank-insurance model and our diversification of income are now really bringing their merits.
The first driver is diversification, both through insurance income, mainly non-life, and the asset-management business, which is driving our fee and commission business. Both have been performing very well over the last couple of years. KBC is one of the few institutions in Europe which has been working very hard on the implementation of a diversification-of-income strategy. This pays off in terms of profitability and in terms of return on equity.
Another important driver is that, for five years now, we strongly focus on cost, on how we deal with our business, and on how we run it in the most efficient manner. That obviously helps our profitability to rise as well.
However, apart from these technical drivers, we have a common corporate culture called PEARL that we have been pushing quite a lot throughout our group since 2012. PEARL is an acronym. It stands for Performance, Empowerment, Accountability, Responsiveness and Local Embeddedness, and it has been an important factor in achieving strong results.
Under this PEARL umbrella, we introduced what we call the performance diamond. This performance diamond is a way of steering the whole group—every country, every entity, every type of business line—along the same lines. The diamond consists of four steering parameters: profitability, capital liquidity and people, which is actually customer satisfaction, staff satisfaction and ultimately also shareholder satisfaction. These four steering parameters are the same in all countries KBC is active in. The metrics per line may be different for each country, but the parameters are the same. The metrics on profitability, return on equity or return on allocated capital will be different in Belgium, for instance, from those in Bulgaria. For obvious reasons. These metrics are followed up, country by country, entity by entity. Every local CEO is accountable for his results. That has been in place for the last five years. And I can assure you it drives the whole group towards the same mindset, towards the same drive for performance. You highlighted PEARL earlier. How does KBC ensure that those five traits—Performance, Empowerment, Accountability, Responsiveness and Local Embeddedness—are exhibited on a consistent basis? We have been taking a whole series of initiatives since 2012 to make sure that KBC group-wide actually becomes a PEARL-driven organization. Let me give you an example. Our top 300 general managers have been following a specific training programme called KBC University on PEARL leadership. All of them really understand what it means to be a PEARL leader. It may sound awkward, but the strength of PEARL also lies in the fact that we have never defined black on white what every letter exactly means or how it should be strictly “interpreted”. Everybody in our staff knows what it means, but it also entails a certain degree of freedom to apply it. PEARL is a mindset, a philosophy of working, which is fostered by the people on the floor. To make PEARL a success, we have been working top down, but clearly also bottom up. In Belgium, since the start of PEARL, we have some 700 PEARL ambassadors in our staff who actually spread the word and who help other collaborators to become PEARL ambassadors or PEARL leaders as well. That is real strength. And the main advantage of this approach is that it’s not easy to copy. And do you have specific examples of KBC people actually incorporating PEARL into the business culture? The best example is our smart-banking app, which was developed according to the PEARL mindset. It all started quite simple. I actually said to some of my staff that we needed a smartphone app on the banking and on the insurance side. I gave them some budget, a deadline, and all the freedom to build it. I told them to come back within six months, and promised not to interfere. “Gather your own team, and come back if you find the solution. If nothing can be worked out, OK. We may have burned some money, but at least we tried. So be it.” This is empowerment and accountability to the extreme. Guess what happened? Some people took the initiative, set up a team and actually developed in only three months’ time a smart-banking app which afterwards has become the most innovative banking app in the Benelux. I could give you 10 examples like this. People get inspired by that. And once they are inspired, the roof comes off. As I understand it, the bank has updated its group strategy and has captured the update through this slogan, “More of the same but differently”. Can you broadly explain what this means? As a matter of fact, it summarises our group strategy and consists of two parts. “More of the same” refers to what has made KBC so successful over the last five years: a bank-insurance company, focused on sustainable growth, putting the customer in the center of its attention and, in doing so, picking up its role in society. That strategy remains the same. We are not going to change the core of our success. However, what is becoming different is the way we are going to achieve this success. It is driven by a change in customer behavior which we observe as a pattern in all types of industry. Customer behaviour today is heavily influenced by the digital changes we see around us, by the fact that everything is always and immediately accessible and available through the digital channels. Being consumers, our customers are currently used to convenience, to ease of use, to 24/7 availability. They actually expect the financial sector to do exactly the same thing. That is what we now are focusing on. How does it translate into reality and practice? As a trusted partner to our customers—which is a key prerequisite for a financial institution—we want to create a convenient, easy-to-use, 24/7 bank-insurance availability. This is something which is easily said, but not necessarily easily implemented, because it requires a fundamental change of mindset of all of the staff. Consequently, the “but differently” is not only about the fancy front-office applications, like smartphone or tablet banking or Internet solutions. It also means “but differently” for our back-office systems and applications. How do we develop our products? How do we design our procedures? Can a customer approach us without hassle? Can he do it without pitfalls? Can he easily conclude the contract he wants to have from KBC? That is what we mean by “but differently”. Yes, I imagine that it’s an exciting time for KBC in terms of introducing innovations like banking apps. Indeed, I noticed that you are now implementing a “digital first” customer-centric bank strategy in Ireland. What does this initiative entail, and for what reasons are you exclusively focusing on Ireland? Ireland—and also Slovakia—are well advanced compared to some other countries in our group in, for instance, the usage of smartphone banking. Because we don’t have a legacy branch network in Ireland, we could easily start there with a digital-first strategy as such. We were perfectly able to install a completely new open-architecture banking ICT (information and communications technology) platform, a key step to go for the digital-first approach. We are the only bank in Ireland able to onboard clients fully digitally. The new IT platform provides us with the capacity of running operations in a very smooth and, for the customer, easy to use and convenient way. Ireland is not the only country where we do this. But because we don’t have a legacy branch network in Ireland, it’s more apparent. Because of the specific circumstances of the Irish market, it is perfectly suited for us for doing business in a way we never did before. Ireland was for us the first market where we launched an application for digital onboarding. Ireland was the first market where we launched an application with Google Pay or with Apple Pay. In that respect, KBC Bank Ireland is the frontrunner for the group. Staying on the topic of Ireland, the group announced in February that the country is now one of its core markets, around 40 years after it first became active there. What has changed, if anything, for Ireland to have received this promotion? There are plenty of elements which were driving that decision. One of the main drivers is the digital revolution all over Europe, and which is clearly taking place in Ireland. Ireland is one of the most advanced countries in terms of smartphone usage, Internet penetration, etc. That obviously influences the way one can do business in Ireland. Ireland, by the way, also has a very young population, and perhaps that’s one of the reasons that they are potentially among the most advanced in terms of digital savviness. Another element was the fact that the economy in Ireland is recovering very fast from its trough in 2008-09, the crisis years. Today they are one of the fastest-growing economies in Europe. The forecast for the next coming years remains extremely positive for Ireland, despite the fact that they will be hampered by Brexit. Last but not least, KBC Bank Ireland has now returned to profitability. Not only because of write-backs on the legacy business but also because of their performance in their new business development. If you combine these elements, Ireland becomes very attractive to build a new type of bank in a new way of doing business in a country which is really suitable for doing so. And turning to some other key markets, in June KBC completed the acquisition of United Bulgarian Bank and Interlease from the National Bank of Greece. What strategic advantages do you expect KBC to now possess as a result of these acquisitions? We’ve now become the number-one financial group in Bulgaria, where in the past we ranked sixth or seventh. We used to be the number-nine bank and number-three insurance company. Now we can really deploy fully our bank-insurance model. One of the key elements to have a fully integrated bank-insurance activity, as we run it, requires a rather sizeable bank. Then you can really lever the bank-insurance model according to our standards. By acquiring UBB, we are now in this position. That means that the economies of scale of the bank are going to be exploited in full, not only in the banking business but also in cross-selling with the insurance side. Mr. Erik Luts, Chief Innovation Officer & Executive Director at KBC Group Some of the ways in which the bank encourages entrepreneurship is through Start it @KBC, a major incubator for start-ups in Belgium. And KBC Match’it, a digital platform for transferring businesses. How have these or other entrepreneurial initiatives performed thus far in terms of meeting goals? Start it @KBC was launched once again under the umbrella of PEARL. It was actually invented by one of my employees who had a bright idea. He stepped into my office and said, “Listen, this could be something interesting for KBC.” In essence his idea was quite simple. Let’s stimulate the entrepreneurship of Flemish people by creating a working environment which facilitates young entrepreneurs in working out their ideas. This working environment would not only take away all the hassle that young entrepreneurs encounter, like finding working space or financial or accounting advice, but also would create a network of like-minded, entrepreneurial people and specialists in domains such as IT, telecom, accountancy, finance. Once the idea was implemented as Start it @KBC, it became a big success. Currently we serve more than 500 start-ups under the Start it @KBC umbrella. By the way, two of our start-ups have been awarded during the international Startup Nations Summits as the most promising start-ups in the world: neoScores in 2014 and Turbulent in 2015. KBC Match’it is more what you could call a “dating site” of KBC. Dating in terms of bringing together people who want to buy a business and those who want to sell their business. In the meantime, we have already accomplished the conclusion of several of such deals. And what is very interesting is that we’ve seen a picking up of demand of people working on the platform quite significantly. And what about internally—are you satisfied with KBC’s employee-training programs, particularly with regards to accommodating the greater role being played by technology within the banking industry? This is a very interesting question. A year ago we introduced several training initiatives to make people aware that the world is changing. We introduced what we call a “driver’s permit” for the digital world. It’s really like a driver’s permit, where you have to pass an exam. This driver’s permit for the digital world is something our staff takes very seriously. It’s not a mandatory test, but everybody is doing it. And it triggers them to follow some training in order to catch up where necessary. Next to that we obviously have some other training programs. I’ll give you one example: all our leaders are invited to follow courses at the KBC University, setting very high standards. Most of the courses are given by lecturers from very renowned universities like Harvard, London Business School, INSEAD, just to name a few. They are focusing on PEARL leadership, bank-insurance and customer centricity. They are actually training our leadership in terms of our strategy. How to interpret our strategy, what to do, and what we expect them to do. Looking at all of this, I’m very pleased with our current training program. Among KBC’s most interesting policies within its corporate sustainability framework is the aim to be in compliance with United Nations standards on human rights. How does the bank ensure this policy is adhered to in practice? KBC’s group-wide sustainability policy is the accountability of the group Executive Committee and its individual members. We can delegate operational tasks, but we cannot delegate accountability. To ensure our corporate-sustainability policy is correctly observed, we have set up a group-wide internal steering board consisting of KBC’s country CEOs and myself. They are personally accountable to follow up what it means, how it should be interpreted and how it should be implemented. On the human rights United Nations standards, we are very strict and don’t give much freedom to interpret. It is a group-wide and centrally monitored rule, defined in each and every country. The same applies to environmental responsibility, as it is one of the core elements of our sustainability policy. Which means that it is also under the accountability of the country CEOs or the group Executive Committee and that it is discussed by the internal sustainability steering board as a topic on the agenda. Each and every entity defines what they can do, and they feedback what they are doing and how they are implementing environmental responsibility. Other entities can pick up the lessons learned from another country or from another entity and implement best practices. This creates a lever. We have already been doing this now for about three years. We call it smartcopying, meaning that we copy ideas from other entities in a smart way. If you think an idea is reusable, then smartcopy it and tailor it to the specifics of the country where you intend to apply it. This way of working really speeds up the implementation of our sustainability policy. To give you an example: we request our entities to translate environmental responsibility in their product development. If one country has a bright product idea, another country just smartcopies that idea and adapts it to its own environment. How do you see banking in the eurozone changing over the next few years? If you ask me, “Give me one notion covering the banking business change in the next few years”, I would choose “fundamentally different”. My guess is that the impact of the changing customer behavior is of such a kind that the banking sector has to reinvent itself. We have had the financial crisis which created a lot of turbulence in our sector. Many banks have been doing a good job since, and actually have created a new bank on the back of existing business. Today and tomorrow we are going to deal with a change which is far more fundamental. It means that we will have to reinvent our business models and the way we deal with customers. We are going to compete with completely new competitors. You spoke about the next few years, but perhaps we are already going to compete tomorrow. Someone may be inventing in his garage today something which will be a disruptive technology tomorrow that completely changes our world. This uncertainty makes the future very challenging for the banking sector. And turning finally to yourself, Mr. Thijs, in the future when you look back on your time in charge of KBC, what is the one goal above all else that you hope you will have achieved? What I hope is that I will have prepared KBC for the future. That I will be able to say: “Together with my team, together with 41,000 people, at that time we have been creating the future of KBC.” And that reality shows that people are still proud to work for KBC, and our customers still enjoy being customers of KBC. Well, given the spectacular results you have achieved recently, I suspect that your goal will ultimately be achieved. Mr. Thijs, thank you very much for your time. 