By John Manning, International Banker
It’s proving to be a tough year for the eurozone. The war in Ukraine has unleashed an energy crisis that could well send the region into a deep recession. And while this deteriorating economy may end up taking down a few vulnerable lenders with it on the way, the unimpeachable strength of KBC Group means the Belgian bank-insurance group has little to worry about.
But it’s not only the €300 million in provisions that KBC has set aside in the event of a deep-recession scenario arising or its impressively strong capital and liquidity positions that provide reassurance. Nor is it only the high level of diversification the Group has achieved through its various lines of business across banking and insurance, nor the consistently excellent performances in recent years in each of its core markets of Belgium, Czech Republic, Slovakia, Hungary and Bulgaria.
The factors most responsible for providing reassurance are the bank’s relentless quest to give customers innovative, hassle-free solutions that continue to exceed their expectations; its commitment to maintaining a culture that has proven a consistent winner over many years; and its scarcely believable prescience that has allowed it to not only anticipate future trends with unerring accuracy but also integrate those trends into improving the customer experience more impressively than any of its banking peers.
Such innovations include Discai, which stands for Discover Artificial Intelligence, KBC’s banktech (banking technology) subsidiary. Discai provides companies with its Bank/Insurance-as-a-Service platform using the latest artificial intelligence (AI) solutions. Through the commercialisation of patents developed in-house, Discai allows KBC to stand at the forefront of AI-based banking solutions that can solve long-running challenges the banking industry faces, such as money laundering.
Then there’s Kate, KBC’s personal digital assistant, which is continually improving through advanced machine learning (ML) and deep learning (DL) techniques. The fact that “she” has exceeded the Group’s targets with respect to the rate of successful autonomous resolutions of customer queries only further illuminates KBC’s prowess in producing cutting-edge solutions that unfailingly deliver for its customers.
Nonetheless, it’s a vastly different playing field out there for Europe’s top bank-insurance group and every other financial institution in the region. It is clear that KBC has anticipated the economic outlook over the coming months—as well as the likely responses of policymakers—in a sound, balanced manner, which is certainly helping to optimally position the Group for the undoubtedly testing challenges that lie ahead.
And yet, despite such monumental changes and disruptions this year, KBC’s steadfast commitment to its longstanding cultural model, as represented by PEARL+—Performance, Empowerment, Accountability, Responsiveness, Local embeddedness and (+) adding value by working together and co-creating across national borders—keeps it grounded in a formula that has produced unrivalled success over the years. If it ain’t broke, why fix it?
Indeed, KBC Group’s chief executive officer, Johan Thijs, sees the cultural aspect of PEARL+ as more important now for KBC than at any time previously, especially given the hugely transformative impact the COVID-19 pandemic has had on the banking world since early 2020. The emergence of new trends in digitalisation and remote working as direct consequences of the pandemic, for instance, has meant that unavoidable changes in banking practices have materialised. But among Mr. Thijs’s highest priorities has been ensuring that company culture, as the main driver of the Group’s excellence, can be adapted to accommodate this new reality optimally.
But perhaps most telling of all, as far as KBC’s phenomenally consistent success is concerned, is its commitment to the customer, a commitment that remains unwavering in 2022 despite the clear challenges that European banking faces as a likely recession now looms. This unique strength would not be possible without the Group having a sufficiently flexible approach to customer service. Perceiving changing global trends and evolving customer preferences is of paramount importance in that regard, such that as soon as customer behaviours begin to change, KBC is in a sound position to correspondingly adapt to those changes.
This restless pursuit of ever higher standards for its customers spurs the Group to constantly explore how it can make their lives easier, save them time and money, and further improve its services to eliminate potential hassle and friction. And it’s ultimately what continues to set KBC apart from its competition.
International Banker recently enjoyed the opportunity to ask Johan Thijs, KBC Group’s chief executive officer, several questions to discover how KBC is succeeding so impressively in serving its customers despite the taxing economic environment that has engulfed Europe in 2022.
According to KBC Group’s second-quarter (Q2) results, it posted a stellar net profit of 811 million euros during the three months. What main factors underpin such an impressive performance?
KBC has been showing consistent profit contributions over the last couple of years, mainly by being a highly diversified bank-insurance group and because of all our core countries delivering. So, the KBC engine has been firing on all cylinders.
Rising interest rates are also contributing positively. What we call the jaw—the difference between increasing costs and increasing income—is thus beneficial to KBC. This is clearly evident in the Czech Republic and Hungary and is now materialising in the eurozone. Despite high inflation, we have kept costs well under control.
Finally, sizeable investments in innovation are benefitting KBC through greater productivity, lower costs and higher revenues. We see new customers coming to us because of the digital applications we launched recently, which are contributing positively to our P&L (profit and loss).
One such digital application is Discai, KBC’s banktech (banking technology) subsidiary that groups the organisation’s in-house developed AI (artificial intelligence) solutions and offers a cutting-edge Bank/Insurance-as-a-Service platform to other companies. For what main reasons did you feel the need to create such an entity? And are you satisfied with Discai’s performance in the six-plus months since its March 2022 launch?
Discai stands for Discover Artificial Intelligence. KBC has been at the forefront of innovation for many years and was among the first to use AI on a massive scale. But we always start from the perspective of how to better serve our customers and remove all the potential friction customers encounter with AI solutions. Tools were developed in-house, meaning that we own the intellectual-property rights, which are protected by patents. The commercialisation of those patents represented the birth of Discai.
The first Discai application was in anti-money laundering (AML), a challenge banks globally struggle to address. When we launched it, we received much attention from the press, alongside banks worldwide wanting to work with us and use the application.
Many predict that the eurozone will experience a painful recession this winter as interest rates continue to be lifted sharply. Do you share this view? If so, do you believe KBC is adequately prepared to withstand this economic deterioration?
I think a difficult winter is coming, but it does not necessarily translate into a deep and painful recession. KBC was among the first to indicate likely impacts on both the economic side and the interest-rate side. So, we made a distinction based on two scenarios: On the one hand, a modest recession scenario sees an economic slowdown in the second half of 2022, followed by extremely weak growth in 2023. This translates into average eurozone growth figures for real GDP (gross domestic product) of 2.9 percent in 2022 (mainly as the result of very strong overhang effects from the end of 2021 into 2022 and relatively strong growth in the first half of 2022) and around 0 percent in 2023. A deep recession scenario sees growth declining to minus 2.5 percent, or even minus 5 percent in Central Europe, before slightly recovering in 2024 and 2025. We also see higher inflation than the 4.6 percent estimated under the modest recession scenario.
Which scenario actually materialises is strongly linked to Europe’s energy situation. If we have a shortfall due to the consequences of the Ukraine-Russia war, which Europe can’t compensate for, the deep recession scenario will transpire. But if Europe can cover that energy deficit, the modest recession scenario will prevail. We currently see the modest recession scenario as likelier than the deep recession scenario—roughly a 60-percent probability versus 40 percent.
We are prepared for both scenarios, having apportioned at the end of Q2 in 2022 roughly €270 million in provisions against the aforementioned emerging and geographical risks. Given KBC’s very solid capital and liquidity positions, we can perfectly weather this storm. With the high inflation, we expect interest rates to rise further, even beyond the guidance we provided at the release of our Q2 2022 results. I remember when we gave our forecast for the European Central Bank’s (ECB’s) deposit-rate forecasts—i.e., 150 basis points (bps) for year-end 2022 and 250 bps for the end of 2023—it was considered to be quite aggressive. In the meantime, this forecast is fully priced into the markets and looks, I agree, even conservative. We look forward to seeing the ECB announcements at the end of October and the end of December.
In terms of the likely recession, is it literally just a case of how long the war in Ukraine lasts?
I don’t think so. Even an unlikely short-term ceasefire will still yield high energy prices because of the sanctions against Russia, and we still have the counter reactions of Russia to those sanctions.
So, a turbulent energy market will persist as Europe remains dependent on Russian natural resources. We will still be under pressure for a longer period, with relatively high prices—definitely when you compare them with the energy prices in 2021. While the war was the trigger, sanctions are also playing into this.
So, are you anticipating a looming solvency crisis among KBC’s business customers?
Under the modest recession scenario, we anticipate fairly limited bankruptcies, defaulting companies and layoffs amid a zero-growth environment. This will only have a mildly negative impact on our capital position. Money will become more expensive as interest rates keep increasing, which will have a positive effect on our revenues. Of course, inflation will have a negative impact on our cost side, which will be mitigated by strong cost controls.
A deep recession scenario, however, will create solvency issues with clients; we expect to see a much sharper increase in credit losses, which we have anticipated, at least partially, by setting aside provisions for emerging and geographical risks in 2022. We have seen public finances deteriorate significantly during the COVID crisis. The big question now is: if and how governments will consider any further financial supports for their citizens, SMEs (small and medium-sized enterprises) and corporates to mitigate the impacts of the war. A positive answer to this question will put further pressure on public finances and, together with the rising interest rate, might trigger rising sovereign spreads. As for the Central European market, the support programs of the European Commission (EC) still to be executed should have a mitigating impact.
What are some of the key permanent features of the post-pandemic world as far as KBC is concerned? And do you see any major challenges in adjusting to this “new normal”?
COVID has transformed the world, and we will never go back to the old normal. There has been a fundamental change in the usage and availability of digital channels, and customers have realised that digitalisation works well. KBC is a frontrunner in that respect. The usage of our applications and the launch of facilitating factors like Kate, our AI-driven customer service bot, are helping customers tremendously.
People have also become used to working remotely and will continue doing so. It is no longer a given that companies will have staff in the office five days a week. I think the average will be 50/50 between working remotely and on-premises, which obviously impacts company culture. This is something we are working on because I think company culture is the main driver of excellence and should, therefore, be adapted to the new situation.
The last thing is globalisation. During COVID, people needed certain products to withstand the health crisis. A simple example is the mouth mask. Being sourced internationally, mainly from China, created huge issues at the beginning of the COVID crisis. All of a sudden, Europe realised that such dependency is not always wise. Also, the current war has triggered similar discussions. So, for certain practices, one should reconsider globalisation—or at least have a debate about it.
So, you brought up Kate. As you said, it has been 18 months since Kate’s successful launch. Are you happy with how “she” has performed for customers during this time? And can you also please explain how Kate continues to learn and improve her service?
Upon launching Kate in November 2020, I said, “Don’t judge Kate after one year, but after three years”—because she is being trained using machine learning and deep learning. As a consequence of the machine-learning technology, Kate will gradually, step by step, build up her knowledge. Kate will, in the beginning, not always answer customer queries satisfactorily. But over time, she will learn what is a right answer and a wrong answer, and she can thus perform better.
We have firm 2023 targets for Kate, whereby she answers questions and provides solutions without our human interference. This “autonomy” was targeted at 30 percent by 2023 but has progressed much faster than we’d anticipated. At the end of Q2 2022, her autonomy in Belgium was 53 percent; so, for every two questions asked by a customer, Kate answered one correctly and autonomously, and for the other one, she referred the customer to KBC’s call centre. We now anticipate an autonomy of 75 percent by 2023, which means Kate will answer three out of every four questions correctly and autonomously.
This has greatly helped to release pressure within our back offices. So, yes, we are very happy with Kate and her progress.
You also mentioned in the Q2 results that KBC is rolling out the Kate Coin, your “proprietary digital coin based on blockchain technology”, which private KBC customers in Belgium will soon be able to earn and use through their wallets in the KBC Mobile app. What distinct benefits does the Kate Coin provide for these customers? And on what type of blockchain will the project be based? Will it be permissioned, open source?
Kate Coin is on a private blockchain. And using the taxonomy of the ECB, it is actually an e-money token. We use the Kate Coin in a closed-loop system with a pre-defined value (say, one coin equals one euro). A closed loop could be the ecosphere of all KBC Group companies, such as the bank, the insurance company, the asset-management company, etc. Outside this ecosphere, the value is zero, so while you can use Kate Coins to pay for KBC products, you cannot use them in, say, Tesco.
But the ecosphere can be built as expansively as desired. For example, you can reward the loyalty of your customers—i.e., those who buy more products receive more coins, which they can then use in the KBC ecosystem. But you can also strike a deal with firms outside of the KBC ecosphere, whereby they agree to accept the Kate Coins of KBC customers and give customers, for example, discounts when they shop with them.
It’s also programmable money so that customers can use Kate Coins for a set period of time, each with a specified value, and confine their usage to, say, within Brussels only. Kate Coins also open new markets for us. For instance, we can make an agreement with the product supplier and offer Kate Coins electronically to customers via their wallets.
On July 7, it was announced that KBC Bank and Raiffeisen Bank International had completed the deal concerning the acquisition of 100 percent of the shares of Raiffeisenbank (Bulgaria), which is responsible for the banking operations of RBI in Bulgaria—including fully owned subsidiaries, the leasing side, the asset-management side and the insurance broker. But what was the main reason that this acquisition was made?
It is our policy to strengthen our banking and insurance positions across our core countries of Belgium, Czech Republic, Slovakia, Hungary and Bulgaria. We have completed a series of acquisitions in Bulgaria, including a bank, an insurance company and a pension fund, all of which have strengthened our local market position.
With Raiffeisenbank (Bulgaria), we first checked all the basic, underlying principles of acquisitions and any activities that we have in KBC Group—whether it was a strategic fit, which it was; whether it fit our banking-insurance business model, which it did; and whether it underpinned our financial targets in the short- and mid-term, which it did. Therefore, we acquired Raiffeisenbank (Bulgaria), making us the number one financial group in Bulgaria.
The acquisition also allows us to leverage our bank-insurance model and to service customers across banking, insurance, asset management and financial business. So, we have full coverage for our customers’ financial needs.
We have previously discussed KBC’s core culture as represented by the acronym PEARL+: Performance, Empowerment, Accountability, Responsiveness, Local embeddedness and adding value by working together and co-creating across national borders. Would you say that what this acronym represents in practice has changed or evolved in any significant way this year? If so, can you provide an example?
Intrinsically, the acronym remains valid, and I would say even more so after COVID. The only change is that the “plus” representing the co-creation is something we emphasise more due to what has happened during the pandemic. We still strongly believe that culture is fundamental to a company’s success. And, drawing from that experience and the post-pandemic reality we discussed in the previous question, we have combined those two experiences.
It’s clear that the PEARL+ culture is of utmost importance going forward. Because it is about finding the perfect balance between working physically and remotely together. And the imperatives embedded in PEARL+ reflect all the different bits and pieces of that new way of working. So, I would say it is even more crucial now compared with 2019.
In what ways does KBC strive to ensure its business strategy remains “future-proofed” as much as possible? And given the rapid pace of innovation within the financial-services industry, are you resigned to accepting that some of your solutions will have to be replaced or discarded before too long?
In terms of current performance, we are constantly assessing our message, our business proposal and our performance across all markets and product lines. This is translated into our “performance diamond”, which has four assessment angles:
- Capital and capital generation,
- Liquidity and our liquidity position,
- People, including customer, employee and shareholder satisfaction.
We account for changing circumstances and anticipate future global trends. We then come to conclusions about our own situation and examine how we can step in to become a frontrunner.
So, we always link together what is in the customer’s interest. How can we take away the hassle? How can we make life easy for our customers? And how can we save them time and money—by using technology and the trends we see in society? And that’s precisely the conflation of our strategy—as the customers change, we change accordingly. And we proactively anticipate that change using data that customers generate from their daily behaviours.
Would you say politics has played a more influential role with respect to KBC’s business strategy in recent times? If so, what are some of the key ways in which politics has manifested itself this year?
Politics plays an influential role everywhere we do business. Firstly, regulations are inspired by political decisions either at the European level or domestically. But I can easily refer to the regulations written on behalf of AML fights or the usage of bank branches and so on.
Then there is sustainability. We all know that the environment is changing, most likely due to humans, which means that intervention on the sustainability side becomes obvious. Political interference is considerable, with banks used to leverage output in terms of sustainability.
And we now see governments in need of additional budget funding mostly looking to banks. Political instruments are also translated into extra taxes, and all countries experience that.
Talking about sustainability, what is the single most significant way KBC is helping to combat climate change in 2022? Do you believe the global banking industry is doing enough to fight climate change at present? What is the most significant measure it can take to be more effective in this fight?
KBC has already taken successful steps in limiting the emissions of our own operations. But most significantly, as a financial institution, we must limit the emissions of our loan and investment portfolios.
On September 30, we published our first-ever group-wide “Climate Report” (Visions, Ambitions and Emission Introduction Package for 2030 and 2050). Externally audited by PwC (PricewaterhouseCoopers), the report states the CO2 (carbon dioxide) exposure our customers have, with the analysis covering about two-thirds of the total CO2emissions for the entire KBC Group. We recommend reading the report, which clearly explains what we are doing, why we are doing it and what impact it will have on our business.
We also know that the quality of sustainability data provided by companies is not necessarily of a high standard. Nonetheless, we are taking decisive first steps; we are not waiting until the day that the data is perfect.
What is KBC’s most significant challenge or goal over the next 12 to 18 months? And how do you intend to overcome or achieve it?
We will further implement our strategy going forward because that is the long-term measure of the Group’s success. We are diligently working on implementing Kate and Kate Coins, creating ecospheres in which customers are served better and without any hassles, saving them time and money.
But the war in Ukraine has negatively impacted the ways banks are doing business, our customer base and our welfare. It will have an impact on the coming 12 to 18 months for sure. So, it all depends on which scenario is going to be the reality—a modest or a deep recession scenario. We are focused on helping our customers overcome this economic crisis.
We also want to better serve our customers in the coming two to three years and then constantly adapt that view to the reality of today. In Belgium, for example, banks already agreed in October 2022 with the government to support customers facing issues paying their energy bills by postponing capital repayments on their mortgage payments. And companies struggling with energy-bill payments can come to the bank for tailored solutions.
Your dedication to serving your customers should be an inspiration and guide to all banks. Thank you for your time today.