By John Manning, International Banker
It’s not exactly controversial to declare 2020 among the toughest years on record for the global banking industry. Thanks to a global pandemic that has virtually swept across the entire world, government-mandated lockdown measures have seriously crippled business activity in most countries throughout much of the year, raising the likelihood of defaults among increasingly indebted businesses and households and triggering profound changes in the way banks operate on a daily basis.
Make no mistake, COVID-19 has posed a once-in-a-generation challenge to lenders the world over to date, and it will continue to do so for much of 2021, if not beyond. But thanks to many years of sound management, KBC Group remains positioned among the world’s strongest, most resilient and most dynamic financial institutions, allowing it to tackle the unique challenges presented by this pandemic with a sense of assurance rarely observed during these turbulent times.
KBC’s robust financial position, accumulated over much of the last decade, has enabled Europe’s leading bank-insurer to navigate the fallout from COVID-19 with a certain degree of confidence. With its long-running, fundamental ambition to be among Europe’s very best-performing, most capitalised and most liquid financial institutions from the outset, it has been able to deal adeptly with the strain the coronavirus has inflicted on its business and finances.
For instance, its common equity Tier 1 capital (CET1) ratio stood at a very strong 16.6 percent before profit recognition at the end of the third quarter, while its robust liquidity position can be reflected in its net stable funding ratio (NSFR) of 146 percent and liquidity coverage ratio (LCR) of 142 percent, both well above the regulatory requirement of 100 percent. With such strong capital and liquidity buffers in place, therefore, the Group has been able to weather this ongoing crisis with confidence. Its having already provisioned all COVID-related impairments and loans during that second quarter only further underlines how well prepared KBC remains for any further virus-induced deterioration going forward.
Nonetheless, plenty of adjustments have still been required in order to deal with the impact of COVID-19. From an organisational perspective, the resulting lockdowns have triggered some fairly seismic changes within most banks, with the need to work from home with the same levels of productivity and efficacy being of considerable importance. With KBC, however, standards for employees working from home were already in place long before the coronavirus emerged at the end of 2019, with most employees having had the opportunity to work from home up to two days per week. By the time the pandemic reached Europe, therefore, the Group was already au fait with making this crucial adjustment. Ultimately, 95 percent of KBC employees have ended up working from home five days a week and have thus been able to seamlessly make the transition—a testament to the Group’s almost singular sense of foresight.
KBC has also decided to expand on its already highly lauded cultural philosophy, PEARL—which stands for Performance, Empowerment, Accountability, Responsiveness and Local Embeddedness— to accommodate for the COVID-19 and post-COVID-19 eras. Specifically, the Group has launched PEARL+, with the plus sign representing an additional focus on the joint development and smart-copying of solutions, initiatives and ideas within the Group (in such areas as human resources, strategy, finance and retail products and services) so that they are easier to use anywhere in KBC Group. According to the bank-insurer, it is taking group-wide cooperation between the various countries and domains to an even higher level, which will make it possible “to work more efficiently, to respond more quickly to change and to make optimal use of local skills throughout the Group”.
But it’s no surprise that the most dramatic transformations being experienced by the banking sector as a result of the virus have been within the digital realm. With lockdown measures severely limiting the role played by the traditional bank branch and with social-distancing measures preventing the normal face-to-face interactions between customers and staff, digital banking has become a critically important channel. With such considerations in mind, therefore, KBC’s innovative, responsive leadership decided to boost its existing digitalisation strategy to ensure customers’ heightened needs and expectations continue to be met during these challenging times. Called “Differently: The Next Level”, the upgraded strategy focuses on accelerating certain key aspects of its business model.
According to Johan Thijs, KBC’s highly regarded group chief executive officer, Kate is a philosophy translated into an algorithm that will steer the organisation into making customer service perfectly customised and will thus be fine-tuned to address the needs of each customer as a separate, distinct individual, encompassing his entire customer interaction and relationship with KBC and beyond. “So, whereas in the past, we would have a solution for all customers, we will now have for all customers a solution,” Mr. Thijs noted recently, “and in that perspective, the algorithm-steered Kate will be a support to our staff, will be a support to our people and will definitely be an added value for our customers, because it is able to analyse the individual data of each and every one of our 13 million customers in such a way that it can provide a solution which is requested.”
Kate is not the first and only exciting AI-powered service that KBC has introduced. In January, KBC partnered with Objectway, a leader in digital wealth- and asset-management software, to launch Matti, a new robo-advisory service for tracking portfolios that originates from KBC’s leading online investment platform and brokerage, Bolero. Matti is supported by components of the Objectway WealthTech Suite, with Objectway itself providing portfolio management, rebalancing and proposal-generation capabilities in an “as-an-engine” supportive model. Matti’s services are tied to a specific product, built for a particular group of customers, Mr. Thijs confirmed. “And Matti is providing a solution for them, specifically tailored to that type of investment business.” So, compared to Matti, Kate is a completely different setting.
While automated solutions such as Kate and Matti carry high expectations, they do beg the question of whether they represent perfect substitutes for human skills; and if so, are they about to render a sizeable bunch of KBC employees redundant? Not according to Mr. Thijs. “Technology and automation will always play an important role, and that role will become more important going forward. So, we are an industry which is offering financial solutions to customers,” he explained. “Let’s face it, we do not build chairs or tables. We offer financial products, which are based on trust. And trust is something between human beings which, I think, cannot be digitised.” Ultimately, therefore, the choice will remain firmly in the hands of the customer, such that if the machine solution is not preferred, a human solution will always be on hand, and vice versa.
It does mean, however, that, somewhat perversely, the acceleration in digital bank-insurance in terms of both demand from the consumer side and supply on the business side could be perceived as the one major positive that can be taken from this devastating pandemic. “I would say that it is now quite clear that digitalisation has become a fundamental cornerstone of our society,” Mr. Thijs confirmed. “And it is now also clear that the impact of digitisation is not going to be turned back tomorrow when we have the vaccine. The digitisation which we have now seen is here to stay. And to say it differently, what friends and the manager can realise over a period of four years in terms of digitisation, COVID has forced us to do in five weeks.”
Indeed, as Mr. Thijs alluded, it would seem that the pandemic has expedited a process that was already fast becoming a reality anyway. And KBC stands ready as ever to be a leader in ushering in this new reality. Proof of this can be demonstrated by its Ireland unit, which recently launched a new digital pension product, the first of its kind in the country and representing the Group’s first foray into the Irish life-insurance market. The launch follows the development of KBC’s own life-insurance company, which will provide pension products to Irish customers that have been fully redesigned so that they can be offered in a fully digital way. “So, it’s simple, it’s hassle-free, and it provides the customized solution to the customer. It’s unique in its kind in Ireland,” Mr. Thijs asserted. And over the next couple of years, it has every chance of becoming a successful frontrunner in the local pension market.
That’s not to say that KBC has been prescient in foreseeing every challenge thrown by COVID-19—given the unique nature of and the sheer number of unknowns associated with the virus; no institution was able to anticipate all that has transpired over recent months. Nonetheless, KBC’s leadership continues to persevere to ensure that business is not more adversely impacted than is necessary. Again, KBC Ireland provides an apt illustration of this uncertainty, with the full release of the IT (information technology) platform update in KBC’s Irish unit being successfully executed without having people on the premises. But while some employees were used to working a couple of days a week from home prior to the pandemic, it became apparent once lockdown measures were in place for a couple of months that doing so for five out of five workdays was proving to be a significantly tougher challenge, with employees starting to voice their unease with not having sufficient social contact with colleagues and customers. “At the end, we got quite a few requests from staff, asking, ‘Could you please allow us to come back to the office? We want to see our colleagues; we want to have back again social contact. Interchange is much easier when you have everyone physically gathered around the table. Allow us to do that again from time to time, respecting all necessary precautionary measures’,” Mr. Thijs acknowledged. “So, I think also, the long-term impact of lockdown and remote working still has to be investigated properly.”
But while it may not be possible to be completely prescient in such times of uncertainty, experience can play a significant role in how a financial institution deals with looming challenges. For Mr. Thijs himself, parallels between the current situation and the global financial crisis (GFC) of 2007-09, during which time he became CEO of the Belgium Business Unit, should not be ignored. “The future is not 100 percent predictable, that’s the repeat of the lesson of 2008. And as a consequence, as a manager, you always try to anticipate this uncertain future. Fortunately, we were well-prepared at KBC,” he stated. With COVID-19, however, it would seem much easier to predict the need to push a big digital wave at present. Nonetheless, there will be situations that will emerge that no leader, no matter how skilled, will be able to anticipate. In such situations, Mr. Thijs believes, the key is to respond and act swiftly. “There’s a big difference between managers responding to a crisis situation. Some will really blossom in a crisis like this; their managerial skills come to the surface. Some others completely block. And that’s also something I saw back in 2008 in a different setting. And for me, it is therefore quite crucial to have a very diversified pack of managers.”
It should also be emphasised that while COVID-19 has undoubtedly triggered comprehensive transformation across a number of areas, it has not prevented KBC from continuing to apply its forward-thinking business philosophy. This means that the Group is still ready and able to lead in a similar fashion as it has for many years, and this fact is no more visible than when it comes to sustainability, a concept that has become a priority for much of the global banking industry in recent years.
For KBC in 2020, this has meant tightening its existing energy policy by implementing a stricter evaluation process for customer relationships as well as by implementing a zero-tolerance policy for the financing and insurance of coal activities, something that is already in effect for most countries in which it operates. For the Czech Republic, however, the initially agreed deadline was 2030, as the country continues to make heavy use of historic coal-fired power plants to provide power to municipalities, meaning that a transitional period is required to prevent millions of inhabitants from being cut off from vital heating in the winter. However, demonstrating its persistence in working to create a greener, more sustainable future for all, KBC very recently announced that the deadline will be drastically shortened to 2021.
Sustainability also means having a rigorous methodology in place for determining those counterparties with whom KBC is willing to do business. This is especially important given the lack of common sustainability standards being enforced across the industry at present, particularly when it comes to environmental standards. As such, KBC uses a combination of external and internal reference sources as its basis to apply standards that ensure sustainability is implemented across the whole group in a uniform matter.
The external component includes guidance from world-renowned organisations such as, firstly, the United Nations—from which the Group can extract a range of references, such as the UN Global Compact Worst Offenders, which was heavily used in the creation of the KBC Blacklist, and the UN Guiding Principles on Business and Human Rights, which plays a major role in helping KBC meet its responsibilities in respecting human rights. KBC was also among the first financial groups to endorse the UNEP/FI (United Nations Environment Programme Finance Initiative) Principles for Responsible Banking and sign the Collective Commitment to Climate Action to show its continued support of important societal matters. Secondly, the output of KBC’s internal steering committees is assessed by an external sustainability board consisting of professors and experts in their domains. This is a fully independent body that is not linked to KBC. Their advice is used in order to drive KBC’s sustainability policy, and that advice is taken into account by KBC’s internal sustainability board. This ensures that when KBC takes a decision on a sustainability matter, it is implemented across the whole group in a uniform manner.
And with one eye on the future, KBC leads the way for both customers and financial institutions to enter the post-COVID-19 era in a soundly prepared and confident manner. The virus has sped up the development of many aspects of digital banking and has forever changed the nature of work and customer interaction. But with an unfailing commitment to keeping the customer at the top of its priority list, KBC will retain its position among the best-performing and most trusted financial institutions in Europe for some time to come.