The disintegration of the euro-zone would bring massive costs and European politicians will try to stop it at every price. However, the hands of governments in troubled countries are tied: they need to reinvigorate their feeble economies by fiscal expansion, but markets expect them to come up with austerity measures. Many states have unsustainably high level of debt and, therefore, must opt for budget cuts. This will be very painful and could result in social tension, says Henri Bonnet, the CEO of Komercni banka, in an interview for Patria.cz. He expects the Czech economy to grow by 0.5% next year. The state of the economy, regulatory environment and KB´s own growth prospects will be the key points which will determine the size of the dividend from this year´s profit. The decision will come only with the results for the whole year scheduled for February 16.
Patria.cz: Komerční banka announced a strong set of 3Q11 figures at the operating level. Interest margin and the quality of the loan book were supported by a relatively sharp y/y increase in lending, while a q/q drop in costs also surprised on the positive side. What are your expectations for the rest of this year and for next year, considering the slower economic development ahead of us? How far are you on the way to meet your target to restructure the bank on the cost side?
I would like to say that has been strong over the long term, and not only for the past quarter, but also in every respect – operational, financial, its product offering, and the quality of its people. Thanks to our strong position we have been able to accelerate the financing of our clients and expand our market share. I do expect that the economy will slow down indeed next year, and we can only guess how heavily. Despite this, we would like to further develop the financing of our clients and we see several areas with a relatively hopeful potential even for next year such as mortgage loans, loans to small businesses, and factoring. However, the overall portfolio growth will be slower than this year.
is not undergoing any significant restructuring. I am convinced that the business and operating model is designed well, we have reached one of the best levels of operating efficiency among not only Czech but also European banks, and we were able to support our clients also during the economic recession in 2009. The changes are primarily intended to further strengthen our market position. This year, we have even increased our investments in projects that are important for our competitiveness. They include, for example, the training of our relationship managers to help them keep their superior position among our competitors as regards their advisory quality. We will also introduce significant novelties in direct banking. It is true that the growth in costs will slow down next year but we have to react to the economic situation and sluggish growth in revenues. Nevertheless, we keep in mind the bank’s development all the time and we are not planning any reduction in the branch network or activities at all.
Patria.cz: In line with its parent , already wrote down, in the third and second quarters of this year, 60 per cent of its exposure to Greece. That translated into a lower net income on the one hand while, on the other hand, it was positively reflected in lower risk. As markets turn their attention to Italy, investors also start watching KB’s exposure to this country. Are you expecting further steps aimed at eliminating these kinds of risks in this or coming quarters? Are you worried about any other possible forms of the impact of the tension surrounding Greece and Italy on your results, and is taking any precautions in this respect?
You are right; the residual risk of Greek government bonds is already very limited. Italy, in my opinion, is a significantly different case than Greece. It is a country that shows a primary surplus of its budget, they have a traditional and very well developed industrial base, and a large portion of the government debt is held by domestic investors. Investors’ nervousness is caused, to a certain level, by their blocked political situation; it seems now that this problem is about to be resolved soon.
However, it is true that the tension concerning the eurozone periphery does not only influence the bond valuation. If the situation of government finances and bank balances is not clarified and if the very existence of the eurozone is questioned, even the private sector will not be encouraged to create essential new investments and jobs, and the prospects for economic growth will be darker. KB’s preparations for such risk consists in retaining capital and liquidity reserves at levels significantly higher than those required by regulations and in developing long-term relationships with clients – mutual partnership will help us overcome hard times.
Patria.cz: Local investors regard as a stock with a high and stable dividend yield. Some were therefore worried about the decision of its parent not to pay any dividends from this year’s profit. Can something like this happen to with its strong capital base? When are you going to decide about dividend payment and its size and what considerations will play the key role in the process? In your opinion, can the parent be expected to maximise the dividend payout, as the majority shareholder, or will it rather keep the capital within the group? Could you, at least somehow, address investors’ uncertainty as to the dividends?
In the past, the dividend policies of the two institutions also developed in different ways and KB’s dividend policy is therefore not fully dependent on the dividend policy of SocGen. Now, the year 2011 has not yet ended and it is not the right time to speak about what the policy will be. We will announce the Board of Directors’ proposal when we present our 2011 results on 16 February 2012 and in our decision-making we will consider the actual situation of the economy, regulatory issues, and the prospects for our growth.
Patria.cz: Taking into account your broad-ranging experience, as a long-time representative of in Germany among other posts, do you see any signs that the largest EU economy is about to plunge into recession? What do you expect will be the impact of the European debt crisis on the Czech economy, which is driven mainly by exports to Germany and other EU countries? What are KB’s specific projections for the Czech and the eurozone’s economy? Do the concerns about an economic slowdown influence your clients’ behaviour in any visible way?
We have definitely noticed indications of the German economy’s slowdown, in particular when the September figures on German industrial production showed a decrease, affecting especially industrial equipment production which dropped by 4.7%. Our colleagues from have significantly decreased their estimate of German GDP growth to 0.9% next year, and expect a mild recession for the eurozone as a whole early next year. It would be rather naive to assume that this development will not have any impact on the growth of our economy. Our economy has grown even more open over the last few years and Germany is our main trading partner. Therefore, we also had to adjust our expectations; I expect that Czech GDP may grow by around 0.5% next year.
Patria.cz: Are European (or world) policymakers capable of containing the current debt crisis and of calming the turmoil on the markets, or is it already inevitable that some European banks will be severely hit or that some countries will have to leave the eurozone?
Governments of problem countries have, in a way, tied hands. They would need to boost a sluggish economy by a fiscal expansion; but the markets rather want to see austerity measures from them, allowing for reductions in the deficits of national budgets. But fiscal restrictions may further depress economic growth, which would lead to lower tax collection and, in turn, increasing debt. Many countries’ debt is no longer sustainable for the long term, and these countries’ governments will therefore have to finally take the path of savings although it will be very painful and may cause, among other things, social pressures and tensions in the society.
The disintegration of the eurozone would be extremely costly and European politicians will therefore try to prevent it using all ways and means. The time may have come to take some measures that will move the eurozone towards a fiscal union.
Patria.cz: IMF chief Christine Lagarde recently warned that banks in the CEE region could soon face liquidity problems as their parent banks start siphoning capital off from the region. Do you agree with the statement? How can be affected by this?
I assume that Ms Lagarde referred primarily to the financial institutions that are mainly funded through their parent banks. There are quite a few of such banks in the region, but is not among them. Generally, the Czech banking system has good liquidity, in particular in the case of the large local banks, and I therefore do not expect any significant impacts on the system level.
Patria.cz: What is your view of the Czech government’s austerity measures with regard to the performance of the Czech economy and KB’s performance in the coming quarters? Government sources admitted that the start of the pension reform, for which investment funds have to prepare in advance, could be postponed until 2014. The Czech finance ministry is planning changes in the taxation of yields on the capital market, which could negatively influence investors’ interest in investment funds, especially those with shorter investment horizons...
The changes in the taxation of capital gains would not be favourable for capital markets. Such measures could dampen even more the already weak trading at the Prague Stock Exchange. This regulation might discourage a number of those Czechs who favour a shorter investment horizon, from investments. In addition, it can be expected that many investors will evade this taxation, and at the end of the day the revenues from this tax will not be high.
According to its latest statements, the government is prepared to carry out the pension system reform next year and launch the new system of retirement savings and supplementary pension savings on 1 January 2013. has been preparing for the changes to be able to continue providing its clients with comprehensive solutions for their financial needs in the area of long-term savings and provisions for retirement from 1 January 2013.
We are rather disturbed by considerations that the reform may be postponed, one year before the planned launch of the new pension system. The transformation of the existing pension fund requires extensive changes inside our organisation and also a number of administrative steps, including the obtaining of the licence from the Czech National Bank. In our opinion, the date of the launch of the new pension system will be confirmed with finality by the end of this year.
Patria.cz: In the last few months, bought its own shares worth several hundred million crowns. Do you have plans to continue with these redemptions? And what should we read from it? Should we regard it as an expression of the opinion that stock should be valued differently than now or are these transactions motivated by other goals?
The purchase of our own shares is, for us, just one, more or less additional, tool for managing the bank’s capital adequacy. We still have the capacity to make additional redemptions if we are convinced that they will contribute to the protection of value for our shareholders and to capital optimisation, but we have not declared any programme determining how many shares we will buy in a given period of time.
Patria.cz: It has been some two years since you took over as the head of . Over this time (and in a very different-than-expected environment), how successful have you been in fulfilling the visions and expectations with which you accepted leadership of ? Have the financial crisis, economic recession and the current debt crisis somehow changed the bank’s long-term goals? Where do you see the in the near future, a few years from now?
I would say that the long-term goals are set up with a long-term vision. And of course, also the long-term strategy needs to be revised to reflect the recent changes affecting both the economic environment as well as regulations.
The major goal of is to become the reference bank for target segments of clients within three years. This is not an easy goal, taking into account the competitive banking market in the Czech Republic with the newcomers, and also taking into account the steadily changing situation on financial markets. But, in , we like ambitious goals. This is why we are working intensively on innovation of our products, on the efficiency of our processes and last but not least on the approach towards our customers. Speaking about processes, since I came to , I have decided to focus more on synergies within our financial group, mainly in the Czech Republic. The exchange of client data among our daughter companies, joint offers to customers, and cross-selling are our objectives. This year, our approach to synergies resulted, among others, in the fact that acquired a majority stake in SGEF (SG Equipment Finance – previously held by SG Group directly) to be more active in equipment financing. I am more than happy that our strategy starts to bear its fruits – this year we have received many awards and prizes, among them most recently the Bank of the Year 2011 award.
Henri Bonnet
Chairman and Chief Executive Officer
Henri Bonnet holds a law degree from Poitiers University. He has held a variety of post within the Group, both in the international network (South Korea, Brazil, and Germany) as well as the Corporate Banking Division. In 1997, he was appointed Country Manager for Germany. In 2001, he was appointed Executive Vice President, Deputy Head of the Specialised Financial Services within the Group. He joined in 2009 as Chairman and CEO and is also member of the Group’s Management Committee.