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CEO KB Bonnet after strong 1H: We do not expect deterioration in any of our customer segments in coming months. Crisis requires to be creative

CEO KB Bonnet after strong 1H: We do not expect deterioration in any of our customer segments in coming months. Crisis requires to be creative

06.09.2012 8:49
Autor: Josef Němeček, Patria Finance

We do not expect, in the months to come, any fundamental deterioration in the situation in any of our customer segments, CEO of Komerční banka Henri Bonnet said in interview with Patria.cz after strong first half of this year. For FY 2012, KB expects the GDP to fall by 1.1% and CNB rate cut by 25 bps at its September meeting. Over the medium term, KB still sees a potential to pay out around 60% of net profits through dividends, which will make it possible for KB to retain its strong capital position while financing the development of its business activities, incl. possible acquisitions. What about rescue of the euro zone? See the interview with Henri Bonnet.

Patria.cz: Komerční banka (KB) ended the second quarter with a much better-than-expected bottom line due to the combination of a rising trading income, lower write-offs and the sale of the bank’s share in ČMRZB. Additionally, the bank lowered its risk profile by selling the rest of the Greek and Portuguese bonds. Are the numbers for 2Q12 and 1H12 a sign of improving conditions for the bank’s profitability and its business at large? Given the market conditions, are you satisfied with this year’s results?

The Komerční banka Group’s results as at 30 June 2012 confirm its long-term stability in operations, its financial strength, and also its ability to set the trends in financial product innovation. In this respect, overall I am satisfied with the development of the whole Group’s business.

However, we have to keep in mind that the banking sector will face a number of challenges in the near future, including the European economies’ expected weak performance, the long-lasting euro zone crisis, and also the plans to strengthen banking sector regulation in the European Union.

The profitability potential of a bank with strong liquidity such as Komerční banka is obviously constrained by the low market interest rates, which limit the profits coming from the investment of free funds. At the same time, we are facing a risk of a global economic slowdown.

Thus, the low confidence of consumers and companies in future economic development, combined with austerity measures in the public sector, erodes the demand for loans and, in turn, reduces the scope for generating additional revenues.

In this uncertain economic environment, Komerční banka’s advantage is the correct design of its business and operating model, and its good reputation and long-term relationships with clients. In terms of performance ratios, Komerční banka achieves the best results among Czech as well as European banks. In a number of customer segments we are regarded as the reference bank on the Czech market, and therefore have the best potential for taking advantage of the challenges of the future and creating additional value for our shareholders. 
Patria.cz: Among the indisputably positive developments in the results are the decline in the cost of risk (in 2Q12 at half of what the market predicted) and a relatively strong growth in loans, which is not something that can be taken for granted, compared with some of your rivals in the Czech Republic and in the CEE region. KB also talks about improving the quality of its loan portfolio. What lies behind these positive developments? Do you expect a continuous improvement in the loan book, including bad loans, in the quarters to come, or, considering the expected developments in the macro environment, can there be additional upward pressure in bad loans? And if so, who will be the main source of the deterioration: households or companies?

You are right in saying that the quality of Komerční banka’s loan portfolio is improving. The cost of credit risk dropped by 6% to CZK 979 million in the first half of 2012 year-on-year. Although certain ups and downs may occur in the area of risk due to the unstable development of European economies, we do not expect, in the months to come, any fundamental deterioration in the situation in any of our customer segments.

We are carefully watching the situation of Czech exporters, who can be affected primarily by stagnation in the German economy; but it’s not only about Germany; I recently met an entrepreneur who told me that due to the sudden cancellation of orders from a major US client, he had to decide to stop his activity, which was down by 80%. This means that, along with an increase in unemployment in this country, and although we have not yet felt a substantial increase in the cost of risk in the Individuals portfolio, we have to expect some deterioration in this segment.

Patria.cz: KB is now talking about a rise in loan activity, be it individuals or companies. In their defence, banks in the region often claim that loan activity stagnates because of the lack of good projects that companies put forward or because of low creditworthiness of individuals and households. What are the main drivers of the lending activity: refinancing of previous projects or new high-quality investments and sufficiently trustworthy private clientele?

It is certainly a combination of all the factors that you are mentioning. As I have said, Komerční banka is the reference bank for many customer segments. This gives us a certain advantage because we have more input information for assessing the quality and viability of projects. There is no question that some of our clients appreciate the fact that KB stood by them at the time of the deep economic fall, which is not so common on the Czech market. Thanks to the efficient co-operation of KB Group’s subsidiary and sister companies we are able to offer – and at a superior quality level – various forms of financing, ranging from plain vanilla operating and investment loans to hire purchase, lease and factoring, along with sophisticated syndicated loans. 
Patria.cz: The growth of mortgages in 1H12 outpaced the overall dynamics of loans. Can the growth in this segment be explained by the pressure for the refinancing of current debtors or by new investments in real estate? What are your expectations regarding the Czech real estate market?

Refinancing of outstanding mortgage loans is the consequence of the practice on this market where interest rates are fixed for a limited number of years, mainly between 3 and 5 years. Clients are using the currently low interest rate environment, which mainly results from the CNB’s key rates.

Looking at Komerční banka’s mortgage loan portfolio, refinanced loans account for approximately 20% of its mortgage loans. This shows that most clients are still willing to invest in a new property, or in an older property that is not yet encumbered by any mortgage. It also clearly suggests that the drop in the prices of real estate is contributing to the current recovery on the mortgage market. 
Patria.cz: Growth of deposits (+6.5%), mainly in savings and current accounts, is worth mentioning. This poses a question of whether the rising level of savings reflects households’ cautious approach in hard times or the bank’s ability to hold its own against the emerging threat of new banks, or even insurance companies and mortgage providers, that are trying to build their competitive edge and lure new clients by (apart from being online) offering attractive savings accounts.

I wouldn’t comment on our competitors’ activities on the market. To simplify somewhat, this growth can be explained by the fact that in respect of deposits, we offer interesting products, whose attraction is underpinned by Komerční banka’s stability and financial strength. The sophistication of the overall offer for retail clients is playing an increasingly important role in the area of deposits, which fact also weighs in our favour. Discerning clients expect more than just advanced direct banking services – they also expect an extensive branch network with experienced and knowledgeable relationship managers, a network of ATMs via which they can draw on their deposits as they need, and a coherent offering of liquid deposits with solutions for long-term savings for pensions or investments. In particular, high-quality advice provided by relationship managers plays, and will continue to play, an increasingly important role in this respect. 
Patria.cz: Low market interest rates create pressure on interest margins. Given the performance of the Czech economy and comments of some CNB Board members, the expectations are growing that further monetary easing is on the cards. What is your forecast for interest rates and the main macro indicators of the Czech economy, including the Czech crown FX rate, for the rest of the year and for next year? Given the competition on the market, what are the consequent expectations regarding the development of rates on loans and deposits?

According to preliminary estimates, in 2Q the Czech economy declined by 0.2% q/q, and as a result its recession extended over three quarters. In the remaining part of the year the Czech economy is expected to continue to feel the unfavourable development in the euro zone. Thus, the probability of the Czech economy staying in recession is high. For FY 2012, we expect the GDP to fall by 1.1%, while expecting a slight growth of 0.4% next year.

As regards interest rates, we expect that at its September meeting the CNB will cut its rates again, specifically by 25 bp to 0.25%. 
Patria.cz: Expectations of a quick end to the European debt crisis have turned out to be wrong. Markets have turned their attention to economic heavyweights in the euro zone: Italy and Spain. Given its sovereign debt exposure, do you consider the situation in Italy to be stable? Do you intend to hold Italian bonds until they mature?

Italy is, unquestionably, in a different situation than Greece, but also than the other peripheral countries of the euro zone: the country has not experienced any real estate bubble, and it has strong industry and creates a primary surplus of public finance. The high level of its debt, to a certain extent, is manageable using the country’s own means if there exists at least some basic confidence on the part of financial markets. Komerční banka is not compelled to reduce its exposure to Italy at any cost; any reduction in our present exposure shall be decided in the light of the conditions under which such reduction might be carried out. 
Patria.cz: As a seasoned banker with experience from the French and German markets, what is your opinion on the recent debate about the rescue of the euro zone, in which the Germans favour spending cuts and the French put emphasis on growth? Are the steps taken by the ECB going to be again the only solution with the potential to calm the markets? Are you in favour of stretching the mandate of the monetary policy to solve the problem of government debt? What could be a really effective way of curbing the crisis in Europe?

This is a tough question; as for me, solving an indebtedness issue for a sovereign country is more or less the same as saving an indebtedness situation for a corporation; it basically requires time, as long as the visibility on the medium or long-term horizon is clear enough to validate the repayment capacity of the debtor. I have the feeling that so far, this aspect of time has not been sufficiently integrated by the market, so that the first reaction of the countries has been to engage in very severe adjustment plans in order to reduce their deficits.

Unfortunately, this leads to a situation where we are simply adding recessionary measures to the present situation, resulting in lower tax revenues for the government, which obviously will not help to solve the issue of deficits.

Mario Draghi’s recent declarations have created a huge expectation that the ECB will be acting in the near future, in order to cope with the high interest rates still required by the market for countries such as Italy, in spite of the measures that have been taken by the country, the outcome of which requires time, as I mentioned earlier. I am sorry to tell you that I don’t have the solution, which probably will be a combination of a bunch of measures, maybe Eurobonds for the part of debt within the Maastricht criteria, maybe Eurobills for the short-term debt, maybe the transformation of the EFSF or ESM into a special vehicle funded directly or indirectly by the ECB, but I guess we have to be creative if we want to get out of a situation which has severe repercussions for the world economy. 
Patria.cz: Strong results in 1H12, supported by one-offs such as the sale of ČMZRB, make investors think about the level of dividends paid by KB. As an important dividend play on the Prague Stock Exchange, is KB thinking about an even more attractive reward for the shareholders, given its gains on the ČMRZB sale and high levels of capital?

We generally seek to create the highest possible added value for the bank’s shareholders and maximise the yields achieved by both international and Czech owners of our stock while maintaining a stable and healthy development. Over the medium term, we still see a potential to pay out around 60% of net profits through dividends, which will make it possible for KB to retain its strong capital position while financing the development of its lending and business activities, including acquisitions if an advantageous opportunity appears in the future. 
Patria.cz: Shareholders are also rewarded by the share buyback which puts upward pressure on the share price. Are you thinking about continuing with the buyback or about setting up a special programme for it?

For Komerční banka, share buyback has long been a complementary tool in its capital adequacy management. We have the liquidity capacity to make further buybacks if we are convinced that it will help to protect value for our shareholders and optimise capital. 
Patria.cz: When reporting 1H12 results, KB confirmed that gaining a leading role in the building of the new pillar of the Czech pension system is its strategic priority. What exactly should clients and investors expect that you have in mind, and what are your plans in this respect? What are the bank’s key strategic targets for the coming years?

We will only present the specific details of our offering for the reformed pension system once we have the CNB’s approval of our application for the establishment of KB Penzijní společnost. Systematic savings for pension in the second and third pillars of the pensions system will nevertheless be some of the strategic products for the Komerční banka Group. We want to maintain our leadership in savings and investments, the aim of which is to accumulate provisions for the retirement age of the KB Group’s clients. I think that these high ambitions are logical – both Penzijní fond Komerční banky and Komerční banka are today among the reference providers of savings and investment services on the Czech market.

For the time being I can confirm that together with Penzijní fond KB, we are preparing a comprehensive range of long-term saving and investment products, a key component of which is savings for retirement. In the third pillar in particular we will offer a combination of a simple and clear offering with a personalised approach to every client, which will be ensured through an offer of investment strategies for the whole life cycle.


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 Société Générale 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 Société Générale Group. He joined Komerční banka in 2009 as Chairman and CEO and is also member of the Société Générale Group’s Management Committee.

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