KBC Group NV (KBC) Earnings Call Transcript & Summary

I mean this is a very good question. Indeed, the starting position is that you, as a customer, own your -- customer, you as a citizen or a human being, you own your own data. Now this is something which is definitely true. But the question is, how many of the citizens really consider this to be the case? And how many of our citizens are really dealing with that? You might. I might. But they [ aren't ]. Let's face it, if we walk on the street out there and we'd ask the same question to 10 people passing the KBC building right now, I think 9 of them will say, "Who cares?" The point is privacy is protecting that, and that's, to me, the starting position. Data is protected by privacy. Within the privacy laws, we can help customers and actually optimize the way their data is used for them. So every word that I said is important. And this is what we try to do because the majority of our citizens is not -- I mean not capable, even not aware of the fact that they own their own data and that they can do something with it. And there, we have now created Kate, which is helping our customers to make money and to earn money. And those 2 things are important. That's the reason why we go beyond banking. We own -- not only do banking and insurance sales, but we also help them to earn money, for instance, by saving money on their accounts, on their invoices for eating, for electricity, whatever. So in that perspective, we are using the data of third parties. If tomorrow, all citizens come to the conclusion they can do better, yes, then we don't have a competitive advantage anymore. You're right. But I think I will be retired and you as well before that day arrives.

Your next question is from the line of...

Stefan Nedialkov, Citigroup. A couple of questions on my side. Number one, on the platform. So from what I understand, you will be using your own financial products on the platform, i.e., you will remain a closed, bank-insurance company, opening up to other financial products. And you also would like to own the customer journey, which judging by the video of that lady that you showed, it looked like she only had one friend in life, Kate. So you almost want to own her life journey. So you want to own somebody's life journey, and you also don't want to open to third-party financial products. To me, that means you will constantly have to be at the cutting edge of whatever comes up, which means you would have to invest quite a bit to be always at the forefront, together with all the fintechs out there. Could you tell us if that reasoning is correct? And if it is, what does that imply for developmental resources, both human and IT in terms of your cost line at the end of the day? And my second question, back to the sustainable advantage question that has been asked already. Is this really going to be a sustainable advantage for you over the long term? Are banks not going to catch up with that? And I guess related to that, have you thought about how your customer retention is going to change before and after this strategy has been put in place? Is it offense or a defense in your case when it comes to market share? So any color on that would be great.

Thanks, Stefan, for 2 very interesting questions. Let me perhaps -- you asked, is this a correct reasoning on the platform and the closed infrastructure? I mean the straightforward question -- the straightforward answer to your question, yes, it is indeed a correct reasoning. But there's a but. We do have, indeed, on our platform, we use our own financial products. And this is mainly true for the essence of our customers. For good understanding, in private banking, we do use third-party customers -- to third-party products as well. But for our mass, we do indeed use our own financial products, which are tailored to the needs of those customers. We own the customer journey, indeed. And you are right, we have one friend in life tomorrow, and that's Kate. Now the philosophy of KBC Group is already, for many years, we have to be at the cutting edge for our products and our services. And that's precisely the philosophy which we have applied in KBC Group now for the last 10 years. We are always number one, if it comes out in terms of insurance products, quality, servicing and so on, so forth. In customer service, we are coming out mostly in time as the best or one of the best product providers on the banking side. Customer satisfaction is an explicit target. Product quality is amongst those targets to be reviewed on a monthly basis. So yes, indeed, your analysis was correct. But it was already part of our targets in the way which we operate. How can we then deal in offering that to a customer in a competitive way? Well, this is precisely where the Amazons of this world and the Googles of this world have a big advantage. The -- it's about using data. In terms of data usage, scale does matter. And so we have a competitive advantage. Compare ourselves by, for instance, other banks in Belgium or in Czech Republic and so on, so forth. If you compare this with Amazon, we have a big disadvantage because their scale and their -- the availability of data on their side is much larger than KBC and much bigger than KBC side. So it's a twosome game. It's 2 sides of the coin. One side, we are bigger than some of our competitors. The other side says you're smaller than other competitors, potentially even other competitors in your own domain. In that perspective, we have to learn from those, for instance, big techs, and we have to take onboard what they're good at, what they are much better at than the traditional incumbents in the financial sector. And that's precisely what we try to build right now. The main advantage which we have, if we do that part of the servicing right -- so it means cutting-edge products, but also cutting-edge services, hassle-free, frictionless servicing to our customers, if we can provide that, the main advantage we have is trust. That's the reason why we want to be amongst the best-performing banks in Europe. Stable, stable in capital, stable in liquidity and stable in return. Profit generation, it gives us also the possibility to build capital. Capital, you need to be stable. So it's -- everything is interlinked. As long as we can provide that trust, I think we have a main advantage. Combining the things together allows us to create a competitive advantage. That competitive advantage is definitely true for incumbents, but I so -- also convinced that we can build that, say, competitive advantages also towards the big ones in the tech world. For good understanding, we will never be able to beat the Googles or the Amazon in data analysis globally, no way. They just have more access to data. And in terms of your second question, do we -- well, you also asked, I do not remember if it -- that was in the first question or the second question that, is this a sustainable advantage, is what's your second question. Is that a sustainable advantage? Or can it be copied? Yes. Of course, everything can be copied. And the question is, does everybody have the scale to do exactly same thing as what we do today? I think, indeed, certain firms can have that scale. We have been building now 5, 6 years on this matter. We do have a very sizable AI team, definitely given our size. You can always copy that, but it will take you a couple of years. Building the bank-insurance model, which has been highly successful, took us 30 years. You can copy that. How come nobody succeeds in the same way as we do and deliver nowadays? Because it is not that easy to copy. On PowerPoint, it looks easy, but in reality, that's something else. So it is sustainable. It can be copied, but at least we have the competitive advantage of being now in advance of certain of our peers. Can it deliver extra market share? KBC has, over the last 2 years, gained a lot of new customers. This is true in, for instance, Belgium, which is a great -- a bigger country, a big market for us, important market for us. But this is also true, for instance, in Ireland, where we have been growing our customer base with CAGRs of more than 10% a year. So how come? Because exactly, we have been there presenting -- let me use Ireland as the example, we have been presenting there a digital-first strategy. Ireland was, in that perspective, a kind of laboratory. We presented a digital-first way built on a mobile app application where we try to integrate it in a seamless way, low friction, low hassle for the customer. And I mean it is what it is. We gain a lot of new customers in Ireland, not because we are the cheapest one, but because we are apparently a very attractive one on the innovation side, digital side. And as a matter of fact, there was a survey -- a recent survey in October, which said that on the whole Irish market, not only banks, when we were looking -- when the firm involved was looking at the best digital applications and the best digital solutions for its customers, we came out second with KBC Bank Ireland. And yes, then you have a competitive advantage. We came out second amongst all companies in Ireland. We came out first on the financial industry. So that's what it's all about. Can it be copied? Of course, but it will take some time. But by then, when it is copied, we will have invented something new. Don't doubt about that.

Yes. And we've seen that, Stefan, on the way to have customer retention. So when you follow courses in customer excellence, the professor will tell you, "Give your customer a reason not to leave you." And that is built on the trust, the convenience, the quality of your services. So next to the fact that, indeed, we are adding quite a substantial number of new customers on a net basis. Also in Belgium in the last 2, 3 years, where the market is quite settled. And where in the previous cycle, I would say, we did not see so many customers leaving banks, that is starting to happen. Johan mentioned earlier today, we have 45,000 non-KBC customers who are using our mobile application, and 20% of them became already customer. And that is really the excellence, the trust, the convenience that we provide our customers with. And that is the mouth of words, and we are able to roll out and -- the model and keep the customers and keep them loyal to us.

And let me add the last thing. I forgot to mention that the more the customer uses the Kate application, the better the Kate application knows the customer and the better we can indeed customize solutions to the specific need of the individual. And I come back to what Rik just was explaining. The more you tailor your solutions to the customer really needs, the more he becomes loyal, and that's what we noticed with the bank-insurance model. Bank-insurance stable clients have a churn rate, which is a factor 15 lower than the churn rate of a customer, which only has a bank product with KBC. And that's quite striking, but this is how it works in reality. So the competitive edge is, in that perspective, indeed present.

Your next question is from the line of Andrew Lowe.

It's just a follow-up to your answer to Stefan's question. Specifically, why do you think your digital assistance platform is suited to being operated and owned by a bank? You mentioned tech companies with deeper pockets and greater scale. What stops them doing this, say, better than you linking in multiple banks? Is it simply that the customers are sort of have greater trust in you over the tech company?

I mean what stops them? I don't know. You should ask them. And how come it's not there yet? I don't know either. I mean what we launched today, we have been building for 3, 4 years now. So we have been building all the components in several countries in several solutions, and we bring it now together with the building of Kate, which is -- Kate is, in essence, a mindset. And that mindset has translated into an algorithm, which uses a lot of building blocks, which we have in the group. And we grow each and every time, one step further. But intrinsically -- I mean if somebody out there would be available to bring that all together under one umbrella and can, under that umbrella, connect the algorithm, which is called [ Brussels Kate ], you could exactly build the same thing for -- as a platform in, for instance, the banking landscape in Europe and you combine everything together. I mean this is intrinsically true, but then you have to deal with all the complexity of the banking business, which in each and every entity, which in each and every country are different. You have to deal with that under the guidance of -- then the -- let's call it, the European Kate. And I can assure you that's a nightmare because then you are confronted with all different legal systems, all different AML systems and so on, so forth. So I think on PowerPoint, it's an easy job. But the reality is, as always, a bit different.

Your next question is from the line of...

Benoit Petrarque. I've got 2 questions. The first one will be on the IT budget. Back to 2017, a substantial part of the budget was going in the -- into core banking investments and also the multichannel investments. I was wondering in this digital-first model, whether your overall IT budget will change materially. Will that stay stable? Go up or down? And I also noticed that you've capitalized as -- been capitalizing software substantially over the past years. I guess this is also linked to the development of Kate. But I wanted to understand what you will do on that front, so capitalization versus taking cost to P&L? But just wondering if you could provide more data point and figures on the IT budget. And the second question was coming back on this closed architecture you have now, on the 5 to 10 years' time horizon, do you think you can keep a closed architecture model? I think you -- we've seen that Kate put companies in competition with each over, trying to propose the best deal for the client, but why will that not apply to mutual funds put on the platform?

Thank you, Benoit, for your questions on the IT budget. Again, as Kurt said in the beginning, we will come back and give you better insight in what our development budget will be for the coming years in the month of February. But it's fair to say that in the previous cycle, which ends this year, that will lead to a substantial amount of the EUR 1.5 billion investments that we wanted to do and needed to do, what's in preparation of what we have been able to present today. Capitalizing software is something that we watch carefully. You're right in saying that, indeed, we have been capitalizing more over the last 2, 3 years than the period before. So if you look at our balance sheet, you see that, indeed, a number of a little bit over EUR 800 million of capitalized software there. With a prudently valued software, that's going to come down somewhat. We are mindful of this, but we have been, indeed, developing a number of substantial core bank systems. We talked about Temenos already. We have -- for company data management, we have a project called Rainbow. So we're in the process of building this, and that will still come with the substantial investment. We are careful. We watch very carefully what is the amount of capitalization we do, what is the future impact it will have on depreciation and amortization. And we are mindful of the fact that we don't want to capitalize way more on an annual basis than what we depreciate and amortize. So that's an important element that we take into account when we look at our financial structure.

And Benoit, going back to your second question on the closed architecture. So the closed architecture is only true for the financial products on the -- beyond bank-insurance products. We obviously have an open architecture. But on the bank-insurance product, closed architecture. What is it going to be within 10 years? Is it still going to be the same? Honestly, I don't know. We'll see. I don't -- we don't have strategies which last for 10 years. Most of the time, we review our strategies over the period of 3 years. And also on this perspective, what we have to today is not necessarily going to last for the next coming 10 years. What is going to last is that we start from what the customer really needs. And as of the moment that we cannot fulfill those needs anymore, for instance, with our own products, then we definitely switch to a completely different setting, a completely different architecture and that might trigger, indeed, for instance, opening up the current position of our product's architecture in KBC Group. But for the next coming 2 to 3 years, we do not expect any change in that perspective, and we don't see any need. We are still confident that with our current products and the philosophy which we -- which I explained a bit earlier in this call, that with that philosophy, we can serve our customers best.

Your next question is from the line of Daphne Tsang.

Two please. The first one on your new platform Kate in auto. Just wondering, especially on Kate, what is the rollout time line you have in mind on this machine learning initiative? You mentioned that in the next couple of weeks, you are going to launch it in Belgium. What is the time line for other countries like? And more importantly, when do you expect to see meaningful traction with customers with Kate and see some results on reports? And then on Kate as well, although -- and of auto -- or don't you have to be [ view of these 2 ], and they are ready to be launched in your core countries, but during the rollout phase in the next -- like starting from the next couple of weeks, should we expect to see any increase in like marketing costs because you would like to -- probably need to ramp up the initial usage to get enough traction there? And then my final question is that -- I think Johan mentioned about not going to expand your existing geo exposure but focusing on growing your existing core markets. Is it fair to assume that your M&A buffer will mainly be used for the Central, Eastern Europe local market penetration purpose and also fintech partnership?

Thank you, Daphne, for your questions. On the time line of Kate, as you heard earlier, we did start in Belgium, and we then, a week later, started in the Czech Republic. One of the reasons for starting with fewer countries is also the specificity that we are working in a number of relatively smaller countries where the national language is, no pun intended, not maybe world language, and it's not so easy to find the right translation, so that takes a little bit longer. So the idea is we start in Belgium. We started in Czech Republic. As long as we have -- as soon as we have the language capabilities developed for other countries, we add them to what we have. And then the idea is also to -- on a monthly basis, to add 2 applications, so 2 new products or services to Kate. And it's really by customers using Kate more and more that we will be becoming more and more performant. So that is how we build it up. In terms of marketing cost, no, we're not going to go overboard with marketing. So within our overall marketing budget that has been restrained this year, as you know, there is a room available for Kate. This is the new digital way of working. So some of the old marketing is replaced by newer marketing, and Kate is definitely going to be a part of doing that. On the exposure to core markets and M&A buffer, as Johan has said this morning -- and this afternoon as well, so our strategy is geared towards the core markets that we have. It is indeed our intention to increase our footprint, both on the banking side and on the insurance side. And yes, we are and we have been investing in fintechs as well. So our total investments are now slightly north of EUR 100 million. So we've been investing mostly in Belgium, but also in some of our Central European countries. And even when it fits in the strategy that we are explaining, we will continue doing that.

Your next question is from the line of Thomas Dewasmes.

Three short questions, please. Just to come back on the rollout in -- of Kate in other countries. You could, for instance, decide to launch this in Ireland, right? Because this is in English. But is it fair to assume that you also need a critical market size for the project to be viable locally? Or is it mainly a question of local resources? The second question is relating to the project. And without talking about the quantum or the timing of improvement in returns for the group as a whole from the Kate initiatives, what level of straight-through processing score would you need for the project to become very interesting in terms of returns for the group? And then the third question, is it fair to think of Kate also as a way to perhaps roll out and improve on the bank-insurance model in countries like Czech Republic, for instance, which is probably a bit more broker intermediated?

Thank you, Thomas, for your questions. These are short questions, not necessarily short answers, unfortunately. But let me start with the first one. So rollout, as Rik pointed out, at other countries will happen and is bound to certain rules and a certain set of conditions. You referred to Ireland, where we already have a digital-first model, and Kate would be there a perfect solution to indeed integrating all these solutions in one single go on the back of the digital-first approach. The reason why it is coming not first and is part of the rollout in a second stage is -- has to do with a couple of things. I mean the main driver for -- or the main success for using Kate is obviously data. And in Ireland, we have no access to as much data as, for instance, in Czech Republic or in Belgium. And for that reason, the training of Kate is happening. As I said, it's a group-wide platform. It's one infrastructure. So the training of Kate is -- and the applications which we can use on Kate will be trained by other countries, by other solutions on the back of other data, which then can be translated into other countries. We call it smart copy. As was, for instance, the case with the mobile banking app in Ireland, this was also originally built somewhere else. And then it was transferred into Ireland and launched in a very short throughput time, a very short period. Same is true for Kate in this perspective. We want to bring down fundamentally the costs in Ireland, with fundamentally -- I mean fundamentally. And therefore, the development of Kate, as such, within the Irish environment is either -- is rather a smart copy solution than a full-fledged own development in that country. The level of straight-through processing is a direct indicator of the success of Kate. The answer is yes and no at the same time. First of all, Kate and -- Kate, it's -- as I said, it's the mindset. Kate starts from the fact that we want to deliver a hassle-free, proactive service to our customers. Now hassle-free means also when the customer clicks on, yes, I want to have this product or I want to have this service, that he has no -- he or she has no hassle with the delivery of the service. And as a consequence, it -- ideally, it needs to be a straight-through process. This is definitely not the case. And therefore, the targets which we used -- which we launched an 1 hour or 1.5 hours ago, you can see that we are quite ambitious on the straight-through processing targets, and that's the main driver. Because it is indeed the case that the more straight-through processing they have, the more customers also like -- start to like Kate. The more they start to like Kate, the more they start to use it. The more they start to use it, the smarter Kate becomes and the better it serves. So it's an upward cycle. And in that perspective, success of Kate is generated by the success of the delivery of the solutions to the customers. So straight-through is indeed a crucial element. And can we use, for instance, Kate or all the approaches which we explained today to leverage the bank-insurance model? The answer is yes, big time. Fully agree with you. And the big advantage of Kate is Kate will never sleep. She is never ill. She is always well minded. I mean she -- I will -- I'm going to say she's the ideal person. And the big thing is also, she will be able, definitely, when we -- when you are using advanced Kate to monitor your own transactions and to monitor your own preferences. So what a human being can do perhaps for 100, 200 clients, Kate can do for several millions of clients. And in that perspective, offering new bank-insurance solutions starting from, "I'm an insurance client and I will offer you bank-insurance," or the other way around, "I'm a banking client and starting to offer you insurance solutions," can be done on the basis of Kate on a 24/7 basis for the rest of your life. And that's the big game changer. It was also said in the presentation, and Rik also pointed it out earlier, when -- we do see today that noncustomers, which are using our app, are converting to become a customer 20%, 25% already after 3 months. Then I can easily guess that Kate -- once Kate is becoming mature, let's say, within 2 years, once you have used it, that you can get -- become addicted quite soon and that the temptation to become then a full-fledged customer is substantially higher than it is today. So yes, it is going to help us on the rollout of the bank-insurance activity.

No more questions? If not, then this concludes this Q&A session. I would like to thank you for your attendance. Take care, and enjoy the rest of the day. Cheers.

Thank you, Kurt. That now concludes your conference call. You may now disconnect. Thank you for joining, and have a very good day.