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KBC sticks to cost target after Q1 spike, still weighing central Europe M&A

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KBC sticks to cost target after Q1 spike, still weighing central Europe M&A

KBC Group NV will be able to reach its 2020 target for a cost-to-income ratio of about 54% in banking despite coming in far above that figure in the first quarter, CEO Johan Thijs said May 17.

KBC booked a cost-to-income ratio of 70% in banking for the quarter but noted that "the comparison of costs is distorted by the fact that the bulk of special bank taxes" for the full year were booked up front. Excluding bank taxes and one-offs, the cost-to-income ratio was 55%, KBC said.

Aside from one-off effects, which typically drive quarterly cost surges, there was a "huge impact" from the depreciation of the Czech koruna, Thijs told a conference call on the group's first-quarter earnings. Furthermore, wage pressure in central Europe continues as unemployment rates fall significantly, he told analysts.

"But what we have seen in the first quarter, taking into account all these effects — including the transformation of our business — is that we were able to maintain more or less ... the long-term 1.6% cost increase target," the CEO said.

He said that translates into an expectation that KBC will be able to manage costs as well, and he reiterated the 54% target, including bank tax effects. The average bank tax run rate for the next few years will stand at some 24%, compared to 19% in the first quarter; the figure was lower in the first quarter because of positive effects related to a tax law change in Belgium.

KBC saw first-quarter net profit decline to €556 million from €630 million in the prior-year period, while operating expenses grew to €1.29 billion from €1.23 billion. Shares were up 0.46% as of about 2 p.m. Brussels time May 17, broadly in line with the BEL 20 Belgian benchmark index.

Future M&A

One of the cost drivers over the first quarter was the acquisition of MetLife Inc.'s 40% stake in Ubb-Metlife Zhivotozastrahovatelno Drujestvo Ad, a life insurance joint venture of MetLife and KBC's United Bulgarian Bank AD.

KBC had been looking for further purchase opportunities on the insurance side in central Europe over the first quarter but has set aside its interest given the quality of the assets under review, Thijs said. "We are going to look at that from another perspective, a commercial perspective," he said on the call.

The group continues to observe the market for potential assets on the banking side as well, Thijs added. "There are some rumors that some assets are coming to the market but officially [they] are not on the market yet," he said.

Thijs reiterated his statement from earlier in the year that KBC would look at Hungary's Budapest Bank if the government decides to proceed with privatizing it. So far, there has been no progress, which was to be expected given the general election in the country, the CEO said.

The Hungarian election took place April 8, with Prime Minister Viktor Orbán's Fidesz party winning the majority and remaining in power. The sale of Budapest Bank was part of a 2015 plan to privatize bank assets over the next three years, devised in cooperation with the European Bank for Reconstruction and Development.