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KBC updates capital plan, eyes possible 2018 bid for Budapest Bank

Belgium-based KBC Group NV may bid for Hungary's Budapest Bank if it comes up for sale in 2018, according to KBC CEO Johan Thijs.

Speaking on Feb. 22 about KBC's capital deployment plans during a presentation of the group's 2017 financial results, Thijs said there is a rumor that Budapest Bank, which is owned by an arm of the Hungarian government, may come on to the market this year.

"That is definitely something which we could be interested in," he said.

To pursue a deal, KBC would deploy part of the 2% capital buffer it is keeping for future mergers and acquisitions, the CEO said. He estimated that a deal would exceed €1 billion.

Budapest Bank's sale is part of a plan by the Hungarian government, announced in 2015, to offload majority holdings in domestic lenders within the next three years. The plan was devised as part of an agreement with the European Bank for Reconstruction and Development.

The Hungarian government acquired Budapest Bank for $700 million from GE Capital Ltd in July 2015 via Corvinus Zrt., a unit of the Hungarian Development Bank. Its subsequent sale to the private sector has faced delays; in November 2017 a government spokesman said the situation is being reassessed, without providing further information, according to a Reuters report at the time.

KBC is not considering any further large M&A deals currently, Thijs said, adding that it will not consider takeovers outside its existing regions of operation. KBC's core markets include Belgium, Bulgaria, the Czech Republic, Hungary, Ireland and Slovakia.

Thijs said the bank was approached several times over the last quarter to acquire assets in the Balkans, but the answer has always been "No."

Lower capital ratio targets

KBC has altered its overall capital deployment plan, because it no longer sees itself as affected significantly more than peers by the Basel III capital framework. It is therefore removing from its management targets the 1% Basel-related buffer, which was estimated relative to the bank's peer group.

Taking into account the updated median common equity ratio of 12 peers, it has lowered its "own capital target" and "reference capital position" to 14% from 14.6% and to 16% from 16.6%, respectively.

Its fully loaded common Tier 1 equity ratio stood at 16.3% at 2017-end, compared to 15.8% at the end of 2016.

The group expects an €8 billion increase in risk-weighted assets, on a fully loaded basis, as a result of the so-called Basel IV reforms. This corresponds to RWA inflation of 9% and a CET1 ratio decline of 1.3 percentage points, the group said.

KBC estimated the negative effect of the first-time implementation of the new IFRS 9 accounting rules, in effect since Jan. 1, on its fully loaded CET1 ratio at 41 basis points.

Further effects on KBC's capital position from upcoming regulatory actions such as the ECB's Targeted Review of Internal Models or new guidelines from the European Banking Authority have not been taken into account in the current CET1 ratio targets.

The ECB conducted a review of KBC's small and medium-sized business portfolio in the second quarter of 2017 and of its mortgage portfolio in the fourth quarter, CFO Rik Scheerlinck said. The group expects to receive the ECB's recommendations at the end of the first quarter or early in the second quarter of 2018, but there is nothing new at the moment, he said.

The original assumption about TRIM was that it would not result in further RWA inflation, Thijs said.