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Morningstar | We Like KBC's Bank Insurance Business Model

After the global financial crisis, KBC managed to turn around its business via heavy restructuring that enabled the bank to repay its state aid received earlier than originally planned. This was thanks to good performance that translated into a good capital position and profitability. We like KBC’s bank insurance business model, where the bank leverages its retail branch network for the sale of insurance products. The business model offers diversification in terms of revenue and risk. The collaboration between the bank and insurance distribution channels creates synergies and enables KBC to manage costs. These synergies produce higher cross-sales than peers, switching cost advantages, and lower operating costs. For example, in Belgium, for every mortgage loan signed, property insurance is sold to 88% of new homeowners and life insurance to 77%. When it comes to cost advantage, we believe KBC stands out with funding costs, as it has access to low-cost customer deposits (around 74% of loans are funded via deposits) and a cost/income ratio of around 56% at the group level. In the long run, we expect KBC’s cost/income ratio to improve toward 50% by 2022.We also like KBC’s Belgium business, where 65% of its total revenue is derived and its biggest market share is based. KBC enjoys a cosy banking oligopoly in Belgium, where the top three banks control about 80% of banking sector assets. Due to its size and market share in the country, KBC can operate with a cost/income ratio of 57% and a combined ratio of 87%, which we deem to be good. We believe KBC's low combined ratio results from utilization of its branch network, which enables the bank to cross-sell and create a more efficient franchise. Of the households in Belgium that are KBC Bank clients, 50% hold at least one insurance product from KBC. After Belgium, the Czech Republic is KBC’s largest market in terms of revenue generation (16%) and market share (20%) in loans and deposits, where the bank enjoys a cosy oligopolistic banking system.