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Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach díospóireacht -
Wednesday, 1 Dec 2021

Withdrawal from Irish Banking Market: Engagement with KBC

KBC will now give us an update on its recent announcement regarding its withdrawal from the Irish banking market. The chief executive officer of KBC is with us, as is the executive director and chief risk officer. The chief executive officer will give us a brief opening statement and then members will discuss the various issues with the representatives of the bank. I again remind members of the notice of privilege and that it is a long-standing parliamentary practice that members should not comment on, criticise or make charges against a person or an official outside of the Houses either by name or in such a way as to make him or her identifiable. I now ask for the opening statement.

Mr. Aleš Blažek

Chairman, Deputies and Senators, as the CEO of KBC Ireland I am grateful for the opportunity to address this committee. I am accompanied today by Barry D’Arcy who is our director of risk and an executive director of KBC Ireland, KBCI. We are looking forward to a discussion and will be answering questions. I will now cover the key summary points of my opening statement shared with the committee earlier.

On 22 October 2021, KBCI confirmed that it had entered into a legally binding agreement with Bank of Ireland following the entering into a memorandum of understanding, MOU, between the two groups on 16 April 2021. This transaction remains subject to respective regulatory approvals. It is our intention to be as comprehensive as possible in answering any questions, while fully respecting the boundaries set by the ongoing approval processes. While it is our intention to withdraw from the Irish market, I wish to reiterate our strong commitment of support and responsibility towards our customers, colleagues, communities and all stakeholders within Irish society. We intend that any exit will be carried out in an orderly and responsible manner fully respecting all of the obligations we hold.

We see Ireland as a progressive, open economy that is very successful with an outward-looking society that is attractive to international investment. At the same time, the model of retail banking is evolving in Ireland and across Europe in response to how consumers want to access financial products and services. This transformation is also driven by technological changes and new forms of delivering banking and financial services. This evolution presents challenge and opportunity in equal measure for all retail banks in all markets. Included in these challenges is the ability to achieve reasonable and sustainable returns on investment. In this respect, we welcome the recent publication of the terms of reference for the retail banking review and we will contribute positively to that review.

While we believe we have been a positive force in the Irish market since 1973, the tracker mortgage issue is a hugely regrettable chapter in what we have done in Ireland. We have learned significant lessons from our mistakes. We have apologised in this forum for those wrongs we have caused our customers and I now apologise again here. At the same time, KBC Bank has gone through substantial cultural change, re-embedding responsible behaviour frameworks in its activities. Our customers remain central to every action we take and our exit from the Irish market will not be considered complete until we do right by each of them. Our mission for our customers is to support them in any action we are required to take. We will ensure customers are provided with plenty of notice of any impact or changes to their account in line with all legal and regulatory protections. Service remains our top priority.

We maintain strong lines of communication with our colleagues directly or through an employee council. We agreed on strong terms of voluntary redundancy with the employee council that reflect our deep appreciation of the service given by our employees. On the transfer of undertakings, TUPE, KBC will, of course, fully comply with its duties to provide choice to entitled employees.

We have strengthened our employee well-being programme, providing a range of support to staff to help them manage their own resilience and well-being in this time of uncertainty. We are also supporting staff in preparing them for their future careers with management programmes and career coaching workshops to discuss options available to them when transitioning into the labour market.

We will continue engage comprehensively with all stakeholders in Ireland. The board and executive committee of KBC Bank Ireland are fully conscious of their responsibilities to our customers and employees and we are committed to fulfil these responsibilities.

Thank you for hearing our perspective and we are now happy to answer any questions.

I thank Mr. Blažek very much for his opening statement. I call Deputy Doherty.

Go raibh maith agat. Cuirim fáilte roimh na finnéithe chuig an gcoiste. Mr. Blažek talked about KBC's role in the tracker mortgage scandal. We heard the KBC Group's CEO basically calling on the Central Bank to "turn the page" on the whole tracker mortgage stuff. Those comments were quite insulting given the fact that KBC was forced to pay €153 million that it wrongfully took from customers, including compensation in relation to the scandal. Some 66 properties were taken wrongly, 11 of those being family homes repossessed wrongly and, I would argue, illegally. Can Mr. Blažek comment on the financial loss that individuals have suffered? Has all the remediation been done? Is KBC making any further provision on tracker mortgage cases? Has the Garda been in contact with KBC on the tracker mortgage scandal?

Mr. Aleš Blažek

I thank the Deputy for his questions. I would like to reiterate that this was definitely a very regrettable event. When I arrived in Ireland, I spent much time looking at this. We currently still have some customer claims outstanding. Some are raised through courts, through the Financial Services and Pensions Ombudsman, FSPO, or the Court of Appeal. We are working proactively to resolve those cases appropriately and in a comprehensive manner in order that when the facts and the legal grounds are established, we will fulfil our obligations. At the moment, we have created some additional reserves related to tracker mortgages. As I said, we will continue to fulfil all our obligations to our customers when they arise, in respect of tracker mortgages.

We know, as part of the scandal, there is a "stop the harm" principle in the Central Bank. KBC adopted a "continue the harm" principle during this process. Despite the intervention of the Central Bank, KBC continued to overcharge customers incorrect rates and continued to repossess homes, despite the fact it was as a result of its own malpractice. Has Mr. Blažek been able to ascertain who continued that harm principle, despite the intervention of the Central Bank? What action, if any, has been taken against senior officials on that?

Mr. Aleš Blažek

I would like to reiterate and point out that we have implemented the stop the harm principle in respect of our customers and that is largely still in place. We have been co-operating with the Central Bank of Ireland in all of the investigations. We have been making sure that none of the wrongdoing which has taken place would be repeated or continued.

Does Mr. Blažek dispute what the Central Bank has found against KBC as part of its €18 million fine? It found that KBC continued the harm despite its intervention and the stop the harm principle was not adhered to by KBC. It continued to overcharge and continued to repossess homes. If KBC accepts those findings, which are part of the €18 million fine, has it identified who at senior level continued the harm, continued to overcharge, and continued to repossess homes that it had no right to, despite the intervention of the Central Bank? What action, if any, has it taken? Or did it, in the words of the KBC Group CEO, "turn the page" on this and just brush it aside?

Mr. Aleš Blažek

Once it was established that there was a continuation of the harm, we stopped the harm immediately. We have accepted all of the findings of the Central Bank of Ireland. I want to reiterate that it is a great regret of our group CEO, who has apologised without any conditions for his words, which were quite unfortunate, and he recognised them as such. As soon as the Central Bank of Ireland confirmed we had to stop certain actions, we fully stopped those actions.

Moving on to the fact that it is regrettable that KBC is withdrawing from the Irish market, Mr. Blažek is aware that the Competition and Consumer Protection Commission, CCPC, has decided to carry out a full phase 2 investigation into the proposed acquisition of certain assets and liabilities of KBC by Bank of Ireland. Can Mr. Blažek outline the acquisition by Bank of Ireland, including the value and profile of the loan book involved and the staff who would transfer as part of that loan book? What engagement has KBC had with the investigation by the CCPC? When is the outcome of that investigation expected? Does Mr. Blažek have any concerns about competition from KBC's exit from the market? As he knows, there are not a huge number of players left. What is the expected timeline for the sale of the loan book and the assets and liabilities to Bank of Ireland?

Mr. Aleš Blažek

I thank the Deputy for his many questions. They will require comprehensive answers. I will try to answer all of them. As mentioned, we entered into a binding contract with Bank of Ireland on 22 October. That agreement covers all of the performing assets; €8.8 billion of assets of KBC Ireland. It also includes the deposits which are in our portfolio. There are assets, performing assets, and deposits, and the assets are primarily formed by mortgages. As soon as we signed the contract with Bank of Ireland, we entered into detailed migration talks, through which we are dealing with the technical aspects of the transfer of those assets to Bank of Ireland. Those discussions are continuing and we probably will have results of those discussions in the near future.

In respect of the CCPC, we have entered into the second stage of the review by the CCPC. Both Bank of Ireland and KBC Ireland are providing full co-operation with any questions or inquiries the CCPC has.

That dialogue is continuing as we speak in a written format. It is hard to assess when the CCPC will make a decision regarding this procedure because it depends on whether the CCPC requires additional information. If it does, the certain period may be stopped while that information is required. We assume, which assumption may not be fully correct, that at the beginning of the second quarter next year we will know the resolution or decision of the CCPC on this review.

As I mentioned at the beginning, this transaction is still subject to that approval. If the approval is not provided, the transaction will not proceed. If approval is granted, we assume those assets will be transferred in the second half, more likely in the fourth quarter, of next year. That depends on when we receive the necessary approvals and on the details of how the assets will be migrated.

The last part of the Deputy's question related to competition in the Irish market. I will answer it more broadly to explain what is happening not only in Ireland but in banking more broadly. Banking, including retail banking, is undergoing a massive change. I think the Deputy called it seismic and that is correct. There is a huge transition to digital and to a model where banking products are not only provided by banks, but also by fintechs operating across the European Union and more broadly internationally. Then there are the financial services and banking provided by big techs. Retail banking 20 years ago was provided largely by retail banks but that is not the case any more. Retail banking is provided by many participants, including retail banks, but there are niche providers in each segment, such as payments, accounts and loans. Today the customer has a much broader choice of where to purchase financial banking products than 20 years ago. Consolidation in the retail market is taking place everywhere, including Europe, the US and many markets in Asia. It is driven by the technological changes and other big shifts which I mentioned.

To return to the Irish market, I believe the Irish customer has an abundance of choice in all the products he or she wants to acquire, whether accounts, payment cards or loans. It is through retail banks and also through new entrants, new banks, big techs and others.

I thank Mr. Blažek for a comprehensive response. My next question is in two parts. One relates to non-performing loans. We know KBC has sold non-performing loans related to 5,000 buy-to-let homes to a vulture, namely, CarVal, to be administered by Pepper Finance. Mr. Blažek will be mindful that the deputy governor, Ed Sibley, said in November 2019 that:

The Central Bank does not have a preference for loan sales. We have a preference for sustainably reducing non-performing loans. ... Banks need to engage with their customers in a sensible and proactive manner with a view to finding long-term solutions that work for both parties.

I am of the view that is not happening. As a bank that is leaving the market, does KBC see this suite of repayment arrangements as options or requirements on the bank? They are not followed by all banks. Some banks only choose a number of them as options for the customer; others have a different suite of options.

The second part of the question relates to Mr. Blažek's comments, which were interesting. I was thinking of the future of banking forum. We have long called for the establishment of such a forum to look at how banking is evolving, what is needed for the future, how fintechs are playing and all of that. As a bank that is withdrawing from the Irish market, what advice would KBC have for the State on attracting a new bank? What issues would need to be overcome? There has been discussion on the level of capital banks have to hold as a result of the crash and whether they are fit for purpose in the long term. There are issues relating to how technology is evolving and so on. What would need to happen for Ireland to be in a better position to attract new entrants, whether KBC in the future or another bank?

What was KBC's relationship with the Central Bank? Over the past year or year and a half, how many formal meetings has KBC had with the Governor or deputy governor of the Central Bank to discuss the bank's decisions?

Mr. Aleš Blažek

On the first question related to our sale of non-performing assets, we have as an institution always preferred to come to a suitable arrangement for the debtors or customers. That has been our first priority and we have worked with our customers diligently. We have a number of processes respecting all aspects of this.

On the sale to CarVal, which will be administered by Pepper Finance, it needs to be stated that Pepper Finance is regulated in the same way we are regulated and is subject to the same regulation regarding conduct in respect of mortgages. It is bound by oversight of the Central Bank of Ireland and based on my interaction with Pepper Finance, it is apparent it takes that oversight extremely seriously. I have no reason to believe the customers will be in any worse position than they are with KBCI.

The other-----

On a point of clarification on that, can CarVal through Pepper Finance increase a variable rate mortgage which used to be with KBC and now is with CarVal by 2%, 3%, 4% or double it? Is there any limit on the level to which it can increase a variable rate mortgage?

Mr. Aleš Blažek

I am not certain.

Mr. Barry D'Arcy

In the context of contract and terms and conditions, the same terms and conditions apply to the loans in KBC as will at CarVal. With a variable rate, the bank or institution can change the rate. We have seen in the marketplace the funds that have come in and purchased loans have typically acted in a constructive and positive way with customers. We would not see that being different in this circumstance.

The risk, however, is there. The difference is that high street banks are looking for deposits or more loans so there is a reputational risk but for CarVal there is no such risk if they double the rate. I apologise for taking up the witnesses' time. Will they answer on the Central Bank and what we need to do to attract banks to the market?

Mr. Aleš Blažek

We have extremely constructive and close engagement with the Central Bank of Ireland, CBI. This engagement has been heightened in recent weeks and months but it also has been in place prior to our announcement. We have been working with the respective officials very closely and the regulatory authorities in an appropriate and standard manner, which one would expect from a very qualified regulator, which the CBI certainly is.

The question was as to how many times Mr. Blažek has met the Governor of the Central Bank in the past year, on this issue.

Mr. Aleš Blažek

I have not met the Governor of the Central Bank. As the Deputy probably knows, I have only recently been appointed but I have to admit that from my perspective, the engagement of the Central Bank and the seniority of the engagement has been totally appropriate and done in an intense manner.

I welcome the witnesses. Mr. Blažek referred to the changing face of the banking system in this country towards a more computerised system. I would regard it as a more impersonal system and one that is doomed to failure, because it will not work when the central authority with which the customer deals is replaced by a machine, telephone or answering service. That is doomed to failure. Will Mr. Blažek tell me how many countries has his bank operated?

Mr. Aleš Blažek

Has the Deputy asked how many countries I have worked in before?

Yes, along with Ireland and throughout Europe.

Mr. Aleš Blažek

I have worked in the orbits of most of the markets in Europe. I have been working in Citigroup and GE Capital, which have operations in many markets. I have engaged in the markets of the UK, western, central and eastern Europe.

In how many countries did Mr. Blažek's bank remove the tracker mortgages, where such mortgages had been established?

Mr. Aleš Blažek

A mortgage is one of the most important products, if not the most important product any of us has. It is usually the highest amount any individual will ever have to handle. Unfortunately, mortgages attracted issues not only in Ireland, but in other markets. It has happened in Poland and Hungary and even before in western Europe, because the rates provided in the local currencies were too high. The banks then decided to provide the loans in a foreign currency, such as in Hungary, where they were provided in Swiss francs. Through that, the banks had not only exposed the customers to the change in the interest rate, but also the change in exchange rate. Obviously, there were also normal risks of credit issues, such as customers losing jobs and financial crises. That has created substantial issues in those markets. There were similar items in other markets. The tracker mortgage issue is quite specific and very regrettable. However, mortgages generally have attracted some issues in other markets over the years.

Did KBC consult with the European Central Bank, ECB, when consideration was being given to the withdrawal of the tracker mortgage in this country? Was consideration given to the fact we operate in the Single Market and that whatever prevails in one country, prevails over all European member states and in the eurozone, in particular. From whence did KBC get the permission or authority to intervene and change the mortgage structure for those who had already been operating under the tracker mortgages?

Mr. Aleš Blažek

I am not really clear on this question. Perhaps Mr. D'Arcy would know.

Mr. Barry D'Arcy

The specific element of the regulations that were applied to customers and what occurred with the tracker mortgages in the period following 2008 was specific to each bank. The ECB would set the refinance rate and the banks would then apply a rate toward that. The ECB would not have direct engagement with what an institution would do to its customer. However, we would follow closely and track the rates the ECB set. In that context, the ECB sets the broad framework in which banks can operate, but not necessarily what would be specifically applied to an individual customer.

How did KBC Ireland decide to withdraw the benefits of the tracker mortgages? My colleague, Deputy Doherty, already referred to this. Permission surely had to be got from some quarter or central authority, whether it was the Central Bank of Ireland or the ECB, at which Ireland is also represented. The propaganda claim around that time was that the retail banks were losing as a result of the tracker mortgages. They were not losing, because they borrowed the money on the international market at a very low rate and had an entitlement to maintain those mortgages throughout the European Union, not to decide to on a country-by-country basis or based on where there was least resistance. KBC did not have the authority to withdraw that facility from the people, many of whom were penalised, to which my colleague referred at length. I am trying to figure out from where the inspiration came to apply that new rule. It was a new rule that cost many people their homes and was seriously at variance with the Single Market that applies throughout Europe. The Single Market applies to everybody, not just selectively to some people.

Mr. Barry D'Arcy

An important piece here is in 2008, a large number of the Irish banks had started to withdraw the tracker product from the marketplace. Around that time, the rates by which banks were charged to fund their balance sheets had become very high and the tracker product became unprofitable for those banks. In that context, it is important to note that KBC still retains a large number of tracker products. The key element through the review is for those customers from whom a tracker product was withdrawn or not facilitated and through the examination challenge, we have corrected approximately 3,785 accounts. As it stands, we still have a large quantity of mortgages on a tracker rate that make up approximately 22% of our portfolio at €2.3 billion. The benefit of a tracker rate is still availing to a large number of our customers today and throughout the market.

The Chairman will be glad I am coming to a conclusion, but I could go on for a long time on this issue, having met representatives of KBC on numerous occasions during which we had many robust exchanges. I do not wish to go into that but I will register my points. Why and where was it thought Irish mortgage holders would be punished to the extent of being removed from the ability to enjoy the provision already made for tracker mortgages?

I strongly object to that.

I know KBC has sold on what it considers impaired mortgages. I am familiar with the conclusion reached in most cases that the mortgages in these cases were not sustainable. That was an arbitrary declaration by the bank based on a box-ticking exercise drawn up by all the banks, to which I also strongly object. There is no arbitration in that whatsoever. There is no attempt being made to accommodate the various possibilities, except on the basis of the bank's assessment of the situation.

The bank will still retain some interests in this country after its withdrawal. Mr. Blažek might mention some of the interests it will retain. I understand that is the case also with other banks leaving the jurisdiction. Is this a cherry-picking exercise or is it to maintain a foothold in the market?

Has Ireland become a place where banks do not wish to do business or cannot make sufficient profit on the basis of the size of the market? I again emphasise that all banks have a right to operate throughout the European Union, but they do not have the right to declare the manner in which they operate in certain sectors of the European Union. Otherwise, again, the Single Market applies. It must be absolutely clear from everybody's point of view that if an institution, whether a bank or other, sets up in this country, it is setting up in part of the European Union and the rules apply and they cannot and should not be changed.

Mr. Aleš Blažek

I thank the Deputy. I will answer those questions. We are selling all of our assets. That is our intention. After we resolve all of our remaining liabilities on all of the issues, we intend to withdraw from Ireland.

On the other question, on the profits, I do not want to repeat all that I said in respect of the question from the previous speaker, but we have encountered substantial challenges in Ireland vis-à-vis having sufficient sustainable return on capital. That is something which is important. It is driven by a number of factors. It is the competition in the Irish market and some of the aspects of the higher capital requirements for assets which we have to hold in Ireland. As I mentioned, it is also a function of structural changes that are taking place in other markets and in Ireland as well. Similar to us withdrawing from Ireland, there are other markets which experience such a similar withdrawal of other participants and they are selling their activities to their competitors. The consolidation is a trend which is taking place across retail banking. It is not specific to Ireland; it is a wider trend.

Would Mr. Blažek mind giving us some figures on the number of tracker mortgages, the claims that are still in process and the number the bank has concluded on? Could he perhaps give us an idea of the numbers that are currently before the courts, either by the bank or by the customers? If settlements have been reached, either through the process or through the legal system, have they all been paid?

The bank has a branch, for example, in Kilkenny city. What will happen to the properties owned by KBC in towns around the country?

Mr. Aleš Blažek

I will respond to the last question. We do not own any of the properties. All of them are leaseholds. We will be in discussions with the owners of those properties to terminate the leases in accordance with the contracts. We do not have a historical portfolio of properties that we are selling or handling in another manner.

In respect of the tracker mortgages, we will not leave until we settle all of the obligations related to tracker mortgages which we have. We will abide by all of our obligations. We are going to fulfil our obligations to the last. I want to reiterate that whenever we have reached a settlement, we have paid our obligations to customers. We have currently around 27 cases in the courts. All of them were initiated by customers. None of the cases were initiated by KBCI. After the proper facts are established and the legal assessment has been reached through the court process, we will abide by our obligations. This is something which we will handle appropriately. We need to get to a proper finding of the facts in order that it is clear what our obligations are. We have fulfilled our obligations to more than 3,700 customers. In the scope, there is a small number of outstanding legal claims before the courts.

Okay. I call Deputy Matthews.

I thank Mr. Blažek and Mr. D'Arcy for their attendance. Customers do not normally change banks during the course of their banking life. It is rarely that people change from one bank to another, so when something is forced on them it causes concern and difficulty. I get contacted a lot of the time by bank customers because KBC is not the first bank to close down branches. We have had other banks in and have had discussions with them. We have gone through the issue in the committee and we understand the pressures on the banking system, the move to online banking and the reasons branches are closing and not operating.

My questions for the witnesses are directly from customers and I would appreciate if they could answer them. Some of those customers may be watching today or may go through the transcript of the meeting afterwards. I have a number of questions and I ask the witnesses to respond as simply as possible. The first question from a customer is when notice will be issued to KBC customers on the formal transition to becoming Bank of Ireland customers.

Mr. Aleš Blažek

In respect of mortgages and deposits, those notices will be given more than 60 days prior to the migration. As I mentioned, we have not yet been able to set the date because it is dependent on when we receive CCPC approval. We will provide sufficient notice, which will definitely be longer than 60 days, to customers about any change.

In respect of the current account holders, the situation is different because the most preferred way for the customers is to transfer to a bank of their choice. We can do that either through switching or the customers' switching process or the customers can open new bank relationships at their will. The current accounts will not at first be transferred by us. It is down to customers to decide whether they want to move to the Bank of Ireland or some other bank. We will start to communicate on the current accounts with the customers as soon as possible. It will be a set of communication, which will be in the form of what we call soft notice and are telling them now. We have already notified all of the customers about the fact that we have signed the transaction with the Bank of Ireland and notified our intention that if there is an approval, we will leave the market. That has been stated to all of our customers. When we receive the approval we will also communicate to our customers that now we have received approval, in due time we will notify them that we will no longer in the future provide banking services in Ireland. It will be a longer period and there will definitely be more than 60 days for customers to choose which bank they want to use.

I want to mention that we have focused on this in great detail. Most of our customers have other banking relationships. They do not have KBC as their only bank and we support those customers. It will be much easier to close the account or transfer their banking to that bank.

May I interrupt Mr. Blažek, as I am unclear about what has been said? In the case of mortgage and deposits, it will be 60 days prior to the migration. That is the minimum notice. KBC intends to give longer notice but it cannot say when that will be and I did not catch what KBC awaits.

Mr. Aleš Blažek

We await for clarity on the CCPC approval because that approval will then drive the timing of subsequent steps. We assume that if we receive CCPC approval at the beginning of the second quarter of next year that we would transfer deposits and mortgages to the Bank of Ireland in the second half of next year, so probably in August to October, and then the customers would be appropriately notified prior to those dates..

How many countries is KBC going through this process with at the moment? Is Ireland the first or has KBC done this in other countries? I mean where KBC is leaving a country and transferring to a national bank within that country.

Mr. Aleš Blažek

KBC is undergoing this process only in Ireland.

In how many other countries in Europe does KBC operate in?

Mr. Aleš Blažek

We are operational in five other countries in Europe.

Will formal documentation be issued to KBC customers seeking their consent and confirmation of the transfer of funds from KBC to Bank of Ireland?

Mr. Aleš Blažek

The transfer is managed through what is technically called a part 3 transfer, which is subject to the consent of the Department of Finance. For that transfer there is no consent of customers required. As part of that transfer all of the terms and conditions will be then transferred to the Bank of Ireland.

All right, so there is no requirement for a customer to give his or her consent to transfer funds to the Bank of Ireland.

Online banking is great when it works but as sometimes one needs to talk to someone at the end of the phone, one does appreciate a relationship that one may have built up with one's bank over the years and know how to get in to touch. With the majority of banking being done online are there plans in place to integrate banking apps or will all KBC customers be required to move to the Bank of Ireland app? Does Mr. Blažek envisage where KBC will integrate its app into the Bank of Ireland or will people have to just drop out of one and join the other?

Mr. Aleš Blažek

Those apps will not be integrated. KBC customers will have to open the new app in the Bank of Ireland.

I am sure that Mr. Blažek can appreciate the difficulty that this may cause for people. I mean that people have become very used to using the KBC app and now will have to transfer. Will KBC assist its customers with the transfer to the Bank of Ireland app?

Mr. Aleš Blažek

Yes. We are developing a very detailed communication plan, which will be driven both by people and technology. Whenever it will be more appropriate and convenient for our customers they will be able to speak to someone on the phone, to talk to someone in our hub or do it digitally through other applications.

Did Mr. Blažek say that current account holders will have a choice in where they wish to go?

Mr. Aleš Blažek

Yes.

Will the Bank of Ireland take over existing KBC hubs or locations?

Mr. Aleš Blažek

No. Bank of Ireland does not intend to take over our hubs.

What actions do mortgage customers need to take to transfer their mortgage to the Bank of Ireland? Do they just need to wait for this communication, which Mr. Blažek has said will come and will give 60 days or more notice? Is that the advice that Mr. Blažek would give?

Mr. Aleš Blažek

Yes. That is the intention. We have worked with the Bank of Ireland on the detailed process. As I have mentioned, there is no action required by the customers. The customers will be notified of any changes well in advance and there is the assistance of our hubs, other contact centres or other digital offering etc. Our customers will not need to do anything in order for their mortgage to be transferred to the Bank of Ireland.

The KBC customer mortgage holders can opt out of time-bound contracts. If the terms of service are changing dramatically, will they be able to switch to another bank other than Bank of Ireland?

Mr. Aleš Blažek

Yes. Our customers are always entitled to switch to another other institution. That is their right and that right will be respected today and in the future.

KBC customers benefit from zero banking fees if their current and saving accounts meet some basic balance criteria. Will these benefits be carried over to the Bank of Ireland? Is there an option for them to carry over some of those benefits?

Mr. Aleš Blažek

To what benefits does the Deputy refer?

Some KBC customers benefit from zero banking fees if their accounts meet certain basic criteria. Can existing KBC customers carry over these benefits to the Bank of Ireland or must they meet the Bank of Ireland's set of criteria and that is it?

Mr. Aleš Blažek

As I mentioned, the current accounts will not be transferred to the Bank of Ireland. Such customers will have to open an account with the Bank of Ireland and they will be subject to the terms of contract provided by the Bank of Ireland.

I apologise because I realise that Mr. Blažek has covered this and did say that.

Many of our constituents who are KBC customers are contacting us about banking matters or concerns. Would the bank consider setting up a facility for Oireachtas Members to liaise directly with KBC on behalf of its customers who may be experiencing difficulty?

Mr. Aleš Blažek

Absolutely. We would welcome that. We have other communications such as a customer centre and a specialised line for our customers. We would be happy to set up a direct line for Oireachtas Members.

I suggest to the Chairman that the committee liaise with KBC on the setting up of an Oireachtas liaison line for the period of transfer for, say, the next 12 months. That might be helpful for all of us. I thank Mr. Blažek and Mr. D'Arcy for their time today.

I thank Deputy Matthews. If the witnesses could send on the details of that facility to the committee, we will make the members aware of it. The next speaker is Deputy Mairéad Farrell.

I thank the witnesses for appearing before the committee. I want to follow up on two issues raised with the witnesses by my colleague, Deputy Doherty. My first question is in regard to meetings with the Governor of the Central Bank. Is Mr. Blažek aware how many times in the past two years his predecessor met the Governor of the Central Bank?

Mr. Aleš Blažek

Unfortunately, I am not aware so I cannot comment.

I thank Mr. Blažek. Would he be able to furnish the committee with that information in writing post meeting?

Mr. Aleš Blažek

Absolutely.

I thank Mr. Blažek. My second question is in regard to an issue mentioned by my colleague, Deputy Doherty, but which he did not get an opportunity to tease out. What advice would KBC offer a new entrant, or a re-entry of KBC, into the market?

Mr. Aleš Blažek

It is a very tricky question. It is important to understand that the regulatory and legal corporate framework is very standard in Ireland and very similar to all European states. There are no real differences in this respect. Also, Ireland is an extremely attractive country in terms of its fluency and gravity of economy. It is a very successful economy. New entrants have already entered the market but they have focused more on niche products. They have not initially started with the global comprehensive retail banking offering but they have either offered current account payments and lending, including mortgages. That will continue, I believe. Ireland is a growing economy with an affluent population. It is very successful in the global economy. I believe Ireland inevitably will attract those investments. I cannot point to any specific cases of organisations that will come in the future but I understand there are a few banking groups from the Continent that are considering coming to Ireland to do certain projects because they feel there is an opportunity for them. That would be the advice.

I would probably not advise any entity to do the holistic retail banking, similar to what KBCI has been doing. The main reason for that is that it requires extremely high and ongoing investment. That complexity of universal banking requires a large number of customers to support that cost. Without a large number of customers, inevitably you end up in a situation where costs are not equal to revenues and then the cost of capital goes up. That would be my advice. For universal banks, Ireland is in a position which is quite standard. I believe more new entrants will come into the market, including Fintechs and other niche players.

I thank Mr. Blažek for that very interesting analysis. On the staff of KBC Ireland, what protections for pensions will the bank put in place for the long term? Will the bank transfer the employer covenant responsibility and deeds to KBC Group in order to best protect both deferred, active and pensions members of the KBC schemes?

Mr. Aleš Blažek

I apologise but at the moment I cannot speak about the specifics of how this is going to be arranged because we are still in discussions with the pension trustees. Those discussions are continuing. I hope they will finish soon. I can confirm that the rights of other pensions will be properly protected. The arrangement which I think we will ultimately agree on will keep other pension holders at the same level as they are today.

I would hope so. This is about people's lives and livelihoods.

Mr. Aleš Blažek

Absolutely.

They have given KBC Ireland long years of service. That needs to be remembered as well. That is extremely important. These are people's real lives that we are talking about and, in some ways, playing with. It will be very interesting to see what comes out of those discussions, which I hope will conclude soon. The reality is this is a huge stress on people's lives. We cannot forget that.

I have one final question. How can the bank still say that it is committed to the UN Global Compact when it is clearly in breach of commitments relating to unions as it continues to refuse to negotiate with the union or even to attend the Workplace Relations Commission, WRC, to seek solutions on workers' issues? As this is something I feel quite strongly about, I am interested to hear Mr. Blažek's response.

Mr. Aleš Blažek

I thank the Deputy for the question. I agree that the rights of the employees have to be fully protected. Even though I have not been working with colleagues in KBC Ireland for that long, that for me is one of the biggest positives of my work. We have extremely good and dedicated colleagues, who have showed incredible and admirable flexibility. We are focusing on their well-being in many aspects. The Deputy mention the pensions, which is one aspect. As I mentioned at the beginning of this meeting, we have programmes with respect to the well-being of colleagues. We also have training programmes to prepare them well for the future, whatever their career plans may be, in order that they get an appropriate framework in which they can operate. My belief is that our colleagues are extremely well prepared for entering the job market in Ireland. Today, there was an announcement of very low unemployment numbers. Other colleagues have ample opportunity in the job market with their skill sets which they have acquired through KBCI.

We have also put in place quite a good framework on redundancy, which is extremely favourable for other employees. We have respected all groups of employees appropriately in order that no one is left behind and this is the market standard at present in Ireland.

On the issue of representation, we do our best to have a direct engagement model in Ireland with other employees. We have had that engagement model for the past 40 years through employee councils and that model has worked and is working quite well in our case. The employee council properly represents all areas of the bank. All areas of the bank have elected their representatives in the employee council. There is direct engagement with the management, with me and with the employee council and we communicate on a regular and robust basis. Also, the employee council has demonstrated its value in appropriately perfecting employee rights in many aspects of how we progress with the preparation of the transaction and possible wind-down.

I am personally convinced that the model we have had in Ireland for the past 40 years, and which we have now enhanced, works extremely well for employees. It is my personal conviction that we protect the rights of the employees and that we act in accordance with all other undertakings we have taken as KBC or KBCI.

I must go now to the committee room now but if Mr. Blažek feels strongly that the bank is working so well with the employees and that it is so well functioning, I do not understand why it would not engage with a union that represents workers and allow workers and employees to work with their union and have it represent them. That is my opinion on the matter.

Go raibh míle maith agat Mr. Blažek agus mile buíochas as an gcur i láthair. It has been an interesting discussion. I would like to zero in on the Irish banking market. As Mr. Blažek knows, the Irish banking market is in crisis at present. The fact that Ulster Bank and KBC are leaving means there is more concentration happening within the pillar banks. More concentration leads to an oligopoly, which leads to enormous power within those banks. They can determine all aspects of the engagements they have with customers because customers have no choice. There is a banking review happening soon. There are weaknesses with regards this banking review in that it is run by the Department of Finance and does not include public banking, credit unions or post office banks in its terms of reference. Has KBC received an invite to attend the banking review to give its insights of the Irish market?

Mr. Aleš Blažek

We have, through Banking and Payments Federation Ireland, BPFI, which is the association of the banks. We will participate in that review.

Has Mr. Blažek ever met the Minister or the Department to discuss what is wrong with the banking market?

Mr. Aleš Blažek

No, I have not personally met with the Minister, but we communicate with the Administration through the BPFI.

The Department of Finance has never sat down and asked why KBC is leaving Ireland.

Mr. Aleš Blažek

As I have personally communicated with some officials in the Department of Finance, we have communicated and as I mentioned, we will participate in the work relating to the review of the banking market going forward.

The phrase, "we have communicated" is very broad. I am looking to nail down some specifics here. KBC has communicated with officials in the Department of Finance as to the exact reasons the Irish market is no longer attractive to it.

Mr. Aleš Blažek

No, we have communicated generally about our exit and about that fact, and we also communicate with the officials through presenting the part 3 transfer of other assets to the Bank of Ireland.

KBC is in quite an interesting position. While Ireland is suffering from a banking crisis at present, KBC is in a good place to give detailed analysis as to why we are having a banking crisis. Elements of the Irish market are so unsatisfactory that it does not make sense to KBC to function here. I would like to dig down into that if I can. Mr. Blažek mentioned competition, which was fascinating. He said that unless you build up a critical mass of customers in this State, it is impossible to cover the overheads and other aspects to make the issue profitable. Will he detail that further?

Mr. Aleš Blažek

I understand why the Deputy is saying that the banking market is in crisis but I would like to say that the Irish banks have proven extremely resilient and robust over the pandemic from their operational perspective, from their credit perspective and in respect of their support of customers. I have worked in banking for 22 years. Banking in crisis looks in my eyes very different in my eyes from what the Deputy sees, but it is a personal perspective.

I am coming from the perspective that the market is shrinking significantly in the State. We have higher interest rates than other European countries. Banks are closing in regional towns. There are obviously online elements and the market is shifting to a certain extent but there is enormous supplier power. Anyone who studies economics will say that if there are two or three really large players within a sector, they have enormous supplier power, especially if they are dealing with a buyer section that is so small and disparate and which has very little influence. Ideally, if one were to build a banking market, one would have far more players with less supplier power and therefore, the consumer would have more influence over the transactions and engagements with the banks.

Mr. Blažek raised the issue of competition. That is important. When Deputy Mairéad Farrell was speaking to him, he said that one needs a certain critical mass of customers to be able to pay for the bank's overheads and therefore be profitable. Will Mr. Blažek detail that further?

Deputy Mairéad Farrell took the Chair.

Mr. Aleš Blažek

As a universal bank, your customers and your competition require you to make processes digital. You have to invest a lot in other technological aspects like handling of data, cybersecurity etc. You have those duties to society, to yourself and to the regulator. That is one part.

The other part is that generally, banking is more and more regulated. This is not only in Ireland; it is a global trend. There is the cost of regulation. One has to spend that money. It does not matter what is happening; one has to spend that money. With the technological transition and the regulatory compliance costs, there are two big costs which you have to invest in. In order for appropriate returns to be made on that investment, you need to have a critical mass of customers as a bank. If there is a smaller market, which is measured by the number of citizens, inevitably one cannot sustain as many universal banks as a much bigger market such as the United States of America, which has many more universal banks because its market is many times bigger.

I apologise for interrupting. In Ireland, the system after the last banking crash was built as a two-pillar banking system.

In many ways, creating those two pillars to be so dominant in the market has led to a difficulty in competition for the smaller banks and new entrants to the market will have the same difficulties as KBC has had. Is that not right?

Mr. Aleš Blažek

No, I do not think so and I go back to my previous answer; this a competitive market. The Deputy referred to the higher interest rates on mortgages. If you look at the average interest rate of 2.3% on a mortgage, it is favourable for the customers from a long-term perspective. It is slightly higher than some of the other countries which have a slightly lower cost of capital. That rightly reflects some of the historical mistakes the banks have made and that needs to be reflected in their capital requirements. As I have stated a number of times, this is and has been a competitive market and I am convinced it will be competitive going forward.

Can I ask Mr. Blažek then-----

Mr. Aleš Blažek

If I may, the banking services are provided not only by the universal banks but also by other means such as neobanks, payment service providers, fintechs and niche providers, which are non-bank lenders that are active in mortgages. Yes, there are a limited number of big retail banks but customers still have a substantial choice in how and where they can buy financial products.

The size of the market and the capital requirements are two aspects of the Irish market that are different to the other markets that KBC is successfully functioning in. Is there anything else different about the Irish market that adds to KBC's decision to withdraw from the Irish market?

Mr. Aleš Blažek

No. I said that there are higher capital charges for certain assets in Ireland. Those capital charges reflect the historical performance of the mortgages.

I appreciate that.

Mr. Aleš Blažek

They will improve in time because the Irish economy and Irish customers are extremely prudent. These capital requirements will go down. This is a function of pan-European regulation. It is a generic framework for how capital requirements are set up. The same methodologies apply to all of the markets in Europe.

I understand that and unfortunately regulation itself can be pro-cyclical. I am a big fan of regulation. Ireland was shockingly deregulated before the last crash, which significantly contributed to that crash. Sometimes there is a regulation lag and it can come too late and therefore have a pro-cyclical effect, which further depresses the market. I understand KBC’s need to speak positively about the Irish market but as it is leaving, it does not have an economic logic for staying. It is useful to us to try to understand exactly what the components of that lack of economic logic are in order that we can look to change those and so have a more competitive market. What I mean by that is that we need to have more players within the market. More players within the market would make for a more sustainable market in Ireland.

KBC made €1.3 billion in the first half of the year in total and it made a profit in total in the first half of 2021 in this State. A chunk of KBC’s losses last year were from setting aside money for potential loan charges to the bank because of Covid. Did those loan charges materialise in the end or how did that work?

Mr. Barry D'Arcy

In total we have provided about 6,400 payment breaks to customers because of Covid. About 73% of those customers came back to normal payment thereafter and about 19% required some further restructuring or forbearance. Thereafter a small number may require some further support if they are in arrears now. We are still working with those customers. We put in place a certain element of provision of that time . We have released some of that provision but we have retained a large part of it at the end of the day. It is a mixed element at this point-----

Would Mr. D’Arcy be able to quantify the level of forbearance in proportion to the business loan element that was necessary?

Mr. Barry D'Arcy

Let us look at the total amount of non-performing loans we have in the bank today. We have about €1.28 billion in non-performing loans, which is about 12% of our portfolio. A large part of that grouping would have a restructure against it and there would be an element of arrears but fundamentally a large element of that will be restructured in some way.

Non-performing loans are being sold and they are not being sold to Bank of Ireland but elsewhere. Is that correct?

Mr. Aleš Blažek

The majority of them. Yes.

They are being sold at a discount. Is that discount commercially sensitive or are we allowed to know what it is?

Mr. Aleš Blažek

If it was not commercially sensitive we would not enter into that contract.

I know of businesses, farms and family homes etc. that went into mortgage distress or difficulty with their loans. They made pitches to their banks that they would be able to meet 80% of the debt they had and banks have said “No” to them. At the same time banks have sold on loans at discounts of 40% and 50% to vulture funds or third-party financial institutions. I always thought it was immoral for the individuals who have, through their blood, sweat and tears, built up a business or farm to pitch higher on repayments on a loan. Yet the bank can turn around and sell it to a third party with no tie to the location for a higher discount. That is happening right now with KBC.

Mr. Aleš Blažek

I repeat that we have always tried to accommodate our customers in whatever situations they have been and to work actively with them to find solutions for them. These non-performing loans have been sold based on certain criteria but as I said, historically we have always worked actively with the customers to find solutions to their needs.

I thank the witnesses for their presentations. I appreciate it.

I thank KBC for attending our hearing. Given that KBC is about to exit the market, my questions will primarily focus on its engagement with its workforce, its relationship with its workforce and the package it has put in place. I heard Mr. Blažek talk about the direct engagement model it has with its workers earlier. I am sure it works well but Mr. Blažek would say that. The reality is we have a trade union that represents a large share of KBC’s workforce in this country.

Mr. Blažek stated he has been in banking for 22 years. Is it not somewhat strange and reputationally difficult for KBC that it has no problem recognising trade unions for the purpose of collective bargaining in Belgium, yet has consistently refused to recognise trade unions representing the bank’s staff in this country?

Mr. Aleš Blažek

From our perspective, we have continued in the practice that was set up in KBCI 40 years ago. This is not something novel. We have strongly considered the well-being and the interests of our customers in that engagement through the employee council. It is the case that the union has been approaching us. It is our conviction that engagement through unions would only bring a third party into an already-working relationship with our employees.

On the other hand, we fully respect the right of our colleagues to be unionised in some markets. In Belgium, which the Senator mentioned, the union is recognised by the executive committee there, whereas in Ireland we have a model that from our perspective, and we have not been proven wrong, works well.

I would judge that more on the results than on the process. I reiterate that the redundancy terms we have agreed with the employee council and that we have, ultimately, committed to in discussions with our employees are the best in the financial sector in Ireland. That speaks for itself. This is not an area where we can stop being active. It is something on which I personally spend a lot of time. As part of our direct engagement, we need every day to listen to what worries our colleagues, whether through the employee council or other means. Our work never stops. I would rather focus on the result for our colleagues rather than whether a union feels it has not been recognised and justified.

I reiterate one point that I mean very sincerely. The colleagues in KBCI have been incredible. We have very qualified, experienced, capable people in KBC Ireland, and it is a pleasure for me to work with them. I repeat that now, in case they are listening to the discussion, in order that they can hear it for themselves.

Mr. Blažek has given his perspective. To me, it seems somewhat hypocritical given that as I understand, the bank has an international code of conduct that refers to the right of suppliers to the bank to be recognised for collective bargaining purposes, yet that inconsistency with regard to its treatment of its Irish staff remains.

Mr. Blažek spoke about the results, which, of course, are probably the most crucial matter here. I understand there are outstanding concerns with regard to the treatment of the pension fund in particular, because it is a defined benefit, DB, fund. Deputy Mairéad Farrell raised some of these points earlier. The trade union has expressed concerns regarding the pension fund, and there is concern also regarding fixed-term contractors and how they will be dealt with for the purposes of redundancy. How does the bank propose to deal with that? I understand letters may have been sent from the Workplace Relations Commission or the Labour Court. Has the bank received those letters? Will it engage with the institutions to clarify for a large share of its workforce, represented by the union, these matters relating to pensions and other issues?

Mr. Aleš Blažek

On pensions, as I mentioned, we are in discussion with the trustees of the pension fund. It is my concern that this be dealt with properly. Until the discussions have concluded, I cannot confirm how this arrangement will work but I propose that in time, when this has been agreed with the trustees, I will formally inform the Oireachtas joint committee about the result in order that it will have visibility of the result, which I am quite confident will be viewed positively by affected employees.

We have received the communication and we will handle it in line with how we have done so in the past.

To be clear, is the bank going to respond to the correspondence it has received from the Workplace Relations Commission or the Labour Court or not?

Mr. Aleš Blažek

We will acknowledge the receipt of the communication but we will continue our approach of direct engagement. We do not need to change anything in our approach in that regard.

The bank is refusing to engage with the industrial relations machinery of the State.

Mr. Aleš Blažek

No. We will continue to engage directly with our employee council and our employees, and we have agreed this is a very valid and appropriate model for KBCI.

If a letter comes from the Labour Court, therefore, the bank is not going to engage.

Mr. Aleš Blažek

I will have to revert to the committee on that after discussion with my HR director.

We will look forward to that future engagement.

I thank the witnesses for attending and for their engagement with the committee. I propose we suspend briefly before beginning our second session to discuss the review of the EU economic governance framework.

Mr. Aleš Blažek

I thank the committee for the opportunity to speak with the Deputies and Senators and the Chairman and I wish them a good day.

Sitting suspended at 3.08 p.m. and resumed at 3.30 p.m.
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