KBC welcomes wealth back to Belgian shores

Erwin Schoeters, general manager of retail and private banking at KBC Bank, looks forward to a bright future for the Belgian-based private bank, having put in place a number of initiatives aimed at capitalising on the expected surge of repatriated wealth.

Internationally, there is a clear shift from offshore to onshore wealth, driven by more stringent regulation on private banking secrecy and an increasing number of tax treaties between countries. “Luxembourg and Switzerland are, or have been, very important offshore centres in the past, but today we see repatriation of offshore assets from both countries,” says Mr Schoeters.

On the domestic front, Belgian tax authorities demand citizens fully declare the existence of any banking accounts held abroad and, since the beginning of  2013, of life insurance policies too. This move aims at addressing a gap of the European Saving Directive against cross-border tax evasion, as these vehicles are excluded by the scope of the directive. Belgians have switched their long-term offshore money into insurance policies since the directive came into place in 2010.

Also, many high net worth individuals are assessing whether they should bring their money back to the country before the likely introduction this summer of a new tax amnesty, expected to be less favourable than the existing system, explains Mr Schoeters.

Reports in the local press estimate Belgians with assets worth at least €250,000 hold around €80bn in offshore wealth. Onshore assets are estimated to range between €250bn and €350bn.

The lack of harmonisation of tax rates across the 27 nations of the European Union is also in favour of Belgium.

The announcement from the government of President Hollande last year of a “temporary supertax” of 75 percent on annual incomes of more than €1m gave new momentum to the migratory flux of wealthy French citizens to Belgium, beyond the reach of the French tax authorities. Here the level of income tax is higher, reaching 50 per cent, but there is no “impôt sur la grande fortune” as in France.

Also, in Belgium, wealth planning structures are highly effective, as they can reduce inheritance tax down to 9 per cent – or even less, to 3 per cent – for assets donated in life.

“Estate planning is a very important part of our private banking offering,” says Mr Schoeters. “We will see a huge shift of wealth over the next five years, it is already happening. A lot of new wealth comes from SME owners transferring their wealth to the next generation or selling out their company,” he says.

Small and medium enterprise (SME) owners form a large part of Belgian wealth, with around 20 per cent of them planning to sell or transfer their company to the next generation in the coming five years, according to national newspaper De Tijd.

Enhancing client segmentation is high on the bank’s agenda. Late in 2011, on client demand, KBC PB launched a Wealth Office (WO) division, dedicated to managing wealth for portfolios with more than €5m.

The WO clients are offered more tailored solutions, exclusive products in private placement and the management of their portfolios follows a “multi-goal approach”. The more proactive service is reflected in the lower client/adviser ratio, which is 40:1 in the WO, versus 80:1 in the private bank. 

The new division, staffed by a mix of KBC private banking and asset management people – as well as professionals sourced from outside the bank – has attracted €2.5bn in assets since its launch, of which more than a third is new money, reports Mr Schoeters .

KBC PB, which manages around €23bn, has maintained its minimum threshold to private banking services for clients with at least €1m, channelling individuals with a lower level of wealth, holding a minimum of €250,000, to the premier banking service. This is in contrast with many competitors in the country, particularly independent wealth managers, who have lowered the minimum thresholds to €250,000, states Mr Schoeters.

Under the “one bank” model, based on close cooperation between investment banking, asset management and private banking, KBC private bankers represent the single point of access for the client to the group’s capabilities.

KBC PB prides itself on having a range of domains of expertise which is broader than some of its competitors offering a similar integrated approach, like BNP Paribas, ING and Belfius. Being a pure domestic player, with capabilities and decision makers more easily accessible, as they are based in Belgium, is a key strength to play too, he says.

Having sold its Switzerland-headquartered private banking subsidiary KBL European Private Bankers last summer, KBC no longer has broad ambitions in Europe, although KBC Group has independent private banking subsidiaries in Central Europe, including CSOB PB in the Czech Republic and KH PB in Hungary.

“I do not see how having private banking operations in other European countries would add value for our Belgian clients. If we were active in the expat market, that would be another story, but we are really servicing the doctors in Antwerp, the lawyers in Ghent and the SME owners in Kortrijk,” explains Mr Schoeters.

“We focus on the needs of the local clients, and if we come up with a solution, it is really developed for the Flemish and Brussels markets,” he says.

These are also Belgium’s richest regions, while the French-speaking, southern part of the country is served by KBC’s sister private bank CBC, according to a territorial division of wealth management markets between the two banks.

Meeting client needs was the key driver behind KBC PB’s recent decision to establish distribution agreements with Pictet Funds and Invesco AM. These were added to BlackRock, JP Morgan AM and UBS GAM, whose products KBC PB has been offering to clients for the past seven years. “With these five partners on board, it is going to be quite a challenge for external providers to find important gaps in our product offering,” says Mr Schoeters, although he is not excluding an increase of external partners in the future.

Third-party fund houses are selected jointly by the private bank and the group’s KBC AM, whose funds still represent the lion’s share in private banking clients’ fund portfolios.

 “Having third-party products on the table helps us grow the overall pie of the assets we manage. It benefits all the parties of the group involved,” he says, explaining third-party products are also included in the KBC AM’s multi-manager fund range.

KBC PB has almost 85 per cent of its total assets under advisory arrangements, with the remainder managed in cooperation with KBC AM in discretionary mandates.

This bias towards the advisory service is partly due to historical reasons. The bank’s reputation in this approach, whose popularity has increased during the financial crisis, has attracted new clients too, says Mr Schoeters. “It is not about client trust but more about client demand.”

However, the bank is “working hard” on its discretionary proposition. “As a private banker you should be in the position to offer both approaches and let the client make the choice,” he maintains.

A strong supporter of structured products, in which the bank has been traditionally very active and often criticised for their excessive use, Mr Schoeters explains wealth preservation is  the top priority for wealthy clients and capital/floor protected funds contribute to provide this. “The fund wrapper is the most heavily regulated wrapper on the market. This brings several advantages, including diversification, control on valuation and concentration. We have not had any issue in these products over the past 20 years.”

KBC’s issues during the financial crisis, which led to the bank’s government bailout, were linked mainly to the exposure of the bank itself to CDOs (collateralised debt obligations), as well as the bank’s active role in warehousing and structuring them. Only to a much smaller extent were they due to the CDOs sold to private and retail clients, states Mr Schoeters.

Following divestments and the reorganisation programme, the group is on the way to being “out of the woods”. Last year the bank repaid €4.25bn of state aid to the Belgian Federal Government and intends to “accelerate repayment” of the remaining €1.17bn owed to the Flemish Regional Government, plus the accompanying penalty of €580m, in the first half of 2013.

Some of the bonds structured by the investment banking division, such as CDOs, which were once very important, have been discontinued. “Clients demand transparency, simplicity, and good information,” says Mr Schoeters. “Those are the characteristics we want to offer in our products. There is no blind faith.”

Yet, KBC AM is the only provider structuring these solutions for the bank’s clients, with the appearance that group profits are prioritised ahead of client returns. “We have very good insights into how they structure, the margins they take, the underlying counterparties they hedge themselves with,” he says. There is also a “very strict” broker policy applied to these funds, on where they can hedge their exposure and the collateral they receive in the transactions.

The private bank is not subject to any pressure to sell these funds, he states. “Our objective is client satisfaction.”