Company Reports

Narrow-moat KBC reported fourth-quarter 2024 results that were broadly in line with expectations. Guidance from management for the next three years is more bullish than what we and the company-compiled consensus currently have in our models. KBC expects a modest growth in net interest income. The firm also expects that positive loan volume growth will offset the ongoing pressure on deposit interest rates and the potential impact of lower interest rates. KBC is also guiding a much better outcome for loan loss provisions, with the credit loss ratio remaining below midcycle levels over the next three years while we are currently building in normalization to midcycle levels. The guided outcome for operating expense growth is also slightly better than what we are currently factoring in. Considering all, it would suggest that KBC still expects earnings growth despite the potential headwind from declining interest rates. KBC is one of the few European banks that could still deliver positive earnings momentum over the next few years.

Over the past three years, KBC Group has been the most profitable bank that we cover in the eurozone. Only the Scandinavian banks have been more profitable in Europe as a whole. We believe that KBC can consistently generate returns on tangible equity comfortably in excess of our cost of equity estimate of around 10%.

We are dropping coverage of some of our European banks and asset managers. We will no longer be reporting on Santander, Credit Agricole, Julius Baer, Unicredit, Intesa Sanpaolo, Mediobanca, Amundi, KBC, DWS Group, BBVA, and Schroders. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Narrow-moat KBC reported a net profit of EUR 663 million for the fourth quarter of 2021, 10% higher than the EUR 601 million it reported for the fourth quarter of 2020 and slightly ahead of the EUR 635 million the consensus of analysts collected by KBC had penciled in for the quarter. In addition to the EUR 4 per share share ordinary dividend (66% fiscal 2021 earnings), KBC intends to pay a EUR 4.60 per share special dividend. KBC also committed itself to an annual return of any excess capital above its 15% common equity Tier 1 ratio target. We like the clarity that the new distribution policy brings while maintaining flexibility. Due to its high profitability, KBC generates significant capital organically, which positions it well to continue returning capital to shareholders.

Narrow-moat KBC reported a net profit of EUR 601 million for the third quarter of 2021, 14% lower than the EUR 697 million it reported for the third quarter of 2020, but 20% ahead of the EUR 501 million the consensus of analysts collected by the company itself had penciled in for the quarter. The earnings beat was mostly due to KBC booking a net loan loss reversal for the quarter while consensus expected a charge for loan losses. Revenue growth was virtually flat year on year while expenses grew by 11% leading to a 9% decline in pre-provision profits. A EUR 81 million once off charge for staff redundancies in Ireland inflated the operating expenses for the quarter. Excluding the redundancy charge, expenses grew by 2% year on year. We keep our fair value estimate of EUR 62.50 per share and our narrow moat rating.

We believe that KBC allocates capital in an exemplary fashion. KBC has a very strong balance sheet. It invests in the business areas where it has a competitive advantage, and it exits business where it does not have an edge. When KBC cannot invest capital profitably, it will return surplus capital to shareholders. We maintain our EUR 62.50 fair value estimate and our narrow economic moat rating.

Over the past three years, KBC Group has been the most profitable bank that we cover in the eurozone. Only the Scandinavian banks have been more profitable in Europe as a whole. We believe that KBC can consistently generate returns on tangible equity comfortably in excess of our cost of equity estimate of around 10%.

Over the past three years, KBC Group has been the most profitable bank that we cover in the eurozone. Only the Scandinavian banks have been more profitable in Europe as a whole. We believe that KBC can consistently generate returns on tangible equity comfortably in excess of our cost of equity estimate of around 10%.

Narrow-moat KBC performed very well under the recent ECB stress test. Its 2023 common equity Tier 1 ratio under the adverse scenario of the stress test came to 14%, which is well above the 10.5% regulatory minimum common equity Tier 1 ratio KBC would need to keep to be able to pay dividends. Under the adverse scenario, only three banks we follow had a higher buffer than KBC over its minimum capital requirement. KBC’s adverse 2023 common equity Tier 1 ratio was 3.6% lower than the 17.6% KBC reported for 2020. The decline was lower than the average decrease of 4.6% that the European banks we cover experienced under the stress test. If we compare KBC’s operational performance under the base and adverse scenarios, its loan loss provisions increased to a similar extent as its peers. The decline in its revenue was among the lowest of the European banks that we cover. We maintain our narrow moat rating and our EUR 61 per share fair value estimate.

Narrow-moat KBC reported a net profit of EUR 793 million for first-quarter 2021, compared with the EUR 210 million net profit it reported for second-quarter 2020 and 7% ahead of the EUR 739 million the consensus of analysts collected by the company itself had pencilled in for the quarter. However, earnings growth was solely the result of KBC booking a net release (credit) from loan-loss provisions of EUR 130 million compared with a net provision (debit) of EUR 845 million booked for second-quarter 2020. Revenue declined 9% year on year, while operating expenses increased by 8%, leading to a 23% decline in preprovision profits. We maintain our narrow moat rating and our EUR 61/share fair value estimate.

Over the past three years, KBC Group has been the most profitable bank that we cover in the eurozone. Only the Scandinavian banks have been more profitable in Europe as a whole. We believe that KBC can consistently generate returns on tangible equity comfortably in excess of our cost of equity estimate of around 10%.

The head of supervision at the European Central Bank, or ECB, Andrea Enria recently confirmed the bank would lift the ban on dividends and share buybacks that it imposed on eurozone banks in March last year. Eurozone banks will now be able to resume returning capital to shareholders at the end of third-quarter 2021. The market widely expected the lifting of the ban, so we do not believe it will have a material near-term impact on the valuation of eurozone banking shares. As banks start reporting second-quarter earnings and the market gets a better idea of the extent of capital returns there may be more support for share prices. The European banking authorities will announce the results of their stress tests at the end of July. This will also provide investors with a better idea of which banks are best placed to return capital to shareholders.

Narrow-moat KBC reported a net attributable profit of EUR 557 million for first-quarter 2021, compared with a EUR 5 million loss it reported for first-quarter 2020. The results came in 34% above the consensus expectation of analysts collected by KBC itself. This handsome earnings beat was largely the result of KBC releasing more loan-loss provisions than what consensus had anticipated. The first quarter tends to be the softest quarter of the year for KBC as incentive compensation and bank taxes are paid during the quarter. Our fiscal 2021 earnings estimate of EUR 1.8 billion is starting to look light and we are likely to hike our estimates, with a consequent increase in our fair value estimate of around 5%-10%. It will be mainly a more favourable loan-loss outcome that should drive our estimates higher. We maintain our narrow moat rating.

Narrow-moat KBC Group reported net attributable profits of EUR 538 million for fourth-quarter 2020, 23% below the EUR 702 million it reported for fourth-quarter 2019 and exactly in line with the consensus expectation of analysts collected by KBC itself. KBC reported a common equity Tier 1 ratio of 17.6%. It has one of the soundest capital adequacy levels compared with any large, globally listed universal bank. It managed to generate nearly double-digit returns on equity, on what could be viewed as elevated capital levels and during the most severe economic downturn for more than a decade. Unsurprisingly, KBC trades at a material premium to the sector and is currently firmly in 3-star territory. We maintain our fair value estimate of EUR 58 per share and our narrow moat rating.

For all intents and purposes, the European Central Bank has extended its shareholder distribution suspension for European banks until September 2021. Supervisors did give a small concession in the form of reduced dividend distributions for 2020, but essentially the suspension remains in place. We think the ECB has struck middle ground in its decision, trying to appease banks and their shareholders as well as securing financial stability in uncertain times. We also believe the distribution limit has been set to such a level that all banks could stomach it. This is important from a supervisory standpoint as it avoids any potential signaling of which bank is currently under higher capital constraints. Because of this signaling effect, we expect banks to bend over backwards to pay the maximum allowed dividends in 2020 if permitted by supervisors. With the exception of the banks we anticipate to be loss-making this year, and therefore not eligible to pay dividends under the new guidance, we estimate that all banks under coverage have the capacity to pay up to the maximum amount allowed. Our fair value estimates and moat ratings across the board are unchanged.

Over the past three years, KBC Group has been the most profitable bank that we cover in the eurozone. Only the Scandinavian banks have been more profitable in Europe as a whole. We believe that KBC can consistently generate returns on tangible equity in the midteens, comfortably exceeding our cost of equity estimate of around 10%.

In a return to form narrow-moat KBC Group reported net attributable profits of EUR 697 million for the third quarter of 2020, exceeding both the EUR 612 million it reported for the third quarter of 2019 and the EUR 600 million consensus expectation of analysts collected by KBC itself. The earnings beat was primarily driven by stronger-than-anticipated asset growth and loan-loss provisions declining further than expected. We increase our fair value estimate to EUR 58/share from EUR 54/share previously--mainly as a result of stronger-than-anticipated volume growth we have seen from KBC. We maintain our narrow moat rating.

Over the past three years, KBC Group has been the most profitable bank that we cover in the eurozone. Only the Scandinavian banks have been more profitable in Europe as a whole. We believe that KBC can consistently generate returns on tangible equity in the midteens, comfortably exceeding our cost of equity estimate of around 10%.

Narrow-moat KBC Group reported net attributable profits of EUR 210 million for the second quarter of 2020, appreciably lower than the EUR 745 million it reported for the second quarter of 2019. KBC did, however, comfortably beat the consensus expectation of analysts polled by KBC itself of EUR 150 million attributable profits for the quarter. KBC exceeded expectations for revenue growth, mainly due to strong performance from nonlife insurance and trading. Loan-loss provisions were lower than expected. We maintain our narrow moat rating and EUR 54 per share fair value estimate for KBC.

European banks have never been this cheap. Ever. Even at their 2008 nadir, investors believed European banks were worth more than they do today. The average multiple of European banks fell by half after the 2008 global financial crisis, which was justified as their profitability was also halved. There is no indication of such a step change in profitability happening now. It seems investors are fretting about the prospect of large-scale asset impairments, which may force banks to once again pass the cap around for a capital injection. We published an Observer, "Impact of Coronavirus on Credit Quality, Capital Adequacy, and Profitability Is Manageable; European Banks Remain Undervalued" on July 6 to explore the valuation, credit quality and capital adequacy of European banks in more detail.