Introduction

I have a rather substantial indirect long position in KBC Group (OTCPK:KBCSY) (OTCPK:KBCSF) and as the bank/insurance company has a generous dividend policy thanks to its very strong CET1 ratio, I am expecting a continuous stream of dividends to be paid out. I like the bank for its conservative balance sheet (it learned its lesson during the 2008 GFC when it needed government assistance) while it also provides exposure to certain Central European countries on top of its exposure to Belgium. This article is meant as an update to my previous coverage on KBC Group, and you can find all older articles (which also discuss the scope of the company’s geographical reach) here.

KBC Group has its primary listing on Euronext Brussels where the company is trading with KBC as its ticker symbol. The Brussels listing has an average volume of just over 500,000 shares per day, making it the most liquid listing, and I would strongly recommend using the Euronext Brussels listing to trade in the company’s stock. As KBC Group reports its financial results in Euro and has its primary listing in the same currency, I will use the EUR as base currency throughout this article.

Unfortunately, the bank’s website mainly contains download-only links, but you can find all relevant information I will be referring to on this webpage.

The net profit remains strong, and that bodes well for dividend investors

The bank reported a very strong net income in the second quarter of the year and the sharp QoQ increase was expected as the majority of the bank levies are payable in the first quarter and are recorded as such rather than amortized over the entire financial year (shown below).

One of the key elements of the bank’s earnings model is of course the reported net interest income. In the first half of 2024, KBC Group reported a total net interest income of approximately 2.75B EUR, which is about half a percent higher than the net interest income generated in the first half of last year, and we saw a [small] sequential growth in the second quarter as the NII increased by about 10M EUR compared to the first quarter. The bank’s net fee and commission income also remained robust with 1.56B EUR in H1 2024 compared to 1.47B EUR in the first half of last year.

One of the reasons (other than having exposure to Central Europe) why I like KBC Group as a business is its ability to cross-sell insurance products through its banking channels. As you can see in the income statement above, the insurance division generated 1.44B EUR in insurance revenue while the expenses (before reinsurance) came in at 1.15B EUR for a total contribution of about 290M EUR, and roughly 250M EUR after taking the reinsurance expenses into account. Needless to say, the insurance division provides a nice little kicker to the income from the normal banking activities.

The bank reported a total provision for loan losses and other impairment charges of 101M EUR in the first half of the year (including 88M EUR related to the loan portfolio), and this resulted in a pre-tax income of 1.84B EUR and a net profit of 1.43B EUR. This resulted in an EPS of around 3.44 EUR per share, after also taking the payments to AT1 securities into account. Using the net share count at the end of the semester, the EPS was approximately 3.48 EUR per share.

The strong first semester allowed KBC Group to hike its full-year expectations. Whereas the bank was aiming for a net interest income of 5.3-5.5B EUR, it is now upgrading that target to 5.5B EUR. Meanwhile, the operating expenses will increase by just 1.7% which is well below the anticipated inflation and the credit cost ratio will remain ‘well below’ 25-30 bps. That makes sense as the credit cost was less than 10bps in the first half of the year. The credit cost ratio was 0.2% in Belgium, but the bank was able to recoup previously recorded provisions in its other core markets.

The anticipated strong result for 2024 also puts the bank and insurance company firmly on track to realize its 2026 plans as it wants to increase its NII by a 1.8% CAGR between 2023 and 2026 while the insurance revenue should increase by at least 6% on a CAGR basis.

The bank aims to continue to distribute at least 50% of its net income, and that continues to bode well for the next few dividend payments. We know the H1 EPS was 3.44 EUR on a reported basis, but that also included north of 500M EUR in bank levies, which are mainly non-recurring. This means the H2 net income will likely exceed the H1 net income (unless the credit cost ratio increases quite substantially), and we can likely look forward to seeing a full-year EPS of around 7.5-7.75 EUR per share. In that case, the minimum dividend would be 3.75-3.87 EUR per share representing a yield of north of 5% (subject to the 30% dividend withholding tax in Belgium, but the country has signed treaties with plenty of countries to reduce the effective dividend withholding tax rate so you should consult with a tax expert to check how to recoup some of those taxes). As KBC has recently paid out more than 50% of its net profit (the actual payout ratio was closer to 60%), I think a dividend of 4.5-4.75 EUR per share is more likely, especially as the CET1 ratio of in excess of 15% continues to exceed the bank’s own target of 15%.

The risks to the thesis

The potential risks that could derail the long thesis are pretty much all related to sudden economic shocks. While the bank has an excellent history of a low ratio of loans that are defaulting, a sudden increase would definitely have a negative impact on the earnings. Even an increase to the upper limit of 30 bps through the cycle would reduce the earnings by 10-15% and that would also weigh on the dividend projections by a similar percentage.

Additionally, as the bank reports its financial results in Euro but also has activities in countries with other currencies, FX fluctuations do play a role. I think those fluctuations should remain relatively limited, as the Central European countries obviously would like their currencies to remain pretty stable given their trade relationships with the Eurozone.

And finally, I see a low risk on the regulatory front in case new calculations for CET1 capital get introduced, or if the minimum CET1 ratio gets increased. That being said, with a payout ratio of 60% of the earnings, the bank is basically keeping 1.1-1.3B EUR per year in earnings on its balance sheet, so it shouldn’t have any issues dealing with building up additional CET1 capital, even during a period of economic shocks.

So while there are risks, I think the bank’s policy to retain 40-50M of its net profit to strengthen capital buffers helps to reduce the impact of those risks.

Investment thesis

And that makes KBC Group an interesting dividend idea. I like the robust balance sheet with below-average loan loss provisions, the exposure to Central Europe and the robust CET1 ratio. I have an indirect long position in KBC Group, and I am looking to add to this position on any weakness. The Global Financial Crisis in 2008 was a wake-up call for this bank, which now has one of the highest CET1 ratios in the European banking landscape in its category (with total assets north of 350B EUR).

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.