KBC Group Stock: A 7% Dividend Yield With A 51% Payout Ratio (OTCMKTS:KBCSF)

Introduction

Because it has been some time since I mentioned KBC Group (OTCPK:KBCSF) (OTCPK:KBCSY), the latest publication of the full-year outcomes for 2023 is an efficient second to investigate cross-check the efficiency of the Belgian financial institution/insurance coverage firm.

KBC Group has its main itemizing in Belgium the place the corporate is buying and selling with KBC as its ticker image. The Brussels itemizing has a mean quantity of 625,000 shares per day (for a financial worth of roughly 36M EUR), making it probably the most liquid itemizing and I might strongly advocate to make use of the Euronext Brussels itemizing to commerce within the firm’s inventory. As KBC Group experiences its monetary ends in Euro and has its main itemizing in the identical forex, I’ll use the EUR as base forex all through this text.

The financial institution’s web site incorporates a ‘obtain solely’ hyperlinks, however yow will discover all of the related data I’ll be referring to right here.

Regardless of the turmoil, KBC posted an honest set of ends in This fall

The monetary sector hasn’t had a straightforward 2023 however luckily most European banks weren’t hit by the fallout brought on by the problems within the US banking sector. I additionally just like the mannequin of providing banking providers and insurance coverage providers below one roof as cross-selling of merchandise may be fairly worthwhile.

However in fact, the primary focus has been on the evolution of the web curiosity revenue. And KBC Group has really accomplished a fairly good job in defending its web curiosity margin. Whereas the strain elevated in the direction of the top of the yr, the FY 2023 outcomes point out a pleasant 6% improve within the web curiosity revenue, which jumped to five.47B EUR.

Wanting on the different parts that make up the 2023 outcomes, we see the full insurance coverage income elevated to 2.68B EUR whereas the bills associated to the insurance coverage actions had been simply 2.12B EUR leading to a constructive contribution of roughly 560M EUR. The revenue assertion above additionally clearly reveals the financial institution has its mortgage loss provisions below management. Whereas it recorded a 215M EUR impairment cost, in extra of half that cost was associated to the impairment of goodwill on the steadiness sheet. The ‘different impairment’ expenses had been primarily associated to intangible fastened belongings.

The robust credit score danger atmosphere was boosted by a 155M EUR launch of beforehand recorded provisions for geopolitical and rising dangers and that launch absolutely compensated for the 139M EUR recorded mortgage loss provisions throughout FY 2023 and that is why the revenue assertion above reveals a provision launch of 16M EUR on monetary belongings. Whereas we should not financial institution on this occurring once more sooner or later (the mortgage loss provisions will normalize), it didn’t have a serious affect on the financial institution’s reported web revenue as the opposite impairment expenses had been larger than standard which implies the full impairment cost was simply 67M EUR decrease than within the earlier yr.

The web revenue generated throughout 2023 was 3.4B EUR which works out to an EPS of 8.04 EUR per share. KBC Group is proposing to pay a dividend of 4.15 EUR per share (topic to the usual dividend tax in Belgium of 30%).

Wanting ahead to the 2024 efficiency

The financial institution has additionally offered an preliminary steerage for 2024. It expects a web curiosity revenue of 5.3-5.5B EUR and the midpoint of this steerage represents a small 1.5% lower in comparison with the FY 2023 web curiosity revenue. Nonetheless, the anticipated insurance coverage income will probably offset the affect of the decrease web curiosity revenue.

The mortgage loss provisions ought to stay very low: as you possibly can see above, KBC Group is guiding for a credit score price ratio ‘nicely beneath’ the through-the-cycle price ratio of 25-30 bp. With a complete quantity of 306B EUR in monetary belongings on the steadiness sheet, assuming a 15 bp credit score price ratio would lead to whole impairment expenses of 450M EUR. I feel 15 bp is fairly conservative contemplating the financial institution’s latest credit score price ratios for the interval 2020-2023 had been respectively 0.60%, -0.18% (a web launch), 0.08% and 0.00% in 2023. Odds are KBC can maintain the credit score price ratio beneath 10 bp through which case there needs to be no noticeable affect on the financial institution’s earnings assuming no different goodwill or intangible asset impairments are essential.

This means we are able to count on the financial institution’s earnings to stay comparatively steady in 2024. Nonetheless, if I am making use of the upper credit score price ratio, I anticipate a small earnings lower in the direction of 7.75-7.85 EUR per share. A decrease credit score price ratio would clearly increase the earnings end result.

Funding thesis

I presently don’t have any direct place in KBC Group however I’ve a fairly substantial lengthy place in a mono-holding whose solely asset is a stake in KBC Group, so I not directly have publicity. Buying and selling at simply over 60 EUR per share, KBC Group will not be costly in any respect because the inventory is buying and selling at roughly 7.5 instances the 2023 earnings and at lower than 8 instances my anticipated 2024 web revenue. The dividend yield of just about 7% is interesting as nicely and given the low payout ratio of round 50%, that dividend is sustainable, even when the EPS would present a slight lower in 2024.

Editor’s Word: This text discusses a number of securities that don’t commerce on a serious U.S. alternate. Please concentrate on the dangers related to these shares.