KBC Group: Expect exceptional dividends in 2023 (OTCMKTS:KBCSF) – Seeking Alpha

Introduction

I have been following the KBC Group (OTCPK:KBCSY) (OTCPK:KBCSF) for a while now because I like the model of the bank acting as a bank and an insurance company. Based in Belgium, KBC also operates in Central and Eastern Europe which offer interesting diversification. But the main reason I like KBC is its very strong capital ratio. The European regulator has recently published updated required capital ratios and KBC is – as expected – in a very safe position and has hinted at returning excess capital to its shareholders.

KBC Group has its main listing in Belgium where the company trades with KBC as its ticker symbol. The Brussels listing has an average daily volume of 720,000 shares, making it the most liquid listing. I would strongly recommend using KBC’s main listing to trade the company’s shares, as the average daily EUR volume exceeds EUR 40 million. As KBC reports in EUR and has its main listing in the same currency, I will be using the Euro as my base currency throughout this article.

The new capital requirements are in

Across the Atlantic Ocean in Canada, we saw how the Bank of Montreal (BMO) had to raise over C$3 billion in cash to shore up its reserves as required capital ratios were set. updated by the regulator. A smart move by the Bank of Montreal to nip any potential problems in the bud, but it shows that required capital ratios will play an important role now that countercyclical buffers can be increased.

December is also traditionally the month when European banks are notified of changes to required capital buffers. KBC unveiled its new required capital ratios last week and virtually all non-ECB regulators (KBC is active in Czechia, Slovakia, Bulgaria and Hungary and as none of these four countries use the euro, c is the national regulator that sets the countercyclical capital buffers).

The table below indicates the old countercyclical buffer, the new required countercyclical buffers and the date on which the new requirements will become active.

In addition, the National Bank of Belgium has set up a sector-based systemic risk buffer for exposures related to residential real estate in Belgium. These new rules will force KBC to further increase its minimum regulatory CET1 capital ratio by 32 basis points.

Taking into account all updates and new requirements, KBC’s fully loaded CET1 ratio requirement increases to 11.43%.

What does this mean for shareholders?

The updated capital requirements are easy enough to understand, but the main question is what does it actually mean for KBC shareholders?

At the end of the third quarter, the bank’s CET1 capital ratio stood at 15%.

So, despite the increase in the required CET1 ratio to 11.43%, KBC is doing well because its CET1 ratio is already 15% (and will probably exceed this level by the end of this year).

This 15% level now also appears to be the bank’s official capital ratio policy. When announcing the new required CET1 ratio, KBC announced that it would decide on an annual basis whether it would simply return capital above the 15% threshold to its shareholders in the form of a special dividend and/or or share buybacks. Bear in mind that KBC’s normal dividend policy calls for a payout rate of 50% of reported net income, but the willingness to payout everything above a 15% CET1 ratio indicates that shareholders may soon see 75% to 100% of the net income goes to them.

Of course, there are still a lot of variables: the total amount of risk-weighted assets may fluctuate, KBC may decide to acquire smaller regional banks to strengthen its presence, which could have an impact on the CET1 ratio , etc. a 100% payout ratio is not a guarantee, I have a feeling that total shareholder distributions will exceed the standard 50% payout ratio in years to come.

According to the third quarter financial report published by KBC, the total CET1 capital at the end of September was 16.5 billion euros. The total amount of risk-weighted assets amounted to EUR 110.2 billion, resulting in the aforementioned CET1 capital ratio of 14.97% (15% on a rounded basis).

The bank reported total EPS of EUR 4.82 in the first nine months of the year and is likely to report EPS north of EUR 6 per share in 2022. EPS is expected to increase in 2023 thanks to the expansion of the net interest margin (probably partially offset by slightly higher loan loss provision). This means that – barring unforeseen circumstances – KBC will generate north of 2.5 billion euros per year in profits which can be fully distributed to its shareholders.

Investment thesis

Although the required higher CET1 capital ratio is not a surprise, KBC’s existing capital ratio is strong enough to remain one of the banks in the Eurozone with the highest capital ratios. Based on €110.2 billion in risk-weighted assets, the bank has approximately €3.5 billion in excess capital over the regulatory minimum requirement. And as the bank will generate approximately 2.5 to 2.8 billion euros per year in net income over the next few years, there is no doubt that the bank’s dividend will increase as the 50% payout ratio will be completed. through special dividends and/or share buybacks.

I’ve sold put options on KBC (which are now all out of the money) and although I don’t have a long position in the bank, I have an indirect long position through KBC Ancora, a holding company with KBC shares as the only asset.

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