Fintech Alternatives And European Risks Will Destabilize Legacy Banking

Key Takeaways

• Competition from fintech, neobanks, and digital alternatives is eroding KBC's core revenues and threatening long-term market share and fee sustainability.
  
• Rising regulatory and compliance pressures, coupled with regional economic exposure, risk further margin compression and stagnant or declining earnings.
  
• Ongoing digitalization, commercial momentum, strong diversification, conservative guidance, and capital strength drive profit resilience, efficiency, and potential for elevated shareholder returns.

Catalysts

Provides banking, insurance, and asset management services primarily for retail, private banking, small and medium sized enterprises, and mid-cap clients in Belgium, Bulgaria, the Czech Republic, Hungary, and Slovakia.

• The proliferation of alternative financial platforms, such as fintech and decentralized finance solutions, is expected to accelerate, eroding demand for traditional credit and banking services while reducing KBC Group's core deposit and lending volumes, which are crucial drivers of revenue and future earnings growth.
  
• Continued and intensifying regulatory scrutiny, especially in the areas of ESG compliance, data privacy, and higher capital requirements, will lead to steep and recurring compliance costs, as well as significant operational complexity that is likely to compress KBC Group's net margins and undermine its long-term return on equity.
  
• The rapid decline in demand for legacy branch-based and cash-dependent services, driven by the shift to a cashless society and embedded digital alternatives, is set to cannibalize fee and commission income from KBC's traditional infrastructure, impairing long-term revenue sustainability.
  
• KBC's high concentration in Belgium and Central/Eastern Europe exposes the group to weak and volatile regional economic outlooks; even management acknowledges volume and spread gains are unlikely to persist, suggesting a real risk of stagnant or declining earnings if regional macro conditions deteriorate.
  
• Intensifying long-term competition from nimbler neobanks and non-bank tech entrants is expected to structurally weaken KBC's market share and pricing power in core banking and asset management businesses, increasing customer churn and leading to a multiyear structural decline in net interest and fee income.

KBC Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on KBC Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming KBC Group's revenue will grow by 5.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 30.6% today to 26.9% in 3 years time.
• The bearish analysts expect earnings to reach €3.6 billion (and earnings per share of €9.42) by about August 2028, up from €3.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.0x on those 2028 earnings, down from 11.8x today. This future PE is lower than the current PE for the GB Banks industry at 10.6x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.02%, as per the Simply Wall St company report.

KBC Group Future Earnings Per Share Growth

Risks

• KBC's digital transformation, exemplified by the high uptake and expansion of digital assistant Kate and mobile banking solutions, is delivering substantial cost savings and enables cross-selling at scale, which will likely drive operating leverage and sustained improvement in the cost-to-income ratio and contribute to higher earnings.
  
• The bank's strong commercial momentum, with record net interest income growth supported by rising lending volumes and customer deposit growth, combined with continued fee and commission flows from asset management and insurance, points to greater revenue resilience and the potential for further guidance upgrades.
  
• The bancassurance model is demonstrating increased diversification and defensive strength, with insurance income and non-life combined ratios beating targets and stabilizing profits, which makes KBC's earnings base more resilient in different environments.
  
• Management's track record of conservative guidance-systematically exceeding targets for net interest income, loans, and cost evolution-suggests that built-in upside and ongoing volume growth could lead to positive surprises for future profits.
  
• KBC's robust capital position, ability to generate surplus capital, and willingness to return excess capital to shareholders in the absence of large acquisitions set the stage for potentially higher dividends and attractive total shareholder returns, thus providing downside protection to the share price.

Valuation

• The assumed bearish price target for KBC Group is €74.28, which represents two standard deviations below the consensus price target of €99.02. This valuation is based on what can be assumed as the expectations of KBC Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €120.0, and the most bearish reporting a price target of just €72.4.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €13.4 billion, earnings will come to €3.6 billion, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of €103.3, the bearish analyst price target of €74.28 is 39.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.