EUR 850.00 For Business Accounts Only

Morningstar | KBC Reports Decent 1Q; FVE Maintained

KBC reported a decent first quarter of 2019, and we maintain our fair value estimate of EUR 80 per share and narrow moat rating. Results before tax declined to EUR 503 million from EUR 683 million a year prior. The decline can mostly be explained by impairment charges of EUR 69 million in the first quarter this year versus a reversal of EUR 56 million in the same period in 2018. We don’t think this is particularly worrisome for a couple of reasons. First, impairment losses reflect past loan underwriting decisions and are rarely indicative of operating performance over the last quarter. Second, we anticipate credit costs to increase from here, given that the reversals that KBC has booked on average over the last two years are not sustainable. Third, the credit cost ratio of this quarter of 16 basis points is below what we would consider midcycle of about 40 basis points. And lastly, the impairment charge stemmed primarily from a few corporate loans in Belgium rather than a portfoliowide deterioration of credit quality.

Net interest income stayed virtually flat year over year at EUR 1.1 billion as loan volume growth, interest rate increases in the Czech Republic, and lower funding costs offset commercial loan margin pressures in most core countries and low reinvestment yields. The net interest margin declined 3 basis points compared with last year to 1.98%. Insurance results were stable year over year while lower entry and management fees in asset management hurt net fee and commission income (down 9%) vis-a-vis last year. Cleaned for bank tax charges, which are incurred fully in the first quarter of the year, the cost/income ratio came to 57%, in line with full-year 2018.