Bank of America (BofA) has told clients that Belgian financial group KBC is entering a new phase where its growth will increasingly come from deals rather than from the tailwind of higher interest rates. In a preview of third-quarter results for banks in the Benelux region, the investment bank argues that the period of rapid earnings upgrades is coming to an end, and that investors should now focus on how KBC deploys its excess capital.
KBC is a major player in Belgium and Central and Eastern Europe, offering both banking and insurance products. Like many European banks, it has benefited over the past couple of years from the European Central Bank's (ECB) aggressive rate hikes, which boosted the interest income it earns on loans. But BofA believes that this so-called 'earnings upgrade cycle' is largely played out.
Why the easy gains are over
The core of BofA's argument is that the balance of risks for KBC's earnings has shifted. If ECB rates stay above 3%, the firm says loan growth could cool as borrowing becomes more expensive and demand slows. At the same time, Belgium's inflation-linked wage costs are likely to keep rising, squeezing margins. And credit losses, which have been unusually low in recent years, could drift back toward more 'normal' levels as the economy softens.
In other words, the factors that helped KBC beat analyst expectations quarter after quarter are now less supportive. That means the stock's future performance may depend less on whether KBC delivers another earnings beat and more on what management does with its spare cash.
M&A as the next growth lever
BofA expects KBC to use its excess capital on mergers and acquisitions that are 'EPS accretive' — meaning deals that increase earnings per share. The bank says KBC is likely to stick to its core markets while selectively expanding into new ones. This is a common strategy for financial firms when organic growth slows: buying another company can instantly add to profits, provided the price is right.
But M&A is not without risk. If KBC overpays for an acquisition, it could destroy value rather than create it. And any large deal would consume regulatory capital, which could limit the bank's ability to return money to shareholders through dividends or buybacks. That trade-off is something investors will be watching closely.
The Ethias decision looms
A key near-term catalyst is KBC's stake in Ethias, a Belgian insurer. BofA says the process is reaching a critical stage, with a decision on whether to sell the stake expected by year end. Selling Ethias would free up capital that KBC could then use for a deal or return to shareholders. It would also simplify the group's structure, which some investors have long wanted.
The outcome of the Ethias decision could therefore have a significant impact on KBC's capital allocation plans. If the sale goes through, KBC would have more firepower for M&A or buybacks. If it doesn't, the bank might have to be more conservative.
What it means for investors
For shareholders, the shift from earnings upgrades to M&A means the stock's valuation will hinge more on deal discipline than on quarterly results. BofA has a price target of €140 for KBC, but that target now depends on management making smart acquisitions at sensible prices.
Investors should also keep an eye on the broader European banking sector, which has been navigating similar dynamics. As the ECB's rate hiking cycle winds down, banks across the region are looking for new ways to grow. Some are turning to M&A, while others are focusing on cost-cutting or returning capital to shareholders.
The situation also echoes themes seen in other markets. For instance, Shriram Finance's recent share drop after trimming its loan growth target shows how sensitive financial stocks can be to growth expectations. And with central bank decisions and earnings dominating the global agenda, investors are already on edge about what comes next for interest rates.
For KBC specifically, the third-quarter earnings report due in the coming weeks will be less about the numbers themselves and more about what management says about its M&A pipeline and the Ethias decision. Any hints about deal terms or capital returns could move the stock more than the actual results.
As always, it's worth remembering that analyst views are just one perspective. BofA's note is a forecast, not a guarantee. But it does highlight a real shift in how KBC's growth story is likely to play out — and what investors should be watching.
