Barclays upgrades ING on capital returns; downgrades KBC amid M&A uncertainty

Investing.com -- Barclays (LON:BARC) analysts, in a note dated Tuesday, upgraded ING Groep (AS:INGA) to “overweight” from “equal weight,” raising the price target to €24 from €18.40, a 30% increase, citing superior capital return potential and upside in Wholesale Banking. 

Meanwhile, KBC Groep was downgraded to “equal weight” from “overweight,” with the €102 price target left unchanged, amid concerns over trapped capital and uncertain merger and acquisition execution.

Barclays projects ING will deliver a 36% capital return yield over FY25–27, placing it at the top end of the European Union banking sector, where the average is 26%. 

Analysts view a large M&A event as unlikely, reinforcing confidence in sustained distributions.

While ING’s Wholesale Banking lags with an 11% Return on Equity in FY24, compared to 13% group ROE and 24% for Retail Banking, Barclays sees recovery potential. 

Profitability in the Netherlands remains weak due to cost inefficiencies. ING has initiated 230 redundancies, including in Dutch Wholesale Banking, incurring €80–90 million in FY25 restructuring provisions. 

In Germany, low profitability stems from revenue challenges, with wholesale fees at just 30–40bps of RWAs in FY22 and FY24, compared to a sector average of 80bps.

The Rest of World (RoW) sub-division continues to dilute group performance, dragging RoTE by 70–80bps in FY23–24. RoW carries €85 billion in loans funded by only €21 billion in deposits, leaving a wide funding gap. 

While ING has added EUR 33 billion in deposits since FY23, further progress is needed, especially in Germany.

Barclays’ FY25–27 EPS estimates are 2–12% above consensus, driven by stronger revenue assumptions. 

Net Interest Income estimates for FY26–27 are 2–6% higher, helped by the replication portfolio. 

ING has shown it can lower deposit rates without impacting flows, demonstrated when the 3-month forward curve dipped below 1.8%. 

Fee income is also forecast 1–3% above consensus, bolstered by growth in daily banking, AUM revenues, and improved lending margins via Interhyp in Germany. ING trades at 6.7x FY27 PE, making it among the most attractively valued EU banks.

Barclays’ downgrade of KBC stems from growing doubts over the redeployment of its 14.5% CET1 ratio, well above its 13% requirement. 

The report flags reliance on a possible acquisition of Ethias, a state-owned insurer, as central to KBC’s equity story.

However, political resistance may block the deal. While the Walloon region may be open to selling its stake, the Flemish and federal governments prefer dividend income over a one-off sale. 

The Walloon PM has also demanded job guarantees for over 5,000 employees, limiting potential synergies. Competing bidders, Belfius, Ageas (EBR:AGES), AXA, and Baloise, could further complicate the acquisition.

While Ethias could deliver 7.4–9.4% EPS accretion by FY27 with 23–31% RoI under the Danish Compromise, the impact to CET1 could 2% to 2.6% lower if the framework is not applicable.

KBC’s CEE profitability, especially in the Czech Republic, remains strong. However, EU banks outside CEE are closing the gap, with RoTE expected to rise from 12.6% in FY25 to 13.7% by FY27, while CEE’s dips from 18.2% to 17.3%. Regional risk includes new taxes on banks in Hungary, Romania, and Poland.

KBC trades at a 9.5x FY27 PE and offers a 19% dividend yield for FY25–27, below the EU sector average of 26%, making it relatively expensive.