KBC Groep NV

XBRU:KBC

Earnings Call Transcript 2018-Q1

[Operator]

Good day ladies and gentlemen, and welcome to the KBC Group Earnings Release First Quarter 2018 hosted by Kurt De Baenst. My name is Adrian and I'm your event manager. [Operator Instructions] I'd like to advise all parties the conference is being recorded, and now I'd like to hand the call over to Kurt. Please go ahead.

[Kurt De Baenst, General Manager, Investor Relations]

Thank you Adrian. A very good morning to all of you, and welcome to the KBC conference call. Today is Thursday the 17th of May, 2018, and we are hosting the conference call on the first quarter '18 results of KBC.Today we have Johan Thijs, our group CEO with us; as well as Hendrik Scheerlinck, group CFO, and they will elaborate on the results and add some additional insights. As usual, it will take half-an-hour to guide you through the presentation for the analysts, which can be found on our corporate website kbc.com. After this, there's of course time for questions until around 10:45 a.m. Brussels time.This conference call is taped and can be replayed via our website kbc.com until the 8th of June. Investor Relations and our CFO are organizing a Sell-Side Equity Analyst Meeting in London tomorrow morning at our offices in the city of Broad Street 111. This meeting starts at 8:30 a.m. local time and we would be pleased to welcome you there.And now it's my pleasure to give the floor to our CEO, Johan Thijs.

[Johan Thijs, Group CEO, MD & Executive Director]

Thank you very much, Kurt. And also from my side a warm welcome on the announcement of the first quarter result of 2018. I'll guide you through the slides and we start traditionally with key takeaways, which are on Page 3. And it's with EUR 556 million profit on the quarter, actually a very good quarter. This quarter is traditionally influenced by the upfront booking of bank taxes, and for this year we have booked upfront EUR 371 million, which is a very significant number.Anyway, the return on equity stands at 14%. If you would spread out the banking taxes on an equal basis over the full year, this return on equity would go up to 19%, which is indeed a very strong number. The reason why the result was quite good is that the machine has been turning and firing on all its engines –– all the cylinders, sorry, and that means that the bank-insurance franchise once again has performed well in all countries and all entities.That is reflected in good customer loan volumes increases. Also, the customer deposit increased. We have generated in a very difficult market a stable net interest income with a higher margin on interest. Also, we had a very strong performance on fee and commission because also our insurance performance was very well. With a combined ratio of 90% and increasing sales, the income line was strongly supported.Quality wise, on the banking side, cost/income ratio of 55% is reflecting a good cost management and the impairments are with 0.15 basis points –– sorry, not 0.15 basis points, but 15 basis points negative, extremely low, and that is a release of EUR 63 million for the quarter. We confirm our guidance of Ireland. With EUR 43 million today confirms the releases pattern and EUR 100 million to EUR 150 million is our expectation for the full year. And if you combine all these results, then we will have a equity position of 15.9% taking into account fully the IFRS 9 impact. We already flagged that in advance with 41 basis points. So it is fully in line with what we previously indicated. Leverage ratio stands at 5.6%. The insurance company is also very solid, and liquidity performance is as usual very strong.Now what is influencing our results in a one-off manner? We had a couple of elements which kicked in. In terms of our revenue line, we have a reversal of an old legal file totaling pre-tax EUR 18 million. We sold a building in Hungary totaling EUR 7 million pre-tax, and we have had a deferred tax asset booked on a sale of a KBC lease U.K., which is also EUR 7 million pre-tax.On the cost side, on the other hand, we have booked a provision for a cleanup of a building in Antwerp, EUR 12 million where we found asbestos. So if you would take that into account as one-off, then you clearly see that this result is still very, very good.Let me go through the split up between the bank and the insurance company on Page 6. That is something which is quite common, [ 82% versus 18% ]. So let's not waste too much of time there because this is perfectly in line with what we have seen in the recent past.On Page 7, we have added an information, which we had sent out earlier last week, and that has to do with the fact that the numbers are a bit more difficult to read because of IFRS 9. So we have started applying IFRS 9 as of this quarter, and in very simplified terms, this means that the classification of financial asset and liability as well as the impairment methodology has changed significantly. That's not surprise to you guys. But as a result, some of the profit and loss and balance sheet numbers are not fully comparable to the 2017 reference numbers, which were as we know all still based on IAS 39. So what we have done to make things a bit more clear that is we've added certain comparisons with the pro forma recalculated figures of 2017. Mind you, these numbers are unaudited and that analysis is reflected on Page 7.Now how does it work? In essence it is quite simple. You start from the financial instruments at fair value, which are also including our cross-currency swaps. And what we have done now is that all those cross-currency swaps, which we have been using for trading between the euro and the dollar and between the euro and the Czech krona, you'll remember our stories of the previous quarters in 2017, we have been booking them now for the sake of clarity, and according to IFRS 9 into net interest income as it should be. And as a consequence, and I'm only talking now about, for instance, the fourth quarter 2017 results, the EUR 235 million, which was booked under financial instruments fair value is shifting EUR 108 million into the net interest income.On the other hand, we also had an impact on our available-for-sale gains. As you know, IFRS 9 is shifting that into other comprehensive income. On the insurance side, on the other hand, you have the possibility for a management overlay and that overlay is approached. And as consequence, we have a shift from our available –– on the gains of available-for-sale shares and [ impairments ] of available for sale shares to financial instruments at fair value. And that shift is for 2017 fourth quarter EUR 17 million.And then a change which also is actually purely related to the intrinsic underlying activity. That is we have our people in the network selling cross-currency swaps for our clients. They were booked under financial instruments at fair value. So the fees which were paid for that were actually paid on the financial instrument fair value, whereas in reality obviously that is not necessarily correct. And, therefore, we made the shift at the 1st of January, 2018, as well we shifted that fee income generated through those sales from financial instruments fair value to fee and commission business totaling EUR 26 million. And that is all explained in Slide 7.So let me then go through the main building blocks that is starting with net interest income, which you can find on Page 8. So the net interest income stands at EUR 1.125 billion, which is down on the previous quarter with EUR 12 million, 1%, and which is down –– which is up, sorry, 4% on the year-on-year result. Let me first go into the quarter-on-quarter comparison. In essence, it's quite simple to explain. There is a difference between the cross-currency swaps proceeds fourth quarter -- first quarter of EUR 20 million. So the difference is fully explained by those cross-currency swaps. And that has to do with the fact that the spreads between the euro and the dollar fully completely came in, and as a consequence, those trades became no longer profitable and we stopped them.On the other hand, if you make a comparison quarter-on-quarter, this is traditional stuff which is explainable. We see still the low interest rate environment impacting our reinvestments. We do have pressure on our commercial loans and that is mainly related to the mortgage business in Belgium, Czech Republic and Slovakia. All other countries, we do see even increasing rates, there is pressure, but that we are talking there on -- to a lower -- lesser extent compared to the previous 3 mentioned countries. And on the SME and corporate business, commercial loans were up.We do also see and that is something which we need to remind you of that in the first quarter we had 2 days less business and that impacts obviously also about EUR 9 million to EUR 10 million on interest income. This impact on quarter basis was fully offset by the lower funding costs because of the calling of the CoCo and because of the loan volume which went up significantly 5% on the year basis and 1% on the quarter basis.And last but not least, we do see the positive impact on the increasing interest rate in the Czech Republic. You know that there were a couple of rate hikes on the repo rate in the Czech National Bank and that has translated obviously itself in a growing interest income. So all in all on the purely banking side taking into account our core activities, interest income was improving on the quarter basis.The same story can be told on the year-on-year comparison also. There we have the positive impact of the rate hikes in Czech Republic. We do see similar stuff on the lending business, the margins went up and the volumes went up significantly already mentioned 5% for the group. Now on terms of volumes also on the deposit side, we had an increase of the volumes in deposit with 2% and 7% if you take into account the certificates of deposits which [ shrinked ] significantly as I just explained those certificates of deposit were used for the trading between the dollar and the euro and that has been stopped.Focusing on the net interest margin, very good news; the margin went up 201 basis points which is a significant increase compared of the previous quarter and that this mainly due to all countries but Belgium where the net interest margins remained stable.Let me take you to the other contributor -- important contributor to the top line, that is the net fee and commission business which is on Page 9. Also there a very strong quarter. Purely on a reference basis it goes down 1% on the quarter-on-quarter basis and it goes 3% down on year-on-year basis, but there is a big box. Remind you that the fee and commission business which is mentioned here is a sum of parts. The bulk is asset management fees or management fees generated through asset management and life insurance business which still was about 66% of the amount mentioned here on the slide.You have the banking services, security services, so on so forth and then you have the negative one which is a distribution fee. Now the good news is that the difference between the bookings in 2017 and 2018, the changes which we made are irrelevant. You can see that on the top of the slide you see there the fee and commission which is booked coming out of the network, it's more or less the same number. It's either EUR 24 million, EUR 25 million, EUR 26 million so that doesn't make a big difference.The reason why we do have a different between quarter 1 and quarter 4 last year, the EUR 6 million is fully explained by lower fees on the payment services EUR 5 million; lower fees on the credit files and bank guarantees in the different countries in Central Europe minus EUR 6 million; and lower security-related fees EUR 3 million. That totals minus EUR 14 million which means that it was fully offset by the increase on the asset management activities meaning we have on the quarter higher entry fees, plus EUR 4 million and we have in that respect also good news because we do have indeed an increase on the net sales of asset management products, EUR 833 million on the quarter.In terms of year-on-year comparison, it is EUR 16 million down and here we have one big explanation; you have about EUR 10 million which is explained because of the lower security-related fees and the fees from the credit files and the bank guarantees, so that is explaining the bulk. But also mind you the first quarter of 2017 was a tough quarter because of the launch of our product [ Expertise Easy Interest ] at the end of 2016, the first quarter 2017 was the first quarter where we actually were dealing with the product and the low hanging fruit was picked at that time and boosted our entry fees. That is a difference in entry fees which is quite significantly between first quarter of '17 and first quarter of '18.So in that respect actually it's a strong performance. As I already said, EUR 833 million assets under management flew in and that has been translated in strong sales. Also to remind you the difference between the Q1 and Q4 2017 and this quarter was characterized by a good start in January and then extremely turbulent financial markets in February and March and as -- obviously translates itself in the sentiment of our customers and has obviously had a negative impact.So all in all strong performance on the fee and commission business if you split it up into different parts, into different building blocks. In terms of insurance, also good news, bring Page 10, we do see an increase of our sales with 5%. That is not fully reflecting what is happening and Belgium is lower, but it's 50% higher than market growth in Belgium and Czech Republic and all the Central European countries we're growing 10% or more. And the good news is that the quality of that growth is very good. Combined ratio stands at 90% despite the fact that we had a windstorm -- actually we had 2 windstorms in Belgium just after the turning of the year. We had 2 windstorms totaling EUR 35 million of impact on our claims ratio.So combined ratio stands very good, 90% growth is very good. What about the live business which you can see also on Page 11. Also there the comparison with fourth quarter and first quarter doesn't make too much of sense because you know that we always run campaigns at the fourth quarter, but if you make the comparison first quarter first quarter which is in terms of commercial activity exactly same, you see that the growth was 5%, 4% for interest linked and 6% -- so for interest guarantee, the 6% for unit-linked products which is indeed a good result given circumstances given the low interest rate environment and what is also important that is it is spread out all the countries, so in this respect also the countries in Central Europe are contributing to that good result. Small detail, unit-linked is about 44% of our total book.In terms of the fair value gains and net other income, this is again a result which is obviously influenced by the impact of IFRS 9, we are on Page 12. In that respect, we see a lower quarter-on-quarter number and that is fully explained by the ALM derivatives and then the fair value adjustment for funding for credit valuations and also for our market valuations that is totaling EUR 13 million.So if you add to that EUR 3 million changes on ALM derivatives, we have EUR 60 million of difference which almost fully explained the difference between quarter 4 and quarter 1. The remaining gap is explained by the lower dealing room income, so that is also quite acceptable giving circumstances. The difference between quarter 1 and quarter 1 '17 and '18 has precisely the same explanations, the fluctuations on our fair value instruments of market credit and selling value adjustments at a difference of EUR 32 million which explains almost fully the difference between quarter 1 and quarter 1 '17 and '18.On the other income side, I would say this is a normal quarter, so the underlying profitability generated through assistance company, leasing company, our real estate companies is actually perfectly in line with what we have seen in the previous quarters more or less running rate EUR 50 million, but we have added here a one-off settlement of an old legal file which was totaling EUR 18 million as already mentioned and a EUR 7 million of a sale of a building in Hungary. So I would say that's normal results except for the one-off.The OpEx side on Page 13, here we have obviously a completely distorted number because of the bank taxes, so let us not waste too much of time, bank taxes total 11% of our operational expenses, which I think is a bit over the top. But anyway, we are not in control of that. The cost itself, so the operating result, if you make the comparison between fourth quarter and first quarter '17, '18, it's substantially down. But I honestly won't -- wouldn't love to skip that because we all know that quarter 4 is traditionally a very high-cost quarter because of marketing expenses, IT expenses, and so on and so forth, which most of the time are concluded in that quarter, so let's focus more on the comparison between the first quarter '17 and the first quarter '18.There is gap of EUR 52 million with our first sights looks quite significant. It's an increase of 6%, but can be fully explained by one-offs. And the first one is the integration obviously of UBB and Interlease in the group has contributed EUR 20 million to the costs in 2018, and obviously not in 2017. We also have a one-off in Belgium because of the building the tower in Antwerp, which was EUR 12 million. So the 2 totaling EUR 32 million.And then you have FX effects in Czech koruna, which has a big impact, about EUR 11 million. So the main difference between quarter 1 and quarter 1 '17 and '18 is fully explained by those 3 elements, one-off elements; the remainder is an increase of our cost even below the 1.6% which we put forward in Dublin last year. So perfectly in line.Mind you that we indeed are starting up for the transformation of the -- the digital transformation of the group and that we do see indeed which wage drift and wage pressure in our Central European entities which we have managed accordingly with [ FTE ] decreases. Just to give you an example, business unit Belgium, despite the increase of salaries 2% linked to indexation, the costs remain totally flat, including the EUR 12 million of Antwerp.Okay, so bank taxes, we all heard it about that, that was on Page 14. So Page 15, another important topic, which is the assets impairment bucket and there we have, I already mentioned, EUR 63 million of lease of which the vast majority comes from Ireland, but also we have loan loss provision reversals in Bulgaria, Hungary, Slovakia, and Group Centre. And that's good news, more or less EUR 6 million to EUR 10 million in the different countries reflecting the good quality of the loan book. In total credit cost ratio, we now stand at 15 basis points minus, which is indeed a historical low, and in that respect, we can -- this is not obviously something which you can put forward for the next coming quarters. This should be a little bit coming in, but it is substantially down on the 30 basis points-40 basis points through the cycle credit cost ratio.In Czech Republic, we had a small impairment of EUR 6 million on the review of the residual value of financial leases, so summing up both amounts make our impairments stand at EUR 56 million. No big surprise to say that our impaired loan loss ratio has improved as well, it now holds 5.9% of our book. And if you take the more severe class, the 90-days past due, then it's even down to 3 -- then it's down to 3.5% which is also a fundamental improvement compared to what we saw over the previous -- quarters and previous years.In terms of the countries, let me -- please skip that. It is more of the same, but definitely one country dips a bit compared to the other. So let's skip that entire part and let's go immediately to the overview of all the business units which is on Page 41. Here, you can see the different returns. So RORAC return on group level is 21%, remind you the impact of the bank taxes and then the different business units are described. Let me only mention one thing. This unit, international market is indeed delivering with a RORAC of 25% despite the impact of the bank taxes in, amongst other, Hungary.On the Pages 42, 43, you can see per country, what is the organic growth of volumes. As I already said, it's quite strong, 5% for the year. Difference a bit country to country, and also on the organic growth, we are with 4% perfectly in line with our ambition level and perfectly in line taking into account the different growth in the different markets.Now capital position, Page 45, 15.9% down on the 16.3% previous quarter. It’s perfectly reflecting the impact of IFRS 9. We already flagged that before, 41 basis points was indeed the impact. And remind you that KBC has not applied any transitionary measures on the application of IFRS 9. So we fully applied the full impact of IFRS 9, means a full reclassification of our bond-book and also obviously for the classification of our impairment state into account expected credit losses.In terms of where we are, obviously you have the implement of IFRS 9, and then look at the denominator and nominator of our ratio, the good news is that when you look in our capital position, the impact of IFRS 9 is limited and also the -- if you look at how we deal with that, and the detail is provided on Page 88.0; you can see that our profit contribution is offset by the dividend accrual. Mind you that the dividend accruals in the first quarter is higher than 50% because of the impact of the bank tax on the banking side, and that the dividend accrual is obviously on the full result, but as the capital buildup because it's a banking ratio, it's only on the banking side.And then the second thing is that the increase of risk-weighted assets for this quarter is EUR 0.8 billion. So we go up from EUR 92.4 billion to EUR 93.2 billion, which is fully explained EUR 9.8 billion comes from -- I mean 80% is growth -- volume growth, so EUR 0.6 billion is volume growth; EUR 0.3 billion is model changes, and we have a positive impact on marketers because of a change in Czech Republic of EUR 0.1 billion.So that is -- it's for the capital position, so also there very strong performance and because the full impact is not taken into account, we can expect some evolution also going forward. The total capital ratio is mentioned here as well, 19.7% the first quarter. The building blocks are mentioned in the graph. We also added to that a pro forma total taking into account the issuance of an additional Tier 1 instrument in April of about EUR 1 billion, so the capital ratio now stands at 20.7%.In terms of the leverage ratio and the solvency ratio in the insurance company, Page 46, this is exactly same story. It went down because of IFRS 9, but also because of balance sheet management. We all know that balance sheet is managed by the end of year for tax purposes and that is in this quarter exactly same thing. So it's perfectly in line with first quarter 2017, and is also in line with what I just earlier said on the FX swaps where we have built down the euro-dollar swap with EUR 5 billion. I think that is -- this is it. Solvency ratio of insurance company came up because of better capital position, EUR 29 million, and also the solvency capital requirement went down with EUR 40 million because of the market risk which went down.In terms of liquidity position, not too much to mention. 72% of that customer -- of that liquidity position is customer-driven, which is perfectly in line with the history. Historical performance item, not going to dwell too much upon these slides because these results are extremely good and no big surprise to the market, I think. Page 48 more or less in line with what we saw last time. Extremely strong buffers and therefore, not only the liquidity -- not only the capital position, but also liquidity position is performing again very well.So let me wrap up. It was a strong commercial result in the first quarter. It is supported and underpinned by all the markets. It's underpinned by all the business activities. It's unfortunately hampered big time by the banking taxes or otherwise, it could be also at fair value much higher. But it's again a confirmation of our successful earnings track record, and last but not least it's organic confirmation of a very solid capital and liquidity position. I would love to keep it here.I give back the floor to Kurt who will guide us through your questions.

[Kurt De Baenst, General Manager, Investor Relations]

Okay. Now the floor is open for questions. [Operator Instructions]

[Operator]

[Operator Instructions] Your first question on the telephone comes from the line of Flora Benhakoun of Deutsche Bank.

[Flora A. Benhakoun, Research Analyst]

Two questions from me please. The first is regarding the mortgage margin pressure that we have in Belgium which is obviously increasing, whether you could elaborate on this, where it's coming from, why? How long do you think it's still going to last? The second question is regarding the fee income, whether you could actually comment on the quarter to date in Q2, the performance? And also update us on the CPPI, the amount and the positioning, please?

[Johan Thijs, Group CEO, MD & Executive Director]

Let me come back to your first one on the mortgage business and the pressure which we see in Belgium. So it's quite clear that what is happening in the Belgian market is driven by I mean the bigger banks. So it's clear without mentioning names that couple of big banks have been going into a commercial fight and the competitive pressure has been bringing their margins substantially down. KBC has been always managing on the margin as you know, and so we try to do that as well and what we saw in quarters 3 and a little bit in quarter 4, that is that we were not able to convince the market to do it otherwise, and therefore our market share dropped significantly. Consequences were that we are of course now defending our market share as well and that means that our margins came down and our market share was back to the level where it was before around 20%. So you -- I mean, this is what is happening. You can put yourself the name on the bank who is triggering that, I think you know the name. The other element which is -- to be answered is how long will this take? Honestly I don't know, I mean I'm not in charge of the other banks, I think what we're doing is not sound, and giving also the interest rate environment currently we are in, KBC is very fortunate that we very diversified our income, but this is not good, if the margins are dropping to 86 basis points in Belgium that is definitely not sound. How long? As short as it can be. KBC will be pushing for margin, but we are not going to be naïve.

[Hendrik Scheerlinck, CFO & Director]

To come back on the evolution of the asset management activities, quarter-over-quarter we have seen good inflows of new funds in the first quarter. We have net sales inflow of EUR 833 million. If you go back 1 year, we look at the first quarter 2017, there the inflow was EUR 620 million, so that's a good evolution, but as a result of the turbulences in the market, the asset mix has been changing, where we are now much lighter on equity then we were, and much higher in cash than we were and the nature of question on CPPI is a good proxy for that. First of all in terms of volumes, the CPPI at the end of the first quarter stood at EUR 15.4 billion, that is roughly EUR 1 billion lower than a quarter ago, but if you then look at the asset mix, fixed income stayed around 33%-34%, equities went down from 57% to 40% and of course the communication factor to that is then cash which went up from 8% to 24% and that then results in an lower asset management fee.

[Operator]

Your next question comes from the line of Sofie Peterzens of JP Morgan.

[Sofie Caroline Elisabet Peterzens, Analyst]

Here is Sofie Peterzens from JP Morgan. I wanted to ask over on net interest income, you mentioned earlier that you have lever euro-dollar swap in place at the moment. How should we think about the net interest income contribution from the ALM FX swaps going forward? It was down EUR 20 million this quarter, should we expect similar decline in coming quarters, and how should we think about it going forward? And my second question would be on M&A. Could you just remind us is there any new opportunities on the M&A front that you are looking at with the second quarter results you mentioned a bank in Hungary -- sorry, with the fourth quarter results you mentioned a bank in Hungary, are you still looking at Budapest Bank, and if not -- or are you looking at any other bank?

[Hendrik Scheerlinck, CFO & Director]

On the NII, on the ALM swaps, as Johan already mentioned, the spreads came in dramatically especially on the dollar side; 2 reasons for that or the main reason is the -- basically the tax changes in the United States, and that had 2 effects. So first of all, it becomes more expensive for companies to issue debt, but on the other side given indeed the increasing budget deficit in U.S. resulting from that, there was a strong issuance of U.S. dollars by the treasury and actually since the first quarter of this year, dollar is now priced again of LIBOR and that was not the case for a while, so right now the spread is basically gone. Again, we do expect that probably in the -- in the late second half of the year, spreads will widen up again and making it attractive again to the business, but right now there is almost no activity on that one.

[Johan Thijs, Group CEO, MD & Executive Director]

And then Sofie for your second question on M&A activity, first Hungary, so Budapest Bank, so what I said in the first quarter, I'm going to repeat today, so Budapest bank is not -- I mean it's not on official sales process yet, which is normal. I think that, first, the elections have to brought to an end, and then you can go as government to the next step, so we'll be observing the market and if it comes to the market, we'll definitely have a look at it, but until now it is not an official sales process, so it's not on our desks. What about other activities, other potential acquisitions? So we have been looking into some potential add-on acquisitions on the insurance side in Central Europe and had a close look at it, but unfortunately quality was too tricky, let's call it like that, therefore we declined our interest, so we will be observing that from another perspective, pure commercial perspective. And we are observing the assets in the Central European area on the banking side as well. There are some rumors that some assets will come to the market, but officially it is not on the market yet.

[Operator]

Next question comes from the line of Pawel Dziedzic of Goldman Sachs.

[Pawel Dziedzic, Equity Analyst]

My first question will be on the cost growth and your cost income trajectory in the next quarters. So you mentioned that 55% cost income if we adjust for bank taxes is a very good result, but is there any scope to perhaps to lower it near term? And then of by 2020 you're aiming for below 54%, but how we should think about this in the coming quarters? If we -- if I try to look at underlying cost increase even if we strip out let's say consolidation in one of the tier around 2% to 3% it seems in a first quarter and obviously your core income including fees is not growing with the same pace, so how should we think about that, your thoughts here will be very helpful? The second question is a bit more technical and just on your tax rate, it dropped to 19% and obviously it includes positive impact of tax reform in Belgium, but is there anything that disported it in 1Q, and what's the effective tax rate you think we should expect for the full year?

[Johan Thijs, Group CEO, MD & Executive Director]

I will take the first one on the cost income ratio. So indeed our long-term target is foreseen 54%, we are currently at 55%. And I'll remind you what I also said during the presentation of the Q1 numbers, the difference between the different quarters is most of the time explained by either one-off you already mentioned that in your question excluding those has a significant impact, but also if we look at the quarter 1, remind you that there's a huge impact of the appreciation of the Czech koruna on the Czech Republic obviously that makes a big difference, EUR 11 million for the quarter and that's something which we could see going forward as well. On the other hand, you have some wage pressure -- sorry, wage drift pressure and that's definitely through Central Europe. You know that the unemployment rates are going down significantly and obviously that will be translated in pressure on that respect. But what we have seen in the first quarter, taking into account all these elements including the transformation of our business is that we were able to maintain more or less a little bit lower, the 1.6% long-term cost increase target to maintain that to our reality level. Now we stick to that guidance going forward to 2020 and we will see how it evolves over time. So I'm not necessarily saying that we will go beyond or below the 54% as you indicated in your question and I'm not saying that every quarter it will be 1.6%. It will be fluctuating a little bit, it will be perhaps upfront or a bit pushed in the back, it depends on how we are going to make our investment and how that evolves over time. But as a guidance, I can clearly say we were able this quarter and previous quarter as well to maintain it at the level of 1.6% or even a little bit lower. We will try to manage our cost in that respect long-term as well, 1.6% over time.

[Hendrik Scheerlinck, CFO & Director]

And on your tax question, Pawel, indeed the running rate at KBC group level, normal rate would be around 24%, that's what we expect for the rest of the year. The reason why it was only 19% in the first quarter has to do in Belgium because indeed the decrease of the corporate tax rate from about 34% to 29%, and then there was a EUR 7 million positive [ DDA ] on the liquidation of a company.

[Operator]

Your next question comes from the line of Benoit Petrarque of Kepler.

[Benoit Petrarque, Head of Benelux Equity Research]

Just one -- I'm not sure your answer on the outlook for the fee business in Q2, it was I think the first question, sorry for that. My first question will be on NII in Czech Republic, a very strong uptick there thanks to higher rates. I was wondering in Czech Republic do you see the competition on the deposit side, and do you expect actually to pass some of the higher rates at some point to clients? And how far you are from that process basically? So that will be the first question. And then the second, maybe a bit technical, but Page 12 of the presentation I see over fair value gains at EUR 73 millions in Q1. On the Page 24, I see that Belgium contributed for EUR 17 million only, so it leaves quite a significant amount for all the divisions, I have the feeling that it comes from Czech Republic, but I'm a little bit surprised to see such a large dealing room or other fair value gains are being generated from other units than Belgium. So maybe you could just clarify where it comes from.

[Hendrik Scheerlinck, CFO & Director]

Indeed on the NII, we have seen a strong uptick in the Czech Republic. We have had the interest rate -- repo rate increases that we mentioned in the past. In the third quarter of last year it was 20 basis points, in the fourth quarter 25 basis points and then we had another in February of 25 basis points. So far there is no activity in the market in the sense that there is a pass-through of interest rate. And if you now look at the interest rate outlook in the Czech Republic, the governor of the national bank has become a little bit more dovish. We have seen that the latest inflation numbers in the Czech Republic are actually receding somewhat, they're not increasing and so the guidance that was there in the beginning of the year that probably we would have next to the February hike, another 2 hikes now looks more that there will be only one hike which would then probably only be somewhere in the fourth quarter. So that means also that the pressure on pass-through rates is not very substantial, so we don't expect anything there. On the fair value gains, you rightfully mentioned that indeed that is mostly situated in the Czech Republic. When we look in Belgium in the dealing rooms -- dealing room results in the first quarter of this year was lower than the quarters before. That has to do with some interest rate position-taking which materialized later, but not in the first quarter, while in the Czech Republic dealing room activity remained very strong and that's where the bulk of the fair value gains were being booked.

[Benoit Petrarque, Head of Benelux Equity Research]

Just to follow up on the -- maybe -- thank you for your answers. What is the outlook for the fee income in Q2? Do you have an answer on that one?

[Johan Thijs, Group CEO, MD & Executive Director]

As you know, we don't give an explicit guidance on the fee income, we never did and we only do it for exceptional circumstances which are not the case today. If I just look at the fee and commission business, then let me help you a little bit. We all know that market sentiment is driven by performance in international markets that we saw in February-March and obviously Rik already explained that the [ developments ] on the financial market has an impact on the underlying asset classes of our CPPI and our Easy Invest products. Now, I cannot clearly predict -- or with 100% guarantee what the financial markets are going to do, so allow me to ask to make some homework in that respect yourself. What is clear is that the emphasis of KBC continues to be on diversification of income which means insurance, but also asset management and that is also translated in the first quarter in a strong inflow of EUR 833 million of new assets. And for good understanding despite the fact that we had turbulence in the financial markets in February and March, we had EUR 833 million of new assets. So that's good news for the entry fee side. So in that respect, I think I cannot give more without saying the explicit number and therefore I will keep it here. One last remark, be aware that the -- if you look at the total net fee and commission number, EUR 450 million, that about 65% is related to what I just said and so it's that part which is related to management fees, entry fees on investment products. All the rest is related to traditional banking and distribution costs.

[Operator]

Next question from the line of Stefan Nedialkov of Citigroup.

[Stefan Rosenov Nedialkov, Director]

It's Stefan from Citi. I've got 2 questions on your IT and digital transformation overall. You had previously told us that you are working on updating your core banking system especially in Central and Eastern Europe. Can you give us an update where you are in terms of that? I believe you are moving towards terminals or updating from terminals to a new conversion by terminals. And secondly, you gave a very interesting presentation on the digital initiative in Ireland in June of last year. Are you able to share some metrics with us in terms of where the progress is in Ireland? Maybe tell us a bit more about how many clients have been onboarded solely through the mobile app which I remember being very impressive in terms of onboarding? And also maybe the loan mix in terms of new production between mortgages and non-mortgages within Ireland?

[Johan Thijs, Group CEO, MD & Executive Director]

Let me try to answer your questions. First of all the updating of our core banking systems and then we are indeed talking about Central Europe and Ireland, so we are working on integrating a new banking system which is indeed terminals in 2 countries, that is Slovakia and Hungary, we are preparing for that. We already have terminals in Ireland and we have terminals now in the much -- [ CBANK ] and UBB, so in UBB in Bulgaria. In that respect, we are bringing now the 4 countries together on the same platform. So that's the next step. That will take us a couple of years and ultimately that will lead to a shared platform fully standardized and as a consequence will have a significant impact on cost and I mean a positive significant impact on cost. Where are we today? So Ireland is on terminals. Bulgaria is also on terminals and is now switching the CIBANK platform to the new terminals platform that is the latest version of terminals, that will be done fully by year-end. So we have a big release now upcoming in June, we have another one in September and last one is in November. So then it is fully on the new platform both Ireland and Bulgaria. On the 2 other countries, they will follow in -- because of this year the program is starting up, preparing, we are selecting system integrators and so on and so forth. Also, that comes to a conclusion soon. But because of the process is running I cannot give you particular details on that for confidentiality reasons obviously, but when concluded we will come back to you guys anyway. Then in terms of digital and where we are with the progress made in Ireland, I can say here clearly that that is going very well. So in the first quarter of 2018 because of the digital innovation, more than 20,000 new accounts were added. The -- you know that Ireland was already far ahead in our group in terms of digital usage of systems. They went up, the digital transactions with 49% year-on-year, which is very, very significant. So in that respect, the Irish developments are going extremely strong. Also the new mortgage lending, but that's in general and that is partially digital, partially via our hub, increased at 60% over the year-on-year comparison. So we outperformed the market there as well. This is a trend which we do not see only in Ireland, we see it in every country. I mentioned in the previous call on the Q4 numbers that January was the first month's -- for instance in Belgium where we surpassed the 50% range for our consumer loans productions digital. I can give you the April number, it is now 64%. So the trend is just continuing and is going indeed much better than we anticipated. Also, in Belgium, all products sales are in between 40% and 50% digital already even when it is launched 5, 6 months ago. So it's going quite strong.

[Stefan Rosenov Nedialkov, Director]

If I may, just a quick follow up. In terms of the new production in Ireland, how much in 1Q was mortgages versus non-mortgages?

[Hendrik Scheerlinck, CFO & Director]

So the volume that we booked in the first quarter was EUR 200 million new mortgages.

[Operator]

Your next question comes from the line of Kirish Vijayarajah of HSBC.

[Kirishanthan Vijayarajah, Analyst]

Just on mortgage pricing, very clear about maintaining margins over volumes, but my question is really on the asset management side, how do you think about the same trade off particularly when inflows are slowing, could you envisage lowering the pricing on things like the Easy Invest product where I think you said inflows have slowed versus last year? And then quickly on the FX swaps, now you've closed out those positions, what's the RWA or the capital released from doing that please?

[Johan Thijs, Group CEO, MD & Executive Director]

If I understood well your question because I had a bit of difficulties understanding it because of the line. So you were asking about the pricing of the mortgages?

[Kirishanthan Vijayarajah, Analyst]

No, more on the asset management side when inflows are slowing, could you envisage cutting pricing on that, or is it the same approach that you really want to preserve pricing over volumes without tradeoffs?

[Hendrik Scheerlinck, CFO & Director]

No, Kiri, sorry, we misunderstood your question somewhat, so my mistake, I'm sorry for that. On the asset management side, as I said, the inflows in the first quarter were EUR 833 million as compared to EUR 620 million last year. So there is an increase. There is a shift indeed in activities; I just mentioned that the sales are -- or that the volume of CPPI went down with EUR 1 billion. And actually what we have seen in the first quarter of 2018 is that the Easy Invest proposition that the volumes increased by about EUR 1 billion. But last year as we were just launching that product, the increase was higher. What is promising for us what we see that indeed the asset management new sales is now basically being expanded to the other countries as well. We have seen good sales in Czech Republic including the new channel that we're using of the Czech Post there. We see actually good sales in Ireland and in each of the other countries their sales are increasing well. The impact of the market turbulence will be somewhat on the -- in the new entries or new sales, but mostly as I explained earlier the composition of the assets under management where we are shifting partly out of equity and we are a little bit more into cash. The impact of the lower volume of FX swaps on RWA is actually almost 0, but this is an off-balance sheet and so the only thing you have to take into account is counterparty risk, but that is very, very minimal.

[Operator]

[Operator Instructions] We do have another question waiting from Maxence Gouvello of Jefferies.

[Maxence Patrick Patrick Laurent Le Gouvello du Timat, Equity Analyst]

I have 2 questions. The first one would be on the cost of risk. Can you give us a little bit more color on the upcoming quarter you are being quite vague between the minus 15 bps of this quarter and the guidance of the group between 40% to 45%? And if we could be possible to give us a bit of a review per country? The second question is for Johan. In your conclusion in the press release, you gave a little bit of I would say careful tone regarding European growth. Can you please elaborate little bit more on that one?

[Johan Thijs, Group CEO, MD & Executive Director]

Sorry, could you please repeat your second question because we completely didn't understand it. The first one is perfect, I can give you an immediate answer, but could you give us the second question as well? Didn't understand it.

[Maxence Patrick Patrick Laurent Le Gouvello du Timat, Equity Analyst]

The second question, in the conclusion of your summary into the press release, you are mentioning that you are seeing a little bit of cloud on the European economic growth going forward. Can you let us know why this kind of radical change -- not radical, but this kind of change and to elaborate a little bit more on that one, please?

[Johan Thijs, Group CEO, MD & Executive Director]

Yes, okay. So let me first answer your first question that is on the loan loss provisions and the guidance. As you know we don't give an explicit guidance on what we think it will be. Currently, indeed as you flagged out, we are at 15 basis points minus and that is something which is definitely not sustainable, at least that's what we assume. The quality of the book is good. Through the cycle, it is 30 basis points-40 basis points, but actually let me give you a bit of flavor there, we probably will not reach the 30 basis points-40 basis points, so it will be lower, that will be significantly lower. But don't push me to give you a number because we normally don't do that, you know that. But it is significantly lower than -- yes, than the -- due to cycle average. And then on the...

[Maxence Patrick Patrick Laurent Le Gouvello du Timat, Equity Analyst]

Sorry, Johan, just on the cost of risk, if you have one specific topic on which you are focusing your attention in term of cost of risk changing trend, which type of asset are you looking at?

[Johan Thijs, Group CEO, MD & Executive Director]

Honestly, I mean we follow up the group in detail on -- in every country in the same way. So that's centrally steered. We do have in mind, and you know that, we already flagged that before that the evolution of housing prices and obviously combine that with mortgages. We have taken measures already a while ago. You know that the Central European -- most of the Central European governments have already taken also some precautionary measures. We follow that very strictly and we were a little bit off of the market, that has cost us a little bit of market share, but that's the price we were willing to pay giving avoidance of concentration risk and avoidance of asset bubbled. All the rest of the book I'm not really concerned about. You saw that we also took a quite tough stance on everything which is related to energy amongst status quo. That is also influenced by our concern that it is a non-sustainable energy source and therefore it could hamper the credit quality over time definitely if you have longer-term contracts. And for that reason, we stopped that co-financing by '20, '21, '23. Is that okay as an answer?

[Maxence Patrick Patrick Laurent Le Gouvello du Timat, Equity Analyst]

Yes, thanks very much.

[Johan Thijs, Group CEO, MD & Executive Director]

And then on the economic side, so what is our expectation? So we are still having good economic growth so therefore it -- the sentence to use was it remained attractive. But we do see the globalization trends and I'm particularly referring to what Mr. Trump is amongst others saying and the potential escalating trade conflicts which are linked to that. We do see in the producer's confidence rate that, that is coming down and we do expect that the economic growth in Europe is going to slow down as well, so obviously still be significantly positive, but it is going to slow down and we think about 20 basis points-30 basis points -- 20 basis points-30 basis points down compared to the previous estimates which were amongst others, but it was OECD I think about 1.9% of growth. We think that will come down little bit. We're good understanding this is perfectly in line with what we assumed in our plan and our budget going forward.

[Operator]

We have another question waiting from Nick Davey of Redburn.

[Nick Davey, Research Analyst]

Just 2 questions please. The first one is simple one. Is it possible to provide for things like NII, fees and costs since it's a growth year-on-year in constant scope and exchange, so excluding the acquisitions and FX moves? And then the second one, can I just ask for little bit more detail around the assets under management trend, you obviously helped by giving us the net new sales now, but it is quite difficult with your disclosures to sort of see this interplay between what's going on in the mutual fund business in group assets. So is there anything -- more numbers you can give us on the stock of each of those buckets, and then anything you can say about the group assets, any way of sort of stemming the outflows that's being quite consistent there?

[Hendrik Scheerlinck, CFO & Director]

As we have -- we mentioned already at the end of the second quarter of last year, we have fully integrated UBB, so we don't keep track anymore of what our results would have been or evolutions would have been of NII and cost without UBB. So really we look at the integrated numbers which we have explained the underlying trend of the increasing costs, if you indeed clean it for all the one-offs that you could take into account, then we come to an increasing cost of slightly above 1% which is well within the guidance of 1.6% cost evolution that we gave in our Irish Investors Day.

[Johan Thijs, Group CEO, MD & Executive Director]

And then coming back to your second question about the trend in the asset classes and our assets under management, actually we do see 2 main trends, that is clearly what we started at the end of 2016, which really started off in the first quarter 2017 continues. That means that clients are shifting from advisory to more discretionary management and there is a slide translated on our product Easy Invest, that product has grown in the meanwhile to almost EUR 6 billion, so I mean on -- what is that, 5 quarters, it's not too bad to use an understatement. That's a trend which is continuing and that still will also pursue it in other countries of our group going forward. That's the first thing. The second thing is what we see is the shift out of CPPI, and that is because of the expertise products gives more flexibility. What we also see is that customers -- and that's a bit bizarre -- are actually walking away from our protected -- from capital-protected funds. Despite the fact that it worked very well during the crisis, we do see a trend that customers are shifting out of that product into more traditional asset management products and/or discretionary products. So that's, in general, the trend what we see. The second thing what we see in terms of -- you asked about group assets and how do we think about that. The shift out of group assets has mainly to do with the impact of the life insurance company on our book. So in terms of life insurance, life investment products, we do clearly see that the impact of low interest environment is kicking in. People are offered in KBC group always the alternatives. The alternative is the asset management book and if you have an alternative which is taxed substantially less, and Belgium is the main driver here, then for instance the 2% of the inter-guaranteed products or the inter-linked products in Belgium, then clearly customers choose value for their money and they go to asset management provides. So that has an impact on our group assets as -- also going forward. Where this will change in the future, I think you have to wait until 2020 which is our guidance for the long-term interest rate end of 2019, early 2020 we do see there a major shift, but otherwise all the trends which we have seen in the last couple of quarters, we expect to continue going forward.

[Operator]

We have no further questions waiting.

[Kurt De Baenst, General Manager, Investor Relations]

Okay, if no further questions, this sums it up then for this call. Thank you very much for your attendance and hope to see you tomorrow morning at 8:30 a.m. at KBC in Old Broad Street. Have a nice day, cheers.

[Operator]

Thank you, Kurt. Ladies and gentlemen, that concludes this call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.