KBC Groep NV

XBRU:KBC

Earnings Call Transcript 2019-Q1

[Operator]

Good day and welcome to the KBC Group Earnings Release First Quarter 2019, hosted by Johan Thijs. My name is Nigel, and I'm your event coordinator. [Operator Instructions] I would like to advise all parties that this conference is being recorded.Now I'd like to hand the call over to Kurt De Baenst. Please go ahead.

[Kurt De Baenst, General Manager, Investor Relations]

Thank you, Nigel. A very good morning to all of you from the headquarters of KBC in Brussels, and welcome to the KBC conference call. Today is Thursday, May 16, 2019, and we are hosting the conference call on the first quarter '19 results of KBC. Today, we have Johan Thijs, group CEO, with us; as well as Rik Scheerlinck, group CFO. And they will both elaborate on the results and add some additional insight.As such, 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 a warm welcome to this conference call about the quarter 1 results, to all people present. As usual, we will use the slides which have been provided to you on our website. And I will not walk you through all the slides, but I would like to highlight the most important topics.Let's start with Page 3, where we have the key takeaways. And we posted this quarter a good result given the very difficult circumstances the quarter started in. The group result is reflecting a EUR 430 million of profit. And be aware that this result is heavily distorted by the bank taxes which once again were upwards EUR 11 million and now totaling EUR 382 million for the quarter. That is substantial.Now the reason why the results were good has been translated in the first sentence, and I think this is a very important one, that actually the commercial engine fired on all its cylinders in all the core markets. That means the bank-insurance, asset management activities have been performing quite well. And we have seen also a very strict cost management, which was also in this respect good news, and that has strengthened our solvency and our liquidity position. All the details, I will go into in a second.Now in terms of our performance, if you translate that in our returns, it stands at 14.5%, which is a bit better than the same quarter last year, 13.8%. And also that quarter was distorted by bank taxes, so that's a good reference position. Cost/income ratio stands at 57 -- sorry. That will be a lot. 57%, yes; and combined ratio at 93%, compared to that in an instant; and a credit cost ratio at 16 basis points.In terms of our common equity ratio, it stands at 15.7%, but here we have to add some more explanation because we have been recently contacted by the ECB, which changed their stance how we should calculate the common equity ratio going forward. And to be honest, I don't really understand their reasoning, but this common equity ratio of 15.7% does not include the interim profit of this quarter. And I will give you far more detail later on, but if you would just maintain what we have been doing in the recent past for the last couple of years, by the way, it was approved by the ECB, how we did it, then this ratio would stand at 15.8%. Leverage ratio at 6%. Liquidity ratio is also very strong. So in essence, good performance, solid capital and solid liquidity and quite okay and good cost management.Now I wanted to add here as well that about, let me see, 50 minutes ago, we launched another press release indicating that we have announced internally in this group a further optimization exercise at management level. And as a result of that exercise, discussions with the relevant people have been started up as we speak, and that will obviously take some time to conclude. Actually, it's due to be concluded in the next coming 2 days, so today and tomorrow. And that exercise is the exercise -- start of a large exercise that will conduct the very same thing in the organization as a whole. It is endeavor to increase the operational efficiency. It is endeavor to increase the governance -- the agility of our governance structure. And it will run for the next coming 4 weeks in this group. Results will be communicated in the course of the third quarter 2019.Now the impact of the decisions which we have already taken and which we are communicating this morning is of a nonmaterial -- the financial impact, for sure, is from a nonmaterial kind. And we will definitely, on the announcement of the second quarter results early August, give you all the details on what it entails in terms of cost savings, what it entails of one-off costs and recurring costs going -- cost savings going forward.Let me emphasize now the detail of each and every building block. And as we do it in previous quarters, you can see on Page 4 what are the different building blocks to come to the EUR 430 million result. The only thing I would highlight on this slide is that the tax rate, the effective tax rate, has dropped because of a couple of deferred tax assets which we could book totaling EUR 50 million. On Page 5, you see the exceptional items. And in essence, I could conclude from this page that there is nothing worth mentioning which jumps out of the picture compared to previous quarter or previous year, so let's not waste too much of time on this slide, neither on the next one, which is Slide 8, where we see the split-up between the bank and the insurance company. It's a 78%/22% split, but be aware this number, the 78%, is a little bit distorted by the one-off booking of the vast majority of the bank taxes.Let's go to Page 9, where we have the net interest income. So the net interest income stands at EUR 1.129 billion, which is EUR 37 million lower than previous quarter, which is higher than the same period last year. If you only had a look at the banking net interest income, the picture is a little bit better even. It's EUR 22 million more than the same quarter last year. It's slightly down about EUR 24 million compared to the same quarter (sic) [ fourth quarter ] last year. The reasons why this is happening is, again no surprise, the further continuation of the low interest rate environment which was further strengthened by the statements of Mr. Draghi. So resulting in lower reinvestment yields. We have seen a lower netted positive impact of our ALM foreign currency swaps; and also this quarter accounted a lower number of days, totaling EUR 6 million loss of potential income.Last but not least, we do see a further continuation of pressure on commercial loans, but, and that's a very important one, this is due to the impact of previous quarter commercial pressures on margin on the outstanding total book, the total portfolio, because in all countries we have seen an increase of our net interest margin [ on ] mortgages, for instance, in all the countries. It's quite significant in Czech Republic. It is substantial in Belgium. And it's definitely a shift in what we have seen in the commercial pressure in that type of product over the last couple of quarters, and a shift in a positive way. Obviously, volumes on new production are lower than the bank book, so we will see the positive impact on net interest margin if this continues in the quarters to come.So that's the good news. We have seen also good loan volume growth, and that is also with 5% better than what we have guided the market for before. We thought it would be close to 4%, but we have beaten our own expectation in this respect. And that's good news because it's underpinned by all countries, and in that respect is it indeed a positive contributor to the net interest income. We have also seen a small positive impact of the interest rate increases in the Czech Republic and further continuation to a lowering of our funding costs and a little bit better dealing room income.So actually, in this respect the EUR 1.129 billion is a further confirmation of the earlier guidance which we have given for the full year. EUR 4.6 billion remains our positions going forward.In terms of volume growth, I forgot to emphasize the growth on the retail mortgage side. 3% year-on-year is also a very good number. And [ it's actually says ] something about customer deposits. KBC Group is in all countries considered to be a safe haven. And as a consequence, we do see further inflow of deposits, 6% on the year, which is quite good.In terms of fee and commission business, next page, Page 10, we see a positive evolution compared to previous quarter, and that's very good giving the very difficult start of the quarter. We all remember the last 6 weeks of 2018, which had a significant impact, minus EUR 13 billion, on our assets under management. But nevertheless EUR 3 million better than the previous quarter. In terms of previous years, [ it is ] back to that in a second.What we have seen in the quarter, let me compare first quarter-on-quarter, is that the asset management business, which is as you know the vast majority of the total fee and commission business -- 65% of that is asset management fees. 35% is banking business and securities business.So let me start first with the asset management business. Management fees were up EUR 1 million. Now it doesn't seem to be a lot, but if you look in the circumstances, we started the year with a significant impact on our assets under management because of the decline of the financial markets at the end of 2018. That has recovered. As you can see in our assets under management, we recovered EUR 10 billion but started off the year very negative and actually building up over the quarter into what it is. EUR 210 billion now means that the assets under management contribution in the management fee has been slightly increasing throughout the quarter -- sorry, gradually increasing throughout the quarter. So in that, given that circumstance, the EUR 1 million is quite an achievement. It comes also from a gross sale of EUR 1.5 billion positive over the quarter. So given the difficult start of the year, still EUR 1.5 billion of gross sales, resulting also in a net positive sale of about 4 -- EUR 0.4 billion. In terms of -- as a consequence, in terms of entry fees, this contributes positively. The entry fees were up EUR 7 million on the quarter.If I compare this particular part of the fee and commission business with last year, it's clear that we're -- during 2018 started extremely positive, building further on the end of 2017, with the same mindset that management fees and entry fees have dropped compared to that period, but I would like to emphasize that 2018's start was extremely strong and therefore the comparison is a little bit distorted. And so the vast majority of the EUR 40 million is entirely due to the impact of management fees and entry fees.In terms of the banking business, let's not spoil too much of time there. Quarter-on-quarter, it is slightly up. Year-on-year, it's a little bit down. The reason for that is that we had a little bit of lower fees on the payment services, on the credit files, on the bank guarantees. We talk about between -- difference in between EUR 2 million to EUR 5 million, so we're not talking about big numbers. And on the KBC -- sorry, on the securities business, [ within us it's ] KBC securities, we had an increase quarter-on-quarter of EUR 2 million, also good news but, of course, not a significant number.I mean, in terms of year-on-year, I explained the biggest impacts because of the management fee and the entry fee. I, we'd love to stick to that. One more thing: MiFID II has been rolled out. We have been rolling out statements to our customers. The first ideas and the first views, I mean, over the first quarter on the impact of that are encouraging.In terms of insurance business, which we can see on Page 11, good news to mention. We have seen a strong growth of the premium income nonlife on the earned premium, plus 9%, on the -- 10%, sorry; on the written premium and -- 9%. The life insurance premiums were slightly down on the quarter but up on the year, but I will give you a bit more detail when we take into account also class 23, because that makes the difference.In terms of the quality of the book, we see that the nonlife combined ratio now stands at 93%. And that has been influenced significantly by a windstorm in mainly Belgium totaling EUR 39 billion gross, that is before reinsurance; and then EUR 2 million in Czech Republic, also gross. And we had also, unfortunately, 2 large fire claims in the Belgium Business Unit totaling EUR 20 million, so the sum of the 2 totaling EUR 20 million. This 93% is still a good result which also translates the underlying quality of the book, the nonlife insurance book. On Page 12, you see the insurance sales on the life side -- sorry, on Page 13 -- no, Page 12. You see the life side. The life insurance business is actually performing quite okay, if you look at the quarter-on-quarter and the year-on-year results, taking into account class 23. Both are positive, which is good news because, as you all know, in Belgium we have the vast majority of the production in class 23 and in class 21. That is heavily influenced by the tax regime of the Belgian authorities. And giving the low interest rate, it's not an easy one, but we managed to grow our book a little bit 1% and 4%, comparing year-on-year and quarter-on-quarter.In terms of the fair value gains, which we can see on Page 13. The evolution is completely different as what we have seen in the previous quarter, and this is mainly underpinned by the positive change in the market, credit and funding value adjustments, which were highly negative in the previous quarter, now actually come in quite significantly. There's a difference of EUR 59 million explaining the vast majority of the EUR 97 million difference between the quarter; and also the higher net result on equity instruments, mainly in the insurance side, EUR 32 million positive; and then higher dealing room income, EUR 26 million positive [ that accrued ], contributing positively. It's slightly offset by the EUR 20 million negative on the ALM derivatives.In terms of net other income, actually I would say it's a normal quarter. It's perfectly in line with the longer-term run rate which actually hovers around EUR 50 million. We are now at EUR 59 million, but there was a positive one-off impact of a legacy file, legal file, in Czech Republic totaling EUR 6 million. So if you will deduct that, we have it EUR 53 million. Let's not waste too much of time because it's perfectly in line with that run rate.Far more important is the cost management and the impact of that on the cost/income ratio. Now that cost/income ratio now stands at 57% and which is a bit better than the full year 2018. These are rounded numbers. '17 -- '19 is a little bit better than '18 but which also explains that the cost management has been quite strict and that we keep our costs as such under control.In terms of the comparison of the numbers, the costs are down quarter-on-quarter, EUR 41 million, but also year-on-year, EUR 7 million. And that is influenced by a lot of things. I mean it's, as you know, the quarters are not necessarily comparable quarter-on-quarter because of staff expenses evolving. And invoices of marketing or ICT or professional fees are not necessarily invoiced in the same quarter, but if you compare apples with apples, so you get rid of the one-offs and you get rid of the bank taxes obviously and you get rid of the cross-currency differences, then we see a cost increase of -- quarter 1 2019 versus quarter 1 2018 of 1.4%. And that shows that indeed we bring it lower than our longer-term target of cost growth 1.6% per year.Giving what I said in the key takeaway, we are building upon this. To go further with our actions, so the announcement this morning, and the further exercise on the delayering of the organization and the optimization of the structure will bring some results as well. That should improve further this cost evolution. You will have probably a one-off because of the impact and which we'll have on staff, and then you will have recurring cost benefits coming in over the quarters to follow. But as I said, more detail is going to provide to all of you in the second quarter of 2019 results announcement.In terms of bank taxes, there are certainties in life. They were up again another EUR 11 million, and it stands now at a striking 12% of our operational expenses. This is a huge amount. And if you would exclude that from our cost-to-income ratio, then our cost/income ratio would drop to 50%, which is dropped.Okay. In terms of the impairments, we are on Page 16. It is actually with, I would say, better than back to normal. As we said in the past, a normal credit cycle in KBC would bring us close to 30, 40 basis points. We are now at 16 basis points over the quarter, and this is mainly due to a increase of the impairments in the Belgian Business Unit. It's up EUR 82 million, of which EUR 70 million, 7-0, because of one file. So it's in essence a couple of corporate files, I would say, mainly driven by one big file.So credit quality remains good. It's also translated in all the other countries. In Slovakia we had small loan loss impairments, a couple of million euro; as well as Bulgaria, EUR 2 million. All the other countries were either having releases, EUR 2 million in Czech Republic, EUR 6 million in Group Centre and then EUR 12 million in Ireland. So in this respect, it shows that underlying quality of the book remains good.In terms of credit cost ratio, I've mentioned the 16 basis points, which is in line with the guidance which we gave before and which is definitely also perfectly in line with our longer-term average through-the-cycle 30, 40 basis points. If you would take it over about 20 years, I think, 22 years, then our average credit cost ratio would be 44 basis points. So it's still good compared to that.Impaired loan ratio has also stabilized at 4.3% after the sale of a nonperforming loan book in -- a big chunk of that in Ireland. We stand now at 2.4% of 90 days past due. And that is indeed good number, and it brings KBC down to the average of the European banks. According to the EBA definition, this number 4.3% is actually 3.2%.Let me go to -- I will skip the business profile. It gives you an idea on where we are. Perhaps one more thing on Page 18: We also announced this morning that -- on the branches, the bank branches in Belgium, that we are going to indeed further transform that banking branches environment with a closure of another 65 branches in the course of 2019. 65 branches will be transformed into foreclosed or unmanned automated branches. And we will close, next to that, 51 unmanned automated branches as well.On the next coming pages, we have all the details of the business units. The -- I'm not going to go through the detail of all those numbers. It will take us too far, but we'll be happy to answer all of your question in this respect. Just perhaps one funny remark: It's first time ever in our group that the Belgium -- or that the Czech Republic Business Unit has a result which is higher than all the other business units, including the Belgian one. Now the reason why it's funny is obviously that is because it's heavily distorted with the bank taxes, 50 -- EUR 35 million bank taxes in Czech Republic, whereas the Belgium Business Unit has more than EUR 270 million of bank taxes to pay. But nevertheless, EUR 177 million is EUR 1 million higher than EUR 176 million.Let's go to the balance sheet. We are on Page 38. The growth is, as already mentioned, in loans positive, better than the -- and perfectly in line with last year, better than what we anticipated for, yes. 4% was the anticipation. It's reflected in both commercial loans and retail mortgages. And you can see per country where we are. I'm not going to go through every detail, but let me summarize it as follows. All countries have been contributing to that, and all countries have been contributing in a positive manner. And we do see margins creeping up in most business activities, retail, SMEs and corporate; and in most countries.So we're on the Page 40, which gives us the insights on the capital side. And let me start with Page 40. That is the most important one. And I already reflected upon the very unexpected and bizarre reasoning of the ECB.So for good understanding. Our dividend policy remains unchanged. So our policy, our payout policy, remains, I believe, a 50% payout. And that includes the AT1 coupon. We also continue to state that we will pay out a -- an interim dividend of EUR 1 per share normally in November; and that in principle, at the discretion of the Board of Directors and ultimately decided by the AGM, that -- we go on top of the payout ratio of the at least 50%, pay out the reference capital position, capital [ which is doubling down ]. Now it's a policy which is already in place for many, many years; and the recent conversations with ECB have triggered that.So we can apply, according to the directors of that very same ECB, what they call the umbrella decision. On Page 40, it's you can find the detail on the reference number, but that umbrella decision actually states that the dividend which you should take into account for the calculation of the capital ratio is actually the maximum payout according to the dividend policy, in short the policy I explained; or the average payout over the last 3 years; or last year's payout ratio. Now our last year's payout ratio was 59%. The average over the last 3 years is lower, so that is excluded. And then it goes about the maximum payout according to the dividend policy. Now the dividend policy is at least 50% consolidated profit, and that is interpreted [ as well ]. Upper end is 100%. Now [ on a mathematician's background ], there is definitely not 100%. If you should use that, the only certainty that you have is 50%.But we have discussions with them, and as a consequence, we concluded -- or we had to conclude that we could not add interim profit to our capital as we have done with their approval over the last couple of years. So in essence, it is 50 -- 15.7%, no profit recognition included. If you would go to the payout ratio for last year, 59%, it would increase to 15.8%. We currently have discussions with the ECB on this matter. I have seen that we are not the only bank in this respect. And we'll see how it boils out done and what the final conclusion will be, but it will be continued.So let's go to Page 41, where you then see the summary. And 15.7% is anyway substantially higher than our own capital target and is substantially higher than our regulatory minimum. And nevertheless, our dividend policy remains unchanged.The reason why it declined a little bit has to do with the increase of risk-weighted assets. And the decrease of the risk-weighted assets is mainly driven by the volumes. So the growth of our loan book accounts for EUR 0.8 billion of increased risk-weighted assets. Then you have the remainder actually is also triggered by regulatory changes and by a PD shift mainly in a few Belgian corporates, which I already talked about.By the way, if you want to have detail on that. I will kind of immediately -- not wait for the question. The regulatory impact has to do with IFRS 16. We already flagged that on an earlier occasion. It was EUR 0.3 billion. But also a change in weighing of sovereigns, and that was mainly in Bulgaria. That was impacting EUR 0.2 billion of risk-weighted assets. I think we are one of the few companies, banks in the European landscape which has already implemented that rule fully since a couple of years. And that obviously now has an impact.In terms of our fully loaded Basel III total capital ratio, we stand at 19.3% and after the successful issuance of a EUR 500 million AT1 instrument [ everyone ].Page 42. The leverage ratio more or less is in line with what it was previous quarters. And the reason why it a little bit came down is the significant increase of our balance sheet. In terms of our solvency ratio, 217% went down to 210%, can be explained by the evolution of interest rates and the evolution of our bond portfolio.Which brings me to Page 43, where we have the liquidity ratios. Let me summarize that in one sentence: solid as it was, compared to previous quarter, and [ customer drift ]. So actually quite good.Conclusion. I mean it was a solid performance. It was a solid performance in very difficult then circumstances. Costs are well under control, and it's something which we are going to do more of this going forward. So deliver solid returns and keep our costs under control.The economic outlook is that Europe is a little bit in a slowdown, but we expect a rebound, more or less in line with what the ECB says, in the second part of this year, definitely in 2020. And then all the rest depends a little bit on the [ logical statements ] which we all read in the press every day. In terms of the acquisitions which we recently announced, the acquisition of CMSS, the 54% (sic) [ 45% ] stake, will be closed before the end of the second quarter. And also we had a transaction announced which we think also will be closed in the next quarters.I will leave the floor to Kurt, who will guide us through your questions. And we will be happy to answer them.

[Kurt De Baenst, General Manager, Investor Relations]

Thank you, Johan. The floor is open now for questions. [Operator Instructions] Thank you.

[Operator]

[Operator Instructions] The first question is from Pawel Dziedzic from Goldman Sachs.

[Pawel Dziedzic, Equity Analyst]

Two questions from me. The first one will be on costs. And I think you made those 2 announcements today on operational review of the business and changes to the branch network in Belgium. I know the details will come a little bit later, but can you give us a sense what's triggered the review? And what do you expect to get on the back of that? Do you believe this is necessary to keep the cost growth within the targets that you set for yourselves? Or perhaps you go to a stage where you can actually go a little bit beyond that. So the context for the decision and what to expect would be very helpful. And the second question is on the repricing in Belgium. You very helpfully show us, I think, to Slide 21 that front-book spreads for both mortgages and SMEs are up. And if you could comment a little bit more on that. Is it beginning of the trend? Could we expect a little bit more of that going forward? To what extent do you think this decision to raise prices can impact your loan growth and your market shares? And I know, in the past, you made a point that this is delicate balance to be struck, but are you changing in any way your tactics? It will be very interesting to hear.

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

Thanks, Pawel, for your questions. Let me give you the context of the announcements which we did this morning. So first of all, so the 2 things which we announced, the network and then the redesign of the governance structure, actually both are related to the same context that is the changing environment we all live in. So the network has been reviewed every year. And we do this as an annual exercise. How many of the branches are used? How are customers using the other network components like the remote channels, the mobile applications, the Internet application and definitely also our KBC live call centers? And we come to the conclusion that this evolution is going further and further. 57% of our customers have not been using the bank branches. We also followed up the usage of every individual bank branch. And we come to the conclusion, when it -- when that usage is coming down significantly, that it doesn't make sense anymore to keeping open; and that we are closing them or transforming them in a unmanned, unpaid, fully automated branch. This evolution led us to close last year about 75 branch and led us to close this year 65 or transform them in unmanned branches. So this context is the same. Now the same rationale is behind the other decision which we have taken. It is clear that in our way of working we have done every year -- we did a similar exercise in 2012. We updated that exercise in 2014. And we also updated the same exercise, a little lower impact, in 2017. We do it now again 2019. That is how is our organization organized in order to reflect what is happening in the outside, but let me make it a little bit less abstract: We have to take decisions swiftly. We have to respond in an agile fashion. And we have to react in a very easy-to-understand and easy-to-use manner to what customers demand from us. And that's precisely what we are doing. We saw that in the current governance, for instance, we have too many management layers. We have established a new shared service center in Varna where we -- which is Bulgaria, where we can have more operational processes run in a similar fashion at a lower cost. And that's the reason why we have taken this decision. So that is speeding up the decision-taking process; creating operational efficiencies; speed up processes for our customers' sake; and then also last but not least, as a consequence, also allow us to simplify the way we work in order to create greater ease of use for all products and all our customers.In terms of the repricing, I will give you -- and Rik can always jump in if he wants to. I mean the main question which you asked was is this one-off, or is this a trend? Now what is the most important conclusion in this respect is what we see and that is true in most countries, that is that we are not the only one increasing prices. So it hasn't been -- or no impact on our volumes. This is a market trend. And I think also, with the statements of the ECB to keep the low interest rate environment now steady for a longer while, that also the banks come to the conclusion that the pricing effect is the only way to come to reasonable returns. And this is something which we have seen in the course of quarter 1. It's a bit difficult to already talk about quarter 2, but let me say something about it. The first weeks then of quarter 2, we saw the same trend.

[Hendrik Scheerlinck, CFO & Executive Director]

And in terms of market share bubble. At this increased pricing on mortgages, we're getting very close to actually the market share of the back book. So this confirms what Johan said. It's a trend that we have seen in the market. On the corporate side, as you know, that is the margin is a little bit volatile. It really depends on the composition of the book of new business you do in a certain quarter. So you have seen an uptick in the first quarter, but overall, and that you can see on the top line, the pricing of the entire back book of our loan business in Belgium remains flat.

[Operator]

The next question is from Robin van den Broek from Mediobanca.

[Robin van den Broek, Research Analyst]

My first question is on the potential Czech banking tax. Johan, I heard you are not too happy with these taxes, to start with, but the Czech Republic is drawing something up. And I was just wondering. Since you're -- yes, you're somewhat dependent on the dividends that have come through from the subsidiary, I think there's also a plan to lock part of the capital upstreamed into an investment fund or something like that. I'm just wondering, if that would be higher percentages, if that would have any risk for your dividend policy. That's the first question. The second question is on insurance and then mainly nonlife. 10% premium growth, pretty impressive. I think, this quarter, the fire claims of EUR 20 million were largely unexpected. So was just wondering if you could talk a little bit about how sustainable this premium income growth is and maybe touch upon the -- what is a sustainable combined operating ratio. I mean 88% last year was on a low -- very low, but 93% this quarter seems a bit elevated, so is the answer somewhere in between? Some color there will be helpful.

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

Thank you for questions, Robin. And let me start with the Czech banking tax -- or the rumors about the Czech banking tax because that's where we are today. It is clear that you have 2 sides on -- in the Czech public domain, yet your position was pushing for an increase of the banking taxes in a more significant way. How it should then be delivered? Is it straightforward tax? Or is it a tax on dividends? Or is it something else? That is completely uncertain. I think there are some studies which have been published by analyst communities. And you can see that in those studies, Robin, if those things come true, there will be some impact, but relatively depending on which model is used relative, it's acceptable to KBC. That's one thing. The other thing is [ it is agreed to ] come true. And there I would love to say that the other side, which is the Prime Minister, the President of the country; the governor's national bank; and also recently the IMF, stated that they don't want to have banking taxes increased. So I mean we have elections in 2021. I think until then, we will have the talks ongoing and rumors ongoing, but as far as I'm concerned, I think that a straightforward increase of bank taxes, as is rumored by some, in some, reduces, is I think not -- or as we know it and is not on the table. What I guess could be the case is that there will be some initiatives one way or the other where banks are going to whatever, help the government in establishing further growth in the country, whatever that may mean. So let me repeat what I said in one sentence: There are rumors the people who are in charge are not in favor. And we will further continue and [ efforts ], for sure, but also [ the bank is likely to ] underpin the further growth of the Czech economy and Czech welfare. And if something will be deducted in order to make that happen, then I think we will have a rather limited impact. I'll give you one example. There's a rumor that corporate taxes would be risen for the financial industry. Then we talk about EUR 15 million actual impact on our profit, which is okay. It is what it is. In terms of the insurance side, I will hand over the floor to Rik.

[Hendrik Scheerlinck, CFO & Executive Director]

Thanks, Robin, for your question on the insurance side, about the sustainability of the premium growth on the nonlife. You see on Slide #12 the gross written premium gives you actually a better indication of what's going forward. Overall up 9%, but if you do the breakdown of the countries: Belgium was up 3%. Czech Republic and Slovakia were up 13%. Hungary was up 27%, but there's a little technical issue there that an [ MCPL ] tax that used to be paid separately by the client is now part of the premium. So if you take that into -- if you take that out, then gross written premium year-over-year grew by 6%, in Bulgaria 21%. So actually, the sustainability of the growth model is there. As you know, the integrated bank-insurance model is improving, is further improving. The number of our customers on the banking sides who are also taking insurance products, which is mostly pushed by their branch network, is growing. And actually, there's a lot of potential still in the largest countries to grow further, so -- and then we have seen that -- in a number of countries, especially in Central Europe, that tariff increases mostly on the car business have supported that. In terms of combined ratio, again it's a subject of what happens on the [ retro ] side, but your guess that the aim is to land somewhere between the number of last year and the number of the first quarter of this year is correct, yes.

[Operator]

The next question comes from Flora Benhakoun from Deutsche Bank.

[Flora A. Benhakoun, Research Analyst]

The first question is regarding the Czech Republic. I'd like to ask you, given you are one of the main banks in the country, what you're feeling on the ground regarding the level of activity and whether you are concerned that there are any kind of potential macro slowdown in the country. The reason why I'm asking that, obviously, is that the Czech Republic is very linked to Germany and especially the car industry which has been struggling a bit lately. So should we be a bit concerned here by the level of activity for the rest of the year in the country? And the second question is just to ask regarding M&A. You had talked in the past that you would be interested in buying Budapest Bank if it would be up for sale. I just wanted to ask whether there has been any change in the status there.

[Hendrik Scheerlinck, CFO & Executive Director]

Thank you, Flora. On the macro side of the Czech Republic, actually, last week, the national bank in the Czech Republic and also the Ministry of Finance came out with a new macroeconomic forecast. They see continued economic growth this year of 2.4%. So that is fresh from last week. What is supporting the economy is exactly private consumption. Domestic consumption keeps on increasing quite well. And then I agree, on the industrial side, this is also going to be a little bit a function of what happens with the German economy. You've seen the numbers yesterday. GDP growth in Germany in the first quarter of this year was a positive surprise with 0.4%. And so overall the signs of continued growth in the Czech Republic remain quite positive.

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

And Flora, regarding the M&A question, actually no news to mention. So we are still interested in indeed any assets coming to the market. And as you know, Budapest Bank is indeed pushing to do so. So we have repeated our interest again, also in writing, to the Hungarian government. And we are preparing ourselves for the launch of that transaction.

[Operator]

The next question is then from Farquhar Murray from Autonomous.

[Farquhar Charles Murray, Partner, Insurance and Banks]

Just 2 questions, if I may. Firstly, on fees. You suggested the response on the first MiFID II statements was encouraging, and I just wondered if you could update us on where we are with those disclosures and then perhaps give some detail on why you are encouraged by the response so far. And then secondly, on the ECB's umbrella decision on dividend accrual, which I agree it's actually quite bizarre, could I just ask whether you would consider stating a maximum dividend payout as a mean of kind of getting around that stupidity? Or frankly, are you going to take the view that it makes no difference on your year-end reporting, anyway, and so you'll just leave the dividend policy unchanged?

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

Thanks for your questions, Farquhar. The first one, on MiFID II. [ So on response ] to the disclosure of the second quarter, but let me give you a little bit of flavor there. So when we issued our statements to our clients, then we, of course, monitor their reactions on the -- definitely on the private banking side, which is for us quite an important part of our portfolio. Reactions are -- and we -- I will give you the announcements which we collected -- sorry, the conclusions which are collected until the end of the first quarter, which is about 25% of our portfolio. And actually, what we saw is customers do understand what we do. We give everything in full transparency. I think we're the only bank who are giving the costs and the taxes which we are transferring to the government. So they have the full insight. They understands what is happening. They understand what it costs and, let's say, the impact of that cost on their returns. Negative reactions are very few. I know the amount, and it's you can count them on one hand, of customers which have said this is for us too much. And so we are talking about very low numbers. And if we talk about calculating the numbers on 1 or 2 hands, you have to compare that with 50,000 customers. So that's what we're talking about. So actually, all in all, we are very attentive of what is going on. And we keep the finger on the pulse with our customers and until further notice. And that's something which we're then going to disclose the full disclosure in the second quarter because these are actually second quarter events. And we will give you far more detail, but until then, what we saw up to now, which is about 1/4, 1/5 of the total portfolio, it's okay.And indeed what you said about the umbrella decision. You called it a stupidity. I can understand the usage of that word. I tried to not use it, but I understand what you said. Putting that in is actually changing our dividend policy, and we were not intending to do so. So we will continue to have discussions with the ECB to convince them the 50% is not necessarily 100% and that actually what they are doing does not make sense. I don't have a clue why they changed their policy. Because they approved it the last couple of years, and then it was also at least 50%. I don't know what happened, but we are trying to convince them. Changing the dividend policy is not on the agenda right now.

[Operator]

The next question is from Stefan Nedialkov from Citi.

[Stefan Rosenov Nedialkov, Director]

Hello...

[Operator]

We can hear you, Stefan.

[Stefan Rosenov Nedialkov, Director]

Oh, hello. Sorry about that. Two questions for me. The first one is on capital. Now just so that we understand correctly: After you have accrued for your EUR 1 per share, then the accrual rate drops to -- well, basically still stays 100%, unless you can further negotiate going down to 59%. Is that how we should think about this? And obviously in the absence of a confirmed maximum on your part. And the second question is actually a bit more sort of longer term. You guys always show us a slide with the level of bank-insurance that you have reached in Belgium and your targets for Central and Eastern Europe and Ireland. It's towards the end of the presentation usually, Slide 54. Could you just elaborate on your Central European ambition for level 3? Could you let us know in your view at what level is each of the country right now? And what is the time frame over which you see each individual country moving towards level 3? As -- and also as an additional piece of color for us: Do you think that in each of those countries you will have an open architecture or a closed architecture system down the road?

[Hendrik Scheerlinck, CFO & Executive Director]

Thank you, Stefan. On your first question, on the capital and the capital accrual, as Johan said, so far, what we have received from the ECB is under what they call the umbrella decision. So umbrella decision is taking it lower levels within the organization. And there they have said, "Okay, according to our -- the way that we read rules now, which is not the same as a couple of years ago, we feel that you cannot accrue dividends." I mean you -- if -- you cannot take interim profit in your capital calculation. We are engaging in the ECB to take now what is called the long procedure. That means, on a quarterly basis, we can submit a request to the ECB to allow us to recognize part of the quarterly profit into capital, and that part would be everything above dividend accrual of 59%. These discussions take a little bit longer, and eventually they end up at the board of the ECB. Again, we do expect that, in the next 4 to 6 weeks, we're going to have a little bit more clarity about that.

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

And then Stefan, coming to your question on bank-insurance. So where are we with the different countries? So all countries are actually on level 3. The level of integration is not necessarily the same in every country, but they are all on level 3. And they are all steered towards going to level 4. In terms of what that means, in Bulgaria where we recently, as you know, acquired another bank, it means that the first thing we did was the integration of the bank. The second thing which we did was the integration of the bank and the insurance company. And they are massively transforming their former UBB customers into UBB DZI bank-insurance customers and with massively -- I mean this is virtually massively. The cross-sell ratios in Bulgaria are close to 100%. In terms of open or close architecture, I don't really understand your question. Let me make a guess what it means. That is that we are open for third parties in order to sell products. In principle, in all the countries we strive to have a closed architecture, which means that we only work with our own banks or insurance and, as a consequence, products. The only exception to that is Ireland, where we don't own an insurance company, as you know, but where we are on the life side dealing with setting up our own life insurance activities.

[Operator]

The next question is from Benoit Petrarque from Kepler.

[Benoit Petrarque, Head of Benelux Equity Research]

Yes. Benoit Petrarque from Kepler Cheuvreux. Two questions on my side. The first one will be on the asset management inflows in Belgium. I think you had outflows of 1% in the first quarter '19. Could you talk a little bit about the appetite going into the second quarter, where you probably have seen a good April and -- or calendar, reacting also so far in the month of May? So a bit of guidance around the fee business for the second quarter will be useful. And then on net interest income, if I adjust for number of days and annualized Q1, I get closer from EUR 4.5 billion than EUR 4.6 billion guidance. So I'm talking only on an organic basis. So -- or do you think you will [ see an eye ] moving towards your EUR 4.6 billion level? What could be the big reasons for that? Because we are still in a low interest rate environment, i.e., it will still be a drag on NII. I appreciate you have loan growth, but -- or do you think you can make this EUR 4.6 billion on an organic basis?

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

Thanks, Benoit, for your questions. In terms of the appetite where you are referring to on the asset management side. So what we -- I mean you asked the explicit guidance of the second quarter. It's a little bit difficult, but the -- let me repeat what we have said also in the recent past. And vast majority of this production is done in Belgium. The Central European countries are now picking up. We saw good results in Czech Republic, where we had EUR 400 million of new production of one particular product. But the appetite is driven mainly also by the sentiments in the market. And in terms of what it means, look at what happened in the fourth quarter. And look -- in 2018, I mean. And look what happened in the first quarter of this year. So the gross sales EUR 1.5 billion positive is a perfect reflection of that good market. People jumped in and they did more than actually what I expected. So [ in commercial ] we have been performing quite a good job. In terms of the second quarter, it's too early days, in principle. I cannot comment the second quarter, but let me state it as follows. April was a good month, okay? And I will stick to that because otherwise we'll start to give too much guidance over the second quarter.

[Hendrik Scheerlinck, CFO & Executive Director]

On the NII, Benoit. And thanks for your question. First of all, there is the number of the effect. So you need to -- you cannot analyze the first quarter because you have fewer days. So if you would take those -- [ unless you ] take into account, on an annual basis the difference is already EUR 15 million, 1-5 million. Then we have had the repo hike in the Czech Republic, which came a little bit earlier than we expected. We expected it somewhere at the end of the summer. It came already in May. And we expect the annual impact of that to be around EUR 20 million. Then we announced the acquisition of CMSS. So that will be in our results in the second half of the year, and that will boost NII with about EUR 40 million, 4-0. And then last but not least, what we commented on before, we see that the margin of the new production in mortgages in Belgium, in the Czech Republic, in Slovakia and the other countries is picking up somewhat. And then again that's -- this is expected to continue. That also is going to have a positive effect on the NII.

[Operator]

The next question comes from Bruce Hamilton from Morgan Stanley.

[Bruce Allan Hamilton, Equity Analyst]

So firstly, just coming back to capital, just to clarify. So the 14% peer sort of medium target, that's confirmed. I think that's also what you said in this -- in the presentation, so I assume that's the number we should use for the rest of the year. And then in terms of the level above which you return on capital, that is now 15.7%, I assume, because the Czech deal you sort of deduct from your 200 basis of M&A buffer. And then can you just give a sense? As we walk through the next 2 quarters, obviously you're accruing no earnings, so that's seemed negative to the extent you grow risk-weighted assets, but are you expecting significant TRIM impacts? Can you sort of remind us of guidance there just so that we think through? Because obviously, I guess, we should expect a trend down and then a big step back up in capital levels in Q4. And then second question, just going back to your comments on MiFID, which were very useful. So if I think about your sort of EUR 210 billion of AUM, how much of that do you think is subject to potential risk? Is it really just the sort of high-net-worth private banking part of the AUM? Is it all of retail? Or is it retail and institutional? And can you give us any sense of the split in kind of AUM or revenues between those kind of 3 buckets [ if it furthers ] to grow at this sort of relative risk?

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

So thank you, Bruce, for your 2 questions. Let me start with the one on capital. Yes, indeed -- and I forgot to mention that. Thank you for pointing out. The 14% is confirmed today. So after the review of our peer group, indeed the median was 14%. And so that is confirmed in terms of where then our reference capital position is. That means that we should indeed take into account the acquisition of CMSS. We've just not concluded yet. We foresee that in the second quarter, so in the next coming months. And that should have an impact on the capital ratio of 30 basis points negative, and that will be indeed deducted from the 2% buffer which we take into account. So indeed your analysis is correct. That capital reference position will become 15.7%. In terms of the capital evolution going forward, implicitly we do not give any guidance on our capital going forward. If I would answer to one particular part of your question: What about TRIM? Indeed there is an exercise on the -- that has been an exercise ongoing in TRIM, but we don't have a clue when they are going to make that conclusion happen. Normally, it takes for them at least 6 to 9 months before they come to conclusion. That would bring it to year-end. We have already flagged the previous TRIM exercise. That impact is known. What the other one will be is unpredictable. I can really not give you more flavor to that. I actually am sorry about it, but I can't just because I don't have the number. And I don't have any insights in their rationale or their reasoning. So my expectation is probably towards year-end; probably at the end of first quarter, at best, or fourth quarter impact. We don't have a clue. We don't expect it to be substantial. And therefore I think it will be [ accepted ].

[Hendrik Scheerlinck, CFO & Executive Director]

And to continue on the risk-weighted assets. Indeed, in the first quarter, you saw they are somewhat more elevated. As Johan already mentioned, there are 2 one-offs in the sense that we have IFRS 16. And second of -- one, there's Bulgarian sovereign weights. So basically what the -- what happened there is that, so far, investments by banks and by us in sovereign Bulgarian government bonds expressed in euros were rated at 10%. Starting January 1, that rate went up to 25%. So in that sense that is also a one-off exercise. And then we already explained that the reason why we had risk-weighted assets grow mostly in Belgium had also to do with a number of bigger files, where we have seen a negative PD migration. This was on -- this was what the corporate sector has been experimenting or experiencing as a result of inventory and receivables stress, but that seems to abate. So there in that sense there were certain one-offs happening there. If you look at the MiFID responses we get from the clients, what Johan was talking about is indeed the ones where there is most money at risk. These are the clients in private banking. We don't give more details on that, but as Johan said, you can count the disillusions that you -- to changing banks, on one hand. Customers understand that. We have longer-term relationships, of course, with these customers. We typically see them at least 4 times a year. We do portfolio discussions with these customers. And they understand that indeed, if you look in the longer cycle, that what is happening now is nothing extraordinary. And by the way, most of them already had an indication of what the fees were. If you then move to the premium banking segment, there also reactions have been similar. What we see happening, and I've commented on that before, and that is actually one of the strategies that we want to follow as well, that the shift towards discretionary is improving or is further increasing. So right now we have about -- if we take entire private and premium banking in Belgium, about 33% of the assets we have under management is discretionary. So that is increasing. The standards in Anglo-Saxon route is around 50%, where we see that quarter-over-quarter we increase by 1% to 2%. But there indeed the pricing is very visible, and we have not seen any negative reactions from clients on that one.

[Operator]

The next question comes from Albert Ploegh from ING.

[Albert Ploegh, Research Analyst]

Most questions have been answered. Basically, one question left, which is more of a follow-up on the earlier question of Robin on the potential bank tax in the Czech Republic because I -- is the issue not more about banks there basically being foreign owned and dividends being paid through the parents abroad? And I hear your comments on maybe increasing [ the role ] and to stimulate further the local economy, but if in a way you were forced to keep capital low key to avoid any excessive taxes on it, does that not limit yourselves in terms of capital flexibility and, in a way, to fund capital distribution from the holding to shareholders? Or is this a concern at all? Or am I reading way too much into this?

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

Thanks for your question, Albert. The -- I mean I'm not going to repeat what I said to Robin's question, but there's indeed, maybe in Czech Republic, the foreign-owned banks and also the telcos, [ which will be the understanding ] which are envisaged by the opposition. That's for sure. The -- let me highlight one of the elements which was put forward as an idea. That is to put a tax on the dividends in order to keep them -- the money in the Czech Republic. Yes, in principle, nice idea, but this is not how it works. In the European environment there is since 1990 a European parent, subsidiary directive which clearly states that any dividend arising from a subsidiary in the European Union can -- which are then paid through a mother company is free of any taxation. And this is a directive which is also applicable to the Czech Republic, so the idea which was rumored and which is considered to be the case for increasing the taxes on banks in Czech Republic is practically not feasible. It's just not allowed by law. So I mean I can go into every potential scenario which has been in documents standing around over the last couple of weeks. We have a counterargument for most of them. "Or the impact is not big. Or it's not feasible by law," and so and so forth, but there's -- I think it would lead us too far. Let's stick to what I've said. First of all, there is indeed thoughts by opposition. There is a clear opinion by people who are in-charge currently who are not in favor of taxing the banks. And let's see what it brings to the table. I think that the banks are doing their utmost in Czech Republic to stimulate the economy but also to increase welfare. And that can [ impact ] the emphasis going forward. I think taxing the bank in this respect, as the IMF said, as the governor's national bank said, is not the only way of doing so.

[Operator]

The next question is from Alicia Chung from Exane.

[Alicia Marianne Chung, Analyst on the Pan]

Just a couple of quick questions for me. Firstly, on the costs. Cost discipline has been very good at KBC now for the last couple of quarters. And in a way, it's what you'd originally guided to, that investment costs will come first and then the cost savings will come later. And it looks now like the costs are starting to trend below your CAGR target of 1.6% for 2016 to 2020, which makes sense that we are now starting to see that rebalancing. Is it fair to assume now that you will continue to trend below your CAGR target for 2019 and 2020 as you rebalance from the investment costs to cost savings? And are there any cost headwinds that you see on the horizon that could prevent this, whether it's compliance or costs related to the CMSS acquisition? That would be my first question. Then secondly, on NII, you've made a number of helpful comments on NII. And it's reassuring that you're keeping your EUR 4.6 billion guidance for the year, but if I think about what changed since you originally gave that guidance, obviously yield curves have flattened then as well, which has led to more reinvestment yield pressure. And we're already seeing that come through in NII. We've had the acquisition of CMSS, which adds EUR 40 million; the Czech rate hike, which will add a little more to NII this year because it came a bit earlier. And plus, we're seeing slightly stronger loan growth, so given the number of positives that we're seeing coming through versus negatives, is there not upside risk to your NII guidance for this year?

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

Thanks, Alicia, for your questions. Going to the costs side: So indeed we are now having cost evolution which is below our 1.6% costs CAGR, according to our targets. And so what we do is indeed, and that's what we said also on previous occasions, we try to manage our costs in the most strict manner. And there are a lot of elements which we don't have to take into account. We have been mentioning the wage inflation. We have been mentioning the further increase in regulatory costs. And we have obviously mentioning the transformation which is ongoing and which costs quite a lot of money. And as you know, the costs always are advancing the benefits. In terms of where we spend today and is this trend -- is this [ 1.4 ] evolution a trend going forward? That's what we try to do, indeed. Do we see some one-off costs or [ backlogs ] coming up? Obviously, when I was talking about what we announced this morning, that will create a one-off cost charge. And I will give you the details in a couple of months, but as I said, that will -- most, that will be absorbed. And that will be generating recurring cost savings going forward. So straightforward answer to your question is indeed we will do our utmost to bring that cost evolution below the 1.6%, as you have seen in this quarter but actually also in last quarter.

[Hendrik Scheerlinck, CFO & Executive Director]

And the Alicia, on the NII. We take note of your comments that the negative yields or the decreasing yields, as we have seen -- and they became more pronounced the more that Mr. Draghi talked about the interest rate environment in Europe. That will be offset actually by the EUR 40 million NII that we will be booking from CMSS. And the other elements that you mentioned are indeed to support this but not to an extent that it would lead us to change the guidance.

[Operator]

The next question comes from Jose Coll from Santander.

[Josema Coll, Equity Analyst]

The first one is on NII. I'm looking at the composition of your interest income and interest expense. And what I see is that, in this first quarter, you show an interest income of EUR 1,821 million, which is down 1.5% quarter-on-quarter but up 8.3% year-on-year, which makes sense. They [ can be coming in ] growth, but when I look at your interest expense, it's at EUR 692 million, which is up 1.5% in the -- quarter-on-quarter and up 24% year-on-year. So if you could please help me understand how come your interest expense is rising so much. What are the drivers there? So that's the first question. And the second question is on sovereign risk weightings. You spoke about Bulgaria adding -- sorry I missed the exact number. I think that you said EUR 0.4 billion more risk-weighted assets. So the question is should we expect further sovereign risk-weighting impacts coming from either Bulgaria or other countries in the coming quarters?

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

So José, I will answer your second question because, [ as you may, it's ] straightforward one. It was not EUR 0.4 billion. It was EUR 0.2 billion. That makes a difference. And that was because of -- that's what Rik said, I think, because of the shift for euro-denominated bonds. And that is weighted because they are sovereigns, home sovereigns, for us. Now for good understanding: KBC already applies this. And I said it in my introduction. I think we're one of the few who has applied this already for many, many years fully loaded. So no transition scheme whatsoever. All our home sovereigns' exposure are weighted fully in our risk-weighted assets. And that brings the total of that weighing to EUR 2.9 billion; on a total of EUR 96.5 billion, makes a lot of difference, as you can assume. Are there any changes going forward? In principle, not. And if that would be the case, for us, that makes no big difference. We're talking about only EUR 0.2 billion of difference. If it would be implemented by European authorities and would be implemented as rumors have said it a year ago that it would be the case, then the impact on KBC is negligible. The impact on certain other banks in Europe will be significant.

[Hendrik Scheerlinck, CFO & Executive Director]

And José, on your first question, on the NII. You were indeed referring to difficult-to-understand IFRS tables in the quarter report. Actually, the way to compare the evolution of NII is better when you look at our presentation, on Slide #9, the managerial explanation there. And then you see that indeed year-over-year our NII banking, because that's what you were talking about mostly, increased from EUR 970 million to EUR 992 million. That is the relevant number to look at the evolution.

[Operator]

Thank you. Then I'll now pass back to Johan for closing remarks.

[Kurt De Baenst, General Manager, Investor Relations]

Hey, thank you very much, Nigel.This sums it up for this call. Thank you very much for your attendance. And I hope to see many of you at the sell-side equity analysts meeting in London tomorrow morning. Please note that the meetings will not take place at our offices in the city due to refurbishments but at the Peel Hunt office, Moor House, 120, in the city. This meeting starts at 8:30 a.m. local time, and we would be pleased to welcome you there.In the meantime, enjoy the rest of the day. Cheers.

[Operator]

Thank you. That does conclude the call for today. You may now disconnect. Thanks for joining, and enjoy the rest of your day.