KBC Groep NV

XBRU:KBC

Earnings Call Transcript 2020-Q1

[Operator]

Good day, and welcome to the KBC Group Earnings Release Quarter 1 2020 hosted by Kurt De Baenst. My name is Nigel. I'm your event coordinator. [Operator Instructions] I would like to advise all parties that this conference is being recorded. And now I'll hand over to Kurt. Kurt, please go ahead.

[Kurt De Baenst, General Manager, Investor Relations]

Thank you. Ladies and gentlemen, a very good morning to all of you from the headquarters of KBC in Brussels, and welcome to the KBC conference call. I sincerely hope that you and your family are still healthy in these unprecedented times. Today is Thursday, May 14, 2020. We are hosting the conference call on the first quarter results of KBC. As usual, 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 insights.As such, it's my pleasure to give the floor to our CEO, Johan Thijs, who will quickly run you through the presentation.

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

Thank you very much, Kurt. And also from my side, a warm welcome to all of you in these indeed unprecedented times. And I concur fully with Kurt. I hope from deepest of my heart that all of you and your beloved ones are still in a good shape, good healthy, and that it remains in the same position.Let me come back to the results, which have been published this morning. And as usual, I will start with the key takeaways.It has been a very awkward quarter. Because if we would not have had the last 2 weeks of March, I would have announced record results. And this is indeed still the case on the commercial side. But unfortunately, because of what happened in the last 2 weeks of March, the announcement today is a little bit different. We have, indeed, very strong commercial results. We have had a very strong performance in all our core markets in terms of sales of loans, of insurance contracts. And on the non-life side, we have seen an extremely strong sale. On the asset management side, we actually had a record month in January and February. We have -- we were able to decrease our costs on a like-for-like basis, and we had normal impairments. So I would have said these were excellent results.Unfortunately, because of the impact of the corona crisis, we have had a negative impact on our financial instruments at fair value, which brought the result EUR 385 million down. And then because of the very awkward way of booking bank taxes in the first quarter, as you all know, we are taking the upfront booking of the bank taxes and almost the entire amount of bank tax, EUR 407 million, in the first quarter. That brings our result down to minus EUR 5 million. Now if you would translate those numbers in a different manner than our return on equity, if you spread out the bank taxes uniformly over the year, it would stand at 4% negatively, obviously, impacted by those EUR 385 million of the financial instruments and fair value. Our cost-to-income ratio is negatively impacted by that number. The combined ratio stands very solid. The credit cost ratio is 27 basis points. But intrinsically, without management over it, 17 basis points, which is perfectly below our guidance, which we gave earlier this year. And the capital position stand at a very solid level being 16.3%, which is an 8.5% buffer compared to the absolute minimum stand by the ECB. And liquidity ratios of more than 130%, which also creates buffers of more than EUR 19 billion.So all in all, a strong quarter, but distorted by the bank taxes and distorted by the first impact of the corona crisis.And on Page 4, you see the building blocks. And here you see popping up those 2 main drivers, they -- colored in gray, EUR 385 million of the financial instrument fair value, which was also a subject of previous press release, and then the upfront payment of the bank tax and bringing down the result of minus EUR 5 million.In terms of exceptionals on Page 5, actually nothing new to mention. We had one exceptional related to the termination of a large corporate file in Belgium. We generated a one-off fee of EUR 12 million. But we also have -- because of the intervention of the Hungarian government in relation to the corona crisis where they post a moratorium on the mortgage books in the Hungarian market, we had a modification loss of EUR 18 million. If you sum it up then, I mean, in terms of exceptionals, we are talking only about EUR 7 million. So in regard of this type of exceptionals, there is nothing special on the quarter.If you go further and then we make the split-up between the bank and the insurance result, then the insurance result is still positive, be it only EUR 3 million. And the reason why the difference, the previous quarters or previous year is of such kind, is mainly in essence only because of the impact of the financial markets on the equity book of the insurance company, which is an impact of EUR 110 million.On the banking side, clearly, we have the impact of the both financial instruments at fair value and the bank taxes, bringing down the result to minus EUR 11 million.Let's go further and let's go into the different P&L lines. I start with the fee and commission business -- sorry, I'll start with the net interest income visions, obviously. And there, the good news is that it increased 6% on the year, which is quite a strong performance. And this is due to 2 reasons, mainly because of the increase of the volumes. The volumes went up with 6% as well. And that is something which we do see in both the mortgage business, 5%, and the commercial lines business, which is indeed something remarkable, shows a strong performance in the first quarter. It is also due to the fact that the margins were going upward, and that is also good news in total with 3 basis points now, standing at 195 -- 197 basis points. The strong result is due to kind of the -- I mean, commercially, well working on the Belgium mortgage book. Commercial lines were quite stable. And then you had a one-off of EUR 12 million in Belgium. But also, in Czech Republic, we had the Czech National Bank hiking earlier in this year, actually in February, which increased also the net interest margin in Czech Republic.In terms of the comparison, obviously, we do see the impact of the negative interest rates still kicking in. And we do have that partially offset by the funding costs of our group and by the impact of the tiering, which has delivered -- normally delivers about EUR 41 million on the year. So you could calculate easily backwards what that means on the quarter.In terms of performance in that respect, indeed, we saw strong growth on the total loan book, totaling more than EUR 5 billion extra, which is excluding the FX effect because the FX effect in Czech Republic and in Hungary have negatively impacted the nominal numbers expressed in euros, but underlying a strong growth.If we go further into the fee and commission business, also there, we do see an increase of 5% on the year, whereas the comparison with the strong and actually the strongest quarter of the year 2019 was a minus 4%.Now in order to actually give you a good insight of what really happened, January and February were amongst the best months ever. And I'm talking now about the asset management part. This was a record high. It was a continuation of what we have seen in the third and the fourth quarter of 2019, and it even went beyond. In that perspective, we have seen a EUR 0.6 billion net inflow over the quarter, despite the fact that the second part of March has kicked in negatively because the financial markets have been going down tremendously, as we all know. Consequently, the assets under management followed. In the same direction, we had a decline our assets under management on a quarter basis of 11%. That stands for the EUR 23 billion of difference. It's quite significant. And obviously, that has also a negative impact on our fee business, both entry fees and management fees at the end of March. So January and February, first part of March was super. And then the negative impact translated in the second 2 weeks, a mitigating factor bringing back the fee and commission business generates through asset management to 220 -- sorry, to EUR 270 million. Normally, we should have seen here a number which was higher than the fourth quarter of 2019.In terms of other impacts, we do see that the fees which were generated through banking services have declined with 6% on the quarter, and that is easily to be translated by the drop in credit-related fees. As you might remember, in 2019 last quarter, we had the change of the tax regulation of mortgage business. And therefore, the mortgage business boomed in the fourth quarter. As a consequence, you have already the take back in 2020, where we had a drop in our sales in mortgages. Actually, it stayed flat compared to previous quarter -- previous year same quarter. And as a consequence, you have a drop in your credit-related fees. In terms of our payment fees, which are, due also to a seasonal effect, you have a peak at the year-end and then you have kicking in this new SEPA regulation in the Central European countries. The payment service fees dropped to EUR 13 million, and that is something which is -- was expected and, indeed, part of the change of regulations.So all in all, the fee and commission business did well, and that was mainly underpinned by the strong start in the first 10 weeks of the year.In terms of the assets under management, already mentioned the drop of 11%, but let me emphasize again strong inflow. Net inflow of EUR 0.6 billion, and the outflow has been -- sorry, the correction has been fully translated because of the market sensitivity, the market pricing.Let's switch into the insurance business. Here, again, a strong performance also on the sales side. We have had an increase of sales of 7% on the year, which is due to 4 countries, including Belgium and the Central European countries. In that perspective also, it is very assuring that our combined ratio, despite the fact that we have had impact from windstorm mainly in Belgium, so we had a windstorm impact of EUR 51 million. If you -- without the split-up then the majority of that impact, EUR 46 million is related to the Belgium business unit. EUR 5 million is located in Central Europe. And in that perspective, even then, combined ratio of 90%. It shows how good the underlying book was.In terms of the sales of the life side, that's another story because there we do see the impact of 2 things. First of all, in the beginning of the year, because of the low interest rate environment, we had pressure on the sales of the interest guaranteed products. As a consequence, we see a drop year-on-year of 17% on the quarter, 20%. That is also negatively impacted by the decision which we took previous year to stop with the single life interest guaranteed products in Belgium because it is no longer profitable, and it is no longer also, from a customer perspective, acceptable to sell this kind of products to our customers.In terms of the unit-linked business, we saw an increase on the quarter. But on a year-over-year basis, we saw the decrease, and that is mainly driven because of the effect of the last 3 weeks of March, where we had, obviously, the corona crisis kicking out all of the appetite of customers to invest in this kind of products.In terms of technical results, actually, if you look purely at the technical result of both bank -- sorry, both the life and non-life business, the first quarter was an excellent quarter with a slight increase on the technical results.In terms of financial instruments, it's a value. This is -- was already subject of a profit warning press release sent out. I don't know precisely how long it is ago. Let's say 2 weeks ago. That indicated that we would have a EUR 385 million drop or loss on that position. That is mainly driven by the FVAs, funding value adjustment, counterpart of value adjustment and market value adjustment totaling EUR 186 million, EUR 100 million on the funding value adjustment, EUR 79 million on the counterpart and EUR 7 million on the MVAs, mainly driven by evolutions of the long term and long end of the euro yield curve and also the drop of the financial markets and, as a consequence, the widening of the credit spreads of counterparts. So as the main drivers, this is not a big surprise, and this is also indeed flat to what's the market. So on the equity side, also there, an EUR 82 million negative position because of the net result on the equity instruments that is on the insurance company and totaling EUR 110 million. Both positions have, in the meanwhile, obviously, recovered as the financial markets have recovered, and that has -- will be contributing positively in the quarters to follow.On the net other income side, we have a result of EUR 50 million, 5-0. That is a normal result. Run rate is indeed somewhere in between EUR 45 million and EUR 50 million on the quarter. So nothing new here. Also, therefore, I would suggest to switch to Page 14, where we have the insight in more detail on the costs.If you look at the cost side, obviously, heavily distorted by the bank taxes, EUR 407 million. There is -- there are certainties in life, and one of those uncertainties is that bank taxes go up. And once again, to my -- I mean, not really to my pleasure, but here we have another increase of EUR 24 million of bank taxes. For the year, we expect bank taxes to increase to EUR 521 million, totaling more than 12% of our operational costs, which is indeed quite a lot.In terms of the real costs, looking at the operational cost in the different entities, the good news is that the bank costs are going down. If you compare it with the quarter, that is obvious because we have always the seasonal effect in the fourth quarter. But far more important is that we are perfectly able to manage our cost downward as well on a year-on-year comparison. And that's intrinsically good news because always you have to take into account wage inflation, which definitely in Central Europe is quite significant; and then the inflation, which is directly linked to the weighted salaries in Belgium, which was more or less 1.5% last year. So we have been able to manage that down to a decrease of the cost for a like-for-like basis of 0.5%, which shows indeed that costs as such are under control despite the investments, which we continue to do on the transformational side.In terms of the cost/income ratio, obviously, it's heavily distorted by the bank taxes and by the impact of the financial instruments at fair value. So it now stands at 91%. But obviously, that is not comparable because of those bank taxes. If you leave them out, the cost -- credit cost -- sorry, the cost/income ratio stands at 69% compared to the 58% of last year. Cost ratio was heavily distorted by the bank taxes.Let's go to the credit cost ratio. The credit cost ratio stands at 17 basis points, which is a translation of EUR 77 million or EUR 78 million of asset impairments mainly due to the Belgium business unit, where it was related to corporate business. So out of that EUR 77 million, EUR 50 million was related to corp, more or less. It was related to corporate business.In terms of the further evolution towards the number, which is on the slide, EUR 141 million, you have EUR 20 million of other impairments mainly related to our investment book, of course, and then the EUR 43 million, which is COVID-related management overlay. I will come back to that in a second, where I'll explain in detail where this comes from. It totals the credit cost ratio 27 basis points, whereas the 17 basis points is indeed the normal quarter related credit cost ratio, perfectly in line with the guidance which we gave for the full year earlier this year at 22 basis points. The nonperforming loan ratio stands at 3.3%, of which 1.9% 90 days past due. That is further decreased compared to the 3.5% of last year.Now let's switch into the COVID-related part of this presentation, and this is definitely something which is not an easy way to do. Because let's face it, nobody knows what is really going to happen. We all do make estimates. We all do make assumptions. And on the back of those assumptions, we try to predict our results. We keep all our fingers crossed that we will not go into a scenario where the corona crisis and the impact on our health peaks again and that we have to go to another full lockdown. But we don't really know. Only God knows.What we do know is that, when it occurred, we interfered in the company. We went off into crisis modus before the lockdown in Belgium. So we anticipated that lockdown. And KBC was as of day 1 up and running as it should be. We have been focusing clearly on the safety of our staff and our clients. It was priority #1. And then clearly, parallel with that priority was the continuity of our service, and that was at every day, at every moment guaranteed for the full 100%. Systems were running up and running as of day 1. Information which was gathered to steer the company was there as of second one. And as a consequence, KBC was fully in control.To give you an idea what it means, it means that 95% of our staff in Belgium, which is totaling 16,000 people, 95% of them were working remotely. And also in our Central European countries, it depends from 90% to certain other countries, 65% are working permanently from home daily working. In that perspective, it is clear that the coronavirus is going to kick in and will change not only the behavior of customers today, but also probably -- and perhaps I should skip the word probably, the behavior of customers tomorrow.Digital is becoming the new normal. And for that perspective, that way, KBC is lucky, or you could call it proactively thinking, anticipating, because of the transformational process which we went through over the last 4 or 5 years. It clearly pays off if I see the number of digital interactions with our customer, with the number of contacts with our customers are at least at the same level as they were before, only no longer physical. And if I see also the number of digital sales going on and I see the results, which are depicted on Page 18, it's quite massive. We do see certain platforms, for instance, the investment platform, Bolero, in Belgium. We have concluded more new customers in 3 months, and it's 50% more than 2019 full year, and that only in 3 months. We have had a peak of 30% new more customers in Ireland. Czech Republic, we tripled our digital sales of mutual funds. I think you have examples of all countries. It is indeed quite striking to see number of digital interactions going forward. But that is the obvious thing. What is obvious is what is the consequence of COVID on our economy, and as a consequence, on the banking and insurance business?Now governments have interfered massively. On this Page 19, you can see the detail of the government responses in the core countries on products which are related to banking. The governments have interfered also in different manners. For instance, in Belgium, we have a massive introduction of temporary employment, which helps companies going through the very difficult period right now. We have some interventions as well to support private individuals, to support companies, which are not depicted on this page. It would lead us too far.But anyway, what they have been doing on the lending side is clearly indicated on Pages 19 and 20. I'm not going to dwell upon this. But what I'm going to talk about a little bit more is Page 21, where you do see the economic scenarios, which we have been putting forward in order to make estimations for what is going to happen in the near future. As always, we take a quite conservative stance when we came out with those scenarios. They were much more harsh than what was published by, for instance, the national banks, the ECB or OECD. But in this respect, I sincerely hope that our prediction, which is on this page, is wrong, and that the ones of the OECD or the ECB are right, and therefore, those numbers would come down. But on the back of this, we use this for the calculation of our predictions. And it is quite clear that we have a base case scenario, which said that the spread of the virus is becoming under control because of the lockdown. That's the current situation, that we will have a slow but a gradual recovery after the removal of the lockdown measures, which is currently taking place, indeed, and that we have a significant drop of the economic activity in 2020, which is slightly bottoming out in the second, third quarter and then creeping up towards a more positive territory in the course of 2020 year-end. So you can call it a V-shape or a U-shape, but it is indeed a deep dip and creeping up in the second part of the year.And then we have 2 sensitivities on this. A positive one, which I think is indeed still possible but quite unlikely, that is that the V is becoming a very sharp V. The 2 legs of the V are close to each other. We'll see if this happens. But another one, which is pessimistic, which means that it is the same as the previous one, the base case scenario, but where you do have a second outbreak and definitely a slowdown of the economic recovery, which means that back in 2021, the recovery is definitely not that outspoken even on the eurozone. It will be having a negative impact on the growth compared to 2020.So those 2 scenarios, we -- those 3 scenarios we have been using for calculation of our forecast for the full year. And is it right? We don't know. Is it conservative according to others? Yes, if it's -- what does it mean then in reality? And how do you translate that IRS-wise into your results of the first quarter?Because of the uncertainty, we came to the conclusion that our current models obviously do not take into account the full detail of what I just described. And on Page 23, for good understanding, but that we use an expert-based calculation, which is then obviously a management overlay on the portfolio, which is under revision. In total, we use the definition of all credit exposures which we have not only consumer lending, so that it totals EUR 180 billion, split up, as it is described on Page 23. In that perspective, we took the expert view that in the portfolio, there will be definitely sectors which are more vulnerable than others and which will have a negative -- definitely a negative impact even if you take into account government measures which are taken. Now how much that government measure is going to mitigate, we don't know yet. That still has to be proven. I can give you a couple of examples later on.But how we assume that to be the case is described on Page 23. For sure, we are going to take into account PD downgrades between 1 and 3 notches. Now to translate 1 notch, it means that you double your probability of default; 3 notches, multiply it by 6. And the second assumption is that higher PDs are more vulnerable than lower PDs.Second thing is, if you make distinction between SMEs and corporates, SMEs are more vulnerable. And then the other thing is that, within sectors, you have subsectors which are far more vulnerable than others. And that position is translated on the bottom of Page 5. We do consider the distribution sector, shipping sector, hotel, bars and restaurant services and aviation as very vulnerable sectors. That is not -- no surprise to you. That has been mentioned several times already in the press, which totals in 5.2% of our portfolio. That is then translated into Page 24, the impact on the different sub-kinds. We reviewed, for instance, the distribution portfolio. We took out 18%, which is considered to be high-risk, which are car service industry, textile shops, audio, construction materials. Everything which was locked down entirely is considered to be high-risk and that is then downgraded significantly.Sometimes, on those activities, we take the full portfolio, for instance, hotels, bars and restaurants or aviation, despite the fact that some of those activities still will survive. But anyway, that is how it is taken into account. For instance, on the shipping side, we have not much shipping in our books. A big chunk of that shipping is the famous dredging industry that is still going on. So that hasn't been affected. But anyway, we took that portfolio into account.Now if you do the calculation on this basis, then you end up with an overlay of EUR 43 million. And on Page 25, which is entirely taking into stage 2 and brings up the total of the impairments on the first quarter for EUR 120 million. So that's what it is.Now honestly, actually, that's not the important part. What is far more important that is, if you would use the methodology I just described and you look at the total book and you do not consider only what I just said, but you take into account the scenarios, which are described on Pages 20 and 21, and you look at the total impact of that scenario on your total book, we came to the conclusion that, be it conservative, we have an impairment for the full year of roughly EUR 1.1 billion in the base case scenario to go. If you apply the sensitivities on that, then you can go between EUR 0.8 billion or roughly EUR 1.6 billion at the back end.Now what is going to be the scenario, we don't know. We assume today it is the base case still where we do see that all depends on the length and the depth of the economic downturn, and that still needs to materialize. We know all that a lot of mitigating actions have been in place. The question is how far will that reach, how far will -- I mean, the control on the virus be on the different countries where we are in and how big will be a potential impact of the release of those measures? All those elements influence the split between EUR 0.8 billion and EUR 1.6 billion, midpoint EUR 1.1 billion.To express on the credit cost ratios, the low end of the range is 42 basis points. The back end is roughly 93 basis points. Midpoint is 64 basis points.In terms of the business profile, Page 26, I'm not going to develop on this. The only thing which is important to mention is that all the Central European countries, including Ireland, were positive, contributing to the result. And the net result in Belgium was at minus EUR 86 million.That brings me to the different business units. I'm not going to talk about this to leave some room for questions. But in essence, what I said for the group is true for all the business units, except for the financial instruments at fair value which are mainly concentrated in Belgium and Czech Republic. All the rest remains, in essence, the same.So let me switch then to the balance sheet on Page 47, where you can see the growth, I already mentioned, the 6% growth on the loan book and 5% on the mortgage book. You can pick out your favorite country to see what the evolution of those 2 numbers are per country.Let me go to common equity ratio and to the liquidity ratios. First of all, on the capital side, our common equity ratio stands at 16.3%, which is a solid buffer compared to the overall capital requirement of the ECB, which stands at 10.55%. Now as of the beginning of the crisis, the ECB has lowered, temporarily basis, the minimal capital requirements and brought them back to 8.05%, which means that KBC has, at this instance, after the first quarter and after the increase of the risk-weighted assets, which mainly drive this decrease of 80 basis points, has actually above of EUR 8.5 billion of capital, which is indeed quite sizable and which allows us to deal soundly with the current crisis.Now as I said, the risk-weighted assets were the main driver of this decrease of the CET1 ratio. Part of that is related to COVID. Actually, the COVID relation was more or less EUR 2.8 billion because of the positive effect of the FX rates in Czech Republic and in Hungary. Net effect is EUR 1.5 billion. The other part is related to the strong growth of loans in our book, EUR 1.8 billion. And also what is part of this risk-weighted asset increase is the fact that we already fully took into account the new definition of default and other regulatory measures, which are totaling more than EUR 2 billion, EUR 2.5 billion to be precise, EUR 1.7 billion for the new definition default. That is fully absorbed in these numbers as well.The insurance solvency ratio stands at a solid 212%, where we have the impact on the symmetric adjustment of volatility adjustment. Leverage ratio stands at 6.5%, which is indeed also very solid. And the same can be said about the liquidity ratio on Page 51, which is, as always, strongly customer-driven and which is also reflecting the very strong liquidity position of KBC.Now in this perspective, to say one thing as well, what we have seen in the beginning of the corona crisis is indeed that KBC is considered also by consumers and customers as a strong solid bank because we saw indeed a net inflow of deposits from the market, which brings me to the conclusion at Page 53. There, we see our guidance also going forward. On the economic side, I already mentioned that on the group guidance. It is clear that, in 2020, all financial institutions will have a negative impact of what is happening with the corona crisis. And in 2020, also KBC will be impacted by that. We guide our net interest income from 4.5 -- EUR 4.65 billion previously to now EUR 4.3 billion ballpark, and that is mainly driven by the consecutive rate cuts done by the Czech National Bank. They actually since February cut 7 or 8 times their interest rate and then also the depreciation of the Czech koruna and HUF, which also is explaining 1/3 of the difference here.In terms of the measures which we have taken, we took immediately after the beginning of the crisis when our assumption was indeed that it would have a negative impact on the revenue side, we took the measures already, and those measures come already into play as of May, the cost side. And as a consequence, we will save further cost, EUR 150 million down, bringing it to 3.5% cost decrease compared to previous years rather than an increase of 1.6%. So the difference is about 5% compared to what we assumed last year.On the credit side, I already mentioned it, and it's also clear that, in that perspective, the digital side is going to evolve in a positive way going forward.Now I would suggest to stop here and to give the floor back to Kurt, who will guide us through the questions, please.

[Kurt De Baenst, General Manager, Investor Relations]

Thank you, Johan. Now the floor is open for questions. [Operator Instructions]

[Operator]

[Operator Instructions] So the first question is from Pawel Dziedzic from Goldman Sachs. You're maybe on mute. We can't hear you. Okay. We will move to the next question from Tarik El Mejjad from BofA.

[Tarik El Mejjad, Equity Analyst]

A couple of questions, please. First of all, in terms of your NII guidance, can you mention what -- indicate what's your volume growth assumptions and margin evolution? Because the EUR 300 or so million lower guidance is clearly only driven by the rates in Czech Republic and the FX. So it would be interesting to see what could be the other drivers. Do you expect volumes to slow down? And how do you incorporate that in your outlook?And then on the cost of risk, I mean, thank you very much for the quite granular indication in terms of scenarios for 2020. That's very helpful. Could you maybe shed some light as well on 2021? You mentioned it will be like pronounced V-shape or U-shape. But what kind of provision we should expect going forward? That will be it.

[Hendrik Scheerlinck, CFO & Executive Director]

Thank you, Tarik, for your questions, and good morning, and welcome to all of you from my side as well. Indeed, on the NII guidance, we gave 2 elements that had an impact on it. So the lower exchangeable rates and then the foreign exchange, the depreciation of the koruna by 7% and the forint by 8.2%. On top of that, the growth of the assets, growth of loans is now probably going to come in at 2%. So where we previously said 3% to 4%, that has now been lowered to 2%.

[Tarik El Mejjad, Equity Analyst]

But this 3 -- 2% is included in your guidance, 4.3%?

[Hendrik Scheerlinck, CFO & Executive Director]

Yes. Yes, indeed, 2% is included in the guidance now.

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

And I will take your second question, Tarik. Actually, also on the guidance, it's indeed a bit higher than 2%. And as Rik said, it involves over the countries.In terms of the cost of risk, you're indeed right that we made calculations not only for 2020 but also for 2021 and for 2022. When you take into account, obviously, the base case scenario and you see the significant drop in 2020, it's obvious what the position for 2021 will be.Now the unfortunate thing is that we prefer not to give guidance on 2021 already today because it is so uncertain what the situation is going to be. What is -- the base case scenario is today our position. And clearly, I hope that we will -- and that is also from a health perspective, we will have not a second major outbreak, which goes hand in hand with the lockdown. If that would be the case, then we have a completely different way of thinking because then we go into the pessimistic scenario.So in that perspective, for 2021, we want to wait a bit longer to see what it's going to be. But clearly, going forward, over the quarters, when we do see what the impact of the coronavirus, we will give further clarity on that guidance not only for 2020 but also 2021.Let me translate a little bit why we are cautious for 2021 because, indeed, we have given a lot of guidance now. We follow up on a daily basis and clearly do a review of all the numbers on a weekly basis. When we started the corona crisis immediately after the lockdown, taking into account the mitigating factors by the governments, for instance, payment holidays and the establishment of new loans in the different countries, we made on that basis a bottom-up calculation of what's the impact on our positions would be.Now those numbers, which dated back from early March -- end of March, early May, they have been, in the meanwhile, reviewed downward because the reality shows it's a bit better. If we -- if I just extrapolate that situation to 2021 is, indeed, if we would make a prediction, if we would give a guidance for 2021, it will be indeed with a lot of grains of salt.

[Operator]

The next question is from Giulia Aurora Miotto from Morgan Stanley.

[Giulia Aurora Miotto, Vice President and Equity Analyst]

Yes. I have 2 questions, please. One is on capital. So the first one is on capital. Could you please give us some guidance on the impact that you expect both from a positive and negative perspective for 2020? There are some new measures that the European Commission has introduced regarding SME infrastructure, also IFRS 9 provisioning impact on capital, intangible reliefs, et cetera. So this could be positive. But then on the negative side, of course, we are thinking about credit risk migration. So any quantification on the different moving parts on capital would be quite helpful. That's my first question.Then I have another one, on the Belgium government measures. So they seem perhaps less benign than other countries because they still require banks to absorb the first 3% of losses. So I was wondering, how are you thinking about these measures? Do you think they can really help mitigate the impact, or actually not that much given that you are still required to take some significant losses, potential losses?

[Hendrik Scheerlinck, CFO & Executive Director]

Yes. Thank you very much for your questions. I'll take the first one on the capital side. As you rightfully mentioned, there are indeed a number of measures that are being taken, and you enumerated them correctly. And for us, the most impact will be on the SME, the infrastructure and then, indeed, the IFRS 9. And we, at this stage, see the impact of between 70 and 80 basis points positive on CET1.On the credit risk migration, that's a very difficult one because, as you know, as a result of the number of government measures that actually defer payments and we see in our entire book that the evolution goes country by country, but it goes in the same ballpark. As a result of that, basically, you freeze your PD stages, and so you don't have the automatic migration of staging. So we're only going to see major effects of that on 2 sides. First of all, indeed, companies that go bankrupt anyway, where the payment deferred is not sufficient, and they will go into bankruptcy, that you're going to see an increase in Stage 3 then. And again, what we have been seeing over the last quarters in business in Belgium may be an indication of what we expect to continue. The second part will be, and that's a big question, once the government measures stop, how are we going to handle the cliff effect? How is the banking industry going to handle the cliff effect? How are the national authorities going to handle the cliff effect? And there are discussions going on in most of the countries between the banking associations, the national banks and the ministries of finance and the ministry of the economy also to soften that cliff effect. Because when the crisis started, I think most governments had a V-shape scenario in mind. Now everybody is moving to the U-shape scenario. So the expectation is that the cliff effects will probably be delayed.

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

And coming back to the second part of your question, partially, it is already answered by Rik in his answer on the first part. So let me also then add a little bit more flavor on the first part as well. So indeed, what Rik said is true. We do see governments stepping in. What is the full impact that should still be materialized? Your question was, I think, specifically related to the Belgium part, which is indeed different compared to the other countries. Now in that Belgium proposal -- or no, there's not a proposal, Belgium law for the guarantee scheme is indeed giving a first loss of 3% on the total book, which can be max EUR 50 billion for the whole Belgian banking sector. And that loss has to be borne by the banks. Now what we do see in reality is that new guarantee scheme, which is focusing only on short-term lending, so liquidity loans with a tenor of maximum 12 months, that is not really picking up. So the portfolio, which has been foreseen EUR 50 billion, will probably not used.On the other hand, I do see also that the needs in the market, obviously, because the corona crisis is much deeper than what was originally anticipated by the government at the beginning of March, half of March, and that is going to last longer. So I think that also, in that perspective, we should reconsider a second layer of protection. That is for liquidity loans which have longer tenor than 12 months. And in that perspective, I would say that, that measure would have another impact -- more positive impact on the SME sector as a whole in Belgium.Now what we do expect giving -- or taking into account what Rik just said, the base case scenario, the impact on our capital ratio going forward by year-end will not be massive. So the evolution of risk-weighted assets has been picking up in the first quarter mainly, and we do not impact the fundamental decline of our capital ratio by year-end under the base case scenario.

[Giulia Aurora Miotto, Vice President and Equity Analyst]

Understood. And can I just follow up on 2 technical points, on my question on capital? So TRIM, do you expect any reversal? We have seen some other banks reversing impacts that they took in the past. And when you have loans in moratoria, can you already see some credit migration? Or you wait until the moratoria is over? For the capital impact timing.

[Hendrik Scheerlinck, CFO & Executive Director]

Yes. So on the TRIM, no, we have not reversed anything. So what came in, in the first quarter, and we told you last year that we already made TRIM provisions or risk-weighted asset provisions for both the corporate model and the international financial institutions. So the final draft for corporate came in. But again, we had already provided for that, and we have not reversed the buffer that we have built for the TRIM review of financial institutions. What the ECB has informed or communicated to the banks is that actually, they basically freeze the TRIM letter and the new definition of default letters at the end of March. So everybody who received the letters have to book the impact. Anybody who has not received the letters does not -- is not required to book the impact. And the new letters are going to then start to coming in only in the fourth quarter of this year.In terms of migration and when do we take credit losses, again, as I mentioned, of course, when you look at the bigger companies and you look at payment deferrals, that as we do the normal credit follow-up in the normal credit review cycle, if we feel that the company is a growing concern and that, indeed, after a period of lower cash flows, which, depending on the view we take on the U or the W, that is a growing concern company, then there would not be a reason to put that company in PD 3, and hence, you would not see a change in credit provisions. If we feel that the company has no going concern chance, then we will adjust as we normally do with our prudent credit evaluation. We will probably put that company in PD 3 and then make the provisions that we deem necessary to deal with that situation.

[Operator]

The next question is from Omar Fall from Barclays.

[Omar Fall, Analyst]

First question is just on Slide 23, when you state that you assume no additional impact on retail exposures, thanks to government support measures in your stressing. Should we take that to mean that across all 3 scenarios, there's a meaningfully smaller effect on mortgage impairments due to the government support measures so that even in the pessimistic scenario, where unemployment rises significantly, the losses are limited on retail exposures due to the government support? Then how do you factor in that support in your provisioning? Is it like an impact on the LGDs? Or it comes into the different IFRS 9 scenarios as a kind of overlay to the GDP and unemployment outcomes?And second question is just on the cost savings. Could you just give us some more additional color on where these additional savings come from exactly? Because, obviously, they're quite sizable in terms of the delta. I guess part of that is travel and entertainment as per most banks. But how much would you say is recurring, please?

[Hendrik Scheerlinck, CFO & Executive Director]

Yes. Thank you for your questions. On the retail side, so again, what we do is we take an assessment at the end of the first quarter, and then we look at what are the expectations on the book for the next 12 months in a number of countries or in all of the countries the governments have been taking.Two measures. So first of all, the deferral of payments. So the deferral of payments, which, for retail clients, mortgage clients means that they pay neither principal nor interest. So in that sense, from a cash flow point of view, there is a certain protection there. And then second part, and that's very important on the social security benefit side on the unemployment benefits, generous measures have been taken when I look at Belgium and I look at Ireland. And based on the cash flow that households were -- unfortunately, and we hope it's only temporary, have lost their jobs, the cash flows coming into social security should be able to support those households and make sure that, again, once the measures are lifted that we're going to see a normal migration of portfolio, and we're not going to see a major cliff effect.Again, under IFRS 9, we look at the coming 12 months. Based on the social security measures and the payment referrals, we don't see any major shift happening at this time.

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

Thank you for your question, Omar. We'll take the second one, on the cost savings. So yes, indeed, we have taken 2 types of measures. That means, amongst others that we have taken, what I call obvious measures, you referred yourself to them already, we have cut back the travel expenses, the training expenses, travel expenses to 0, almost 0. Training expenses, event expenses and so on and so forth have been cut significantly. Most of the time, we always say, you only keep the really necessary part. On the marketing side and communications side, we also cut back the costs significantly, ranges from 30% to 50%, depending on the type of cost. Because let's face it, also in the marketing activities, we have a lot of events, which are going to be canceled -- are canceled, are uncertain. We just got it back to what we could also, contractually, and that ranges from 30% to 50%.Let me come into what I call the less obvious things, and that is twofold. First of all, we have postponed and even canceled certain projects, IT projects. And the rationale behind it is quite simple. Everything which is related to the transformation of the company to the rollout of the new strategy, which was normally foreseen to be explained to all of you in June of this year, every investment which related to that is just still there. On the contrary, we even increased certain parts of our investments. And in that perspective, they will be just rolled out as they were planned and as we were intending to explain them to you within a month's time. What is then cut are the, what I call, old-school business investments, and certain of those projects have a nice-to-have flavor, and those have been cut and have been or postponed or put to 0 going forward. Total impact of that is about EUR 20 million and immediate effect, for good understanding.The other thing, which is less obvious, that is we have cutback on the HR side FTEs, and that is a further continuation of what we already said in the past, where we would say 1,400 FTEs in Belgium over the period of 3 years, and we would have another 250 to 300 FTEs per year in Czech Republic. That continues. And on top of that, we have frozen all hiring, and we are going to use the maximum amount of churn, which is, for instance, in Belgium, hovering around 500 per FTEs per year. All externals, all insurance, all contracts have been canceled already and come into play in May 2020, so this year. And have -- if we do not reinstall them in 2021, obviously a recurring effect.In terms of the last part, we have frozen the payout of all variable pay for the year 2020, and that obviously has also a significant impact. So also there, we have an immediate impact on the year 2020.

[Omar Fall, Analyst]

As a quick follow-up, and sorry if I missed this, but what's the -- what do you estimate the modification loss for the bank will be on the noninterest accrual for lower-income households in Belgium, please?

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

So in Hungary, I think, as Rik said it, it is minus EUR 18 million already taken into the numbers of the first quarter for Belgium. The estimate is quite uncertain because it depends, obviously, on the number of people applying for the payment holiday and also that there is a split between those who are what is called vulnerable and those who are not. More or less, it's 1/3, which is part 1/3 to 40%, which part of that vulnerable part. Depending on the number of people applying to that, it hovers between EUR 10 million and EUR 20 million.

[Operator]

The next question is from Farquhar Murray from Autonomous.

[Farquhar Charles Murray, Partner, Insurance and Banks]

Just 2 questions, if I may. Firstly, just coming back a little bit on the Belgian loan guarantee framework, and the volumes sound relatively low there. I don't know if -- whether you'd actually even give us the number. Is that a consequence of practical bureaucracy? Or is it something else in terms of client behavior? And then more generally, what's the impact you expect there on margins to any degree?And then secondly, perhaps just one big out. Just on the insurance business, could you outline how you see COVID-19 impacting on that business? Obviously, motor claims would be down. But I'd also just like to understand whether you have any business interruption exposures, and if not, why not.

[Hendrik Scheerlinck, CFO & Executive Director]

So thank you for your questions. In terms of the loan guarantee scheme of the Belgian government, I mean, the reason why it has not been picked up massively today is twofold. First of all, what has been picked up massively is the request for the payment holiday on the Belgium domestic area. I'm not talking about now KBC, but the total of the Belgian banking sector. We have about 120,000 requests from corporates and SMEs for a payment holiday of up to 6 months. So that is massively used. More than 80% out of those requests are related to SMEs. What we do see is there is only limited uses of the new lending under the guarantee scheme. How come? It has to do with a lot of things. In essence, with the fact that corporates don't really need it today, they obviously are in a different position. They have a lot of committed lines outstanding, which they have been using in the beginning of March quite significantly. Now we don't see any further drawings. That's one thing. And then the SMEs, they obviously have financial needs which are related to the COVID crisis but not necessarily on -- with a tenor of 12 months. So what we do see is they have indeed needs, but on the longer term, and that means that, therefore, out of the guarantee scheme, they come just into our lending. And to give you an idea, on the total Belgium domestic area, all banks, we had EUR 4.5 billion of new loans in April of this year, so the second quarter, EUR 5 billion in March, that is first quarter, but obviously, half before the crisis and half in the crisis. Now let me develop on April because that's fully corona-linked, EUR 4.5 billion of new loans, of which the vast majority, not to say 85%, is linked to non-guaranteed scheme loans. So longer tenors. That has another reason as well not only the tenor but also indeed some administrative procedures, which are linked to that currency scheme, are indeed a little bit heavy on the hand. And as a consequence, also because of the premium to be paid, the entrepreneurs, when they don't really need it, they don't use it and they use traditional loans. The impact on the insurance side is actually twofold. It is different for the insurance, non-life and life, obviously. What we do see is that the volumes actually in the first quarter hold quite firm. So in that perspective, there's no surprise that we had an increase of 7%. Obviously, if you look going forward for year-end, then you will have some negative impact on the loan volume -- sorry, on the premium volume.Now in that perspective, on the non-life side, we don't expect that impact to be massive, and it's fully compensated by the decline of the claims, which we do see indeed in this first period. Now let's face it. The lockdown is the reason why the claims came down, and the lockdown is temporary. So we do see a pickup as of day 1 that the lockdown measures have been released. We do see a pickup in the number of MTPL claims. No, it does not change anything on the claims side of your properties nor on other types of business. Obviously, we do not have travel claims anymore. That is something else. But in essence, given the drop in premium, given the drop in claims, it will be more or less balanced over the year.On the life side, it's a different story. There you have everything which is investment, product-linked. We talked about that earlier. In terms of the COVID-related death, that is relatively limited at KBC because in certain contracts, we do not insure that and other contracts where we do insure it. We are reinsured for that. So the impact of COVID-related death cover is rather limited in the whole of KBC Group.

[Farquhar Charles Murray, Partner, Insurance and Banks]

And just to follow up on business interruption exposure, is there any?

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

We have business interruption exposure, which is linked to, for instance, a fire claim or to -- which is linked to an insured claim. It is indeed a part of our contracts. But we do not have business interruption claims which are linked to pandemics.

[Farquhar Charles Murray, Partner, Insurance and Banks]

Okay. So it's all physical triggers?

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

Correct.

[Operator]

The next question is from Raul Sinha from JPMorgan.

[Raul Sinha, Analyst]

Can I have 2 questions maybe? The first one, on fees and sort of just trying to get a sense of the activity levels in your core markets during the lockdown in the second quarter of the year. Could you perhaps maybe shed some light on what you've seen in the mortgage market in terms of transaction pipeline after the very significant pickup in Q4 and Q1? How should we think about the sort of Q2 volumes? And linked to that also, sort of new insurance activity levels in Q2 and how that impacts, amongst other things, your fee income outlook for the rest of the year.And then the second one is on capital. From my side, I mean, obviously, in the slide pack, you do talk about reviewing the capital deployment plan at Q3 after the ECB sort of time line comes to an end. I just wanted to ask if you think, given what's happened so far, it might be worth revisiting the significant management buffer you operate with. And also, is M&A on hold? Should we think about that in those terms? Or do you think you will still be opportunistic if there is any interesting opportunity that comes along, say, this year?

[Hendrik Scheerlinck, CFO & Executive Director]

Yes. Thank you very much for your questions. So on the mortgage activity, indeed, as we came to the lockdown mid-March and as notary publics stopped working and real estate brokers were not allowed to show properties anymore, the requests coming in for mortgages are coming down somewhat. To our surprise, they came in and they still come in at a little bit higher levels than we had expected because there was a pent-up volume that still needed to be worked off by notary publics and by, actually, the national authorities when you look at the cadastre officers and so on. For Belgium, we had already seen in the first quarter, for the reason that Johan explained, that we had an elevated demand for mortgage loans in the fourth quarter as a result of a tax change in Flanders. We had already seen the volumes come down. In some other countries, we actually have seen in the second quarter, and that may be a little bit counterintuitive, volumes go up slightly. But again, if you look at the big blocks, which is Belgium and Czech Republic, you can expect volumes coming down a little bit.What is positive, and we have seen that evolution continuing actually since half of the first quarter, is that margins are increasing, margins are improving. And so that should then support or offset somewhat the lower volumes that come in there.

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

I will -- thank you for your question. I will take the second one. I didn't fully understand the first part of your second question, but what I understood -- I mean, and if I do get it wrong, please correct me. That is, indeed, we have buffers in our capital ratio. We have our management buffer, as you know, but we also have indeed not taken in fully already the measures which have been announced by the European Commission, for instance, and that fluctuates between 70 and 80 basis points, which is still not used by us. And we also have the usage of AT1 and Tier 2 capital instruments on the Pillar 2 requirement, which is also more or less 70, 75 basis points, which we do not use. So the sum of those 2 parts is intrinsically you having a buffer of 150 -- or a buffer effect of 150 basis points on our CET1 ratio.So where we are, de facto, is at 16.3%, and that is indeed a solid buffer compared to what we need. So in first place, this is used to manage the situation of today, and it gives us some confidence. It does not give us arrogance. We will do what we always have been doing, being very conservative in assessing things and try to outperform our own guidances. That's what we continue to do.Coming back to the second part of your question that is, what about M&A? Is that on hold? The answer is no. I mean, still, if opportunities arise, and if those opportunities arise in our core markets and they are perfectly related to our types of business, then we will look into it for sure, and we will make the assessment as we always did. And if it makes sense from both the strategical and the financial side, then we will definitely give it a go, as we did recently, as you know, with OTP and with the insurance company in Slovakia as well. So we'll see what that's going to bring going forward.

[Raul Sinha, Analyst]

I guess, my question on the first part was about the reference capital position, which already was very, very conservative, but now looks extremely more conservative. And so I was wondering if we should think about that should be going down. And essentially, you have more capital to deploy, but it seems like we have to maybe wait until Q3 for you to set out more details on that.

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

Yes, indeed. Now I fully understand your question. So when you look at our capital position today, and I mean, we do make reference to the 10.55%, not to the 8.05%, because the 10.55% is driving the MDA, and that's what obviously is all about as well. So in that perspective, what we are going to do is also in terms of capital deployment, we are going to stick to the recommendation, which has been given by the European Commission -- sorry, by the -- not by the European Commission, by the European Central Bank, sorry for that, which means that we will position ourselves only at the end of that period, that is October of this year. And in that period, we will not reposition ourselves. So on the back of, let's say, that's the third quarter results in October, after October, we'll give you more guidance on our deployment, also on the postponement of the dividend over the year 2019, which is still on the table. And we will give you further guidance as of the moment that we are allowed to by the European Commission.

[Operator]

The next question is from Pawel Dziedzic from Goldman Sachs.

[Pawel Dziedzic, Equity Analyst]

I hope you can hear me now. I have 1 question on your cost of risk guidance still. Your stress test and guidance is very helpful. Now if I look at EUR 1.1 billion of losses in your baseline scenario, which is around 63 basis points, I think you mentioned, it still looks very reassuring, in particular, if you look at historical trends. It is less than half of your peak losses if we look back to 2009 or '13, and it is much below EBA loan loss guidance in the last stress test. So just looking from that perspective, because I understand the analysis that you've done, obviously, was bottom-up and very thorough and based on quite conservative macro assumptions, but if you look at this from top-down, what are the biggest differences between this cycle and your assessment versus perhaps the previous loss experience? To what extent it is driven by -- just by your lending mix that now is different? Do you think that actually those government schemes are the key driver currently? Or is there anything else that you can kind of give us to explain the difference?And my second question, I think it's very, very small and technical on what you just mentioned on the -- basically on your dividend reversal. So the fact that you reverse, does it impair in any way your ability to distribute it post October? Are there any technical reasons why this would be more difficult? Or is it just accounting?

[Hendrik Scheerlinck, CFO & Executive Director]

Yes. Thank you very much, Pawel. On the cost of risk, what is different than last time? So first of all, we don't have the CDO exposure and related exposures to different vehicles. So that is already a very big difference. And as you know, over the last years, we have dramatically derisked the business. If you look at the KBC Group level, 37% of what we do are mortgage loans. There, we have collateral values behind that. We have prudent lending. We have been doing prudent lending on that one. And then also, you've seen it in the past, when you look at our coverage ratios, that in terms of our corporate lending on SME lending, there also we are actually -- take a little bit more collateral than some of our peers would do. We're a little bit more conservative on -- we've said that in the past, on commercial real estate, on acquisition finance, where we had caps in place, nominal caps, since the last 2 years. And as a result of that, we have actually been derisking our books. And that is actually what is the big difference between what we see now and what we had about 10 years ago.

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

And thanks for your questions, Pawel. This time we hear you perfectly, indeed. And coming back to your second question, the technical one. Indeed, there is no impact at all for the dividend over the year 2019. We just postponed. The only thing which we canceled was the share buyback, and we can execute it on the back of our retained earnings, whatever, by a decision of the Board. We don't even need an AGM for that.

[Operator]

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

[Robin van den Broek, Research Analyst]

Okay. Yes. So thanks for the disclosure in the presentation. I think it's better than most peers, but it also prompted me to ask you some questions about it. I mean, in your base case assumption, you are modeling for quite a sharp V-shape for the euro area. What we hear from some of your peers is that the depth of the V basically doesn't matter too much. It's more about what the net GDP movement is for a certain time period.When I look at the regions, Belgium is still showing net GDP growth, and that the main net GDP decline basically is in Central and Eastern Europe. I was just wondering to what extent basically that also reads into the Stage 2 formation that you are assuming for the -- from a geographic perspective, if you can add some color on that. And in relation to that, why are you so pessimistic about the Central European regions? Because in the end, they do have still monetary policies available to them to try and limit the impact of these prices for the economy and could also result in a quicker bounce when we do see this V-shape, but that's not reflected by the modeling at this point. So just curious to get your views there. And the second question is on fee income. Could you maybe give some color about sales momentum on mutual funds and also on your AUM base? You talked quite timely in Q1, but presumably, there's also a good pickup quarter to date.

[Hendrik Scheerlinck, CFO & Executive Director]

Yes. Thank you, Robin, for your questions. On the GDP, again, these are moving targets, as you know. We do a careful analysis together with our local macroeconomic teams in each of our countries. And indeed, for Belgium, you saw what we have published. They probably were a little bit more conservative than some others of our peers. For the Central European economies, the reason why we go a little bit deeper and why it may take a little bit longer is a little bit more structural. As you know, there is an exposure to certain sectors, not to talk about automotive, that's an important one, services, in general, transportation. And these sectors, we do expect that they're going to take a little bit longer to come back. Construction activity, probably on the commercial real estate side, is also going to take a little bit longer before it comes back. And that's why we are maybe a little bit more conservative than some of the other entities on our Central European countries.On Ireland, there, our GDP growth number is -- or the dip in that is a little bit lower than what the Central Bank in Ireland does or what the Ministry of Finance does. They are at around 8% and 10%. We are at minus 5% in the base case. But that is also a technical reason, given the role of multinationals in the Irish economy. As you know, they're responsible for 63% of the sales. And what we have seen in the first quarter, if you look at pharmaceuticals, for instance, so sales of pharmaceuticals in the first quarter in Ireland, so exports increased by 17%. And these are according to our macroeconomist dynamics that will actually result in a lower dip in GDP in Ireland than some of the others are saying.

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

Thanks, Robin, for your question. Let me add a little extra on the answer of Rik. Yes, indeed, you have 2 different kinds of recovery. And as I said during my presentation, the V is not the most important by how deep it is but how wide the legs are. And in that perspective, I think the guidance which we gave today on the economic scenario is very helpful because the W scenario, if you look closely at that, it's actually a V, of which the left leg is deep and steep and the right leg is very wide. So it's -- we actually have given the combination of the 2 things in 1 single guidance. So -- and by the way, which one is going to be true, that depends obviously on the next coming months or the next coming weeks.So coming back on the second question, you have the fee income, what about the impact on mutual sales going forward? And what about the assets under management? So in that perspective, let me start with sales. I said that, indeed, we had a very strong start in 2020. January and February, we were at record highs. And it also means that, I mean, the type of products which we have launched in the market was actually the right one, that we have shifted into the discretionary management for all customers of ours, also retail customers. And that is already the case for a couple of years now. It was an anticipation of MiFID II, and it clearly pays off. We have been switching amongst other CPPI into that direction. CPPI has now become EUR 7.9 billion, so quite limited in terms of our total exposure. And that has also a great impact, obviously, on the way how we do build business with our customers. We can anticipate what is happening now, you can start to cash out your products and so on, and you can revamp those products out of the market as the moment the markets turn better again.Now in terms of what it brings, obviously, I cannot predict the sentiment, the investor sentiment amongst our customers, amongst our retail customers. What we do see is -- and I should not talk about the second quarter, but what we do see in the weeks which have been passing that is, you have a little -- indeed, a little bit of volatility there on the sales side. And it is not necessarily that we do have a negative trend line over the last couple of weeks. On the contrary, it is picking up again. And that is quite positive, which means that customers are but reluctant to step in as massively into asset management business as they did in January and February, but they have not forgotten about that. And it clearly starts to pick up again. So there's a trend line which is positive. That's the first thing. The second thing is that, obviously, the financial markets have an impact on our management fees. And that is the vast bulk of the fees, which are on Page 10. Let's remember, out of the EUR 270 million of asset management services, 80 -- sorry, 63% is related to management fees -- no, sorry, EUR 270 million on the management fee, 85% of that is related to asset management fees, 15% is entry fees. And the management fee is obviously related to 2 things, that is the assets under management and then, obviously, also the composition of that underlying asset classes. Because we do have a shift to discretionary products, that asset mix is far more stable than it was in the past. As a matter of fact, today, we have for the total book of CPPI, the -- even the best product, the flexible products combined. We have 35% in bonds and 15% in equity, and the other 50% is then in cash. Whereas in the past, we had substantial differences there because of the CPPI cashed out almost fully. And that is a big mitigant on the drops of the management fees. That's what we see. And the other news is that you saw an incremental decline on the assets under management. That has now come in already quite significantly. We stand currently at EUR 200 billion a couple of weeks ago, and that's obviously an improvement of EUR 7 billion, EUR 8 billion compared to what it was at the end of the first quarter.

[Operator]

The next question is from Stefan Nedialkov from Citi.

[Stefan Rosenov Nedialkov, Director]

It's Stefan from Citi. A couple of questions on my side. On the NII guidance, have you baked in any management actions in terms of savings rates across the countries, maybe more TLTRO benefit? And also related to that, have you changed your hedging policy in terms of FX exposures? From what I know, you don't really hedge the P&L or the book values of the subsidiaries. Is that still the case? And my second question is more on the loan losses. The EUR 1.1 billion of baseline, can you just give us some color in terms of the split between macro assumptions going forward as well as any future management overlay that you expect for the rest of the year and specific provisions?

[Hendrik Scheerlinck, CFO & Executive Director]

Thank you, Stefan. On the NII guidance, the TLTRO benefits, so the potential to participate in TLTRO 3 in a couple of weeks has taken into account, and that should help for the lower volume growth, as I explained already. So we expect for this year that the volume growth will be around 2%, where previously we were at almost double that number.In terms of the change of hedging of FX exposures, indeed, we did that in the second quarter of last year. So now we hedged the CET1, where in the past, we hedged the capital, and that is the reason for those translation differences that you see on the OCI in our quarterly report.

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

Thank you, Stefan, for your questions. I will take the second one regarding the detailed split-up of the EUR 1.1 billion of what is previous and what is new, what is management overlay. Honestly, we do not provide that detail. But what I can -- I mean, I can help you a little bit and that you have an idea of what it might be, previously, we guided the market that our loan losses will be more or less 20 to 22 basis points. If you calculate that backwards on the total exposure of EUR 180 billion, you can easily deduct from that, that we were having about EUR 300 million, EUR 360 million of loan losses. Everything which comes on top of that is related to COVID and obviously to new volumes. We don't provide you the further detail of that second part. But it is clear, if you take into account the split of our management -- of our staging book, which is provided in the quarterly reporting as well, it can just also give you an idea what it might be.

[Operator]

The next question is from Benoit Petrarque from Kepler Cheuvreux.

[Benoit Petrarque, Head of Benelux Equity Research]

Yes. A couple of questions on my side. Now the first one is to come back on the cost of risk. I'm actually impressed to see that the best case is quite in line with consensus. I think we've done a great job overall. But when -- kind of where I'm struggling a bit is the difference between base and pessimistic scenario. If you look at the 3 years cumulative GDP, on the base, it's plus 1% on eurozone, while it's a minus 12% on the pessimistic scenario, yet the difference in loan loss provision is only EUR 500 million between the 2 scenarios. So I was wondering if you could guide us a bit through that difference. And also, will that mean that in a pessimistic scenario, 2021 will be much higher in terms of loan losses versus your 2020 guidance? That's the cost of risk.On NII, I'm still struggling a bit to understand your guidance. So it's EUR 4.3 billion. If I strip out the EUR 1.2 billion reported in Q1, I'm coming to kind of EUR 1,050 million per quarter in the next coming quarters. It will be a normalized of EUR 4.2 billion on that basis. So that will be a gap of kind of EUR 400 million versus the EUR 4.6 billion guidance. So that's why I have quite some difficulty to reconcile because you mentioned a bit less in terms of the delta. So I was wondering if you expect a bit more drag from negative rates also in Belgium.And also what I see on the mortgage rate recently that we see prices on the 10-year in Belgium actually moving to 1%. So it looks like the margin improvement is a bit driven by the swap rate coming down, but not by a fundamental increase of the commercial margins by the peers. So if you could quantify that, that would be useful.

[Hendrik Scheerlinck, CFO & Executive Director]

Thank you for your question, Benoit. And on the cost of risk, indeed, the calculation there is correct, but we only give guidance for 2020. So we have to look at what is the difference between the base case and the pessimistic case, just relating to 2020, and that is the difference that we mentioned. Again, as Johan already said, it is way too early to try to extrapolate the impact on provisions for 2021 and 2022. As and when we have more insight and more view on how the economy evolves now that the lockup measures are being lifted, we can give guidance on that as well. But today, that would not be prudent.

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

And then coming to -- back to your second question, Benoit. So on the guidance, obviously, a lot of elements play -- the guidance on NII, sorry. Obviously, a lot of elements play into that. We do not provide full detail because you're right, we took into account a lot of elements to make that guidance. But on a straightforward basis, when you start ballpark EUR 4.65 billion, and you look at what happened on the rate cuts of the Czech National Bank since February, they had 8 rate cuts. Now every 25 basis points had an effect of more or less EUR 30 million. 8 times EUR 30 million is EUR 240 million, which is summarized in our guidance of EUR 0.2 billion. And then you have the negative impact of the depreciation of the Czech koruna and the HUF versus the euro. If you sum that up, all of that is also EUR 0.1 billion makes some EUR 0.3 billion. And there comes, indeed, the difference between EUR 4.65 billion and EUR 4.3 billion, which is precisely the difference of those 2. Now it means that underlying in that EUR 4.3 billion, a lot of mitigants are working and a lot of elements are positive or negative, but offsetting each other more or less.Rik already mentioned the volumes, so 2% to 3% in general. That is substantially lower than what we can see now in the production of the first quarter. On the margins, we have certain assumptions made on the cost of funding. We have certain assumptions made. We have taken into account the impact of [ net interest and sum ], we have taken into account the tiering, we have taken into account the impact of TLTRO and TLTRO 3. All those elements have been taken into account. We further consider the NII on the insurance side to drop. And if you sum up all the parts, then the guidance is EUR 4.3 billion. But the detail of what I said, the last detail, we do not -- actually, we never give that, but we do not give it also, not today.

[Operator]

The next question is from Daphne Tsang from Redburn.

[Daphne Tsang, Research Analyst]

It's Daphne here. I got a couple. Firstly, on your cost of risk full year guidance. Are you able to give some sort of sensitivity to your cost of risk assumption? And if you use the IMF assumption, which is a peak of V, what would the deviation be? Is there any upside risk to that? And if you could quantify, that would be appreciated. And then secondly, on...

[Kurt De Baenst, General Manager, Investor Relations]

Daphne, sorry to interrupt. Could you speak a bit louder because we hardly understand you? We hardly hear you.

[Daphne Tsang, Research Analyst]

Oh, sorry. Yes. Let me pick up my...Is it better?

[Kurt De Baenst, General Manager, Investor Relations]

That's much better.

[Daphne Tsang, Research Analyst]

Okay. Cool. I will repeat my question. First one, on the full year cost of risk guidance of EUR 1.1 billion. Just wondering, if you used the IMF assumption instead, have you done any sensitivity now -- what that may mean to your proficient number? Is there any upside risk to that if you used the IMF numbers? Secondly, on capital, appreciate that you have already taken some RWA increases in Q1, some related to COVID. Can you give an outlook on what the credit RWA inflation looks like for the rest of the year? And also on capital, are you seeing any -- or what kind of positive impacts you are seeing, if meaningful, from the software intangibles?

[Hendrik Scheerlinck, CFO & Executive Director]

Thank you for your questions, Daphne. On the first one, so the sensitivity of the cost of risk, if you would take the IMF assumptions, well, actually, it is a little difficult to do that. So the way that we arrive at this cost of risk is a double analysis. Of course, we put our macroeconomic models or assumptions in our IFRS 9 calculation engine. And the reality is that a difference of a few points, given the magnitude of scenarios we're talking about does not have a major impact on the credit side there. So in that sense, it would be a few million euros, but not more than that.The second thing that we do is more a bottom up. So we basically look at what are the times -- what are the types and the volumes of payment deferrals that we see coming in, what do we expect once the economy normalizes again, what a normal migration would be in that portfolio. That is maybe a little bit more stressed. And that's how we come then with a bottom-up, and we do that in each of the countries, an assumption of the credit loss, and then we compare the 2. And that's how we arrived at that number. And again, the macro assumption in that sense has a lower impact than our individual appreciation for the different classes of loans we have and the high-risk impact it may have on the number of sectors.

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

Thank you for your question, Daphne. The answer to the second question -- I mean, I said already on an earlier question that, for the full year 2020, we do not expect major changes to our capital ratios under the base case scenario, obviously. If I'm not going to give you -- I'm going to give you some more flavor on the risk-weighted assets, then I'll give you an indirect guidance on our profitability, which we never do. So in that perspective, what I can say is the following: we have taken definition of default already into account, we have actually taken for EUR 2.5 billion of regulatory impact already into account. Risk-weighted assets will obviously evolve further, taking into account 2 things. Obviously, the volumes, we still foresee 2% to 3% growth of our volumes. And then obviously, the second impact will be related to the circumstances we all live in, so the credit quality and the counterparty risk. So those will be the main drivers. But I think far more important is that, overall, under the base case scenario, we do not expect a major shift on our capital ratio CET1.

[Daphne Tsang, Research Analyst]

And the software intangibles?

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

Sorry. Could you repeat because I didn't hear it?

[Daphne Tsang, Research Analyst]

What level of positive impact you would expect from the software intangible?

[Hendrik Scheerlinck, CFO & Executive Director]

Yes. So again, it is a little bit too early to say at this stage because we're first going to need to see what is the definition that they take on software that is universally deployable because that is the item they're always looking at. So again, we're going to have to wait till we see the detailed text of what we can take into account, and then we will deal with that. But as I said, we do expect that the impact of all the measures, SME supporting factor, infrastructure support, deduction of software, all these elements will have a positive impact on CET1 between 70 and 80 basis points.

[Operator]

The next question then comes from Kiri Vijayarajah from HSBC.

[Kirishanthan Vijayarajah, Analyst]

Yes. A couple of questions on costs, if I may. So on the cost announcement today, I was wondering, is there any direct linkage at all to the faster adoption of digital channels by your customer base in this environment? Or do you think about it more as a sort of stand-alone cost initiative because of the revenue pressures you see coming down the pipe?And you've given us -- secondly, you've given us the FX impact on your NII guidance, but have you allowed for any positive impact to the FX on your cost guidance as well? And maybe if so, give us some numbers on what you've assumed there. That would be helpful, please.

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

So thank you for your questions. I mean, the cost savings, which we have announced today, are related to direct cost savings so it is not necessarily linked to the pickup of the digital channels. That has obviously a side effect, but that is not the reason why we're doing this. On the contrary, what we do explicitly, also taking into account what we have seen, that it sort of speed up the further implementation of our strategy, as I said, and as a consequence, we do not have any cost savings in that domain.Is the FX impact included? I mentioned cost savings, EUR 150 million in that number. The cost savings -- the FX impact is not included. So for clear understanding, in the saving of the 3.5%, it is included. And I do apologize if I caused any misunderstanding or any hesitation there, but the 3.5% is including the FX impact.

[Operator]

The next question is from Bart Jooris from Degroof Petercam.

[Bart Jooris, Analyst]

Yes. It's good to hear you all back. If I can continue on costs, you've given us a lot of examples of where your cost savings will be, but could you make -- would it really the 3.5% of what would be sustainable? I'm thinking about the canceled projects, the cutback on FTEs, the frozen on the hirings maybe, but some will pick up again in 2021. And assuming that interest rates do not go back at the same levels in the Czech Republic and that effect doesn't change, the NII would be -- decrease, would still be there in '21. So do you have possibilities in '21 to pick up those cost savings? And then a little bit more technical questions regarding maybe your dividend. I hope you'll come back with a profit in the second quarter. What will you do with the dividend reservation and the capital there? And also, normally, the insurance pays the dividend in the fourth quarter. Would you be able to do that under the current EIOPA and MBB recommendations?

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

So thank you for your questions. Let me answer those. First of all, on the split-up, I mean, we do not give you any -- on any different pocket, I already gave a lot of information, but we are not going to give any of that -- for any of that line, the precise cutoff in how much of the percentage is linked to whatever. But in essence, everything, what we are going to save now is sustainable until further notice.Let me explain what I want to say with that. I mean, if COVID is going to continue what it is impacting today, then also in 2021, we will not release any buffers on travel, we will not release any buffers on events and so on and so forth. So that's sustainable as such. Obviously, if we return back to normal, then those costs are normally going to come back to a certain extent. Honestly, I don't think we will go back to the level of the travel budgets which we have seen in the past given the experience of today, working remotely and also working like we are now talking to each other via conference calls or via Skype.The same is true for all the HR-related costs. Everything is sustainable until further notice. And if the situation is going to go along as we have seen in 2020, also in 2021, this is fully recurring. So only it would take a different position, by, again hiring people, by again paying out comparable compensation, then it comes back. But otherwise, it is perfectly sustainable. Again, putting back in place all those projects which have been postponed, I cannot guarantee that we will put them back in the reality in production in 2021. So they are indeed recurring savings.And I think on the dividend, so I don't think I fully understood your question. So on the dividend, what I understood was -- and I answered also on a previous question, we are perfectly able to pay out dividends. We don't need an AGM for that. But I think that Rik will add some more flavor because I think I did not fully catch the whole question. Rik?

[Hendrik Scheerlinck, CFO & Executive Director]

Yes. Thank you, Johan. Thank you, Bart, for your question. So first of all, on the dividend -- sorry, on the capital accrual in profitable quarters, actually, the stance of the ECB has not changed. So as we have in our dividend policy that we pay out at least -- or sorry, that we pay out at least 50% of our profit. So the interpretation of the ECB at least can also mean 100%. And as a result of that, they do not allow us to actually include interim profits into our capital.On the dividends of the insurance side, as you know, we pay that in 2 tranches. So typically, in the second quarter, we paid final dividend for the previous year. So for the year 2019, we have indeed taken the decision that the insurance company will pay the final dividend to the KBC Group, and that's in a ballpark figure of EUR 150 million.On the interim dividend and for the year 2020, from the insurance company to be paid to the group, there is indeed EIOPA guideline, and we will have to wait, as Johan already said before that, on what is the stance of the ECB, what is the stance on EIOPA in the fourth quarter, and we will then take a decision in the fourth quarter of whether or not the insurance company can pay an interim dividend to the group.

[Operator]

That was the final question.

[Kurt De Baenst, General Manager, Investor Relations]

All right. Thanks a lot. This ends that for this call then. Thank you a lot for your attendance, and hope you remain healthy. Take care, and enjoy the rest of the day. Cheers.

[Operator]

Thank you. That does conclude the call for today. You may now disconnect. Thanks for joining. Have a very good day.