KBC Groep NV

XBRU:KBC

Earnings Call Transcript 2021-Q1

[Operator]

Welcome, everyone, to the KBC Group Earnings Release First Quarter 2021 Call, hosted by Kurt De Baenst. My name is Angela, and I'm the event manager. [Operator Instructions] I'd like to advise all parties that the conference is being recorded. And now I'd like to hand over to Kurt. Please go ahead.

[Kurt De Baenst, General Manager, Investor Relations]

Thank you, operator. A very good morning to all of you from the headquarters of KBC in Brussels, and welcome to the KBC conference call. Today is Tuesday, May 11, 2021, and we are hosting the conference call on the first quarter '21 results of KBC. As usual, we have our group CEO with us, Johan Thijs, as well as our new group CFO, Luke Popelier, 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, 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 the announcement of the first quarter results of 2021, which is, as you all know, still a full COVID quarter. Now nevertheless, given the difficult circumstances, the very particular circumstances, we are very pleased to announce an excellent net result of EUR 557 million, which is also a result after paying EUR 424 million of bank taxes. It actually means that the KBC machine has been running of all its cylinders. We have been having a very well quarter in terms of commercial performances. It's true for both the banking and the insurance side. And this is true on all different lines of our P&L. I can indicate that loan business was growing significantly, deposits as well. The interest income was higher. We have been selling more investments products, both on the asset management side and the life insurance side. We have been performing strongly on the payment business and the securities business. We have been covering up on the financial instruments at fair value. Insurance business was performing stellar, both on the non-life and the life side, and we have been able to manage our costs despite the fact that 2020 was already a decrease of more than 4%. We have been managing our cost position further downwards with another 4%. Cost-to-income ratio now stands at 46% before bank taxes. And that's a quite strong performance better than our guidance. In terms of impairments, we have seen releases over the quarter. And that obviously translates itself in further expectations going forward regarding the guidance, which we have brought downwards from 40 basis points to 30 basis points. It will be no big surprise, so to say, that our solvency position has further improved. We are now standing at a common equity ratio of 17.6% and 235% on the insurance side and the liquidity is strong as well. In terms of performance return on equity stands at 16%, taking into account a capital ratio of 17.6%. If you would normalize that, you easily go close to 20%. In terms of the combined ratio, 78%, indeed, stellar. What can I say more, it is indeed a good result. Let me dive into the details. I'm going to come back to each of all those numbers, which I just indicated more in detail. Page 4, you have the building blocks of the net result. Not to waste too much time on this slide. What I can say is that the diversification of KBC Group, thanks to the bank insurance model had it, asset management has further increased. So we are about 52%, 53% of income related to interest-bearing products. All the rest comes from the insurance side and from the asset management business. Slide 5, the exceptional items. The exceptional thing about this quarter is there are no exceptional things. So let's continue to Page 8, where you can see the split up between the banking and insurance business. Banking business stands for about 75%, whereas the insurance business has strongly performed, 25%. And that means -- and the split up, if you want to calculate it in precise numbers, it's 76%, to be correct. Insurance business has indeed, again performed very well, which was the same as the full last year. So when things go rough, the insurance side is the differentiator on the positive side. In terms of the different P&L lines, let's start first with the net interest income. And we're very happy to announce that we were, despite very difficult circumstances, giving the very low interest rate environment, it's increasing again. So we were able to increase our banking net interest income 1%, which is true for the total as well. So quarter-on-quarter, as you know, on the insurance side, the long-term interest rates kick in and continue to kick in negatively. So there we have a decline of EUR 7 million but on the banking side, we had the reverse, so an increase of EUR 7 million. In terms of the reasons why, it's straightforward, good volumes. We have seen an increase of 1% on the lending business quarter-on-quarter and also 1% year-on-year. Now let me remind you that first quarter last year was a quarter which was 2.5 months, so 10 weeks, normal quarter and 1.5 months, 2 weeks, a COVID quarter. In that last COVID quarter, we have seen a lot of drawing on undrawn lines. And if you would make a correction out of that drawing, which was very particular and came back in the second and third quarter in 2020, if you make a correction, then the loan growth would be substantially north of 1%, closer to 2% rather than 1%. So actually, to indicate that the loan growth has been extremely strong in this first quarter. It has translated not only in the commercial lending business, but also on the retail business, 1% growth on the quarter, 8% growth on the year, which is fully reflecting what I just said. So be careful by interpreting total loans number, it is substantially impacted by the drawing of undrawn lines in the first COVID impact quarter of last year. What is also good is that the margin went up 3 basis points and that margin is increasing in almost all of our countries. So Belgium, Czech Republic, Hungary, Slovakia, the interest margin went up despite the fact that we see an impact on the Czech business of prepayments, which KBC is one of the few not charging prepayment costs to its customers, and that has a negative impact on the net interest margin. If you would have done that charging, then the net interest margin would have further gone up as well. In terms of the net interest income, I can also highlight that we have EUR 7 million of net interest income due to the consolidation of OTP, but that negative -- that the net interest income was negatively impacted by the fact that we had 2 low -- 2 days less of sales, which is in total as well, EUR 15 million. So net interest income side has known a quite good performance if you take into account all these circumstances. If you look at the fee and commission business, once again, we have seen an increase there now for the fourth quarter in a row, and that's indeed good news because, let's face it, we are still in a COVID situation, which means a semi-lockdown situation in the majority of our countries. We are not able, for instance, in the retail network, to contact our customers and to see them physically, which tempers the sales anyway. But if you look at the asset management sales, then we have seen that the asset management fees were up significantly, 11% quarter-on-quarter. And also compared to last year, they were up EUR 14 million more on a quarterly basis, and the same is true for the entry fees. On entry fees, I can once again, say that we have seen net inflows in this quarter, EUR 0.3 billion, which is good news. Actually, the quarter was -- if -- the quarter was characterized by strong gross sales, we also had a lot of maturities. So we've compensated more -- we compensated the maturities more by EUR 0.3 billion. And in that perspective, also if you compare the strong quarter last year where we had record sales in January and February with this quarter, actually, we brought it home again. Also the unit-linked insurance portfolio has performed in sales well, if you compare it year-on-year. I'll come back to that when I go into the details of the insurance side. In terms of the sales of, for instance, SRI funds, it was a major evolution. We are now selling in Belgium, almost 60% of all sales in the SRI domain, which is very strong performance, indeed. On the other elements contributing to the fee business, the banking services were up 3%, and the income generated through our securities business network was up as well in quite significant numbers. The total was EUR 9 million on the security services, which is mainly due to the EUR 6 million our platform -- our securities platform in Belgium, EUR 3 million in KBC Securities, in terms of sales, another EUR 3 million. So also, in that perspective, a very strong performance business-wise as well. Assets under management now stand at EUR 220 billion, which, as I said, is due to an increase of 0.3% net inflow and the rest is a market effect. Insurance side, very strong performance. We have seen a growth of 2% on the earned premiums, but be careful by interpreting earned premiums. As we know, because of the COVID impact and the lockdowns, earned premiums kick in as of the moment that you are in a lockdown. So this quarter is a full COVID quarter, which you compare with a non-COVID quarter last year. So on the earned premium, it has a significant impact. As a matter of fact, if you just look at the written premium, the growth is 4%. Life premium income was down, but I think it's far more important to interpret life premiums by written premium, which I will do in instance. Combined ratio stands at 78%, which is an historic low of KBC. I know that I said on previous occasions, when we were having a combined ratio of 83%, this is an historic low. And 78% is indeed substantially lower than what it was. I think this is the bottom. This is mainly due to the good underlying quality of the book, but also the fact that the storm claim, which is traditionally happening in the first quarter and in the last quarter of the year. And this quarter was only contributing EUR 6 million to the claims side, but as it did, EUR 51 million last year. Combined ratio is solid in all countries. All countries are below 85%, which is a major achievement and it also underpins the quality of the book. In terms of sales, written premium, 4% growth on the non-life side, which is very good given circumstances and given indeed the fact that our business are still hampered by those semi-lockdowns, which are applicable in most countries where we are present. And then life sales if you compare them on the year, it is up on unit -- sorry, it is up on interest guaranteed products with 2%, has been now impacted negatively by the low long interest rates, and it's up almost 23% on the unit-linked business, which is indeed a strong start of the year. If you compare it quarter-on-quarter, be careful, it is traditional that in the main market in Belgium, in this perspective, is driven by tax optimizations, which traditionally take place at the end of the year. And therefore, we do see a decline of 19% quarter-on-quarter because of that seasonal effect. So the insurance business has performed stellar, and the financial instruments at fair value now start to bring results at the, let's say, normal pace. It's EUR 127 million, a bit better than previous quarter. And is due to the equity businesses, which are performing on the insurance side quite well. The dealing rooms, we had a great result, EUR 33 million better on the quarter. And the ALM derivatives or the -- the mark-to-market of the ALM, indeed, EUR 23 million better than last quarter. If you make the comparisons between the quarter, of course, last year, we were having the full impact of our financial instruments at fair value. The difference between the 2 quarters is EUR 0.5 billion, but we all know where this comes from. It is low quality. So let's ignore this. Net other income, normal run rate stands around EUR 45 million, EUR 50 million. This time, it's EUR 53 million. It's a little bit better than the normal run rate. But in essence, it is nothing special to mention. In terms of operating expenses, well, yes, this will be the positive surprise, I think, for sure. Once again, we were able to cut our costs down with a 5% quarter-on-quarter, if you exclude the bank taxes. This is due to lower staff expenses again. And therefore, you need to be a little bit careful by comparing it with the fourth quarter because in the last quarter of last year, obviously, we do add accruals for bonuses. In terms of the better comparison, I think it's to make it with the last year's first quarter and then still we had a 4% decline of our cost, which is good news. Why? Again, lower staff expenses, and then obviously, a lot of cost savings triggered by COVID-19. Also there, we would be careful when making the comparison straightforward. First quarter last year was a non-COVID quarter and this quarter is a COVID quarter. Also, we have the positive effect of our lower software depreciations, which was announced last year, and the fact that there was a depreciation of the Czech koruna against the euro. So in this perspective, 46% cost-to-income ratio is an excellent result. If you add the bank taxes to that, we stand at 53%, which is significantly better than what it was in full year 2020, 57%. We stick to our guidance of 2% cost guidance. Why? Because the full year, obviously, is influenced by COVID, and COVID is normally going to be slightly disappearing -- disappearing is perhaps the wrong word, going to be slow down over the year as we speak because of the vaccination programs. The bank taxes now stands for 12.5% on our OpEx, which is a quite significant number. We expect this to go over EUR 0.5 billion by year-end. Let's go to the asset impairments, which we did see, and that will also be a positive surprise, coming down significantly. As a matter of fact, we have a release of EUR 77 million, which is in total a credit cost ratio of minus 17 basis points. If you would exclude the impact of the management overlay, where we had a release of EUR 26 million, then the credit cost ratio stands at minus 0.11 basis points, which is, indeed, given the very difficult circumstances we are in quite exceptional. This is due to the fact that we had some major releases on corporate files in Belgium and in Czech Republic, and that was indeed a very positive one, resulting in a release of a significant amount. In terms of the impairment loans ratio that amounts now at 3.3%, if you would apply the EBA definition, then it would stand at European average of 2.7%. In terms of the COVID-19 impact, I have already mentioned this word several times. Obviously, this still having impact on our way of working, both on the operational side and on the results side. I'm not going to go through the details on pages 18, 19, which are updates of what we explained earlier, but this will lead us too far. Let me go into where we are with our book. So KBC had an EBA-compliant book of EUR 13 billion, of which -- which is about 8% of our total loan book, of which, in the meanwhile, 91%, which is EUR 12 billion, has been expiring. Now the good news is that, that expiration of those payment holidays actually showed us that 98% of those customers have resumed payments as before, while only 1% have generated new defaults. So in that perspective, knock on wood, we are still doing fine. In the other part of the book where we are granting loans under the government guarantees, you could also see that KBC has been using those government guarantees to the tune of EUR 900 million, which is actually quite a low number because what we do see is that customers prefer the normal lending business rather than the, let's call it, government-aided lending. It's also a token that customers are quite sure about that underlying quality and is also a token about the underlying of the credit quality of the credit book. In terms of the split up, the portfolio is quite stable in terms of its staging, 12% is stage 2, 3.3% is stage 3. And the coverage ratios are mentioned on Page 23, quite solid. But I would like to go to the next slide where we have the detail on our management overlay. So we have done a further analysis on that management overlay, as always, as each and every quarter again. And despite the fact that the moratoria are still in place in certain countries, Belgium, amongst others, also Hungary, for obvious reasons, it's mandatory by government over there, and then we will finalize how they will drop that by the end of June. As of then, we will see the full impact of COVID on our book, and we will start to see the full impact on our impairments as well. The good news is, the one I just said, 98% of customers are resuming payments. And we have translated, therefore, also a definition of our 3 scenarios, the economic scenarios, which are split up in a positive scenario, base scenario and the pessimistic scenario. And we have changed those parameters to the better for the base scenario and for the optimistic scenario. That has resulted in some releases on our management overlay, which is a total EUR 26 million, and that has created, as I said, the further releases of impairments for the total book. At this stage, the whole collective management overlay related to COVID-19 is in -- 98% is in Stage 2 and in Stage 3. I think it's a very important message to bring. In terms of the selection of the portfolios, we once again updated the sectors, a little bit of changes there, but not worth to mention it. It's on Page 25. One out of 4 is considered by us to be in the high sectors -- the high-risk sectors, which I think is quite conservative stance. The detail is explained on Page 26, but I would not like to waste time there. The business profiles. All countries have been contributing to the result of KBC Group. On Page 28, you can see the differences for all the countries, also including their allocated capital and all the detail, which is interesting. Let me translate it as follows. On Page 47, you can see the return on allocated capital. At group level, it stands at 19%. The different countries, you can see, Belgium and Czech Republic are above 20% and international market is close to that number. I'm not going to go through the detail of all those countries. So let me bring you again to Page 48, where you have the split up of our loan, so -- our loan and our deposit side. The only thing I want to highlight is the loan growth of 1% is hampered big time by the drawing on the uncommitted lines -- on the committed line, sorry, in business unit Belgium. So be careful by interpreting the minus 1% that is negatively impacted by that drawing, and that is going to be corrected as a consequence of the behavior in second quarter 2020, also in the second quarter of 2021. All the rest, you can pick out your favorite country, you can see lending business was quite strong, and the deposit inflow also reflects the fact that a lot of people consider KBC to be a safe haven and, as a consequence, trust their monies with us. Capital wise, on Page 50, you can see the capital ratio further improved to 17.6% without profit -- interim profit recognition. So it's indeed a very strong number, due to a further improvement of the capital side and the slight increase on the risk-weighted asset side that's mainly driven by the volume growth there. Without the profit recognition, 17.6%; including the profit recognition above 18%. So indeed, this is a strong number. Definitely, if you compare that with the capital buffers, which are posed upon us by the governments, then we do have buffers of EUR 8 billion, EUR 9 billion. The transitional measures are the same as what we indicated previous quarter, 51 basis points. As you know, we don't include them into our numbers. Total capital position stands at 21.2%, rock solid and the buffers have not changed on the AT1 and the Tier 2. But on the leverage ratio, the leverage ratio dropped to 5.8%. Now how come? The same effect you can see on the banking side. How come? It's quite straightforward, easy to understand. We have been using the momentum, which was given by the surplus of liquidity available in the market. And therefore, we did use that short-term money market position and the repo opportunities to leverage our P&L on the net interest income side. The Solvency II position on the insurance company further improved to 235 basis points, which was mainly due to the positive impact of the interest rate increase. And then obviously, you have a couple of elements which are playing with the symmetric adjustment factor, but that is a detail. Liquidity side, super strong, 65% is customer driven. We were also able to take up another EUR 2.2 billion on the TLTRO III. Also there, I can give the good news that KBC has been lending more than sufficient in order to be granted basis points extra discount on that pricing of the central -- sorry, of the ECB, which means that for the total EUR 24.2 billion, we do get the minus 100 basis points. In terms of the liquidity ratios, they stand substantially higher than our regulatory requirements. So as that perspective, it is a confirmation that KBC is not only a solid, but also a very liquid financial institution. This brings me to the guidance for the future. We do expect that given the vaccination programs coming up to speed, in the meanwhile, for instance, in Belgium, we are at 36% of population, which have got their first shot, we do expect that it will further increase going forward. By the end of the summer, all people in Belgium should be vaccinated. This is true for the majority of our countries where we are present. And in that perspective, we do expect that consumption will start to rise and the economy will start to rebound. We do not expect that in 2021, we will be at pre-COVID levels. This is something for the course of 2022, but it's clear that the economic forecast, which was put forward growth of 3%, 4% is something which is quite realistic. We do keep our guidance on the net interest income at ballpark EUR 4.3 billion. But I would say now, rather, it is on the higher end of that range. On the cost side, we keep the 2% guidance for the year. Be careful with making the comparison. I remember you that 2020 was a cost decrease of 4%. And we do give a lower guidance for the credit cost ratio, whereas it was the higher end of the range, 30, 40 basis points, we now say it's the lower end of the range. And then last but not least, we repeat our guidance on the dividend policy. So we will pay -- and that will be now very likely, given the comments of the ECB, we'll pay another EUR 2 in the second part of this year, EUR 2 per share. Decision will be taken by the ECB, but I mean all likelihood is that we will be allowed to do so. And therefore, we stick to our policy. We aim to be amongst the better capitalized institutions. We are going to consider all capital above 15.5% to be surplus capital and that surplus capital, as you know, will be considered for distribution to our shareholders. So intrinsically, nothing has change there. I would like to leave it here and give the floor back to Kurt, who will guide us through your questions.

[Kurt De Baenst, General Manager, Investor Relations]

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

[Operator]

[Operator Instructions] The first question comes from Giulia Miotto.

[Giulia Aurora Miotto, Vice President and Equity Analyst]

Yes. This is Giulia Miotto, Morgan Stanley. And congratulations on a strong set of results. I have 2 questions. So first of all, on the cost of risk guidance, you currently still have EUR 757 million of basically values management overlays. So I was wondering, given what you're seeing at the moment, which is quite encouraging trends also on the moratoria side, could we actually see even a better print than the low end of the guidance? And when do you expect to use those sort of overlays, or if anything, potentially release them? So that's my first question. Then the second question, I noticed you were referring to a rumor on Basel IV potentially being implemented in 2024. So I was wondering if you could give us a refresh there because there are many moving parts, potential parallel stack and EU-specific inputs, et cetera. So what are your assumptions at the moment and how this could change?

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

Thanks, Giulia, for your questions. I will take the first one on the cost of risk. So indeed, we have been guiding the 30, 40 basis points range down to 30 basis points. And coming back to the detail of your question, so the management overlay, how do we need to interpret that within that guidance? So first of all, I think you're right. On the management overlay, we are still at this instance conservative. Let's face it, we didn't use anything of our management overlay in the first quarter, 0. On the contrary, we had a release. Now that release is triggered by an update of the economic scenarios. And with the -- coming up to speed of the vaccination programs the last 2 weeks, and the outlook, which is now based on that acceleration of the vaccination programs in quarter 2 and then also July, August of quarter 3, you might expect a further adjustment of that economic scenarios, which will ultimately trigger another release on the management overlay. As you have seen in the first quarter, we had a release, which was related to the other EUR 50 million. So you could expect this, indeed, to happen going forward. The other thing is that when we provided the detail of our EBA-compliant moratoria, they are going to end at the end of second quarter. So I assume that all those moratoria, also in Hungary, will come to an end by that period, which seems to be logical, given the progress made in the vaccination program. In the EBA compliance stuff, we have EUR 1 billion still standing. What has -- what the market never reports about is the non-EBA compliance. Now let me exclude Hungary because, I mean, because of the definition of government, they're all noncompliant. If I look at the numbers of KBC, and will take a conservative stance there, then we have similar amounts, quite similar amount, non-EBA-compliant in moratorium, which means that in total, we were going in the neighborhood of, say, that's EUR 1.9 billion of moratoria. Now the good news is that we do see exactly the same behavior in the total moratoria book, compliant-EBA, noncompliant-EBA. As we have seen in the EBA compliant book, so 98% of them resume payments. So there is intrinsically, at this instance, I mean, it's exactly the same pattern as what we've seen. So against that book, we have about EUR 750 million management overlay, which is indeed a significant amount. If we do see same evolutions going forward, and we take conservative stance, then we could decrease the interest guidance going forward to 30 basis points. If we do see further improvement of the economy, further translating in a good behavior of customers, and that means that in the moratoria, we do not see a fundamental deterioration of the arrears, default and so on and so forth. And you can expect, indeed, going forward, improvement of the guidance. But it is too early days. We cannot -- I mean, let's face it. We will only really see what is going to happen in the third, fourth quarter going forward. So going forward, yes, it is indeed -- we are on the safe side because of the economic scenarios, you can expect something to come in the third quarter as well. If the economy is evolving in the right direction, if economy is evolving in -- also in a positive way to our customers' economic activity, then you might expect in these releases going forward quarter 3, quarter 4, quarter 1 next year. But I used a lot ifs. And as long as the ifs are not clear -- clearly settled out, then we keep the lower end of the guidance, 30 basis points.

[Roger Elie Popelier, CFO & Executive Director]

Perhaps on the second question with regard to Basel IV, I'm afraid there's not much news. We -- you know that the discussions on the single stack versus parallel stack are still ongoing. So it's too early days now to give any guidance on this. And we remain with our guidance, as we said at the end of the first -- last quarter, that the RWA impact would be around EUR 8 billion, so minus 1.3% core Tier 1 ratio -- percentage points core Tier 1 ratio. So we stick with that at the moment.

[Giulia Aurora Miotto, Vice President and Equity Analyst]

And just a follow-up on the Basel IV. How much of that EUR 8 million comes from the output floor?

[Roger Elie Popelier, CFO & Executive Director]

We do not disclose this, I'm afraid.

[Operator]

Next question comes from Omar Fall.

[Omar Fall, Analyst]

It's Omar from Barclays. Just a couple of questions. Just going back to loan growth. I appreciate the base effect from the corporate drawings in Belgium. But even ex that, there is a bit of slowdown from 3% last quarter to 2% this quarter. And there's actually a slowdown outside of Belgium. And on a Q-on-Q basis, I think, basically in the Hungary on Bulgaria are in line with the 3% to 4% loan growth guidance for the full year that you've got. So I just wanted to square that. How confident are you in hitting that 3% to 4% now that we're nearing halfway through the year? And what level of loan growth do you need to hit the EUR 4.3 billion NII guidance? You seem quite relaxed. In terms of highlighting you'll be at the kind of higher end of the ballpark. So I guess you're fairly confident in a reversal of that trend in the second half on loans. Then the second question is just on Czech NII. Why was it up Q-on-Q when there was no loan growth, pressure on mortgage margins and there's a small FX impact, but you quote high interest rates, but I thought most of your liquidity was in repo, the CNB, where the rate hasn't moved. So have you changed some of your extending duration by swaps or something similar?

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

Thanks, Omar, for your question. Let me tackle the first one on the loan growth. For good understanding, so what we published today is 1% quarter-on-quarter, which brings us at 4% at year-end. So it is perfectly in line with the guidance, which we used to calculate the EUR 4.3 billion. Because in the EUR 4.3 billion, we assume the loan growth between 3% and 4%. As a matter of fact, if you carve out the abnormal take-up of loans working capital facilities in the first quarter and last year, then actually, we are now substantially higher than what we have seen and what we have anticipated for our ballpark guidance of EUR 4.3 billion. Now as a matter of fact, you referred to a couple of countries slowing down, everything is relative, of course. So if you take into account the different countries, I would say there is a -- despite the fact that we are above target, there is a slowdown compared to what we have seen last month of 2020, for instance, on the corporate side in Belgium, but it's above target. The -- for instance, the month of April was, again, super strong. So you see clearly indications that economy is picking up. If I look at the market in Czech Republic, then I saw a slowdown on the corporate business, but the booming business, SME. We saw a booming business on the mortgage side, which has the best quarter ever in Czech Republic. And ever, I mean ever. Not only over the last 3, 4 years, but over the whole period. And the same is true for other countries. So if you take all the numbers and mix all those numbers together, then we are perfectly in line with our guidance of EUR 4.3 billion. And as I said, during the first part of this call, we are probably even at the higher end of that guidance, because the growth is going to pick up in the quarters to come. The economic growth I'm talking about. And normally, we always take a fair share of that, the part of that growth into our businesses. We do have potentially further rate hikes to come up on Czech Republic. We only took into account one, so we might expect another one to come in the second part of this year. And, yes, I mean, if you bring them all together, I think we are at least within that range of EUR 4.3 billion, perhaps even at the higher end of that range.

[Roger Elie Popelier, CFO & Executive Director]

Perhaps on the NII, despite the fact that there is very limited to no loan growth at the moment, there's indeed an FX impact. It's not small. It's maybe bigger than you think. But most important one underlying is that we had a slowly growing interest increase on our replication of the current accounts and savings accounts. As you know, the interest rates in Czech Republic have increased about -- let's say, about 50 basis points and in replication of our current accounts, savings accounts, you start to feel that effect gradually, I must say. It's not a big one, but gradually increasing. And that also explains why we have an improvement and we think if interest rates remain at this level or increase that we have certainly reached the bottom, and we are improving now going forward.

[Omar Fall, Analyst]

Sorry, just a quick follow-up on that. So firstly, the -- I mean, the FX impact, according to your slides is EUR 5 million, I guess. But beyond that, the -- I thought that the majority of your excess liquidity was parked via repo at the CNB. And obviously, that's at 25 bps, and that hasn't moved. So are you saying that actually, no, there's a portion or an increased portion that's actually replicated by swaps? That's basically what you're saying, right?

[Roger Elie Popelier, CFO & Executive Director]

Yes, indeed. Indeed. So we've used our benchmark position, and we've created slightly the core part, which can then be replicated at the higher rate, indeed.

[Operator]

Next question comes from Thomas Dewasmes.

[Thomas Dewasmes, Associate]

I'd like just to come back on the NII. And actually, since you're EUR 4.3 billion or higher end of EUR 4.3 billion, so EUR 4.35 billion NII guidance, anticipates just one rate hike. I mean, I assume that the impact in the Czech Republic might be coming from the -- from short rates. But as you said, the rates have already moved, right? And the market is probably anticipating more like 2 or 3 hikes. So is it fair to assume that actually your guidance might be conservative given the increasing effect in the replicating portfolio in the Czech Republic should have on your numbers in coming quarters? And then the second quarter -- the second question, sorry, it's not about KBC in particular, but rather your interpretation of the comments of Mr. Enria on the euro system. He said on asset quality recently that he thinks that some banks are sweeping loans issued under the carpet. I mean we must keep in mind that there are about 120 banks [indiscernible] a lot of which are not listed on equity exchanges, but is there a chance that these comments could be linked to the context with now on dividend? I heard your comments on the likelihood on the payment of EUR 2 per share dividend. But is it possible at all that his perception on asset quality can impact either the system-wide consideration for the recommendation or company-specific allowance to distribute capital to shareholders? Just would like to know your opinion on this.

[Roger Elie Popelier, CFO & Executive Director]

Okay. So on the interest effect on our guidance on the rate hike that we expect 1 to 2 this year. We'd expect now even 2 this year, all depends on the timing. Is it beginning of September? Or is it the end of October? We don't know yet. And as you know, we guide about EUR 30 million per year for 25 basis points increase. Now one quarter is about EUR 7.5 million difference. So that is an effect that you need to take into account. We've been a bit conservative on that side, I think, in our guidance, perhaps, hopefully, but we'll see that's an uncertainty. On the repo rates, on the swap rates, indeed, we have seen an increase already. So that's in the numbers here. But there, we also are looking at how much of our extra deposits we had in Czech Republic, in particular. How much that is core, not volatile and how much is volatile. Depending on the models that we are now running, whether we can increase the core part and therefore replicate more, so not at higher rates, but more of the deposit inflows.

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

And Thomas, I will take your second question. Yes, indeed, Mr. Enria made a couple of statements, including the statement on asset quality. I'm pretty sure that he was not referring to KBC when he was saying that a lot of poor assets are still covered up in the balance sheet of banks. Because we have been taking, as you know, quite conservative stance when we put in the management overlay last year. As a matter of fact, we were -- and that you can see in a lot of reports, which are issued by you guys. One of the banks which have provided most, given the quality of their book. And that starts now to clearly pay off. We are still -- we have released today EUR 26 million, but we are still conservative. And therefore, my earlier statement on, I think it was on the question of Giulia, yes, that is -- this conservative stance allows us now to, indeed, look positively to the future and also take into account potentially further releases of provisions, which, is indeed, linked to the second part of your question, that is banks which have a low -- medium to low risk profile as is KBC, which have sufficiently buffered provisions for potential impact of COVID on impairments, like KBC, and which have been doing this in a conservative way, like KBC are definitely not the ones which are envisaged by Mr. Enria where he make statements about dividends. So in that perspective, I think we are sitting on the good side, and it pays off what we have done in 2020, anticipating difficult circumstance, anticipating in such a way that you can build in the buffer, which is then released when you don't need it. So I'm quite confident that in that perspective, we will be sitting on the positive side and that we will be allowed to pay out the promised EUR 2 per share dividend in the second part of this year.

[Thomas Dewasmes, Associate]

So assuming from your comment that there is a positive or negative side. So you're saying that there might be an impact, but just not for KBC. Is that correct?

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

That's correct, indeed. For good understanding, Thomas, Mr. Enria is not sitting in this call. So I just am interpreting what I read about his statements in the press. Of course, the last call was halted by Ms. Enria, for sure.

[Operator]

Next question comes from Raul Sinha.

[Raul Sinha, Analyst]

It's Raul from JPMorgan. I've got a couple, please. Firstly, on the Belgium NIM, that was up 4 basis points in the quarter. Obviously, there's a TLTRO benefit that's come through that. Could you give us some color on the moving parts as you expect from here on? And I guess there's a little bit more TLTRO benefit still to come in, into further quarters, but also beyond that, how you expect the NIM and the NII to shape up in Belgium? And then the second one for me is on Ireland. I just wanted to get a sense of the RWA release potential from clearly what the actions you're looking at. I know that it's very high RWA density business like EUR 2.5 billion ECB-driven model adjustment to your business there. What happens to that order adjustment? Does that go away when you sort of dispose your business? It'd be useful to get a sense of how much RWA you might create.

[Roger Elie Popelier, CFO & Executive Director]

Okay. So the guidance for Belgium, we don't specify, obviously, but to give you some guidance, on the one hand, we still see an increasing pressure on the replication of our current accounts and savings accounts. Reinvestment yields are still much lower than the back book. So that will be continuing. Having said that, it will mostly, to a large extent, be compensated, but not fully, by further growth in the lending book. As Johan has explained, the first quarter that we see here should not be used as the basis for the full year, and we expect higher growth in Belgium than would be implied by the first quarter. Even if you make a correction for the drawdowns in the first quarter of last year. So the growth is still there, particularly in mortgages, and you can see -- and in SMEs. And you can see that these are at better margins than the back book. There is a bit of margin pressures, yes, but margins are quite healthy. So the lending growth will really contribute there compensating not fully, but partly the reinvestment yields. Secondly, on the funding side, the TLTRO effect will be -- it's about EUR 8 million extra for the last 3 quarters because of the extra EUR 2.2 billion TLTRO, which is not in the first quarter numbers. Of course, EUR 8 million is for the full group, but most of that is allocated to business unit Belgium. And that -- yes, that's the only effect that will be coming from the TLTRO III this year. Having said that, we still have quite a lot of term deposits in Belgium, which are -- we are reducing, and therefore, reducing the funding costs. And secondly, when term deposits are rolled over, these are rolled over at better margins for us as a result of which, we also will continue to see further uptick in NII coming from that part. So this means that NII will, of course, all these variables is very difficult to see what the full extent will be. But we do not think there will be a cliff effect. There will be maybe stabilization, but no real downward pressure in Belgium at the moment.

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

I will take your second question, Raul, regarding Ireland, what about the risk-weighted assets release. So in total, we have EUR 6.8 billion of risk-weighted assets allocated to the country. And you know that we have 2 deals running and so the memorandum of understanding with Bank of Ireland on the performing part of our book, both on the asset and liability side. And then we have the NPL process running on -- what we do not give is split up between the 2.Now if you do take into account and you assume that both elements would come to a conclusion, then we're talking about EUR 6.8 billion risk-weighted assets, which is an equity position of EUR 1.2 billion. I cannot give you further details because then I wouldn't [ disclose ] potential impact on P&L or whatever, and that is indeed part of the process. But then you have an idea, EUR 6.8 billion of risk-weighted assets, total equity, EUR 1.2 billion, that is gross numbers. All the rest is part of the deal and cannot be disclosed at this instance.

[Operator]

Next question comes from Benoit Petrarque.

[Benoit Petrarque, Head of Benelux Equity Research]

Yes. It's Benoit Petrarque from Kepler Cheuvreux. Just a follow-up on NII and 2 questions on my side. So the follow-up on the Belgium NII. And by the way, Luke, welcome back. Just wondering if you could comment a bit more on the effect of the steepening, if it's still fair to assume a relatively limited impact on the steepening in 2021? And if this is also something you have in your guidance and then a ramp-up effect gradually. But my understanding was that your duration on the application book was a bit higher than 5 years. And just wanted to confirm that. And also, I do see a bit of commercial margin pressure, especially after the increase of interest rate we've seen in the first quarter in Belgium. It's actually on mortgages. Are we getting close to the back book? And what do you expect for the remaining part of the year? The second question is on the insurance non-life earnings, a very strong combined ratio at 78%. I was trying to figure out if we kind of -- we clearly need to kind of normalize this figure, but where the kind of new normal could end up? Do you still think it's going to be a 90%, 93% range? And how fast could we come back to that range? Is that a matter of kind of opening back the roads and getting people back to work? Or is there anything else to be taken into account? And then the last one really on capital. I do see a consensus, we do not expect you to pay back all the excess capital versus 15.5% in 2022. So if you look at the DPS, it's still kind of on the low side, and I cannot reconcile it. So yes. Do you think consensus don't get it? Or do you kind of agree with the view that we need to still be a bit cautious? And going in that direction, assuming you go back to normal on COVID, is that fair to assume that you will just pay the excess capital above 15.5%, say, in 2022? Is that the second assumption in -- if we are back to normal?

[Roger Elie Popelier, CFO & Executive Director]

Okay. And thank you very much, Benoit. Great to be back, and I hope to see you live again in the not too long future. So your question on Belgian NII, and particularly with the replication of the current accounts and saving accounts. I've been told and I've now been out for a few years, and we gave some more details about that previously, but that's no longer the case, I understand. But the 5-year replication, you mentioned is not entirely correct. Because you have to make a distinction with current accounts and savings accounts. So it's going to be a bit less than that, but we don't give any specific numbers anymore on these. So that means that the -- yes, the reinvestment yields are still negative, but slightly less negative than the previous quarter. And that will hopefully also improve if the rates stay and maybe improve as well. So -- but the thing is there is still a negative drag of the increased deposits coming into Belgium. And that continues to be the case, be it slightly lower effect than last quarter because of these high rates and replication of -- into a 10-year cyclical. You have to remember that it's not -- yes, below 5-year bonds. We invested in 10-year bonds on a cyclical basis. So that's going to be there. And that is -- that's why I'm saying it's going to be only partly offset by further loan growth at improved margins. And the total effect is, of course, difficult to judge at this moment. That's why we also prefer not giving any guidance for Belgium separately. I hope this answered your questions. And otherwise, of course, we can follow up afterwards.

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

And I will take the second and the third question, Benoit. First on insurance side, indeed, 78% is very low combined ratio, and you're fully right, this should be normalized. But then the second part of your question is obviously very difficult to understand by when and how much. So the guidance was 92%. The long-term guidance is 92%, which is perfectly doable given the underlying quality of our book, and this is true for all the countries because all the countries currently are below 85%. So when will it normalize? It depends, first of all, the reason why it's so good in this quarter 78% is because of the fact that the storm only cost at this time, EUR 6 million, if you take that to normal levels, EUR 25 million, let's say, then the combined ratio would be in the 80s, which is still stellar. We're just still beating the market with, I think, 10 points percent. Now in terms of normalization, people going back to work again, people going more on -- during the weekends on travel and so on and so forth, that will indeed normalize a bit more the claims level. I don't think we will get to 92% this year, for sure, not, except when we have abnormal natural catastrophes, but for the normal type of business, on the non-life side, we will not get there. We will get there over time, we'll see. I think 92% is still stellar compared to the average of the European insurance market. But it will gradually normalize over time. So let's say, 2, 3 years. In terms of capital and in terms of level of distribution, actually, I'm going to repeat what I said on previous occasions. So it's indeed, our surplus capital is not defined straightforward, 15.5% every penny topping that is considered to be surplus. And all surplus capital is at a discretion for distribution by our Board. So your question was are we going to distribute this as of 2022. The answer is, yes. And the answer on your question, how will be answered by our Board. They have several means in doing so. It can be a share buyback, it can be a cash dividend. They have several options, and that will be decided by the Board. As you can imagine, we are early May in 2020, we have not discussed that at our Board in that detail. But surplus capital topping 15.5% is capital to be distributed by us.

[Operator]

Next question comes from Kiri Vijayarajah.

[Kirishanthan Vijayarajah, Analyst]

Welcome back to the earnings call, Luke. Good to have you back. I've got a couple of questions on Ireland, if I may. So firstly, is there any update on how commercial momentum has been there since you announced you're going to quit the market in Ireland? Have you seen any sort of staff or customer attrition that's worth noting? And then linked to that, I wonder if there's kind of any software write-offs because I know you've been making some decent IT investments in Ireland as per your earlier Investor Day or other kind of restructuring charges we need to think about for Ireland that could be triggered by the sale?

[Roger Elie Popelier, CFO & Executive Director]

Kiri, many thanks, and great to see you as well here, and hopefully also, I can see you physically as well very soon. So on Ireland, there is -- for the moment, we don't see any employee employees leaving the company that -- at the moment, we have a very strong and dynamic team, very -- where we have a very strong relationship with, and we have done extensive communication on what is -- [indiscernible] communication as well what is going to happen, and we give them visibility on the transaction and particularly on the fact that this is an offer that we, at the moment, are looking at where we are negotiating in terms of conditions, where this is being done. But at the moment, we continue our business. And we are very much focused on this, result of which people continue working, do what they do. Of course, it's not helpful that they know that potentially this deal could happen. But they are doing their work. We don't see any people leaving. Of course, it's early days, and we'll have to see. We are putting in place also some incentive plans to make sure that people remain. And that, I think, will also be a big incentive for them. And thirdly, on customers, we maybe surprisingly, we see quite still customers coming in, not so much for new current accounts, but on the mortgage business, it's actually doing quite well. Not as good as anymore as the first quarter because it was a stellar performance in the first quarter in terms of market production, first quarter as well, fourth quarter and the first quarter was stellar. Obviously, has produced a bit, but the broker business is still going strong. On the restructuring costs, obviously, we will have to look at the deal as a whole. We don't give any details, but you can imagine, this is an asset and liability deal. So we are selling our underlying assets, both nonperforming to one party, nonperforming part to potentially Bank of Ireland, also the liabilities. And then we will have a ramp, which is there. So there will be restructuring costs. That is obvious. But we don't give any guidance on how much that will be. But obviously, in the calculations we made when we looked at the deal with Bank of Ireland that has been taken into account.

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

And Kiri, if you allow me just to add something to what Luke's just said, on the communication towards our staff on the working schemes and the incentive plans. They have been announced this morning to old staff. So clarity has been given to staff as we speak.

[Operator]

Next question comes from Robin van den Broek.

[Robin van den Broek, Research Analyst]

Luke, also from my side, welcome back. Maybe first question on capital. I was just wondering about the insurance unit. Last year, you basically skipped the upstream to the group because of the several guidances that were in place. The unit is currently capitalized at 235% standard formula, so that seems almost courageously high. I was just wondering what should we expect from that side this year? Should we just expect the normal remittances to come through? Or could we also see a catch-up, which will obviously feed into your group CET1 ratio, and as such, also increase the dividend capacity on that side? And also maybe an update on home state sovereigns. I think last year when one of your peers was able to get an RWA reduction on that side, it sounds like you would appeal that treatment for yourself as well. And maybe in relation to Ireland, I understand you can't share too many details now. But can you just explain when do you think you could take the capital out, assuming that both deals were basically find a positive ending? I assume you have to hand in your banking license before you can actually upstream the release capital to the group, which is probably not going to happen this year, more likely to be next year.

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

Thanks, Robin, for all of your questions. On the insurance side, you're right. We did not upstream dividends, and to be it straightforward, there was a recommendation, not only in the banking side, but also on the insurance side, and we decided to follow that guidance. As you know, we don't need capital group levels. So therefore, we did not have a discussion or a fight with our supervisors. But we do have a capital ratio solvency ratio of 235%, which is -- you called it outrageous. I would not call it outrageous. The thing is rock solid. And that means that, indeed, we do have surplus capital. We will resume dividend payment as of the moment that we can allowed by the National Bank of Belgium, which is the supervising authority for the insurance side. And we will do so, taking into account our capital levels, which we require to steer the insurance business group-wide. So yes, you can expect further upstream to the group. In terms of home state government paper and the risk weighting with that, you're right. There was one of our peers doing so. And you're right, we were appealing that with our supervising authority, which is the ECB. We're in the middle of that process. So it's a bit difficult for me to make any comments because those comments might influence the way of thinking, the line of thinking of our supervisors. So please, apologies for that. And then the latter on Ireland, and I forgot to give that part to the earlier question on Ireland. I do apologize. But indeed, you're right, this deal is not going to be settled and -- I mean, settled in the way you formulated the question to get out -- to take out the capital. So if we are going to settle all the deals, then we will go in to close those deals in the course of 2022, and therefore, capital releases will only be considered as of that moment. Until further notice, as Luke has indicated, we will have a further continuation of our business as we speak.

[Robin van den Broek, Research Analyst]

And then Johan, sorry to come back. But on the insurance, is there any potential for a catch-up on remittances? It's not very clear how you will be looking at remittances when the NBB would open the way for that.

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

Yes. So what we do is we do steer the insurance -- like the rest of the group. I will induce the steering of the insurance group taking into account solvency ratios. Those solvency ratios are then defined taking into account -- I mean, the longer-term perspective. It's a kind of a target as well. And everything which tops that target is going to be streamed up to the group.

[Robin van den Broek, Research Analyst]

Okay. So there is potential for something extra to come. Okay.

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

Correct.

[Operator]

Next question comes from Tarik El Mejjad.

[Tarik El Mejjad, Equity Analyst]

Just very quick one question just for me. And welcome back, Luke, from my side as well. So on the -- on Ireland and on the digital investments and I understand you've been using Ireland as almost as a lab to develop new technologies that you'll implement within the group. So how that would work? I mean, would you repatriate some of these platforms, teams to Belgium? Or this is something already done in your November plan that you presented was it was more than look like. Just really a quick question to understand how you deal with that.

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

Thanks, Tarik, for your question. Actually, it's quite simple. So on the digital investments, which we have been doing, mobile applications, so on and so forth, be aware these are group applications. So we are running platforms group-wide. And for instance, mobile application platform, which is backed by our teams in Slovakia. And therefore, we don't have to roll back anything in that perspective, for instance, on the mobile side. Other parts of the digital investments worked the same, for instance, the whole investment of Kate is a group-wide investment, and we have similar things in that perspective as well. And then I come back to the answer, which was given by Luke earlier on. We do not disclose anything on detail on the platforms in general, so not only the digital platform, but the other ones as well, as long as the deals are not closed or not further progressing in that perspective.

[Operator]

Our next question comes from Martina Matouskova.

[Martina Matouskova, Equity Analyst]

First, congratulations on the results, very good print. And then on questions. I think you've been very clear guiding on distribution that anything above the 15.5% is for distribution, which is great. And I think, hopefully, consensus has moved the direction now. But when we think, you still have a surplus capital and lots of excess capital, and it comes back to the questions of consolidation, to see acquisition. I know it's very difficult to comment, especially if you are looking, you cannot allow what you are looking at. But just maybe your thoughts on the sector, do you see the activity picking up and especially with the surprise book with the Hungarian government on AEGON and Vienna Insurance Group. Does that open the opportunities for you in the Hungarian market or not really -- kind of color about that would be welcome?

[Roger Elie Popelier, CFO & Executive Director]

Thanks, Martina, for the congrats and for the questions. So on the 15.5%, you understood it well. So that is indeed everything topping that number is considered for distribution. And using of capital in general, is indeed considering as well M&A activity. We have been doing this in the recent past as well, and we continue to do so going forward. Your question about, is there any activity in the market is indeed a tricky one because if I would start to give details, then I might hamper my potential acquisition process. So I'm very, very careful. But let me go into the question which you just asked referring to Hungary. Yes, we were extremely interested in the AEGON deal. As you know, we didn't make it, which we still regret. I think that what is now happening with the AEGON activity in Hungary is discussion which goes a bit further than a pure M&A acquisition, that's something which has been -- has to be dealt with by the 2 parties involved, including the Hungarian government. But it does not change our position for Hungary. If we can strengthen our position there, both on the banking and/or on the insurance side, we will not hesitate to do so. We are committed to the country. We are committed to the business there. And if we can strengthen our position, we will not hesitate.

[Operator]

[Operator Instructions] We have one more that's just appeared. It comes from Phelbe Pace.

[Phelbe Pace, Equity Analyst]

This is Phelbe Pace from SocGen. Apologies if I'm dragging the call, but just one question that I'd like to squeeze in, if I may, as a follow-up to the previous question, indeed. There have been some press reports today suggested that NKBM, that is Slovenia's second largest bank, which has a significant market share in the country of about 20% in assets and loans, was gathering some interest by 2 important banks from an acquisition perspective. So I just wanted to know if KBC could be potentially interested in such a deal, so to say, simply to understand that your policy is to think of bolt-on opportunities only in markets where you're present, but I assume this is because you want to avoid ending up with marginal low market share businesses, which wouldn't be the case presumably with NKBM. So I just wanted to have your thoughts on this, not specifically on the deal, of course, but just to simply understand if your policy of making bolt-on deals only markets where you're present is a very strict one or not?

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

Thanks, Phelbe, for your question. And I mean, I have to reflect on this question, taking into account what I said on the previous one. Indeed, when NKBM comes to the market, this is not a core market. But if I would now say that I'm utterly interested than I actually calling a couple of shots. So I said just, listen, on activity, we are interested in the Central European market. We are definitely considering our own core markets to strengthen our position, and everything else until further notice is speculative. But I understand what you said, and it's quite an interesting way of thinking.

[Operator]

There are no further questions.

[Kurt De Baenst, General Manager, Investor Relations]

All right. This sums it up for this call. Thank you for your attendance, and I hope you remain healthy. Take care and enjoy the rest of the day. Cheers.

[Operator]

Thank you. Ladies and gentlemen, that concludes your call. You may now disconnect. Thank you for joining, and have a good day.