KBC Groep NV

XBRU:KBC

Earnings Call Transcript 2022-Q1

[Operator]

Good day, everyone, and welcome to the KBC Group Earnings Release Q1 2022 Conference hosted by Ilya Vercammen. [Operator Instructions] I would like to advise everyone this call will be recorded.

And now it is my pleasure to hand the call over to Ilya Vercammen. Please proceed.

[Ilya Vercammen;Investor Relations, executive]

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 Thursday, the 12th of May, and we are hosting the conference call on the first quarter results of KBC. As usual, we have Johan Thijs, our group CEO with us; as well as our group CFO, Luc Popelier, 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, executive]

Thank you very much, Ilya, and also from my side, a warm welcome to disclosure of the first quarter results 2022. And let me begin with the key takeaways. As always, well, we have posted an excellent result of EUR 458 million in the first quarter 2022. And the reason why we call it an excellent result is actually in the fact that we have, in this quarter, a couple of things which are quite remarkable also in terms of bringing the EUR 458 million down and some one-offs.

Let me explain the latter. First of all, this quarter is as traditional, characterized by the fact that the bulk of the bank taxes are paid in 1 quarter. And this is also true for this quarter, which means that we have paid EUR 514 million bank taxes in this quarter. This is an amazing amount. If you would exclude those bank taxes, then the profit of this quarter would have been around EUR 870 million after tax. And then out of a sudden, the number becomes completely different. As a matter of fact, in the -- if we'd exclude the one-offs, which are particularly into this quarter, then the picture becomes also completely different.

Let me give you the one-offs, which I'm referring to. First of all, we have booked in this quarter an extraordinary bonus of EUR 41 million, which we have paid out to our staff, and this is reflecting the very difficult COVID year 2021 and the excellent job done at that time. Next to that, we have also a couple of one-offs, which are related to the sales transaction in Ireland, totaling EUR 31 million. And we have put in EUR 11 million write-down on the sale of a headquarters building here in Brussels, that is EUR 11 million. Now if we would bring that into account, then we are talking about in total EUR 170 million of one-offs. If we bring that into the numbers, then all of a sudden the number which is EUR 458 million becomes EUR 600 million. And then this is indeed a completely different picture.

I will explain later on that we have put in a safety buffer as well on the impairment side, and that safety buffer is reflecting the very difficult situation we are all in in Europe, which means, amongst others, the war in Ukraine, Russia and also the impact of that war on the commodity price, energy prices, inflation and so forth. And for that reason, we put a safety buffer of EUR 223 million.

So if I would compare apples with apples and I would make a comparison between quarter 1 of last year and quarter 1 of this year, and I will take out the one-offs, which I just highlighted, then the picture becomes completely different. And the picture means that the profit has grown with 40%, 4-0 percent, and that's indeed a very strong performance.

Now let me explain how that extremely strong performance is translated in the underlying P&L numbers. Well, first of all, I can summarize it in one sentence, the commercial machine in all our activities in all our countries have been performing excellently. First of all, we boosted the sales of our loan book, both on the mortgage side and on the commercial side, we had a growth of 3% on the quarter. We have a strong increase in our deposits, 5%. We had one of the best quarters ever in terms of our sales and asset management. As a matter of fact, we have outperformed the top year 2021 almost entirely in 1 quarter. I think this is indeed a stellar performance.

The -- next to that, we have also realized already now all our responsible investing targets of the full year. So in that perspective, also on sustainability side, things we're doing excellent. The non-life insurance business has performed tremendously with a 9% growth. Life insurance business on the unit linked was more than 30% up on the year. And then despite the fact that we were hit by the worst windstorm for a very long period, the combined ratio on the insurance side stands at only 83%.

Regarding the costs, the costs are maintained well under control. And as a matter of fact, the cost/income ratio before bank taxes stands at the same low level as it stood last year, which I think is in stellar performance, it's 48%. Why is it stellar performance because 2021, remember, was a COVID year and for that reason, there were a lot of costs like travel costs and so on so forth and investment costs on the IT side, a little bit lower than normal, which is indeed fully compensated now by the cost maintenance, which we have done in the past quarter.

You will be not surprised when I say that the return on equity is again at 14%, including the extra safety buffer on the impairments of more than EUR 200 million and the ratios in terms of our capital stand at a very solid 15.3% liquidity ratio, 50% above the legal requirements. So in that perspective, it is indeed -- it was a very strong quarter or let me say it as follows, it is a very strong quarter.

And I already highlighted, and you can see that on the next page, the fact that the Russian-Ukrainian war has impact, of course, on our society and as a consequence, also on the results of KBC. Let me be straightforward. The immediate impact, the direct impact across the board of KBC is 0. So we don't have any direct impact yet. But if I look into the exposures, which we have had. So as you know, we already disclosed that on the fore hand, KBC has no direct exposure nor to Russia, nor to Belarus, nor to Ukraine. So that perspective is indeed is 0. But the only thing which we have is some trade finance activities and therefore, some transfer risk to Russia, and that is limited to only EUR 55 million, we [indiscernible] services stance, and we put that to 0 in our provisioning.

We have also taken into account a certain philosophy, I will explain that later on, on our other loans, which we have in the other countries, which are not loans to Russia or Ukraine or Belarus, but just Russia loans to our customers in our core countries, and we've taken provisions to that. I'll come back to that in detail later on.

Regarding the insurance side, no exposure. Asset management, no exposure, let me correct myself. We have EUR 150,000 of exposure to Russian and Ukrainian assets, which I can easily translate given the total assets under management at 0.

Cyber Risk, here we are taking full measures, and we are in this perspective not more under attack than it was in the recent past. So in that perspective, all additional measures have been -- preventive measures have been taken. We do expect an impact on the GDP growth of -- and that's already guided on our previous occasions of between 100 and 150 bps. To be very concrete, for the euro area, we conclude that there will be a negative impact on the GDP growth for 2022 of 120 bps, bringing it down to 2.3%. And then the impact -- the direct impact of the fact that Sberbank Europe went into default. And as a consequence, their subsidiaries in the different countries where they are active indeed, but also the default.

Our exposure in that perspective was 0, but given the fact that Sberbank Hungary went into default, the deposit guarantee fund stepped in and the sector had to contribute in that perspective to compensate for that deposit guarantee fund. Our stake in that compensation was EUR 24 million, which is taken into account of the increase of the bank taxes. So that is what about the exposure on Russia. I go into the detail for the safety buffer, which we set aside on the lending side later on.

In terms of the Page 5, where you see the overview of our profitability, solvency and sustainability and digitization targets, you can see that KBC is in the dark green zones. So we're performing quite well. And the performances are in the first 2 on European level the last 2 are on a global level where we are performing indeed quite well.

Page 6 gives you an overview of the building blocks is actually indicating the diversification of KBC Group. And in that perspective, also, I can say that the diversification is driven by asset management and for sure, also the insurance side. But obviously, with the increase of the starting increase of the interest rates, we will see here the KBC is in principle, if you do a recalculation a 50-50 balance debt interest income, other income, that will indeed change a little bit in the nearby future, but it's constantly showing our good diversification in our results.

The exceptionals I already highlighted on Page 7. So I'm not going to dwell up on this. Mind you, and the biggest impact there is EUR 41 million of staff bonus. But as I indicated, it is totaling EUR 101 million as a consequence.

On Page 10, you can see the split-up between the banking and insurance contributions. There's a bit more now on the insurance side, 25% of the total, which is obviously due to the fact that on the banking side, the impact of the bank tax is kicking in, in a very significant manner.

Okay. Now to more serious stuff. What about net interest income, in that perspective, we can indeed announce good news. And that is interest income continues to rise. We have an increase of 2% on the quarter, 12% on the year, and this is driven by 2 things. First of all, very strong growth of our lending book. The growth of the lending book is 2% on the quarter, 7% on the year. This is on the total loan book. I mean if we would start to exclude, for instance, the fact that we are on the exit on Ireland, which is still a EUR 10 billion loan portfolio. If you would decide to exclude that, the numbers would be significantly better, start to speak about 2.7% growth.

In terms of the split up between retail loans and commercial loans, it's more or less the same. So it's about 2% growth each, which is indeed stellar performance at 7% on the year, and that shows indeed a very strong evolution of KBC in the different countries in the lending business. Deposits were growing 5% on the year, given the interest rate increases, this is no longer bad news, but it also clearly shows that KBC is a well-trusted partner for a lot of customers, a lot of countries. We could clearly see that again when Russia invaded Ukraine, as of the 24th of February, we were indeed considered by a lot of customers, also customers of smaller banks as a safe haven in all the countries where we are present in that region.

In terms of growth, we also see that our net interest margin has gone up in this quarter with 6 basis points, now stands at 191 basis points, and this is primarily driven by the fact that the interest on the policy rates in Czech Republic and in Hungary to a lesser extent, are moving upwards. For the other Eurozone countries, the margin, for instance, in Belgium went slightly down, and that is mainly due to the fact that competition is still very strong. And that, of course, KBC is also growing its book and defend this market share.

And as a consequence, it mitigated a little bit downward the growth of our net interest margin. In terms of the other contributors on the net interest income, I can clearly say that KBC continues to build upon its short-term cash management, and it's definitely driven also by what is happening in Czech Republic in terms of the policy rates, and we continue to grow our negative charging of monies in current accounts that went up to EUR 12.2 billion, which is a rise of EUR 2.7 billion.

In terms of the fee and commission income, I can again say this was indeed a very strong quarter because it was despite the fact that the financial markets had a negative impact on the assets under management. So the turbulence on the market generated a decline of assets under management, EUR 13 billion. Now we grew our book on the contrary in our sales side. And as a consequence, the total number, the net number is a decline of EUR 8 billion.

Now let me come back to that in detail. So first of all, we grew our book significantly. In terms of inflows, we had EUR 1.6 billion of net inflows in this quarter. As a matter of fact, that was booked mainly in the first 8 weeks of this quarter. And that actually to express what it means, EUR 1.6 billion of net inflows is as much as the net inflows in 3 quarters in 2021. And then you remember that last year, we had net inflows in every quarter. So this is indeed a stellar result.

We see, of course, a little bit the inflows declining after the war, after the start of the war. But still, also in March, we had positive net inflows in KBC Group under the investment product side. So fee and commission business was up significant on the entry fee side. It was because of the decline of the assets under management and the fact that management fees are calculated as a percentage of those assets under management that was revised downwards.

In terms of the other contributors, we know that, of course, asset manager is 2/3 of the pack, 1/3 is related to fee business generated through credit fees to payment business and so on and so forth. Payment business was slightly down compared to previous quarter, but mind you, the fourth quarter is traditionally very, very good in terms of payment because of yes, the Christmas period and so on and so forth. If you compare the payment fees with the previous year same quarter, then it's up significantly as a matter of fact, EUR 23 million up obviously. COVID is going out of our life at least in terms of lockdowns and so on and so forth. And that means that payment business coming back to normal territory.

Credit fees were up on the quarter and on the year. And what was, again, very good was the business which is related to securities trading in that perspective, despite the fact that we have a record year 2019, a record year 2020, a record year 2021. This quarter started even better, and we have seen the number of customers flowing in on, for instance, the Bolero trade platform in Belgium with 6%. We have seen the transactions rise with 22%, and the same can be said about the trading platform in Patria in Czech Republic and in Hungary. So that is doing actually very great.

In terms of -- the distribution costs went down compared to previous quarter, it has to do with the seasonality of the fourth quarter. If you compare it with the previous year, you can see that it is slightly up EUR 5 million, and that is fully linked to the fact that the insurance business is boosting and, of course, security -- sorry, commissions are paid on those sales if you have a strong growth on your insurance side, then you have to pay more commissions.

Now let me go immediately into that insurance business, non-life insurance business was up on the written premium with 8%. Far more important is the earned premium that went up with 9%, and that is indeed an amazing number. This is driven by -- and Belgium and the Central European countries. So in that perspective, indeed the bank insurance model continues to pay off. What is also true is that in this quarter, we had a big windstorm in Belgium. As a matter of fact, we already said it in the introduction, this is one of the biggest one. I mean, it's at least the biggest one I can remember, and I'm about, what is it, almost 30 years in the insurance business. So it was a windstorm totaling EUR 87 million of claims provisions, about 38,000 claims at quarter end. And in that perspective, it obviously overshoots the reinsurance contract. I mean, the reinsurance priority kicks in, and that is limiting this type of claims down to EUR 40 million, take into account our captive structure in Group Re as well, then we will be more or less at EUR 47 million net claims.

So if you add those numbers to our combined ratio and to other claims, then the combined ratio is increasing to 83%, which is an extraordinary result given the impact of the storm. Now how come that the 83% or the combined ratio is that good? It has to do with the fact that on the rest of the portfolio, in all countries, the major claims and let's say, the normal regular claims were quite low. It shows again the underwriting quality in all countries because the combined ratios in all countries involved are hovering around 83%, 84%. So that is indeed a token of good underwriting over a long period of years.

In terms of the life sales, no big surprise here. We do see that the low interest rates in the Eurozone, and that is mainly Belgium, of course, is having a downward effect on the sales. Definitely, if you compare it on the quarter, you need to be aware that sales are driven seasonal. And in that perspective, fourth quarter is always a top quarter also driven by tax returns in Belgium. So if you compare it with previous year, it's exactly the same amount we are talking about a difference of only EUR 3 million, and that's not a lot.

Positive news there to say is that the unit-linked business grew 35%, which is quite a lot if you compare it on previous quarter, it grew with 39% -- sorry, it grew, yes, indeed, at 39%, which is a significant increase. So unit-linked is now totaling 54% of our life insurance sales in this quarter. Other good news is the performance on the financial instruments at fair value, where we do see a significant increase on the quarter, EUR 182 million up. That's mainly driven by 2 things. First of all, the dealing rooms had a stellar performance in this quarter. 100 -- I round the numbers, EUR 100 million increase compared to previous quarter, EUR 40 million increase compared to previous year. Reason it's obvious, first of all, a lot of volatility in the market, which helps a lot in dealing rooms, obviously, because customers are using them hedges in order to mitigate the impact. Second thing is the upward shift of the interest rate yield curves and the widening of the cost currency spreads, which is triggering of course, reactions of our customers.

On the second big contributor is the mark-to-market of our ALM derivatives, which are indeed EUR 80 million upwards moving on the quarter, and that has to do with the fact that, amongst others, the impact of the increasing HUF rates are now put into hedge accounting, as we announced last year. This has positively got significantly to that mark-to-market of the ALM derivatives.

All the other things, the XVAs and the equity is more or less neutral compared to previous quarters, we've not spent any time there. What about net other income stands at EUR 54 million, which is a bit higher than the normal run rate, which is -- I mean, hovering at around EUR 45 million, EUR 50 million. We are now at Eur 54 million, so it's a slight overshooting that run rate, but let's not waste too much time here because it's not important as such.

Going into the cost side. Well, the cost excluding the bank taxes and the one-off items decreased quarter-on-quarter. So that's indeed the good news. I think it makes also much more sense to compare it to previous year. Also there, the cost performance is actually extremely well. So if you look at the bank taxes, which are, as I said, on the rise, 9-0, EUR 90 million, if you exclude the FX effect and you exclude the one-offs, amongst others, the EUR 41 million staff bonus, then you will see that our costs are only up 5% on the year, where we are comparing with a COVID year, which was extraordinarily low.

So in that perspective, we are even lower than the guidance which we gave on beforehand. So our cost/income ratio now stands at 48%, excluding all the bank taxes. If you compare it with last year, it was last year, 51% in full year 2021. If you compare it with not excluding the bank taxes, but spreading it around or uniformly over the year, which is actually what you normally could expect, then the cost/income ratio goes to 53%. And if you compare it with last year, it stood at 55%, also there an improvement. So in this perspective, indeed, it's showing that we have been able to manage our costs significantly downwards in the quarter.

Now what is going forward going to happen, well, inflation kicks in. We already see that in the first quarter in this year and the inflation kicks in more significantly than what was originally budgeted by KBC. So in that perspective, going forward, indeed, you might expect a raise or a rise, sorry, of the costs in the quarters to come.

The fortunate thing is that not only the costs will be reviewed upwards. And the cost side is indeed because of inflation, but also the income side will be reviewed upwards, and that is because of continued good sales and then according to plan and then, of course, [indiscernible] move of the interest rates and the policy rates, and that will be translated in a strong increase of income.

As a matter of fact, if we then look at the evolution of the cost-to-income ratio for this year, the guidance which we have given will be, of course, reviewed. And what I can say already today is that the guidance which we have given will be reviewed in a more positive way as what we have announced, what is it about 3 months ago. So to express it in terms of jaws, the jaw, which was linked to the original guidance is positively reviewed after this quarter. We will give also further detail on that guidance for the long-term guidance, which means until 2024 on the back of the second quarter results, where we will have more insight of the evolution of the war because this is a crucial element in that perspective. And we will have then also more insight on the evolution of interest rates and inflation.

Coming back to bank taxes, Page 17, significant impact. I already mentioned that 13% of our OpEx is now bank taxes, and this is different than every country. You can read the numbers on Page 17. But let me go immediately into the impairment side. What is crucial in that perspective is that we have -- if you look at the underlying book, we have EUR 33 million of releases. So on the regular book, EUR 33 million of releases, which is mainly driven by Belgium and to a lesser extent, Czech Republic. In that perspective, it is also logical that if we have releases on our regular book, we can immediately conclude that there is no impact anymore of COVID on the traditional lending book in our group.

As a consequence, of course, we have a release of the COVID buffer. The COVID buffer stood at EUR 289 million at the end of last year. We are releasing now as of a consequence of what I just said, EUR 205 million. And because of the evolution of the sales transaction in Ireland, we also wrote down an extra EUR 31 million on that COVID buffer, which means that 5-0, EUR 50 million is still left in that COVID buffer, which is then set aside for potential extra highly critical, vulnerable sectors and for the exposure which we have in Hungary, where the government has, indeed, as you know, in November made statements about the moratoria.

We -- as a methodology, we say when the moratoria run down, we have a, let's call it, a probation period of 6 months. And after the 6 months, we can release. And for that reason, we keep EUR 50 million, 5-0 COVID buffer left. That means, as I said, in principle, EUR 33 million loan impairment releases, EUR 205 million impairment releases on the COVID buffer.

Now given the evolution of what is happening in our European world, given the evolution of the invasion of Russia in Ukraine and the impact on commodity prices by the invasion, but also by the -- let's call it, the fallout of the COVID crisis, we have reconsidered our position in terms of potential emerging risks going forward. Inflation is high, negative impact on credit growth, and so what is the potential impact going forward?

Let me start with the most important thing. Yes, Page 20, you can see the detail. The most important thing is, as we speak, the impact is 0. Going forward, we have sort of potential consequences. And on Page 20, you have the full split up. So on the direct impact, the answer is 0. We have no direct subsidiaries in the countries, Russia, Belarus and Ukraine. Second thing is, if you look at our commercial exposure, which is in as in trade finance, and therefore, we have a transfer risk on Russia. The stance is EUR 55 million, EUR 49 million is that trade finance exposure. We decided to put that immediately into write-down, which I think is a very conservative stance. There has been a good understanding, no exposure on Russian sovereigns.

Second thing is [ direct stops ] and principal direct stops, but secondary effects. What about secondary effects? So we made an analysis on our clients, get those clients at an exposure, for instance, to the country itself in terms of sales, in terms of profit generation and so on and so forth, which is more than 20%, then those companies which we are lending to, for instance, Czech Republic or in Hungary or whatever country or Belgium doesn't happen. For those countries -- for those companies, sorry, we took a very conservative stance, and we took a hit on that book.

The total outstanding exposure, we calculated at EUR 2 billion, which is resulting from a detailed analysis of our portfolio, which is then extrapolated. And the total P&L charge on that EUR 2 billion exposure, which we took into account is EUR 33 million, which goes immediately into stage 2. In terms of secondary effects going forward, and this is true for all of us. That is what is the impact over time on both retail and non-retail portfolios in terms of the higher energy prices, the supply bottlenecks, the rising interest rates which are coming and so on and so forth. What is the potential impact? Let's make an assumption there. And let's see how much of our book could potentially be hit.

Now in terms of calculation, we came to an outstanding exposure once again, same philosophy, detailed analysis in our portfolio and then an extrapolation, EUR 5.9 billion exposure on which we took ahead on a provisional lease of EUR 135 million, totaling EUR 223 million. As I said, this is a quite conservative stance because as we speak, the reality is 0.

All those things, which I mentioned on exposures, C and D are put into Stage 2. So we do take into account an extra buffer of EUR 223 million. So if you combine all the things together, then we come to the conclusion that our credit cost releases of EUR 238 million, minus EUR 223 million is indeed going down with EUR 15 million, 1-5, resulting in a credit cost ratio of minus 0.03, which is indeed very low.

In terms of further impairments on other things, we accelerated a couple of things in Ireland, as I said, which goes into cost, but also into impairments. So on the intangible and intangible assets, we have pulled forward EUR 24 million in Ireland and then the real estate impairment of EUR 11 million. Totaling EUR 22 million of impairments for this quarter.

The credit cost ratio is not only low on the road book, but it also means that the impaired loan loss ratio drops to 2.3% now, and that is, of course, triggered by the sale of the non-performing loans book in Ireland.

Now on pages 19, 20, I already spoke about 21, 22, and 23, and let me see, yes, 23, that is the detail, which I explained a second ago, so I'm going not to repeat that again. But on Page 25, you see then back again, the balance sheet already highlight the fact that we grew our book significantly. 7% on the commercial and retail side, 5% on deposit side.

You can -- sorry, I'm going to speak on Page 45, I have not a page in front of me. So that means that we -- you can pick out your favorite country where you look at the growth. Clearly, you see the 0 in Ireland, which is obviously the consequence of the decision which took to exit the country. And all the other countries are then indeed having strong growth levels significantly high on both the retail book and on the commercial line book. So I'm not going to go into the detail of every country with a good understanding that save us a little bit more time. So let us go to the solvency and liquidity positions of KBC Group.

The KBC Group has posted a 15.3% CET1 ratio that takes into account the new Pillar 2 requirement of 186 basis points. And that obviously also taking into account the profit contribution of this quarter. Now the reason why it came down is twofold. First of all, because of the increase of the risk-weighted assets. Risk-weighted assets which went up at EUR 2.7 billion, mainly driven by volume growth and the strong loan performance obviously is translated to an increase of the risk-weighted assets and to a EUR 0.4 billion increase of the market activities.

On top of that, the impact of the capital side is negatively influenced by the fact that we had -- that we have to take into account EUR 500 million of bank taxes in one single go. If you would exclude that, then the capital CET1 ratio would go north of 15.5%. The -- it's anyway strongly above the MDA levels and the OCR levels. And if you would take into account Article 104 of CRD V, then you could even deduct all those levels, 81 bps, which indeed is showing that KBC has a very strong buffer.

On Page 48, you see the detail of the composition of MDA OCR. Let's skip that. You see the capital ratios on Page 9 -- 49, sorry, and you see the leverage ratios at Page 50. For good understanding, drop, which you can see between '21 and '22 are obviously driven by the cash position, the money market, the short-term money market and repo opportunities, which we use to indeed underpin our net interest income. So in that perspective, if you would exclude the cash positions, which we have to have, then the leverage ratio would go back to 5.4%.

In terms of Solvency II ratio of the insurance companies, strong 217%. The increase is triggered by the interest rate increase, of course, and also the correction on the symmetric adjustment factor, which is driven by the decline on the equity market is contributing. It sounds counter-intuitive, but this is now the way how it is calculated, contributes to a positive contribution of that solvency ratio. Main driver there is the interest rates, [ 12 ] points percent.

Liquidity is super strong. We stand at the midterm, 149%, the short term, 162%, which is indeed a very strong performance. And let me then sum up all the things in one slide, which is Slide 53. I already highlighted the fact that this is indeed is a strong performance, which is -- I mean this is negatively influenced by the bank taxes and the fact that we put in a safety buffer for quarters to come of EUR 200 million. If you take out the one-offs, if you take out the bank tax, then it's a 40% increase compared to the same quarter last year.

What is also very strong is our solvency liquidity position, which is reassuring going forward, giving -- taking into account what is happening in our European area. And then also, last but not least, I would like to highlight that our assistant Kate is growing like hell. Customers are picking up Kate more and more. In the meanwhile, we have 2 million users -- active users of Kate, who completed 2.9 million interactions in 1 quarter to express it in terms of growth, this is 170% up year-on-year. And if you look at the interactions, it's even more flabbergasting, it is 221% up.

What is very comforting in that perspective is that customers are using Kate not only to check things and do a transaction, but they start to also communicate with Kate in an interactive modes. About 1 million of our customers have not only used a single step Kate, but also started communicating in Kate by asking her a question and go into a conversation with Kate.

Clearly, we also bridged another milestone, and that is the digital sales. If you look at the current accounts, consumer loans, the vast majority is already sold digitally. But to give you one idea, we have in the first quarter of this year in Czech Republic, more than 50% of our standard products, what is the standard product -- these are the products which you use anyway if you are a private individual, more than 50% of those standard projects are sold digitally. This is the first time ever.

In terms of autonomy of Kate, to give you an idea, autonomy means that you address Kate with a question, and Kate gives you the answer and the solution without human interference. So without somebody from the network or the call center interfering, that autonomy stands now at 43%, which means that she can answer 43% of all the questions which are asked to Kate. To give you an idea, the 43% is much better than we originally anticipated because the year-end target was 25%. So this is growing like hell.

Looking forward, what is going to bring in the future? Well, there is one fundamental unknown that is what is going to war. I was going to bring the war. Let's keep the fingers crossed that this will not be an escalating war. In our base case assumption, we assume that the war will go on for months, but it will not escalate. It will have a negative impact on the economic growth. It will have a negative impact on inflation. And those 2 things are translated indeed into reactions of the different central banks. We already saw the reactions of the Czech National Bank. We saw the reaction of the Hungarian National Bank. We saw the reaction of the fab, but we also will see the reactions of the ECB, the rhetorics of the last days and weeks are indicating that indeed rate hikes can be expected already in the third quarter and then definitely in the third and fourth quarter.

What is the impact on our guidance? Well, last quarter, we guided indeed concrete numbers on 2022 and 2024. As I already indicated during the call, the impact is, of course, significant on those numbers. Let's face it, costs will go up. It will be slightly higher than what we have indicated. And the fortunate thing is that net interest income will indeed be going up more strongly than the cost side. As a matter of fact, in that same way, I can easily say that what the difference is between the income growth and the cost growth previously guided. And currently guided is that there will be an improvement for the year 2022. So the jaws will be better than what they were in 2022.

In terms of the net interest -- sorry, not net interest income, in terms of the credit cost ratio, we guided 10 basis points. Well, because we put in a buffer of EUR 223 million, which is, as I said, not a single penny of that is used yet. We put in a buffer of EUR 223 million. We now guide a credit cost ratio, which is higher than 10 bps, but below 25 bps. For good understanding, the 25, 30 was through the cycle and guidance of previously.

And with understanding, we will continue to monitor the situation, and we will adapt that guidance in concrete terms also for 2024 on the back of the second quarter results. Also I have then the opportunity to have more insights of the evolution of the situation in Ukraine. I would like to keep it there and give back the floor for questions from your side.

[Operator]

[Operator Instructions] The first one will come from the line of Benoit Petrarque.

[Benoit Petrarque, analyst]

So yes, the first question is actually on the NII sensitivity. Could you update us on -- well, the sensitivity obviously in Czech Public. We've seen some hikes recently. And I was curious to understand how much positive NII we could still see in the coming quarter from that? But also probably more importantly, in kind of Eurozone mainly Belgium, when do you expect the headwinds on the replicating portfolio and we continue to see some drag from low rates in the first quarter. But when you expect that to turn into a tailwind on the kind of Eurozone NII for KBC? And also looking at the -- what SEBI is saying, how much NII uplift we could get from 25 bps, 50 bps hikes. So that will be the first question.

And then maybe turning more into this Russia and Ukraine exposure, the EUR 2 billion, yes, have you -- did you run any kind of scenarios like you've done during the COVID like base case, optimist and more pessimistic scenario on credit losses potentially linked to those [ counterparties, ] which are, well, highly exposed to Russia and Ukraine. And I was also -- I was wondering if you -- how much risk-weighted assets you have on this book and if we could see some risk-weight asset inflation in the coming quarter from that?

[Luc Popelier, executive]

Hello, Benoit. This is Popelier, the CFO. We're just discussing who is going to ask -- respond to each question. Now for the NII sensitivity and the potential tailwinds on the euro current accounts, savings accounts, I will answer that. So the sensitivity going forward, we do not provide any very detailed sensitivity. But as you know that we've given you a simulation on a parallel shift of interest rates, now this is mainly driven by the euro obviously because that's the largest book. There, we have an increase of 4% in the first year. This is a year-on-year basis. 4% increase versus the current level of interest income. And that will increase because next year thereafter, it's already 11%. So that gives you a sense of how it evolves. I think it makes less sense to give you, for example, a sensitivity on the short term, for example, ECB rates because when ECB trades move, the whole yield curve tends to move. And the sensitivity quickly gets compensated or enhanced by movements in other parts of the curve.

On the tailwind potential when the current accounts and savings accounts will potentially provide support to the NII, I think we're very close to that because with the strong interest rates rise that we have seen in euro, I think we will be very, very close to that.

Sorry, I forgot the next question was Czech Republic. Yes, the sensitivity for the Czech Republic, that is now down to about EUR 15 million, down from EUR 20 million before. The reason for that is that obviously, as you know, there have been shipped some deposits from current accounts and savings accounts to term deposits. Overall, as Johan already said, we have in our deposits increased overall, but there was a shift clearly from current account, savings account to term deposits and there for the sensitivity has reduced. Secondly, we have been already for a bit lengthening our duration on the replication portfolio of current accounts and savings accounts.

And Johan I think will answer the other question.

[Johan Thijs, executive]

Yes. And then we'll go Benoit also, hello from my side, we will go to the second question, which is the exposures on, I mean, the emerging risks, which are mainly related to indeed inflation, GDP higher interest rate, let's call it the war. So what about the exposure of the EUR 2 billion? Indeed, we have underpinned the numbers, the exposures, which you could see on Page 20. We have underpinned those with a sector analysis. And you can see that on the pages 20, let me see -- let me have a look back on pages 20 and 21 and 22 of the pack and 23. So on those pages, you have an insight of how it is build up.

Let me explain it in 2 words. What we have done is we have taken, first of all, an approach like you were familiar with in the COVID buffer. So we have done a quick scan of the different sectors. And then we did a deep dive in those sectors on concrete trials. And on those concrete trials, we started to analyze. So a good understanding they are not directly active in Russia or Ukraine or Belarus. And so they're not located there, but they do business with parties which can influence their turnover or their profits or their cost side.

And on the basis of the deep dive, we extrapolated that to our portfolios. And there we came to the exposure of EUR 2 billion. We took a very conservative stance, and that drove the P&L charge to EUR 33 million. The same approach was done on the secondary indirect credit impact of the whole portfolio. And then we looked into not business-related impact -- direct impact for, let me say, customers, which are doing transactions with Russian counterparts.

Let me give you an example. So the EUR 2 billion includes, for instance, a customer of KBC in Belgium, which is doing [ ag ] transactions with the customer in Germany. And that customer in Germany is having an exposure not to KBC, but having exposure to, for instance, Russian turnover. So I mean, you could consider this to be super conservative, but that's how we did it. The emerging risks as for the bucket #3 and the bucket number D that is going even further. You take the entire portfolio and you say, what would happen if energy prices would rise. What would happen if the cost of linking goes up significantly, what could happen if the interest rates are rising significantly. Would that mean -- what would that mean for our retail customers, what would that mean for our corporate customers and SME customers.

And there, we drill down a portfolio of about EUR 6 billion of potential worries and there we took a conservative stance of EUR 135 million of P&L charge. As I said during the call, currently, the impact and the reality is 0, so we don't see anything. So also your question about what about the impact of risk-weighted assets, there is no hardly any move on the PDs as we speak. So what is on Page 20 is just the provision. We don't see any PD movements yet.

What we expect going forward depends on how the war will evolve, how the inflation will evolve and so on and so forth. And then obviously, we'll have a change of environment and that might then translate into PD moves. But this provision is just a safety buffer. It has nothing to do with PD moves and has 0 impact on risk-weighted assets.

[Operator]

The next question in the queue is coming from Giulia Aurora Miotto.

[Giulia Miotto, analyst]

Yes. Two questions from me. The first one on momentum. So Johan you opened the call talking about the commercial machine working very well in Q1. And I just want to ask you, is that a bit backward looking? So is the situation changing now we are in May? What do you see on the ground, especially in CEE, is loan growth slowing sales of insurance products, asset management et cetera. So yes, that would be my first question.

And then the second question a bit more technical. So back to the NII. I think in the prepared remarks, you mentioned margins in Belgium on the asset side is being impacted and saying that KBC is defending the market share, but the margins are still low. So what are you seeing on the asset side of things? Are you managing to pass on the higher swap rates to customers, especially in the mortgages, not yet? Do you expect to be able to? So any update there?

[Johan Thijs, executive]

Thanks, Giulia, for your question. So let me answer the first one on the momentum and the commercial machine and where are we and what do we do? What do we do see or what do we do get to see in the nearby future. So first of all, what I was explaining was indeed for the third quarter, in total. So including the month of March, where we already had more.

Let me go bucket by bucket, but very briefly on the lending side in the first quarter, I mean throughout the entire quarter, we do see strong sales on the lending side, both on mortgages and on commercial loans, be it SMEs, be it corporate. Now if you want to know what's going to go forward, actually, I'm talking about the second quarter, which is a bit early, but let me give you an insight what we have seen.

First of all, on the commercial side, I mean, it goes -- I mean, very strong still. Honestly, and this is my personal opinion, I think we will only see effects after the summer. That's my expectation. And then it all depends on how the world is evolving. Currently, we don't see it yet on the commercial side, so commercial lending side.

On the mortgage business, they start to see the impact and talking about, let me say, the last 5 days, 6 days, you start to see the impact of the increasing interest rates. Yesterday, there was an article on the Belgium press saying, the mortgages have been never debt expenses since the last 3 or 4 years, 5 years, which is true. And that translates -- the good understanding, the interest rate is still low, if you compare it, for instance, but 10 years ago, but still, and you start to see that.

Now you don't necessarily see it negatively because not every country is the same. And in that perspective, what we have seen in the first quarter was really extraordinary. So if we would see a slowdown, then I'm comparing with the first quarter, I'm not necessarily comparing with the same quarter last year.

So let me summarize that. The guidance which we have given in the first quarter -- sorry, on the basis of the full year results 3 months ago on the loan growth, where we said, listen, we expect 45% that we are clearly above that level now. We stick to our guidance for sure. And as a matter of fact, because of the advance, which we have taken by the very strong performance in the first quarter, we have already realized 45% of the target after 1 quarter. So the remaining part, 55% of the absolute number, which we had to do to get our target -- to get our target don't achieve that 55%, we have 3 quarters to deliver. So that's the reason why we say we confirm.

In terms of asset management, super performance in the first 2 months, net inflow even in March, we don't expect this to be the same in the quarters to come because of the volatility. All depends on the evolution of the war. On the sales side of insurance, no difference. We see 0 impact also because of the commercial activities continue to go on.

Of course, we will see a little bit slowdown of car sales because of supply issues, but it does mean that those cars are ordered, that those cars are going to be delivered at just a bit of delay. So I don't expect that perspective, any fundamental change. And therefore, we have on the income side, confirmed our guidance that on the contrary, we actually have increased our guidance going forward.

[Luc Popelier, executive]

And on the net interest margin on the asset side, in Belgium, well, given the increasing rates, we are not able to fully pass that through to our clients at the moment. That is due to a number of reasons. There is a technical reason. For example, we give a guaranteed period for a short while, so that people can then see whether they can buy the property. And then they -- when we give an offer that they can eventually sign the offer, so they have a period in which that rate is fixed.

Secondly, there is competition, which makes it more difficult in an increasing environment to pass it fully through. And of course, the consumer behavior, if we do it too radically, there could be a backlash, so that we do it gradually. It does have an impact, therefore, on margins. You can also see that clearly on Slide 28, where you see in new production for mortgages, clear further decrease. And we believe margins will remain under pressure as long as interest rates rise, but we do expect to recover that over time. We see that already in the Czech Republic, by the way.

There, we had also quite strong margin pressures because of the very strong increase in rates. We now see that the margins are improving again or have improved again. So it's a bit, sometimes up, sometimes down. But there, we already see that sometimes we are able to improve margins again. But it will take a while, obviously, in the Euroland if interest rates continue to increase.

[Operator]

And our next question is Kiri Vijayarajah.

[Kirishanthan Vijayarajah, analyst]

Yes. A couple of questions on capital, if I may. So firstly, on Ireland, could you just remind us what the remaining capital impact is there because you're taking some upfront impairments through the P&L on things like real estate in Ireland. I'm not sure if those impairments were included in your earlier guidance? And also kind of hypothetically, is the competition authorities in Ireland impose some conditions alongside granting approval because I think granting approval is still the base case here. But maybe there's some conditions, could that influence or impact the size and timing of the eventual capital release? So basically, that 90 bps you gave us before, still the right number and they're kind of the moving parts around that we need to think about?

And then secondly, thinking about the timeline on the kind of next capital return plan beyond your ordinary and interim dividend later on this year. Is it the case that Ireland, Bulgaria, they all need to close, and then you take stock of the situation or so, I guess, the geopolitics as well and then take a view at the year-end stage, i.e., February next year? Or could you contemplate doing something sooner in the second half of this year. So just your thoughts on time line about what you could do in terms of extra capital return beyond the ordinary dividend.

[Luc Popelier, executive]

Okay. Many thanks for those questions. First of all, the capital impact when we do the sales transaction to Bank of Ireland, that is still about 90 basis points impact on core Tier 1. So positive impact core Tier 1, mainly driven by the fact that we will be releasing risk-weighted assets. That's we have about EUR 5 billion still locked in and that we released in 2 waves. The first one when we complete the transaction, then we will leasing approximately EUR 4 billion, and the rest will be released over time because part of that release has to do, for example, with operational risks, which have a 3-year average calculation and so on, so EUR 4 billion plus EUR 1 billion after that, and total of EUR 5 billion.

The impairments that we saw the last few quarters, which we took are purely a shift in time impairments, which we have thought to be taken at completion of the transaction, we've front-loaded those. The last one you see now in this quarter for the tune of EUR 25 million impairment has to do with the fact that when we are looking at the value of our assets, we looked at 2 scenarios, a scenario where the Bank of Ireland would be sold and when where it would not be sold. And when it would not be sold, then we would continue our operations.

As you know, we have now -- a few weeks ago decided that if the sale would not go through, then we would stop business anyway. We've communicated that during Easter. And therefore, if the sale of Bank of Ireland would not go through, those assets would not be valuable anymore, and that's why we decided to also write that down.

[Johan Thijs, executive]

Yes, and then I'll take your second question. So what about the distribution of capital and we're not talking about the regular dividend, we are talking about the, let's call it, the extra dividends. So the dividend policy has not changed. From a good understanding what we announced -- or the position towards the dividend policy did not change. What we announced a couple of months ago, it still remains valid.

Let me repeat for good understanding, at least 50% of our profit, including AT1 coupon is distributed to our shareholders. We have an interim dividend of EUR 1 per share normally in November, and then we have a definition of a surplus capital, which stands at 15%. And all surplus capital in that perspective, that will be a discretionary decision by our board to see what we are going to do with that in principle, it is, so turned out to -- or it's paid out to our shareholders in what kind of format is a decision of the Supervisory Board. That has not changed, also not taking into account the current circumstances where we are living in, and that means that we are not going to reposition ourselves in the second half of this year, but we will take that decision on the back of the full year's result somewhere in the first quarter next year, which is the same as we did this year. And therefore, it's a confirmation of what we have been doing.

[Operator]

The next one in the queue is Flora Bocahut.

[Flora Benhakoun Bocahut, analyst]

Yes. I'd like to talk about the Belgian business first. Obviously, we're seeing cost pressure from the high inflation in the country. But unlike the Czech Republic, it doesn't go with rate hikes yet. The NIM continues to go down. So for Belgium, what I'd like to better understand is how much of a squeeze we could see, especially this year between the revenue pressure on the NII with also the TLTRO benefit going away late this year and the cost inflation. Should we consider that the Belgian costs are probably going to grow high single digit this year and that the NII will remain under pressure this year, maybe even next year. And then on the Czech Republic, what I really would like to understand is maybe the risk on provisions and thanks very much for the Slide 20 because that's very clear, very useful. The question here is really the EUR 135 million provision that you took this quarter against the EUR 5.9 billion exposure that you consider is potentially at risk. Do you think this is enough or you don't rule out that there could be more provisioning coming there in the next quarter?

[Johan Thijs, executive]

Thank you for your questions. Let me try to answer those. First of all, I mean, on the guidance of the costs and on the guidance of the income, actually, we stick to what I just said. So we will have a dilution on the cost side, which is indeed influenced by inflation, which is indeed not necessarily the same between Belgium and other countries. As you know, a big chunk of our costs are related to staff expenses, obviously, and then Belgium staff expansion are automatically linked to the inflation. So in that perspective, you have that immediately pass through, let's call it like that, into our cost side.

In terms of Czech Republic, but also the other countries, inflation is not automatically passed through into our costs. That goes gradually, and that has to do with market reactions, how is the market picking up rate increases and so on and so forth, which are obviously influenced by the inflation.

So in that perspective, cost side are going up. And what I said, the costs are going up more than what we have guided in January of this year or in February, it was February this year. But -- as I said, the guidance on interest rate returns, which are linked to, amongst others, the net interest income are going up as well, and they go up more significantly.

Now we don't give us explicit split up between the countries and not for the cost, not for the revenue side. But the outcome of the sum of the 2 is that the jaw has increased because of the combined effect of cost and income review. So as a matter of fact, it has been positively reviewed.

And then there was a second part on the risk provision, and I lost my clue -- it wasn't enough, was the EUR 135 million enough. Well, it is with what we know today, -- let me be very explicit. This is conservative. Okay. But when you know it today, this is very conservative. So the outstanding exposure of EUR 5.9 billion is a conservative stance. If the war would escalate and we would go into a really significantly exposed more where potentially more countries are involved, then we have a completely different picture.

Then we have what is more countries involved countries, I'm talking about countries which are currently under the NATO surveillance. If that would happen, then we have a completely different picture. Then we have a completely different picture on GDP growth, a completely different picture on inflation, interest rates and so on and so forth. And then for sure all of us, whatever we are and whatever industry we are not necessarily in the financial industry, we will have a completely different picture.

So yes, this is with the situation we know today conservative stance, but all depends on the evolution of the war. And let us assume that the second quarter will give us some more insight. And on the back of that second quarter, we will further assess not only the guidance on costs and on the revenues, but also the guidance on Page 20 going forward.

[Operator]

The next question is Tarik El Mejjad.

[Tarik El Mejjad, analyst]

Just a very quick question. Can you update us on your prospects for M&A entering new home market on the back of the recent events? Is that something you still contemplate in CEE or you feel more cautious or, I would say, wait for things to clarify or be an opportunity on price? Where do you stand?

[Johan Thijs, executive]

So on the M&A side, actually, we stick to our policy that is we do consider M&A in our core countries, and that includes the bank and the insurance business. And then we always look at it in the same way. That means the assets of the company, which is then under investigation needs to add value. So also in terms of the return on equity in the midterm, it should contribute to KBC Group, and it needs to have a strategical fit, so both on the business side and on the geographical side, and that means we are not interested in investment banking activities and so on and so forth, you know the story. So that has not changed.

So if tomorrow, we get a possibility of strengthening our position on the bank and insurance side in the core countries, we will have a look at those assets. And to be very specific, besides Ireland and Raiffeisenbank Bulgaria, we have no concrete files on the table.

[Tarik El Mejjad, analyst]

But my question, Johan, was more on the -- on the new home market, the idea that you would consider something else. I know you said there's nothing on the table, but would you still consider that? Or are you back to your previous strategy or focus on core markets or present?

[Johan Thijs, executive]

So I mean we remain on -- I mean let me explain again what I think I explained also on previous calls. We have looked into a while ago into a specific file, which was outside of the core market, and that's what I flagged to the market. But the policy remains we stick to our core markets. And those core markets will repeat them for good understanding, our Belgium, Czech Republic, Slovakia, Hungary, Bulgaria and that it stops, the strengthening of the position on both on the banking side and currently, we have no file, not in the core countries, nowhere else in the world on our table.

[Operator]

We have one more question in the queue. [Operator Instructions]

[Raul Sinha, analyst]

Can you hear me? It's Raul from JPMorgan. Hello?

[Operator]

Yes, we can hear you. Can you please introduce yourself?

[Raul Sinha, analyst]

It's Raul Sinha, JPMorgan. I just had a couple of questions from my side. The first one is on the total benefit of negative charging on NII. I was wondering if you could give us an update on what the contribution to NII is from that? And secondly, related to that, I was wondering if you might be able to share some color on the impact of asset floors on your NII as rates in the Eurozone move from negative towards 0?

The second question is on the outlook for loan growth. As inflation picks up, obviously, mortgage is very strong here. Do you expect loan growth to continue, especially on the mortgage side at these levels? Or do you think that there might be a slowdown later in the year?

[Johan Thijs, executive]

Thanks, Raul, for your questions. I don't know if you were in the entire call because the question on loan growth, I answered already in detail earlier to another colleague. And so I would say my answer to you is exactly the same one. Coming back to the negative charging and to the asset floors, indeed, we have EUR 12.2 billion of negative charging, and that is a significant amount and indeed, EUR 8.6 billion out of that comes out of Belgium.

And then I will combine the 2 answers -- the 2 questions, what about the impact of the asset floors and so with negative charging and also with the contributions there? What happens that the interest rates are going up. So let me give you the -- we don't give the detail now on the precise number. We don't disclose this. What is true is obviously that because of the negative charging because of the asset floors, the floored credits, of course, the increase -- rate increases in Europe and the Eurozone will have not an immediate effect. And so that effect is mitigating by that.

But we take that, of course, into account when we are saying that we have shifted our net interest income. And as a consequence, our income guidance upwards, say more significantly than that we did in February of this year. We took then the mitigating impact of those asset floors and those negative charging into account. This precise number how much impact that has, we don't disclose.

[Raul Sinha, analyst]

Sorry, guys. Some issues in my phone line.

[Luc Popelier, executive]

Don't worry, Raul. I mean we can take it offline as well because I prefer not to repeat it again, but if you want to, we can read the question on the loan growth, we will take it up line as well.

[Operator]

The next question is coming from Robin van den Broek.

[Robin van den Broek, analyst]

I [ was saying ] quite late on the call as well, so I'll just ask one question, which I'm sure has not been asked before. It's about your insurance activities. When I look at non-life, I think performance from an underlying perspective has been quite stellar. I think if you put the storm impact back, I think it's for long life, including [ seeded ] results, you're probably around EUR 270 million that compares to a run rate of last year of around EUR 200 million per quarter. Your peer yesterday came out with results, and was basically saying that the traffic has sort of normalized, but that there's still 20% frequency benefits basically on the back of people basically rearranging their day. How do you look at the 2 run rates that I've given you, and are these potentially sticky benefits from COVID. Yes, what should we do with that? Any guidance here?

[Johan Thijs, executive]

Thank you, Robin, for your question. And indeed, it is a question which has not been asked yet. And I think your question is spot on. So first of all, the combined ratio of KBC is with 83%, very low. And in that perspective, what is reassuring is that the combined ratio in all countries is at similar levels. So we have a little bit of difference there. We speak about 1, 2, 3 points percent, but that's not much, definitely not when you're in the 83% area.

So in that perspective, it reflects the underwriting quality. Now the underwriting quality, as you know, is not going to deteriorate overnight. So in that perspective, what we now see is a very low combined ratio, that low combined ratio in terms of underlying quality will remain throughout the year. You cannot destroy that by attracting new business in the next coming period.

The only thing which influences this number is natural catastrophes, of course. So fingers crossed. We already got a windstorm in, which has a significant impact. And we have put in EUR 87 million for this quarter. But in the -- I mean, we still got some further claims in the second quarter, to give you the total number, EUR 3 million extra. So then you have the full picture of provisions. So for a good understanding, they are not payments yet. That's one thing.

And the other thing, which is influencing is, let's be aware that the 83% number will deteriorate anyway because in Belgium, we book -- we have to book by law, in the first quarter, all the premiums of workmen compensation. So the premiums are in and the claims will follow in quarter 2, 3 and 4. So therefore, you have a logical deterioration of the number.

Where will it end? Well, our guidance was originally 92%. But given where we are and assuming we don't have a further big impact of a storm or a flooding or whatever, then we will definitely not get to that number. So it will be substantially better going forward. As a matter of fact, on the basis of this underwriting, we continue to build our business because, as you rightly pointed out, the economic activity is definitely compared to '21, for sure, compared to 2022, coming back to normal.

Economic activity is back to normal with that understanding that we do see people working from home, therefore, traffic is more dense than it was in '21 and, for sure, in 2020, but it is not at the same level as it was in 2019 or '18. So I think, structurally, there is an improvement of the quality.

Now the mere fact that KBC is at low levels, and I saw the disclosures of some of our peers in the recent days on their combined ratios in the markets where we are active. So it shows one thing we know to underwrite and it shows another thing, we have a competitive advantage, given our low combined ratio. So we can continue to keep the growth levels at the level which they are, which is hovering around 9% to 10%.

And to just add one more thing to the latter, the CAGR of KBC in non-life insurance business, KBC Group, non-life insurance business for the last years is indeed always around 8%, 9%, 10%. And despite the fact that we are growing significantly, our combined ratio remains extremely low. So it is because we have a fully automated underwriting process. So we will use further our commercial skills to enhance our non-life diversification factor, which is called non-life.

[Operator]

The next questioner is Farquhar Murray.

[Farquhar Murray, analyst]

Just one question for me, please. Just coming back to Slide 28 and the mortgage margin question in Belgium, where understandably you're saying it will take a bit of time to pass on higher rates. Could you just tell us in broad terms how much KBC has increased the Belgium mortgage rates so far to this date. I presume it's embedded into that slide. And are you stating the material part of that move has been in the last week or so. I'd be a bit surprised by that.

[Luc Popelier, executive]

Perhaps on the increase in rates, they have an increase of a few 10 basis points. Of course, it depends on whether you take a fixed rate or a variable rate. But most of the -- as you know, 95% of the production is now fixed rate for the full period, and that's a few tens of basis points.

[Farquhar Murray, analyst]

Okay. And that's tens of basis points since the start of the year?

[Luc Popelier, executive]

I have to check that. I have to check that. I'm not entirely sure since when exactly that happened. Yes, but we'll come back to you on the precise number. It's public. It's very easy to find back.

[Operator]

The next one in the queue is Omar Fall.

[Omar Fall, analyst]

Just one question, please. So looking at the Czech curve, it's quite inverted, and I think you referenced that in your outlook around the front-loading of policy rate hikes. Things are moving around a lot, but if what the market is implying ends up being the outcome, shouldn't NII in Czech Republic fall, no matter any realistic level of loan growth next year, especially if every quarter, the sensitivity is going down due to higher pass-through rates. And I guess is the idea here that Czech Republic helps a lot this year in terms of NII then falls to be offset by the benefit of euro rates starting to feed through on the replication portfolio. Is that roughly the path of things as rates stand?

[Johan Thijs, executive]

Thanks, Omar, for your question. My answer to your question, it depends on where you put the emphasis. Is it on the roughly? Or is it on the in line with? So it is indeed roughly in line with, for sure. So there's a bit more nuanced. In essence, the Czech net interest income is indeed fundamentally improving. In that perspective, we also have seen very strong growth, as you could see in the numbers, which we published today. Going forward, and that's what I said on an earlier question, you might expect there is some slowdown, but be careful, the slowdown is the comparison between quarters to come and the first quarter of this year, which was a record quarter.

If I compare it with our guidance, then the slowdown is perfectly in line with our targets. And therefore, we have confirmed our growth targets, which we have guided before. So it's a little bit nuanced. And then the question is, if that goes down, is it then compensated or the interest increases in -- by the interest increase, sorry, in the Eurozone and the answer straightforward is, of course, yes. So that is picking up. Luc, has already answered on previous question that the margin will be positively influenced.

There is a certain delay because of the commercial aspects and certain legal aspects in several countries. But it is indeed compensating and the big thing is, of course, that if you look at the composition of the portfolios, we have more euro portfolios than we have Czech koruna portfolio. So you have an upward lift.

Let me give you one more detail. I hesitated to say it earlier on the question, when I said listen, on the mortgage loans, I said that is a positive effect. That is a negative effect, of course, on demand when you see the interest rates increase, and I was talking about Belgium, but it can also be a positive thing.

I hesitated to say what that positive effect was. Let me give it to you now because it's a second quarter in fact. The positive effect is that certain customers anticipate the Eurozone increases and therefore take out mortgage loans. And we see that in some of our jurisdictions significantly because the growth of mortgage is done in the second quarter, outpacing every budget, which we have put forward.

[Operator]

The next question is coming from Guillaume Tiberghien.

[Guillaume Tiberghien, analyst]

My question is around the capital. You mentioned that you could activate 83 basis points if you decided to apply Article 104a. My question, I guess, is when and on what basis would you decide to activate it? Would it be that, for example, you decide next year to do exceptional distribution that would take you below 15% and therefore, to stay above 15% and still do elevated distribution, you would activate that?

[Johan Thijs, executive]

There is no intention to accelerate that. So we are not going to apply that. So we don't need it. It's not a purpose to apply that immediately. Then you have to run it through P&L, as you know. So it is no intention.

[Operator]

We have no further questions in the queue. [Operator Instructions] No more questions in the queue.

[Johan Thijs, executive]

This then concludes the conference call. Tomorrow we'll be obviously in London, and we can answer more questions there. See you all tomorrow.

[Operator]

Thank you, everyone. This concludes your conference call for today. You may now disconnect. Thank you very much for joining and enjoy the rest of your day.