KBC Groep NV

XBRU:KBC

Earnings Call Transcript 2023-Q1

[Operator]

Hello, and welcome to the KBC Group Earnings Release First Quarter 2023 Call. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. And for the duration of the call your lines will in listen-only. However, you will have the opportunity to ask questions at the end of the call. [Operator Instructions]

I will now hand you over to your host, Kurt De Baenst, Head of Investor Relations to begin today's conference. Thank you.

[Kurt De Baenst, General Manager, IR]

Thank you, operator. Very good morning to all of you from the headquarters of KBC in Brussels, and welcome to the KBC conference call. Today is Tuesday, the 16th of May 2023, and we are hosting the conference call on the first quarter results of KBC for the first time under IFRS 17. 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, CEO]

Thank you very much, Kurt, and also from my side, a warm welcome to the announcement of first quarter results. And as usual, we're going to do this on the back of a couple of slides, which starts with the overall view and the highlights.

Let me open with saying that, indeed, we posted an excellent net result of EUR882 million on the first quarter of this year, which is significantly better than last year and is also significantly better than the average of all quarters last year, including the fourth quarter of 2022. The reason, the main reason is that, we have done excellently on our commercial bank insurance franchises in all our core markets. We performed very well. But also the result is significantly positively impacted by the divestment of our activity in Ireland, which has contributed on a net basis EUR370 million to the first quarter of this year. There's also a negative impact. As usual, in the first quarter of the year, we have posted a EYR571 million impact on bank taxes, which is significantly more than what it was last year. But all in all, EUR882 million is the results, and that is indeed excellent.

Let me come back to the highlights. That is, we have seen a strong performance on the customer loan side. And also on the customer deposit side, we have seen a year-on-year increase and also a slight increase on a quarter basis. We have seen a higher fee and commission income. We do see a slightly lower net interest income, but that lower net interest income was fully in line with the expectations, given the fact that there were a couple of one-offs influencing negatively this first quarter, and this will be offset in quarter two, three and four making us come back to where we guided in the beginning of this year.

It's also true that the other diversifying factor next to the fee and commission business, the insurance business was performing excellently on the level of the non-life insurance company side with extreme strong sales and good combined ratio, it was less on the life insurance side, but this is entirely due to the commercial planning agenda, the agenda, which drives the commercial actions into the different business entity.

Costs were well under control, with a 38% cost-income ratio before bank tax, it is very well and that is one of the record low numbers which we have seen over the history of KBC, we had releases on the impairment side, and all of those numbers combined have improved further our solvency position, both on the bank and the insurance side as well as our liquidity side. To summarize it, return on equity stands at 15%. Cost/income ratio at 38% before bank taxes and the CET1 ratio stands at 16.1%, whereas the short-term liquidity ratio stands at 152%.

Let me go back then -- let me go further with a couple of other things, and I will shift immediately to the slides on the one-offs, which is Slide 6. This means that we have indeed a very fundamental one-off this quarter, and I already highlighted the fact that the divestments of the KBC Bank Ireland subsidiary has triggered a EUR370 million net impact on the P&L. This is due to EUR405 million net other income increase and then a couple of one-offs which are related to that transaction, which are driven by either OpEx, either taxes and that brings the total of EUR370 million.

Talking about taxes, we had also a temporary extra windfall tax and insurance tax in Hungary totaling EUR79 million. That was only partially recuperated or recovered with the EUR9 million, which we got back from the extra order in deposit guarantee contribution, which we had to do last year. And then also the good news on the tax side was that, the banking sector in Belgium won a court case against the Belgian state. And therefore, we were able to recuperate EUR48 million of unwarranted paid bank taxes in Belgium in 2016. So that sums it up to a total exceptional in this quarter of EUR340 million and that is indeed quite significant.

Let me also highlight one specific element, which is also very important. That is, as you know, we published a press release about this, we lost a historical legacy file in Czech Republic. We had -- as a consequence of that outcome, we had an extra impact, negative impact, which have occurred in February of this year of EUR149 million. This is mentioned on this table as well. But given the fact that our external auditor consider this to be a subsequent event of the year 2022, we had to restate the numbers and that restatement makes the booking of that impact of EUR149 million to be done in the fourth quarter of 2022. So that is also in this list. Mind you, it was happening in 2023, but it is booked in the fourth quarter of 2022, leading to a full restatement of our numbers -- quarter -- full restatement of our numbers, 2022.

Let me go to the detail on those numbers. As I said, net interest income was down on the quarter 7% and was significantly up on the year 10%. Let me explain the 7% down. The 10% is easy to explain because it's mainly driven by growth in online side and then, of course, rising interest rates on the other side, but the decrease of the 7% was entirely due to one-off effects of FX, which we well aware of and which we took into account where we were calculating our guidance given by the beginning of this year.

So all these events are in essence, first, the TLTRO benefit, which is no longer there in the first quarter 2023, whereas it was in the past that it has an impact of EUR41 million in this quarter. The second one is that, Ireland only contributed for one month in this quarter, whereas it contributed for full in 2022, so that means that we do have a difference of EUR31 million -- EUR33 million, sorry, on this quarter. We had a significant impact because of an accounting effect on the inflation-linked bonds of EUR44 million this quarter. This is something which is temporary and which will be recovered in the quarters to come. It is indeed purely linked to the way how those inflation-linked bonds are calculated for accounting-wise, so it will be fully recovered in the next coming quarter. And also, we confirm that on the inflation-linked bonds, everything which we took into account in our guidance of 2023 full year net interest income is still there.

Also, the negative impact, which was perfectly calculated and I expected was the fact that we had a higher pass-through on the saving accounts in Belgium, we shifted from 11 basis points to an essence 60 basis points at the beginning of this year. And this impact, of course, is on the total saving account book of EUR61 billion, very significant, and that kicks in, in the full quarter, which was not happening as we know, in the fourth quarter of last year. So those elements are the perfect explanation why we had a decline of those net interest income. If you would exclude those, then you would see an increase of our net interest income with roughly 10%.

In terms of the last element which is specific for this quarter is -- sounds a bit ridiculous, but it is not that we had two working days less, and that has a negative impact of EUR15 million in total. This sums it up for the quarter-on-quarter. I will not make the comparison year-on-year to save some time. On the net interest margin, obviously, you have the same effect. We do have a decline of 6 basis points, but that is also driven by Ireland. If we would exclude Ireland from these numbers, we have a slight deterioration of 4 basis points, respectively, on the quarter and 17 basis points on top on the year.

In terms of volume growth, also on the lending side, we see a clear growth of 6% on the year. Which shows a strong performance over the last 12 months, but also it shows that we have a quarter-on-quarter growth of 0%. It clearly indicates the fact that the economy is growing -- is bottoming out and the economic growth is indeed slowing down, and that is translated in those numbers. You can see the shift between retail and term loans. Mind you that the term loans are negatively influenced by one single loan, which was granted by Belgium to the Czech Ministry of Finance and that loan of EUR1 billion you would exclude that, then the growth would be indeed slightly positive also on a quarter-on-quarter basis.

On the customer deposit side, the growth of 3% on the year, what is more important is the decline of 2% on the quarter-on-quarter growth. Now we have to mention here the reason why, because this is entirely due to the fact that in our foreign branches, mainly the London branch, we have seen outflows in this quarter to a total amount of EUR6.9 billion. And if you would -- and it is what this is, in essence, very volatile money, which is related to professional overnight deals. We have mostly the time called it a short-term cash management. You remember that from previous calls. So that money was no longer there and EUR6.9 billion, if you deduct that number from the deposit account, then you would see a slight increase.

For good understanding, to show you the volatility in this quarter, we already had money to the tune of EUR3.8 billion flowing back in. In terms of where we are -- so by the way, if you would exclude those -- that EUR6.9 billion, then the minus 3 becomes slightly positive. So if you would look then at what is really important, that is on the next slide, the inflow or outflow of core customer money, well, we can clearly state that we have seen an inflow of core customer money. In order to explain that, we dealt -- and that you can see on the light blue side, we dealt with a different building block of core money.

First of all, we saw a decline of current accounts, EUR7.1 billion, which is, in essence, a shift from those current accounts to term deposits, which you can see rising EUR6.1 billion. On the saving accounts, that remains slightly positive growing with EUR0.6 billion. And if you would make that sum that you see a slight decline of the total deposits. Now the reason is very straightforward. The reason is that what we call anchoring that is we guide our customers with their monies on current accounts, saving accounts and so on towards mutual funds. And we have seen an extreme good of inflow of core money into mutual fund business, in essence, EUR1.8 billion. So if you make the total evolution of all those monies you see at KBC Group level, an inflow of EUR1.3 billion net.

Let me highlight again the caveats we took into account, first of all, foreign branches are included, which is purely volatile money, as I explained. And secondly, we took into account that, of course, in Ireland, where we are divesting the outflow was EUR0.2 billion. Also, we excluded any potential positive impact of foreign exchange rates. That is quite significant given the strong performance of the Czech Runa and to a lesser extent, Hungarian Forint. So we excluded that as well. And still after that, we see an increase of our volumes, core direct money of EUR1.3 billion.

Let me go to the next topic on the P&L side, that is the fee and commission business. We had an extreme good performance in this quarter, despite the fact that we had very volatile circumstances in the markets. We all remember the turbulence, which was linked to the collapse of a couple of US banks, and to the takeover of Credit Suisse. We have seen -- despite of that turbulence, we have seen a net inflow of EUR1.8 billion on the asset management side. This is really good because if I go back to my statements on the first quarter of 2022, I at that time mentioned that we had a record inflow, net inflow of EUR1.6 billion during that quarter. Well, we have beaten that inflow with another EUR200 million in this quarter, despite indeed the very difficult circumstances, which we were facing.

If you translate that in the evolution of the asset management services then the fees were up at 5% on the quarter. They were compared to last year slightly down and it has entirely to do with the starting position of the assets under management. You know how it works, but also the banking services performed extremely well with an increase of 5% on the quarter, and also if you make the comparison with last year then there is a positive uptake of roughly 9% as well.

In terms of the total amount, as I said, it is EUR27 million up, which is nicely divided over the two topics. You will not no longer find the fee and commission business being negatively distorted by the commissions of the insurance companies. This has to do with the definition of IFRS 17 commissions are now posted on another line no longer in this fee and commission block. And I think honestly this is now reflecting much better the commercial activities of the bank, and also on the insurance company.

In terms of assets under management, we went up with EUR11 billion to EUR217 billion now which is an increase of 5% which is an almost nicely split up between net inflows and the performance of the market plus 3%. Talking about the insurance activities, let me start immediately with the non-life insurance activities. We had a very strong quarter in terms of sales, 11% up and this is attributable to all countries. In all countries, we had double-digit growth on the non-life side, but what is also important that this growth of 11% is not only positive on the growth side, but also in terms of quality. We do see a record-low combined ratio of 83% posted in this first quarter. Even with that low number, it is negatively distorted by the windfall tax which is charged upon the Hungarian business. In Hungary, the gross combined ratio stands at 115%, which is entirely due to the windfall taxes. If we would exclude those windfall taxes then in Hungary the combined ratio dropped to 83% and the Group combined ratio drops to 81% which is indeed an excellent number.

Talking about the life insurance company, well, we do see a different picture there on class 21. So interest guaranteed products, which is mainly driven by the Belgium Business unit. We do see a growth which is compatible with the growth of last year, which is slightly down compared with the growth of previous quarter, but what is far more important is, we do see a decline of the unit-linked business quite significantly quarter-on-quarter, and roughly 25% down year-on-year. Now the reason is very easy to explain. We did not had any commercial actions in quarter one, on the unit-linked portfolio. We do have like normal in every year at the quarter four, all these commercial actions, but also last year we had some commercial actions ongoing in the first quarter. So this is entirely driven by the commercial calendar and this will be changed as you will see in quarter two, where we do have commercial actions running.

In terms of the financial instruments at fair value, actually, it's similar to what it was previous quarter and previous year. So it's roughly the same. Total amount -- the components which are underpinning or which are underlying to the total amount of EUR90 million here and there shift a little bit, but in essence, we had excellent results on the dealing room side. We had quite good results on our XVAs and also in terms of our unit-linked activities and our mark-to-market of our activities. There was almost similar results than last year and last quarter. So it is not big shift there.

In terms of the net other income line is a completely different story. There we have an absolute increase of the number. I already mentioned the fact that we have booked a one-off gain on the sale of our Irish activities of EUR405 million, and next to that we do have also a one-off recuperation of Belgian bank insurance taxes of EUR48 million which was booked in this quarter. So the sum of both is EUR455 million, if you would deduct that from the number EUR498 million, then you would come back to 45 -- roughly EUR45 million which is actually the run rate of net other income.

I also want to highlight again fourth quarter 2022, I already mentioned that, we had a negative impacts of an old legacy file in Czech Republic of EUR149 million which was concluded in quarter one of 2023, but because it was defined as a subsequent event, we had to restate the numbers of 2022 and that is translated also in this quarter with a minus EUR103 million because of the impact of that legacy file of EUR149 million gross.

So to summarize, if you would exclude the one-off effects, which had a significant impact then we are kind of normal, in terms of the net other income line. Far more important in that perspective is what about costs. If you look at the cost side, then you will see that the costs are significantly influenced by inflation and that is for obvious reasons then with an upward pressure year-on-year, but we do have a downward evolution of our costs of EUR66 million on the quarter-on-quarter comparison, which clearly indicates that KBC is as always managing its costs very, very tightly.

The reason of this decrease of cost is driven by lower staff expenses i.e., lower FTEs, and also that we have spent less than in the fourth quarter on the IT side, but I would not really refer to that, nor I would refer to marketing expenses because of the typical seasonal. Beware also that the consolidation of this group is different because in one quarter you will have Ireland in, the other quarter you will have Bulgaria in for instance in the first part of this year as we have full consolidation of Bulgaria, which was not the case for instance compared to last year.

In terms of cost to income ratio that tells you a bit more about what is now the situation. We are at 38% before bank taxes and if you would include all other costs, all other bank tax, but would exclude certain non-operating items which are in essence linked to the transactions in Ireland and in Bulgaria, if you would exclude those then our cost to income ratio stands at a very excellent 50%. Far more important is the 38 because that exclude the bank taxes and on bank taxes, I can as always give you almost a guarantee that the trend there is upward. This time 11% higher and we do expect that by year-end we have to pay EUR690 million in total of bank taxes of which indeed [for EUR571] (ph) million was already paid in this quarter. It is roughly 14% of our OpEx group wide. And on Slide 13, you can see the detail on every country or in every business unit, in terms of the percentage of the operational expenses.

Let us go to loan loss impairments. Well, we have once again an excellent quarter, which reflects the quality of our book. In essence, if you look purely at the loan impairments, all loans combined in KBC Group we had a release of EUR3 million, which is giving also circumstances is indeed super well. In terms of impact on our buffer, you remember that we had set aside a buffer of roughly one year full year of loan losses of EUR429 million. The fact that we did had releases on our regular book also meant that we had a couple of releases on this, what we call, geographical and emerging risk buffer. Well, that release was in total EUR21 million and that is bringing our total releases this quarter at EUR24 million.

Besides impairments leases on the topic order of EUR2 million brings the total to EUR26 million which is indeed an excellent result. Translate that in credit cost ratio without the buffer we are at zero basis points. Including the buffer for emerging risks, we are at minus 4 basis points. Also in terms of the impaired ratio, we are improving to 2%, which is, of course, driven also by the divestment in Ireland. If you would apply the EBA definition, KBC stands at 1.5% which is clearly below the European average.

In terms of the emerging risk buffer, you can see on Page 15 the detail. You can also clearly see that we have releases in every particular line. The direct exposure, which we, as you know, we have no direct subsidiaries in -- nor in Russia, nor in Ukraine, nor in Belarus. But we had some trade finance activities which we wrote down immediately when the war started. Now that money is coming back and also this quarter we had a release thereof EUR4 million.

In terms of all the other lines, what we call bucket C, D, and E we did see money flowing back in because of things which we anticipated for are not happening, or let me state it definitely. The conservatism, which was part of this assessment is indeed conservative. In total EUR36 million, how come that we only booked EUR21 million in this P&L for this quarter. Well, it has to do with Ireland EUR18 million of that was linked of that, buffer was linked to Ireland. That buffer is now gone because of the divestment of Ireland, and that EUR18 million is for obvious reasons not reflected in the P&L today. But it is reflected in the transaction price with Bank of Ireland.

On Page 16 you have an overview of the gas supply and how we are currently positioned. Now let me summarize this page. It clearly indicates that at European level also in our core countries, the current provision of gas and gas supply is much higher than it was a year ago and as a matter of fact, we are at a quite comfortable level given the time of the season. So we are at the end of the winter, beginning normally now to boost those suppliers to prepare for the next winter.

Let me summarize it definitely given these numbers it is very likely that we will not run into energy shortfall as we have experienced in October last year, and as you'll remember that drove up energy prices and inflation in a very significant manner. So taking into account for this, on this slide, you can translate that the likelihood that this will happen again in quarter four of this year is very remote.

Going to page 17 brings me on the capital position of KBC Group. Well, given the profitability when we assume a dividend payout of 50% at least then our capital is now increasing to EUR17 billion, and if you look into the risk-weighted asset evolution, which is positive, the influenced by the sale of KBC Bank Ireland and then set off partially, only partially by volume growth of [indiscernible] trends, then it's quite obvious that our capital ratio grows significantly to a solid 16.1% CET1 ratio fully loaded under the Danish compromise. That is clearly above our 15% reference position defining surplus capital. So indeed we do have more than EUR1 billion extra surplus capital compared to where we were with a 15%. The 15% is not restated because KBC stands with its policy that we want to be amongst the better capitalized financial institutions in Europe. And when we do the calculation of the median of that European banking sector, we come to the conclusion that the median is roughly around 15% and for that reason, we did not redefine the surplus definition of our capital which sticks at 15%.

Translate that in buffers, that is on Page 18. You can clearly see that we have on top of the MDA level and that is the lowest number of the three potential definitions of MDA buffer. We have more than EUR5 billion of buffer, which is clearly indicating that KBC is solid capitalized. It's also translated into our MREL position, which is somewhere further in the pack. We currently stand at 30% MREL position, which is clearly higher than the requested target of 27.86% request to be fulfilled by 1st January of 2024.

So, solid capital position. What about the liquidity position -- sorry what about the leverage position. I forgot to mention that one. So it increase also very significantly is also related obviously to the sale of Ireland now stands at 5.5% and also the insurance company with 207% is also in a very solid area. What about liquidity? We have a 152% liquidity LCR ratio and also on the mid-term 139% is a very solid numbers, if you compare them with a request of 100% lease of the ECB we have solid buffers. To say it differently on the short-term liquidity we do have a buffer, a liquid buffer of EUR92 billion.

Coming to the period to come. Well, we do see that economic growth is slowing down, and it is what we do see now today, it is potentially not going to go into a recession. What we do see is recently a restatement of -- in our core countries of GDP numbers slightly upward. So for instance, the Belgian GDP growth has been restated from what it was 0.7%, 0.8% to 1% now and we also see that in also in Central European countries we do see inflation stabilizing, and there is a trend towards actually bottoming or topping off the inflation and then the downward trends will continue. But there is a persistent core inflation which is still too high compared to the European Central Bank target, and that clearly indicates also that interest rate will remain higher for a longer period than was originally anticipated by the market.

As a consequence, we have guided in the beginning of this year for the full year 2023 on the net interest income side, on the total income side, and then also on the credit cost side and OpEx there is -- we are perfectly on track for those numbers, and we as usual, don't update every quarter, but given the update twice a year, and therefore the numbers on the guidance are the same as was guided in the 2022 year results announcement.

The only change which was there, as you might remember is the fact that we restated those numbers taking into account IFRS 17. Now all the other slides are linked to Belgium and Czech, and International business unit. I'm not going to dwell upon that detail, but I would like to stick it to this presentation.

And I will give back the floor to Kurt, who will guide you -- who will guide us through your question. Please, Kurt.

[Kurt De Baenst, General Manager, IR]

Thank you, Johan. The floor is now open for questions. Please restrict the number of questions to two to allow for a maximum number of people to raise questions. Thank you.

[Operator]

Thank you. [Operator Instructions] We'll take our first question from Flora Bocahut of Jefferies. Your line is open. Please go ahead.

[Flora Bocahut, Jefferies]

Yes, good morning. The questions I have mostly on the excess capital distribution. Firstly, if you could clarify the amount that we are talking about here because in the Q4 slide pack, I think you were mentioning the intention to distribute an additional EUR1.4 billion. Obviously, we've had the post-balance sheet events since. So if you could clarify what amount we are talking about today, and on which I think you are still awaiting the ECB approval? Then around the timing of that distribution. Let's assume you get the ECB approval over the next few weeks. Would you consider distributing that intra-quarter, or are we going to have to wait until Q2 results are published in August for the distribution to be made? And lastly, still on that subject. If you could clarify how you're thinking along the mix on the distribution? And if we can expect it to be entirely done via buyback? Thank you.

[Johan Thijs, CEO]

Thank you very much, Flora for your question. I think it's indeed very obvious questions. So let me give answers to those different elements which you highlighted. So first of all, indeed originally we announced the share buyback of EUR0.4 billion surplus capital which was 15.4% capital ratio, 0.4% above the 15% threshold 0.4%, on roughly a bit more than EUR100 billion of risk-weighted assets makes it EUR0.4 billion indeed plus then the surplus capital which was linked to the transaction in Ireland, that transaction brought us roughly EUR1 billion of capital and the two combined give you the 1.4%. That is what we announced. And on early February, I don't know the precise date anymore, but with the announcement of the Q4 results.

Unfortunately, we had that subsequent event which happened in, at the end of February in Czech Republic and that was EUR0.1 billion, as a matter of fact EUR149 million precise. So if you deduct that number from the 1.4, then it brings the share buyback level at EUR1.3 billion. So in essence, it's just mathematics.

Now, what's far more crucial is the second part of your question. What about the timing and what about the distribution? Well, so we filed a request for a share buyback as announced on the basis of the quarter four results. The second thing is that we had that subsequent event, and you know that the delay the regulator has to, or the supervisor has to adhere to is roughly three months. When we did the re-submission of the file we had to restate that the full quarter two numbers -- sorry, the full 2022 numbers of that file as well.

So we resubmitted a file to the ECB. We got a couple of questions for clarification after this resubmission and you could say that by the end of March, the file was complete because the three months only start counting as of the moment that the file is complete. So we do expect, let me say it differently, the timeline by which the ECB is going to answer our request is foreseen end of June, max ultimately beginning of July. So we do expect that answer in that period.

Now in terms of positioning as of the moment, we have the answer and of the ECB. Our Board will take a decision and that decision then will be communicated to the market. So ultimately, it depends a little bit on when we do get the answer of the ECB in and that answer will be ultimately given to the markets, of course on the August announcement, and that is, I think the 12th of August of the Q2 results. That is for sure the ultimate deadline.

In terms of what then will be, will it be a full-fledged share buyback, will it be a mix distribution with interim dividend that is at the discretion of our Board, but it's obvious that while we are waiting for the approval of the share buyback, that the share buyback is clearly also part of that distribution for sure.

[Flora Bocahut, Jefferies]

Okay. Thank you.

[Operator]

We'll now take our next question from Benoit Petrarque at Kepler Cheuvreux. Your line is open. Please go ahead.

[Benoit Petrarque, Kepler Cheuvreux]

Yes, good morning. So the first one is on the shifting to term deposits. I think you mentioned, plus EUR6.1 billion at group level. We were aware that this shift was happening in Czech Republic, but apparently, it is also happening in Belgium. Now, so could you maybe quantify the shift you've seen in Belgium specifically? And I think you provided a guidance of EUR150 million to lower pass-through going down from 40% to 30% on savings accounts. Is there a shift you actually see now into term deposits in line with your basic assumptions around NII for the full year? Or does that go, maybe a little bit faster than expected? So that's the first question.

And then the second one is on these threshold for share buybacks and special distribution. I was wondering here because, could you maybe change the cut-off date for kind of deciding about what the threshold will be on 2024? I mean we are still in Q1 -- well, Q2 2023. Now you decide on keeping the threshold basically for 2024. And we also know that many peers are going to buy back shares this year. So it sounds like KBC is going to run a bit behind the pack, let's say on distribution. So the question is, I understand that median is still around the 15%. But given your peers will buy back shares, this year I guess the CET1 ratios will come down on average. So could you maybe give you -- give us your impression on whether it's adequate to have this kind of debt already now. Okay, I'll leave it here. I've got some questions on cost, but it's already two, sorry.

[Luc Popelier, CFO]

So with regards to the shift to term deposits and the pass-through changes, I will answer that question. So when we looked at our guidance, we had of course a certain shift to term deposits in our minds obviously that is -- that speaks for itself. And you also saw what assumptions we took on the pass-through rates.

Now in reality, the shift had to turn deposits is a bit more than we expected. On the other hand, you can see that the pass-through rates are well below what we assumed in our assumptions and that is why those two, we at the moment think they are more or less compensate each other and therefore we did not feel there is any material impact to change the guidance at this moment. You can just ask another question, okay. And Johan will answer the second question.

[Johan Thijs, CEO]

Thank you, Luc. Thanks, Benoit for your question. If I may add one more element to the answer of Luc, because you specifically refer to Belgium. If we look at the market share of term deposits beginning of the year and end of the quarter then the market share is still, the part of our term deposits is still below our national market share on deposits to good, which means that the move, which we have seen in the first quarter is actually a catch-up because the market share at the beginning of the year was substantially lower than our natural market share.

Going back to the share buyback thresholds or the capital distribution thresholds, that's a better description, I think. So of the 15% and there are two questions, first of all, what about the cut-off date, or you called it cut-off date, could it be earlier and then secondly, is it -- with 15% not too high.

Well, let me start with the answer to the second part to explain the first part. So, as you know and we will not change that position. We always want to be amongst the better capitalized financial situations in Europe. We therefore have a peer group of similar financial institutions to us and that is also something which we constantly monitor and I mean constantly, constantly. It's not only once a year. We do that on a regular basis.

Well, we have seen is that median of that group is indeed around 15%, it's roughly 15%, which clearly indicates that what you indeed triggered in your question, that if they are facing capital distributions, the debt capital distribution is not yet executed by those institutions. If it becomes clear that capital distribution is happening, then of course we will adjust the numbers of our peer group and we will see further evolutions. On the basis of that, we will take decisions. In principle of take that decision, in once a year as you know, and in the first quarter and that decision is influenced by the peer group setting, but also by the circumstances. The circumstances, which have been very rough in the first quarter. God knows what is going to happen in quarter two, three, and four.

Let's hope it is not going to be as rough as what we have experienced after the fall of a couple of American banks, but taking into account the situation we will take a decision and that decision is not necessarily bound on the date, but it's clearly the logical or the common way to deal with it is indeed once a year, but this is not 100% bound to that. If we do see that our peers are indeed doing what they said they were doing and bringing down the capital ratios.

And on the remark on the uncertainty, one of the drivers, I think, why we are waiting for the share buyback decision is also that the ECB also in their official communication towards the market and we all know that they are looking in the supervisory measures, which are going to be reviewed after the turbulence in the financial markets over the first quarter that they are not pushed by any urge to give to the markets very, very rapid answers on capital distribution. For them, it's better on the safe side than on the sorry side.

[Benoit Petrarque, Kepler Cheuvreux]

Sorry to come back on that, because obviously, you have a large bond portfolio. So does that weigh on the decision of the ECB, at what interest rate will do? Is there any link to kind of postponing or analyzing a bit more interest rate risk or anything, any ideas on this?

[Johan Thijs, CEO]

So, of course, we are not sitting around the table with the ECB to discuss matters, that is at their discretion. But until now we did not get any questions on that position of our bond book. As a matter of fact, because KBC has super high liquidity buffers and as you can see we continuously strengthening those buffers. And by the way, this is also linked to the business model, because we have a surplus -- significant surplus of deposits, because of that buffer we do not have any issues. But that's amortized cost bond portfolio, and until further notice, we did not get any particular questions from the ECB side.

[Benoit Petrarque, Kepler Cheuvreux]

Okay, great. Thank you very much.

[Operator]

Thank you. [Operator Instructions] We'll now move on to our next question from Amit Goel at Barclays. Your line is open. Please go ahead.

[Amit Goel, Barclays]

Hi. Thank you. So, two questions. One, just coming back to the 2023 NII sensitivity. Of that EUR0.9 billion benefits that you see, how of that comes from Belgium? And what's the Czech component, if you could give us some color on that, please? And within that, for those two regions, what you're seeing in terms of quarterly development?

And then the second question, just trying to understand in terms of the terming of deposits versus the low beta on the savings accounts. How does that work in terms of, is it not better just to pass on a bit more on the savings to see a little bit less terming, or do you see these things as completely independent? Thank you.

[Luc Popelier, CFO]

Okay. So on the NII sensitivity EUR0.9 billion. It is obvious that this will mainly be coming from euro transformation results and that is both in Belgium, but also partly Slovakia and Bulgaria because Bulgaria's levis linked to the euro and the contribution of Czech Republic and Hungary will be relatively low. So, that's first question.

The second question on your term deposits versus giving you a bit more savings accounts. This is of course the [indiscernible] the work that our treasures together with the business do all day long, day in day out, and looking at refining the pricing on the various products and making sure that the mix is optimized. So this is the work we do every day obviously. And this is the conclusion of that work. And of course, driven by competition and the customer behavior. And so there are some parameters, we do not always control like it is in sailing up.

[Amit Goel, Barclays]

Thank you. So for the Czech contribution would that be a positive contribution?

[Luc Popelier, CFO]

Well the full year, I think as such had last time as well. We think that for the full year, the interest income from Czech Republic would not be materially different. So higher or lower materially, I'm stressing that. So it depends on certain circumstances, but it will not be material both in positive or negative sense.

[Amit Goel, Barclays]

Thank you.

[Operator]

Thank you. We'll move on to our next question from Kiri of HSBC. Your line is open. Please go ahead.

[Kiri Vijayarajah, HSBC]

Yes, good morning everyone. A couple of questions from my side. So coming back to this mix shift from the current accounts into, I guess predominantly term deposits. I'm just wondering does that trigger a big change in your behavioral model assumptions, behind your reinvestment portfolio because it looks like you're actually able to keep all of the deposits in-house more or less. So, I'm wondering just what's been happening. Have you been shortening maturity duration on the reinvestment portfolio? Actually, it's all fairly steady state versus last year. And then secondly, just on your LCR ratio doesn't look like it's changed very much in the quarter, and a little bit surprised just because you no longer have to do the intra-group funding for Ireland anymore. So just some of the moving parts, please on the LCR ratio? And why that's not really improved in the quarter? Thank you.

[Johan Thijs, CEO]

Okay. So on the mix shift, there we have actually lengthened the duration, not actively passively because when we see outflow out of current accounts to term deposits then we obviously payout of the short end of the curve where we have invested either ECB -- cash with the ECB or very short-term bonds that matured within one month, two months, three months.

So as a result of that actual duration lengthens somewhat, and that is passively done. It's also part of our treasury strategy when interest rates rise that we gradually increase duration, and this is now passively done at some point we may even do that actively but that is not yet decided. On the -- LCR has not changed, well, the main reason for that is that we also repaid TLTRO of more than EUR2 billion. And secondly, with the short-term cash management opportunities these have been reduced and also had a compensating effect on the LCR.

[Kiri Vijayarajah, HSBC]

Great. Thank you.

[Operator]

Thank you. We'll move on to our next question from Anke Reingen at RBC. Your line is open. Please go ahead.

[Anke Reingen, RBC]

Yeah. Good morning, and thank you for taking my question. Just following up on net interest income. You said the underlying growth quarter-on-quarter was 10%. If you maybe then just talk a bit about the trajectory on the course of the year to reach your full year target? And within your NII guidance, you have this assumption about 3% to 4% loan growth. I just wonder how sensitive the loan growth or the target is to the loan growth assumption given the start of the year has been quite low even on underlying basis. And then just lastly on the new business, mortgage spread at Belgium. Is that mainly -- is it because of the delay with pricing, or is this competitive pressure? Thank you very much.

[Luc Popelier, CFO]

So on the underlying growth that is if you make an adjustment for all the, let's call it one-off components that Johan had explained at the TLTRO which was EUR41 million in the fourth quarter which we no longer benefit from. So if we make it like for like and we exclude the benefit of TLTRO in the fourth quarter.

For Ireland, if you exclude Ireland's interest income both in the fourth quarter and in the first quarter and as a delta of EUR33 million and you make then a correction for the number of days, not necessarily full EUR15 million, but for example, half of that, and you make a correction for inflation-linked bonds because inflation-linked bonds are tied to an index, which is a monthly index. And on the quarter it can be very volatile and we had a negative indexation. So negative inflation that is not normal, actually it is now restoring itself. If you make a correction for that and that is not much.

Then you look, you have a like-for-like NII and there you said, if you calculate it your like-for-like NII would be around 10% quarter-on-quarter. So it means that the underlying growth is quite high, and as you look, if you make a detailed analysis of the presentation we made you will see most of the net interest income, there's not complementing income because that was a negative contribution, does not come from ALM, and does not come from improved funding costs, because we have higher cost for our funding of participations.

So majority comes from transformation result, and that is logical because the reinvestment yield that we have is not at the ECB rates but is of course a mix or reflecting the bond replication, bond portfolio, and the cash with the ECB. So that means that this will continue even if ECB rates are plateauing, close there's still going to be some increase but plateauing. The reinvestment yield of replication portfolio will continue to rise.

Secondly, we have a pass-through change in Belgium of 50 basis points from 11 basis points to 60 basis points. We do not see these jumps happening every quarter, and that means that we continue to see good growth in transformation result in the coming quarters.

[Anke Reingen, RBC]

And the loan growth, how important is your loan growth assumptions within your NII guidance for the year?

[Luc Popelier, CFO]

Yeah. The loan growth, of course, has a role that it is draft by the transformation result.

[Anke Reingen, RBC]

Thank you.

[Johan Thijs, CEO]

And perhaps, Anke if I just fill in. Also, the last part of your second question, because they refer to Belgium. So yes, indeed. This is due to competitive pressure that the margin on the mortgage business is coming down. And the reason is twofold. First of all, there is, given the interest rate increases in the market there is lower demand, and that lower demand is clearly showing in Belgium as well, but also in other countries.

The second thing is that because of the ample liquidity, which is available, combined with the lower demand, there is a very strong competition. Within that strong competition we do have been able to increase our market share with 10% which is good news, but it has obviously also a price tag. But is also the good news, if you look group-wide and you go a bit further than Belgium we do see that, for instance in Czech Republic, and you know that in Czech Republic, they were running a little bit ahead of the ECB in terms of the positioning of the Czech policy rate. There we have seen the same effects, the margin came down significantly.

The production plummeted giving the 7% policy rate and what we do see now is in --at the end of the first quarter, that margin is recovering in Czech Republic, and that volumes are picking up a little bit, including picking up of market share on top of our normal natural market share.

[Anke Reingen, RBC]

Thank you.

[Operator]

Thank you. We'll have a follow-up question from Benoit at Kepler Cheuvreux. Your line is open. Please go ahead.

[Benoit Petrarque, Kepler Cheuvreux]

Just actually two follow-up questions. On the inflation-linked bonds to start with offer this item will kind of reverse the negative reverse in the coming quarters? And also assuming inflation stay on the kind of low side months-on-months, are we going to get a sharp reversal or could the trend be different? And then staying on this inflation topic, obviously, the Belgium inflation has been extremely low month-on-month, even, I think, negative somewhere in January. So how much indexation are you going to pass in the coming months to the Belgium staff? I guess that could be close to as from February, March, but just wanted to confirm that? Thank you.

[Johan Thijs, CEO]

On the inflation-linked bonds, as you know, we had a very strong growth in the fourth quarter of -- in the index. The index pent up by about 3.4%. The backlog of that was in the first quarter where we've been down by 0.7%, so negative. That will be addressed itself because of the full year we expect inflation in Europe to be above 4% -- between 45%. So if that is the case, then efficient link bonds will for the full year be approximately around EUR 40 million to perhaps even EUR 50 million, if we go to 5% inflation. Because we have about EUR 1 billion of these inflation in bonds. And therefore, you can see that the income from fishing bonds should adjust itself in the next few quarters. It's not continue nicely spread obviously each quarter. But for the full year, we're not going to be very far off. Do you want to answer the question? Johan is going to answer your second question.

[Johan Thijs, CEO]

And Benoit on your second question, indeed, the evolution of the Belgian inflation was completely different than what we see at the European level. Now it was indeed negative in month-on-month. It will be now adjusting and it is clear that it's coming down significantly, it's roughly around 3% now. Going forward, obviously, there is a persistent component into that, that is everything which is related to non-energy prices let's be aware of that, but what your derivative question is out of this is clear and that's the answer is positive. It means that it is indeed adapted in a certain way and you know how it is calculated in Belgium. It is not the inflation over the last month, it's a comparison over a longer period, a three month average, and so on so forth, and it is not the entire inflation is what is called the Health Index in Belgium, which is a subset of the traditional core inflation and that will be indeed applied on the wages in Belgium, which I mean is a big chunk of our costs.

So, yes, you're right, if this trend continues, then it will having mitigating effect on our cost evolution and other elements which are Belgium related. And on the wages you're right, it is automatically indexed. So it will have that automated -- sorry it will have that immediate effect as of the moment it is applied.

[Benoit Petrarque, Kepler Cheuvreux]

Thank you so much.

[Operator]

Thank you. And we'll take another follow-up question from Flora at Jefferies. Your line is open. Please go ahead.

[Flora Bocahut, Jefferies]

Yeah, thank you. Two follow-up, please. I'd like to talk about also on the cost line, the bank taxes. You provide us with a guidance for this year, where you expect basically close to EUR700 million. As you mentioned, it's a huge amount. It's 14% of your cost base. Towards 2025, I think we can expect the windfall tax in Hungary to go away. I guess the Single Resolution Fund will have declined significantly in terms of the contribution.

So can you maybe clarify what number we can expect for 2025 compared to the roughly EUR700 million of this year. And then on provisions you stick to the guidance of 20, basis points, 25 basis points for this year, ex the ECL but in Q1 it's minus 4. So, why do you think is going to be a significant deterioration in the next nine months, please? Thank you.

[Luc Popelier, CFO]

Thanks, Flora for these questions, again. Bank taxes are indeed up and so we guide to EUR690 million, which is roughly EUR120 million then what we have recorded in the second -- in the first quarter of this year. You're right, it's 13.8% to be precise of our operational -- 13.8% of our operational costs, which is a lot. Now, going forward on 2025 what about the future? What about windfall taxes? You made just an analysis on what is potentially possible on the windfall tax is indeed forecast to be applied for two years.

Also the Single Resolution Fund contribution should come to an end in a certain period, also roughly in that timeframe of two years. And my question is what is going to happen? No, I think this is by far the most difficult forecast to make. To be very straightforward, I don't count on any reduction of the bank taxes and what kind of form or shape going forward. This is perhaps very -- let's hope a very conservative stance, but giving the state of a lot of budgets of governments are currently in, given the profits banks are making, I don't count on a lot of leeway from the political side. So anything which will fall away from the bank taxes is a benefit, but we don't take it into account in our guidance at all.

Coming back to guidance, yes, indeed, you're right. Currently, we do have a guidance on the credit cost ratio of 20 bps, 25 bps whereas in reality, we do have minus 4 bps, but as I said, we did not update. We do not update every quarter again, our guidance’s we only do that in principle once a year and we adjusted at best in the middle of the year, or when we do have a fundamental material change. In this perspective the guidance of 20 basis points to 25 basis points on the credit cost ratio indeed it looks very conservative.

[Flora Bocahut, Jefferies]

Thank you.

[Operator]

We have no further questions in queue. I will now hand you back to your host for closing remarks. Thank you.

[Kurt De Baenst, General Manager, IR]

Okay. Thank you, operator. This sums it up for this call. Thank you very much for your attendance, and enjoy the rest of the day. Cheers.

[Operator]

Thank you. This concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.