KBC Groep NV

XBRU:KBC

Earnings Call Transcript 2018-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the KBC Group Earnings Release Second Quarter 2018 hosted by Kurt De Baenst, Head of Investor Relations. My name is Nigel, and I'm your event manager. [Operator Instructions] I would like to advise all parties that this conference is being recorded. Now I would like to hand over to Kurt. Kurt, please go ahead.

[Kurt De Baenst, General Manager, Investor Relations]

Thanks, Nigel, and 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, August 9, 2018, and we are happy to host the conference call on the second quarter results of KBC.Today, as usual, we have Johan Thijs, Group CEO, with us; as well as Rik Scheerlinck, Group CFO, and they will both elaborate on the results and add some additional insights. As usual, it will take around 0.5 hour to guide you through the presentation for the analysts, which can be found on our corporate website, kbc.com. After this, there's, of course, time for questions until around 10:45 a.m. Brussels time.The conference call is taped and can be replayed via our website, kbc.com, until the 31st of August. As usual, Investor Relations and our CFO are organizing a sell-side equity analyst meeting in London tomorrow morning at our offices in the city, Old Broad Street, 111. This meeting starts at 8:30 a.m. local time and we would be very pleased to welcome you there.And now it's my pleasure to give the floor to our CEO, Johan Thijs.

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

Thank you very much, Kurt, and also from my side a very warm welcome to the announcement of the second quarter results of 2018, and warm is indeed a well-chosen word given the weather conditions in I think the whole of Europe over the last couple of -- yes, all those months. We are on Page 3 of the slide pack. And actually, the second quarter 2018 was characterized by a good result of EUR 692 million, which is -- and that's the reason why we use the word good and translated that via its return on equity, which is 16%. And if you would flatten out the taxes over the full year, then it's even 17%, which I think is indeed a very good result. The quarter is characterized by actually a good commercial performance and that is true for all our business activities, both banking and insurance as well as good performance in all our markets. That's reflected in several building blocks, which I will go into the detail in a second. But also in terms of the side where the money goes out, in terms of credit quality, in terms of insurance quality and also on the cost side, the quarter was indeed characterized by good results. This has translated into strong capital ratios, now it stands at 15.8%, given the fact that we have concluded the share buyback. In this second quarter, we actually concluded this share buyback by taking in 100 -- more or less, EUR 181 million, 2.7 million shares which indeed are now destroyed, and as a consequence, the impact on the capital ratio of all those actions was 20 basis points negative. So intrinsically, the 15.8% would have been 16% if we would have not done a share buyback. Also quite important is that the liquidity ratio has remained very strong and that our leverage ratio stands at 6%. As a consequence of all of this, we again announced further confirmation of our dividend policy that is -- that we are going to pay out EUR 1 of interim dividend on the 16th November 2018 and that is perfectly in line with our dividend policy, which, as you know, states we are going to pay out at least 50% our profits taking into account the AT1 coupon. So these are the main things. But obviously at this time, more to say about the detail and therefore I suggest that we are going to go through the following slides. This -- I'm Slide 4, this is a new one where we actually indicate what are the exceptionals for the quarter. The main exceptional for this quarter is 1 legal file, which we settled. And this time, whereas previously it was often a positive, this time it's a negative for EUR 38 million, which actually means that the result of EUR 692 million was intrinsically without the one-off EUR 730 million, which is indeed a strong performance.On Slide 5, you can find something which we announced as well this morning, and this is a post balance sheet effect. So we concluded this morning a transaction with Goldman Sachs on the sale of important chunk of our legacy portfolio in KBC Bank Ireland. We have sold EUR 1.9 billion of that legacy book and that contains the nonperforming corporate portfolio part. It also contains the most of the buy-to-let nonperforming part of our Irish mortgages and it also contains the full pack of the buy-to-let U.K. loans, mortgage loans. So in this respect, we have been able to sell that above book value, so that's the good news and it has positive P&L impact, but also it has a strong reduction of our NPL ratio. It drops 11% and it will now end at 25%, roughly. And it also has a positive impact on our capital ratio, 7 basis points is, in that respect, the improvement. We expect this deal to be closed in the fourth quarter of this year, and we maintain our guidance, nevertheless, that we sold off this portfolio, we maintain our guidance for the loan provision releases in KBC Bank Ireland and that range was, as you remember, EUR 100 million to EUR 150 million for the full year. So this is a post balance sheet effect and has had, indeed, no impact. We don't have to restate the second quarter numbers as such. Let me then go into those second quarter results. Traditionally, and at from Page 8, we have the split between the bank and insurance company. Let's not waste too much time because that's traditionally 85%-15%, and this time, it's 83%-17%, almost spot on. So in that respect, we are doing quite normally. On Page 9, you have, of course, the most important block -- building block of the P&L that are, definitely on the income side, that is our net interest income. The net interest income actually performed very well. At first glance, you would say that there's a little drop, 1% down, but the EUR 8 million difference between both quarter 1 and quarter 2 is actually quite easily translated. It is translated because of a difference in the short-term cash management, which we are doing, and also if you even take into account the FX effect and you would wipe that away, so that the FX effect, mainly on Czech Republic, is EUR 3 million. The difference between the short cash management between quarter 1 and quarter 2 is EUR 8 million. Then actually, the net interest income has gone up on the quarters. This is also translated -- by the way, if you see in this graph the difference between the pure banking result on that interest income, and as you can see, that has gone up as well. So indeed, net interest income is influenced by that short-term cash management. Let me say one more detail about that. You know that we are working on the difference between the euro, and amongst others, the Czech koruna. We have been placing excess liquidity, which is present at group level, we've been placing that in Czech Republic and Czech koruna. That is managed by our group treasury that is placed in Group Centre. And the difference between the first quarter and the second quarter was precisely EUR 8 million and that's precisely the difference between the net interest income first quarter and second quarter. Now also that has an impact on countries and on the business unit. I'm normally not going to speak about the detail about of the business units, but for the sake of clarity, I will make an exception now. That short-term cash management, which I explained, has a difference of EUR 8 million. The profit of those short-term cash management actions are allocated, taking into account reference interest rates, which are intrinsically market interest rates. Now because of the movements of that reference rate, the allocation between Czech Republic and the business unit Group Centre is different between quarter 1 and quarter 2. Now the shift is negative in the second quarter and that shift is exactly the difference in the net interest income, which was generated in the Czech Republic and therefore explains the full difference, almost the full difference between quarter 1 and quarter 2 in Czech Republic. So intrinsically also there, the picture of net interest income needs some nuance and need some explanation.Anyway, let me go back to the group result net interest income. As I said, in principle, net interest income, if you make some adjustments, was slightly up. On the banking side, it was clearly up and it's mainly driven by 2 things. First of all, lower funding costs. We have been calling -- as you know, the CoCos has been reducing our funding cost, but also the term deposits have been coming down as well. And like next to that, there is pressure on margins definitely in the mortgage businesses, it's true in Belgium and Czech Republic and Hungary amongst others. But that pressure on mortgage margins is also compensated by the increase of volumes. We had a very strong quarter in that respect. The lending business went up 5% year-on-year, 3% on the quarter, it was quite significant. And also on the mortgage business, it went up 3% year-on-year, which is indeed a good number. So the margin pressure was offset by volumes and by the lower funding costs.This is also translated in the margins, which are also on the same page. We have a slight drop of 1 basis point in the net interest margin, which now stands at 200 basis points. This is mainly due to, more or less, stable net interest income, but a slight increase of the interest-bearing assets, and because it's a ratio, both effects play. So net interest income was indeed good. What about the other 2 main contributors? Let me start first with the fee and commission business, I'm on Slide 10 now. The fee and commission business was slightly down 3% on the quarter and it was down 4% on the year. Making the comparison on the year, let's be careful because the first 2 quarters of 2017 were characterized by the launch of Easy Invest in Belgium and that has, as you all know, has a huge impact. But if we make the comparison on the quarter, then we also see a slight decrease and that's mainly driven by the volatility on the financial markets. And volatility of financial markets means drop in investor sentiment with our customers and that means pressure on sales. And what we saw in the second quarter of 2018 was indeed lower sales in the fund business. How much? About EUR 200 million, which means that for the first half of 2018, we are on a net sales inflow of about EUR 600 million for the group, which is indeed, again, expressing the fact that KBC is performing quite well in this respect. In terms of the fee contributions, if we make the split between entry fees and management fees, what we see is the entry fees, indeed, as a consequence in the second quarter, were going down. This is due what I just said in the unit-linked business. But also what is quite important to mention is that management fees are actually stable, more or less in line with previous quarter and that has to do, amongst others, with the fact that the margin as such on management fees remained stable over the quarter. And I know there's some speculation ongoing what is the impact once it falls on the full regulatory changes, amongst others, MiFID II. As such, we have not seen that yet in the margin on the asset management business. What we do know is that it has impact on the administrative burden, which is related to the sales, but that's something else. Anyway so in that respect, it is definitely something which is reflecting the turbulence and the uncertainty on the financial markets. What we also see in the fee and commission business is that the fees, which are related to the banking services, are doing actually quite well, banking and payment services, and that is mainly due to Central Europe. I'm not going to dwell upon the detail per country, but there we do see indeed good performance. And we saw a slight decrease on our security business. We did more deals, smaller ones, and for that reason, the security fees were a little bit lower compared to previous quarter, minus EUR 5 million. In terms of assets under management, more or less stable, EUR 214 billion. Positive fee influenced by the pricing effect and I just spoke about the net outflows that is then indeed fully compensated by that price effect.Let me go to the other bigger contributor, that is the insurance side. We had actually a very strong quarter in the insurance business, definitely on the non-life side. We saw that the quality of what we sold in the quarter was extremely good. This is reflected in a combined ratio of 88% for the year-to-date. So it fully compensated the impact of the windstorms and the floodings in the first quarter of this year and it now stands at 88%, which is the case for most countries. I mean, all the countries are more or less in line -- more or less lower than 90% combined ratio. The only one which stands a bit higher is Czech Republic, 95.6%, but that is indeed also a good number and it reflects the quality -- underlying quality of the insurance underwritings. What about the sales? Up 6% on the non-life side, which is strong performance, and up on the interest-guaranteed products. But given the financial markets, given the tax rates, which are quite harsh on the unit-linked business in Belgium, again, we saw a decline of the unit-linked production in Belgium and that is fully reflected in the total of life sales, which is coming down 14%. So insurance business, we're doing quite well. And then you have the last contributor to the income side that is on Page 13, the fair value gains. Here also we see a decline and that has been driven by, amongst others, the evolutions of the interest rates obviously. And the main parameters for the explanation of the decline are given by the ALM derivatives, EUR 18 million down. The quarter-on-quarter number, for good understanding, there is negative change in the market, credit and funding value adjustments, EUR 16 million down. And we saw in the Czech Republic a lower dealing room income that has to do with a decline, a deep depreciation of the Czech koruna, which is minus EUR 7 million. That has an impact on sort of the bond portfolio and therefore negatively impacting this number. On the other hand, we saw a realization of gains on equity instruments that has a positive of EUR 14 million and positively influencing the numbers I just referred to. So given the turbulence on the financial markets, this is reflected in fair value gains, and is in that respect, perfectly aligned with what we could expect given the circumstances. Net other income, actually quite easy to explain. You see a fundamental decline there between first quarter and the second quarter, also -- compared to the same quarter last year in decline. But that is entirely, entirely explainable by settlements of legal file. The first quarter, we had a positive one. The second quarter, as I already mentioned, we had negative impact of the settlement of an old legal file and that was to the tune of rounded number EUR 38 million.So far, the income side, let me now go to the other side of the P&L where the money goes out. Let me start with the operating expenses. Actually, the operating expenses are doing quite okay. They're perfectly in line with what we budgeted and they are indeed, if you look at the number at first glance, it is up 3% on the quarter and 6% on the year. How come? In essence, it boils down to 3 elements. The first one is staff expenses, which increased. That is due to the fact that we have in Belgium indexation on wages, as you know, and that is linked to inflation, that's 2%. We have in Czech Republic, but also in Hungary and the other Central European countries clearly effect of the unemployment rate dropping close to 0 and therefore an impact on wages. So hiring people in the market becomes more expensive and wage inflation is pushing indeed those staff expenses in those countries up. And then the third element, which kicks in is obviously the fact that KBC is investing quite a lot of money in digital transformation and that investment cycle is now up to speed, and as a consequence, we do see some further increase on the IT side. The 6% needs to be nuanced because if you exclude there the impact, amongst others, of UBB, then the increase is only 2.9%. That is the difference between UBB, FX in fact excluded from the cost ratio comparison of second quarter 2017 to second quarter 2018. And the 2.9% is perfectly in line with what we budgeted and what we are expecting -- what we were expecting for this quarter. So yes, indeed, costs are strictly managed and costs are managed with 1 -- 2 focuses. Obviously, we have to tackle all the regulatory requirements, all the stuff which has been put on the banks by supervisors and regulators. We all know them, MiFID II, PSD2, GDPR, and that kind of stuff has impact on costs, that's one thing. But definitely, it is also in line with our strategic agenda, that is transformation and preparing ourselves for the future.Another element, which is negatively influencing that cost ratio is the bank tax. It now stands at EUR 195 million, another EUR 24 million were added. It's 11% of our operational expenses, which is quite a lot. And if we would exclude the bank taxes from our costs, then our cost-to-income ratio would drop significantly and be around 50% for the whole group. If we would spread out in a uniform manner the bank taxes over the full year, then our cost-to-income ratio stands 56.4% and that was perfectly in line with our own budget. In terms of the other and obviously also very important line on the outgoing side, that is the impairment releases. Yes, I mean, we have had a statement previously saying, listen, our credit portfolio is good quality. We see that translated into releases. We also see a benign economic environment and the two combined gives us, again, for the second quarter, a release of provisions now EUR 21 million. This is due to, amongst others, releases in Ireland, EUR 39 million, will bring the total at EUR 82 million and that's perfectly on track for the guidance, which we have given. The other countries, Czech Republic released, Hungary has released, Bulgaria has released and we have almost 0 in Slovakia. So the only country where we had some impairments is in Belgium, EUR 26 million, and that's related in assets, to the 3 corporate files. Credit cost ratio, as a consequence, stands at 10 basis points, rather low. We always said, listen, this is not sustainable. This is definitely not something which you can expect through the cycle and therefore it's nice in that respect also the translation of the good quality of our credit portfolio. Impaired loans ratio stands at 5.5%. That is a number which still includes the nonperforming loans in Ireland. If we would exclude [ TARA ], so excludes the Irish portfolio, this ratio drops to 4.4%. Page 18 is an overview. I'm not going to talk about it. And then we end with -- then we come to the business units. I am not going to talk about the details, but if you have any questions, we will be happy to answer them in the questions section. Let me then go to page, let me see, 41? Oh, no, I mean, they put me on the overview of the business units in terms of return on allocated capital, that's Page 38. I mean, what it says is return on allocated capital is 23% for the group. And you can see what it is per country. Czech Republic is clearly outperforming in that respect with 37% is indeed is very high. If we would now could go to Page 40, which gives us the overview on capital. Then the common equity Tier 1 ratio stands at 15.8%, clearly ahead of our target, but also clearly ahead of the regulatory minimum, big time. Now in terms of the share buyback or I mentioned the impact of 20 basis points. If we would have excluded that, then our ratio would have stood at 16%, which is perfectly in line with our reference capital position. And that has obviously an impact on how we deal with business. In terms of the total capital ratio, it now stands at 20.8% at the end of the first half year, which is indeed also a good number. Basel III leverage ratio, 6%; split of bank, 5.1%; Solvency II ratio 219%. All these ratios reflect a strong capital position of our subsidiaries, and in that respect, are just a continuation of what we have been saying before.Let me add one number to this. We also received a confirmation of the -- or a confirmation actually, we received for the first time an official letter of the SRB on our MREL targets. Those MREL targets are confirmed at 25.87%, so that rounded number, 25.9%. We're currently standing 26.4%, so we are higher -- 26.3%, we are higher than that. They added another element in that respect, which is a translation on what they call TLOF, that is the total of our liabilities and own funds, which is 9.4%. We have to manage both, but the TLOF will drop away after the review of the CRD director. So it's only standing there for a year. So we are already there on the fundamental of that ratio. We have to be in order in May 2019. So intrinsically, this is not an issue whatsoever. In terms of liquidity, strong ratios, NSFR, LCR, but also the ratio, which is saying how much cover we have with liquid assets compared to our short-term funding, is now standing almost at 4x that total number. Also reflects a very strong position there as well.So I mean, this is what it is. If we look forward, I can say that indeed the second quarter was a good one. We expect to have solid returns from all business units in the quarters going forward. The impairment guidance has been maintained for Ireland. And what is also quite important is that the tax regime has an impact, a positive impact, on our results. You know that the Belgian corporate taxes have been changed and are influencing positively as of this year, the ultimate profit which we post in our numbers. Let me end with 2 things. The strong capital position allow us to give the, again, the interim dividend and the confirmation of our guidance on the dividend policy. I would love to keep it here and hand over the floor to Kurt who will guide us through your questions.

[Kurt De Baenst, General Manager, Investor Relations]

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

[Operator]

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

[Pawel Dziedzic, Equity Analyst]

So 2 questions from me, the first one will be on your NIM and outlook. You managed to stabilize it at around 2% this quarter, so very little change since Q1. But how do you think about the rest of the year? Would you be able to perhaps deliver similar results? You mentioned that you still benefited from lower funding cost and so on, I'm wondering if that's going to continue. And if you could perhaps comment on Belgium versus International Unit. If we look at NIMs there, it seems that it's been stable in Belgium despite pressure on lending margins and it has been actually falling in both Czech Republic and in International Unit. And then my second question will be just on your Irish NPL disposal and it is quite simple. Could you help us understand why you decided to dispose loans now versus before? You obviously carried those exposures on your books for a while now. And if we are likely to see more of similar transactions going forward.

[Hendrik Scheerlinck, CFO & Director]

Thank you very much, Pawel. And first of all, in my name also, welcome to everybody on this call. To coming back on your first question on net interest margin, maybe I can start a little bit broader by saying that, indeed, we have seen now 2 rate increases in the Czech Republic at 27th of June and the 2nd of August. And as a result of that, we are now changing actually our guidance on NII, wherein the past we have said the overall, again if you compare to -- if you look at how we publish it now, we said after the first quarter that our guidance was for an NII of EUR 4,460,000,000. Now our guidance would be for EUR 4,500,000,000. And again, that is the result of the interest rate increases in the Czech Republic. If you then translate that to outlook, Belgium versus the Czech Republic and the International Market, we know in Belgium margins will remain under pressure in the low for longer. That being said, we see actually good margins and good margin evolution, especially on the corporate credits and on the SME credits. In the Czech Republic, we would expect the net interest margin to go up again on the back of the interest rate increases. And then International Markets should be able to stabilize around the levels that we have seen now.

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

And then, Pawel, your second question on the transaction of the Irish NPLs -- or the NPLs of the KBC Bank Ireland. First question you had is why now. I mean, it's quite simple. We have been looking into selling off part of that book already for quite a while and I think the first analysis of this possibility, I think, about 1.5 years ago. But we always put forward a condition present -- I mean, we always put forward a condition that the impact on our P&L should be positive because KBC, as you know, is not forced whatsoever given its capital position, given its P&Ls to do fire sales at all. So statement was quite clear from beginning: if the impact is not positive, so if we'll not be able to sell above book value, we're not going to do it. So when we were looking into this option, we came to the conclusion, together with Goldman, that indeed we were able to fulfill that condition, and as a consequence, EUR 1.9 billion is sold today. So the conclusion, as I said during the call, was disclosing by year-end. So the signing was happening today. Are we going to look into similar transactions? Well, if you look at the book which is remaining, then, in essence, I can say that what is on our book is more or less only PDH. So in that respect, something which we originated and which is big time part of our core activity in Ireland. So we're not inclined to go for sales there. I think also that the public opinion and also political opinion in Ireland is, in that respect, also not in favor of getting rid of those books. But on the other hand, if you look at group level, so at group level, we have some other countries where we are looking into those options. If you remember, in the first quarter of 2018, we also sold part of our NPL book in Bulgaria and these are things which we continue to look, which we continue to work on and which we continue to try to establish in a positive manner. So positive manner, both positive impact on the P&L and on the capital position. So similar transaction, yes, at group level. On the Irish level here, there's perhaps a cleanup of something which we completely written off, but that is something which we normally would not sell. Okay.

[Operator]

The next question comes from Flora Benhakoun from Deutsche Bank.

[Flora A. Benhakoun, Research Analyst]

I have really 2 questions actually. The first is regarding the CPPI, whether you could provide us with the usual quarterly update, I would say, regarding the total amount and how it's broken down across the different asset categories. And the second question is regarding your M&A plans, whether you could update us on whether anything has changed in all this is what you were mentioning in Q1. If you have basically new files on the table or something that could come up in the coming months or quarters?

[Hendrik Scheerlinck, CFO & Director]

Thank you for your question, Flora. On the CPPI, the evolution we have seen between the first and the second quarter is, first of all, volumes have dropped by EUR 400 million and exactly that is the increase that we have seen in Easy Invest. So we see that arbitration out of CPPI into Easy Invest continues. In terms of the distribution of the underlying assets, there has been a reduction in cash. At the end of the first quarter, we were 24% in cash, now we are 18% in cash. And that reduction in cash by about 6 basis points went into fixed income. So fixed income went from 35% to 39%. And then equities went from 40% to 42%.

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

And then your second question, Flora, on M&A, what's about -- what about the update M&A. So straightforward answer to your question I could do in 2 seconds, nothing changed. So we are looking into strengthening our position in our core countries. If there is something available, then we'll definitely have a look at it. And we are not going beyond our current core countries. So this is still true. And as we have shown this morning, by getting rid of a portfolio, we constantly monitor what is in our books and what is available in the market, both negative, both positive. If negative, we get rid of it; if positive, we'd definitely have a look at that. That has not changed. And also, in that respect, the positions on the markets have not changed dramatically as well. I mentioned in an earlier call that we would definitely be interested in strengthening, amongst others, our position in Hungary. I mean, as a consequence, Budapest Bank was put forward also in that respect, nothing new. It is not for sale yet, but we would be interested in having a look at that. So nothing changed. In essence, we are looking into possibilities in our core countries.

[Operator]

The next question comes from Tarik EI Mejjad from Bank of America.

[Tarik EI Mejjad, Equity Analyst]

I have 2 questions, please. First of all, on -- stay on the capital topic. You basically will probably reach 16% in Q3 pro forma of the legacy book disposal, which is your reference level including the M&A and all kind of buffers. So when do you think you'd update the market on your dividend policy? Because it's been for a while now like above 50%, which is quite wide guidance. So should we expect something around Q3 when you will hit the 16%? Or are we waiting for February next year with Q4 numbers to get some sort of updates? The same question is on your margins in Belgium. I mean, there have been some kind of blame game between all the banks that are operating in Belgium, blaming competition from some specific banks. Could you maybe comment a bit more on what's the dynamics there? And it looks like from ING numbers that this is easing now. But any color would be very helpful.

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

Thanks, Tarik, for your questions. Let me answer both of them, the first is on capital. So indeed, we are at 15.8%. If we would have not done the share buyback, we would be at 16%. Our reference capital position is indeed true. If we hit that position, you know that, in principle, we consider every euro exceeding the 16% threshold as surplus capital. So what is our policy in that respect? And when are we going to update our dividend policy? We are going to do that. And as I said it, I think, as well on previous occasions, we are going to update our policy on the basis of full year numbers. So in principle and indeed in February next year. But the dividend policy remains the same. We consider the thresholds -- every money exceeding the threshold of 16% as surplus capital. In terms of the Belgium position and then definitely the margins, you're referring -- you use the word blame game. You're referring to interviews, which were indeed in the press in Belgium last week on the back of the announcement of quarter results of other financial institutions. I mean, it's simple. Also I said in previous occasions that we all have to monitor carefully what we are making on our return on equity for every product and that's definitely also true for the credit business in general in Belgium. We are -- and I'm not talking about KBC because we are a bit of an outlier there, but in general, in Belgium, banking sector is indeed not hitting the return on equity requirements for lending business and I'm talking about mainly the mortgage business. So in that respect, the remarks which were in the press were correct. How that is going to evolve in the future is a tricky one. I cannot comment because you know taking public statements about price and price evolutions on products is eligible to antitrust, so I cannot comment in public about that. But the policy of KBC is quite simple: products which we sell, which are core products, need to be profitable as such, but also needs to be profitable in relative terms. And that means that we take into cost of the equity, cost of capital and it needs to exceed that for sure. And that's something which we monitor. That's something which we do and we play a role as market leader. Let's keep it there.

[Operator]

The next question comes from Farquhar Murray from Autonomous.

[Farquhar Charles Murray, Partner, Insurance and Banks]

Just 2 questions, if I may, both on the Irish portfolio disposal. Firstly, could you actually possibly give the split of the EUR 1.9 billion portfolio...

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

Excuse me to interrupt, but can you speak a bit louder because we hardly understand what you say.

[Farquhar Charles Murray, Partner, Insurance and Banks]

Okay. Can you hear that better now?

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

It's indeed a bit better.

[Farquhar Charles Murray, Partner, Insurance and Banks]

Okay. Firstly, 2 questions on the Irish portfolio disposal. Firstly, could you give me the split of the EUR 1.9 billion between the Irish corporate, the Irish buy-to-let and the U.K. buy-to-let component? And then, secondly, what was the impairment experience of this portfolio in recent kind of years? Just trying to understand what its contribution was to the impairment cost we've seen lately.

[Hendrik Scheerlinck, CFO & Director]

Thanks for the question. The split of the 9 -- of the EUR 1.9 billion over corporate, corporate was EUR 800 million and then we have EUR 1.1 billion on the buy-to-let mortgages, EUR 900 million of that are delinquent Irish buy-to-let mortgages and then we have EUR 200 million of that, which were performing and nonperforming U.K. buy-to-let mortgages. At this stage, we prefer not to give any details on the evolution of the provisioning or the take back of provisioning. We will say more about that when we close the deal in the fourth quarter.

[Operator]

The next question comes from Bart Jooris from Degroof Petercam.

[Bart Jooris, Analyst]

Coming back on Ireland first, you're already at EUR 82 million releases. Your guidance is EUR 100 million to EUR 150 million. Could you believe that it will rather reach the top of your guidance? Does the sell-off of the portfolio has any influence on that? And then, secondly, if I can look at your combined ratio, which stays extremely low even if taking to account that you have some, let's say, a weather effects in the first quarter. Do you believe that is sustainable? And if so, why? Or do you see a higher number coming in, in the second half or next year?

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

So thank you for your questions. Let me come back on the first one. In Ireland, indeed, we are combined for the half year at EUR 82 million releases and this is indeed coming close to the bottom of our range. Obviously, the [ TARA ] -- sorry, we call internally the NPL deal in Ireland [ TARA ], our project [ TARA ], therefore my uses of the word, excuse me for that. So the sell-off of that NPL book in Ireland has obviously some impact on the releases because part of the releases are related to that book. But as Rik just indicated, we are not going to disclose the detail right now. For obvious reason, it's part of -- was part of the negotiations with the buyer. We will give some detail when we close the deal in the fourth quarter. So we are perfectly fine with having [ end ] the deal concluded, knowing that the deal has impact on our releases and our guidance. So in that respect, the EUR 100 million, EUR 150 million is maintained. Where we will end, top of the range or bottom of the range, is something else. I mean, then we would narrow down the kind of a number and I think that is not the purpose of this guidance. Then the second question was related to combined ratio. It's 88% and it is considered indeed very good. Question is how sustainable is it, I mean, I cannot predict obviously the impact of the weather conditions because that is mainly influencing the big swings on your combined ratio. We have seen that in the first quarter and we have seen that in the past as well. What we are sure about that is, and I'm giving implicitly a guide but that's not the purpose, that is that we are sure that we are going to get our target and our target is below 94% structurally. And that is true for all countries and definitely true for the group. So in this respect, yes, it is sustainable. If it will be 88% at the end of the year, that's another question. Ask me again in the fourth quarter.

[Bart Jooris, Analyst]

If I can follow up slightly. In that 94% target, how much of that is weather?

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

How much of that is, sorry?

[Bart Jooris, Analyst]

Weather impact.

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

Weather. Okay, weather impact. So we don't make an explicit -- at least not in our disclosure, we don't make an explicit split-up between what is, let's call it, regular claims and what is natural catastrophic claims. But indeed, we make a separate analysis and we take into account year-after-year, more for weather claims for sure.

[Operator]

The next question is from Benoit Petrarque from Kepler.

[Benoit Petrarque, Head of Benelux Equity Research]

I've got 2 questions and 1 follow-up. First one is on the FX swap trade, I was wondering where you are in terms of notional at the end of Q2 and early Q3? And how much of FX swap contribution is your -- is in your EUR 4.5 billion NII guidance. Second one will be on the fees. So net inflows was, if I remember well, EUR 800 million in Q1 and now you mentioned EUR 600 million in H1. I'm not sure if I understood correctly, but I was wondering if you could disclose the net flow in mutual funds for the second quarter. And also tell us a bit more about the sentiment in the market also going into the third quarter. I was wondering if Q3 should be comparable to Q3 last year. And we know that H1 was a bit special last year, but I was wondering about kind of Q3 year-on-year. And then maybe following up on the combined ratio, yes, I was wondering if you could disclose the previous year reserve release you have put in the ratio because your peers are disclosing much higher combined ratios. I think Ageas disclosed 97% yesterday, but taking into account some large reserve releases. So I was wondering if you could do that as well, that would be very useful.

[Hendrik Scheerlinck, CFO & Director]

Yes, on the FX swap trade, if you look at the average volumes, you know especially on the dollar side it has become far less attractive than it was before. The pounds sterling swaps are still okay if you keep them very short term, so up to 30 days it's still attractive. The volumes in the first quarter were on average around EUR 11 billion, ended up somewhat to EUR 10 billion in the second quarter. We don't give guidance on what we expect of the contribution of these foreign exchange swaps for the coming quarters.

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

The other questions, first of all, starting with the fees. So what I said was the following in terms of net sales. We had in the first quarter of 2018 EUR 800 million net sales. We have now net outflows so a negative, minus EUR 200 million, in the second quarter. And that makes it for the first half of this year a total of plus EUR 600 million. So inflows net sales, EUR 600 million. That is, for the first half, your second question was how do you think the situation will evolve going forward and mainly focused on the third quarter? Normally, we don't give explicit guidance quarter by quarter. And let me give you some circumstances which have generated the EUR 200 million outflows. It has been generated by, amongst others, 2 things that has the negative impact of the [ Italian, of actions ] which has created turbulence, we all know. And then, obviously, statements on trade wars between the U.S. and some other continents has created a lot of nervousness. In this respect, we do see immediately an impact on the investor sentiment with our customers. Money is no longer shifted from, let me say, something -- saving accounts to investment portfolios and that happened in the second quarter. It has also a consequence, by the way, on the number of money which -- on the total amount of money which we have on saving account. It went up significantly. I'm talking about billions. What about third quarter? I don't know. I mean, I cannot give you the first July month and the first days of August. We don't disclose that yet, as you know. But that I can ask you to judge on statements which you have seen of Mr. Trump, I can ask you to judge on the turbulence and I think that given that circumstances -- of those circumstances, you can judge on what it will be. Will it be In line with the third quarter of last year? Yes, definitely, it would make sense to compare it with that. Same season, same holiday period and also there we had some turbulence as well. So it makes sense. What it will be ultimately is something else. And then the combined ratio, we will give you -- we will provide you the detail as requested. You made reference to a Belgian insurance company. Be aware that KBC has always outperformed in terms of combined ratio in Belgian sector big time and I'm talking about the last [Audio Gap] since 2001, what is that, the last 15 years. So it's quite the structural. As to the way we underwrite, it's fully automated and it's very detailed in terms of analysis or profile of customers. So it's no big surprise there. And I'm talking not only about motorcar business. I'm talking about, amongst others as well, homeowner's insurance [indiscernible] protection insurance business. And then the second thing is the number, which we have published today is not influenced by release of provisions at group level. I mean, here and there perhaps in a country it could have a bit of shift of provisions, but Belgium is the main contributor and there the reservation on claims remains quite stable. So we have no big releases. But we will give you some splits. You asked also the splits of 2017, we will provide you that split. If need be, we do it off-line.

[Operator]

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

[Robin van den Broek, Research Analyst]

Coming back on NII guidance. Rik, I appreciate what you said raising the guidance to EUR 4.5 billion. I was just wondering if you could talk a little bit about the pressure from reinvestment yields. Some of your peers are basically saying that they see some easing there. I can remember in the past that you have lengthened the duration of this book compared to some peers that have reduced the duration of that book. Does that also mean that we will see more pressure throughout time? And maybe reflected also for 2019, I think your underlying growth now goes from 2.5% to roughly 3.5%. Do you think that underlying growth is sustainable going forward? Then secondly, on insurance, Johan, you're basically saying below 94% is sustainable. I think your gross written premium growth is, yes, is between mid- and high single digits. So any normalization in the combined operating ratio, I guess, would be offset by your gross written premium growth? But I was also wondering if on your group results, you see in revenues now that for life, your -- I think, you've printed a positive number there for the first time in a long time. I was wondering to what extent do you think that is sustainable. Those were my questions.

[Hendrik Scheerlinck, CFO & Director]

Thank you, Robin. I'll take the first one on the NII guidance. Sorry, the core -- so if we start from the number which compared it to last year for the full year of EUR 4,121,000,000. Then on that, in our guide, an increase by 3%. You remember last quarter, we said 2.5%. But as a result of the rate hikes in the Czech Republic, we bring that to 3%. In terms of pressure on the reinvestment yields and the duration of our portfolio in the application duration, we actually expect that as a result of the tapering of the ECB that spreads would widen. You know there has been somewhat delay in the tapering set that is now in 2 stages. We still expect that by the end of the year, we're going to see widening of the spreads. And as a result of that, we are actually not reinvesting part of the B portfolio that is running off because that would be an opportunity risk that we've taken. We don't want to take that because we are confident or we hope at least that we're going to be able to reinvest that higher spreads by the end of this year. We don't give any guidance on NII of 2019 yet.

[Robin van den Broek, Research Analyst]

And maybe to follow up on that, Rik. So the not reinvesting is presumably an additional drag on your reinvestment yield? And I also wondered if implicitly you're saying that the gains from the foreign exchange rate, arbitrage rate, is going down. So the fact that you're upping your guidance for 2018 is basically absorbing that as well, right?

[Hendrik Scheerlinck, CFO & Director]

Well, year-over-year indeed -- on the second part, year-over-year, that is correct. On the first part, the fact that we reinvest less than before is already reflected in the numbers and also in the guidance.

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

Let me then come back to your question on the insurance side. So what about the further evolution and on the sustainability of both quality and on sales and then mainly also focused on -- that was the second one, I think, on life. So in terms of sustainability and quality, be aware that full group underwrite according to the same standards. And as I said, I mean, Belgium is by far the biggest one. I think 80% of total revenues is generated through Belgium. But that is fully automated and is driven by data and data analytics already for 20 years. So nothing is -- will be expected to change. I refer also to another question, which was asked earlier in this call that is obviously we do not have an impact on the magnitude of natural catastrophes. We have a reinsurance policy in place obviously, but that can still generate some fluctuation in your P&L. So set aside natural catastrophe, I'm quite confident about the outcome of our insurance business going forward, not only this year but also next year as well. Then the second thing on sales, the fact that we are performing quite well in the second quarter has to do with the disappointment I already mentioned on the insurance sales a couple of quarters ago. As a bank assurer, we have quite ambitious targets in terms of covering both the financial needs on the banking and insurance side with our customers and we were lagging behind it on our internal target. That has been also quite significantly stated to our colleagues in the different countries. And what you now see is a consequence of that. There's much more attention on the insurance side, so sales, and definitely I'm referring to non-life because that's perfectly countercyclical with the banking business. Definitely, in non-life, the attention has been increasing substantially. I'm not talking about Central Europe. I'm talking about Central Europe and Belgium as well. In terms of life, we have a positive contribution with the life side that's mainly due to the fact that the underlying portfolio and that's what we disclosed already at the end of fourth quarter last year as well. The underlying quality of the life business, both unit-linked and interest-guaranteed products, is quite profitable, has to do with the increase of the embedded value. And it continues to increase also in the second quarter despite the low interest rate environment. So what we expect in terms of quality, same evolution going forward. What we expect in terms of sales principle, we don't give guidance on this. But as you know, we have some specific campaigns on life insurance business in the end of the last quarter of this year and the last quarter of the year, so also this last quarter of this year. So is it a positive result going forward? All the indications show indeed in that direction.

[Operator]

The next question comes from Jean-Pierre Lambert from KBW.

[Jean-Pierre Lambert]

Two questions, please. The first one is the digital transformation, we see that you up front some expenses. I was wondering if you could indicate where are you in percentage terms of achieving your overall transformation project? Are you midway? And how do you see the evolution of these investments? Are there going to taper off at some point and when would that be? The second question is related to provisions in general. So we see a trend, which is quite positive still going on for the output gap, which is reducing. I'm talking about GDP output gap. So that should normally support further sequence of low provisions. And how do you -- but at the same time in the press release, you warned us that the peak has been reached. And I was wondering how do you see the evolution of these provisions, when to expect a form of pickup to take place? Is it end of this year or middle of next year in general?

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

So thank you, Jean-Pierre, for your questions. Let me go already into the first one on digital transformation. Let me first say something about the results. We did not put it in the first part of our presentation, so the announcement of the results. But as you can see in the annex of that slide deck, there are again some numbers included on the further evolution of our digital sales. So that is indeed going further and further on. It is -- honestly, it is a bit surprising to us that it goes that fast. It is beating every budget which we have put forward in that respect. The numbers which I mentioned are the digital sales in Belgium. And I mean, I'm not going to dwell upon the detail, but if you see that our consumer loans now for more than 2/3 of our digital, we were not expecting that honestly a year ago. So what we see has been picked up. What we see in other countries, for instance, Czech Republic, Slovakia, they picked up as well. In that respect, the trend is a given. We are, as you know, investing EUR 1.5 billion in the next coming 4 years. We announced that in our investor event in Dublin; nothing has changed in that respect. In terms of spend per year, we are -- I think we have a slide on Page 59 in the deck, which actually indicates where we are. And what we are doing is we're spending 2.2 -- not 2.5, that would be a lot -- EUR 250 million a quarter, and that spend is, I mean, described in that slide. That spend is followed. I am not saying that we are perfectly spot on for every quarter on EUR 250 million, but we are normally following those investments. We don't give the precise detail nor guidance on where we are on a quarterly basis. I mean, that would not make sense because it has also to do with circumstances which are bound to a quarter for instance. But in essence, we are indeed following what we have announced in Dublin last year. And then on provisions, I see Rik also has some -- so let me say one thing [ more against that ]. So in the press release, we referred to the economic cycle. We were not referring to the provisions whatsoever. We're not giving any kind of indication in that respect. What we do see is -- and what do we do think is that the economic growth going forward is still positive in Belgium, for instance, 1.6%. But the peak has been reached, which means that we brought it down from previously 1.7%. So yes there is economic growth. Yes, the growth is still quite positive, but it has not been as high as it was before and that obviously trends a little bit in the credit quality, but not to such an extent that we have to be worried. When is it going to turn? I mean, we are conservative in this respect. We don't give explicit guidance, but we don't expect this to be any day soon.

[Hendrik Scheerlinck, CFO & Director]

Short term, Jean-Pierre, what I can add to that is that we, of course, carefully watch our NPL formation and that remains very benign. And as I have said in the past meetings, we are carefully watching the more dangerous parts of a traditional credit book, that is mortgage lending. We look into that in detail. We do deep dives on that, that is commercial real estate, that is acquisition finance, that is consumer finance. So we carefully watch the evolution of our portfolio. We set standards even if the impact of those standards results in somewhat lower market share and production of volumes, and we will keep doing that. And I agree with Johan, it will be good to know when the credit cycle turns, but we don't have a crystal ball on that one.

[Operator]

The next question is from Stefan Nedialkov from Citigroup.

[Stefan Rosenov Nedialkov, Director]

It's Stefan from Citi. Two main questions on my side on the excess capital and the M&A buffer. In terms of the M&A criteria, you had mentioned last year that one of your criteria would be the ROI on any deal would be accretive to your group ROE. Is that still the case? Or are you happier to kind of sacrifice group ROE for growth in insurance banking or asset management? And related to that, if you don't find something, as seems increasingly likely, how much longer are you going to keep that M&A buffer for? Obviously, it's a drag on your overall profitability. So just some color on that. I know it's definitely not an exact science, but any color you can give us on that would be great. And my second question is on the NIM. Could you give us the impact on the Czech's NII of this allocation between the Czech segment and the Group Centre in terms of the treasury result. And is this something that's going to be embedded for the future? Or is it sort of a one-off negative impact? And related to the margin question, just looking at the new production of mortgages in Belgium, you're down to, if I read the chart correctly, 80 basis points or so. Looks like it's still accretive versus your back book in terms of whatever you wrote 10 years ago. But how much low could you go before your ROE/ROI criteria start getting breached on your production?

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

Thank you, Stefan, for your question. Let me answer the first one. So on the M&A buffer, the -- I mean, indeed, it was at 2%, which is a variable -- or which was a dynamic buffer. So what we are doing is indeed keeping this, we said for a period of 2 years, 3 years perhaps. We are now down, what, we announced in June last year. So we are maintaining that position 2, 3 years and then we'll see. But is it's clear that there is no opportunity out there? I mean, an opportunity, which can add value, then we are no longer going to hold that buffer and we will make a proposal to our board on the dividend policy. So do we make an explicit statement after date X? It is completely over. Do we give you explicit date? The answer is no, but then you have more or less the time frame on which we are looking at. But also the added comment which we also added in the past was if it's clear there is no prosperity out there, then we are not going to pursue any more that 2%. What is available out there is checked on different conditions, amongst others, return on investment, correct, and that has not changed. You mentioned to exclude or to include the deal, we are going to look at return, the ROI, and refer to the ROE of group level. That's a bit close through the corner, I think. That's not entirely how we said it. It needs to have added value both on the ROE and on the ROI side for every deal and we take -- make a difference between short and long term. If it's clear that the return on equity of a deal on the long term is value destroying in terms of the ROE of the group, why should we do it? We are not going to increase our market share if we cannot create value. That's something which we said and that something which I repeat today. Also on the ROE, on the short term, that same philosophy is followed. If we would stick to it needs to be higher than the ROE of group level and we have concluded 17% today, I mean, there's not much out there which could tick that box. So let's be careful. And it's a little bit nuanced, but it is exactly the same as we said in the past. It needs to be value additive and it definitely also has needs to add value in terms of return on equity. We have internal targets, which we don't disclose, as you know. So that's something we should take into account.

[Hendrik Scheerlinck, CFO & Director]

And then, Stefan, on NII, in the Czech Republic, basically what Johan referred to before is we need to have excess liquidity at KBC Group. An example of excess liquidity being created next to a good increase in customer deposits is, for instance, the additional AT1 that we issued in the second quarter of EUR 1 billion, the EUR 500 million green bond that we issued, so it gives us excess liquidity. And we swapped part of that excess liquidity in Czech koruna and then replaced Czech koruna with [ CSOB ]. For that, we use a reference rate which is a market reference rate. In the first quarter, as you know, with the year-end effect because typically these deals are 3-month deals, with the year-end effect, we have negative interest rates in the Czech Republic on the koruna. So as a result of that, in the first quarter of this year, the profit that was made on that arbitrage, which was EUR 9 million, was fully accretive to our activities in the Czech Republic to [ CSOB ]. In the second quarter, as interest rates became positive, we see that on those transactions we made EUR 8 million in profit. EUR 6 million of that was accredited to Group Centre in Belgium and EUR 2 million was accredited to [ CSOB ]. And you have also take into account, when you look at the NII evolution in the Czech Republic that we had the weakening of the koruna in the second quarter and that had another negative effect of about EUR 3 million. Going for the pricing on the mortgages. Basically, indeed, you guessed in the ballpark where the production has been in the second quarter. We look at what is the long-term return on these transactions. So we -- and indeed, they have to bring an income that is higher than the cost of capital. And as you know, with our cross-selling model that we have with the cross-selling on the insurance side, but we also we look at the lifetime value of a customer. So next to selling the credit product, we have the insurance products, we have current accounts and we see that indeed in the lifetime activity we can get more out of those customers from this book product. But I will not comment on further evolution of pricing.

[Operator]

The next question is from Jose Coll from Santander.

[Josema Coll, Equity Analyst]

Two questions, please. The first one would be a follow-up question regarding loan growth in Belgium, you said a very strong 2% quarter-on-quarter growth. You mentioned good volumes in mortgages. But I suppose that consumers, it means large corporates, have also performed well. So could you please comment on market dynamics, expected growth by lending segment, asset yields and how these [ values ] are coming out of your -- are impacting the competitive landscape? Any further color here would be much appreciated. And my second question is on Central and Eastern Europe. I look at your Slide 38 on return on allocated capital in Czech Republic and International Markets and it's quite high. I suppose that International Markets is even higher if you exclude Ireland. So how do you see the competitive landscape here? Is there any -- I suppose, the sort of returns will attract competition. What are you expecting here? And is there any regulatory risk in these countries?

[Hendrik Scheerlinck, CFO & Director]

Thank you, Jose. On the loan growth in Belgium in the second quarter, actually we have seen good growth on the corporate side. That growth was quarter-over-quarter EUR 2.5 billion. We see that Belgium companies are investing more. There are a number of acquisitions for us going on. So the dynamics that we have seen on the corporates [ and this ], to me, is quite strong. On the mortgages, we are just able to replace the runoff of the books. So basically there, quarter-over-quarter, there has not been growth in the back book of mortgages because again runoffs are being replenished by new underwritings that we do.

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

And then, Jose, for your second question, what about Central Europe and the strong performance over there? Obviously, this performance is related to 2 things. That is sales, one; and then the intrinsic margin, which you make on yourself. So in terms of the quality of the book, we do not see fundamental changes nor in Central Europe nor in Belgium and that is something which we expect also going forward to see -- that we have given. So in terms of pure quality, underlying quality, of the sales, which is one of the driver of the return on allocated capital, we do not say -- we do not see any fundamental changes. Also, if you listen carefully to one of the previous answers of Rik, how we follow our portfolios, we are not afraid to interfere when we think that the market is doing stupid things in terms of quality of sales. We did that in some of the Central European countries, but we imposed limits and therefore market share declined. We see the market now returning back to our standards and we step in the market as well. In terms of competition, I mean, the competition is in all countries quite strong. It's not only true for Czech Republic, but is also true for Slovakia or Hungary or Bulgaria, whatsoever. But the strong increase of the improvement of the profitability in International Market is mainly due to, first of all, the improvement of the quality in Ireland. This is despite the fact that we have severe competition over there, a success also for what we call new bank. Again, in the second quarter, we established 20,000 new customers in the bank, which brings a total for this year at 40,000. So we are going on a run rate of 20,000 customers, new customers, for the bank every quarter. And then the second element for the explanation of the improvement of International Market is the position of Bulgaria. Integration of UBB, CIBANK is going very well and the performance of Bulgaria in this quarter was EUR 26 million, which is indeed quite good, and quite is an understatement. So competition -- despite the competition, we are still performing well. One of the reason I think why we are doing well is not only the way how we deal with business, but also the name. KBC is a quite solid name. We have local names in every entity, but everybody knows it's a daughter of KBC and that is considered to be a strength reputation-wise.

[Operator]

And the next question is from much Matthias De Wit from Kempen.

[Matthias De Wit, Analyst]

I got 2 questions remaining. First is on the life insurance activities, which, again, did better than I [indiscernible] expected. I just wondered how we should think about the net contribution from premiums and technical charges due to the quite significant negative in the past, but it has improved and is now becoming -- or became positive. So how should we think about that going forward? And then just second question is on cost. During last call, you suggested that the migration to terminals could generate significant cost savings. Just wonder if you could be a bit more specific in this respect? And I also wonder if any of these savings are captured in your guidance for operating expense growth. I think it was 1.6% per annum.

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

Thank you for your questions, Matthias. Actually, you're also referring to question that was asked by Mr. Petrarque earlier on. Perhaps we should provide a little bit more detail then on the split-up in the insurance business, life, non-life and then definitely also on the life business. So indeed, we are working on the quality of our book. We constantly monitor the underlying value generated. Most of the time it's translated on embedded value. We only publish that once a year, but as you understand now we are monitoring this on a quarterly basis. So the reason why we have this evolution has obviously to do with the composition of the book. Unit-linked is an important contributor. It's a fee generative and has, in principle, no impact. It's not influenced by the evolution in financial markets. This is not the case with the interest-guaranteed products. If you look at evolution in the second quarter, then it's obvious that we are making much -- that we are making more money than we did in previous quarter. And therefore, the life business is contributing positively. Same is true for the total result of the insurance company, life and non-life combined, if you look at a financial contribution of that insurance company. But as I said, I think it's perhaps wise to disclose a bit more information next time and that is something which you can follow-up on the phone. Then coming back to your question on the cost side, so indeed, we are working on the integration of a new IT platform in entities in Central Europe and in Ireland. We already have terminals in place. As you know, in Ireland, we have terminals in place in the acquired UBB. We have been integrating CIBANK and UBB now on 1 platform and we are upgrading it to the latest releases. There we are. Now what we are doing in all the countries of International Markets is bring it together on 1 platform. This is on its way and it will indeed generate over time serious cost benefits. Now I mentioned that in an earlier call and I was referring then to the position of Slovakia. The situation -- we don't give that in detail per country. But the situation is indeed that once the terminals are in place, that we are bringing down the relative cost of IT country per country and indeed in a very interesting manner, so in a significant manner. The point I want to make is this is not happening tomorrow. We are talking about a couple of years here because the implementation of the terminals both from group-wide will take us 2 or 3 years for Slovakia and for Hungary. I'm not talking about Bulgaria and Ireland where it is already in place and we can reap the benefits already in, let's say, the next coming years.

[Kurt De Baenst, General Manager, Investor Relations]

Okay. Thank you very much, everyone. This sums it up for this call. So I want to thank you for your attendance and hope to see you tomorrow morning at 8:30 a.m. at KBC in Old Broad Street. See you. Cheers.

[Operator]

Thank you. Ladies and gentlemen, that does conclude the call for today. You may now disconnect. Thanks for joining. Enjoy the rest of your day.