KBC Groep NV

XBRU:KBC

Earnings Call Transcript 2020-Q2

[Kurt De Baenst, General Manager, Investor Relations]

A very good morning to all of you from the headquarters of KBC in Brussels, and welcome to the KBC conference call. I hope that you and your family are still healthy and hope that in the meantime, you were able to enjoy some holidays.Today is Thursday, August 6, 2020, and we are hosting the conference call on the second quarter results of KBC. As usual, we have Johan Thijs, Group CEO, with us; as well as Rik Scheerlinck, Group CFO, and they will both elaborate on the results and add some additional insights.As such, it's my pleasure to give the floor to our CEO, Johan Thijs, who will quickly run you through the presentation.

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

Thank you very much, Kurt, and also a warm welcome from my side to all of you. I hope indeed, as Kurt already said, that all of you and your loved ones are safe and sound and that you all guys are taking care in these very peculiar circumstances.In terms of the second quarter results, let me start. But indeed, what I just said, it is a very unprecedented time. And actually, the second quarter is -- the first quarter, which is fully characterized by the impact of a lockdown. And that lockdown was indeed released by the end of the second quarter, but nevertheless, it obviously has a substantial impact. It has definitely a substantial impact in the way we are working. We are working with our staff remotely. We are seeing customers staying in, in Flemish expression, their cots, in their houses. We are indeed seeing a change of behavior, and that obviously impacts the way we are presenting -- the outcome that we are presenting in terms of results.What is also true is that it did not impact yet our normal impairments. And that's an important thing. We do not see any material deviations in terms of PDs and so on and so forth caused by the corona crisis causing by the COVID-19 virus.On the other hand, because of IFRS 9, we have taken into account the expected credit losses, which will be related to COVID-19 for the remainder of the year. And we have, therefore, booked that in a management overlay for the entire year in this quarter.We also confirmed the guidance which we gave earlier in the end of the first quarter in terms of the full year impact on impairments, EUR 1.1 billion. And as I just said, the vast majority of that impact is now booked in this second quarter.What is true is that, indeed, COVID-19 has impact on the way we work, but also it has -- and that's the good news, actually had little impact on our gross sales. We have had strong performances in terms of our lending volumes. We have seen a strong performance on the deposit side. We have seen a strong performance on the insurance side. Actually, we have once again seen that the bank insurance model is adding a lot of value in very difficult circumstances. And in this case, indeed, the bank insurance model delivers the vast bulk of the results in this quarter. We have seen strong gross sales even on the investment product side, and we have kept our costs under control. So all of the important things, which we can do, we have delivered. Also in this quarter, we have seen normal impairments -- set aside from the management overlay, we have seen normal impairments coming into our books. All of this results in good cost/income ratios and a return on equity of normally 14% if I take the management overlay out in terms of combined ratio, with 83% in terms of credit cost ratio. We had a normal level, 0.20%, which was perfectly in line with our guidance. But after taking into account the COVID impairments entirely, we would end up at 64% (sic) [ 0.64% ], perfectly in line with what we guided at the back of the first quarter.Also our capital ratio, common equity Tier 1 stands at 16.6% before profit recognition, which is indeed a very strong number, translated also in very strong leverage ratio and liquidity ratio. So all in all, with EUR 210 million of profit we have delivered, again, a strong quarter.If I look at the building blocks on Page 4, I mean, that is translated in all detail. Let me skip that because, I mean, it is what it is. There are very few exceptionals this quarter. If you make the comparison with second quarter 2019, mind you that the -- at that time, we did a one-off booking for the consolidation of CMSS, delivering EUR 82 million before taxes. So remember that one. All the other exceptionals which you can see in this quarter are related to COVID-19 because we do have to book certain modification losses, which are related to the payment holidays, obviously, which are related to the COVID-19 issues. And as a consequence, these are one-off bookings done in this quarter. Comparison between quarter-on-quarter has actually no difference whatsoever.If we go to the split of bank and insurance straightforward, EUR 210 million of profit, EUR 173 million is coming out of the insurance company, which says a lot. It's the traditional split of 80-20, but the other way around. It's 20-80 this quarter, obviously, heavily influenced by the management overlay.Okay. Enough for that kind of things, let me go into the line-for-line explanation. Obviously, we start with traditional, the net interest income. That net interest income went down to EUR 1.083 billion. That is a drop of EUR 112 -- actually round it, EUR 113 million. That is due to partly the insurance company, no big surprise, hampered by the low interest rate environment. Let me not waste too much time there.And if you look at the banking net interest income, taking into account the FX swaps, the ALM FX swaps, then there is a drop of EUR 105 million. You say -- you see the same pattern in our net interest margin. There, we see a drop of 15 basis points, which is indeed quite significant.Now the explanation straightforward is very simple. If we take into account the rate cuts of the Czech National Bank, which went, as you know, from 2.25% early February to 0.25% early May, and it went down from end of March to 0.25% -- from 100 to 0.25% in May 2020. That rate cut had costed us in our operations in Czech Republic EUR 115 million. It is explaining the whole difference, which you can see in this net interest income. It is also the explanation of more than half of the 15 basis points on the net interest margin.Let me state it differently. If we would exclude that impact and we would add up the net interest income in Belgium, in international markets and in group center, then we would have a positive outcome. Actually, the net interest income in Belgium and interest margins was better than previous quarter, which is an achievement in itself given the difficult circumstances.In terms of the other elements which are influencing one way or the other the net interest income, we are quite familiar with that. That is the low interest rate environment. We have seen that low interest environment kicking in on the XVA deposits, which we have been booking. We have a net inflow on deposits year-on-year of 7%. It's quite significant. That has also to do with the fact that the loan margins on the total outstanding portfolio in most core countries are indeed pressurized -- under pressure. Belgium is an exception there. Belgium has indeed produced, again, high margins, which are substantially higher than the outstanding book. The same is true for Czech Republic and Slovakia for the mortgages. And also that is good news. We have seen a very strong uptick on the margin, on the mortgage book in Czech Republic.All the other things are smaller of kinds. But as I said, the main difference in this drop of net interest income is the Czech Republic rate cuts by the Czech National Bank.Now because of that strong performance, both in volumes and both in margin, we have reviewed our guidance for net interest income over the full year. But as previously we guided EUR 4.3 billion, we now guide for the full year net interest income, EUR 4.4 billion.Coming back to the volumes as depicted in the table at the bottom of the page, you can see clearly that we have been growing our lending book as well. One side remark, for instance, the 0% on the total loan growth, which actually depicts the growth in the commercial loans, is due to a couple of one-offs, which were maturing in 2020 second quarter. For instance, in Belgium, we have seen a strong net production in our SME corporate book as well, but that was offset by a maturing bond to an institutional of more than EUR 1.1 billion. So the net outcome there is flat.So net interest income is what it is. Let's go to fee and commission business. Here, we see a drop of EUR 41 million, which is down 10%. This is driven by 2 things. This is driven by the fee and commission business generated through the asset management activities and the banking service activities. Now let me explain the difference. Actually, what you can see here is indeed fully COVID-related.As a matter of fact, in the second quarter 2020, we have seen again gross sales which were higher than the same quarter in 2019. So we have had gross sales EUR 200 million more than what we have seen in the same period of last year. If you compare it with the previous quarter, which was the best quarter in a lot of years, the gross sales were down EUR 1.1 billion. Remind you that January and February were top months in terms of gross sales, never seen before. And as a consequence, obviously, that picture is a little bit distorted. So in terms of gross sales, actually, the outcome was well. If you look at the majority of the portfolio, we have seen net outflows to the tune of EUR 600 million.Now in terms of management fees -- now let me continue with those sales. That obviously defines our entry fees. What we have seen with those entry fees is a decline of EUR 13 million. That has to do with the comparison with previous quarter, obviously. Lower gross sales is one thing. And the second thing is that those sales happened for an important part in the private banking segment. The entry fees on the private banking segment are lower than on the traditional private segment -- traditional private individual segments. And as a consequence, entry fees were down EUR 12 million.In terms of our management fees, actually, it is also straightforward. It is explained because of the assets under management dropped at the end of the first quarter significantly. You can see that in the graph. It dropped EUR 13 billion and -- sorry, EUR 23 billion. And as a consequence, because the stock was very low, management fees are going down.Next to that is also an impact on the management fee margin because of the terminals on the financial markets in our CPPI portfolio. Products -- some products cashed out and generated a lower fee. The combination of the 2 brought the assets -- brought the management fee down with more or less EUR 21 million.In terms of the banking fees, here, we do see, indeed, again, the impact of the coronavirus on the consumption of our clients, of our consumers. It means that we have seen lower fees from payment services. That is due to the less transactions, then also sort of less credit cards and so on and so forth. And as a consequence, we have seen the drop of EUR 10 million of fees on the banking services.We had a very strong quarter on the KBC securities activities on M&A and origination, which was of the same kind as the activities in the first quarter, and we have seen on other activities, indeed, a very strong performance in terms of sales.In terms of assets under management, we recovered gradually through the course of the second quarter. That recovery is translated in an increase of assets under management of EUR 9 billion, entirely driven by the positive price effect and partially offset by what I said, the net outflows.Let me go into the insurance activities. We have an extremely strong quarter there to mention. We have seen growth of our premium income with 2% on the earned premiums. Given circumstances, as you know, also government interfered on the insurance side. Given circumstances, the 2% is a quite strong performance. What is actually even far more important is that we have seen, also as a consequence of the lockdown, the number of claims dropping again, whereas in normal circumstance, the combined ratio will be hovering around 90%. We do now see a combined ratio for the year-to-date, so including the windstorm in the first quarter, of 83%. That is true for all countries: Belgium, 85%; Czech Republic, 86%; Slovakia, 80%; Hungary, 80%; and Bulgaria, 76%.So all the countries have an extremely good combined ratio, reflecting, a, the good quality of our book, the good quality of our underwriting in the non-life insurance business; and b, the impact of a lockdown on that claims ratio. So on that perspective, the insurance company non-life has performed a difference in the result of EUR 70 million, 7-0, compared with previous quarter. Once again, it shows the impact of the bank insurance model.On the life side, we should actually go better to Slide 12, where you can see the impact on the written premium because here, you can also see the impact of unit-linked. Interest guaranteed products continue to suffer from the low interest rate environment and suffer from the high bank taxes and the insurance taxes in Belgium. In terms of the unit-linked business, we saw a very strong growth. Quarter-on-quarter, unit-linked production went up with 85% and 65% on the year, now standing at 58% of the total production in the life business. As a consequence, the result of the life insurance company was EUR 6 million better than previous quarter, totaling EUR 76 million difference on the insurance activities. So again, strong performance on this side.Let me go into the financial instruments at fair value. Here, we do have the -- I mean the big impact, which we have seen in the first quarter coming back, coming in again, whereas in the previous quarter, we had a negative result of EUR 385 million. We are now at an increase of that number to a positive EUR 253 million for the quarter.How come? Actually, is quite obvious. We already said that the first quarter, that the impact would normally come back in the course of 2020. This is now happening for about -- what is it, 60%, 70% in this second quarter. And this is due to different elements. First of all, the strong performance of the stock markets have resulted in an improvement of our equity portfolio, and as a consequence, on higher net result on those instruments of EUR 113 million in comparison with previous quarter. But what is far more important to that is the improvement on the market, credit and funding value adjustments.Let me start with the latter, the funding value adjustment because of the relief in the KBC spreads, and that was the explanation, which is having the most impact. You could also talk about the increase of the equity markets and the impact on the yield curve, but those 2 are offsetting each other. The main impact is related to the CDS spreads. Those CDS spreads on KBC have a positive impact compared on the quarter with EUR 173 million. That CDS spread obviously has also some impact on our counterparty adjustments, and because also the significant fall in those CDS spreads, we do see a EUR 105 million difference with the previous quarter.Summing up this with EUR 8 million because of the bid offer closeout adjustments for the derivatives on the MVAs, we do see a total of EUR 286 million difference with previous quarter, and that's indeed a lot of money.Dealing rooms did excellent. We had a result of EUR 184 million difference with the previous quarter, and that's also quite a lot of money. But also if you compare it with the same period last year, it is EUR 107 million better than what it was on the previous quarter.In terms of the ALM derivatives, change EUR 56 million, making the total coming to a difference of more than EUR 600 million. To be precise, more -- EUR 638 million in comparison with previous quarter.But as you know, volatility -- so let's not waste further time to that line. Let's go into net other income, perfectly in line with the long-term average of the range EUR 45 million, EUR 55 million, now totaling EUR 53 million. So I would not spend too much time here. It's quite stable. The far more important thing is our cost savings.So we guided the market at the end of first quarter with a cost reduction of 3.5%. That 3.5% was contrary to the previous guidance, which was an increase of 1.6%. So we actually are working on a decrease of our costs of around 5%. And actually, we achieved that in the second quarter already. We have -- if you exclude the bank taxes, obvious reasons, exclude the FX effect and the consolidation of CMSS, so then we have, in comparison with previous year, year-to-date, actually a cost decrease, which is indeed close to the 3.5% cut.How come? So we got not only staff costs, where we put in stock interim contracts and other contractors, but also we have interfered in the variable remuneration accruals. We have interfered in marketing, travel costs, event costs. We put them to 0. We have interfered in our facility costs, everything, totaling in a difference in the quarter-on-quarter comparison of more than EUR 50 million, year-on-year comparison more than EUR 80 million. In relative terms, minus 6% and minus 8%.We, as a consequence, also repeated that guidance going forward. We continue to keep the costs severely under control and bringing back the costs to acceptable levels taking into account the COVID-19 pressure on the income side.Cost/income ratio stands at 59%, which is excellent given circumstances. If we would exclude the bank taxes, then the cost/income ratio would drop to 51%, which is close to the normal environment of, for instance, 2019 where it stood at 5-0, 50%.Bank taxes are explained on the next page. Yes, EUR 434 million year-to-date is a lot of money. And it is more than 12% of our operational costs. That's a lot of money.Indeed, going forward, the other main driver of our results, that is the COVID-19 impact on our lending book. Let me start differently.If we would have booked what we should have to book given the impact on our book -- our lending book, we would have booked this quarter EUR 99 million. That EUR 99 million results in a credit cost ratio of 0.2%. That 0.2% is perfectly in line with the guidance which we gave at the beginning of the year for the full year 2020, where we set more or less 23, 24 basis points.So actually, we do not see today any impact yet of the COVID-related stuff on our impairments on mortgages nor commercial loans. We see -- actually, perfectly, what we have seen in the previous quarter, fourth quarter of 2019, first quarter of 2018, some corporate files in Dallas and Czech Republic. The normal things are happening. There's, of course, a but. The but is what is going to happen going forward because, indeed, we could expect impact on our books because of that lockdown related to the COVID-19 crisis.And the question then is, how much is that going to be? And what are you going to do with that? So what we did is we adapted our expected credit loss models, and we run those models taking into account the economic parameters, as we have described in this pack and also in previous quarter. We run those models, and that came out with an expected credit loss of an extra EUR 150 million for the quarters to come, including second quarter.Now it is quite clear that the current situation which we are in is unprecedented. And as a consequence, it is indeed true that the ECL models are not capturing the full impact which COVID-19 might bring on our impairments. And as a consequence, we did a review of our ECL models in a very specific way that is expertise-driven and expertise-driven tailored on the different lines of our business.Now how we do that is actually straightforward to be explained as follows: We did review per sector and per country, per entity of all the different sectors and translated that into sectors with a high impact, medium impact and a low impact. Now to give you a couple of examples, you can imagine that everything which is related to HoReCa, hotels, restaurant and cafés is indeed under serious pressure, is a sector with a high impact.For sectors like, for instance, the retailers, the Carrefours of this world, they have excellent results given the circumstances. And as a consequence, you might consider them as indeed low-impact or low-risk sectors. The weighing of that is indeed giving them 150% wing for a high-impact sector, 100% impact for a normal impacted sector given COVID and then 50% impact for those which are in the lower sectors.That is one approach. We have split up our entire portfolio, made an analysis and run through the different sectors. We consider 20% of our portfolio to be high risk, 45% medium risk and 35% low risk. That's actually approach one.But on the other hand, let's face it. We have a situation which is very hard to predict in a scientific and in a mathematical precise way. Therefore, we have described a scenario, and that scenario, we call our base scenario. It means what is happening today, which is having a negative impact on the economy, a strong decline, which we experienced already in the first, second quarter, and then a recovery afterwards. We currently estimate that, that recovery will be slow, and that is going to give impact on, of course, our lending book. Now the recovery so means that the recovery is forming a U-shaped curve. It means that we are going to see that recovery happening in the course of 2020 but mainly floating into 2021, 2022. That is what we call the base case scenario.Now you can have 2 different interpretations about that. You can have a more negative interpretation. What we see happening today might worsen. For instance, we see flareups. As such, it is taken part of our base scenario. But what would happen if those flareups result in a second lockdown, a lockdown as we have experienced in the first quarter? If those type of markdowns would happen going forward, then obviously, you will have a further impact on the recovery of your economy, and that will then further be postponed in recovery beyond 2022, 2023. As a consequence, negative impact will occur.A more positive interpretation is what would happen if the recovery of the economy goes faster and those flareups, for instance, have 0 impact or would even go away? That is what we currently see in China, where the recovery is indeed a V-shaped recovery. And that's an area we call the positive impact.Now taking into account what I just said, we run the expertise analysis on our sectors. We split them up per country, per entity, and then we apply the 2 different scenarios on our base case scenario. Obviously, the pessimistic one gives an outcome which is negative. Obviously, the optimistic one gives an outcome which is more positive. And we weigh that.On Page 25, you can see what that means in terms of weighing. Everything what I explained is explained in the pages between 19 and 25. Now on Page 25, you can see the sector-driven scenario under the base case. That means that, ultimately, by doing what I just explained, adding the mortgages, we have EUR 611 million extra provisions foreseen for the base case scenario. The positive approach gives us a bit lower, and the pessimistic approach gives us a bit more negative.Now because of the way we apply, we weigh the different methodologies, we come to the conclusion that the probability-weighted impact of COVID is more or less EUR 700 million, EUR 696 million. The nonperforming portfolio, which is assessed according to traditional standards staging 3 -- EUR 93 million is added, gave you a total impact for the full quarter -- for the full year, sorry, of EUR 789 million related to COVID. And split up already taken EUR 43 million, EUR 746 million is to be taken in this quarter.And on Page 26, you can clearly see then what it means. It is summed up in all detail. We have normal impairments, EUR 99 million. The ECL traditional models with the new economic parameters are EUR 150 million. And then we start to add everything which is related to COVID, everything which is related to the management overlay, the expertise approach per sector, and that sums it up to the total of EUR 630 million, split up EUR 600 million second quarter, EUR 40 million previous quarter.So in total, we end up with 64 basis points of COVID-19-included credit cost ratio, which is perfectly in line with the guidance which we gave, which also means that we can confirm today the EUR 1.1 billion guidance which we have given at the end of the first quarter and that we confirm also the more positive approach and the more negative approach expressed in EUR 0.8 billion for the optimistic one and EUR 1.6 billion in the pessimistic one. The current scenario, as we see it, given the situation of today, is the base case scenario.This sums it up for the credit cost ratio. We are now going into the detail of all the different countries. For the sake of time, I suggest to skip that entirely. The main impact is -- what I explained for the group is applicable to all countries. There is obviously one exception, that's Czech Republic, and that Czech Republic I have explained via the impact of the Czech National Bank.Let me immediately go into Slide, what is that, 48, the organic volume growth. Here again, you can see what was already explained when I was doing the net interest income analysis. Good performance, strong sales. Also in all countries, you can pick out your favorite country at group level, 4% growth on the retail mortgages. And mind you, there is a gross production on the commercial loans as well, both for corporates and SMEs, but that has been offset by a one-off booked in Belgium.Let me sum it up now for the impact of all those elements on the capital. We are having a capital ratio of 16.6%. That is before profit recognition. Now that is a very strong capital position even without that profit recognition and even without the impact -- further impact of relief measures, which have been taken by the ECB and the European Commission.I would like to emphasize the fact that we have not taken into account traditional measures in this 16.6% because there's no profit recognition. If we would do that, another 80 basis points surplus would be generated. Now how we get to the 7.95% is the traditional way of calculation. The 7.95% creates KBC above of EUR 9 billion of capital. And on the MVA level, we do have today a buffer of round it to 6%. So just to express a strong capital position.On the back of this, we have the intention to pay out a dividend over the year 2019 and over the year 2020 in form of an interim dividend for 2020 and the postponement of the dividend of 2019. This was foreseen to be happening normally in November, as usual. But as you all know, the ECB recently came out with their guidance, and actually the guidance or the recommendation was such a kind that no cash should be distributed out of the company.We will follow that recommendation. So no interim dividend will be paid out. And then we will see what the final stance is of the ECB going forward. We do regret the one-size-fits-all approach of the ECB. I think KBC is in a position to be and safe and still distributing capital to their shareholders taking into account our risk profile, taking into account our strong capital position and taking into account the buffers which still are included in those numbers, as I just described and which you can see in the footnote on this slide. So we are waiting their stance. And as far as we are concerned, all the options are still open for the following period.In terms of the fully loaded capital ratio, we are at 19.8%. Nothing special to mention. This is perfectly in line what you're used to.The leverage ratio stands at 6%, and this is entirely explained -- the decrease is entirely explained by the fact that KBC has been picking up TLTRO III to the tune of EUR 19.5 billion. Because this happened at the end of the second quarter, we did not reshuffle the -- we are not having time to reshuffle the rest of our funding. And as a consequence, we had to place it back at ECB, putting that into our assets because the denominated gross capital stays the same, the leverage ratio drops. Normally, if we would reshuffle everything, everything goes back to normal.In terms of the solvency ratio of the insurance company, a solid 198%. Here, we do include a full dividend upstreaming to the group. If we would exclude the dividend upstreaming, then we would be at a Solvency II ratio of 210%. So here, it's clear that we continue to upstream dividend, as I just described, also true for the group.Other technical elements are explaining the difference between the 2 elements that has to do with the financial markets, the impact on volatility adjustment and symmetric adjustments. I can explain you in detail if any interest in that perspective.On the funding side, everything remains super solid. We attracted TLTRO III, 70% driven by customers, resulting in stable ratios more than what it was in the beginning of the year, fully expressing the way we have managed the group to an even more strong liquidity position, 142%, 136% positioned for the whole group.In terms of our guidance going forward, we continue to be based on the base case scenario, which means flareups will happen. We assume that the governments will not go further -- in a further lockdown, as we have seen in the first quarter. Impact will be there on the economy. We do expect that the impact will materialize more by year-end rather than in the next coming quarter. Definitely also in 2021, which has to do with all the measures taken by the government. We do also look forward to what is going to happen with the Brexit negotiations and, of course, the American elections.We stick to our guidance on the OpEx. We confirm our guidance on the impairments. And we change our guidance on the net interest income side, it goes to EUR 4.4 billion, as I said in the explanation of net interest income.Basel IV has been postponed, as you know, 1 year. As you know, it has little impact on KBC. So therefore, it is, in that perspective, actually, I would obviously say a nonevent. And then unfortunately, we have to postpone the dividend payment and -- but the intention remains the same. And what -- for us concerned, all options are still open.I think I can talk for another 0.5 hour about all the other stuff, but I think some more worth to give the floor back to you for questions.

[Kurt De Baenst, General Manager, Investor Relations]

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

[Operator]

[Operator Instructions] Your first question on the telephone comes from the line of Giulia Miotto, Morgan Stanley.

[Giulia Aurora Miotto, Vice President and Equity Analyst]

A couple of questions from me, one on dividend and one on provisions. So I share your intention to still pay, and of course, basically has put this dividend ban. But can you perhaps walk us through what -- how do you expect this to evolve? So if the ECB lift the ban and you indeed can pay, do you still expect to pay the interim 2019 and the 2020 dividend? Or you would perhaps consider share buybacks and the timing about this? So this will be my first question.The second question, about loans -- so thank you for the disclosure on provisions. I think it was very good and very clear. I just have a follow-up in terms of loans in moratoria. I couldn't see the full amount of that book, if you can disclose it. And perhaps if you can talk about the approach you're taking in terms of provisions to loans in moratoria and any trends that you're seeing, if they're going down, for example. And -- yes, any comments there would be great.

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

Thanks, Giulia, for your questions. I'll take the first one on the dividend. As I said, indeed, KBC is currently in a very strong position to weather the COVID-19 storm. And we are confident that we will be clearly able to manage through that storm. On top of that, we are confident that combining that weathering storm, we are able to pay out dividends.In that perspective, we do regret the decision or the recommendation of the ECB in 2 ways. First of all, the one-size-fits-all approach. I think, indeed, not all banks are the same. I can imagine that some banks are having a more stringent or more straightjacket today than, for instance, a bank like KBC. And as a consequence, we would have seen a more tailored decision appropriate. That's one thing.Second thing is that we, as a consequence, would like to indeed distribute capital back to our shareholders, taking into account everything which tell us to come and do it in a prudent way as we always do, but still are confident to distribute capital to our shareholders.So in that perspective, obviously, we are going to adhere to the recommendation of the ECB. But as far as us is concerned, we are considering still dividend payouts going forward, and we are open to all options. So that means share buyback, that means upstreaming dividends via interim dividends, that means actual dividends.What it's going to be is something which we have to decide on the back, what we are indeed allowed to by the ECB, by the supervisors and obviously, taking into account economic circumstances. But it's clear all options are open from our side.

[Hendrik Scheerlinck, CFO & Executive Director]

Giulia, thank you for your questions on provisions and on loans in moratoria. At the end of June, we had about 11% of our book in moratoria, expressed in euros at EUR 17.4 billion. As you compare that to the number we gave you mid-March -- mid-May, sorry, that is an increase of only EUR 0.5 billion. So what we have seen is that the inflow and the request for moratoria is actually not proceeding at the speed that we were initially expecting.That EUR 17.4 billion includes EUR 2.3 billion from Hungary. In Hungary, it's somewhat different that you have a mandatory forbearance, and there, you have not opt-in but opt-out. And actually, what we have seen so far is that about 55% of our clients have already opted out of the moratorium. So overall, again, inflow on -- if we look at the period between mid-March -- mid-May, sorry, and the end of June, about EUR 0.5 billion, and we see low inflows proceeding from that level.How do we address that in terms of provision approach? So in our provision approach, and Johan explained that we do stress over stress over stress, it is not provision approach. We assume that these payment deferrals are actually normal payment deferrals, so meaning customers who are not able to pay. And we do apply a stress migration metrics on that one. So we are extremely conservative. We look at what have we historically seen in previous downturns on loans that were in arrears. And on that, we have put then the migration metrics and that we have then put the provisions.

[Operator]

The next question comes from the line of [ Anand Dembre ], Citi.

[Stefan Rosenov Nedialkov, Research Analyst]

Yes. It's Stefan Nedialkov actually from Citi. Two questions on my side. Johan, you will announce the strategic review in 3Q. Can you walk us through what are the main elements that we should be looking forward to, the sort of main talking point, so to say?And my second question is back to Giulia's question actually on dividends. So if we expect a more tailored approach from the ECB, that surely should include looking at the capital buffers of each bank before allowing dividends or buybacks. I noticed that you're taking a pretty significant IFRS 9 transitional benefit of more than 50 bps. If you guys are pretty comfortable in your capital buffers, why increase them even more on a sort of phased-in basis? Why is it that IFRS 9 is such an important thing to look into? I also noticed that you're not taking the transitional benefit on leverage because your leverage ratio is already high, but so is the CET1 ratio. So why do that at all? Just trying to make sense of that.

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

Thanks, Stefan, for your questions. Let me take the first one. So indeed, and we mentioned that in our slides, normally, we have foreseen a Investor Day for you guys the 17th of June. The -- that was actually a double problem. First of all, that period we were in lockdown, and so a physical gathering was no can do. As such, fair enough, we can do it also virtually.But during that Investor Day, we would normally do 2 things. We would update you on our strategic move. And the second thing is we would give you the long-term targets, including guidances on the traditional stuff like net interest income, costs and so on and so forth, but also our capital deployment plan. So what about the 15.7% reference capital position? What about the definition of [ surplus cash ]? What about the dividend payouts and so forth?Now the latter is obviously -- the target is obviously heavily impacted by COVID-19. And because we don't want to set in the market a target or a guidance which we have to review after 6 months because the changing circumstances, we consider to be wise to actually postpone that part to the second part of this year, ultimately, early next year. Now because of the rollout of our strategic update internally that happened on the 14th of June, we have decided to just continue doing so. So let's continue to work on the operational side of that implementation because we are rolling it out to 42,000 people. We already announced partially that strategic change in the press. What is it if I'm going to do that? Now it will take me -.5 hour. So let me be very brief, it is the next level in terms of the digital offering. It is completely transforming the group into a solution-driven proactive approach towards our customers. But it entails far more other things, which we are going to explain to you in the -- on the back of the third quarter results of this year.And then the longer-term targets, including the dividend policy, and then hopefully also the possibility to also, via the ECB, have some room to maneuver on an execution of dividends, we will do at the back of -- in February at the back of the full year results. So that's what we are adding forward, and that is what we are going to do in 2 steps in the next coming months.

[Hendrik Scheerlinck, CFO & Executive Director]

And thank you also for your second question, Stefan, on the transitional measures for IFRS 9. I would agree with you that, indeed, we do not need to take this. But as you know, this is an availability or a possibility that the ECB has offered. We know that a number of banks are availing themselves of this possibility. And just to be able for all of you to compare our transitional CET1 and our fully loaded CET1 with the way that our peers are doing it, so I think this is going to facilitate your, actually, analysis of the capital position of different banks.

[Operator]

Next question comes from the line of Benoit Petrarque, Kepler.

[Benoit Petrarque, Head of Benelux Equity Research]

It's Benoit. Yes. So the first question was on NII. So I think you are guiding us for an NII run rate in Q3, Q4 of about EUR 1.60 billion roughly. So there's still a bit of NII pressure coming in. I was wondering where it comes from. We've seen a pretty sharp drop of the NII in Czech Republic quarter-on-quarter. I was wondering if we have seen most of the pressure on NII in Czech Republic. And what do you expect there in the coming quarters, whether you expect some repricing on deposits, which could be a bit more positive this time?And also in Belgium, NII was quite good actually in this quarter. Where do you see NII moving? I think volumes are okay, but pressurized [ beats ] on the margin is not there -- is not here, but we heard that there's very recently a bit more margin pressure on mortgages, but I wanted to check that with you.And then the second one is on -- actually on cost of risk. I think your guidance is very clear for 2020. But looking at your base case, 2020, you also told us that, well, you are also looking into 2021, 2022, at least expect some of the loan losses to [indiscernible] in those years. What could be a kind of cost of risk for KBC 2021 considering where we are on the macro? I think in the page, you guided us towards a 30, 40 bps range. So I was wondering if you think we could go back to that range already in 2021 or that could be more of a 2022 more normalized level?

[Hendrik Scheerlinck, CFO & Executive Director]

Thank you for your question, Benoit, on the NII. So what are still some headwinds that we see in the third quarter? Well, as you know, in the Czech Republic, so the last 75 basis points interest rate cuts only happened at the 7th of May. So that means you had a still higher percentage at higher levels in the beginning of May in there. That's number one.And then, yes, at these levels of interest rates or the transformation of what we do, and we have seen a significant inflow of deposits. You have seen that, Johan commented on that. If you look at year-over-year, the deposit inflow is close to EUR 15 billion, and that is a certain drag on NII.So what do we see in terms of margins evolution for new production? Johan already commented on that, and that's a very important one in the countries with our biggest mortgage portfolios that is Belgium, that is the Czech Republic, and also Slovakia has a relatively solid mortgage portfolio. We see production of mortgages at above or well above the back book. So that is important. You've seen also in Belgium, we have said already last time that, actually, the pricing of the back book is increasing. We expect that in the other countries as well. So that is definitely a positive that we see on the -- on that side.In terms of production of loans, again, production of loans are, of course, not booked yet, but it's an important element to see what happened actually during the second quarter. If I give Belgium as an example, quarter-over-quarter, the production of mortgages increased by more than 40%. That's a little bit normal because at the end of the month of March, the North Republics were not able to work. So that is work that was added there. But if you then look at the production of mortgages, as you know, that's an important business for us, what we're doing there. And I compare the first half of the year of '20 to the first half year of '19, in Belgium, we still have a reduction of 20% because we had very low production in the first half. But in each of our other countries, we have double-digit growth in production, again, at margins that are, for the biggest countries, well above the back book.

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

Thank you, Benoit, for the questions. I will take the second one. So as you rightfully assumed, we did a similar detailed calculation of our credit cost risk for 2021 and 2022. We did it for all the different scenarios. The thing is that we don't disclose this yet for good reasons. Actually, it is indeed still early days to judge what is going to happen in 2021 and in 2022. We have in the pack -- I can give you the precise page. We also clearly indicate there the economic scenarios. And you can see indeed -- wait, and this is on Page 21 where we have the economic scenario. So we have changed those economic scenarios at a little bit. We have become a bit more positive or a bit, in that perspective, released the conservatism which was part of that earlier macroeconomic scenario, but you can clearly see that as of '21, we have a recovery of the economy. and you can also -- I mean it's not that difficult to assume what is then going to happen with our credit cost ratio. So it's early days.And then the second thing is, this is precisely part of the guidance which we are going to provide to the market on the longer-term targets and also on the back of year-end results. So yes, we have the numbers, but please accept that we don't disclose them yet.

[Operator]

Next question comes from the line of Thomas Dewasmes, Goldman Sachs.

[Thomas Dewasmes, Associate]

So my questions have partly been answered already, but maybe I'll ask another one. So if you consider what the return KBC has been able to achieve in the past few years, buying the good management of the banks, part of that was obviously because the cost of risk in all your regions has been really benign. If I look at today and the context we're in, you have margin pressure in some regions, possibly a higher cost of risk, although you provision a bit for that today. If you think longer term, what are the levers you can pull if you wanted to keep profitability at such an elevated level that you have had in the past few years?

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

Thank you, Thomas, for your question. So let me try to answer that. So first of all, KBC indeed has delivered over the last, what is it, 7, 8 years and these excellent results with higher returns, which are based on several things. And I've been told already for years that we were not able to continue doing so going forward. Until further notice, we indeed always delivered better than what it was assumed by the market, and we have been actually pulling all levers. This is what we're going to do as well going forward.So first of all, cost of risk is indeed negatively impacted now by the coronavirus, and we will see how much it ultimately is going to be. We gave the guidance which I just described and which also was part of my answer to Benoit Petrarque of Kepler. So we will have the assumptions for the next years to come.But we do -- we are convinced that given difficult circumstances, what we have done in the second quarter, we continue to see volumes growing. We continue to put margins at higher levels. Mind you that we are comparing it with the back book, but that in certain countries, Belgium, for instance, are now producing beyond that back book that we do see, indeed, margins being pushed up in certain other countries as well. So that is something which we consider to do.What we are going to further elaborate on is the bancassurance concept in Central Europe. As you know, we are now normally driving growth levels according to double or triple of what it was a couple of years ago, around 10% of growth. And as I -- as you have experienced in the second quarter, that is indeed something which is delivering quite a lot of diversification and income when it goes up on the banking side.And then last but not least, digital evolution KBC has undergone since 2014 because we were indeed quite early in doing so has given us in certain markets a competitive edge, which is hard to copy on the short term. And as a consequence, definitely with the rollout of the new strategy, we are sure we can lever this more than what -- even more than what we did in the last couple of years. That is going to bring benefits on the cost side.Part of the strategy is straight-through processing. We -- and that's something which I would like to explain to you guys in the third quarter. That is -- we know what we have in straight-through processing today, how much percentage of our operations is straight-through process and where we want to end within a couple of years. That is definitely going to have a positive impact on the cost side, but it's also going to have a positive impact on the sales side because what we are putting into the market, what we already explained partially in June to the outside world is indeed solution-driven, but proactive and fully data-driven. So in that perspective, we have a lot of levers to pull. And we will continue to do what we have been doing over the last 9 years, that is continuously surprise the market.

[Operator]

Next question comes from [ Anand Dembre ].

[Stefan Rosenov Nedialkov, Research Analyst]

It's Stefan. I had actually redialed , but happy to defer to other people who haven't asked questions yet.

[Operator]

Next question comes from Robin van den Broek, Mediobanca.

[Robin van den Broek, Research Analyst]

Johan, I was keen to get your thoughts on the National Bank of Belgium stance when it comes to remittances from your insurance activities in Belgium. I don't think that connected a specific time line to those remittances. So I was just curious to get an update, of course, to you guys that remits from the insurers say that will be right through to your CET1 ratio at the group.Next to that, on the insurance side, I mean, results are obviously very good and supported by lockdown measures. But could you give like an underlying level of the non-life results for this quarter? And maybe a bit more detailed question on TLTRO III. I was just wondering, what are you embedding in your NII guidance for 2020, roughly EUR 20 billion take off. I think in the past, you've always been demonstrating to deliver on the growth objectives to require to book the most beneficial rate. I was just wondering how are you processing that in future quarters.

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

Thanks, Robin, for your questions. It was sometimes not as easy to understand, I mean, quality-wise for the line, I mean, not content-wise. But -- so please adjust my answers if I don't -- do not really answer your question.So on the insurance dividends, there are 2 things, obviously. First of all, we got an approval for upstreaming dividends in 2019, which we did, and that's part of our numbers. The second thing is that we have to wait the upstreaming -- sorry, we have to wait the position of the National Bank of Belgium for the upstreaming of the dividend of 2020. We assume that this is still growing to be happening because we put it into our numbers. So the profit recognition in that perspective is a bit different if you compare '19 to '20.In terms of the positioning, I mean, why are we confident? Previous times, the National Bank of Belgium also took a position where they understand that there is a difference between insurance companies, not only in their performance and then in the solvency levels, but also in the way they have structured. KBC insurance is part of the group. We do upstream the dividends to the group, but the dividend does not necessarily leave the group. As a consequence, the National Bank flagged or gave us a green light for the dividend upstream. In that perspective, nothing has changed. So I do assume that we are still able to upstream fully the dividend.And then you asked something on the non-life results, but I honestly could not understand what precisely was the question about.

[Robin van den Broek, Research Analyst]

Yes. I guess the battery of my headset is slowly dying as well, which might make me less hearable. I was just wondering, I mean, stellar results in Q2, but the fact of lockdown measures, can you strip that out from the reported non-life results? Was that...

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

The insurance? The insurance activities, there was a one-off, but that was related to the insurance results non-life on the first quarter last year in 2019, and the results of the insurance company in this quarter had no one-offs included. So it's a regular result.

[Hendrik Scheerlinck, CFO & Executive Director]

And on the TLTRO, Robin, I think it's easy to do the math. EUR 22 billion, it's 50 basis points divided by 2, that is the -- what is included in our NII guidance for this year.

[Robin van den Broek, Research Analyst]

Okay. So if you deliver on your -- the target growth that [indiscernible]?

[Hendrik Scheerlinck, CFO & Executive Director]

Sorry, we did not understand your last question or remark, Robin.

[Robin van den Broek, Research Analyst]

I'm just going on -- I'm losing the headset now. No, I was just wondering, so if you deliver your target growth at 50 bps, it could go to 100 bps retrospectively at some point in time?

[Hendrik Scheerlinck, CFO & Executive Director]

No, that's not what we expect now because you've seen the inflow of deposits and how significant that has been.

[Operator]

[Operator Instructions] Next question comes from the line of Farquhar Murray, Autonomous.

[Farquhar Charles Murray, Partner, Insurance and Banks]

Just 2 questions, if I may. Firstly, in terms of capital management, could I just ask how the introduction of transitional in the CET1 ratio might kind of impact on your thinking? Because you've obviously given us the numbers today. And just obviously, previously, we'd have probably used the fully loaded ratio against the reference capital position. I'm just wondering whether we should now be benchmarking against transitional at all.And then secondly, on how you might resume payouts, I mean, you've been very diplomatic about the restrictions. That's very commendable. But are you counting in your head dividends that have kind of been forgone and you might wish to catch up on? But are we likely to see more of a kind of a sweet back of excess capital against the reference capital position? And obviously, I appreciate that to a degree, everything up a little bit in the air given that you've got the kind of financial target update coming up in the second half anyway.

[Hendrik Scheerlinck, CFO & Executive Director]

Thank you, Farquhar. On your first question on capital management, indeed, you can continue looking at us fully loaded. And that's an important element, an element that we have not touched upon yet. But what is important for us if you look at our risk-weighted assets, when we look at our sovereign home exposure and risk-weighted assets, we still have a risk weight of EUR 2.6 billion for our home sovereigns in each of our countries in there. So we're very conservative.

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

And Farquhar, let me continue on this to answer your second question. Because we have those buffers in our capital position, because we don't even need those buffers, so we can consider fully loaded. And then still, we added 16.6%. If you look at our MVA, 10.6%, so we have substantial buffer. If you -- obviously, we have calculated the impact in the pessimistic scenario for COVID. If I take that all into account, your question is what you have really in your mind, that is I do consider the dividend payment indeed as a given. And in that context, yes, we regret the one-size-fits-all approach, and we are waiting further recommendations. But for us, all options are open.

[Operator]

We have no further questions.

[Kurt De Baenst, General Manager, Investor Relations]

All right. If no further questions, then this sums it up for this call. I would like to thank you for your attendance and hope you remain healthy. Take care and enjoy the rest of the day. Cheers.

[Operator]

Thank you. That concludes your conference call for today. You may now all disconnect. Thank you for joining. Please continue to stay safe and enjoy the rest of the day.