KBC Groep NV

XBRU:KBC

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and welcome, everyone, to the KBC Group Earnings Release Second Quarter 2021 Conference Call issued by Kurt De Baenst, General Manager, Investor Relations. My name is Cathy, and I'm your event manager today. [Operator Instructions]. I would like to advise all parties, this conference is being recorded for replay purposes. And now I'd like to Kurt. Please go ahead, sir.

[Kurt De Baenst, General Manager, Investor Relations]

Thank you, operator. A very good morning to all of you from the headquarters of KBC in Brussels, and welcome to the KBC's conference call. Today is Thursday, the 5th of August 2021, and we are hosting the conference call of the second quarter results of KBC. As usual, we have Johan Thijs, Group CEO, with us; as well as our group CFO, Luke Popelier, and they will both elaborate on the results and add some additional insights. As such, it's my pleasure to give the floor to our CEO, Johan Thijs, who will quickly run you through the presentation.

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

Thank you very much, Kurt. And also from my side, a warm welcome on this 2021 results call. And let me start with the key takeaways on Page 3, and I can immediately say that the quarter was resulting in excellent net result of EUR 793 million, which is given circumstances, indeed, a stable result. How come? Well, in essence, the KBC machine has performed on all its cylinders has been firing on all the solicit banking, insurance, asset management, leasing, what have you, all was contributing well to the result. As the same is true for all countries which have been positively contributing to the results. We sold more loans. We sold more insurance contracts. We generated good fees. And what is also very important is that the quality of all those sales was stellar. This translated in an excellent combined ratio on non-life insurance side of 82% and it has also translated in a further release of our impairments even when you set aside the release on the impairment buffer, for COVID, even then we do have releases. In terms of the cost side, also there, we were able to manage our costs in a very strict way. We have a one-off which is translating the extremely good performance of our staff during COVID times, and therefore, this was remunerated with a bonus resulting -- group-wide bonus, which is resulting in a total cost of EUR 18 million, and that bonus is obviously a one-off. But nevertheless, if you set that aside and you do like-to-like comparison, then the costs have been maintained very well within our ambition levels. No big surprise to see that as a consequence, the return on equity stands at 15%. Our capital ratios further strengthen even without recognition of the profit. The capital ratio stands at a very solid level, 17.5%. It's further reflecting also the given after stressing the results like it was done by EBA, KBC is a financial institution with a very solid ground, one of the best performers on the European domain in that perspective, and that has also translated in the further growth of that capital position 17.5% before profit recognition is indeed a good number. Leverage ratio stands at 5.5% due to a couple of changes in the regulation and liquidity positions are superb, more than 50 basis -- sorry, more than 50% higher -- points percent higher than the regulatory requirement. So all in all, it was a good quarter. If you look at the building blocks on Page 4, it gives you the detail, but I'm not going to spend any time on that. Perhaps something on the exceptionals. We have actually hardly any exception in totaling EUR 22 million, of which before tax, EUR 18 million is the biggest driver. The other ones are smaller ones, which are, amongst others, due to a couple of the discussions, which we have had with the tax authorities in which we took provisions for and that is resulting ultimately in a EUR 22 million exceptional. So this is not shifting the needle. What is shifting the needle is obviously the split up between the bank and the insurance company. 19% of the profit is coming from the insurance side, 81% from the banking side, which is perfectly in line with the long-term average 85%, 15%. So also there, it shows again that the bank insurance model is performing and is delivering its value. Now to the more detailed split of that P&L, let's go to the biggest line in terms of contribution that is EUR 1.094 billion for the net interest income. And that is indeed an increase compared to previous quarter, and it is indeed also an increase compared to previous year. This is driven by a lot of things, but it's clearly also driven by the fact that we had a stellar performance in terms of lending growth. We were able to have more volumes, 2% growth on the quarter, also on the mortgage side, 2% growth on the quarter. And we were able, indeed, to keep our margins relatively stable. It went up with 1 basis points to 179 basis points, and this is indeed in performance, which we can be proud of. The product of both parts have been resulting in an increase of our lending income of EUR 21 million on the quarter, almost EUR 30 million on the year. Also in terms of our funding costs we had a significant uptick, EUR 6 million on the quarter, EUR 29 million on the year, and that is driven by a couple of elements, of course, the good performance of KBC, which has translated in lower funding costs but also the TLTRO effects, which are kicking in. A couple of other smaller things are part of that net interest income. But for the sake of time, I suggest not to go into it. But given the performance in this quarter, given our outlook for the nearby future, we, for a year, full year basis have increased our guidance from EUR 4.3 billion to EUR 4.4 billion. The other line, which is significantly contributing and it's a diversification compared to the interest income that is the fee and commission business, there we saw indeed, again, a growth of 2% on the quarter and a wopping 16% on the year. Now to say something about the year, obviously, we're comparing with a COVID-19, let's say, first real impact quarter of 2020. So let's not waste too much time on that side. But if we compare it with previous quarter, then still we had an uptick of 2%. This is driven by management fees, which are going up and they are going up quite significantly, EUR 10 million, which has to do with the fact that we were able to create new inflows. This means that the assets under management obviously went up with EUR 8 billion amongst others because of a market effect, but also because of a net inflow in this quarter. We had a net inflow of more than EUR 600 million, which was underpinned by both Belgium business unit and the Czech business unit, which had the net inflow this quarter of EUR 300 million little bit more even. So that's good news. In total, we have, for the full year, now a net inflow of EUR 1 billion, so EUR 600-something million this quarter and about EUR 325 million previous quarter. The reasons for the small decrease of the entry fees has to do with commercial actions. We have taken initiatives in certain countries to go ahead with commercial activities, which were started in the first quarter, and that has resulted in an increase in sales, but we did it also with a reduction of the entry fee in Belgium, partially as well in Czech Republic. What has been performing very well in the other buckets, as you know, asset management services is only 1 part of the fee business that is the fees generated by the payment services. They went up significantly. And it's also obviously to do with the pickup of the economy and the fact that the restrictions which were related to COVID have been slimmed down, it means that we all start consuming again, traveling again, using our cars, using our electronic payments and that generates fees substantially up compared to previous quarter. In terms of the credit files fee generation also there, we saw an uptick, and we had a little bit lower securities-related fees. Why is that? We had still a growth that business compared to last year. It means that both on the pure securities-related business is generated through the dealing rooms to the -- sorry, to the sales to the ECM activities, they were positively contributing, but we are comparing now the best quarter since the last couple of years. Q2 where the business was a little bit lower due also to seasonal effects, and therefore, it came down a bit. On the securities trading platforms like Bolero and Patria platform in Czech Republic, we have seen positive outcome. But if you compare it with the record result of quarter 1, it was slightly down. For good understanding, both combined, we have a 17% growth of income compared to the same period of last year. Just to put things in perspective. In terms of the insurance business, we have seen a strong growth of the insurance business non-life, on the earned basis, 6% up on a written basis 7%, which means that, indeed, economy is picking up, and you can clearly see the immediate effect. We are back to normal levels in terms of premium growth. And what is far more important the combined ratio is 82%, reflecting the good underlying quality of that underwritings in the non-life insurance business. We had a big tornado in Czech Republic, which had a devastating impact and also had a significant impact on our results in Czech Republic. But if you make the comparison of all wind storms over the full period up till end of June, then the comparison was positive in 2021 compared to 2020. And that is something which also is obviously a bit related to coincidence. But what is also definitely true is that the number of normal claims, the number of big claims is lower than what it was in the same half of year last year. One caveat to be adding not talking about now that second quarter, we're talking about the third quarter. As you probably all know, there has been a devastating flooding in Belgium, and that flooding has a very significant impact on the Belgian citizens in mainly the Walloon region. Impact is really devastating, 38 casualties, 1 person still missing. So our thoughts are in the first place with all these people suffering this disaster. In terms of financial terms for KBC, obviously, it has an impact. Net of reinsurance, the current estimates given current situation in Belgian legislation is about EUR 41 million net of reinsurance. In terms of the Life business, obviously, circumstances are very difficult for the interest guaranteed products given the very low interest rates. On the other hand, we have seen an extremely strong performance on the unit-linked business, where we saw a growth. And that growth has reflected the total increase of 5% quarter-on-quarter this year. So that's mainly driven by unit-linked business which was up 25% this quarter. If you look at the split of the sales unit-linked interest guaranteed products, then now 55% of total Life sales were reflecting unit-linked sales. On a more volatile contribution line, the financial instruments at fair value. Result was positive EUR 29 million, but it was substantially down compared to last year's same quarter, where it was more than EUR 250 million, which was a pickup the decline of that financial instrument fair value in the first quarter, purely COVID-related an impact on the financial market. And it is also a decline of about EUR 98 million compared to previous quarter. Now how come in essence it has to do with positions taken in the dealing rooms for an interest rate increase. The interest rates went on the contrary down and has obviously a negative impact. Also, the spreads between euro and Czech Republic -- sorry, not Czech Republic, Czech koruna, of course, came in a bit with us the position taken the opposite side. So in total, on the dealing room income, there was a EUR 31 million difference with previous quarter. The same thing could be said about the ALM mark-to-market derivative of the mark-to-market of the ALM derivatives. And that has come down EUR 45 million for similar reasons. And then on the funding fair valuation, fair value adjustment, the counterparty fair value adjustment and then the market value adjustments. The outcome was positive, but also slightly down compared to previous quarter also for several reasons. The reasons are explained on the slide. So we're not going to go into that detail. On the equity side, EUR 11 million less realizations, but this is indeed an obvious choice. I already mentioned the one-off in the net other income, which is slightly below the running rate of EUR 45 million to EUR 50 million. And therefore, if you would make the adjustments on that -- on those one-offs, then we would be more or less in line with the EUR 50 million actually would be more or less around EUR 49 million, which means that the performance of the underlying businesses, the assistance business, the real estate business and the -- so assistance, real estate and leasing activities is perfectly in line with the overall average. Let me go more into the detail of operating expenses. First of all, the expenses increased 5% on the quarter, which is also reflecting the fact that economy is rebounding and that economic activity is followed by KBC because we do hire more people now. And we also started back again our marketing campaigns, and we started to invest faster on the ID side. This is 5% on the quarter, 7% for the same reasons on the year. But if you start to look into the numbers in a more different way, then the increase of those costs is obviously also driven by the one-off bonus of EUR 18 million and by the fact that, for instance, OTP was in the numbers in this year quarter and not last year quarter. So to make a like-for-like basis comparison between the numbers last year, this year, we come to the conclusion, if you carve that out, what I just said, the 1 of bonus and OTP and you exclude the bank taxes, then we do see a decline of our costs half year-on-half year. So it's decline is a positive way. So there is a reduction of 0.4% excluding the FX effect. As a matter of fact, we do confirm our guidance of 2% on a like-for-like basis, so before OTP and before the one-off bonus, which intrinsically means that we have positioned ourselves a little bit sharper because the negative impact of the FX side is fully absorbed now in the guidance. So in that perspective, the plus 2% growth is better than what we announced on what was at the beginning of the year. In terms of the bank taxes, there are certainties in life. They continue to increase, now stand at 12.4% on half year. If you would exclude the bank taxes the KBC, cost income ratio, which stands at 49%, which I think is indeed a good result. In terms of the credit cost ratio, I already mentioned that we have indeed a further release of our impairments. Now let's set aside the management overlay buffer. Even then we have a release of impairments of EUR 1 million. The credit cost ratio is for that reason, also minus 6 basis points. Now what we do see is indeed a further improvement of the economic scenarios. That means that we do see, first of all, economic growth in the first half of year becoming positive again, and we do expect that the economic growth is going to accelerate further in the next coming part of this year. And we will be, cross fingers, normally according to our estimates, back at the level of pre-COVID times probably even at the end of this year. This also means that we do see that reflected in our impairments. We don't see a fundamental impact yet on that credit portfolio nor for the normal impairments nor for the full COVID impairments. And as a consequence, and I'm now on Page 18, you could see indeed that we have taken that into account reconsidering the management overlay of our portfolio. A release of EUR 129 million over the quarter is the result of 2 things. We update our scenarios. We use, as you know, 3 scenarios, pessimistic, a negative scenario on the basis of a reference basis scenario. And we have increased the probability for the base scenario now to 80% and both others to 10%. That means that we have a release as a consequence of that, to 59%. On top of that, we did a further analysis of the very -- so the high-risk sectors, and we come to the conclusion that not all of those high-risk sectors have been impacted now in the same way, and therefore, we have trust that again and have changed the probabilities releasing EUR 66 million. So in total, we now have a buffer of EUR 628 million for the management overlay, and we do expect further leases going forward. How much? Future will tell, we cannot put in a precise number there. Credit cost ratio all elements of releases included 22 basis points minus, which means also that we do guide in the further future, different credit cost ratio for the full year. We do guide for our regular portfolio now at 0 basis points. This is regardless of the impact of the management overlay releases, and this is also regardless of the impact of any further conclusion on our files in Ireland, where we'll give you some further flavor later on. That means that the guidance is for the regular portfolio, 0 basis points. No big surprise that our impaired loan loss ratio has been improving to 3.2%. If you just strictly apply the EBA rules to that impaired loans portfolio, then the ratio is not 3.2% but 2.6%. All slides as of Pages 18, 19 and following I'll skip. It gives you an idea where we think the economic scenario will be. Perhaps the last thing in that matter, that is on Slide 23, where we have an overview of the outstanding payment holidays. As a matter of fact, the vast majority of those payments holidays granted are maturing and have been maturing. So we have had a granted volume of payment holidays of 12.7%. The vast majority of that has been -- has expired, sorry, which means that EBA-compliant moratoria still stand out for a total of EUR 0.6 billion. And of that book, which has been expiring, EUR 10.5 billion. We do see that 97% of all those people resume payments as before the moratorium. If you look at the detail of the split up, then we are talking about 0.9%, which goes in arrears. That means payment delays between 1 day and max 90 days and then new defaults, 1.8%, which has translated in the impairment numbers as I earlier in this call have been elaborating upon. Mind you as well, we have a non-EBA compliant part. Hungary because of the specific regulation and government decisions, which have been taken in that country stands for a total of EUR 1.6 billion. And then we already had before the crisis and a part of the portfolio, which was having payment holidays for restructuring reasons, whatever. And that stands at a total of EUR 0.6 billion as well. In terms of what has been contributed to clients in terms of loans, which is supported by government. The total number now stands at EUR 942 million, which is supported by governments in a different way. You can see that in the table. For instance, in Belgium, the loans are granted to support by government means of 80%. When I look at the business units, I'm now at Page 44 and following. You can see that all the business units have been performing very well. More or less, it is in line with what I just said on the general terms. Perhaps I can elaborate a little bit later on, but I'm prepared to do that during the Q&A session on commercial pressure here and there. So allow me to skip the part of the countries, and let me go immediately into the capital positions, Page 47. KBC's capital position before recognition of interim profits now stands at 17.5%, which is a very strong number substantially higher than the absolute minimum of 8% and substantially higher than the, let's call it, dividend minimum, the MDA level of 11.38%, which means also that we have a quite good certainty that we can pay out our dividends. And as you know, the dividend policy, which we updated what is it, 6 months ago, results now in a -- in 2 things. First of all, we will catch up with the dividend payments over the year 2020. We will pay out an additional EUR 2 per share. Normally, as of the moment that we are allowed by the European Central Bank, so that will be probably somewhere in October. EUR 2 per share for a catch-up over the dividend of 2020, and we will propose to our Board an additional -- sorry, not an additional, an interim dividend of EUR 1 per share over the year of 2021 being to be paid out in November. So let's say, over the period of 2 months, we are going to distribute EUR 3 per share to our shareholders. That makes our capital position too potentially a surplus capital position. As you know, we define surplus capital -- every capital, which is topping the 15.5% ratio and that surplus capital is indeed something which we consider with the Board going forward as of 2022 for further consideration. In terms of our capital position, if you would include the profit recognition, 100% profit recognition leads to an 18.51% capital ratio. In terms of the total capital ratio, you can see it on Page -- what is that 48, 21%. The reason of the decline compared to previous quarter or full year result is mainly driven by the fact that a Tier 2 instrument, which is on our books is grandfathered because it was issued under U.K. law or mainly on the issue at U.K. law. And those grandfatherings are only applicable under a transitional capital ratio, KBC normally never publishes results on a transitional basis, already fully loaded and therefore, because that CRR2 regulation has come into play as of June of this year. You see the decline number of -- the decline of our total capital ratio on this page. Be aware that this bonds are callable or these have call dates. And the big chunk of that will be called March of 2022, and therefore, this decline is temporary. The leverage ratio stands at 5.5% and has also to do with, first of all, regulatory changes, if you would exclude the regulatory changes, it goes to 5.6%. If you would -- the other reason, the main reason is the fact that our balance sheet obviously has increased because we have further used what we call short-term cash management opportunities, and repo opportunities in the first and the second quarter. That has obviously a negative impact on the size of our balance sheet, and therefore, it brings our leverage ratio down but it also generates P&L net interest income, as you know, and as have been explained on earlier occasions and during this call. If you would exclude that, then the leverage ratio is more online -- more or less in line with the normal ratios, which were part of this graph. In terms of the solvency ratio of the insurance company, 221% purely related to a technical element, which is the increase of the equity market. Increase of equity markets means that you have a negative impact on the symmetric adjustment factor, and that explains almost the full difference in this number. Liquidity ratio is super solid, 166% on the short term, 152% on the long term or in the midterm almost a very important part of this liquidity is generated through our customers, 63% and therefore, KBC is not only a financial institution with a solid capital base. I also been a very liquid institution. So let me sum it up in parts. It was an excellent quarter. And we do expect that the economy is going to continue its rebound and we do see an acceleration of that growth going forward in the second year half, even expecting that the economy will come to the level of pre-corona at the end of this quarter. This goes a little bit further than the text, which is in this slide because we have updated our economic scenarios actually 2 weeks ago. The numbers which are in this call and in this slide presentation and numbers reflecting the position in June. The group guidance, I already mentioned the increase of net interest income to EUR 4.4 billion, and the 2% like-for-like, which is an improvement compared to the cost guidance which we have given in the first quarter. We have a credit cost ratio, which is guided now to 0 for the regular portfolio regardless of the impact of the management overlay and regardless of the conclusion on the Irish deal. And then second or the last thing is that in the third quarter, there will be an impact on our non-life business, taking into account the current situation. The current regulation net impact is estimated around EUR 41 million. I will give back the floor now to Kurt, who will guide us through your questions.

[Kurt De Baenst, General Manager, Investor Relations]

Many thanks, Johan. Now the floor is open for questions. Please restrict the number of questions to 2 to allow for a maximum number of people to raise questions. Thank you.

[Operator]

[Operator Instructions] The first question comes from the line of Giulia Miotto of Morgan Stanley.

[Giulia Aurora Miotto, Vice President and Equity Analyst]

Two questions from me. The first 1 is about Ireland. You mentioned it a couple of times. I was wondering if you can give us any update on timing or any potential expected impact? And then the second question is actually on something which you don't mention in the presentation, which is Kate. It has been now 8 months, I think, since you launched, a first milestone progress. Any thoughts on that project that you would like to share with us?

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

Thank you, Giulia, for both questions. And let me start with the first one on Ireland. Indeed, since 16th of April, negotiations started both that in the deal -- that in the Irish environment, we have 2 ongoing deals: The first one is the sale of the nonperforming loan portfolio; and the second one is the sale of the performing portfolio, both on the asset and on the liability side of our book, where Bank of Ireland isn't as we all know. So as of 16th of April, negotiations have started to become concrete, and we have worked hard over the last couple of months as we do speak both tracks are perfectly according to plan. We do assume that we will have in this perspective for both files. And how do I say this, a further progress state to say assigning, let's say, in the course of the third quarter. The main thing, which is, in that perspective, not entirely and under control has to do with the sale of the performing book to Bank of Ireland because they depend on the fundamental decision, namely of the antitrust authorities, CCPC called in Ireland, who have ultimately a say about the appropriateness of the deal. We provide the CCPC with all data, both sides, Bank of Ireland and KBC in the course of August. And then CCPC has up to 120 working days to take a final decision on this matter. So as a matter of fact, and that has an impact, obviously, on the presentation of results third quarter to fourth quarter. The part which is crucial for that, that is the signing on the NPL deals and on the performing deals are expected are on track and asked in that perspective, it can be expected in the course of the third quarter, ultimately beginning of the fourth quarter. Then the last thing about Kate. Now you can trigger me for half an hour to come in to give you an answer about that. Unfortunately, I don't have time. But Kate has started off very well. Actually, in that perspective, it goes a bit beyond our expectations. For good understanding, I promised you 2 new cases of Kate every month. In Belgium, we are having -- currently 43 cases in play. So much more than 2 per month. Further 11 will be launched in the course of this quarter and next quarter. So we will go to more than 50 cases on the Belgian situation in the course of this year. We have 1 million people in Belgium who have already used Kate. Of which more than 400,000 have gone not only testing Kate, but have Kate for using Kate into actions. As a matter of fact, 125,000 people have used advanced Kate, which means that we will guide them in all details using all the data with their consent for further servicing, and that is the higher service level as possible, which is good success and which is perfectly in line with our targets in that perspective. As a matter of fact, we have had more than 3 million conversations with Kate and our comments and more than 1 million of those conversations have led to further consequences of our customers. As a matter of fact, we also have used Kate, for instance, for triggering customers for servicing them in claims handling. More than 200 claim notifications. And I'm speaking now, before the floodings, more than 200 claim notifications have been done via Kate through our customers, which is a quite significant number. I'll stop here because it otherwise leads me too far, but you'll give you just 1 number. Kate is also helping customers in using third-party services. We have now more than 600,000 unique users of those third-party services. And to give you an idea, the number of transactions in 6 months of 2020 is already more than the 2 million transactions, which we have had in 2019. So over 6 months, customers have been using this application more than for the full year 2019, it's quite successful.

[Giulia Aurora Miotto, Vice President and Equity Analyst]

And maybe if I can just follow up. And so do you think the biggest impact for KBC coming from Kate will be on better revenues because, of course, spending engagement, et cetera, or maybe better costs in terms of the savings in handling claims so far or both?

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

The answer is both. So first of all, Kate will be proactively anticipating certain customer needs over the advanced solution is an important one and it will help customers dealing with the administrative processes. Now all those administrative processes will be straight-through processed into our systems, which means there is 0 human interference. And 0 human interference means that it becomes scalable and as a consequence, cost will go down. So we do see for instance, let me give you the example on a number which I just highlighted. Claims notification. So we had more than 200 claims notifications via Kate 0 people interfering immediately into our back-end system, immediately triggering electronic processes for settlement. So that means 0 people interfering in the vast majority of the claims because it's fully AI driven. And obviously, the cost side, if you would do it in a manual way, it's completely different and far more expensive.

[Operator]

The next question comes from Farquhar Murray.

[Farquhar Charles Murray, Partner, Insurance and Banks]

Just 2 questions, if I may. Firstly, on the increase in NII guidance to EUR 4.4 billion, please can you just outline which assumptions are driving that tweak higher? Is it coming from volumes or margins on which side of the balance sheet? And then secondly, just more generally on the topic of margins. And we're seeing a bit of a continued rollover in new business margins in Belgium. I just wondered if you could outline what's driving that and also where we stand now versus the stock margins on those portfolios?

[Roger Elie Popelier, CFO & Executive Director]

Okay. Good morning, Luke Popelier here. On the guidance, well, there are many aspects. But obviously, an important element that played a role is the increased visibility on rate hikes in the Czech Republic. We now factored in 2 additional rate hikes. So that's the third, 3 in total. If we take the 1 we took last quarter. So 2 additional rate hikes of 25 basis points is included. And of course, a continuation of the good volume growth on the loan portfolio is also included and a bit higher than we expected previously given that the economic environment is also improving at a bit faster rate than we expected. On the new margins in Belgium, yes, we -- the reason you see the reduction in the margins in the particularly mortgages or only mortgages, I should say. It has to do with 2 factors. First of all, there is the increase in cost of funds. So interest rates going up. And that puts a pressure on the margin given that we always have a lagging effect when we price new mortgages. And so we have that reduction. We believe that is temporary if, and that's pre big if competition also does the same. So that's going to be an important factor, how competition is reacting and how fast they are reacting in resetting the external rate with the increased cost of funds. We, therefore, do not see and further you shouldn't extrapolate the further reductions that you saw on the slide. maybe a stabilization difficult to say, but certainly not a big uptick either. So it's going to be something between stable and perhaps slightly negative on the mortgage side in Belgium.

[Farquhar Charles Murray, Partner, Insurance and Banks]

And where do those margins now stand versus stock again?

[Roger Elie Popelier, CFO & Executive Director]

We don't give the margin on new production. And that's the one we've given in the slides versus the back book. So you noticed the new margins as clearly in the slide. You know what the back book is, but that's for the whole portfolio. So we don't give it away, unfortunately.

[Operator]

The next question comes from Raul Sinha of JPMorgan.

[Raul Sinha, Analyst]

The first one is just on capital. I just wanted to get a sense of the total distribution capacity for this year for KBC and just compare that against what consensus anticipates. So based on your comments, Johan, I think you mentioned 18.5% is the real CET1 including the interim profits. Obviously, you've got the 2 year extra dividends to pay, but you still got about EUR 1 billion plus of profits to come in the second half in insurance heavy and maybe be valid for next year. So on my estimate, I'm basically getting above 15.5% threshold, perhaps there is 8% to 8.5%, maybe even higher euros per share of capital that could be the distribution capacity for KBC when it comes to decision at Q4. I just wanted to check if there's anything wrong in terms of on match, if there's any kind of capital hits we should anticipate in the second half of the year? And then the second question is just on payout. Obviously, consensus anticipates almost 100% payout, but obviously, it still shy of EUR 5.3 per share of this EUR 8.5 capacity, if you will. So I'm just wondering whether in terms of your recent conversations, would it be you have any more confidence in terms of your payout guidance.

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

Thanks Raul for your question. And obviously, it's a question with a lot of ins and a lot of out. So a couple of things are influencing, obviously, the ultimate position year-end. So if I may guide you a bit in that perspective, indeed, current capital position stands at 17.5%. If we do the inclusion of the 100% interim profit under the Danish compromise and then it goes to 18.5%. Now the 18.5% obviously is before any capital distribution. And in that perspective, we do see, of course, we have the second year half profit, which you still have to include. As you know, we don't give guidance on profitability. So unfortunately, I can guide you there. On the other hand, the -- if I compare it with the threshold of 15.5%. Then obviously, you have to deduct the EUR 2, which we are going to pay in October. We are going to deduct EUR 1. So it's EUR 3 per share. Then you have the normal dividend policy, which pays out at least 50%. And then last but not least, you obviously have the further continuation of doing our business. I already referred to Ireland where we think that in the course of the quarter 3, quarter 4, normally, we will finalize one or the other deal that has some impact on both sides, on the P&L, but also on the capital side. We don't disclose for obvious reason, what the impact might be because that would influence the process and we -- for good reasons, do not want to do that. And then thirdly, we will continue to look for further opportunities in terms of investments, in terms of further expanding our geographical presence in our core countries. So if any of those opportunities would arise, then we definitely will try to grab them. And that obviously has an impact our capital position. But your analysis and that perspective is correct. So everything topping the 15.5% is going to be considered as surplus capital and is going to be considered for distribution to the shareholder that is a decision taken by a discussion of the Board -- of our Board in the course of 2022, then for further distribution. So in that perspective, I mean, I'm not going to refer to the consensus, but within the guidance I just gave, we will stick to what I just said and what kind of instruments we're going to use going forward because that's another question one may ask. I always said in the past and I will continue to do so today, that is all the instruments which are allowing us to distribute that capital to our shareholders are considered for usage that means dividends, super dividends and share buybacks.

[Raul Sinha, Analyst]

I appreciate that. Just on the payout question, do you think the ECB is more predisposed now to banks like KBC returning potentially above 100% payout?

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

That is a possibility. So I therefore also stress the fact that the EBA stress test was very -- had a very good outcome for KBC. You know that the stress test outcome is going to be used the authorities, not to mention the ECB for the decisions they're going to take going forward that has to do with the SREP, but that also has to do with dividend payout. KBC, as you know, is in the possibility to pay out even more than 100%. We can do it out of our retained earnings according to Belgian company law. And the only thing which is in that perspective, important to consider is what is the position of the ECB and I mean the capital position of KBC surplus means still we have a capital ratio of 15.5%. The EBA stress test at KBC Capital after the stress that's 14.1%. So there is no reason why I would think today that the ECB would restrict us from doing so.

[Operator]

The next question comes from Kiri Vijayarajah of HSBC.

[Kirishanthan Vijayarajah, Analyst]

Yes. A couple of questions on the cost side. if I may. And just on Ireland and the impact on the group cost base because there you've been in kind of growth investment mode there. But once Ireland gets deconsolidated, hopefully by the end of this year. Does that mean you've got scope to be maybe more ambitious on your cost guidance. So maybe looking out to next year, you can do a bit better than that kind of 2% like-for-like once Ireland drops out of the equation? And then turning specifically to that COVID-19 bonus. I just wanted to have your competitors all done the same in the various local markets. Or do you think this puts pressure on them to maybe follow you? And is it kind of a blanket payment to everyone? Or is it just your sales and marketing kind of customer-facing teams. So really just some color there would be helpful because I've not really come across many other banks that have done a similar payment to their staff? Those would be my 2 questions on the cost side.

[Roger Elie Popelier, CFO & Executive Director]

Okay, Kiri, on the Irish impact of potential sale of Ireland on our cost reduction potential, I don't think there's going to be much difference in the sense that, yes, we've out a EUR 200 million cost base in Ireland at the moment. I'm rounding that by the way. But we also therefore saw cost reductions going forward as we were also working very hard on the cost base, both in terms of straight-through processing and in terms of reassuring, which, of course, has stopped at the moment. So the positive impact, there may be, but it's going to be very immaterial.

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

And then, Kiri, for your last question, you first misunderstood the question, but I got some clarification by Kurt. So on the bonus for our staff, that is a decision taken independently by KBC. The bonus is more in buying power more or less the same in each and every country. And the decision was already announced to our staff not with the detail of the number. But the pure announcement was already in after the first quarter. Today, we announced the amount, and it has been very well received. As I said, that is fully independent taken by KBC.

[Operator]

The next question comes from Benoit Petrarque of Kepler Chevreux.

[Benoit Petrarque, Head of Benelux Equity Research]

Just the first one is on NII. Just wondering if you take any charging of negative interest rates into your new guidance? And is there any potential for you to charge a bit more than you have done? I think you have been very quite on the retail side, not charging too much negative rates. And some of your competitors have been doing that more aggressively. So any thoughts on that? And then just coming back on this bonus of related bonus, which is good news for the employees, obviously, but is that not a kind of catch-up on the 2020, which has been extremely low on variable remuneration. And second one on cost will be trying to understand what is your ongoing cost inflation, especially in Central and Eastern Europe and how much you expect for the remaining part of the year. In previous cycles, usually when interest rate goes up, you also have a bit more severe inflation -- cost inflation in CEE. I'm just wondering to where we are right now and what do you expect for the remaining part of the year?

[Roger Elie Popelier, CFO & Executive Director]

Okay. So hello, Benoit. On the NII, the charging negative interest rates is included in the NII guidance for the full year. And we do see a further improvement in the sense that we think we're going to, as we did before, have an increase on deposit width of about EUR 0.5 billion of extra deposits that we could charge negatively. So we're now at EUR 8.4 billion of deposits, which are charged negatively. That is mainly on corporate accounts and some but to a limited extent, SME accounts. As you rightly point out, we have been very conservative on the retail side as we believe that we have to look at the overall relationship and make sure that we don't jeopardize relationships with retail clients. This is also a very sensitive point, obviously, for retail clients who have not always the full understanding of a professional treasurer. And therefore, we are very conservative in this respect.

[Benoit Petrarque, Head of Benelux Equity Research]

Sorry, just a follow-up on that one. On the private banking side, do you charge negative rates right now? Or do you do nothing?

[Roger Elie Popelier, CFO & Executive Director]

You say on the what chart? On the...

[Benoit Petrarque, Head of Benelux Equity Research]

On the private banking.

[Roger Elie Popelier, CFO & Executive Director]

Well, we look there on individual basis, client by client, what we do, and it really depends on the overall relationship. I think we're not going to jeopardize the private bank relationship, which overall gives a very good return on us because emotionally, it's very important sometimes. But if overall, he has a good return for us, then obviously, we will not do that and vice versa.

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

So Benoit, I'm going to take your second question regarding the deal of the COVID bonus and the cost inflation. So I mean, of course, last year, we have, as you know, put down our costs quite significantly where the cost decrease of 4.5% last year. And that is obviously due to a couple of things which are quite logical. The event costs were down, the marketing costs were down, the travel costs were down. But also, we got quite significantly in our FTEs and we cut part of the variable compensation true. So the bonus which we have granted now is a bonus for a good result in 2020. which is much better than we originally anticipated and is in that perspective, an appreciation shown from management to our staff for the hard work. which they're doing in very difficult circumstances. So intrinsically, it has nothing to do with the cut on the variable pay because we are not going to compensate again that variable compensation. But it's a remuneration for an excellent performance over the year 2020, and obviously, also over the first 6 months of this year. And in that perspective, if you could call it a catch-up. But it has nothing to do with the variable pay. The second thing is what about cost inflation going forward and definitely in Central Europe is not necessarily linked with the interest rate increases. It is mainly linked with the performance of the economy and the mere fact that you have your unemployment rates coming down in those countries. And as a consequence, obviously, that creates some pressure on the wages because hunt for people is out of work for talent will cost you money, and it will cost you more money. In that perspective, obviously, you could say because the economy is performing well, certain of those markets have as a consequence, increasing currency pressure and therefor they start to adapt their policy rates. So it is intrinsically indirectly referring to the interest rate, but I think that's an indirect link. Cost inflation in Central Europe is not new. It was there in 2019. It was there in 2018, it will be there in 2021 that will be there in 2022. And all depends on the further evolution in that perspective. Is it more than what to be expected? Is it more to be expected than it was in the recent past? So in 2019, '18, the answer from my side is negative.

[Operator]

The next question comes from Anke Reingen, RBC.

[Anke Reingen, European Banks Analyst]

The first is on NII, please. Your previous guidance about 1 rate hike is about EUR 30 million annual benefit. I just wonder if this is like linear associated to be EUR 30 million or 25 basis points. So does the benefit come down the more we see? And then on the revenue guidance out to 2023, now as there's a lot of moving parts. But should these rate hikes have a positive impact on the 2023 guidance? Or is it is just mainly a timing impact of some of these rate hikes coming through earlier. And then sorry, secondly, a sort of like a second topic on the cost. You indicated you're underlying doing better than you expect that in your guidance for the year. I just wonder which areas you're making more progress? Or is this also part of the more digital serving of customers?

[Roger Elie Popelier, CFO & Executive Director]

So Anke, this is Luke Popelier here. On the NII or the rate hikes in Czech Republic, we still see about EUR 30 million per 25 basis points increase. So that remains unchanged. You want to take revenue side Johan? We're not changing our guidance at the moment for the period until 2023. Of course, there are some -- there's a bit more upside to this guidance than there is downside compared to the last quarters, but we're sticking at the moment with our guidance of 2% CAGR between 2020 and 2023.

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

I'm going to take your question on the costs. So yes, indeed, if you compare our costs with -- and let's compare the cost immediately for the full half year, if you compare that with the same period of last year and you take out the exceptionals, and really just split what I said earlier, indeed, the cost side goes down with 0.4%. Now which areas are doing better? You always have a lagging effect. And as a consequence, we do have a better performance on the purely staff-related costs as we speak. I announced in the first quarter that we would start to hire more people because we cut significantly the number of staff in 2020 immediately after the COVID crisis. That resulted in a cost decrease of 4.5%. Now we are hiring people. Of course, we hired 69 people in this quarter. We did not hire all the people which we have in our plans. And that catch-up will start to do the increase of our cost to a level of 2%. Now I just want to stress again that it is a 2% increase after a decrease of 4.5% in 2020. So it's still better than our cost ratio of 2019. And the other thing is which is doing worse than planned? that is the FX side. because of the increase of the currencies in mainly Czech Republic, also in Hungary. The FX impact is going up. It was about EUR 5 million to EUR 7 million more than in the second quarter last year than in the previous quarter, sorry. And that means that we fully absorb that further increase of our FX ratio, which means that actually the 2% cost guidance is an improvement compared to the previous guidance in what was it, beginning of the year, for sure, in the quarter 1 results.

[Operator]

The next question comes from Robin van den Broek of Mediobanca.

[Robin van den Broek, Research Analyst]

Yes. Johan Maybe 1 clarification because I'm not sure I've interpreted your narrative on Ireland correctly. I mean I understand you might be signing something in 2H. But I guess the big capital release from RWAs coming off the book will be at closure, and that's probably still likely to be in 2022. So maybe a clarification on that firstly? And then secondly, also for you, Johan. I think that the first quarter, you spoke about my operating ratio normalization. And I think at the time, you were quite bullish that it would take a number of quarters before frequency benefits were to abate. So I was just wondering if you could give us your view on how gross written premium growth, which is picking up again, can offset combined over combined operating ratio normalization over the next few quarters or maybe into next year. And on insurance, your solvency ratio is still high, and it's just a technical element why it's down Q-on-Q. Last quarter, we spoke about potential for some dividends from the insurance unit also relating to 2020. So I was just wondering if the NBB steps away, which feels likely after the ECB's step. And what kind of dividends from the insurance units should we expect in the second half of this year?

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

Thanks, Robin, for your questions. And first of all, on the narrative, you're right. For good understanding, the impact of signing goes into the P&L, and that is in the course of the second year half, whereas the release of capital will be going into our books as of the moment of closing. And there you're fully right. It's also on the signing of the deal. So this is a septal element, which is part of the accounting rules. But in essence, you're right. So the narrative, as you have described it, is perfectly correct. Then coming back to the insurance side and to the combined ratio. So the -- first of all, the analysis on the growth is as I indicated in the call, indeed, 7%, which is back to normal levels. And that has to do with the fact that first, we do have a comparison of a COVID quarter with -- so it's a comparison on a half year basis, have a good understanding. We have a comparison of a COVID quarter Q1 '21 with a non-COVID quarter Q1 '22 -- sorry, 2020 and a COVID quarter with a rebound Q2 2021 with a full COVID quarter in Q2 2020. So one balances against the other. So you can start to say, we are making now a comparison kind of like-for-like in terms of business. And the normal growth of KBC over the last couple of years, regardless of the COVID period was more or less 6% to 7%. We're back there. So indeed, that's what I indicated on the previous occasion, to be straightforward, I was a bit positively surprised by the outcome because I anticipated this is going to be happening in the third quarter only. So yes, we have a normalization of the growth. And then obviously, that reflects itself in the combined ratio. If your quality of underwriting remains the same, then your combined ratios remain stable. If your quality is indeed picking up again, which you could expect because normal economic activity is picking up as well. If you look at the number of cars on the street, it's back to normal. If you look at the business activity in factories or workmen compensation claims, it's back to normal. If you look at people leaving their houses because they are working normally, you also have an increase of theft and an increase of fire cases and so on and so forth. So that goes back to normal. What we do have not seen in this first half of year is the wind storms. So we have a couple of them small ones, we had a big 1 in Czech Republic, but did not offset the total impact, which we have seen in 2020. So in that perspective, the EUR 82 million is rather low, and we do expect that to increase. And I already highlighted that there will be a significant impact because of the floodings in the third quarter. The Solvency II ratio is indeed with 221%, very solid. And in that perspective, you could expect the normal payout of the dividends on the insurance side going forward like we did in the past. And you know that we have a full upstream of our profits to the group. 100% payment dividend. Is there any countersigned from the National Bank as we speak, there is no counterindication from the National Bank that they would limit us doing so.

[Robin van den Broek, Research Analyst]

So should we budget for EUR 300 million then for H2 or I think in the past, you did EUR 100 million interim and a EUR 200 million year-end dividend upstream from the insurance unit. Should we issue EUR 300 million to come through in H2 then? Or is that number way off?

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

So, we are going -- I mean, we do not give you the precise number, obviously, because then I give you an implicit guidance on our profits, which we don't do. But as we have seen in the past, we always give a dividend upstream of about EUR 200 million, EUR 250 million in what is it, the third quarter? -- fourth quarter, sorry. And then all the rest follows in -- after the conclusion of year-end that is going to flow into the group as of next year. But on the precise amount, I leave it up to your calculations because otherwise, I'll give you the implicit profit guidance.

[Operator]

We have no further questions, [Operator Instructions].

[Kurt De Baenst, General Manager, Investor Relations]

No further questions?

[Operator]

No further questions.

[Kurt De Baenst, General Manager, Investor Relations]

Right. Then this sums it up for this call. Thank you very much 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 disconnect. Thank you for joining. Have a good day.