KBC Groep NV

XBRU:KBC

Earnings Call Transcript 2023-Q2

[Operator]

Hello, and welcome to the KBC Group Earnings Release 2Q 2023 Conference Call. My name is Sharon and I will be your coordinator for today’s event. [Operator Instructions]

I will now hand you over to your host, Mr. Kurt De Baenst, to begin today’s conference. Thank you.

[Kurt De Baenst, Investor Relations]

Thank you, operator. A very good morning from my side to all of you from the headquarters of KBC in Brussels, and welcome to the KBC conference call. Today is Thursday, August 10, 2023, and we are hosting the conference call on the second quarter results of KBC. As usual, we have Johan Thijs, our Group CEO with us; as well as our Group CFO, Luc Popelier, and they will both elaborate on the results and add some additional insight.

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, Chief Executive Officer]

Thank you very much, Kurt, and also from my side a warm welcome to the announcement of the second quarter results. And we will do it as usual. We start with the key takeaways, which are actually highlighting that the operational results resulted in €966 million of profit, which is indeed an excellent result. As a matter of fact, KBC has been operationally firing on all its cylinders. The bank insurance franchise was doing excellent, and we have been performing extremely well in all countries, which contributed significantly each for their part to this result.

You can translate that differently. I mean customer loans and customer deposits both were increasing, which also triggered given also the interest rate environment higher net interest incomes. We have been able to increase our fee and commission business both on the asset management side as on the banking services side. We were able to increase our net result from financial instruments at fair value. And we were able to significantly increase further our income on the insurance side, both non-life and life.

As a matter of fact, we were able to manage the, what I call, outgoing side of the P&L, that is our cost were despite very high inflation well under control. And the technical side on the insurance side was excellent with a combined ratio of 84%. Whereas the impairments on the loan loss provisions were negative, which means positive, because we had some releases. This underpins our solvency position. This underpins also our return on equity, which now stands at 16% on the quarter and brings our cost to income ratio to 49%.

As a matter of fact, given all those positions, we were able to further do what we have already stated in previous quarters, namely that we are going to decide on two things, the final decision at least, that is: What to do with the surplus capital of €1.3 billion? Well, we received recently the approval of the ECB regarding a potential share buyback and also the Board has taken yesterday decision to execute that share buyback for the total amount of €1.3 billion starting as soon as possible and ending ultimately by the end of July 2024. Next to that, the – we will execute the normal dividend policy for the year 2023, which means that we will pay out an interim dividend of €1 per share in November as usual.

In terms of the capital structure there are two things to mention. First of all, that we are considering an optimization our capital structure, which means that we will do what a lot of other banks are doing in the European – or in the Eurozone, that is making use of the ECB possibility offer to finance part of our requirements with 81 and Tier 2 capital for KBC Group, that means that the potential 81 basis points of our capital in CET 1 is replaced with 81 in Tier 2 instruments. And we have taken the decision to consider this optimization and make use of it when it’s optimal and when it is needed. So it means that we did not immediately execute this option, but we announced today to market that we are considering this optionality.

The second thing on the capital side is an add-on which was following a intervention of the ECB, which is the consequence of TRIM exercise, which resulted, as we all know, in what they call the EBRD program. And that has been leading to an increase of risk-weighted assets on mainly the corporate and SME portfolio in Belgium of €8.2 billion. The mitigating elements on this matter of €8.2 billion, is €1.7 billion risk-weighted assets release, which will be implemented in the quarter three, where this add-on will be implemented and the release. So the net effect of both combined will be €6.5 billion.

Next to that, we are talking with the ECB on a, what is called, simplification program on roughly the risk-weighted assets related to the sovereigns. And that will – or that expects – that is an expected risk-weighted assets release of roughly €2 billion which is going to be implemented before year-end 2023. The balance of all these numbers, €4.5 billion, is actually – and if you take into account all the upcoming legislation, it’s actually a front-loading of Basel IV, which is normally implemented in the period ‘25 until ‘33. And this €4.5 billion, especially the balance of €4.5 billion is the perfect downloading of the substantial part of our first time application of the Basel IV – potential Basel IV impact in 2025.

For a good understanding, in KBC we consider this €8.2 billion of risk-weighted add-on as a very conservative – not to use the word overly conservative – stance of the ECB. We are not necessarily agreeing with those positions, also given the fact that we have a long track record in this perspective and that we see no deterioration at all in our credit portfolio on the Belgian corporate and SME side as we speak.

Let me now go into some other things. I’ll be very briefly on matters which are on page – let me see – Page 5, where we are talking about the split between banking and insurance, which is at the normal level of 84% versus – or 83.5%, to be precise, and 16.5%. But this is, as I said, the normal split up. Very briefly on all the other matters regarding the evolution of the way we deal with our customers. KATE is going much faster than what we originally planned, which is good news. More and more customers are using it. We now speak about 3.4 million customers using KATE. And they are using it pretty massively, more than 10 million conversations between KATE – between customers and KATE.

Next is the conversations which KATE has with the customer, so the other way around, more than 10 million, of which 63% is fully executed by the machine in a straight-through process manner, which means cost savings and efficiency go here hand-in-hand with that statement. And it also means that we are gaining efficiencies both on the sale as on the cost side. And last but not least, the customer satisfaction, which is translated in NPS scores, is in this perspective continuously increasing and now stands at least at the level of our bank branches. We have also been able to issue a second social bond in this quarter and it also supports our sustainability performance, which is explained on Page 6.

On the one-off side, it’s very simple this quarter. Actually, there were no one-offs, but one-offs which are related by government interventions on the tax side, which is mainly driven by the windfall taxes requested – additional windfall taxes requested by the Hungarian government totaling €22 million, and then modification losses also as a consequence of government intervention on the lending activities again in Hungary totaling €90 million.

Next to that, the most important chunk which comes in as a one-off is related to the Irish investment – divestment filed, sorry, and that totals roughly €12 million. If you compare with previous quarters, there’s a big one-off, of course, in the previous quarter. So let’s keep that in mind that the transaction of the sale of our assets in Ireland to Bank of Ireland is – was kicking in significantly in the first quarter of this year for a total of €370 million. So just keep that in mind when analyzing our results and definitely when you make that comparison with previous quarter.

Let me go immediately to those things who do matter in our operational activity. First of all, the net interest income. Well, the good news is that net interest income is further up and now totals €1.407 billion. That is indeed an increase. And as we indicated already in previous quarter, that is that increase is exponentially growing because of the way we deal with the spreading of our interest rate risk and our replicating portfolio and the consequences of increasing ECB rates and turnover rates in – on those portfolios.

Next to that, we had a positive effect of the inflation-linked bonds. We also explained that at the previous quarter. That is now €37 million of difference between the two and it has to do with the explanation which we gave previous quarter, namely that there was a lagging effect of the implementation of those inflation-linked bonds. Also positive is that on the lending side we have slightly higher income, which is due to two things: first of all, an increase of margins, for instance, on the mortgage side in Czech Republic; and then stable margin on the corporate SME business combined with strong volume, and that is 2% on the quarter, 4% on the year. Both elements also bring in – bring our net interest margin to the level of 211 basis points, which is 7 basis points stronger than previous quarter. So all-in-all, in that perspective, this was a strong quarter, which is also translated on the next page, where you clearly can see the evolution of our deposit side.

You know that we have been providing guidance that takes into account, of course, a couple of elements, first of all, the ECB rates, Czech National Bank rates, but also the volumes, and also very important, the shift between current account, saving account, term deposits and potential outflow. Well, the good news, first of all, is that KBC has further inflows of deposits. We have €1.1 billion of inflows, net inflow of deposits, combination current account, saving account, term deposit. And on top of that, we were able to attract €1.1 billion extra money which goes into mutual fund business. So in total for this quarter, an extra inflow of €2.2 billion customer money.

Now in translation of the shifts, we do see that continuous shifts happen between, in essence, term – sorry, current accounts and term deposits, which are mainly linked to corporate SME business and private banking business, but that, that shift between current accounts to term deposits is slowing down compared to previous quarters. We can clearly see that in all countries, and we explicitly see this in Czech Republic, where we are at the peak of the interest cycle.

If you compare that then for the full year, up to now, then you can clearly see that we had €3.6 billion of inflow of customer money, which is split up, as you can see in the right hand side of the graph, €2.8 billion on the mutual fund side and the remainder is on the deposit side. You can also see clearly on the evolution of the first half graph that it is mainly the shift between current accounts and term deposits, which actually makes the numbers work, and the saving account is explicitly at 0.

What about fee and commission business? Also there good news. So it increases further with €8 million and now goes to €584 million, which is split up 55% on the asset management side, 45% on the banking services side. This has to do with 2 things: first of all, the integration of Raiffeisenbank Bulgaria into our numbers, but also the fact that under IFRS 17 commissions, are no longer part of fee and commission, but are booked on a different side. And therefore, the negative effect of a growing book on the insurance side does not influence those commissions. I think the picture which we currently has more clear insight on how the performance is on our fee and commission business.

As I said, both are growing. And on the asset management side, it’s mainly driven by two things: first of all, the management fees, which are obviously linked; also, the assets under management. Assets under management were growing €8 billion on the quarter and €14 billion on the year, which is a clear result of two things: first of all, the performance of the financial markets, which had, of course, a positive effect of 2%; and then the other element that’s far more important that is the underlying performance of the sales. We had a strong increase of gross sales on two things: first of all, on what we call direct client money, which are the traditional funds; and then on the other thing, which is a lower yielding activity, that is the investment advice, which went up in this quarter significantly, as a matter of fact, it went up to €3.4 billion.

Now what about the net inflow on the regular asset management funds, so direct client money? Once again, we had a very strong quarter with a net inflow of €1.1 billion, which brings the total to €2.8 billion. And that is really good. As a matter of fact, last year, we booked a record net inflow of €2.9 billion. Now after 6 months, we are already at €2.8 billion, which clearly shows that the quarter one and quarter two performance was extremely well on the asset management side. The same thing I can say about the banking services fee business, which was growing as well. This is also linked to the fact that Raiffeisenbank Bulgaria was included in the numbers, but also – and clearly, it is positively influenced with the fees which are generated by the payment services, higher network income and also the business which is linked to credit files – the fees which are linked to credit files were evolving positively. So all-in-all, this is a strong quarter on the fee and commission.

What about sales and what about performance technically on the insurance side? Let me start with the non-life business. Well, this was performing excellently. So first of all, the growth of the premium stands on a 13% year-on-year basis, which is indeed very high. And that is good news. It is driven by 2 things. It is driven by the sale of insurance products to new clients or existing clients. Second element is that part of the increases are linked to reclassification of existing products at the higher level, which merely also translates the inflation which is linked to the claims handling side.

Talking about claims handling, 84% combined ratio is – to use an understatement – excellent. It is clearly influenced positively by the underwriting quality of the book, and also because of the nonexistence of important storms, windstorm, hailstorms or flooding have not been excessively part of our activity in the second quarter of this year. For good understanding, all the misery you could read in the newspapers of the first 2 months of this quarter or the first 6 weeks of this quarter had the same effect, we were not part of the regions where all of this happened. And this is a translation of exactly the same thing in the second quarter.

Life insurance business, which was – and you remember that I was not really amused with the quarter 1 results on the life side, is now completely the opposite. We have been running commercial campaigns in the second quarter, and that clearly paid off. The sales on the life side increased with 50% on the quarter and 70% on the year. And as a matter of fact, it was mainly driven by unit-linked products, which were more than doubling compared to previous quarter and more than doubling compared with the previous year. So in that perspective, it’s quite clear that we did an effort in the second quarter and the bulk of this effort was translated in unit-linked production.

On the financial instruments at fair value range, we have seen an increase of our income with €25 million. I’m not going to go into the detail here, but let me say it as follows. This is mainly driven by a very strong performance on the dealing room side. And you could say, if you compare with previous quarter, it’s a little bit lower. Yes, it’s correct. But let’s be aware that the quarter one was extremely strong. If you compare with same period of last year, then it’s clearly up. All the other elements are bits and pieces which are moving. But let me save some time. I’m not going into the details, because mostly of the time it just shifts around, with max €10 million.

On the net other income line, the difference is much bigger. We are talking about a difference of €440 million. But as I said in the introduction, this is driven by two things, two one-offs. One you know, that is the big €370 million related to the sale of the Irish assets. And then the second thing was a recuperation – one-off recuperation of Belgian taxes which were unrightfully collected by the Belgian government, and that was booked – that recuperation was booked also in the first quarter, €54 million of return, which would – or profit, sorry, which is actually a translation of a normal level. The average level excluding all those one-offs is roughly €50 million, 5-0. So it’s perfectly in line with that historical number.

In terms of operating expenses, first message, it is slightly up, only 1% on the quarter. If you compare it with previous year, it’s 12% up. Let me translate that differently. If you look into the comparison with previous years and you would exclude the one-offs, for instance, the costs which are linked to the M&A file or the divestment file in Ireland, the file in Bulgaria and so on and so forth, then we do have an increase, which is roughly 9%, which clearly defines the impact of the inflation.

Nevertheless, costs have been remaining under control because that level is lower than the average inflation throughout the group. And that is due to two things. So we have been able to gain further productivity through our implementation of, amongst others, KATE. But also we have been able, as a consequence of that, to keep our FTEs under control, and in that perspective, lower the number of FTEs. What was the other driver? That is typical seasonal, that is IT cost, marketing cost and some other costs which are linked to professional fees. For instance, second quarter is a quarter where we have the announcement of yearly results and those fees are booked in the second quarter.

In terms of bank taxes, well – I mean, this is a never-ending story. It only goes up, another €51 million, which is mainly due to the fact that windfall taxes had to be paid – additional windfall taxes had to be paid in Hungary on the insurance side this time. And in total, we are now having €654 million of bank taxes. And the expectation for the full year is €684 million of bank taxes for the entire year, which is a very significant amount of money.

Let me go to the impairments. Well, as I already said in the introduction, the quality – the underlying quality of our lending book remains extremely solid. We have hardly any impairments on the regular book. And if you take into account the full book, including the buffers which we have taken in the recent past, then it’s even a release of loan loss impairments, totaling €23 million. The result of €70 million booked in Belgium, including the foreign branches, so overseas activities, which are, in essence, linked to one major claim. Whereas we do see that the improvement of several parameters, most importantly the macroeconomic parameters has triggered our model, which is underpinning our geographical and emerging risk buffer, which has triggered a release of 4-0, €40 billion on that perspective. So the combined sum brings us a release of €23 million.

As I already mentioned, we do have impairments on other things, which have nothing to do with loans, but which are linked to modification losses, intervention of government – That’s a different way to describe it – of €90 million in Hungary. And we have written off €11 million on lease contract which we had in Ireland, where the lease contract was a longer tenure than the remaining period for us in Ireland. Totaling €31 million sums it up to €8 million of impairments.

As a matter of fact, that translates in credit cost ratios which are very low, 2 basis points when we consider no buffer on geopolitical risk; minus 4 basis points, which is a positive when we do consider the geopolitical buffer releases. This is clearly below the guidance which we gave for this year, 20, 25 bps. And for that reason and for the reason that the underlying quality and the economic outlook which we use is of such a kind that we will not come to the level of 20, 25 bps in the remaining 6 months of this year. For that reason, we have lowered the guidance to 10 to 15 bps going forward. Last word about the credit portfolio. The impairment loans ratio now stands at 2%. As a matter of fact, if we would use the EBA definition, it is only 1.4%, which shows that in this perspective we are clearly better than the European median.

On the next page, 16, you have seen the – you can see the evolution of our buffer. We still hold €350 million in that buffer, which is roughly 80% of our full year credit cost ratio guidance. And therefore, it’s on the safer side. As I said, the main reason for the freefall of €40 million was driven by macroeconomic parameters.

Going to the capital position of KBC Group. Well, if you make the contributions on the income side, so the capital side, namely the result of this quarter at 50% traditional payout ratio. We do have the dividend upstreaming on the insurance side. And then we do have a couple of elements which are summarized under other, but have no impact. If you take into account the volume growth, which was mainly driving the increase of risk-weighted assets, and then also sum of parts, which are indeed coming also to a zero conclusion for the bracket other, then you see that the capital ratio stands at a very solid 16.5%. Now that 16.5% is translated on the next slide in the different types of buffer, and you can see the evolution. We do hold a buffer of 6% if you take into account a 10.5% of OCR level. And the MDA buffer goes to 5.1% if you take into account all the elements which are described on the right-hand side.

Now what are all those elements? That is – indeed we do consider to optimize this structure. That means that we are potentially using the possibility which is offered to the European banks namely to finance part of the Pillar 2 requirements with AT1 and Tier 2 capital. Using the possibility is something which we will consider going forward. We are not necessarily executing this immediately, all depends on other elements amongst others market circumstances.

On the next page, you can see the leverage ratio, which stands at 5.4%, which is a very solid position, given the fact that we increased the size of our balance sheet because we have further strengthened our liquidity position, which stands at a solid 152%. For a good understanding, this liquidity position remains very high even after the repayment of €11 billion of TLTRO. To be precise, €10.9 billion was paid back to the ECB, which is almost the full remainder. There’s a small part left over. But still, despite the fact that we paid back €11 billion, we have still 152% liquidity ratio. And on the NSFR side, it stands at 145%.

Also, the insurance company has posted a very solid solvency ratio with 206%. We are clearly above the threshold of the ECB. That brings me to the forward-looking part that is, in essence, dealing with 2 things. First of all, the economic outlook on the growth side looks, yes, not that flourishing. It is indeed a period of low growth, uncertain growth. And it is a little bit better than what was assumed by most economists in the beginning of the year. But still it’s still under pressure. So it still remains weak.

On the other side, it’s also quite clear that given the evolution of the core inflation, which is still higher and clearly higher than expected and clearly higher than the expectation of the ECB that is indicating that it will be there for longer than originally anticipated. And as a consequence, it will have an upward pressure on the ECB monetary policy, which will potentially translate itself according to us in a further one rate hike of 25 bps in the next coming months. And what concerns our guidance for the year 2023, we have guided and we have confirmed in this guidance the outlook for the total income side, which we hold at €11.15 billion. On the other hand, we have lowered the guidance of €5.7 billion of net interest income to €5.6 billion.

On the next page, you can clearly see why this is. It has nothing to do with the evolution of the interest position of our book as such, because on the contrary, we have increased our outlook for the pure net interest income which is linked to our activities, current account, savings account, term deposits, what have you. But we do see clearly two things. First of all, because we have been using money market opportunities, which means that we have been attracting funding and working on the carry with derivatives swapping away the interest rate risk, we have gained money. But the unfortunate thing is that according to the accounting rules, you have to book the, let’s call it, typical banking products part on the NII side and you have to book the derivatives part on the financial instruments and fair value side, which means that the sum of the two parts, which is positive, is not seen in the NII line, but is seen in the sum of the financial instrument fair value line and the NII line, which is as such negative. And that is clearly indicated on this graph, minus €0.1 billion.

Last but not least, since we gave the guidance, the European Central Bank, the Hungarian National Bank and the Bulgarian National Bank have changed the position on the minimum required reserves which we have to hold with them. The compensations which were given on those MRRs are put to zero and have, as a consequence, a negative effect of €100 million, a bit more than €100 million for us, which is translated in this graph as well. So using those external factors, brings down the net interest income despite the fact that the underlying net interest income is higher than originally guided.

Concerning the longer-term guidance, it’s – sorry, I forgot to mention on the guidance one other thing. On the OpEx side, we do confirm the 4.75 ballpark number despite the fact that inflation is indeed higher for longer. And the second thing I already mentioned, we bring down the guidance on the credit cost ratio to 10, 15 basis points instead of the previously foreseen 20, 25 bps.

In terms of the long-term guidance, as you know, we only update that once a year, and that is always on the back of full year results – as a matter of fact, it’s on the back of our budgeting exercise. Well, we do not update those numbers, and we continue to see those numbers being realized to a certain extent. Thus, are offsetting factors, are positive elements. And the full detail how that affects will be guided to all of you in the course of early next year on the back of the budgeting exercise, which starts as we speak. There are no material deteriorating factors as we speak. Otherwise, we already would have updated those numbers.

Which brings me to the next slide, Slide 23, which is actually a wrap-up on the performance of KBC Group, which I can summarize in one word: it was excellent on all elements, on all P&L lines. In all countries, we have delivered what we should deliver what we have promised. And in that perspective, it leads to a €966 million with solid liquidity and solvency positions.

I will close it here, and I will give back the floor to Kurt De Baenst, who will guide us through your questions.

[Kurt De Baenst, Investor Relations]

Thank you, Johan. Let’s open the floor for questions, and please restrict the number of questions to two to allow for a maximum number of people to raise questions. Thank you.

[Operator]

[Operator Instructions] We will now take our first question from Raul Sinha from JPMorgan. Your line is open.

[Raul Sinha, JPMorgan]

Good morning, everybody. Thanks also for taking my questions. Can I have two, please? The first one, just on the capital threshold, Johan. I mean given the front-loading that we are seeing of Basel IV and also the decision you’re making, as you mentioned, to issue AT1 and Tier 2. Should we now start thinking that whenever the next review happens around the capital threshold for distributions to 15%, that it’s a given that it comes down? That’s the first one.

And then the second one, I guess, just coming on to NII. Obviously, there are quite a few moving parts over here. But I just wanted to ask for your broad thoughts around the profile or the peak NII discussion that we’ve been having with a number of banks. Obviously, if I look at your guidance currently as it stands for total income, which is on a CAGR basis, it implies your NII should have significant tailwinds next year. And obviously, you still have replicating portfolio, I think, helping you. So a little bit more color in terms of the growth in NII despite the sort of reduction in this year’s guidance would be helpful?

[Johan Thijs, Chief Executive Officer]

Thanks, Raul for your questions. I will take the first one. The second one will be answered by Luc. Regarding the threshold, the 15%. I mean, first of all, I think your analysis is correct. So what is happening now, because of the risk-weighted asset add-on on the corporate book, that is clearly a front-loading. And I repeat what I said, we consider this front-loading to be very conservative. And we still don’t understand a couple of things in that decision of the ECB. But it clearly means that it’s a far more conservative stance, and therefore, it’s a more solid stance in terms of our capital position given the risk profile of our book.

The second thing is on – indeed, if we would execute the AT1 and the Tier 2 fill up, then, indeed, we have doubled up in terms of our capital if we would keep the CET1. And I fully agree with that position. But let me remind you the usage of my words. I used 2x if. So therefore, it is a consideration which we changed compared to the past, because in the recent past, we always said we will fill it up with CET1, which is indeed more expensive, we know, but we do consider and we will consider the execution of this when the momentum is right. So it is not executed yet. That’s a good understanding.

So in terms of what that would mean, if we would execute it, if we would take into account if we are implementing, of course, in third quarter, the front-loading of the risk-weighted assets, then it improves the solidity on the risk-weighted asset side. And then, indeed, it makes sense to consider the threshold of 50% downwards. Now the decision is always taken on a yearly basis after due consideration by our Board. And that means it is not only this what we are going to take into account when we are assessing the 15%. Obviously, you take into account market circumstances, also you take into account forward-looking elements. I’ll give you one example. If we would have an adverse effect somewhere – let me use something which nobody wants. When the war in Ukraine would escalate, then, of course, that is another element adding. And therefore, we will take a more conservative stance. But let’s not preempt on something which still needs to be decided in roughly 8 months. But the optionality is created. I do agree.

[Luc Popelier, Chief Financial Officer]

And – hi, Raul. It’s Luc here. I will answer the second question. The peak has not arrived yet for KBC. I can’t tell what happens with other banks, obviously. But for us, an important driver of the fact that NII hasn’t peaked yet or will not peak in this year is the fact that our transformation results, i.e., the replication portfolio of our deposits is still growing very fast, continuing to grow at more than 10%, as I mentioned last time. That will continue. And if you look at the country numbers – well, first of all, the group as a whole, NII is growing at 6% as a whole. But underlying transformation result is growing faster. And what you now see is not only in Belgium that there is a strong growth in NII. It’s going up by 11% quarter-on-quarter, driven particularly by the transformation result. But if you look at Czech Republic, there we see there is a change, a corner has turned. And also there, we see an increase in NII of about 5%, also driven by an increase in transformation result. And you see the margin in Czech Republic is also increasing again slightly, but is increasing again, as it does for the group and as it does for Belgium. So the transformation result will continue for quite a while. And that is why indeed it will be a strong driver for our total CAGR growth for the next 2 years.

[Operator]

Next up we have Benoit Petrarque from Kepler Cheuvreux. Your line is open. Please go ahead.

[Benoit Petrarque, Kepler Cheuvreux]

Yes. Good morning. So just wanted to come back on NII, on your €5.6 billion guidance. I think that will imply €1.450 billion quarterly NII in H2. So, yes, there is some improvement, but that’s bit less than obviously we expected. Could you maybe run into the moving parts you expect? I mean you have a pretty strong inflation-linked bond contribution. What will that do – what will be the trend in the future? And also looking at volume growth and margin developments for the rest of the year? And then on your kind of €11.15 billion total guidance on income. If I do the math – so you have H1 at 5.83. I strip out the €400 million, multiply it by 2, I get to €10.9 billion. And when I add back the €400 million which is included in the guidance, I get to €11.3 billion. Yet you guide for €11.15 billion. So did you put some kind of conservatism in your top line guidance for the full year? Thank you.

[Johan Thijs, Chief Executive Officer]

So last question first. That’s an easy one. You know KBC. We tend to be conservative. So perhaps that gives you an idea that indeed there is some conservatism in there. The first question, the moving parts, as I mentioned before, the transformation results will also in the second – the third and fourth quarter be, of course, an important driver. Inflation-linked bonds will be lower than this quarter. This quarter was quite strong. We had a strong increase in indexation. If we look, as I mentioned before, for the full year, you can expect an inflation of about 4% to 5% – this is the Eurozone indexation we have to look at – 4% to 5%. That means €40 million to €50 million for the full year.

If you look at the first two quarters, we already had about €27 million gain on the inflation-linked bonds. And therefore, if you then have the rest, the €17 million to €20 million for the next two quarters, that means about €10 million per quarter in inflation-linked bonds income, so lower in the first quarter, but obviously much stronger than the first quarter, which was negative. What is also perhaps interesting is that we see lending income, which was a distractor because volumes were increasing. But the margin compression was offsetting – was more than offsetting the positive effect of volume increases. That is – it seems to be turning now with lending income slightly contributing again. And you see that there is still growth in the loan portfolio, about 2% overall, which is a rounded number. It’s slightly lower than that. But it means that the 3% growth – the 3% to 4% growth that we envisaged and we always said it will be probably at the lower end, that probably 3% will be achievable. And we see early signs of margin improvements in some areas, particularly in Czech Republic, where the mortgage margins are improving again. And also – and that’s for the group as a whole, corporates and SMEs either stable or slightly improving.

The only drawback here is Belgium, where there is still quite a lot of margin pressure. That is the exception. But that means for the group as a whole, lending income starts to contribute slightly again. And these are the most important components. Obviously, we have these volatile elements such as short-term cash management that is difficult to predict, but we expect that will continue to be a strong – I wouldn’t say a grower, but a good contributor to the NII. So that’s, I think, in summary the drivers that we see for this year.

[Benoit Petrarque, Kepler Cheuvreux]

Yes. Thank you very clear. Thank you.

[Operator]

Next up Matthew Clark from Mediobanca. Your line is open. Please go ahead.

[Matthew Clark, Mediobanca]

Hello. Matt Clark at Mediobanca. My question is, firstly, on the €1.7 billion risk-weighted asset release in the third quarter. Could you give us some guidance on what that relates to? And then secondly, coming back to your target 15% CET1 ratio and potential revisions, I mean you made no mention of peer group capital levels when you were describing potential adjustments for the Pillar 2 restructuring. So is that now gone? Is that now in the past and not really relevant and you’re looking more towards an MDA buffer thinking in order to set your target CET1 ratio going forward? Thank you.

[Johan Thijs, Chief Executive Officer]

Thanks, Matt. Let me answer your questions. And perhaps because – despite the fact that Luc is brilliant in making calculations, he made a small error. And before you put that in your Excel sheets, he said on the inflation-linked bonds minus 7 plus 30 is 27. It is minus 7 in the first quarter, 30 in the second quarter. And that is not 27, but 23. In another way, if you put it in your Excel sheet, it would be painful.

[Matthew Clark, Mediobanca]

Yes. Thank you, Johan.

[Johan Thijs, Chief Executive Officer]

Coming back to your questions. So first of all, on the €1.7 billion risk-weighted assets release in quarter three. This has to do with several elements and this is linked to evolutions in our books which are buffered in this quarter and which are released next quarter because we got in the numbers in – what was it? – end of June when we were still having discussions with the ECB on the risk-weighted asset impact. And therefore, we shifted that into quarter three.

Coming back to the – what you called the capital target of 15%. For a good understanding, Matt, it is not the capital target. It is the threshold which we use to define surplus capital. The capital target is something which we position against the OCR. And the OCR, which is if we would consider – if we would implement the Pillar 2 requirement to be financed by AT1 and Tier 2, comes down to 10.5%. So we hold with the 16.5% today and also with the 15% threshold a significant buffer compared to the threshold.

Now when we are – when our Board is going to make the assessment to review the threshold, they are going to take into account a lot of things. As I already answered in the previous – on the previous question that there is market circumstances, economic circumstances and so on and so forth, but also – and that will remain the case how we position ourselves compared to our peers. And that means also the position of peer groups. KBC wants to be still a very well-capitalized group and amongst the best capitalized groups in the European domain. And that will be – is and will be also going forward a trigger for the assessment of the threshold on surplus capital. The real internal capital target is lower and is defined on a buffer which we put on top of the OCR. So taking all those elements into account, peer group will be one of them.

[Matthew Clark, Mediobanca]

Thank you.

[Operator]

Next up we have Flora Bocahut from Jefferies. Your line is open Please go ahead.

[Flora Bocahut, Jefferies]

Yes. Hello. First question is on the RWA release. I mean you just talked about the €1.7 billion in Q3. Can you talk also about the level for the €2 billion RWA release you target, I think, in Q4? How are you going to do that? Is it going to potentially impair your organic growth potential for results? And then I’d like to get back to the RWA add-on of €8 billion. I mean you talked about the model review by ECB, but it’s a huge number. It comes completely unexpected. It had not been mentioned before. So was it a sudden move by the ECB? Can you maybe clarify what the risk weight is going to be on that portfolio going forward? Like was it extremely low and much below peers, just to try and better understand what happened there. Thank you.

[Johan Thijs, Chief Executive Officer]

Thanks, Flora for your questions. And I think indeed these are very relevant questions. Let me, first of all, come back to the €2 billion. So we are having already for a long period discussions with the ECB regarding what is called simplification of models. This is a process which is ongoing, I think, also with other banks and clearly also with KBC. This discussion is in an end phase. So unfortunately, we were not able to disclose it already today because we don’t have the final – first of all, the final decision is not taken yet by the ECB. And secondly, as a consequence, we did not receive the final discussion – the final decision. And therefore, we cannot disclose the precise detail. But if we make the estimate and we take a range, then it – that’s the reason why we call it roughly €2 billion – then it is indeed somewhere in that neighborhood. And we do expect, that is on the basis of conversations which I’ve had with the ECB, we do expect this outcome to be there before the year-end.

Regarding the €8.2 billion, that is indeed also a discussion which we have had with the ECB. And to be very straightforward, well, it came to us as a surprise as well, because there are no intrinsic triggers in our portfolio which show that this needs to be done. Let me give you one example. Also if you look at the results of the stress test, which is mainly also focusing at corporate portfolios, as you have seen, KBC came out quite well. And we don’t understand then why out sudden we have to discuss matters on the corporate portfolio in terms of risk-weighted asset increases. Discussions took place. Also, we pushed back and we gave explanation why we think what the request was for that, that was – that it was not necessary and that it was overly conservative. It went back and forth for a couple of times. And we were informed by the ECB in writing on the June 30 that it was still a significant increase, which we do not agree with from a purely technical perspective.

Now how does it work? We had a right to be heard. We executed that in 14 days. After 5 weeks in total, we got back the confirmation on the corporate book. And as a matter of fact, it came in on Tuesday, last Tuesday. So it actually works now like an add-on. It is an implementation. And we are now going to implement those recommendations. And with the data of KBC further underpin why we think this is overly conservative. The ECB will assess those implementations. If they consider that we are right, then the add-on will be replaced by the real numbers which are part of the implementation. We will see what that brings.

This is how it works technically. I’ll give you my personal opinion. For me, it’s quite clear. And from a supervisory perspective, I even understand that the ECB is using their powers to assess the books of banks in general where they implemented a far more harsher and a far more conservative stance, increasing risk-weighted assets in general. You can do it on corporate. You can do it on other books as well. And this is what has happened over the recent past. When I refer to Trims, that’s one of it, this is a direct consequence of the execution of Trims and then the implementation of the repair program. They also confirmed to us this is a level playing field. That means that all European banks are scrutinized in the same way. It will be step-wise. They will not do everything at the same time. And we all know that already some of our peers have been subject to the same exercise and have been also announcing increases on risk-weighted assets. Given the facts – or given the events which happened in the U.S. and in Europe recently, I’m talking about Silicon Valley Bank and the likes and Credit Suisse here in Europe, from – which were triggered by an absence, liquidity issues. I can – I understand that the European Central Bank thinks a more conservative sense on a lot of matters. And those matters are, amongst others, translated in further risk-weighted increase. As a matter of fact, it is an anticipation on a potential implementation of Basel IV. As a matter of fact, this is a certainty. Basel IV is still under discussion, is still not final, and there are a lot of moving parts. But I mean, if ECB implements that in a download way, Basel IV becomes without subject – or the discussion on Basel IV comes without subject.

[Flora Bocahut, Jefferies]

Thank you. That is very clear. Can I just ask one clarification because there is one element I’m not sure about? You stated on the Slide 4 regarding the capital optimization that you will fill the AT1 and Tier 2 bucket. But then on this call, it seems to me like the decision has not been made 100%. So just to clarify, will you fill them? Or you will, but you don’t know yet when that will be?

[Johan Thijs, Chief Executive Officer]

I do apologize, Flora. Yes, you’re right. When you read the text, it’s clearly that there is will. But that we made an error. We should have paid more attention to that. It is clearly that we are using the possibility. We have always said in the past that we would not use the possibility because we don’t need it, and we use the CET1. We are one of the outliers in doing so. And therefore, we do consider the option now. And in that perspective, it is an optionality created, which is bringing us 81 basis points potentially. But it comes to the execution only at the moment that we decide as well.

[Flora Bocahut, Jefferies]

Thank you.

[Operator]

Next up we have Amit Goel from Barclays. Your line is open. Please go ahead.

[Amit Goel, Barclays]

Thank you. So I guess just one follow-up on that. I mean obviously, you mentioned – obviously, you’re being very conservative. I’m just curious on that capital bucket kind of optimization, why are you considering a less conservative stance? And whether or not that’s related to the RWA effects? And then what it would mean in terms of ability to achieve longer-term ROCE targets and aspirations? And then secondly, just in terms of the pass-through assumptions and what you’re experiencing at the moment. In terms of the savings accounts, just to check if you’re thinking about an exit rate around the 40% mark. And then on the term deposits, it looks like the pass-through is already above the 80% or 85%. So what would bring that back down to the 80%? Thank you.

[Johan Thijs, Chief Executive Officer]

Thank you for your question, Amit. But to be very honest, there was a lot of noise on the line. So I did not 100% understand your question, the first question. Let me try to answer on what I understood. And if I’m missing some parts, please step in. So yes, indeed, in the past, we had – we always used the very conservative approach filling up our total Pillar 2 requirement with CET1. And in this perspective, we are now creating the optionality to fill it up like most of the other European banks with AT1 and Tier 2. The only reason why we consider it is indeed the comparison on the buffers. We have 5.1% buffer on the MDA. We have 6% buffer on the CET1. Which, actually, if you would consider to fill it up, you would bring that at the same level. And then also taking into account discussions which were ongoing on the threshold, everything needs to be combined. And in that perspective, we created the optionality. And just to give a clear view to the market. Whereas in the past we always said we will not fill it up, we now say, listen, we do consider. We don’t exclude that optionality anymore. And that’s the only driver for that message on Page 4.

The second part, which is on the pass-through, I will hand over to Luc.

[Luc Popelier, Chief Financial Officer]

Yes. Hello, Amit. I’m not sure what you’re referring to because we’ve actually updated the pass-throughs on savings accounts, for the group as a whole, from previously 40 basis points, 4-0, to now – percent, sorry, 40%, to now 30% pass-through on the savings accounts. That’s for the group as a whole. And we’ve increased the pass-through rate on term deposits for the group as a whole from 80% to 85%. The mix obviously is positive because the effect on the savings accounts is very strong. And that is a very positive contributor to the reason why we see an increase of the effect on volume and margins, as you see on Slide 26, I think it is. Is it answering your question? Or did I get it wrong?

[Amit Goel, Barclays]

Okay. Got it. Sorry, I thought for 2023, you have that 30% pass-through on savings and 85% on term. I thought that still on the medium-term basis, you had 40% on savings and 80% on term. But is it the longer-term? The medium-term has also changed.

[Luc Popelier, Chief Financial Officer]

No, no, no. We didn’t give any guidance on the pass-through rates for the next 2 years, and we don’t do this now either. So we’re not going to express any opinion on that. All what we’re saying is that we – looking forward, we just don’t update the guidance. And we have never given any pass-through rates for ‘24 and ‘25.

[Amit Goel, Barclays]

Thank you. Got it. Thank you.

[Luc Popelier, Chief Financial Officer]

You are welcome.

[Operator]

Next up we have Kiri Vijayarajah from HSBC. Your line is open. Please go ahead.

[Kiri Vijayarajah, HSBC]

Yes. Good morning, everyone. Just a couple of questions on my side. Coming back to the capital and then these levers to offset the impact of the model review coming through in the second half. It does strike me that you’ve calibrated those levers to leave the net-net Basel IV impact largely neutral. So I wondered if you had kind of additional levers in your back pocket just in case there are other unforeseen moving parts down the road on capital. Or do you think you’ve kind of maxed out on these various RWA optimization levers, obviously, leaving aside the whole AT1 in the Pillar 2 stack discussion to one side? And then secondly, just turning to the geopolitical risk provisions. And you’ve been releasing that at a fairly steady €40 million or so a quarter. So is that something that we should sort of bake in at least for the next couple of quarters in there to try and make the overall full year number come within the revised guidance there on cost of risk? Thank you.

[Johan Thijs, Chief Executive Officer]

On the capital point above 4, we don’t think we have maxed out or anything. What we are saying is we now have €4.5 billion, that’s an increase on – add-on that ECB has given is a front-loading of the €7 billion we now guide for the first time application. So, there is still €2.5 billion increase in the first-time application as of the fourth quarter, let’s say, of this year. So, it is still an increase. Can we manage that still down, well, that depends on so many variables still and we can take management decisions. So – but we think that the effects we can take as management have more to do with the fully loaded Basel IV impacts rather than the fronts, the first-time application. So, if there are changes, yes, it could happen, but it will be more than mitigating or enhancing or improving the longer term effects. Did that answer your question?

[Kiri Vijayarajah, HSBC]

Yes. And then on the…

[Johan Thijs, Chief Executive Officer]

And then for the €40 million…

[Kiri Vijayarajah, HSBC]

Yes.

[Johan Thijs, Chief Executive Officer]

And that’s a bit more difficult to say because the buffer that we have is now fully, well, fully is maybe too strong a word, but it’s model-driven. And that model has some knockout features. So, that could mean that if we see the stress levels in the different sectors that the model is monitoring, if that goes below a certain level, then it rapidly reduces to zero. So, it’s not a linear effect, yes. And therefore, it’s a bit difficult to say when exactly you will reach that level where it rapidly reduces to zero. So, unfortunately, I noticed it’s going to be difficult for you then to model it. I would be still counting on releases as far as we see the economy evolving accounting on releases, but I wouldn’t take too much of that. And €40 million may be a good point. But to be honest, I am not entirely sure, it is difficult to predict it.

[Kiri Vijayarajah, HSBC]

Okay. Thank you very much.

[Johan Thijs, Chief Executive Officer]

You’re welcome.

[Operator]

We have Giulia Miotto from Morgan Stanley. Your line is open. Please go ahead.

[Giulia Miotto, Morgan Stanley]

Thank you and good morning. Two questions from me, please. The first one on NII, so we hear that the replicating portfolio will continue to be positive. Do you disclose size or yield or duration of this replicating portfolio? First question. And then my second question, sorry, but going back to this unexpected €8 billion impact, I hear your frustration. And would you be sure that there are no more of these reviews to come, or could we be surprised again in the future maybe by some more reviews? Thank you.

[Johan Thijs, Chief Executive Officer]

Yes. Okay. So, I will answer the first question. We do give some idea of the replication durations. So, for the current accounts, that is around, and this is different, of course, country-by-country. And there are some tactical positions, but around 4 years to 4.5 years duration. And on the savings accounts, that is around 2.5 years. For the full book, it’s slightly below 5 years. So, that gives you an idea.

[Luc Popelier, Chief Financial Officer]

Thanks Giulia. I will take the second one. Coming back to indeed the risk-weighted asset add-on, which was unexpected. So, are there any further increases to be expected to the same, I mean there is always shifts, but I mean to the same extent. Well, this – first of all, when we have discussions with the ECB, they stated that at this stage, there are no further add-ons to be expected, definitely due to the same tune as we are currently speaking. Secondly, be also aware that we got the approval and on the share buyback, roughly, what is it, 10 days ago or 8 days ago. And that is a clear indication that there is nothing to come to KBC because they took into account, obviously, I think the risk-weighted add-on plus our profitability going forward. They took into account for sure, the stress test. Otherwise, we would never give a share buyback approval, but they gave the share buyback approval. So, not only orderly we don’t have any signs from ECB side that anything unexpected might pop up again. Secondly, be aware that the approved the share buyback, which is still a significant number and that they have done that in a forward-looking way. So, they have no indication given via the share buyback approval, that’s something unexpected might happen. Point, this is the answer to your question. In general, I think there will be anyway from the European Central Bank side, an upward pressure on the requirements for all banks in Europe, both on the capital side and on the liquidity side. But this is on a different note, and this has to do with the experience of Silicon Valley Bank and likes, and Credit Suisse, you know what I am talking about.

[Giulia Miotto, Morgan Stanley]

Thank you

[Operator]

Next up, we have Anke Reingen from RBC. Your line is open. Please go ahead.

[Anke Reingen, RBC]

Yes. Thanks for taking my question. Just firstly on the Basel IV impact. You now say it’s €7 billion on 1st of January, ‘25. And I think if I recall correctly, the last guidance was €3 billion. So, just trying to understand, I mean obviously, lots of moving parts, but there seems to be quite a bit of an increase. And is some of this – I think you have the latest guidance didn’t give us a fully loaded impact. But would you think that more is now taking day one than over the implementation period. I think the guidance previously was like €8 billion? And then secondly, on net interest income, on the €100 million that shifted from NII into the trading on the fair value line. Will that sort of like, is that expected to reverse in 2024? And then just a brief question, I guess if you issue more AT1 and Tier 2 that will be a headwind to your net interest income. Is that something that you think is legible or something we should focus on? Thank you very much.

[Johan Thijs, Chief Executive Officer]

I will take the first question on Basel IV. So, the impact is actually very simple why it has increased, and the reason is that we now believe, and there is a political agreement on this, although not yet fully finalized, but we think there is a very high certainty that it will happen that the weighting of the insurance company. As you know, we are using Danish Compromise and our insurance company is deconsolidated under that method and then risk-weighted, currently traded at 370%. Initially, the proposal was that the risk weighting would go down in the first-time application to 100% as already some have at the moment. And then gradually would increase over the life of the implementation of Basel IV until 2033, increase to 250%. Now, the agreement is that it would be immediately 250%, so no reduction first. And that is the explanation why we have revisited the first time application, that’s the only reason.

[Luc Popelier, Chief Financial Officer]

Okay. So, Anke, thanks and I will take the last part of your question, giving the question about the AT1 and Tier 2 on potential headwinds. For good understanding, let me repeat what I said earlier. The decision on the optimization is taken. The execution is not a given as we speak. So, that needs to be considered given market circumstances and support. Be aware that AT1 has no impact on NII anyway. And Tier 2 has only a limited impact given the position of KBC. So, in terms of headwind, given the total number we are speaking about is very marginal.

[Anke Reingen, RBC]

And the €100 million in terms of the fair value that is from NII and fair value results, will that reverse in ‘24?

[Johan Thijs, Chief Executive Officer]

Well, this – first of all, what is earned this year in the market – in the dealing room will not be reversed. As you know, the dealing room takes short-term positions, never long-term positions. So, they lock in those profits, and they are made for that period. So, there is no reversal. Will there still be then shifts going forward, well, probably not to the same extent and maybe a reversal there could happen that it goes back from fair value to NII, depending on the positions that the dealing room takes. They always wanted to lock in a margin and arbitrage opportunity, and that makes a shift, what is it going to be next year, difficult to predict, but it’s all quite marginal. So, the NII shifts, given the total NII income is quite marginal effect.

[Anke Reingen, RBC]

Okay. Thank you.

[Luc Popelier, Chief Financial Officer]

Less than 2%, yes.

[Operator]

Next up, we have Tarik El Mejjad from Bank of America. Your line is open. Please go ahead.

[Johan Thijs, Chief Executive Officer]

Dear Tarik, I don’t know if you are speaking, but at least…

[Tarik El Mejjad, Bank of America]

Yes. Hello?

[Johan Thijs, Chief Executive Officer]

Okay. Now we can hear you.

[Tarik El Mejjad, Bank of America]

Yes. Sorry.

[Johan Thijs, Chief Executive Officer]

Here we go. Please.

[Tarik El Mejjad, Bank of America]

Sorry about that. So, the first question again on Basel IV. Can you give us an indication what would be then the fully loaded the impact? I guess it will be – the phase-in will be then lower now. If you can give us a sense, although I understand it’s not fully finalized. And the second one on this, again, on this add-on, I mean I would think we are all surprised and we can feel frustration you have. But is it explained by the fact that you – actually, when I look at compared to other banks in Europe, you didn’t have many, we can call it, TRIM 2.0 or IRB repair, whatever, adjustments in the last 2 years, where others constantly had 10 basis points, 20 basis points here and there. And secondly, you sound very cautious about the sector as well and others could be also impacted. But is this I mean an impression you have in terms of results of the SVB because the message and the share buyback, as you said yourself, has been approved all around and no indication of more capital requests. So, what makes you feel that this is something that will be generalized? Thank you.

[Johan Thijs, Chief Executive Officer]

I will take the question on Basel IV. So indeed, given everything on a static basis, we don’t give any guidance anymore for the fully loaded effects. We did give guidance a while ago that it would be €8 billion, but that no longer is a number we can confirm or deny, as they sometimes say. But it is clear that the €4.5 billion is not only front-loading of the first-time application, but also for the fully loaded application. So, also there, if the €8 billion would still stand, then it would be €4.5 million less, obviously. So, it’s also front-loading on the fully loaded part.

[Luc Popelier, Chief Financial Officer]

Tarik, good morning again. So, I will take your second question on the add-on. And I think indeed you had a number of questions. It’s a very important topic, and I fully agree with that. First of all, is it due to the fact that apparently, when you compare to the previous exercise, terms exercises as we got away quite well. I don’t know, to be honest. I don’t know, first of all, what the output was of the TRIM exercises for my colleagues and other banks. That’s the first thing. I know the publication is not in detail. And the second thing is, obviously, I don’t know the assessment of the ECB on those TRIM outcomes and further analysis, which they are doing. What I do know is how they looked at our position and how they discuss with us and to be very straight, I already said it, it sounds very conservative. From a supervisory perspective, I understand because the more conservative the capital position or the risk-weighted asset position, the lower the risk and therefore also the lower the impact on the supervisor when something is under pressure. I mean I don’t have to explain that. In the talks, which we have with people which are responsible for KBC, also with senior people responsible for KBC at the ECB side, it is quite clear that they are not a big fan of models in general. And in that perspective, it has nothing to do with intrinsically the fact that it is KBC. It has just to do with the view that their approach is far more standardized, let me use the word standardize across the board. So, in that perspective, given also what happened in the recent past where it shows clearly that supervisory measures taken can strengthen our banking sector, which is definitely the case in Europe, which was not necessarily the case in the U.S. to use another statement that that is indeed something which you have to bear in mind all when we are discussing with our supervisor. And what you are going to do with other peers, I already saw a couple of examples in the recent disclosure of a couple of our peers. I am not saying that it’s going to be now the standard going forward. But what was said to us when we were having discussions with ECB, they said it’s – by the way, it’s it will be because the argument, of course is what about level playing field because we are in the market and then the competition with each other and the regulatory impact in the risk-weighted assets has obviously an impact on lending has obviously an impact on pricing or about level playing field they always confirm that that is a level playing field. So, all the rest you can interpret yourself. I think that giving lessons learned on Silicon Valley Bank and Credit Suisse that the conservativeness on the supervisory side is not going to come down.

[Tarik El Mejjad, Bank of America]

Okay. Thank you very much.

[Operator]

We have Marta Sanchez Romero from Citibank. Your line is open. Please go ahead.

[Marta Sanchez Romero, Citibank]

Good morning. I have got two quick ones. The first one is on your MDA buffer target. Do you have one? And what is it? I think pro forma for the buyback and the RWA inflation, it’s 320 now? The second question is just another quick one on deposits in the Czech Republic. Do you think that the cost has peaked, or do you have an idea about betas where we are heading to or given that rates may start coming down, we have left the pit behind us. Thank you.

[Johan Thijs, Chief Executive Officer]

To answer your first question, we do not have an MDA buffer targets, internally we don’t have that. Second, are you going to take the question? And that was on the pass-due rates or on the costs? I didn’t really understand the beta. Yes. On the betas for Czech Public, that’s why I think I understand your question. There obviously, a bit difficult to be very clear, but we do not think that pass-through rates will further increase and may even drop a bit. There are indications that this may be possible. Yes. So, the Basel III ought to maybe the peak of the cycle, yes.

[Luc Popelier, Chief Financial Officer]

Any further questions?

[Operator]

Yes, we do. Next up, we have a follow-up questions from Benoit Petrarque from Kepler Cheuvreux. Your line is open. Please go ahead.

[Benoit Petrarque, Kepler Cheuvreux]

Yes. Just follow-up questions on my side. On this bank approval, I mean did this be linked to the €8.2 billion of risk-weighted assets add-on. It sounds that in terms of timing, it’s very close to each other. It has been paying for quite some time. So, I just wanted to check that with you if that was okay, you take an add-on and I give you the buyback type of discussion. Second one was just on the pass-through rate in Q2 on average for the group that would be useful. And also on the €8.2 billion, I just wanted to check if this is for a large part linked to corporate risk. Thank you.

[Johan Thijs, Chief Executive Officer]

Thanks for your questions Benoit. To be honest, I was not – I mean I was not aware that it could be indeed the trade between share buyback and risk-weighted add-on. And it’s clearly not the case, absolutely not. The request of the share buyback has nothing to do with the risk-weighted asset add-on, first of all. And secondly, it has definitely not been a trade between one or the other at all. The assessment of the ECB takes into account all other elements. And the main concern, and this is applicable to all banks in Europe that is when you do a distribution, extra distribution of €1.3 billion of your capital going forward and definitely taking into account also more adverse circumstances, does that not hamper your solidity as a group. So, that don’t hamper your solvency position. In essence, that is the analysis the ECB makes. And therefore, they obviously take into account what they had in mind, at that time, we were not aware of the number for good understanding. Then they take into account risk-weighted asset add-ons, which they would implement upon us. What number they took into account, we don’t know. We only got the decision in, as I have said, yesterday, and – sorry, on Tuesday. And it’s definitely not a quid pro quo from their side.

[Luc Popelier, Chief Financial Officer]

Perhaps on the pass-through rates then for the full year, a few things. First of all, given the pass-through rates on the term deposits, which we did for the full year will be 85%, 40% for the savings accounts. The current accounts have not given any guidance, but you know that most of the current accounts, there is no pass-through at all. There is a bit of pass-through for corporate SMEs, but that is even there not very unspoken. So, you can have an idea, you have the deposits that’s also disclosed in the website, so you can then calculate what the overall pass-through rate is versus the Central Bank rates. But give you a bit more information on the savings accounts, the pass rate of 40%, we are close to that in Czech Republic. And as I mentioned before, we think has peaked and probably may come down a little bit, but not to a great extent. In Belgium, and that is very visible. We have 90 basis points we pay on the savings account. The – compared to the current ECB rate of 3.75% that means currently a pass-through rate of 24% in Belgium, sorry, 30% pass-through on the savings account, I made a mistake here. So, it’s 30% pass-through on the savings accounts. So, you can calculate the total pass-through. So, peak in Czech Republic, we are 24% in Belgium, and then you can see what that means for the rest of this year in Belgium.

[Operator]

Next up we have Guillaume Tiberghien from BNP Paribas. Your line is open. Please go ahead.

[Guillaume Tiberghien, BNP Paribas]

Yes. Good morning. Thank you. Can you help us understand a little bit the movement of NII in the corporate center? You highlighted, you see a higher funding cost of bonds and participation and also higher sub-debt cost. Are these negative NII meant to be gradually reallocated to the divisions and/or just disappear or just stay there? Thank you.

[Johan Thijs, Chief Executive Officer]

No, these are indeed the costs that you mentioned, and there is no intention to reallocate those. These are group decisions taken to strengthen the positions of the group. For example, the participations, we should not contribute the cost of that to, for example, Czech Republic or Hungary, these are investor costs and not operational costs. So, we do not allocate that to the business units.

[Guillaume Tiberghien, BNP Paribas]

And so should we assume the minus 66 as a new normal run rate or that’s underlying some other income that might offset this minus 66.

[Johan Thijs, Chief Executive Officer]

Well, that will depend on the issuance that we do for the next few quarters in the senior Holdco. And that’s going to drive it, but I think this is going to be more or less – it gives you an idea of what the cost should be going forward if rates stay the same, yes, that is important.

[Guillaume Tiberghien, BNP Paribas]

Okay. Thank you very much.

[Operator]

Next up, we have Sharath Kumar from Deutsche Bank. Your line is open. Please go ahead.

[Sharath Kumar, Deutsche Bank]

Good morning. Thank you for the presentation. So, I still have two questions pending at my end. So firstly, a clarification on the dividend. So even if we end up, say, at a CET1 of below 15% at year-end, I assume you would still pay 50% of the underlying profit. And within this, the Irish capital gains that would be excluded in your underlying profit, just wanted a clarification on that. And second is on buyback. I hear you when you say that it will be completed by August 2024, but any further clarity on the pace of execution maybe more front-loading this year? Any thoughts would be helpful. Thank you.

[Johan Thijs, Chief Executive Officer]

Thanks Sharath for your questions regarding the normal dividend distribution. No, I mean the normal dividend distribution is – has nothing to do with that 15%. That is, as we always say, at least 50% coming out of our profit, and therefore, it is not influenced at all by that 15%. The threshold of 15% is just triggering definition of surplus capital. So, everything above is considered surplus capital. This is considered for distribution and that the consideration will be filled in with – at the discretion of our Supervisory Board, and that is then an extra dividend, which can then go either way, cash or dividend or a blend. Then regarding your sub-question on the Irish capital gain, so as you know, the Irish capital gain was put into the share buyback, so in the €1.3 billion. But you are right, there is indeed a part of that €1.3 billion – sorry, part of that capital surplus linked to Ireland is also booked in the first quarter of this year, so in book year 2023. And therefore, indeed it is double counting. So, we are giving intrinsically extra dividend on this basis in the course of 2024 on the back of the full year results. So, it’s a little bit of a double up. And now I forgot your second question. Okay, the execution of the share buyback and if we would be doing front-loading, sorry, I forgot it. On the share buyback, so we will to try to start it up as soon as possible, so let’s say, in the next coming weeks and the execution will depending on the market circumstances. So, we have a full year to execute the total amount. And in that perspective, market circumstances will define how that is executed.

[Sharath Kumar, Deutsche Bank]

Thank you.

[Operator]

Next up, we have Cor Kluis from ABN Amro-ODDO BHF. Your line is open. Please go ahead.

[Cor Kluis, ABN Amro-ODDO BHF]

Hello. Good morning. A couple of questions on the 15% capital return, you returned the capital above 15% Basel III by the end of the year, given all the data that you provided, there is a few questions on that one. First of all, you talked about possible, I am not sure, of course, but the possible reduction of that 15% if that would be reduced. Is that relevant for this year, or are you talking about the reduction of the 15% possibly for next year? So, will it be relevant for February next year for the determination for capital return. or is it – do we talk about the year after? So, that’s my first question. Second question is on the share buyback. I see, of course the share buyback has not yet been deducted from the CET1 ratio the way that you presented. And of course, it’s a little bit how the share buyback will be executed. How will you – so the first question on that one is how will you deduct the share buyback from the CET1 ratio? Is it really upfront from the end of Q3 and that the whole amount, €1.3 billion is deducted, or will you deduct it gradually when you execute it? And then related to that question, assuming, of course that you have not yet fully executed the whole share buyback by the end of the year. How will you take this into account for determining the 15% if it’s not yet executed, this amount is not yet fully deducted. So, we take a pro forma CET1 for determining the 15%, or how would you work with that? Those are my questions.

[Johan Thijs, Chief Executive Officer]

Thanks for your questions, Cor. Let me answer the first one, a very straightforward way. The 15% threshold on capital is defined for the year where it is executed. So, the 15% is for the execution of 2023 result. The decision of the Board, which will be taken in the course of the first quarter of next year will be executed over the book year 2024. And then the second thing on the share buyback, we will start it up in 2023 quarter three, which means also that we have to fully deduct that from the numbers, the CET1 as of that moment. So next quarter, it will be fully deducted.

[Cor Kluis, ABN Amro-ODDO BHF]

Okay. Very clear. Thank you.

[Operator]

It appears that there are no further questions at this time. I would like to turn the conference back to Mr. De Baenst for any additional or closing remarks.

[Kurt De Baenst, Investor Relations]

Thank you, operator. Let’s close the call. Thank you very much for your attendance and take care and enjoy the rest of the day. Cheers.

[Operator]

That concludes today’s conference. Thank you everyone for your participation. You may now disconnect.