KBC Groep NV

XBRU:KBC

Earnings Call Analysis

KBC Group Reports Strong Q2 2024 Results

KBC Group posted an excellent net result of EUR 925 million for Q2 2024, driven by strong growth in lending and customer deposits, resulting in higher net interest income. The bank's net interest income guidance for 2024 has been increased to EUR 5.5 billion. Costs declined, improving the cost-income ratio to 42%. The bank also announced an interim dividend of EUR 1 per share and completed a EUR 1.3 billion share buyback. Despite challenges in some sectors, overall growth remains robust, leading to a return on equity of 15% and solid capital and liquidity positions .

Introduction and Results Overview

In the second quarter of 2024, KBC Group achieved a net result of EUR 925 million, showcasing strong performance across its diversified banking, insurance, and asset management operations. Notably, the firm increased its guidance for the full year net interest income to EUR 5.5 billion. The cost-to-income ratio improved to 42%, underscoring efficient cost management.

Strong Growth in Lending and Deposits

KBC witnessed robust growth in its lending portfolio, with a significant inflow of customer deposits driven by favorable interest rates. This performance bolstered the net interest income, prompting the company to revise its full-year guidance upward. Lending volumes grew by 2% quarter-on-quarter and 4% year-over-year, prompting updated guidance to 3-4% growth for the full year.

Advancements in Technology and Efficiency

A key aspect of KBC's strategy includes leveraging AI and their service bot, Kate, which is used by 4.8 million customers. Kate successfully addresses two-thirds of customer inquiries autonomously, enhancing productivity and customer satisfaction. Additionally, Kate facilitated 137,000 sales over the past year, with increasing transaction volumes toward the end of the period.

Interim Dividend and Share Buyback

KBC declared an interim dividend of EUR 1 per share, scheduled for distribution on November 1. Moreover, the company completed a share buyback program worth EUR 1.3 billion at the end of July, further demonstrating its commitment to returning value to shareholders.

Insurance and Asset Management

The insurance division reported an 8% increase in non-life insurance premiums, with a strong underwriting result of an 87% combined ratio. Despite a 15% quarter-on-quarter decline in life insurance sales, KBC achieved higher sales on a year-to-date basis compared to last year. Asset management services also saw substantial growth, with total customer inflows reaching EUR 2.6 billion for the year.

Impact of Market Conditions

KBC's net interest income benefited from positive movements in financial instruments at fair value and lower funding costs. However, commercial pressures on margins in lending and deposit products persisted. The net interest margin rose slightly by 2 basis points to 210 basis points this quarter.

Capital and Liquidity Position

KBC maintained a robust capital position with a CET1 ratio at 15.1%. The liquidity coverage ratio stood at 160%, and the solvency ratio for the insurance division was a solid 200%, double the regulatory requirement. The firm is well-prepared for potential economic shifts and continues to monitor capital adequacy closely.

Economic Outlook and Rate Expectations

The management remains cautiously optimistic about the economic growth prospects, expecting moderate growth in the Eurozone and slightly higher rates in Central and Eastern Europe. Inflation levels are anticipated to stay slightly above 2%, prompting further rate cuts in various regions, including the Eurozone, Czech Republic, and Hungary. KBC anticipates these changes will influence its net interest income positively over the coming years.

Conclusion

Overall, KBC Group delivered strong results in the second quarter of 2024, driven by increased lending, deposit inflows, and efficiency gains through AI. The firm increased its guidance for net interest income and remains well-capitalized to navigate future economic conditions. Investors can anticipate continued stability and potential growth in dividends and share buybacks, reflecting the group's ongoing commitment to shareholder value.

Earnings Call Transcript 2024-Q2

[Operator]

Hello and welcome to the KBC Group earnings release second quarter 2024. My name is Caroline, and I'll be your coordinator for today's event. [Operator Instructions]

I will now hand over the call to your host, Kurt De Baenst, General Manager, Investor, to begin today's conference. Thank you.

[Kurt De Baenst, executive]

Thank you, Operator. Also from my side, a very good morning to all of you from the headquarters of KBC in Brussels, and welcome to the KBC conference call. Today is Thursday, August 8, 2024, 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, 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, executive]

Thank you very much, Kurt, and also from my side, a warm welcome to the announcement of the second quarter results. As usual, we start with the key takeaways. And, well, second quarter of this year, '24, was again a result -- it was again a quarter with an excellent net result. EUR 925 million was posted over this quarter, and this is a result of KBC firing on all its cylinders. We have been in that perspective, doing once again, in highly diversified bank insurance asset management, integrated model, and that is indeed returning positive results.

Let me highlight a little bit more in detail what it means. So we have seen in this quarter a strong growth of our lending book. We have seen a deposit -- customer deposit inflow, which is a very important one, as we all know, given the interest rates. This resulted in higher net interest income. It also allowed us to increase our guidance on the full year 2024 for the net interest income, we now put it at EUR 5.5 billion ballpark, more detail about that later on.

We do have an increase of our fee and commission income as well as our results from the sale of our non-life insurance business. There is an upward move of our financial instruments at fair value. And on the positive side as well, be it a negative number. We have a decline of our costs, which means in this perspective, indeed, a positive outcome. Cost income ratio now stands at 42% before the bank taxes, and that is really perfectly in line, a little bit better even than our guidance.

In that perspective, also the loan loss ratio is perfectly in line with what we guided as a matter of fact, substantially better, and there's no surprise to see that we do have a solid capital and liquidity position. The latter allows us also to announce an interim dividend of EUR 1 per share, which will be, as normal, distributed on the 1st of November. We -- for completeness sake, I also want to highlight again, we already announced that with a separate press release that we concluded our share buyback for the total of EUR 1.3 billion and that it was finalized roughly, what is it, 8 days ago, so the end of July.

Now in summary, good results, return on equity 15%, and all the other ratios are very solid. If I go in like traditionally, over a couple of things highlighting what it is built up, 85% on the insurance side -- sorry, 85% on the banking side. It's 15% on the insurance side. That would be the day if we would hit 85% of our income via the insurance company. But also very important, that is the productivity gains, which we continue to book via the usage of AI and via the usage of our service bot, Kate. 4.8 million of our customers are using it on a regular basis. That also means that 4.8 million of customers are confronted with the fact that Kate becomes smarter and smarter, 2/3 of their questions are solved by Kate without any interference of a human being, which generates a lot of productivity gains and also generates a good NPS score with our customers.

Kate is also more and more involved in sales over the period of 12 months. She concluded 137,000 directly -- concluded 137,000 of sales, which is quite a strong number and is, for good understanding, an average over 12 months. And if you look at the detail, you see that it is ramping up towards the end of that period. In other words, it is not something which is not going to improve going forward.

In that perspective, also to highlight that KBC was nominated, amongst others, by the Financial Times as one of the sustainability leaders in Europe, which also qualifies us for supporting our customers better in the transition towards a more sustainable economy, and that is, as we all know, a very crucial element. And in that perspective, we can play ultimately our role.

On the next page, you can see the diversification of KBC Group that is the spread between the net interest income and the asset management income and insurance income. The split up is roughly 50-50, which means that, indeed, KBC has a very diversified position on its income side. In terms of the strategic focus, I'll skip that because this is the things that you already know. And then on the one-off slide, which is the next one, it is -- this quarter is characterized by hardly any one-offs, so we can give you a full picture without excluding too much of detail on certain elements.

Let me go through the biggest P&L contributor in terms of exposure and size, that is net interest income. Net interest income is up EUR 10 million on the quarter, and that is an increase of 1%, which is driven and that is something which is very important going forward, which is driven by a continued increase of our commercial transformation result. And that is indeed good news. It is up EUR 10 million, which is driven by 2 things. First of all, the reinvestment yields, which are creeping up. And then the second thing is that we also saw, again -- or we saw and that's a very crucial one, Core deposits flowing in, I'll come back in a second to that, but also a positive move on current accounts and saving accounts in the second quarter.

Next to that, are also increase of our lending income. The lending income was up on the back of strong growth of our volume. So we guided the market that we would see for the full year, a growth of roughly 3%. Well, if you look at the numbers on the graph, then we have seen 2% on the quarter, 4% on the year. And if you look at the total number for the year-to-date, we had a 2.48% growth, which means that also that perspective, we will update our guidance, and we will bring the 3% to 4% for the full year.

The volume growth was partly offset by the pressure which is still going on, on the commercial margins. This is not for every country the same. But in essence, if I would summarize it all, there is still pressure -- commercial pressure on those margins, and that is mitigating positive impact of the higher volumes. But nevertheless, the interest income generated out of the lending book in the combination of the 2 elements is positively evolving.

For good understanding, the total margin on the net interest side is now 210 basis points, which is 2 basis points higher than it was previous quarter. In terms of the other positive contributor, we have EUR 27 million of net interest income on inflation-linked bonds, which is significantly better than previous quarter. What are the -- and we have lower funding costs on our participations. What are elements which are partly offsetting? We do see indeed commercial pressure on the margins on the lending side, but we also had some commercial pressure on the saving side in Belgium, where we do have a payout in this quarter of our loyalty premium, our fidelity premium.

On the other hand, we do see the commercial pressure on the term deposits, where we have a slightly lower net interest income side. And then we do see slightly lower net interest income side on the -- actually the subordinated debt and the wholesale funding cost, which is linked to our LCR management. And then same thing can be said about short-term cash management, which is also linked to that short-term cash management as well as the evolution of the interest rates.

But let me highlight more in detail the evolution of the things which really matter, and that is the evolution of our deposit side. You can see that on the next slide. In the second quarter, we did have an inflow of EUR 5 billion of current account saving accounts, spilt up EUR 3.6 billion on the current account and EUR 1.4 billion on the saving account. This is an important one. And if you look over the quarter, then we can clearly see that the trend has shifted over the quarter.

In May, we had a kind of stable evolution. That means no further shifts because that was mainly, in the past, between current accounts, saving accounts, and term deposits. And then in June, we had a strong inflow, mainly also in Belgium, of that deposit side. So it is not contributing yet to the net interest income in the second quarter. It will start to contribute to net interest income in the quarter 3, 4, and following.

In that perspective, also, we do see a decline of the term deposits. This is mainly triggered by Czech Republic and to a lesser extent, Hungary. And that is also a consequence of the rate cuts, which are happening in those countries. As you all know, the Czech National Bank as well as the Hungarian National Bank have cut several steps significantly downwards their policy rates, and that is immediately translated in the attractiveness of term deposits, be it [ less attractive ] and therefore people start to deposit more money from their deposits on back again on their saving account.

We do see that trend clearly in both countries, and that has translated itself in the decline of EUR 1.9 billion on the term deposit. Let me say it differently, we do see indeed a slowdown of the shift between current accounts, savings accounts, and term deposits, a slowdown of the shift between higher-yielding buckets to lower-yielding buckets.

If you translate that over the full year, then you see the same trends, be it different numbers for current accounts, savings accounts, and term deposits. And in total, we do have EUR 5.9 billion –- EUR 5.8 billion, sorry, core money flowing in. But it's clearly indicating that the shift is happening and that the order trend is happening with a clear shift, first of all, more volumes; and secondly, lower shifts from current account, saving accounts to term deposits, which is indeed, going forward, an important message to bring.

Sidestep I would like to make that is, obviously, we are very aware of what is going to happen in the next quarter, in the month of September because in Belgium, the state note matures and that is clearly going to have an impact on our commercial approach going forward as well.

Let me shift to net fee and commission income, EUR 623 million is EUR 9 million more than previous quarter, that is 1% up and it is EUR 39 million more than previous year, that is 7% up, and that is driven by 2 things. First of all, the increase of the asset management services fee or the management fees as it is called. And second thing is the fees which are generated through banking services.

Let me start with the former. So the Asset Management Services increased significantly, and it is mainly driven by higher management fee. Entry fees, good news, there is margin went up, and it is driven by sales. The sales are compared with the record sales of the first quarter, and therefore, it's slightly down, but be aware, also in the second quarter we had a positive inflow of customer monies of EUR 0.7 billion, which brings the total for this year to EUR 2.6 billion.

I said last year when we had a record performance that something was quite extraordinary, albeit, almost at the same level in the first half of '24 compared to the absolute record of '23, EUR 2.8 billion versus EUR 2.6 billion. In that growth is also, once again, to be highlighted, the success of the regular investment plans, how it works. Well, out of that inflow in roughly EUR 0.4 billion is dedicated to the regular investment plans. In terms of the bank services, it's actually positive news on all the side. The payment fees were up, the network income was up, and the credit fees were up. There was slightly lower securities fees, which is mainly to do with the commercial activities in that perspective. And then traditionally, the higher distribution -- higher distribution fees on the banking products were partly offsetting this.

In terms of the insurance business, non-life up 8%, written premium 9%, earned premium with a good underwriting result of 87% combined ratio, which I think is indeed an absolute good number. Life insurance business at first glance, because the number clearly said, it's down 15% and 19% comparison year-on-quarter.

On the other hand, let me nuance that a little bit, this compared with an absolute top performance in quarter 1 of this year and quarter 2 of last year and both quarters were driven by explicit commercial campaigns on the unit-linked side, on the private banking side, and then the seasonality of the interest rate products is also not helping really the performance in this quarter.

But nevertheless, we had an excellent result in this quarter and to express that if you combine the first quarter and the second quarter this year, you compare it to the same half year or last quarter, then we have sold EUR 200 million more than last year. So in this perspective, also the life insurance sales side was doing very well in this quarter. For good understanding, the margin which we have on that product is further increasing CSM now stands at roughly 17%, 16.9% to be precise.

Financial instruments at fair value, well, positive evolution on the quarter, EUR 58 million up. And this is mainly driven by 2 things. First of all, a quite good performance on the dealing room side, but we compare it with an absolute top performance in the first quarter. The difference there is EUR 41 million. And we have on the derivatives side, a strong increase. So it's EUR 1 million positive, but you compare it with an absolute downer in the first quarter of '24, the difference is more than EUR 100 million.

Well, I can give you the full detail, but this is mainly driven by a couple of technical things like the ineffectiveness of our hedge accounting and also FX results of dividend payments upstream from Czech Republic. Both of them are explaining more than half of that detail. All other things have to do with interest rate option and interest rate swaps and the cash Brussels, I mean, the combination of the things I mentioned is EUR 80 million. So explaining the full detail on this matter.

Let me also give you a short notice on -- a short comment on net other income, EUR 51 million is perfectly in line with the historical average, which is roughly EUR 45 million to EUR 50 million. So this is perfectly aligned. So let me not waste any further time, but go to the cost side.

If you look at the cost side, very good performance. Costs are super, well, controlled in this quarter. If you compare it with the same period last year, then the costs are down 2%. I exclude for good understanding bank taxes. And if you compare it with the previous quarter, then it's up 1%, but seasonality in this perspective doesn't make it easy to compare quarter-on-quarter.

Now let me give you a bit more detail, the reason why the quarter -- why the evolution is what shares has to do with the fact that staff costs obviously are influenced by inflation, but that inflation is offset by -- or partly offset by the fact that we have been continuously monitoring our FTEs and have been bringing this down. Inflation is also impacting ICT costs and also there in that perspective, we do some mitigating actions.

And all in all, if you translate it, all those mitigating actions and the inflationary pressure, then you end up with the numbers which are there. There is an important comparison differentiating parameter year-on-year, and that is the impact of Ireland. Ireland was in 2023, also in the second quarter and is no longer, or to us, substantially lower extent in the second quarter, and that explains the big difference between year-on-year comparison. If you would exclude that, then the cost evolution would be flattish. Also there, we do see some impact of the FX position. But costs are well in control and this is also explained by the cost income ratio, which now stands at 42%, down compared to the 43% of last year.

On the bank taxes side, well, there are certainties in life, which means that bank taxes are constantly upward pressed. And also, we see this again. We had extra bank taxes in Slovakia, and we do have additional bank taxes in Hungary. As you may have noticed also that is Mr. -- or the government in Hungary has decided that there is an extra levy to come, that extra levy is potentially mitigated by the fact that banks can buy bonds to offset at least 50% or max 50% of that extra levy. While if we bring everything into account, then the potential impact of, first of all, the prolongation of existing tax. Secondly, the impact of the new levy is up to EUR 40 million before mitigation by buying bonds. So in this perspective, this is really the max number.

And last but not least, we had a decrease of the deposit guarantee scheme in Belgium because the lower number of deposits, which were in reality there in comparison with the reference, which was used by the Belgian government to calculate those taxes. That has resulted in a EUR 32 million of decrease of the taxes. Ultimately, at year-end, we do assume that we're going to pay roughly EUR 640 million of bank taxes, which are on the next page explained in a split up per country or per business unit.

Let me shift to impairments. Impairments are at a very low level. And if you compare it with the super low level of previous quarter, then it's slightly up. What we do see in the lending book is EUR 58 million of impairments, which is slightly up compared to previous quarter. And it has to do with 2 files, 2 corporate files in our foreign branches, which are totaling the 2 combined and so the split up is 50-50, EUR 29 million. So on our normal lending book, the vast increase is related to 2 files.

If you would look at the other remaining part of the lending book, we hardly see any impairments. And what is also very crucial, we don't see any major shift or any worth mentioning shift on the PD side of that lending book going forward. This also translated in an impaired loans ratio, which is 2.1%. If you use the EBA definition, it's 1.47%, which is clearly lower than the average of Europe, which is 1.9%.

Credit cost ratio, as I mentioned, stands at 10 basis points if you exclude the buffer. If you would include the buffer, it stands at 9 basis points. Now mentioning the buffer, we have an increase of our buffer of EUR 14 million. The ECL buffer now stands at -- sorry, the ECL geographical emerging risk buffer stands at EUR 237 million after that increase. Why increase? Well, that has to do with the usage of parameters, one of those parameters is inflation. You might know that in Belgium, despite the deflationary trend that was for this quarter, an uptick of inflation, and that uptick generated together with lowering the confidence of the consumers that triggered an extra increase of the buffer of EUR 50 million in Belgium.

We did apply the same model for other countries where we saw a release of buffer and the combined total is EUR 14 million upward. We expect this buffer to evolve as we speak in the next coming quarters. If you sum up all those bits and pieces and you look at the capital side, then our capital ratio stands at the end of the quarter at 15.1%, which is an excellent result. Now the increase of the buffer is mitigated because of the strong growth of the volumes. So given the fact that we have grown stronger than we indicated, we do see our risk-weighted assets, which are linked to our operational business. So linked to the growth of our lending book saw a stronger increase than what we guided.

Why is that? It's mainly because it's driven by growth in the corporate segment. And as you know, the corporate segment is heavier risk-weighted than, for instance, the retail segment, and that is translated at a stronger increase resulting in 15.1% capital ratio. In terms of the buffers, which you can see on the next page, we now have buffers on the OCR side of 4.2% and on the MDA side of 3.9% without using the optimization of [ CRD5 ] Article 104, KBC has not filled up all the buckets, definitely not on the AT1 side. Therefore, the remaining 35 basis points can be used as well.

In terms of the leverage ratio, we stand at 5.5%. And on the liquidity side, we have very solid buffers compared to the required levels of the authorities, 160% short-term cash management, 139% on the midterm cash management and the solvency side of the insurance standard 200 and a very solid 200%, which is double of the requirement of the authorities. The small decline has to do with some concentration risk. It's not even worth it to mention it, but it is still at a very high elevated level 200%, which brings me to the forward-looking part.

Well, there are 2 sides to the story. What about economic growth? And how does that impact our way going forward. We do expect that in the euro area growth will be, we will call it moderate or -- and that moderate growth will bring it ultimately to roughly a bit more than 1%. Also going forward, '25, '26, we think it will be in the same area, 1.21%, 1.3%. It depends a little bit where you are in Europe. If you're in Western Europe, it will be a little lower if we are in the Eastern and Central Europe, where obviously, for us, a big part of our activity is located. We speak about a bit higher growth levels, roughly 100 to 150 basis points higher.

On the inflationary side, despite the deflationary trend, we do see an inflation position, which is slightly above the required level of 2% of the central banks. We speak about 2.2%, 2.3%. So in that perspective, we do expect further rate cuts to happen going forward, starting in the Eurozone in September and further rate cuts in Czech Republic and Hungary, according to what they have been announcing earlier, we do see that trend evolving.

How do we translate that into our guidance? Well, given what I said also on the inflow of deposits, a couple of compensatory elements which could be there, amongst others, the competition. And I think that is the strongest element which we have to observe and that will be influencing where we ultimately are at the end of this year. We are putting our guidance now at EUR 5.5 billion ballpark compared to the previous guiding, which was saying floor 5.3 ceiling 5.5%.

So we go to the upside in this perspective. And we clearly also upgrade the 4% on the lending side. All other elements, we have chosen not to change them also because we are going into a planning process anyway going forward. And that is also indicating why we did not change the guidance on the longer term or the midterm. That's for 2 reasons. First of all, huge volatility on the forwards, which are obviously impacting the income side. And then secondly, also, in principle, only updated longer-term guidance once a year, and that is always on the back of a budget exercise, which now starts in September.

Potentially, one of your questions might be, what about the impact on risk-weighted assets giving Basel IV and the consequential postponement of the ever to be? Well, we will update those numbers in -- on the back of the third quarter results. So the announcement will be done on this matter in November, and then we will include all the elements I just highlighted for KBC, the [indiscernible] impact is hardly -- I mean, let me use the word negligible, so it is having very little impact.

I would keep it here. And I'm not going to go into the detail of the countries, but I will give back the floor to Kurt, which will guide us through your questions. Thank you very much.

[Kurt De Baenst, executive]

Thank you, Johan. I open the floor now 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] We will take the first question from the line of Benoit Petrarque from Kepler Cheuvreux.

[Benoit Petrarque, analyst]

Yes, I don't know if Luc is in the room, but I want to thank him for all the time and the very good answers, and it was a great pleasure to work with Luc. And yes, good luck with you in your challenge, obviously. So the first question is on net interest income. Yes, thanks for the upgrade for '24. I was just wondering, how you think about your more long-term NII guidance of at least 1.8%. It seems that, yes, the mix shift is looking a bit more positive now. Also, the pass-through rate after 2 quarters, things have been pretty stable. Also, kind of the outlook on the state note, I guess you get a bit of visibility on this as well. On the other side, obviously, the forward rate have been trending down very recently. I think you were expecting 2.5% ECB rate end of '24. So I wanted to get your view or your stance on this 1.8% -- at least 1.8% NII CAGR for '23, '26.

And the second question is on the cost guidance of less than 1.7%. I think you are doing extremely great on OpEx. So if I take OpEx ex bank tax and including insurance commission for H1, I think you are -- I think you are basically flat, EUR 2.3 billion roughly. So I appreciate that you expect always an orchestic effect in the fourth quarter, but it has to be a pretty brutal effect in the fourth quarter to get close to the upper end of your guidance. So Yes, I was wondering why you did not update the cost guidance at this stage. Do you expect something we don't know in terms of cost inflation in the second part of the year.

[Johan Thijs, executive]

Thank you very much Benoit for your questions. And I'm not sure who you want to answer your question. Is it me or is it only Luc? I am not sure. But let me start myself, and then Luc will give you the second part. Okay. For good understanding, in general, on guidance in general [Technical Difficulty] perspective, we didn't want to update the guidance because indeed, you're right, we could update every single guidance which we have given, both for the year '24 and for the year '25, '26. But as I said, this was intended not to be the policy. Why did we change the guidance for '24 on the net interest income side because it's so obvious that we will -- should significantly above and it's also quite crucial for -- going forward for what it means also for you guys to calculate what the impact might be.

Now let me come back to your first question on net interest income. On the CAGR, I mean, I think in your question, you already highlighted the crucial elements in this perspective. First of all, -- there's 2 elements which are constantly influencing the evolution of our net interest income that is -- I mean, the big influences that is volumes on one side and then obviously margin, so including pass-through.

In that perspective, if you look at volumes, well, in 2024, we had a big impact because of the September '23 state note, which took away a lot of volumes and has a negative impact on our volumes anyway in '24. We do expect -- so in September 5, the state note matures. And then obviously, everybody is preparing itself to try to get back the money, which were flowing out. In our case, there was EUR 5.7 billion. Also, KBC is prepared for bringing back as much as possible of that money. We already took some initiatives, as you might have picked up in the market, but we are clearly ready for bringing back as much as possible of that money. What it will be and how it will quote it. That is something that you will see going forward. We don't disclose the detail because that gives insight in our professional strategy-- sorry, in our commercial strategy going forward would not be wise.

But let me summarize it as follows. We try to get in as much of that volume as possible. But the impact on the net interest income in 2024 will be limited. It is different for years '25 and '26. There, the impact is significant. Now the second thing is -- and also there, your analysis was correct. The second element is the margin which we make. So the margin on our replicating portfolio on the one hand and then secondly, the margin which is influenced by a shift between current account savings accounts and term deposits as a matter of fact, how much money is passed through to our -- of that margin pass-through to our customers.

And also there, we see a change, at least at the end of the second quarter. It's quite clear that the shift between current accounts, saving accounts, and term deposits, let me translate it different, from high margin to a lower margin is changing. And it means that the evolution on our net interest income is becoming positive. That's one of the reason why commercial results commercial transformation result increased in the second quarter. And the biggest impact you start to see quarter 3, quarter 4 and then definitely going forward. In that perspective, the trend which we see in Central Europe in a sense, Czech Republic and Hungary is crucial. We have seen rate cuts very significantly in 2024 quarter 1 and 2, and that has translated itself in a shift on the customer side or a smaller shift from a customer side from term deposits even back to current accounts and certainly also saving accounts.

As a matter of fact, it has a positive impact on the margin. You will see the impact of that in quarter 2, 3, 4 and the following. We do expect rate cuts as of September in the Eurozone as well, and we will potentially see the same impact in the Eurozone on those shifts going forward. In fact, to be seen probably more in '25 than in '24. Last but not least, we used for calculation purposes the forwards of January. If you look at the forwards now, then they are more or less in line with what we have seen in January.

Now talking about forwards, they have been jumping up and down the last week. So things will change in that perspective. But as we have calculated what we have guided with forwards of January, we have more or less in line with what is now currently the forward going forward. So if you start combining all these things, volumes, margins shifts, then clearly, you could say we are easily getting that CAGR of 1.8%. Why didn't we adapt going forward in the long term because of what I said, budget reasons and the volatility on the forwards, we will do that exercise anyway and announced that in the course of the first quarter next year, traditionally, on the second element for 2024. There is one crucial element, which we don't have an answer on. And that is the reason why we remain a little bit conservative. That is what about competition given the state note and the consequences of that competition after the majority of the state note. Given that uncertainty, we feel comfortable with the 5.5 ballpark, and we definitely feel comfortable with the 1.8% CAGR, but we don't adapt the guidance.

[Luc Popelier, executive]

And on the cost side, I think, indeed, it looks flat half year on half year, but you cannot extrapolate that for the second half. And the main reason -- or one of the important reasons is Ireland. And because in Ireland, in the first half of '23, we still had about EUR 80 million of costs as we still have quite a lot of infrastructure and FT people on our payroll. This, of course, reduced quite heavily in the second half and also in the first half of this year. So there is this Irish effect you have to take out, and you cannot get that repeated in the second half. That's an important factor.

Secondly, typically, we increase wages across the group in April. So the effect of a wage increase, so it's not evenly distributed over the years. We have more effects in the second half of the year. And we should also add that currently, there is a catch-up effect in Central and Eastern Europe. The costs for wages in the last years, when inflation was high, was lower than inflation. But now we see the reverse that there is a catch-up effect because of tight labor markets. And the loss of purchasing power is now -- that I had in the last few years is being caught up by the market. So we have a higher effect than inflation, particularly Central and Eastern Europe, less so in Belgium.

Thirdly, that is a bit smaller. We also had very successful rollout of further Temenos modules in Hungary and Slovakia, which means that the depreciation of those assets started earlier than we thought. So that's actually success. But on the other hand, it doesn't mean depreciation starts earlier. And this is just a shift, of course, from [ '25 to '24 ]. But that will mainly affect the second half of '24. And of course, last but not least, you also have the 4th quarter year-end effect, where we always see there's a bit of a hockey stick. We try to avoid that, but we never succeed, as you know. So these are the elements as of the reasons why you should not keep the cost flat for the second half as well.

[Operator]

We will take the next question from Tarik El Mejjad from Bank of America.

[Tarik El Mejjad, analyst]

And I would like to wish good luck to Luc for the next career adventure. And thanks for the help for all this years taking KBC to where strong it is today as a whole team. I have also a couple of questions please. Thank you Johan for the very detailed explanations on the NII. I guess what you explained all for the '25 and above is what you had in mind, basically, given the assumptions in the beginning of the year? I mean, that all makes sense. And I think it comforts the guidance. I mean, back on '24, early this year, you were constructive on volume growth on -- on deposit margins, then you had the competition on deposits, which is sound now much more constructive on your ability to capture some of these deposits and at decent pricing and the volume growth, you upgraded the guidance. So is there still a chance that you go above 5.5% -- or given it's later in the year, that's the number, and then we should more look forward for '25 that could be like knock-on positive effect on that. So this is #1.

#2 is on the cost for Hungary banking tax of EUR 40 million in the second half this year. What about '25? Should we assume something around EUR 60 million to EUR 80 million? I just have some guidance there. And then on capital and Basel IV, why should we expect an update what is it related to? Because I thought that's the exercise you've done in early this year, gave us kind of the pattern in terms of RWA inflation. I understand as the [ FRTB ], but you commented and it's obvious for you, it's a very small number. So just to understand what kind of updates should we expect.

[Johan Thijs, executive]

Thanks, Tarik, for your question. Let me answer the -- sure, the first one. So I mean, we have all the components on the table. So you have the volume. I'm talking about '24 for good understanding. We have all the components on the table, the volumes and the margins. Margins are influenced by 2 things: The way we have replicated our portfolio. And as you know, we have shifted some of our shorter-term impacts to the longer-term impact, which will clearly benefit not in '24, and that is a negative impact, but it will have a positive impact on the net interest income of '25. So we locked in the higher rates for longer impacting negatively the short-term benefit in '24. And then the second thing is the shift between current accounts, saving account and term deposits, we have seen the -- in the month of June, which is the end of the third quarter -- sorry, at the end of the second quarter, we do have seen a trend shift in that perspective. Now the trend shift is mainly in Central Europe.

In Belgium, we have still seen a growth of term deposits, and that has to do with competition. So that is clearly a positive trend. We have seen the replicated portfolio yields increase also in the second quarter, and we will continue to see that going forward. The reason that we did not, and that we stick to the EUR 5.5 billion, which we're comfortable with, it isn't that we do not increase that, according to what you asked, EUR 5.6 billion is obvious. There is one big unknown and is what about competition.

On the volume side, I'm pretty sure that we will attract a significant amount of the state note. But what I cannot predict now in detail, that is what is going to be the position of our peers, our competitors going forward. Until now, the proposals, which we are today the 8th of August, the state note matures the 5th of September, so still a month ago. Until now, the proposals are perfectly in line and sound in terms of where the forwards are, where the rates are and so on and so forth. So this is perfectly in line. If we continue to have this sound behavior for the period to come, then the outcome will be more or less in line with what I said on the guidance for '24. If we start to behave unrational, giving away all margins, and we continue to do so, then -- so as a matter of fact, if it would be a real war on deposits, then it is better to be a bit conservative in terms of where we are with our guidance. And for that reason, we think 5.5% ballpark is the precise number.

In that perspective, I think the announcement of the third quarter results will give more detail because then we are at the end of the state note campaign, and we will clearly have insights where we are with the competition going forward. All the other staff, lending income and so on and so forth, I explained, we do expect that to be the same line as what we have seen in the first half of this year. We expect this to be more or less in the same perspective in the second part.

In terms of bank taxes in Hungary, I'll give the floor to Luc.

[Luc Popelier, executive]

Okay. Tarik, and also Benoit by the way, many thanks for those kind words, that is very much appreciated, and I will miss you all guys, I can tell you. But to give an answer on the EUR 40 million -- up to EUR 40 million extra bank tax in Hungary, for next years, actually, the -- up to EUR 40 million has 3 components. There is, first of all, an increase of the financial transaction levy, that will continue the next years. And well, the -- of course, a lot can still change, but we assume that it will still continue in the next years that the factional every increase will continue. There is an additional fee that has been introduced by the Hungarian government, which is a fee on the conversion of foreign exchange from Hungarian foreign to other currencies and visa versa a charge is being levied there. And that will normally also continue in the next years.

The third one -- the third part is an increase in the windfall tax. Now there is a particular element that is that the extra windfall tax can be offset to some extent, and that depends on the extra purchase of Hungarian government bonds. So if you buy more government bonds compared to last year, then a portion of that can offset the extra windfall tax. We've assumed already in the EUR 40 million that we have purchased extra bonds -- and the way we've done that means that for next year, we should be neutral, more or less for next year. So that means that there would be actually a reduction of the EUR 40 million. But of course, the details I cannot provide you at the moment.

Then the other one is on Basel IV, why we said that we updated in November, where we have updated the Basel IV impact in the third quarter of last year, and we just wanted to do that each year at the same time, plus it is just before Basel IV take full effect. So we want to give you a last overview of where we are at that point in time. But we do not expect there to be any material changes. Obviously, there will be changes because we will change the balance sheet on which we make the calculations. And because you saw that it is based on a static balance sheet last time. We will update the balance sheet. So there will be moving parts that will influence the numbers. And secondly, there's, of course, FRTB where you will have a shift to '26 from '25, and that will, of course, be a positive element. But again, this also will not be material for us.

[Operator]

We will take the next question from line Giulia Miotto from Morgan Stanley.

[Giulia Miotto, analyst]

Two for me as well. In terms of sensitivity, because, as you mentioned, the curve is moving around a lot. I believe last time you disclosed this, it was EUR 70 million for 25 basis points across curves. Is this sensitivity still valid? Would you update it? And any more color by currency, say, euro versus Czech koruna, for instance? And that's my first question.

And then secondly, I totally appreciate that the impairments, the EUR 58 million are related to sort of isolated files, but bankruptcies are ticking higher in Belgium. And so if you can give us some comments on whether you are seeing cost of risk pickup from here?

And then -- sorry, if I can squeeze in another one. And on Central Eastern Europe, investors sometimes worry that Czech Republic and Slovakia can be quite impacted by the slowdown in Germany, especially when it comes to corporate sentiment and investments and ultimately loan growth. What are you seeing on the ground on this theme? Thank you, Luc, from me as well. And all the best for the future.

[Luc Popelier, executive]

Thank you, Giulia. Yes. Okay. I will. Thank you very much also, Giulia, for these kind words. On the sensitivity, we've not given an update, but the reason is that, basically, even the curves move around all the time, the sensitivities have not fundamentally changed. So the last time we gave an update was EUR 70 million for a parallel shift in the curve of 25 basis points, for the full curve, and you had to take approximately 50-50 for the short-term, that means up to 1 year and 50% of that for the long-term. That has not fundamentally changed. It has decreased a little bit given, of course, that we have continued to lengthen our duration. But fundamentally, no big change.

And also for Czech Republic, sensitivity is about EUR 3 million, so 25 basis points, again a parallel shift of the short-term curve -- only the short-term curve. And that includes all effects, and it's a full year NII, full year versus last year.

On the bankruptcy, do you want to give…

[Johan Thijs, executive]

Yes.

[Luc Popelier, executive]

Okay. Johan will take the bankruptcy question.

[Johan Thijs, executive]

And then, Giulia, on the bankruptcies, well, indeed, in the Belgian newspaper was an article a couple of weeks ago indicating that we had an uptick of the number of bankruptcy, total was 5,800 now. And the first reaction, obviously, is how does that translate into the books of KBC.

Now, for good understanding, the nature of those bankruptcies, you need to reflect the comparison period. So we're comparing with a period just after COVID where, amongst others, there was a strong support from the government as elsewhere in Europe. And second thing is there was a period in Belgium where it was impossible to go bankrupt because there was a law saying that defaults were suspended for a certain period of time. So we're comparing apples and pears in this perspective. So this is purely the statistical explanation.

Now when I look into the books of KBC, in particular in Belgium, then we don't see those defaults materializing in our books at all. Also because a big chunk of those defaults are in a particular type of business where KBC is not involved at all. Amongst others, hotel, restaurants, cafe business, our exposure is quite limited, and a big chunk of the defaults, which were mentioned in newspapers were particularly related to those 3 sectors.

So I don't see this translated into our books. If I look at the PD migration, so individual by the PD migration 1, 2, 3, 4, and so on and so forth, we do hardly see any shift. And on the impends itself, I already mentioned that during the main call -- the main presentation that is also there, we don't see them popping up.

For good understanding, the Belgium files, where we did impairments on, in this quarter were files, which were on our radar already for a longer period, for several years. So in this perspective, it is not linked at all to the news article which we have seen.

And then what about the growth and the growth evolution going forward? How is this going to be translated, amongst others, to slowdown in Germany into our growth in the Central European area? We could split it up in different countries, for instance, in Czech Republic. Well, indeed, Germany has a slower growth as the rest of Europe. And in that perspective, this is nothing new. This is already the case with '24. We don't see that necessarily immediately translated into our Central European growth performance.

As a matter of fact, if we look at the current numbers, the actual numbers in terms of loan growth, we do see -- the Central European countries are a little bit different country by country. But anyway, in general, the countries in Central Europe are outperforming the growth levels, which we have seen in, let me call it, Western Europe, amongst others, and Belgium [indiscernible] the German side where, as you know, we are hardly active.

So in this perspective, we continue to see the trend -- we expect to continue to see the trend of the first half translated in the second half. And also going forward '25, we do expect similar things, but we give far more flavor on that in the course of the first quarter next year.

So in summary, we do not see it translated to slowdown of Germany in the first half of this year in our production in Central Europe. It's not that every country is the same. I make -- I'll give you a bit more flavor, Slovakia in that perspective is a bit slower than the other countries. We do not expect any change of that trend in the second half of this year.

[Luc Popelier, executive]

Perhaps to complement this, I think also for the longer -- the next few years, we don't think that German difficulties will have a big impact on Central and Eastern Europe. The reason is that we see clearly, first of all, the EU funds flowing into Central and Eastern Europe, and that is quite an important factor, that's more than 1 percentage point GDP per year for these countries. And that will continue. That is independent from Germany.

Secondly, we see also strong FDI inflows into Central and Eastern Europe, also independent from Germany. An example is the fact that there will be a nuclear plant built in Czech Republic, where that will be tens and tens of billions of euros that will be flowing into the country to build those, mostly with local labor and suppliers to a large extent. Secondly, an example is Hungary, which attracted factories from China to build electrical vehicles. So we see strong FDI inflow in those countries. And the convergence with Central and Eastern Europe towards Western European standards is continuing in our view, given the fact that there is still an important labor cost arbitrage, and they're still nearshoring towards those countries.

[Operator]

We will take the next question from the line of Raul Sinha from JPMorgan.

[Raul Sinha, analyst]

My best wishes to Luc as well. I've got one follow-up and then 2 questions, if I may. The follow-up is just on the EUR 3.6 billion inflow into current accounts. It sounds to me like this was mainly in Belgium, and it looks like it happened in June. I was just wondering whether you think this is linked to the rate cut. And is this sort of an inflection point in customer behavior in your view?

The second -- the 2 questions that I do have, unrelated, first one is on the reinvestment yields, which was positive in the second quarter. One of your peers commented yesterday that replicating portfolio is a slight drag for them on a mark-to-market basis at the current level of swap rates. My understanding is that your portfolio has got much lower or significantly low yielding swaps maturing. So I was just wondering if you could clarify for us that the reinvestment yield is still likely to be positive for you at the current level of swaps?

And if you don't mind, just my last question is on just the cost efficiency ratio at 42%, obviously well below your targets, but also obviously, much better than your peers. And my question is, are you looking at how much is -- of your, let's say, better performance on cost efficiency is down to some of the investments you have been early to make in the tech side on AI? You flagged 4.8 million customers are using Kate, 137,000 sales. This must be impacting your cost efficiency ratios positively. So I was just wondering if you've got a sense of how much advantage you have over other peers in terms of cost efficiency because of this?

[Johan Thijs, executive]

Thanks, Raul, for your question. So on the cost -- sorry, the cost inflow, the deposit inflow. Well, I mean, of course, Belgium is the country with the biggest of the highest welfare, and there, as a consequence, also the highest part of our portfolio in terms of deposits. But as a matter of fact, we have seen in, let's say it as follows: Stabilization of the inflows of deposits in month 4 and month 5, so in April and in May, and we haven't seen a slight uptick starting in May and significantly increasing in June. This is the pattern which we have seen. Second thing is, and that is on term deposits, that is [ shed ] back to current account or saving accounts, that is mainly Central Europe, Czech Republic, and Hungary.

Now in terms of inflows, well, we did see inflows indeed in Belgium, but we also saw inflows, in the same pattern as I just explained, in Czech Republic and in Hungary. Slovakia and Bulgaria in that perspective were flattish. So there was a small increase, but I mean, it's negligible.

Now, of course, when you look at the nominal numbers, Belgium is by far the biggest one. In terms of the contribution to the result, obviously, the euros, which come in in Belgium are far more significant than the Czech koruna and the Hungarian forint.

In terms of shifts, for good understanding, in Belgium, we had a further slight increase of our term deposits in the second quarter in Belgium as well. And that is due to competition that is to the way how we prepare for the state note going forward.

I'll give Luc the floor for the second part of that question.

[Luc Popelier, executive]

Yes. On the reinvestment yields, as you know, we have been -- we have quite a long duration on replication portfolio, both current accounts and saving account deposits, all for a while. And we've been increasing that duration the last, say, 2 years to anticipate a reduction in interest rates.

Secondly, we have invested our replication portfolio on a cyclical basis. That means that we invest on a 10-year, 9-year, 8-year, 7-year and so on, so all the buckets spread over a 10-year period. That means that, in our current government -- in our current bond portfolio, there are still a lot of bonds which date from a very low interest rate environment. That means that the average yield on the current portfolio, replication portfolio, is still well below the current rates. And that means that the positive headwind -- tailwinds will continue for quite a while in each quarter as well -- each quarter, a little bit up for many quarters to come and many years to come even.

So that's the second answer. And you take the third answer, Johan.

[Johan Thijs, executive]

Yes. Indeed -- so indeed, Raul, your analysis is correct. So we have indeed a very favorable position in our cost income side. And cost income is 2 levers, the cost side and then income. If we focus only on the cost side, then indeed, the evolution of our cost side, which is very positive also if you compare it with certain of our peers, is driven amongst others by -- to a big extent by the investments which we have been doing in the past in terms of artificial intelligence. And clearly, that is extrapolated or that is expressed most in the uses of our service bot.

But as I always said, and that's sometimes not well captured, most people think that the investments which we are doing on the AI side are translated into Kate as a front-end tool. Well, the reality is a bit different. Of course, it has an impact on the front-end side. But we have always, from day 1, invested in the integration of Kate into the operational activities of KBC Group. There's a particular slide in our pack that's in there for many, many quarters. Kurt is diving into the pack to find the precise number. But the reality is that, because we implemented the artificial intelligence tool in the entire organization, driving the operational processes in a, what we call, straightforward way, that means that if Kate is doing something for a customer, then no human being is interfering. So it means efficiency gains, the economy of scale is 100%. Well, that way of working has been the way of working of AI application in KBC Group since day 1. And that translates into productivity gains depending a little bit on the country between 1% and 1.5% on average, so CAGR. So -- and that means very significant cost savings.

We can express that in numbers of FTEs and so on and so forth. We have decided not to disclose those numbers in detail because we want to have more and more evidence of the way of working of Kate and the impact on our operations. To give you -- I will lift on tip of the veil. We, at least -- and this is on a very super conservative way -- estimated Kate has a positive impact on our FTEs of at least 200 FTEs per month translated differently. She does easily the work of 200 FTEs in Belgium. If I would slightly change the assumptions which are underlying, we can easily increase that number with 100 FTEs.

Now, the same is true on the commercial side. I already referred to the main presentation that Kate is generating 137,000 sales without the intervention of human beings. And that is also impacting the cost income ratio, but then on the income side.

The slide I was referring to were the integration of Kate in the operational processes of KBC is explained is on Page 47. It's called the Kate brain, and that translates in full what I just said, but then in a graphic way.

[Operator]

We will take the next question from the line of Samuel Moran-Smyth from Barclays.

[Samuel Moran-Smyth, analyst]

So I've got 2 questions, both on the competitive landscape in Belgium and your pricing. So firstly, on Belgian mortgages, slight pickup during the quarter, but the growth level is still well below historical. I'm just wondering if you could give some color on how much of that is the difficult environment for loan demand in Belgium. Also, how much of that is you choosing not to originate given the low spread that you print on Slide 25, I think it appears to be around 40 bps in Q2?

[Johan Thijs, executive]

Sam, can I interrupt you?

[Samuel Moran-Smyth, analyst]

Yes, of course.

[Johan Thijs, executive]

There's a very poor quality of the line. We can hardly understand what you're saying. Could you -- I mean, I don't know how come, give it a try, please.

[Samuel Moran-Smyth, analyst]

Yes. So I won't repeat all of that. But of course, thank you to Luc, and good luck. So I had 2 questions on the competitive landscape in Belgium. Hopefully, my line is a bit better. So firstly, on Belgium mortgages, there's a slight pickup here in the quarter. Growth level is still below historical. I'm just wondering if you could give some color on how much of that's driven by difficult loan demand environment in Belgium, but also how much of it is driven by your own decision given the spreads you're printing on Slide 25 appear to be around 40 bps in Q2. So are you also choosing not to originate given those spreads?

And then on deposit pricing, I appreciate you can't be kind of too specific with forward-looking statements, but we've seen some of your smaller peers in the Czech Republic track rates down with close to an 80% pass-through, to be much more limited for CSOB, albeit starting from a lower base. Just wondering if we should apply that dynamic to Belgium, i.e., would you expect challenger banks in Belgium to track ECB deposit rates down much quicker than KBC would?

And then as a small follow-up, should we think about the main driver for your deposit pricing is the central bank rate or the yield on your replicating portfolio?

[Johan Thijs, executive]

So thank you, Sam, for repeating the question. We understood indeed better what you were asking. So let me come -- let me answer your first one. So indeed, there is a strong competition going on in Belgium on the mortgages, and there has been a general decline of the demand of our customers. It has been triggered by a couple of elements, which go back in time, amongst others, the fiscal -- sorry, the tax incentives, which were historically there in Belgium has been -- have been reviewed. In Belgium, a bit more than -- what is it, well, 8, 9 months ago, and that has had a negative impact on the whole market in terms of the production of new mortgages.

Now what is important is that -- and you also made reference to the margin, which is linked to that. Now what is important to understand that is, in the total offer of mortgages in Belgium, KBC has maintained or slightly increased even its market share. So our market share is roughly 1.6% up compared to our historical average, which means that we hold our ground in that market.

And in terms of margins, how we think about margin, I think it's quite crucial to have a solid margin. And you made a reference to roughly 40 basis points. We don't disclose the precise number, but indeed, in the booklet or in the presentation, that is the detail per quarter. So in that perspective, we are in line with what is market standards. And yes, as you have seen, the market standard brought the margin down.

But the pickup, which you have seen is only a slight correction on what the production was, let me say, something 2 years ago. For good understanding, we were perfectly in line, even a little bit better than what we anticipated at the beginning of the year in terms of our budget. So we are perfectly in line.

[Luc Popelier, executive]

On the deposit pricing, perhaps, yes, we don't think that -- well, challenger banks, we don't know what -- how they are going to react. Are they going to react the same way as in Czech Republic or not, that is very difficult to predict. This is an entirely different market here. What we do keep an eye on is how our large competitors react to that. Also, we have no insight into their commercial actions. But over time, we think that the big banks will also track the -- well, track down the ECB rates over the next few years.

Now, the extent and the timing of that, that is a big unknown, of course. So we'll need to constantly monitor the markets in that respect. The -- for us, the ECB rate is, as you know, less important. We look at the reinvestment yields of our replication portfolio. And as you know, replication portfolio yields are further increasing quarter-by-quarter and also year-by-year. So that means that if rates would stay the same here that our margin improves. If the rates would come down, tracking the further cuts in ECB rates, then the margin would even further widen. So that was an extra leverage.

I should make a caveat, and that is, given what Johan said about the potential -- the heightened competition around state notes that there is always a risk that interest rates on savings accounts can increase. As a matter of fact, in our guidance, we have taken into account that we have to increase, to some extent, the saving account rate.

And next year depends on where the ultimate, let's say, the equilibrium ECB rates will end up. That will determine whether further interest rate increases could be possible next year. As you know, the pass-through in Belgium is relatively low compared to other countries. So we also need to watch what will happen next year in terms of rates -- potential rate increases on savings accounts next year.

[Operator]

We will take the next question from line Chris Hallam from Goldman Sachs.

[Chris Hallam, analyst]

First and foremost, good luck, Luc. And I hope you must have a bit of a break over the next 3 weeks before the move. So first, another sort of follow-up on deposit mix, Slide 7 showing the drop in term deposits in Q2. And I guess, you talked, a lot of that is Czech Republic, where head loan rates on term deposit products have been becoming less attractive as rates come down. So should we think about that as how you'd like the playbook to look for Belgium over the next 18 months? So in September, you're going to see an inflow into term products with the State Notes. Those will mature, let's say, by September next year, at which point the ECB policy rate will be significantly lower, the term offerings won't be so attractive and the maturing money -- term money moves into [ cold ]. Is that how we should think about how you would like to manage your deposit mix in Belgium over the next 1.5 years in the context of falling policy rates in the maturing State Note?

And then secondly, it's a bit of a clarification just on capital planning. You've said, obviously, again, that you're going to review the surplus capital threshold in the first half of 2025. Several of your peers are going to see higher-than-expected quarter 1 capital ratios in early 2025 due to the delay in FRTB, like the [indiscernible]. So when you calibrate your new capital ratio target in early 2025, do you expect to pro forma the peer group ratios for that dynamic?

[Luc Popelier, executive]

Okay. I will take the first question. So I think, indeed, what you're saying is a perfect reasoning. We also think that if rates of ECB are cut substantially enough, and at the moment, we think that is the case, at least in our assumptions, that there will be less appetite for our clients to enter into term deposits, locking it up for 6 months or a year, and then prefer to keep the liquidity on the savings account in the first instance. So that certainly will be something that could offset potential increase in savings account rates that I mentioned before. So it's an interplay between how much pass-through do you give on savings accounts, making it more attractive versus how many -- if you don't, how many are going to switch from term deposit savings counts anyway. We think that last will be predominant -- will prevail. So there will be a positive effect next year, we believe.

[Johan Thijs, executive]

And then, Chris, on your second question on capital. Well, yes, indeed, we are going to update where we will be with our threshold with the 15%, and that will happen indeed in the first half of next year.

In terms of the update on November which we're going to give on the risk-weighted assets, that's a different purpose, that is give complete transparency to the market where we are in terms of the impact of Basel IV. We already highlighted that. Now we have a new element that is the postponement of FRTB with 12 months. But as I said, it is hardly going to -- I mean, it's not going to have a significant impact on us.

So intrinsically, that FRTB postponement or the whole analysis around Basel IV as a consequence is one driver, but FRTB is not going to influence that, or the postponement of FRTB is not going to influence our position in terms of when and how we will deal with the threshold. So more information on that will be given, as I said, in the course of the first half of 2025. So no changes there.

[Chris Hallam, analyst]

And Johan, just to follow up on that second point. I think what you said before is the surplus capital threshold, at least part of the sort of input to that decision is where your peers are in terms of capital ratios. And so what I meant by the question was not necessarily FRTB for KBC, but if a certain number of your peers have a higher-than-usual CET1 ratio just because of the delay, I guess the peer group average has to be normalized, right, in early 2025 for the fact that they have an artificially high CET1 ratio for a period of time for 12 months. So I'm just trying to see whether or not you've kind of take into account the fact that another bank may have a slightly higher capital ratio than you previously expected because of their own FRTB delays.

[Johan Thijs, executive]

Yes. Indeed, I mean, your analysis is fully correct. So indeed, 2 elements. First of all, we take into account our peers. And in that perspective, we will observe, and that's one of the reasons why we do it in the first half of a year, so that we have better insights where our peers are, not only on the actual numbers, but also in terms of what their policies are on capital distribution. Now, the second element, and you are spot on, obviously, is going to influence where they are with their risk-weighted assets and asset constituted with the capital ratio. So we also take that information into account as well.

And let me say something else. We will also take into account the fact that Basel IV is fading in over a longer period, for instance, the impact of the floors, and we're speaking about -- to the tail of that range, 23 -- ultimately, 2032 will have a potential impact. Well, giving the time delay between today and 2032 or 2033, ultimately, there's a lot of water going to flow through this [indiscernible] before that happens, and it means also that there can be a lot of mitigating actions taken. So we will position ourselves also on the question, what are you going to do with the tail when you take into account your capital position.

So the answer to your follow-up or your clarification on your second question is, indeed, you're right, we will take into account peers, and we will take into account specific circumstances of the Basel IV directive.

[Operator]

We will take the next question from line Kiri Vijayarajah from HSBC.

[Kirishanthan Vijayarajah, analyst]

Firstly, best wishes from side as well to Luc on the next role. Yes, so a couple of questions remaining. So just -- firstly, the uptick on the volume growth target from 3% to 4%. Obviously, the momentum in the first half is already consistent with that. But could you just elaborate a bit more on where we should be a bit more optimistic in terms of our growth -- volume growth assumptions? It sounds like the big Belgian mortgage book is still a bit subdued given the margin outlook. So where is the acceleration, if you like, going to come from versus your previous thinking?

And then on the deposit inflows, you've given us a lot of detail on the various moving parts. So thanks for that clarity. But conceptually, given the volatility we've seen in the last couple of quarters, in terms of the deposit flows across the different buckets, I'm wondering, do you need to be a bit more cautious in allowing a lower proportion of those deposits to flow into the reinvestment portfolio? I know you're talking about increasing duration. But commensurately, are you also holding a bit more as kind of overnight cash just because of all these larger movements than you've historically seen in the various buckets of your deposit base? How should we think about that, please?

[Johan Thijs, executive]

Thanks for your questions, Kiri. Let me take quickly the first one. So in essence, the uptick of the volume growth is throughout the book, throughout the entire portfolio, throughout the entire group. As I said, all countries are a little bit different, and we do see obviously, also given the size of the book, a bit percentage -- relatively speaking percentage-wise, a bit stronger growth in Central Europe. But the growth uptick, so the fact that -- or the trigger, which allowed us to upgrade from 3% to 4%, is not specifically linked to one country, but it is linked to the performance in the entire group. And then it's also linked clearly to the growth in the corporate book, whereas the mortgage book is more on line with what you have seen and that detail is by the way also provided in the pack.

[Luc Popelier, executive]

On the dynamics with the inflows in deposits in the different countries, you're right. What we typically do when we see large inflows, we typically want to first analyze how stable those deposits are. So that means that in first instance, we keep them on a short-term basis, which, of course, in a reverse yield curve, which has positive impact. And depending on the stability analysis that we have pursued, we then lengthen the duration of that part, partly, so investing in longer-term bonds, also on a cyclical basis as I explained before. So yes, there is an effect of that in the third quarter.

[Operator]

We will take the next question from line Guillaume Tiberghien from BNP Paribas.

[Guillaume Tiberghien, analyst]

Good luck to Luc. So the 2 questions are: #1, on the cost, the bank tax. Obviously, in Belgium, you've had a release of EUR 32 million, which I guess is partly coming from the money you lost from the government bond. So is the starting point for next year the EUR 317 million of Q1 rather than the EUR 285 million of H1? And similarly, just to clarify on the Hungarian one, you mentioned the plus 40, and then you said it's neutral for next year. So does it mean minus 40 compared with this year or flat compared with this year? So that's on bank tax.

The second question is on the cost of risk. Can you remind us exactly what you do in the foreign branches outside of Belgium? Because every time there seems to be an accident in terms of cost of risk, that seems to be driven by 1 or 2 large files in those branches. So if you could sort of explain what you do and what's the outlook for that.

[Luc Popelier, executive]

So I'll take the question on the bank taxes. And so the first question on the bank taxes, should we take the full year or the current one? Of course, it's yes, the current one. You're absolutely right. So it will be lower by that amount that you mentioned.

As for Hungary, what I meant about EUR 40 million, it's up to EUR 40 million depending on how much bonds we can extra -- we can buy extra in the market. But suppose we do not buy any extra bonds, there are 3 components that I mentioned, 2 components relate first to the financial transaction level, which has been increased. That will continue. So it will be at that level. The second one is the FX conversion fee for -- if any FX conversion that happens with clients, again, a new fee has to be paid. It will also continue. So there will not be a reduction next year on the contrary, depending on the activity volumes and we could assume that there will be more activity next year. That will actually slightly increase.

On the last aspect of windfall tax, there, we think that can be neutralized. That means that it will be going down, yes. And that is, well, quite a substantial amount of the EUR 40 million.

[Johan Thijs, executive]

[Technical Difficulty] I did not switch on my microphone. Sorry for that, Guillaume. So on the cost of risk, so let me nuance a little bit your question. You said it's each and every time the foreign branches, this is fortunately not the case. So in this instance or in this quarter, indeed, we had, by coincidence, 2 files, which were related, the 2 biggest ones, EUR 29 million out of the EUR 58 million, were linked to those foreign branches.

But how -- what is our policy and how does it work? Well, in essence, the foreign branches are doing business for customers, which have activities in our core countries. In this perspective, one of the files -- I don't know. Are we allowed to -- no. We are not allowed to mention the name, sorry. But one of -- I mean, the 2 files, we're having activities in our core countries, Belgium, Czech Republic, and so on and so forth. And the mothership of that company is then located in one of our neighboring countries. And for that reason, it is linked to the foreign branches. But it always starts from also credit and credit demand in the local countries.

Now, each and every quarter, definitely not the case in previous quarters, it was always -- the files were always, in essence, in one of our core countries. And let me repeat what I said. We are still at historic low levels in terms of cost of risk.

[Luc Popelier, executive]

And maybe I can add that with, we had the same question, obviously, both at the [ group exco ] and the Board to see whether this was something happening more in foreign branches. We did an analysis, not recently, but we did an analysis, and we could not see any material differences in credit costs between Belgium and the foreign branches.

But obviously, it happens that -- it sometimes happens that these accidents happen in foreign branches because we do have a lot of foreign entities, which do business in Belgium. And therefore, as a portion of the foreign branch portfolio, one failure has a big impact in the foreign branch compared to Belgium, which has a much wider and diversified portfolio.

Perhaps, one thing on the bank tax in Hungary, we just had a short discussion, and we're going to disclose broadly that about 50% of the EUR 40 million is due to windfall tax and the other half, more or less half, is due to the extra financial transaction levy and the foreign exchange conversion fee. So that was it.

[Operator]

We will take the next question from the line of Hugh Moorhead from Berenberg.

[Hugh Moorhead, analyst]

Best of luck to Luc in his next role. Just one on -- another one on loan growth, please. You spoke quite positively at the last quarter on your Belgium and corporate lending pipeline. Are you still feeling very positive about that? And, yes, any additional updates? So you welcome this?

And then secondly, on Czech NII, do you still guide for it to be at least flat year-on-year? Or might we see sort of -- or might you upgrade that guidance a little bit? What do you see as the key risks there, I guess, for NII to be only flat year-on-year, assuming constant currency effects?

[Johan Thijs, executive]

Thanks, Hugh, for your questions. Let me take the first one. So the reason why we upgraded the growth level, 3% to 4% at least, has to do with the fact that, indeed, you can see the evolution in the book throughout the group. And that means, amongst others, the corporate lending activities in Belgium have a good outlook, so as -- I'll use your wording -- the pipeline in that perspective is positive. Also, let's be aware, the dynamics of growth -- because we always make comparison quarter-on-quarter and year-on-year -- the dynamics in that perspective are very important.

If I look specifically at Belgium, last year, fourth quarter, we had an extremely strong quarter. And therefore, we had a little bit of a subdued first quarter this year. That is, as normal, the traditional fallout. So what we do see is, second quarter was very strong. We continue to see a very well-filled pipeline. So therefore, we start -- we continue to see a continued strong growth in this year. And for that reason, I mentioned already the year-to-date production numbers in total group, 2.48%, and let's be careful making comparison quarter-to-quarter, in the fourth quarter, we'll make for Belgium, specifically, comparison with an extremely strong quarter. So even if the number looks a little bit -- statistically a little bit low, this is still a strong performance. So short answer to your question. And corporate lending pipeline is filled in all countries, including Belgium.

[Luc Popelier, executive]

And on the Czech NII. Given that we see improvement even in the loan growth and margin development to some extent as well, and then what we see on the deposit side, which shifts back to current accounts, savings accounts [indiscernible], I'm getting a little bit more bullish in the fact that I wouldn't say flattish, but perhaps slightly up. To what extent, I cannot tell you at the moment, but needs to look at further [indiscernible] in the next quarter, but slightly up probably compared to last year.

[Operator]

We will take the last question from the line of Anke Reingen from RBC.

[Anke Reingen, analyst]

Apologies. I hope you can hear me now. All the best to Luc, and thank you so much. Two simple questions, please. The first is on the spreads and front book spreads in Belgium again. Do you think with rates coming down, there is an opportunity for those spreads to increase? And is the higher spread in SME and corporate loans in Belgium in Q2 an indicator of this?

And then secondly -- sorry to come back on the large files provisioning. Do you think there's sort of like potentially more of these legacy cases now coming through? Or do you think the pressure will be coming off now as rates are coming down? And how quickly would you actually see a deterioration in the asset quality? Does it take like a half year for the accounts to come in? Or would it be much quicker unless, obviously, someone doesn't pay?

[Johan Thijs, executive]

On the spreads of front book, we see continuous competitive pressures. So yes, we were hopeful that spread -- that the decrease in rates would give some room for margin improvement. We do see that here and there in Central and Eastern Europe. For Belgium, I would be more cautious about this aspect because we feel there's still a lot of competition, particularly on mortgages, on the corporate and SME book that is more short-term fixation periods, where it's more a spread business than a pure yield -- absolute yield business. There, we think margins will be more or less stable. But I'm not too optimistic about that tailwind.

[Luc Popelier, executive]

And then, Anke, on your second question about the impairments and mainly on the larger files. So first of all, the -- it's a bit unfortunate I could not mention the name because, otherwise, it would give immediate answer to your question, but we can't disclose the names. But let me answer as follows. No, there is no big pipeline of legacy files. Very straightforward, there is not.

The last, indeed, 2 or 3 bigger impairments, which we have had also in previous quarter, were linked to files, which were well known. That is indeed correct. And therefore, perhaps it gives you the sentiment that is all linked to the legacy book and that is all linked to files which have been on the radar screen for, let me say, something 5 years. This is definitely true for at least 3 files, which we have mentioned in this year. But it is definitely not the case for the remainder of the portfolio. So we don't have a set of legacy files, which are potentially boiling up in the quarters to come.

So in essence, as a matter of fact, we feel super comfortable with our guidance. There's no big surprise. And given the fact that we don't see any shifts or significant shifts at our PD classes, there is no expectation whatsoever that this would be different for the existing book and there are not a whole bunch of legacy cases, which might change that picture.

[Operator]

It appears no further question. I'll hand it back over to your host for closing remarks.

[Kurt De Baenst, executive]

Thank you very much for the interesting questions. This sums it up for this call. I would like to thank you for your attendance. And enjoy the rest of the day. Cheers.

[Operator]

Thank you for joining today's call. You may now disconnect.