KBC Groep NV

XBRU:KBC

Earnings Call Transcript 2020-Q3

[Operator]

Good day, everyone, and welcome to the KBC Group Earnings Release Q3 2020 hosted by Kurt De Baenst. [Operator Instructions] I would like to advise all party, the conference is being recorded. And now I'd like to hand over to Kurt.

[Kurt De Baenst, General Manager, Investor Relations]

Good morning, ladies and gentlemen. And on behalf of KBC Group, a very warm welcome. Today is Thursday, November 12, and you're listening to the conference call of KBC's third quarter results. As usual, we have our group CEO, Johan Thijs; as well as our group CFO, Rik Scheerlinck, with us. And they will both elaborate on the results and add some additional insights. As such, it's my pleasure to give the floor to our CEO, Johan Thijs, who will quickly run you through the presentation.

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

Thank you, Kurt. And also from my side, a warm welcome on the disclosure of the third quarter results for KBC Group. And I will take you to the slides. And as always, we start with the key takeaways, which start with the presentation of an excellent result, almost EUR 700 million, to be precise, EUR 697 million in this third quarter. Now the reason for this excellent result is obviously driven by the fact that KBC has been -- or that the engine has been firing on all its cylinders. So we have a very strong performance on the commercial side on both the bank and the insurance activities. We have seen our customer loans and customer deposits increasing year-on-year. We have seen our interest income in very difficult circumstances, but the low interest rate environment has seen continuous growth. And we have seen strong interest -- net interest margins. We had a slightly higher net fee commission, also showing and translated into net sales in the third quarter, which is quite exceptional when I compare that with the previous 2 years, '18 and '19. We have an excellent result on the insurance company. And once again, the confirmation that the diversification effect of the bank-insurance model of KBC Group is paying off again. We have done what we promised, namely working on strict cost management, and that has translated in a further decrease of our cost side with 3.7%. The loan impairments are also perfectly in line with the guidance which we have given. Actually, they're pretty much better. And the consequence of all those bits and pieces summed up together is translated in a very strong capital ratio and liquidity ratio. Therefore, in summary, I could say this is an excellent quarter with a return on equity of 15% on a very elevated capital level. Let's not forget that. So 15% on a 16.6% capital position is indeed not too bad. Let me go through the details on the different topics and, as usual, we start with the one-offs. So it is only one important one-off to mention, that is we have booked EUR 26 million on the net interest income side for a correction on the booking of inflation-linked bonds in the insurance company. All the rest remains intact. We have about [ EUR 4 million or EUR 6 million ] one-off on the tracker mortgage activity or the tracker mortgage pack in Ireland. EUR 4 million out of the EUR 6 million are related to the tracker mortgage fine of EUR 18 million, of which we already had booked EUR 14 million in the past. As I already said, the bank-insurance activity is indeed a diversifying factor in difficult times. The insurance company always stands solid and that, therefore, mitigates the impact of the, for instance, interest rate environment on the banking side. This has also translated into a 22% contribution on the result via the insurance company, and that is mainly contributed by the non-life insurance company. Let me go to Page 9, which is explaining the net interest income. So let me start with the good news. The good news is that the net interest income has increased with EUR 39 million, which is about 4% quarter-on-quarter, which is indeed quite good given circumstances. The low interest rate environment kicks in massively on our transformation results. Obviously, all those reinvestments are done at extremely low levels now, and that is having a significant impact. But that is mitigated by the TLTRO III, which is contributing EUR 26 million quarter-on-quarter. And as I already mentioned, the 26 [indiscernible] of that -- what was that? The EUR 26 million which was the one-off item on the insurance side, NII. The good news is indeed that we have produced more loans, both on the mortgage side and on the commercial side and that we have brought those loans at higher margins. Definitely, also on the mortgage book, we have now margins in Belgium, Czech Republic and Slovakia which are higher than the back book, and which are indeed substantially higher than what they were, for instance, 1 year ago. In total, we have a growth on the quarter of 1% of our loan book, 4% year-on-year. And on mortgage side, it's even more impressive, we have a growth of 2% on the quarter-on-quarter comparison, 6% on the year-on-year comparison. That brings also the total that the lending book continues or the net interest income generated through the lending book continues to increase. It's EUR 16 million more than the same period last year. In terms of the ALM FX swaps, also there, we have seen a higher net positive impact of about EUR 9 million, offsetting the transformation result, as I said, which is obviously heavily influenced by the Czech National Bank. As a matter of fact, in terms of net interest margins, all the net interest margins are increasing in all countries, except Czech National -- the Czech Republic, where the impact of the Czech National Bank rate cuts, obviously, has a tremendous negative impact on the net interest margin and the net interest income which is generated in the Czech Republic. I will switch now to Page 10 to go to the next contribution of the -- important contribution to the P&L, that is the fee and commission business. The fee and commission business is EUR 2 million up compared to previous quarter. And that is mainly translated to an evolution on the asset management side. That is translated in actually 2 things. We had slightly higher -- slightly is an understatement, EUR 12 million higher management fees. This is generated through positive sales, net sales, and that is also good news, but also to a higher net management fee -- relative management fee. It was up 4 basis points compared to previous quarter. In terms of the other contributors to that fee and commission block, that is the banking services, we have seen, obviously, in the previous quarter's impact because of the COVID crisis, the, what we call, banking services can be broken up in several parts. For instance, the payment business, the credit fee business, securities business and, what we call, network income that is a business generated to, for instance, the sale of FX positions and so on and so forth. Those 4 building blocks have been behaving now differently compared to previous quarter, whereas the previous quarter was hit big time by the COVID lockdown, has a negative impact, for instance, on the payment business. Now we see that our payment business has got a strong increase, EUR 10 million more than previous quarter, which is indeed token of a renewed economic dimension or a renewed economic dynamic. That EUR 10 million is -- increase is offset by a EUR 9 million decrease in our securities business. Now the reason why this is minus EUR 9 million compared to the quarter is that the second quarter, as was the first quarter, were record quarters in terms of contributions of KBC securities to this point. So actually, the performance of KBC securities in the third quarter was good, but was not exceptional, where it was exceptional in the second quarter. In terms of network income, FX business and [ also for ] EUR 2 million-plus payment business. I just mentioned EUR 10 million plus credit business is flat compared to previous quarter, which was already characterized by a very strong performance on the lending side, both in Belgium and in the other countries, mainly also in the mortgage business. Also in the mortgage business, Belgium was increasing significantly its production translated into higher fees. In terms of the assets under management, we do see -- I'm sorry, I forgot to mention one thing. The reason why we had a little bit of decline here on the fee and commission business is because of the success of the insurance company, which has translated into higher distribution costs, so commissions paid to our agents. And that distribution cost increased with EUR 5 million, and therefore, has a negative impact on the fee and commission business. In terms of the assets under management, they were slightly up. They were now totaling 2-point -- sorry, EUR 204 billion, which is EUR 2 billion more than previous quarter, mainly driven by a price effect. But let me repeat again, the third quarter has been characterized by net inflows. It's not a lot, but at least it's positive. It's EUR 24 million positive. And just to give you a comparison, in principle, in 2018 and 2019, the pattern was quite straightforward. We had a strong inflow net sales in the first quarter; second, third and fourth quarter, a decline. And this is now not the case in 2020. We had a strong inflow in the first quarter, a record inflow, to be honest. And we had the big impact of the COVID lockdown in the second quarter. But we have now, for the first time in 3 years, a positive contribution on the sales of mutual fund business. Enough for the asset management business, now go in -- let's go into the other diversification factor, and that is the insurance business. Again, the insurance business has been doing quite well. We have a growth of 2% year-on-year. You can consider this to be disappointing if you compare with the overall average of the last couple of years, where we had a growth of 6% to 7%. There is a but. The but is this number is a year-on-year comparison, and it's obviously impacted by the COVID crisis because of the lockdown. A lot of investments have been postponed. A lot of premiums have been suspended. And as a consequence, you do see that translated into the premium growth. Straightforward, it's about EUR 30 million, which has been cut out of that growth because of suspension of premiums on workmen's compensation and on general third-party liability, which is in essence the contracts for the exploitation of firms in the countries where we are present. If you would exclude that one, then we would be back to the level of 6%, 7% growth, which is the growth of normal times. What is also very crucial to mention is that the combined ratio stands at 83%, which is indeed very low, and which is, again, a reflection of 2 things: the good quality of the underlying portfolio; and the second thing, the impact of the COVID crisis in the second quarter. Because of the lockdown, obviously, less traffic, less accidents, a good combined ratio. But what we have seen in the third quarter is that traffic was there again as it was in normal times, but the combined ratio in the third quarter was -- stood at 84%. So it was remaining rock solid, and it is at a very low level, historical level, which is translating into an 83% year-to-date combined ratio. In terms of the life sales, Page 12, we see the decline of the Class 23 business. The Class 23 was boosted in the second quarter. So let's be careful by interpreting this result. It now came down significantly, more than 30%. But this is due to the exceptional high sales of unit-linked business, which was linked to an action in the second quarter. I mentioned that at the time of the second quarter announcement. This has not repeated itself. But also just to give you an idea, the quarter results, EUR 205 million unit-linked business is 27% better than the same period of last year. So comparison in this perspective gives you a completely different picture if you compare it with the previous quarter or with the previous year. Overall, the life insurance business, obviously, is hampered by the low interest rate environment on the interest-guaranteed products and the taxes which are raised on these products on the unit-linked side in Belgium. Switching to financial instruments at fair value gives us a normal result of EUR 85 million. You know that this line on the P&L is always very volatile. The volatility has been, of course, big time impacted by the COVID crisis and the volatility on the financial markets. In the third quarter, we had an EUR 85 million result, which is almost EUR 170 million lower than previous quarter. This is mainly triggered by a decline on our dealing room income. Let's repeat again that the dealing room income was stellar in the second quarter. It is now, let's say, a bit lower than normal. But with EUR 107 million, it explains the vast majority of the difference between the second and the third quarter. On the other side, we have the funding value adjustment coming down EUR 49 million in the quarter. This is mainly due to the decreasing counterparty credit spread and the KBC funding spread, offsetting the lower interest rate environment. On the equity side, we realized less surplus value on our equity instruments, minus EUR 18 million quarter-on-quarter. Let's state it as follows. It's a very normal quarter or a little bit below a normal quarter. The run rate is, let's say, around EUR 25 million. In this perspective, EUR 13 million is indeed a little bit lower. The net other income, again, stands at EUR 37 million, is quite in line with the normal run rate. We do have a normal run rate of about EUR 45 million to EUR 50 million. Where does the difference come from? We have 2 one-offs. First of all, we had a one-off in 2020 second quarter of around EUR 10 million because of sale of a couple of things, real estate bonds totaling EUR 10 million, whereas we had a -- that was a positive one-off. Whereas we had a negative one-off of EUR 6 million related to the tracker mortgage discussions in Ireland. EUR 2 million were related to additional bookings and EUR 4 million were related to the tracker mortgage fine of a bit more than EUR 18 million. So the underlying business, the autolease company, the assistance company, real estate company actually is perfectly on the level of the previous years. What about the cost? Page 14. Well, very good news to bring, we have our -- we maintained our cost control very tight. We have lowered substantially our cost in the second quarter and we continue to do so in the third quarter as well. Year-to-year -- sorry, year-on-year, 9 months, we do have a cost decrease of EUR 3.7 million, which is about EUR 105 million in total, and that's quite a significant number. In terms of the expenses in the third quarter, explicitly, it's always a little bit up because of seasonal effect. You have a little bit more marketing costs, a little bit higher facility expenses on support. But compared to the very low level of 2020 second quarter, the third quarter is only 3% up, and that is quite remarkable given circumstances. It now brings the cost income ratio to 59% year-to-date when you spread out a couple of things in a uniform manner over the year and you take into account certain specific aspects. But the 59% is including the bank taxes. And if we exclude those bank taxes, then we would stand at between 50% and 51%, which is indeed, given circumstances, very good. The bank taxes, yes, there are certainties in life, they continue to increase. Whereas our cost decrease with 3.7%, the bank taxes go up 3%, and they will normally end at EUR 504 million in 2020, which is a lot of money. It's 12.2% of our operating expenses, and that's indeed a whopping number. In terms of asset impairments, we are at, indeed, very low level. We have explained in the second quarter what our expectation was regarding the COVID impact. That COVID impact was booked into the second quarter, and that is now -- and we also said at that time that for quarter 3, quarter 4, if we would not go into a full lockdown, which is not the case, we would have normal impairments, we would have no additional impairments COVID-related. And this is indeed crystallizing in this quarter. We have EUR 52 million of impairments, net impairment, and those impairments are related to, let's call it, normal files. This is quite low. We stand now at 17 basis points for the non-COVID-related impairments, which is indeed substantially lower than the long-term average over 20 years, which stands at 42 basis points at KBC Group. 17 basis points is indeed a good number. If you add to that the collective COVID-19-related impairments, totaling EUR 746 million booked in the second quarter, then our credit cost ratio stands at 61 basis points. It compares to the 64 basis points of previous quarter. And in that perspective is indeed very good. That 61% has translated into 59% -- sorry, 59 basis points in Belgium; 64 in Czech Republic; Slovakia, 53; Hungry, 89; Bulgaria, 81; and Ireland, 94 basis points. In terms of the impaired loans, also there, we see a further improvement, it now stands at 3.2%. If we reduce the EBA definition, then we are below the European average. We do have that impairment loans ratio, 1.8% for the loans 90 days past due, which is indeed another improvement compared to previous quarter. Now in terms of the COVID-related impairments, I did not mention too much about it because we have a specific chapter which is translated in the Pages 18 and following. I'm not going to go through the detail of each and every country. For the interested reader, we are having a lot of detail explained on Pages 18 and 19, and we're currently in the stage that certain countries are renegotiating or are reviewing the support measures because of the second COVID outbreak. Belgium is one of those countries. As it stands today, nothing is concrete yet, but negotiations are ongoing. And then as of Pages 20 and following, we are giving you the detail what we have done in the second quarter and how we deal with that in the third quarter given the fact that we have reviewed, amongst others, a couple of economic parameters. Now on Page 20, you see the evolution of the payment holidays and the guarantee schemes, government guarantee schemes, which are COVID-related. So KBC has, on the total book, according to the EBA definitions, a EUR 13.7 billion of payment holidays granted, which is 9% of the total loan book. Now let me remind you that we have a very specific situation because of Hungary, where you know that the payment holidays were an opt-out formula. It was imposed by the government. But as a client, you could choose to not use it. If we would leave Hungary out, then we would have 8% of our loan book which is indeed enjoying a payment holiday. Now out of that EUR 13.7 billion, in the meanwhile, EUR 1 billion has already expired. So EUR 1 billion of moratoria has already expired. And so net, at the end of the quarter, we had EUR 12.7 billion. The big question is, of course, what happens with those loans which are indeed expiring in their moratoria? Are they resuming their redemption? Well, the answer is straightforward yes. The vast majority of customers which were under that moratoria and which have indeed expired, resumed their redemption, actually fast means 97% plus. So that's indeed good news. In terms of the different building blocks, the situation is not in every country the same. In Belgium, it's even more extreme, 99.5% resumed payments. And Ireland is a bit less because their moratoria were granted also already to loans which were in forbearance already. In terms of the COVID-19 guarantee schemes which were used to support customers, we give you an overview at the bottom of the page. We have granted EUR 583 million of those loans under the, let's say, the last 2 quarters. And that EUR 503 million is now under review because of what I just said, potential reviews by governments of the measures to support the second wave of the lockdown. Now what is important as well is that we have updated our economic parameters. And those economic parameters, which are described on Pages 21 and 22, have obviously an impact on the calculation of our management overlay. In essence, we still have 3 scenarios. This is also linked to the obligations of IFRS 9. You need to have 3 scenarios. Therefore, we maintain our 3 scenarios. We get the scenarios base, and pessimistic the highest value, 45%, 40%, respectively. And what is important to know is that the base case scenario is the scenario which we are still having currently. So the situation, the real-life situation of today, where we had a lockdown in April, March, we had a relief of the lockdown. We have a second flare-up -- let's call it differently, we have the second wave with partial lockdowns nowadays, that is part of our base case scenario. It only shifts into a pessimistic scenario where, when the current situation of partial lockdowns would be translated into full lockdowns actually to put the economy on a lock, as we have seen it in March and April of this year. This is not the case yet. And therefore, the pessimistic scenario is not the scenario to be applied. So what we do expect is the same as what I explained in the second quarter. You have a steady recovery as of the third quarter, which indeed happened. And then you will have a little bit of a slowdown because of the current partial lockdowns and the activity will be back on track compared to pre-COVID levels by the end of 2023. So this is translated into our numbers. You see the detail. I'm not going to dwell upon the detail of all those individual elements, which are on Pages 21 and 22. The main driver here is that we reviewed upward the GDP growth for 2020. It goes from 9.6% minus to minus 8.3%. And as a mechanical consequence, we have then reviewed, lowered the 2021 GDP growth. Now how does that translate itself into the management overlay? Well, we did some calculations. And those calculations are described on Pages 23 and 24. Those pages are reflecting the impact of that whole portfolio. So the whole outstanding loan portfolio is EUR 179 billion. That portfolio is split up, as you can see in the table of Page 23, in retail, SME and corporates. And also, we give you the staging of that portfolio described at the bottom of the same page. Now what is important to know, that in the third quarter, we did not see at all any deterioration on the staging side. So it has been remained quite stable. Obviously, we have -- I mean we have now the current second negotiations ongoing on perhaps prolongation of moratoria in several countries, we'll see. But as it stands today, we have 0 impact of COVID on the staging of our portfolios. We see no PD migrations yet. Definitely, we do not see any PD migrations which are linked to the COVID's crisis yet. So this is then translated into a recalculation of the management overlay, and you know the methodology was described in detail in the second quarter announcement. It is exactly the same way. We split it up in sectors. We had a little bit -- we are taking a bit of conservatism extra into account. So the positive element of the economic parameters upgrade is mitigated by the extra conservatism, which we put in for certain sectors. And that means we have shifted about EUR 2 billion of loans from a medium risk to a high risk, defining a certain conservatism, as you are used to from KBC. As a consequence, the management overlay improved a little bit. It's about EUR 5 million, of which EUR 3 million is linked to the ECL models and EUR 2 million is linked to the management overlay. But as I said, we put in a bit more conservatism for the high-risk sectors. So in essence, the management overlay remains constant, and it means also that the guidance which we have given for the full year impairments, including the collective COVID-19 impairments, remains intact and stands at EUR 1.1 billion for 2020. In the case, in the event that if we would go to a full lockdown, so the economy as a whole goes into a lock as we have seen in the second quarter, then we go into a pessimistic scenario. But also there, we do confirm our earlier guidance of EUR 1.6 billion, which is not the case yet. What I explained is on the sectors and on Pages 25 and in detail on Pages 26, where you have the split up over the countries. But I suggest that I skip that and I will move to the next pages, where we start to explain the performance of the business units. So actually, all countries have been contributing now to the positivity to the result, and that means that the business unit international market is a strong runner-up. And in that context is also contributing more than EUR 125 million to the result. All the detail is provided to you on Pages 28 and following. But for the sake of time and to leave the floor for question, I suggest to immediately switch to the -- to Page, what is it, 50, where we have the explanation of our capital position. And the capital position is standing rock solid. It is standing at 16.6% before inclusion of the profit. So before the profit recognition under IFRS, we do not take into account the transitionary measures, which is 56 basis points. And so we only take into account about 2 basis points which are related to the software allocation. But 16.6% is the strong capital ratio as it stands at the end of the third quarter. The obvious question, of course, is what would it be if we would include the profit recognition, let's do that on a pro forma basis. Then the 16.6% would go up to 17.5%. For good understanding, the software deduction only -- which stands at 21 basis points is only going to be taken into account in quarter 4, it is not included in this number. So 16.6% capital ratio. It is similar as the previous quarter. What we have done is, despite the fact that I just said that we don't see major PD migrations at all, we have put in an add-on, you can call it a buffer, for anticipated PD migrations in the periods to come because we think that defaults will happen anyway in quarter 4 or perhaps quarter 1 next year. For that reason, we have put in an add-on of EUR 1 billion of risk-weighted assets for the anticipations of PD migrations still to come. If we would exclude that conservatism, the capital ratio would have stood at 16.72%. In terms of the comparison with our overall capital requirements or our maximum distributable amount, it is indeed substantially higher. They stand at, respectively, 10.45% and 10.69%. So KBC has a significant buffer to weather the storm or to distribute dividends to its shareholders, which we are a real supporter of. And we would -- we are looking forward to the decision of the ECB, which allows at least for well-capitalized banks, which have buffer substantially higher than the MDA, to distribute capital to their shareholders. In terms of the total capital ratio, Page 51, stands works solid at 19.8%. This is obviously a conclusion, which is a continuation of what I just said on the CET1 ratio. The same is true for the leverage ratio, stands at 5.9%. This is impacted, obviously, by the TLTRO. And then last but not least, the solvency ratio of the insurance company stands at the same level as last quarter, 196%. This is including a dividend upstream, full dividend upstream on the insurance company. If we would not be allowed to do so, then the solvency ratio would come at 215 basis points. So 215%. 215 basis points would be extremely low. 215%. In terms of the liquidity ratios, I mean, they stay very solid as well. As you know, we took some -- we did some interventions on our liquidity side in the beginning of the COVID crisis. And therefore, our buffers now are at 146% and 142%, superior obviously, to the regulatory requirement. But now with a substantial buffer that is obviously triggered by the way how we are funding the company and the inclusion of TLTRO III. In this perspective, I will end with Page 55, which is indicating the way forward. I mean, we have a couple of things, which are indeed very strong, and it also allows us to say that given the strong growth of our loan book, given the strong margins of our loan book and also taking into account as a compensating factor or a rounding factor the EUR 26 million of one-off, which we got, that we are confident to stress our guidance one level higher. That is EUR 4.5 billion ballpark for the full year 2020. We reiterate our guidance on the OpEx, so that is a decline of 3.5%. And we reiterate our guidance on the impairments going forward. And then last but not least, we do have seen that the COVID has got a bigger impact on the digital front. Customers are now absorbing massively digital applications. This is also true at KBC level. And this has translated itself into the way we deal with our customers, the way they -- how they buy products and it's something which we think is going to be sustainable going forward. And in that perspective, we think that digital side of our bank-insurance activity will become more important even going forward. How this will be dealt in detail will be explained this afternoon when we have a special session on the guidance for the digital environment, the business model and also the nonfinancial targets which are related to that. I would like to keep it here, and all the rest of the documentation are a little bit more detail or a little bit more side information, but I will leave the floor open for question. And therefore, I give it back to Kurt De Baenst.

[Kurt De Baenst, General Manager, Investor Relations]

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

[Operator]

[Operator Instructions] The first question is from Stefan Nedialkov.

[Stefan Rosenov Nedialkov, Director]

It's Stefan from Citi. 2 questions on my end. When it comes to fees, obviously, a tiny bit of improvement on 2Q. Very far from the record levels of 1Q of this year. Looking into 4Q and 2021, I know that you don't give specific guidance on fees, but can you just qualitatively describe to us what do you see as opportunities and challenges? So that we get a better idea of potential development on the fee side. And my second question is on M&A. Again, you probably cannot comment on specific situations, but can you update us on where your M&A buffer currently is at? I believe it was 150 basis points last time. You did anything meaningful? And how are you thinking about capital distribution in the form of dividends and buybacks versus M&A right now?

[Hendrik Scheerlinck, CFO & Executive Director]

Thank you for your questions, Stefan. On the fees and the evolution of the fees, you said it right, we don't give any guidance, but to give you some color on how we see the quality of the fees and the evolution that we've seen in the third quarter. So to start with the security-related -- sorry, with the banking-related fees, payment fees should remain in line with what we have seen. Year-over-year, payment fees are down about 10%. There's 2 reasons for that: first of all, the payment behavior as a result of COVID-19; and then you may remember that on a quarterly basis, we have about EUR 5 million less in payment fees as a result of the SEPA regulations. Securities fees, as Johan commented, were down mostly because of institutional brokerage and retail brokerage. Typically, that would pick up again in the fourth quarter. And then on the asset management side, Johan already commented that we feel good with the increase that we've seen in the fees, and that has to do with the structure. So if you look at the composition of our funds, so we are moving more into fixed income and in equity. When we look quarter-over-quarter, fixed income increased from 37% to 49%. On the equity side, we increased from 24% to 27%. And cash flows reduced from 39% to 24%. And that is the reason for the increase in management fees, as Johan commented, and we feel good about that as well. Again, for next year, we cannot give any guidance yet.

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

Thank you, Stefan, for your question. On M&A, your analysis is indeed correct. We do have a buffer of 150 basis points -- sorry, an M&A buffer for 150 basis points, which is indeed foreseen for acquisitions. And perhaps, yes, you know that we are in the last stage of the OTP Slovakia deal. We are looking into, indeed, some other smaller files. And also to anticipate a further question perhaps later on, we are looking into the assets which currently are on the market from the Aegon side. So in that perspective, we do have indeed a buffer of 150 basis points. And how is that related to dividend? In principle, we are going to update you in more detail what we are going to do with our capital deployment plan on the back of the second quarter results. The reason why we only do that in February is, not surprisingly, the fact that normally the ECB is going to take a decision or get more clarity on dividend distribution after their meeting after the end of December. We do give you an insight in what our long-term targets will be. And we will give you, as a consequence there, also the insights in our capital deployment and our capital deployment plans. To already anticipate in that perspective some thoughts, KBC is indeed having a substantial buffer above the MDA level. Even if you take out that M&A buffer, which I just talked about, then still the buffer is very significant. We are talking about more than 3.5% -- sorry, more than 4.5%. That means that we are indeed inclined to pay dividend over the year 2019 and over the year 2020, if allowed by the ECB, that's for sure. And which format, share buyback or dividend, super dividend, whatever, that's something which is going to be decided, obviously, by the Board and the SGM. And that's something which we will elaborate upon further in the year. So February 2021, on the back of the fourth quarter results, we'll give you full detail.

[Operator]

Our next question is from Benoit Petrarque of Kepler Cheuvreux.

[Benoit Petrarque, Head of Benelux Equity Research]

2 questions on my side. So the first one was on the net interest income in Belgium. If you strip out the TLTRO benefit, you see a drag of roughly EUR 30 million in the quarter. Looking at the rate curve, which has been going down since March, how much drag, quarterly drag, do you expect from low interest rates on the Belgium NII, please? And then the second one was on the non-mortgage lending book in Belgium, also keep in mind that this is [ critical ] for the TLTRO benefit. I was looking at the move between Q1, Q3 ex mortgages of the loan book and it's down 2.7% according to my calculation. So just wanted to know a bit where you stand versus this TLTRO recognition, whether you are comfortable you will be making the positive loan growth?

[Hendrik Scheerlinck, CFO & Executive Director]

Yes. Thank you, Benoit, for your question. On the NII in Belgium, indeed, it is correct that in the numbers that you see, we have included the TLTRO III. it is an element, of course, of doing the business. And that's an element that we have to take into account. What are the underlying movements? Why are we confident about the further evolution of NII in Belgium? And that has to do with what Johan said. Very good production, mostly on the mortgage side. But not only on the mortgage side, also SME lending. And then on the Belgium territory, also on the corporate banking, we are good -- doing some good progress on the international branches there, the exposure is coming down somewhat. And as Johan mentioned, we are writing these mortgages at substantially higher levels of what we have done last year. And at substantially higher levels of what is coming off the books and better than the back book. On the level of the TLTRO III, we feel comfortable. We monitor that, of course, on a monthly basis. And we feel comfortable that by June of next year, we will be meeting the targets that the ECB has set to be able to take advantage of the minus 100 basis points.

[Benoit Petrarque, Head of Benelux Equity Research]

And just maybe specifically on this -- the drag from low rates. You are running at about EUR 30 million in the quarter in Belgium in terms of drag. Is that a run rate for the future? Or is that -- will that accelerate? Will that be a bit less? I mean, just to get -- try to get a feeling about the drag you get from the low interest rates going forward.

[Hendrik Scheerlinck, CFO & Executive Director]

Yes. So basically, what you cannot do is extrapolate what we've seen on the foreign branches. So that is -- what we have seen is in the second quarter, we had a drawdown and the end first quarter drawdown on the sort of working capital lines that came down. It depends on what economies they're active in. So basically, the reduction that you've seen in the third quarter cannot be extrapolated in the future.

[Operator]

Our next question is from Robin van den Broek of Mediobanca.

[Robin van den Broek, Research Analyst]

Johan, I'm sorry to come back on capital return. But I think you introduced a capital framework where you promised to return capital above the reference capital position, which currently stands at 15.5%. I think if you do a roll forward to Q4, assuming no dividends, you'll be well above 18% with the software intangibles coming through and some insurance remittances coming through as well. Your remark earlier to the first questions, does that mean that your policy might change? Or is it still your intention to live up to that policy? And second to that, you've based your capital reference position on the median of a peer group. And I was just wondering if you could give some thoughts whether that still makes sense given what has happened on capital last year. And second question would be your corporate loan book. I mean, the QE program is obviously putting a lot of pressure on credit spreads, making it more interesting for corporates to look for funding in the bond market. As you just showed in your presentation, you still have roughly 40% of corporate exposure in the loan book. Do you see any risk of that translating to weaker growth for you? Or if not, then how come?

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

Thank you, Robin, for your questions. Let me tackle the first one on the capital return. So for good understanding, our dividend policy has not changed yet. And just for the sake of completeness, the dividend policy indicates that we are going to pay out at least 50% of our profit. And we do that normally via an interim dividend of EUR 1 per share in November. And that the surplus capital, which is above our own reference capital position, indeed, 15.5%, that is considered to be surplus capital. And if we cannot make the surplus capital work, we should distribute it back to shareholders. That has not changed at all. So in that perspective, we are, for 2020, going to indeed execute that policy. In terms of the intention where you're referring to, well, that is precisely the new capital plan as of next year. And that is what we are going to announce in February next year. I would love to give you the personal idea of myself or my colleague CFO, but I'm actually stealing the thunder, first of all, of the February session; and secondly, I have still a board meeting, which is going to confirm those ideas, upcoming in December. And in that perspective, I do refrain from commenting further on the intentions. But the dividend policy, as it was, is still valid. And I just explained that in detail.

[Hendrik Scheerlinck, CFO & Executive Director]

And then, Robin, on the corporate loan book. So if you look at the volumes, year-over-year volumes have been increasing by EUR 5.6 billion. Of that, EUR 3.7 billion was an increase in volumes on the mortgage side. So then it's fair to say that about EUR 1.8 billion is a growth of the loan book that we've seen on the SME and corporate side. As you know, we are active in markets where there are not so many multinational activities. So if you look at the composition of our loan book of our borrowers, they're mostly mid-caps and small caps. And we see that for those type of entities, bank financing remains an important element. For the bigger ones, I agree with you, they look at the capacity and the possibilities on the bond market. But also there, there is mostly the bridge financing and the corporate revolver loans that are still being put in place on the banking side. So we feel comfortable that the evolution of the loan book in corporates will remain in line of what we expected.

[Robin van den Broek, Research Analyst]

Could you just give a breakdown of what part of your corporate segment is towards the larger multinationals?

[Hendrik Scheerlinck, CFO & Executive Director]

I'm afraid that we don't provide that kind of details, Robin.

[Operator]

Next question is Farquhar Murray.

[Farquhar Charles Murray, Partner, Insurance and Banks]

Just 2 questions from me. Firstly, on negative deposit rates in Belgium. We've had the first movement in that direction by a competitor. Quite rightly, you can't express anything with regards to intentions, and I do appreciate it's sensitive. But I did wonder if you could run through what you see as the pros and cons of negative deposit rates as I think I would previously have regarded them as quite unlikely given you can charge elsewhere. And then secondly, on the loan loss provisioning, you explained earlier that the economic parameters were positive and that you've offset that through increased conservatism within the overlay. Could you possibly quantify the sizes of the positive and the negatives there? So -- or in effect to decompose what -- how you've arrived at the number you've got for the quarter?

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

Thank you, Farquhar, for your questions. Rik and I were just fighting who is going to take 1 or the 2 of them. So on the negative deposit rate, yes, indeed, we do see in [indiscernible] because you refer specifically to Belgium, we see within the Belgium market, a couple of companies, which indeed is referring to the negative deposit rates. As you know, also KBC, already for its SMEs and corporates, has applied that negative deposit rates to a certain extent. The certain extent is the euphemism for client relationship. That means that we do have, indeed, in Belgium, at the end of September, already close to 4 billion accounts -- sorry, totaling EUR 4 billion deposits on accounts which have been negatively rated. In the meanwhile, if we are applying that as well in certain other countries of our group. And if you sum up the bits and pieces, then we will end up by the end of September at EUR 4.8 billion group-wide. So the -- I think the specific thing you're referring to is that, recently, we saw in Belgium certain companies indicating that they would -- might trigger negative deposit rates, also not only to SMEs and corporate, but also to private individuals as of a certain level. We will see how that market evolves. What I can say is that, indeed, the low interest rate environment, which is going to last for far longer than we all anticipated, has a substantial negative impact. And one day, we have to reconsider that negative impact for all the deposits on accounts. And that depends obviously on the client relationship, that depends on competition, that depends on reputational issues, which are linked to that. But the number which I just mentioned, the EUR 4.8 billion at group level, end of September, is in the meanwhile already surpassed.

[Hendrik Scheerlinck, CFO & Executive Director]

And then on your second question, Farquhar, you will appreciate that this is a quite complicated exercise that we do, with a lot of moving parts and a lot of elements. As Johan said, the improvement of the macroeconomics elements played a role, specifically in Ireland, where it had an impact on the house price index. For the other countries, the impact was actually way more limited to the country. Actually in the Czech Republic, we had an offsetting factor, you had an improvement of the macroeconomic forecast for this year, 2020, but then a slower growth in 2021. And on Slide 26, you see, as a result of that, that actually in the Czech Republic, we have increased the management overlay somewhat. When we were looking at the high-risk sectors, and I'm on Slide 25, we revisited that, and we are redoing that again on every quarter. And there were a number of sectors where in the second quarter we were not too sure whether we were going to put them in medium or high. Now that we are 3 months later, so we became a little bit more conservative there. Mentioned here, I would say the biggest deltas are in building and construction, especially nonresidential construction. There, we decided to move that into the high-risk category. We did not see a lot of reason to do that on the retail side, given the [ Boeing ] housing markets and the good pricing at which this can be done. And then the other big increase, I would say, would be on the retirement homes, specifically in Belgium. Given the situation that we see in retirement homes, we decided also to add it to the high-risk category. And again, these are all moving parts. We're talking about a few million here and there. But what is important is the overall picture, that we kept the overlay at the level of the first quarter and only was reduced by EUR 5 million.

[Operator]

Next question is from Albert Ploegh, ING Bank.

[Albert Ploegh, Research Analyst]

Yes, sir. It's Albert Ploegh from ING. I have actually 2. One is on the software intangibles that was referred to earlier as well. I think you guided for something like around 22 basis points, to be included in Q4 as an uplift. Is it still the same? Or is it maybe changed a little bit? And yes, what should we be aware of in terms of other changes that may come still in the fourth quarter of 2021 on models, for example? Or is everything, yes, stable as we speak? And then the second part of the question is on the insurance side. Your combined ratio is very strong. Looking at Q4, is there anything we should take into account now that there's somewhat kind of semi-lockdown, I guess, is still very favorable for household and motor insurance, but maybe a bit less for some pockets as well like disability, for example. But I guess the trends are probably as good, if not even more favorable than the second -- sorry, than this -- than the third quarter. And the final question on the insurance side as well, on the dividend upstream. Yes, is it basically correct to assume something like a EUR 300 million dividend in the fourth quarter coming out of insurance operations that have already been reserved in a way?

[Hendrik Scheerlinck, CFO & Executive Director]

Thank you, Albert. On the intangibles, you see that on our Slide 81, so you're at the end of the pack. So for prudi valued software now also given the fact that we have the EBA guideline on that or the position paper, that is now at 21 basis points. The other elements that you mentioned or indeed a number of our peers are still getting TRIM letters in and getting new definition of the default in. We already took the full risk-weighted assets inflation for the new definition of default in the second quarter. And for the TRIM exercises, we have now 3 of the 4 TRIMs where we have the final letter. And for that, we had already taken provisions last year. And there is only 1 TRIM still outstanding, where we only expect that to come in the first or the second quarter of next year, that is global financial institutions. But we have already provided EUR 500 million in risk-weighted assets for that. And that is actually in line or 25% higher than the net result of the TRIMs that we had on mortgages, on SMEs and on corporates in Belgium.

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

Thank you, Albert, for your second question. I am not 100% sure, because of the quality of the line, that we understood fully your question. But let me answer what I think we understood. So regarding the insurance results and the potential impact of the second lockdown, in essence, it's not going to be the same as what we have seen in the first quarter. So quality-wise, I think the second lockdown, which was a full lockdown, having a significant impact on the economy. Let's not forget a lot of companies were closed. A lot of -- as a consequence, a lot of traffic was excluded from the road. Companies closed means workmen's compensation premiums do not come in and so on and so forth, this is not the case now. So we do not expect a significant impact, as we have seen in the second quarter in the third or -- in the fourth quarter to come. So in that perspective, everything relies to the normal performance of the insurance company, which is, as you know, quite stellar. So we do not expect further deterioration of premium growth nor do we expect a deterioration of -- significant deterioration of the claims ratio. And as a consequence, the combined ratio. So in principle, I think third quarter is a good guidance for the fourth quarter as well, set aside windstorms and satellites.Then on the dividend, yes, you're right. So the insurance company has not upstreamed its dividend yet. It remains the intention to fully upstream the dividend of the insurance company to the group. This is not the case yet. You referred to EUR 300 million, which is indeed the Belgian GAAP number, more or less. And in that perspective, indeed the EUR 300 million is something which is in the pipeline. Everything is related to, obviously, also decisions of our supervisors. In this case, the Belgium National Bank is the supervising entity. The KBC was requesting dividend upstreaming already last year, and the National Bank followed. I don't know what they're going to do this year. But let me emphasize one thing. In essence, the KBC insurance company is part of the group. The capital is upstreamed to the holding. As such, the capital doesn't leave the group. So if there would be a ban on the insurance company, intrinsically, it does not necessarily play for the for the insurance company in our case.

[Operator]

Next question is from Kiri Vijayarajah of HSBC.

[Kirishanthan Vijayarajah, Analyst]

So firstly, can I come back on the higher distribution fees on insurance [ product ] this quarter. So I'm just wondering, how do you reconcile that with the comments you made about much greater use of digital channels during COVID? Because presumably, you should be getting lower distribution costs, not higher given that change in the channel mix. So some color there would be useful. And then on the Czech Republic, Slide 38, you've got your mortgages in the Czech Republic growing at 6%, I see. And then the total loan book growing at only 2 %. So I'm calculating that the non-mortgage book seems to be shrinking. So what's driving that? And presumably, from a mix effect perspective, having lower SME and lower unsecured consumer loans relative to mortgages is going to be bad for margins in the Czech Republic going forward. So is that a fair assumption? Those are my 2 questions.

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

Thanks, Kiri, for your questions. Let me do the first one on the distribution costs. Be aware that on the insurance activities, the majority of distribution is still via the traditional channels being tied agents and being multi agent as it is called in Central Europe. We are talking about digital distribution, also max, 10%, 15% depending on the type of product. But for instance, one of the main drivers is MTPL and comprehensive cover on the motor business. There, the digital sale is rather limited. That's one thing. And the second thing is, until further notice, the distribution cost for a digital sale and for a, let's call it, an analog sale, the traditional sale, is the same because we do not apply dual pricing in this matter. So the price level remains the same. The distribution cost shifts from one pocket to the other in case of a digital sale.

[Hendrik Scheerlinck, CFO & Executive Director]

And on your question for the Czech Republic, Kiri, you're right when you explained that in euro, that you've seen a further depreciation of the Czech koruna in the third quarter. And when we look at volumes, we take the rate at the end of the quarter. For the volumes, if I look at the underlying business, and I look at that in Czech koruna, we have seen the increase in mortgage loans. We have seen an increase in consumer loans. We have seen an increase in SME loans. And only on the corporate side, we had a very slight decline between third -- the third -- sorry, the second and the third quarter. So again, underlying, in koruna, the growth that we were anticipating in the beginning of the year, 4% to 5% is a growth that we have been seeing this year.

[Operator]

The next question is from Raul Sinha of JPMorgan.

[Raul Sinha, Analyst]

I've got actually 2 follow-ups and then a broader question, which you might want to delay for later. In terms of the follow-up, firstly, on the insurance dividend. I was just trying to understand your comments in the context of what we've seen with some of the other Belgian insurers, especially around the payment of 2019 dividends. And I was wondering if there might be a situation where if the ECB bank on dividend was to be extended, whether -- and let's say insurers were still allowed to pay dividends and banks were prevented from paying dividends, whether it might be theoretically possible for you to pay a dividend out of the insurance company to shareholders? The second follow-up is on Czech NII. Obviously, quite a lot of moving parts. You've talked about very strong market growth, just in response to the last question. And obviously, the rate cut has sort of washed through. I was wondering if you think we are sort of reaching the bottom on Czech NII, given the very strong loan growth and the pricing trends there?And then the broader question, sorry, is just on Ireland. One of the other foreign banks in Ireland, they're obviously reviewing it presence in Ireland. And if I look at the profitability and the fit of Ireland within overall KBC Group, I sort of struggle. It feels like a legacy presence to me. So I'm just wondering whether or not you are also looking to reevaluate, at least strategically, the footprint in Ireland?

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

So thanks, Raul, for your questions. Let me do one and -- one of your follow-up questions and the new one in Ireland. So on the insurance dividend, so let's start from your question where you assume there will be an ECB ban on dividends for 2020 again. So in principle, in theory, the decision on the dividend upstreaming for the insurance company and on the banking side are two separate decisions. So the National Bank Belgium is going to take a position on the insurance company, where they are the supervising authority. Whereas the ECB is going to take a decision on the banking side. That's how it works according to, let's say, the rules, any PowerPoint presentation. In reality, I don't know if it works like that. I think that the National Bank Belgium will be influenced by EIOPA and EIOPA is influenced by the ECB, so perhaps it goes close to each other. But starting from your assumption, the ECB picks position, we ban the dividend. Then you have 2 possibilities. Either the National Bank of Belgium follows up and says we ban the dividend on the insurance company as well, and then we are potentially not allowed to stream up the dividend to the group, and it is the group who distributes dividends to the shareholders. Whereas if the National Bank would have a dividend ban excluded, then we just stream up the dividend from the insurance company to the group, what is then subject to the decision of the ECB. So the way KBC Group functions as a group is we consolidated our capital position at the level of the group, but there out, we do distribute capital to our shareholders. So these are the 2 possibilities. In the -- in 2019, there was a decision taken by the National Bank of Belgium, and that was on the basis of, I think, more an individualized customized decision on the dividend. And as a consequence, KBC was allowed to stream up dividend to the group [ bird ], but there it was banned by the ECB. Then the question on Ireland, strategically, the review. So we do consider Ireland to be a core country. We do expand our business there in an organic way. We have been doing that [indiscernible] quite well. Over the last 9 months, we are going into a digital-first approach straightforward. And that is very successful and has been also very well underpinned and supported by the current COVID-19 crisis. The strategic review on Ireland is that it is a strategic -- that it is a core country, and as such is in line with what we said on previous occasions.

[Hendrik Scheerlinck, CFO & Executive Director]

And then to come back on the Czech Republic, on the evolution of NII. There are a number of elements that play. So what is definitely playing our favor, we comment on that. It's the good evolution of the volumes at very nice margins. Johan already commented on that as well. Especially on the mortgage side, we are producing at margins that are 30 to 40 basis points higher than this time last year. So that's an important element. And for the first 9 months of this year, when I look at the volume of production of mortgages in the Czech Republic, that is up year-on-year by 30%, so 3-0 for the full 9-month period. So that is definitely a supporting factor. We are also expecting that starting in the fourth quarter, the back book of the pricing, the back book of mortgages will not further decline because we have seen a few quarters now at production at pricing well above the back book. The same for the other -- on the lending side, so good volume growth overall. What is a drag on the NII and remains a drag is the transformation results. Interest rates came down substantially. Also the curves came down. We've seen over the last days a small uptick in curve, So by about 20 basis points. When we look at the 5 years and the 10 years, about 15 basis points on the shorter end. That will be supportive for actually the reinvestment of our applications. So -- but these are the 2 elements that play. Our expectation was that the [indiscernible] would no longer or no further lower interest rates. So they had a rate setting meeting on the fifth of November. The anticipation of the market was that they may lower the interest rates from 25 basis points to 5. They did not do that, and that was actually our expectation, that they would remain at 25 basis points.

[Operator]

The next question is from [ Giulia Aurora ] of [ Miotto ].

[Unknown Analyst]

2 questions, please. So you pointed out that at the moment you don't see any PD migration yet. But you would expect bankruptcies to come through, starting in the first quarter of 2021. So then my question is on provisions for 2021. Can you confidently say that you would expect these to be below 2020? Or how are you thinking about the provisions for next year? Any color there would be very useful. And then the second question is quite simple. On Slide 39, you published the cross-selling ratios for the Czech Republic. And I was wondering why these are down, because I would have thought there would be a renewed focus on cross-selling given the rates are much weaker in the country.

[Hendrik Scheerlinck, CFO & Executive Director]

Thank you for your questions, Giulia. First of all, on the PD migration, so the EUR 1 billion risk-weighted assets that we decided to book in the third quarter, that is -- one of the reasons for doing that is that we saw, as we have commented last time as well, actually an improvement of PD specifically on the retail mortgage side in Belgium as people or those who avail themselves of the possibility of payment holidays were accumulating more money on their current accounts. Also their behavior as consumers, they were spending less money. As a result of that, you had accumulation again of monies on current accounts, that plays into the behavior score that we use in the probability of default. And so it was actually not the right thing to reduce risk-weighted assets as a result of that, and that's why we decided to neutralize that. It was the main element for the EUR 1 billion in risk-weighted assets that we have been building. On the guidance of NII -- sorry, on -- of credit cost, we will guide you in the first quarter of next year. What we have said over the last quarters is that for this year, our expectation of credit costs are what you see now a little bit, so slightly above 60 basis points, which is 2x through the -- or 1.5, about 2x the through-the-cycle credit cost. We do not expect that we're going to go back to the through-the-cycle credit cost already in 2021. And that the provisions that we're going to need -- and again we will guide you more explicitly in February, but we're going to need more than just a through-the-cycle credit cost in our budgeting for 2021.

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

And then I will take the second question, Julia, on the cross-sell and you referred to Czech Republic specifically. The cross-selling ratios, if you compare the cross-selling ratios for Czech Republic, for instance, with Belgium or with other countries, it's not necessarily comparing apples with apples, because the business model or the distribution model in Czech Republic is a little bit different compared to Belgium. In Belgium, we work only via bank branches and brokers -- sorry, and tied agents. Whereas in Central Europe, it's a -- in central -- Czech Republic is a little bit different. There, we work also with brokers also on the banking side. And in that perspective, obviously, the cross-sell ratios are different. Now also the approach as a consequence in Czech Republic is in the bank-insurance model than what we see in Belgium. But in Belgium, the intrinsic view is, when you do sell a bank product, you always sell. Also, when can see the cross-sell ratio close to 90%, 95%, you also sell an insurance product. In Czech Republic, it is only due to about 60%, that's the case, but we do review the portfolio directly afterwards. So it means that the reason why we do have strong sales in insurance in Central Europe, mainly Czech Republic, that is driven by the fact that we do have cross-sells, but immediately as well, we do have follow-up, direct follow-up of the insurance sales, which are linked to bank customers but not necessarily linked to a particular point in sale of a bank product. As a consequence, the growth levels in Czech Republic are substantially higher than what we see, for instance, in Belgium. Now I just explained this for Czech Republic. The difficulty is -- and I'm sorry for the complexity, the difficulty is that this is particularly true for Czech Republic. To a certain extent, true for Slovakia. But for instance, totally not correct for Bulgaria, where we have cross-sell ratios which are close to 100%. And so there it works, again, differently. So it is a bit related to the particular market circumstances, market situation. And when it's not linked, when an insurance service is not directly linked to a cross-sell of a bank product, we go after it via a traditional portfolio approach on the back of product and product possession on the bank client side. We will give you a bit more flavor about that later on today in the investor event because this has become an explicit target, also an external target going forward.

[Operator]

Your next question is from Thomas Dewasmes of Goldman Sachs.

[Thomas Dewasmes, Associate]

Just one question, please. You still disclose your capital requirements, including the former P2R, I mean [indiscernible]. And I just wonder whether that's reflecting your current unchanged capital targets? Or if you plan to reflect this in your capital update later on next year?

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

Thanks for your question, Thomas. So I mean, the -- as you rightly pointed out, we are going to disclose the capital and capital deployment in the second quarter -- in the first quarter next year. So in February next year. And there we will take positions on all these matters. We don't need it right now. So it's in that perspective, something which you can expect to be the same as it is now.

[Operator]

Your next question is from Daphne Tsang of Redburn Europe.

[Daphne Tsang, Research Analyst]

Three, please. First on -- first two on NII. When I look at your NIM trend, notionally, it is quite stable, [ 1.821 ] H1, but you had some positive remark earlier on lending spread, especially mortgages being above the back book in most of European countries. However, if I exclude your insurance one-off and TLTRO III, you're more like 172 bps versus Q2 182 bps. Where is the drag from, apart from the impact from replicating the portfolio? Can you break down into the underlying trends, excluding the one-off? And then secondly, currently, you have substantial help from BASEL III, but that is expected to run off from H2 next year. Have you got any plan in place? Or should we expect a cliff effect over there as the fourth case? And then my final question is on Czech Republic. So this year, it has significantly reduced rates. But Czech Republic is one of the most dynamic national bank book base on the past few years. Can you disclose how sensitive you are in, let's say, if the Czech rate goes back by, let's say, 25 or 50 bps. Is there any range you can give us some color on?

[Hendrik Scheerlinck, CFO & Executive Director]

Yes. Thank you, Daphne, for the question. On the NII, indeed, there are a number of elements that play a role there. The positive evolution of the mortgages and the margins on the mortgages is definitely very strong, and that helps also to further increase the pricing of the back book, because the mortgages that we're putting on the books now are partly then replacing old mortgages that are running off. And we see that in the countries that we talked about. But specifically in Belgium, that is done at a higher rate, and that is supportive. So overall, the expectation is, given the guidance that we have given on the growth of the loan book of -- expressed in euro of about 2% or 2.4% for this year, that's going to be supportive of the NII on the side of lending income. When we look at the transformation result, it is not a big secret that, that remains under pressure. The lower for longer environment plays a role in that. You know that before or that in the beginning -- or in the second half -- or the beginning of last year through the second half of last year, we have taken the opportunity of, at that time, somewhat higher rates to increase the replication, both in volumes and in terms and tenors. So we extend the duration somewhat, and that is helpful now. But it's clear that in a low interest rate environment, if that does not change soon, that drag on the replication strategy will remain there. And that should then again be offset, as you rightfully said, and as we commented, by good loan growth and then good activities of our customers on a number of NII products. Another element that plays a role there, to come back on an earlier question, is that just like many other banks, we are looking at charging negative interest rates. Johan already commented what we're doing so far. And that is part of our strategic discussions going forward as well. How dynamic can we be in that, specifically looking into corporations and SMES. And these are the elements that play a role on the NII side. On the third question, for the Czech Republic, so if the interest rates -- we've given that guidance in the past, if interest rates would drop by 25 basis points, the annual impact on NII is about EUR 30 million, 3-0 million, for the full year. And the same is true, of course, in the other direction, because depending on how the pandemic rolls out, and if interest -- sorry, basically if the economy in the Czech Republic would start growing a little bit quicker than what we anticipate now in the second half of next year, this -- our expectation that the [indiscernible] is probably going to be the first central bank increasing interest rates again.

[Kurt De Baenst, General Manager, Investor Relations]

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

[Operator]

Thank you, everyone. That concludes the call for today. You may now disconnect. Thank you for joining.