KBC Groep NV

XBRU:KBC

Earnings Call Transcript 2021-Q3

[Operator]

Good day, and welcome, everyone, to the KBC Group Earnings Release Third Quarter 2021 Call, hosted by Mr. Kurt De Baenst, Head of Investor Relations. My name is Jo, and I'm your operator today. [Operator Instructions] Please be advised that the call today is being recorded. And now I'd like to hand over to your host, Kurt. Please go ahead.

[Kurt De Baenst, General Manager, Investor Relations]

Thank you, operator. A very good morning to all of you from the headquarters of KBC in Brussels, and welcome to the KBC conference call. Today is Friday, the 12th of November 2021, and we are hosting the conference call on the third quarter results of KBC. As usual, we have Johan Thijs, our Group CEO, with us; as well as our group CFO, Luke Popelier, and they will both elaborate on the results and add some additional insights. As such, it's my pleasure to give the floor to our CEO, Johan Thijs, who will quickly run you through the presentation.

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

Thank you very much, Kurt. And also from my side, a warm welcome on the announcement of the third quarter results of 2021. And let me begin with the net result of EUR 601 million, which is indeed a very good result, not to say an excellent result, given circumstance. And those circumstances, amongst others, entail the fact that this quarter is also characterized by a distortion in terms of the P&L because of the pending sales transactions in Ireland. As you all know, we have been reaching an agreement with CarVal and Bank of Ireland for both nonperforming and the performing books in Ireland. And that has a negative impact of our results of EUR 319 million. Come later on to the details of that. The EUR 319 million is a one-off, if you would correct that, because that's the number after tax. Then actually, this quarter would have been a quarter of EUR 920 million of profit, which I think is indeed an excellent result. If I would analyze the results, I will easily say that the commercial machine of KBC has been firing all cylinders. It has been performing extremely well. Customer loans were up and deposits were up as well. The margin was going up with 1 basis point on the interest-bearing assets, which means that the net interest income has come up. We have characterized the quarter by an excellent sales performance on the investment product side, which has triggered the fee and commission income to go up. The net gains on financial instruments were at par with previous quarter. And we have seen strong performance on the sales side, in unit-linked and in the non-life insurance business. Non-LIFE was characterized by the floodings. As we all know, it crossed EUR 100 million, net EUR 79 million. And also the quarter was characterized by a very good cost management. Impairment releases are significant because we, once again, had a release out of our buffer for the corona crisis. This quarter was characterized by EUR 260 million of those releases. It's quite significant. And indeed, it brings the buffer to EUR 368 million still after 9 months. There will be no surprise that giving this good outcome also of a solvency position, both on the bank and insurance side, is continuously very high liquidity-wise also. And that what we also announced in previous quarter is now confirmed, we will pay out 2 dividends per share on the accounting year 2020 on the 17th of November, and that will be followed as well with an interim dividend over the account year 2021. Last but not least, in that perspective, KBC also on the sustainability front took a very significant action by no longer providing credit, nor advice, nor insurance to companies which are involved in the exploitation and the discovery of new oil and gas fields. And it's a major step, indeed, because we already had a 0 contribution to coal -- direct coal exposures, and that was disclosed already a while ago. If you look at the summary as well, return on equity stands at a very strong 16%, cost income at very strong 50% if you exclude the bank taxes. And despite the floodings, we have a combined ratio of 87%. The credit loss ratio stands at 20 basis points, minus 2 basis points if you would exclude the COVID impairments and the one-off impact in Ireland, which I think is a reflection of the good quality of the book. Common equity, if you deduct the dividend, stands at 16.4%, which is indeed quite strong. And that also reflects the strong position of KBC Group overall. On the next slide, we actually gave a very colorful overview of the position of KBC on certain domains. I already elaborated on the solvency and the profitability side where we are amongst top performance on the European front. But also, and that is perhaps less known, we are actually an outperformer on the sustainability side. We have used there the scoring, which is provided to us by Sustainalytics, where KBC is ranked #4 globally in terms of the diversified banks in terms of policy on sustainability. Last but not least, the digitization side, moreover on the mobile banking app, KBC was nominated by Sia Partners as having the best mobile banking app in the world. This is a confirmation of all the energy, which we have been putting into that in the last couple of years. And it's also confirmed by others, amongst others, Deloitte and Bain have in recent surveys considered KBC amongst the top performers in terms of the innovation policy and, amongst others, on the performance of its digital assistant called Kate. On the next slide, you see the building blocks. I'm going to skip over that and go immediately into the exceptionals because this quarter, there is quite a lot to say about the exceptionals. I already highlighted the fact that in the 2 pending sale transactions in Ireland have contributed negatively EUR 319 million. Now how is this composed? It's composed, in essence, about in 4 building blocks. First of all, we have a one-off cost impact of EUR 81 million, which goes into OpEx. It's all costs, which are related to the transactions. On the staff side, we have an extra impairment on the books of EUR 170 million. This is the first step, as you know. The impairments, going forward, will be taken into account the profitability of the transaction. This sample transaction, the CarVal sale, is a high profitability, whereas the [ storm ] transaction is, for accounting reasons, a lower profitability. We had extra impairments on the intangible/tangible assets of EUR 15 million. And then we have a tax impact, which is due to the derecognition of deferred tax assets to the tune of EUR 53 million, totaling EUR 319 million. Two other -- one other element is linked to Ireland as well, that is a further impairment of EUR 13 million for the tracker mortgage issue that is fully compensated by a positive one-off because of the sale of the Antwerp Tower. And then we have another one linked to that, Antwerp Tower sale, which is on the OpEx side, where the provision was a release of EUR 9 million. And then last but not least, we have had a EUR 38 million one-off, which is linked to the floodings in Belgium. As you know, we already indicated previously that the floodings were reinsured to EUR 41 million, which was the guidance which we gave on the last occasion when we spoke. In the meanwhile, the gross claims for the floodings in Belgium are EUR 100 million, EUR 99.6 million to be precise. After reinsurance, EUR 41 million. But because of the interventions of the Belgian government, as a matter of fact, the [ lone ] government. It was a kind of solidarity contribution, and that's what their contribution is. The difference between the ultimate amount paid, EUR 79 million and that reinsurance -- reinsured amount of EUR 41 million. Therefore, we have a one-off above the legal limit of EUR 38 million. There's a lot of -- another element because of the prolongation of the moratoria in Hungary, which has a modification loss of EUR 5 million, which sums it up to the total of EUR 346 million one-offs, and that's quite a lot. And -- but I mean, it's quite a lot, but it's indeed an exceptional result as the word says itself. We consider this to be not every quarter happening again. If you look at the split of bank insurance, it's perfectly in line with the historical average of 15 insurance, 85 banking activity. It's now 84-16, so let's not waste time here. Let's immediately go into the net interest income, which was 2% up on the quarter, which is good news. It is slightly down on the year. But let me highlight again that third quarter 2020 was characterized by a one-off of EUR 26 million on the insurance side, where inflation-linked bonds were corrected. So if we would take that one-off out, then also the net interest income on a yearly comparison was indeed better than the same quarter last year. Now let me go back to this year. What has been characterizing this quarter was a strong loan volume growth, which means that on a quarter basis, it's 2% up. On a year basis, it's 4%, which is indeed quite strong. And it is also characterized by a margin, which went up with 1 basis point. Now the 1 basis point is intrinsically linked to good commercial performance in a couple of countries. The mortgage business, on the other hand, is under -- the margin in the mortgage business is, on the other hand, under pressure in Belgium, Czech Republic, Hungary and Bulgaria, and that is clearly due to competition. But if we take into account the other elements like the SME and the corporate banking business, taking into account -- there's also the rate hikes in Czech Republic, then we do see that the average margin over the whole group is 1 basis point up. In terms of all other composing elements, I'm not going to go into every detail. I just wanted to add that Belgium is still -- or the euro countries are still suffering from the low interest rate environment and definitely also Belgium in that perspective. It has a significant impact of that low interest payment -- low interest rate environment also going forward. It means that we do compensate by all other things like loan growth, by margins on the commercial side, funding costs and so on and so forth. But still, that low interest rate environment is still negatively taking in. In terms of the fee and commission business, I think this is really a good quarter. This is now, as you can see it on the graph, this is the sixth or seventh quarter in a row that we do see an increase of our fee and commission business. This is mainly driven by the management fee, but also by entry fees because we have been, once again, seeing a net inflow of EUR 560 million on the quarter. And that is something which is quite extraordinary because in a quarter which is characterized by 2 months of holiday period, it is seldomly seen that you see net inflows. So we have no 3 quarters in a row net inflows, EUR 325 million first quarter, EUR 649 million second quarter and EUR 560 million in the third quarter, bringing the total to more than EUR 1.5 billion net inflows. And that's something which is quite remarkable, definitely, if you compare it with the previous 2 years where the net inflow was more or less either close to 0 or EUR 100 million. So it's indeed a major event, and this is something which we also think would continue going forward. In terms of the fee and commission business, which is related to the banking services, the major contributor there was the payment services, which is quite logical given the fact that it was characterized by -- the quarter was characterized by a summer period, therefore, a lot of usage of credit cards; also the relief, which is happening on the, I mean, on the lockdown measures, which have been taken in the past. So all in all combined, we do see an increase of our fee business generated through the payment services with EUR 6 million, which is quite significant on the total amount. Good news there as well on the security side in Belgium where a couple of major transactions have triggered upwards the fees generated through that business. What is negative? And I always struggle to keep that in our fee and commission business because the distribution costs have risen to EUR 5 million. But this is actually because we have been doing a good job on the insurance side. And mainly in non-life, I'll come back to that in a second, significantly up. That goes hand-in-hand with the payment of commission because that's linked to premium income. And therefore, you see a decrease. The decrease of EUR 5 million actually brings down our fee and commissions. In total, we should better split up those graphs to make a clear understanding what the real business is on the investment products and the banking service and then set aside the distribution cost because the better you work on the distribution side and the better you work on the sales side of insurance, the higher those negative impacts, the lower your fee and commission. It's a bit ridiculous, but here we go, it's accounting. Assets under management, EUR 229 billion, already flat. The positive inflow of EUR 560 million, all the rest is linked to pricing effect. But let me also indicate one important thing. We have managed a shift of low-margin business, which is linked to institutional event advisory mandates towards a business which is more to the retail funds, so collective fund balance funds, where the margin is indeed substantially higher. So that's also a positive effect close to EUR 1 billion. Going forward, we will further bear the fruits of that action. We go to the next topic, which is the insurance side. I already mentioned the fact that, indeed, on the insurance side, we have seen on the non-life side, a strong growth, 8% on the quarter -- sorry, on the quarter compared to last year, which brings us to 5% year-to-date, which is indeed a quite significant increase. The combined ratio, despite the fact that we have EUR 100 million of floodings, net EUR 79 million is at 87%, which is still an excellent result. As a matter of fact, it's an extremely good result compared to our target of 92%. There will be no surprise to say that the ceded reinsurance result is improving by EUR 12 million given the impact of the floodings, the storms and major claims, which we have seen in the course of this year, obviously, the reinsurance compensation flows in. On the life side, on the next slide, you can see that in the traditional environment, low interest rate -- traditional situation, the low interest rate environment has a negative impact on the sales of interest guaranteed products. We do see a negative impact there of almost 4% on the quarter. On the year, it's flat. If you look at the unit-linked, on the other hand, the unit-linked products are up almost 19% on the quarter -- on the year. And quarter-on-quarter comparison, obviously, is linked to seasonal effects, and therefore, not relevant. It's 11% down. But as I said, it is purely seasonal in the summer period. You do have less sales than you have in the second quarter. So therefore, let's not waste our time here, and let's go to the financial instruments at fair value, which are quite flat compared to previous quarter. And that has to do, as a matter of fact, to compensation of a couple of things. First of all, we have a positive change in the ALM derivatives to the tune of EUR 90 million, which completely offsets the lower dealing room income and the lower net interim income, which we did not take on the equity instruments, respectively, EUR 12 million, EUR 7 million. Now on the dealing room income, actually, the underlying result of the dealing room income was better than the second quarter of 2020 because -- better than the second quarter, sorry, because of a couple of one-off effects, which have been booked into this, amongst others, the sale of treasury bonds and so on and so forth in the second quarter. And that has not happened in the third quarter. So underlying, it was okay, but this is not reflected in the full result. In terms of the XVAs, actually, it's quite stable. There's only a difference of EUR 1 million on the quarter, either up, either down, so not worth to mention. So volatility in this respect, first time, now quite stable. On the net other income line, we do see a fundamental increase of EUR 27 million compared to the run rate of EUR 50 million. This is entirely due to the fact that we have sold off bonds. Because of a pure price effect and a pure capital price effect, we were better off to sell off those bonds and to place cash into the Central Bank. We could gain about between 20 to 20 -- 10 to 20 basis points on that, and that delivered us a EUR 21 million return. So the full effect is entirely explained, almost entirely explained by that one-off. In terms of -- all the other elements, I already mentioned the Antwerp Tower and the tracker mortgages, which are booked in net other income, which are offsetting each other. Let me go into the cost management. First, in that sense, if you look purely at the cost, it goes up to 5%. But there's a big but. And the big but is the fact that EUR 81 million of cost increases have been put in because of staff-related costs related to the pending sales transactions in Ireland. So we should actually better exclude it and also exclude the fact that in this year, we have consolidated OTP, which is not the case same period last year. So if you start to exclude those one-offs and you exclude the bank taxes, then actually the cost evolution of KBC in year-to-date is, compared to previous year, only 33 basis points up. So 0.33% upwards, which is a quite strong performance. If you would exclude out of that, the FX effect, actually, we have the same cost side as last year. The increase is almost 0, 0.04%, which I think is quite an achievement. For that reason, we also adapt our guidance, which we said was upwards 2%. We are now guiding to below 2%, slightly below 2% because we do expect, indeed, a [ positive FX ] effect in the fourth quarter and also the picking up of hirings, and inflation will start to kick in, in 2021 quarter 4 and for sure, in 2022 full year. So a review of the guidance. But all in all, with the cost income ratio, excluding bank taxes of 50%, KBC is a very solid position. And therefore, indeed, it pays off or it shows that we have been doing quite a lot of things on cost saving, not only last year but also on this year. Productivity is indeed following our investment pattern on the digital front. Last but not least, certainty are guaranteed in life. Bank taxes still go up. It now stands at 12% of the total, which is a whopping 12%. In Belgium, 13%. In the international market, 14%. It's quite a lot, but it is what it is. We cannot change that. In terms of the loan loss impairments, the total loan loss impairment combined stand at EUR 45 million, EUR 66 million on the pure loan loss impairment releases. That is a combination of a couple of things, EUR 260 million release on the COVID buffer that now stands at EUR 368 million is indeed related to the fact that the current situation of our loan book is not impacted as we speak of the COVID crisis. We don't see any impairments related to that or not a significant amount. As a matter of fact, if you look at the underlying impairments for the total book of the whole group, we do see about EUR 23 million, which are related loan loss impairments, which are related to a couple of -- or a few individual files. In terms of high-risk correction, EUR 170 million on the loan losses and then another EUR 15 million on the impairments of tangible and intangible assets. EUR 5 million because of the extension of the moratorium in Hungary that is a modification loss, and the sum of all it gives us EUR 66 million. Credit cost ratio is obviously -- credit cost ratio obviously is then fluctuating around the, let's say, 0 level. 10 basis points when you exclude the COVID collective releases, minus 20 basis points if you include it. And if you leave Ireland out and the COVID out, then it's 0.02 minus. So in that perspective, it's an excellent number if you compare it with the numbers of the -- through the cycle, which is between 30 to 40 basis points. Also, in terms of our impaired loans ratio, it now stands at 3.1%. If you would leave Ireland out, we go below 2.5%. If you apply the EBA lines, because we're a little bit stricter than EBA, if you apply the EBA lines, it's short below the 2.5%. On Pages 18 -- oh, sorry, 19 and -- 18 and following. So on Page 19, you see the overview of all our bookings related to the COVID-19 management buffer. So the release of EUR 260 million is part of that. I'm not going to dwell upon the detail here. But the only thing I would like to add is the fact that we have shifted in a collective way part of our Stage 1 into Stage 2, in total, EUR 3.3 billion, which you can see on Page, let me see, 23, I believe. Yes, indeed. There you can see the detail of what we did. What we did in essence was we have reconsidered everything what is in highly vulnerable sector, which is 4% of our portfolio. And we have transferred that collectively, to be honest, without specific reason from Stage 1 to Stage 2. For that reason, everything which is still in moratoria now and up to 6 months ago is put into Stage 2 as well. And we will now continuously shift to normal ECL procedures. And also for that reason, we have, for the collective shift, a probation period of 6 months where we will observe if that shift is indeed was rightfully so or too conservative. And if it is conservative and shifts back from Stage 2 to Stage 1.All the rest, which is in there, gives you an overview of where we stand, what the sectors are and so on and so forth. But I suggest to skip that and we are happy to answer all of your questions, which are related to that. As of Page 26, you have the overview of the countries. I am also, for the sake of time, not going to go into that detail. And I'm going to shift to Page, what is it, 46 where you have an overview of the contributions of the business unit. You can see clearly that all the business units are now positively contributing to that result, except for Ireland. So international market is negative and [ prevented ] by that booking of EUR 319 million. If I would leave that out, Ireland would have also a positive contribution of about EUR 18 million. In terms of the organic growth, Page 47, you can see the loan growth, which is significantly up 4% on the year. And then per country, you can clearly see the differences between the countries. The Central European countries are indeed having a strong growth in the business unit international markets. And also in Ireland, we do see have -- we still have a growth of 3% on the loan book. Our capital ratio on Page 49 is rock solid and stands at 16.4%. Mind you, this is a ratio which has already deducted the payout of EUR 3 dividends and has no profit recognition included. If we would add that profit recognition, we will go above the 18%. If we would compare it with the absolute minimal, you can prefer the one -- you can choose the one you prefer. It's the MDA, it's the OCR, whatever we have substantial buffers, taking into account our 16.4%, and that perspective is good news. On the insurance side, we do have, indeed, similar things. We have the Solvency II ratio of 218%. Leverage ratio stands at 5.4%, which is due to the new regulatory requirements which are calculated as of previous quarter. And you can see clearly that the leverage ratio remains quite stable with 5.4%. It's also taking into account the deduction of the EUR 3 per share. This brings us to the liquidity positions, which is very solid with -- let's round the number, on average, 160% compared to the legal minimum. And in that perspective, also a reflection of our good results. In terms of our guidance, I already indicated that on the back of the economic outlook, which we still consider to be positive going forward despite the supply chain issues and despite Mr. COVID knocking on the door again, we do consider that 2021, for sure, and also 2022 will be still having an economic rebound compared to 2020 and to 2021. In that perspective, we maintain our guidance of our net interest income, be it that previously, it was more on the underside of the ballpark range, 4.35, 4.45, what is now it is on the higher end of that range. The guidance for OpEx, I already mentioned, is now below the 2% like-for-like basis and excluding the one-offs. And the credit cost ratio is indeed guided downwards. Previously, it was guided to 0. Now it's guided at minus 10 basis points. And on top of that minus 10 points, we exclude further potential or we can add potential further COVID-19 releases. On Basel IV, nothing has changed. That is indeed the same inflation, EUR 8 billion, 7% risk-weighted asset inflation, 1.1% impact on our CET1. Mind you, this is on a static balance sheet. And we all know that the implementation, because still a lot of things need to be done, it needs to be translated into local law. The implementation will be as soon as 2025. And in 2025, we think that the impact on our risk-weighted asset is approximately EUR 2 billion, which is something which we have experienced in the last couple of years on several times to the same tune. I would like to keep it here, and I give back the floor to Kurt, who will guide us through your questions.

[Kurt De Baenst, General Manager, Investor Relations]

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

[Operator]

[Operator Instructions] We have our first question, and that's coming from the line of Benoit Petrarque from Kepler Cheuvreux.

[Benoit Petrarque, Head of Benelux Equity Research]

Yes. So 2 questions on my side. The first one will be on cost inflation. You have less than 2% on a clean basis for 2021. I think you target 1% over 2020, 2023. So that will suggest, well, probably pretty low inflation figure -- cost inflation figure in 2022 and 2023. I mean I think it will be kind of around 0.5% annually in 2022 or 2023. So how do you see your kind of overall target towards 2023 considering basically your comments on cost inflation? So that will be the first question. And then on NII, so the Czech sensitivity is like 25 bps -- is EUR 25 million NII. Just wanted to better understand what you included in that figure. So I guess that's the short-term impact of hikes but you have also a certain level of pass-through. And also, I was wondering if you consider also positive effect or you expect positive for potentially higher replicating income in Czech Republic over time. Or do you think that could be fully passed through or passed on to clients or basically consumed by margin pressure potentially? So just wondering on that side what it will be. Thank you very much. I've got more questions, but I'll come back.

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

Thanks, Benoit, for your question. Let me answer the cost inflation side and also, indeed, what you rightfully pointed out, the core inflation. So we have guided only 2021 for good understanding. And you're right in our longer-term target over the period 2023, it is a 1% increase. Now for 2021, currently, like on a clean basis, we are indeed having an increase of 0.32%. So the likelihood that we get to 2% despite the fact we will have a hockey-stick effect as always, in the fourth quarter, seasonal effects, IT invoices coming in and so on and so forth. Despite the fact it is indeed, I mean, a clear thing to not guide any more for the 2% because we will not reach it. On the other hand, and there you're right, inflation is picking up significantly. The inflation is quite high. We do see inflation numbers 4%, 5% across Europe. By the way, 6% -- more than 6% in the States. So it's quite significant. And what we need to understand is that inflation, for instance, in Belgium is directly impacting wages because in Belgium, wages are 1:1 linked to what is called the health index, and that index is something which is a deduction of the -- or deducted from the traditional inflation, call it, the core inflation. So we will see that in our salaries, to a lesser extent, in the remaining quarter 4, but to a full extent next year. And for that reason, indeed, it is not realistic to assume that we have only a 1% increase of our cost, pure cost side next year in general. What we do see on top of that is, of course, there is a war for talent going on. We do see that all the banks in all the countries are looking for the same people, be it that a push for AML reason, be it that a push for whatever reason, regulatory, supervisory, whatever. But we do see that all of the banks, all of the insurance companies, all of the big 4 are looking for the same people, and therefore, there is a war for talent. So despite the fact that wages are not directly linked to an index in Central Europe, we can expect that also wage inflation to at least the same tune, I just mentioned 5%. So yes, inflation is going to go upwards. But what is far more important, and we will review, therefore, on the back of Q4 results, we will review our guidance, for sure, for the year 2020. And that perhaps also for the combined years 2023 in -- at the announcement of that Q4 result. But what is far more important to understand is that also the revenue side is going up. So I do indeed confirm that inflation will be impacting negatively the cost evolution. But I do not confirm that, that will have a negative impact on the [ jaw ] between income and costs. So that's something which we have to bear in mind. But more specific guidance on the year 2020 will be given on the back of the quarter 4 result or the announcement of the quarter 4 results.

[Roger Elie Popelier, CFO & Executive Director]

Hey, everyone. Hello to everyone. Luke Popelier here, the CFO. With regards to your question, the NII impact of the sensitivity, we have taken a few factors into account. First of all, of course, you have the negative impact on your short-term investments and particularly the [indiscernible]. That's obviously a positive one. But we've increased the pass-through rates to our clients given that the increase has been quite significant. And we see competitors already reacting strongly to that strong increase on the short-term part of the curve. And therefore, we think it will be difficult to continue offering the very low rates at the moment. So we think a higher pass-through needs to be done and included in the EUR 25 million guidance. Secondly, also an element of an increased cost of funds for lending, which depresses our margins on the loan portfolio. What will we think recover over time, but obviously, there is a negative effect that we've factored in as well. On the other side, there's also the positive effect of the application portfolio. So the long end has also come up a bit, as you know. And we are also gradually shifting more and more to the longer end of the curve. And this has a positive effect, which will only gradually benefit the NII going forward. So these elements are taken into account in the EUR 25 million sensitivity number.

[Operator]

The next question is coming from the line of Giulia Miotto from Morgan Stanley.

[Giulia Aurora Miotto, Vice President and Equity Analyst]

My first question was just a follow-up on the Czech NII. So rates are now 2.75 and they're expected to go up to 3.9. So I would assume 2022 NII should be well above where 2019 was. Would you see, in Czech Republic, I mean, any reasons why this wouldn't be correct? And then another -- well, a quick follow-up on NII. Hungary, can you give us a bit more guidance on the sensitivity there because even if it is smaller than Czech Republic, rates are going up so much that it's meaningful. And then finally, on capital, will we learn about any excess distribution on the full year results? Or will we have to wait later?

[Roger Elie Popelier, CFO & Executive Director]

So on NII for Czech Republic, yes, indeed, NII will be higher in Czech Republic. That speaks for itself with the strong rate hikes, and the whole curve has moved up. But having said that, there are also some negative elements and compensating factors, which need to take into account. So please do not just take the EUR 25 million guidance, multiply it by the short-term rate increase, and then you have the number. That's not how it will work. So as I mentioned before, there will be a much higher pass-through, we believe, on the current savings accounts, in particular. There will be more and more term deposits from corporates at higher rates. So -- and secondly, we have our lending margins, which will come under pressure and has been under pressure. I've flagged that already before, which will also have a negative impact on lending margins. Those 2 elements need to be factored into account. But overall, net effect, obviously, will be positive for the Czech Republic. On Hungary, you do not have the same feature. Yes, indeed, interest rates on the short term -- the short end and the long end have -- medium and long end have gone up also quite substantially. But here, not much of our application portfolio and short-term cash is on the short end of the curve. It is mostly at the medium side of the curve. And therefore, the impact of the higher interest rate environment in Hungary will only gradually moving. We should also mention that in the replication portfolio at the moment, we still have some high interest rate bonds, which are going to mature. So that will also have mitigating -- or sorry, a compensating effect on the NII in Hungary going forward. But obviously, again, also a much better yield environment in Hungary will mean that NII should also be higher next year in Hungary. And then the third question, I think Johan will take it.

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

Yes, I will take that. Giulia, on the capital side and the capital deployment side, so first of all, the normal dividend, I mean, we already stressed that in the presentation. So the EUR 1 interim dividend is going to be paid out now in -- on the 17th of November. And then the remaining dividend, which is an execution of our policy, at least 50%, including the AT1 coupon, will be then on the back of the full year results. In terms of the capital deployment, the philosophy remains the same. So everything which is dividend policies is dividend. Everything which is surplus capital above 15.5% will be distributed accordingly to our policy that can be in different instruments, the share buybacks. And cash dividends, that's something which is going to be decided by our Board and will be announced on the back, indeed, of the full year results. In terms of the review of our capital deployment going forward, so 2022 and following, that review is done, as I already indicated on, I think, on the -- when we announced the dividend policy and the capital deployment. I think it was the second or third quarter -- second quarter of this year. That is every year reviewed, and that review is done taking into account 4 years -- full year results 2021, amongst other peers. And so therefore, we're a little bit depending on the publication because we want to be amongst the better capitalized financial institution. So the review of the 14.5% target and the 1% management buffer is going to be done on the back of full year results, but not necessarily immediately announced because we're a little bit dependent on information gathering. So I would say, ultimately, by the Q1 results, we will give the capital deployment plan going forward for 2022 and following.

[Operator]

The next question is coming from Kiri Vijayarajah from HSBC.

[Kirishanthan Vijayarajah, Analyst]

A couple of questions on my side. Totally on your retail clients and their risk appetite heading into next year, and on the one hand, household cash balance is still high and seems to be growing. Well, equally, we come off a period of kind of strong equity markets. We've had jitters around inflation. So just wondered how much momentum you see. I think particularly for the higher-margin investment products going into next year, how your retail clients kind of positioned in terms of risk appetite. And then on the exit from Ireland, the RWAs drop out, I think, in the second half of next year. But I wondered, is there going to be any eventual benefit to your Pillar 2 requirements, presuming you're going to get better stress test results, et cetera, so you should get some relief. And what's stopping you potentially front-loading the stress benefit into your CET1 target ahead of time? It sounds like you're going to revise your CET1 target in the first half of next year. So could you see some front-loading of any benefit? Or is that something you're going to wait for when you've got the SREP letter? So how do you think about kind of Pillar 2 and SREP requirements post Ireland, please?

[Roger Elie Popelier, CFO & Executive Director]

Okay. Hello, Kiri. I'll ask -- respond to the first question, and Johan will respond to the second one. Well, we do see that retail is getting more and more appetite for investment products, driven indeed by high inflation, also driven by the fact that -- and just the forecast -- sorry, performance on funds, in particular, have been quite strong, yes? And of course, history is never a good prediction for the future, but it plays a role. So we do see much more appetite from the retail households. And we see that also starting in the numbers. Johan already mentioned that in net sales, we moved up in the first quarter from around EUR 300 million to EUR 600 million to again EUR 600 million, so EUR 1.4 billion net sales. That's mainly coming from the retail or private banking side. And we see that improving further going forward. So that also leads us to believe that fee commission income from asset management is going to be supported quite strongly by this trend.

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

Kiri, coming back to your question regarding the risk-weighted assets and also the risk-weighted asset release, which is related to the pending transaction in Ireland. We already indicated that, indeed, there is a positive impact on that risk-weighted assets release because of those 2 transactions to the tune of EUR 0.9 billion. So let me round the number, it's 0.9% on our CET1. Now that is linked, obviously, to the ultimate closing of those transactions, which happen normally at the end of second quarter, let's say, third quarter next year. So we need to get the approval, as you know, for the DOI transaction by the CCPC. It's not within our hands. So let's say, by quarter 3 in 2022, we will get that approval of our lease. We will get the outcome of that approval request. So the risk-weighted assets fall free to the tune of 90 basis points in, let's say, as of quarter 3 next year. And then the question [indiscernible] a positive impact on that Pillar 2 requirement. The risk profile of KBC is indeed improving significantly by those 2 transactions. And as you take out uncertainty, then the positive requirement should come down. Now our [indiscernible] has not been disclosed yet. So I'm not entitled to give already comment about that. But I fully agree with your view. The only thing I can say is that knowing the stands of the ECB, and this is a comment without giving you insight in my [indiscernible] because I'm not supposed to talk about it until it is final. But traditionally, ECB only gives away their buffers when it's not only realized, but also already in place for a while. So there will be any reluctance. But over time, you're fully right, it should bring down regulatory requirement.

[Operator]

The next question is coming from Tarik El Mejjad from Bank of America.

[Tarik El Mejjad, Equity Analyst]

Two questions, please, on capital and M&A. First of all, on the M&A. In our recent conference of Bank America, you mentioned that you were -- with the Board agreements, you were allowed to look at opportunities outside your current perimeter, which is a shift from your previous strategy. Could you perhaps give us more comments and the rationale behind that and if you have any progress or prospects then? I mean my view is that if you apply this new strategy and you want to have enough scale in the new territories, you have to go for quite large acquisitions. So how big in terms of M&A then you can go in new territories? And then second question, which is quite linked to it is on capital. So would you be willing to reduce your CET1 target ahead of Q1 if you announced some big deal because all the capital return expectations would just elaborate by potentially some large M&A? So would you compromise in lower CET1 targets to keep your profile of high dividend distribution in case you do M&A? That's my 2 questions.

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

Tarik, let me come back to your M&A question. Yes, indeed, we have been discussing with our Board on our geographical presence. And that is triggered by 2 things. First of all, KBC has, as you know, quite a bit of capital surplus. And we always had appetite in doing acquisitions, which were until further notice, bolt-on acquisitions in the core countries. But also given the recent decision, which we have taken on Ireland, where we have exited the country, it also gave us the possibility to reconsider that geographical presence that we have been putting it on the table. This discussion with our Board took place, and our Board is indeed inclined to go into further geographical presence, be it that we are not intending to do acquisitions in, let's call it, large-scale countries to obtain there a subdued position. Let me give you an example. It is no intention of KBC, and this is just for the sake of the example, okay, no intention of KBC to acquire bank #25 in Germany or in France. It doesn't make sense. It is not adding value. And for that reason, we'll not go after it. But in countries which are, let's call it, a comparable size in the countries where we currently are present, if we can go into that country and trying to acquire a bank in a, let's call it, [ 3 or 4 ], an insurance company in a top 3 or 4 position, then we will definitely look into it. All the other parameters will be applicable. It means it needs to add value. So return on equity wise in the long term or in midterm, it should be comparable to what we see today. The second thing is that it needs to be of a strategic fit, so banking, insurance, retail, as I mean, corporates, and we need to have the execution -- the ability to execute those deals. The track record of KBC, when we do an acquisition, we always integrate that in a very short time frame. And therefore, we have cost and revenue synergies, and the deal becomes value accretive. That's the track record. So that has not changed. In terms of the reference made to it, it will be always a large acquisition. Everything depends on large. If you call a large acquisition a couple of billions of euro, then the business is indeed large. But given our capital position and the proper consideration, that is not a large acquisition. Then coming back to your second question, what about the CET1 target going forward? As I mentioned to the question of Giulia -- let me see, was it Giulia? Indeed, it was Giulia. Our capital targets are reviewed anyway on a regular basis, at least once a year. And in that perspective, also, we will do that review on the back of the full year results. The announcement will be depending if we have the information available either after that announcement either at the Q1 results. But I'm not going to preempt on that decision. To answer your question, is it then going to stick a high dividend payout? KBC always has indicated that the normal dividend policy will be triggering at least 50%. That will not be changed. So that will be also going forward. Even when we do acquisitions, even when we do acquisitions beyond our current geography, that will be continued afterwards. What might be different compared to, obviously, the current position that is if we do acquisitions and we use part of surplus capital, that surplus capital will be gone. But surplus capital is always considered as being a one-off, averaging about 15.5% will be then paid out. If that is consumed by acquisitions, of course, value-accretive acquisitions, then that still adds value, and that will be then returned via the profitability of at least 50% in the dividend. Now last thing about this, I cannot give you more detail because then I will indicate where we are. So as a matter of fact, I cannot indicate what our CET1 target will be going forward. I cannot indicate what the buffer will be going forward. The only thing what I can say is we will review it. And you will have further information about that, let me say, in at least and definitely within the time frame of 2 quarters.

[Operator]

The next question is coming from Johan Ekblom from UBS.

[Johan Ekblom]

First of all, if we can talk a bit about the costs in Ireland, right? So it's not been a big contributor in terms of preprovision profitability. I guess we can take out most of the revenues from Q3 next year. And I think previously, you said that taking out the costs related to that business will take somewhat longer. So can you talk a little bit about what kind of time frame can we see the EUR 200-odd million of costs in Ireland go to 0, and whether that's part of the 1% cost CAGR in your guidance? How we should think about that? And then secondly, just if you have any update on the impact of IFRS 17 and what the transition profile there would look like in terms of earnings contribution.

[Roger Elie Popelier, CFO & Executive Director]

Okay. Johan, thanks for your questions. And I think a very relevant one because that will, of course, be a change -- a big change in the sale of Ireland on how our P&L looks like, at least in the different P&L items, as you mentioned. Bottom line, it will not change much. But it's more what is coming out in revenues and costs. As you mentioned, revenues on the transaction with Bank of Ireland will remain for us until completion. So it's not a lot of box principle. No, we only -- we get the income until completion of the transaction. So that would happen, for example, in middle of the year, then in the middle of the year, the revenues coming from the portfolio, which is the bulk of the interest income, obviously, will then disappear. On the cost side, as you already mentioned, yes, there will be a delayed effect. There are 3 elements. First of all, we have already been reducing costs significantly for -- by suspending a number of projects, a number of IT projects, a number of innovation projects to wait for the outcome of the completion. Because normally, we would not have to continue those, but we suspend them. That already has a beneficial impact. If you look at the cost basis for Ireland, there's already quite a significant reduction in their cost base. Then for next year, as long as no completion has occurred, we will continue keeping most of the people in place because we always have to take into account a potential no by the competition clearance authorities. We don't think it's likely, but we cannot gamble. So we will have until completion, a large part of those people onboard. Obviously, we also have the revenues coming onboard. So it will still generate a positive margin for us. And then the crucial factor will be how quickly we can then wind down costs after completion. And that is a bit more difficult. Obviously, we'll try to do that as fast as possible. But there are a number of things we have to do keep in place. For example, on the IT front and so on, we have to wind down gradually. We cannot do that immediately. The entity will also need to function as a bank for a certain period until we can give back the license and that will be dependent on the CPI. So there will be another step down in costs after completion. How much? We are still investigating. And near the situation, we can then get a better view. But there will certainly be a step down in costs. And then I think certainly for the first year, quite a good costs step down, and then it will depend how quickly we can then give back the license to the Central Bank of Ireland. That could take a few years on. So that is possible. But of course, we keep then a very low cost base in that period. The second question of IFRS 17, it was the impact you wanted to know on...

[Johan Ekblom]

Yes. I guess long term, there shouldn't be a material impact, but the kind of transition period appears to be very different for different companies. So I just want to understand if you have any idea of how much the impact is on your reported earnings.

[Roger Elie Popelier, CFO & Executive Director]

No, we don't give any numbers at the moment. We have not finalized our guidance and so on. We will only release numbers by the third quarter of next year because we want to make sure that we've got all our ducks in a row and that we have a good set of parallel dry runs and parallel runs before we give any numbers. But generally speaking, long term, it should not affect at all the profitability of the insurance company. It's basically IFRS 17, just reallocates the profits, which are in your contracts over the period of the contracts in a different fashion, depending on the product. So it's just a reallocation of the profits, which are locked in the contracts over time, not -- so the economic value does not change. That is...

[Johan Ekblom]

I guess the question is, does it change how you think about the dividend? Does the dividend help be linked to reported earnings? Or should we think about it as purely being linked to capital, in which case, it doesn't matter?

[Roger Elie Popelier, CFO & Executive Director]

Well, of course, the earnings under IFRS will change. As I said, we're not going to give any guidance to what extent it will change. But the intention is not to have an impact on the dividend policy because this is just an accounting change. And we not run the business. We not look at value created in the business on the accounting numbers, but on the underlying economic models we have.

[Johan Ekblom]

And then just a quick follow-up on Ireland. Do I understand this correctly then, with most of the revenues gone and potentially several years to hand back the license, it's going to be earnings dilutive throughout the current business plan with almost certainty, right?

[Roger Elie Popelier, CFO & Executive Director]

Sorry, say that again.

[Johan Ekblom]

I mean you will keep some cost. I mean you're talking about potentially several years to return the license. So when we think about the business plan you presented, I guess, for the whole period of that plan, the sale of Ireland is likely to have a negative impact on your reported earnings because you'll still have some costs, but none of the revenues...

[Roger Elie Popelier, CFO & Executive Director]

It will have some impact certainly next year, but the year -- so in 2020 to '23, we try to keep the costs as limited as possible, obviously. There will be some costs. But in the scheme of things, that will be quite low. That's our intention in any event.

[Operator]

The next question is coming from the line of [ Sean Nuwest ].

[Unknown Analyst]

I just wanted to ask you a question on your outlook for risk in general. So obviously, there is this big provisions that have been reserved from COVID, which banks are releasing right now but there's also been quite material shift in bank portfolios over the past almost 2 years now, so state guarantees, various protections, et cetera. And I just -- and now there's going to be inflation potentially also changing a little bit the risk outlook, maybe making debt a bit more affordable for borrowers. I just wanted to understand what you think of your kind of through-the-cycle cost of risk from here based on your current expected credit loss on the business you're writing or you've been writing? And secondly, whether in a sense for how long you would expect -- or what would it take for this cost of risk to go up in a sense from here? Why would it not stay lower for longer? Does that make sense?

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

Thank you for your question, [ Sean ]. The answer to your question is not an obvious one, of course. So let me explain the obvious part. First of all, you're right, so we have put a buffer for what we call the management overlay for everything, which is COVID related and we are already leasing now provisions out of that buffer. This is still EUR 368 million, which is provision which is there for COVID impact. We'll see going forward what COVID will bring. As we currently analyze the situation, there will be no negative impact going forward, definitely not to the tune of EUR 368 million, which is translated differently to say that, indeed, we will have further releases of that buffer going forward, quarter 4, quarter 1 next year. What about the risk outlook in general? Now that's a very difficult question because there, you have to assess what is going to be the economic situation going forward. In our analysis, we do not expect the impact of COVID to be substantially negative impacting that economic outlook for the next coming years. And as a matter of fact, that will be translated in the same way in the cost of risk. Whereas in the past, we had a 30, 40 basis points through the cycle because you precisely refer to what will be the true -- the new through the cycle, now through the cycle was 20 years. And if you now refer to another 20 years, I cannot give you that outlook right away. We are going to give the long-term guidance anyway on the back of the fourth quarter results. So it is a too bit early today. But if you want to have my personal opinion, then my personal opinion is that not through the cycle, so not for the next 20 years, but for the couple next years, the credit cost ratio will be substantially lower than the 30, 40 basis points, which we have seen regardless of the release of the COVID buffer.

[Operator]

And we have a question from Anke Reingen.

[Anke Reingen, European Banks Analyst]

The first is on your interest rate sensitivity where you have released on Slide 81, so on the sensitivity. And I just wondered, I guess, the pass-through rate you now experience in the Czech Republic that is consistent with that sensitivity you show on Page 81. And then secondly, on the part is on deposit charging, would that be included in the sensitivity as well? And if you can just give us an update on where we currently stand on the deposits charge.

[Roger Elie Popelier, CFO & Executive Director]

Okay. Anke, in the interest sensitivity that we show on Slide 18, the pass-through rates are not included. It's just a static balance sheet and immediately -- an immediate reaction. We have theoretically included a small pass-through, but this is just critical and does not link to what we now see or think is going to happen in the future. So we have not adapted that pass-through, which in the number 4 what we believe is going to happen going forward. Your next question on the...

[Anke Reingen, European Banks Analyst]

Who's going to take charge?

[Roger Elie Popelier, CFO & Executive Director]

Yes, yes. The negative charging, we have now about EUR 9.1 billion of deposits negatively charged. So that's about EUR 700 million, I think, increase. EUR 400 million increase? No, it's more.

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

EUR 700 million.

[Roger Elie Popelier, CFO & Executive Director]

EUR 700 million increase compared to last quarter. So quite a strong increase quarter-on-quarter, but around EUR 9.1 billion at the moment.

[Anke Reingen, European Banks Analyst]

Do you think that's sensitive to a change in rates, so that would be the numbers on Page 81, I guess, or gross of the potential lower charging demand?

[Roger Elie Popelier, CFO & Executive Director]

Anke, could you repeat your question?

[Anke Reingen, European Banks Analyst]

Yes. So how sensitive do you think charging those deposits as to change in rate? And would that be concluded on Page 81 if rates would go up? Would you be -- do you think you still would be able to charge those deposits?

[Roger Elie Popelier, CFO & Executive Director]

Sorry, I'm not sure I understand your question.

[Anke Reingen, European Banks Analyst]

Well, I can follow up with that afterwards this time.

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

Yes. We have a very difficult line, Anke. You're very difficult to understand. But perhaps we can take it further off-line then, okay?

[Anke Reingen, European Banks Analyst]

Yes. Thank you very much. Thank you.

[Operator]

We don't have any further questions at the moment. [Operator Instructions] You have another question coming from Benoit Petrarque from Kepler Cheuvreux.

[Benoit Petrarque, Head of Benelux Equity Research]

Yes. Just on the negative charging of rates, it's one of the -- your main competitor in Belgium took, let's say, a bit more decisive actions on the regulated accounts. So how do you see these trends on the Belgian market without providing any future guidance, obviously. But is that potentially something which could be applied to the broader market you think?

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

Thanks, Benoit. And indeed, we do see -- so in general, on the Belgium market we do see the negative charging mainly for SMEs and corporates and then also for certain bigger accounts on the private banking side. That is something which we apply in KBC as well. And we do see a couple, but literally a couple of banks which apply above a certain threshold, which mostly have done EUR 1 million on the account, a negative charge to customers and then even on a customized basis. So for private individuals, it is not a common standard that deposits are charged negatively on the Belgian market. KBC is indeed also not applying, therefore, a negative charging in general for retail customers. But we do have adapted our systems, which means that we are in the possibility to do so if that is commercially indeed required and allowed by market circumstance, but we are not the first one to move in that perspective.

[Operator]

We have a question now from Robin van den Broek from Mediobanca.

[Robin van den Broek, Research Analyst]

I just wanted to ask a question on our markets you've put on the fee income side. It has an important shift from low-margin institutional advisory mandates towards retail funds. I was just wondering if you could put that into perspective. Is this just the mix effects where you have outflows on the institutional side and you have inflows on the retail side? Or is there some other dynamic going on that could be a sustainable deal in going forward? And secondly, maybe on M&A, can you just confirm you don't have any active files on the table? It sounds a little bit like this entrance to new markets is a little bit propelled by the opportunity that was there in, I think, Slovenia like 6 months ago?

[Roger Elie Popelier, CFO & Executive Director]

Sorry, we're just asking ourselves who would answer the first question, so I will answer the first question. There -- the shift you see, indeed, we just want to have mentioned that because although the increase in net sales is limited for quarter-on-quarter, there was an important shift between low-margin products, institutional advisory mandates on the one hand, and then shifting to collective funds and discretionary retail mandates. And that was important, almost EUR 1 billion shift. So -- and in terms of management fee, that is quite important because on the institutional money and advisory, you earn between a few basis points to 10 basis points. On the collective funds and discussion on retail, it's anything between 80 to 150 basis points. So that's quite a different big impact. Do we see this as a trend? Well, we do see, as a trend, as I mentioned before, the continued strong increase in net sales of retail funds and discussion retail mandates. The negative impact we now saw out of institutional money has most to do with one large institutional accounts, which has shifted their money. We don't see that repeating because, first of all, it was one large account. We don't expect anything of that sort to happen again in the next 2 quarters. And secondly, institutional money should recover again. But the mix obviously will continue to change in the favor of collective funds and discussion of retail mandates with higher margins given the higher growth rates we expected there.

[Robin van den Broek, Research Analyst]

And look, maybe can you remind us the monthly standard money that people put in through their savings accounts nowadays? Can you remind us of the trajectory of that year-to-date?

[Roger Elie Popelier, CFO & Executive Director]

On the month -- in the deposit accounts, you mean?

[Robin van den Broek, Research Analyst]

Yes. The people put part of their way to basically send that into their investment account, the structural mandates specifically from that side.

[Roger Elie Popelier, CFO & Executive Director]

The retail, it's about the -- in the funds, it's about EUR 500 million per quarter net sales going into retail, these retail funds, retail investment plans, EUR 500 million for the group as a whole.

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

Okay. So coming back to your question on M&A, Robin. So other active files on the table? you know that we never disclose that on beforehand. So we didn't do that when we were acquiring Nationale-Nederlanden Life Insurance and Pension business in Bulgaria. And we do not comment either on your question today. But as always, we are constantly monitoring the market. And for that reason, I cannot confirm nor deny, just no comment on your M&A. When it is a given, we will inform you for 100% certainty.

[Operator]

Thank you. There are no further questions now.

[Kurt De Baenst, General Manager, Investor Relations]

Are there any further questions?

[Operator]

No, there are no further questions now.

[Kurt De Baenst, General Manager, Investor Relations]

All right. Then this sums it up for this call. Thank you very much for your attendance and hope you remain healthy. Take care and enjoy the rest of the day. Cheers.

[Operator]

Thank you. And thank you, everyone. That does conclude your call for today. You may now disconnect. Thanks again for joining, and do enjoy the rest of the day.