KBC Groep NV

XBRU:KBC

Earnings Call Analysis

KBC Group Reports Strong Q3 Results with Positive Net Interest Income Growth

KBC Group achieved a notable net income of EUR 868 million for Q3 2024, supported by a diverse revenue increase across its markets. The company effectively managed a significant recovery of EUR 6.5 billion in customer deposits, a net positive of EUR 0.8 billion from last year. Looking ahead, KBC confidently projects a net interest income of at least EUR 5.6 billion for 2025, driven by a robust lending environment and a stable fee business. Despite a slight increase in costs by 6%, the solvency ratio improved further. An interim dividend of EUR 1 per share is to be paid on November 14, reinforcing shareholder confidence.

Strong Third Quarter Performance

KBC Group reported an impressive net profit of EUR 868 million for the third quarter of 2024, showcasing robust contributions from all operating markets. This result reflects the strength of KBC's commercial efforts and improved customer engagement, particularly in recovering funds from state notes, which contributed significantly to the net inflow of EUR 6.5 billion.

Net Interest Income and Cost Management

The company achieved a 1% increase in net interest income, reaching around EUR 5.5 billion for 2024 and projecting at least EUR 5.6 billion for 2025. This growth is underpinned by strong lending performance and asset management initiatives. KBC's operational costs rose by 6% primarily due to investments in IT and increased facility expenses, but this was in line with prior expectations.

Impact from State Notes and Market Dynamics

KBC faced competitive pressures with a EUR 87 million negative impact linked to state notes, split between EUR 26 million in 2024 and approximately EUR 61 million expected in 2025. Despite this, the firm observed a positive shift in customer deposits and robust growth in term deposits that will benefit funding needs moving forward.

Insurance and Fee Business Growth

The insurance segment displayed healthy growth of 8% year-on-year, buoyed by solid sales and successful commercial campaigns. KBC also noted a 3% increase in fee and commission income, largely driven by new asset management strategies, reinforcing its strong position across multiple revenue streams.

Digital Transformation and Customer Engagement

KBC continues to invest heavily in its digital capabilities, recognized by winning awards for its mobile banking app. This focus has resulted in a productivity gain of 1-1.5%, with the AI-driven assistant 'Kate' significantly enhancing customer interactions. Over 5 million users have engaged with this technology, indicating a strong market presence.

Sturdy Financial Ratios and Future Outlook

The solvency and liquidity positions have notably improved, with a solvency ratio of 15.2%. KBC is confident in maintaining its robust financial health amidst expected rate cuts and ongoing market changes. The focus on operational effectiveness and customer-centric growth strategies positions KBC well for the upcoming quarters.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the conference call of KBC Group. [Operator Instructions]

I would now like to turn the call over to Mr. Kurt De Baenst, Investor Relations, General Manager. Mr. De Baenst, over to you.

[Kurt De Baenst, executive]

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 Thursday, November 7, 2024, and we are hosting the conference call on the third quarter results of KBC.

As usual, we have Johan Thijs, Group CEO with us; as well as Group CFO, Bartel Puelinckx, and they will both elaborate on the results and add some additional insight.

As such, it's my pleasure to give the floor to our CEO, Johan Thijs, who will quickly run you through the presentation.

[Johan Thijs, executive]

Thank you very much, Kurt. And also from my side, a warm welcome on the announcement of the third quarter results 2024. We will do that as usual via the slides which are at your disposal.

Starting with the highlights. Well, we posted an excellent result of EUR 868 million which is indeed, once again, an expression of the commercial machine firing on all its cylinders. All countries have contributed very well.

And also what is for sure, something which you have on the mind, what happens with the recovery of the State Note monies in Belgium. Well, we -- as you remember, we had an outflow of EUR 5.7 billion. We recuperated EUR 6.5 billion of our customer monies, which means that in excess of EUR 0.8 billion came on top and that is an expression how we have positioned ourselves in the market, and it is not only true for Belgium, but in essence, for all of our markets in the group.

Consequently, we see that our net interest income has risen 1%, that we have been able to sell more customer loans than before and that we are able to increase our fee business significantly as our insurance business as well.

In terms of where we are with the sales in our life insurance business, also there, we had a fairly strong increase over the quarter and over the year.

In terms of outflowing monies, we have seen a one-off, which is a gain on a participation in an associated company of EUR 79 million. But on the other hand, costs are under control. There is an uptick of our costs of 6%, but it is perfectly in line with the guidance given earlier, and we have seen good results on the insurance side despite the fact that natural catastrophes in the form of windstorms but also floodings in Central Europe called Boris have kicked in quite significantly.

Impairments are lower than previous quarter. In that perspective, also perfectly under control. And as a summary of all these numbers, the solvency ratio of KBC has further improved as has done the liquidity position. We, therefore, also feel very confident to announce again, fully in line with our dividend policy, that we are going to pay out an interim dividend of EUR 1 per share on the 14th of November of this year.

So we have expressed some elements in terms of more relative numbers. You can see that on the righthand side of the slide. The results are translated in a return of equity of roughly 14%.

Let me go into other slides. First of all, we are very proud also to flag that KBC has been nominated by an external partner, Sia Partners, as having the best performing mobile banking app globally, and we are pretty proud on this one. It's the second time that we have the honor to have won this prize, and it also translate all the efforts and all the results which KBC has put into and has achieved by using technology, amongst others, AI technology group wide.

The good news about winning this prize is also that it translated in our results. We have, in the meanwhile, more than 5 million of our customers, which have been in contact with Kate and start to use it. We do see that what they are doing is paying also off in terms of our productivity. We do have a productivity gain of 1% to 1.5% linked to all the usage of that technology.

But what is more imminent is that if you only look at Kate, then we see that 52 messages are pushed to Kate to our customers, that Kate is in itself able to sell 236,000 products to our customers fully independently in the last 12 months, and this is an exponentially growing curve and that if you would calculate this in terms of customers interacting with Kate and you would calculate it in a kind of conservative rate, then we are roughly around 300 people where Kate is doing the equivalent work off.

What about the split, bank and insurance? Well, it's an 88%, 12% split which is more or less in line what we have seen in the longer-term average. So let me skip over that.

And let me indeed also go over the next slide, which is stressing again that we are doing everything. What is in the green is amongst the better part of the peloton on sustainability, on solvency, on profitability, but also on digitization.

In terms of one-offs, I already mentioned a one-off of EUR 79 million because of the share of results in an associated company. The company is a Belgium payment fintech, which is giving us an extra, plus surplus value of EUR 79 million. All the rest are actually tiny amounts, and therefore, let me skip over it and go immediately to things which are more important that is net interest income.

First of all, KBC, as you know, is a very well diversified institution. Net interest income is, therefore, only 50% of our total income, but that 50% has further increased over the quarter with 1%, despite the fact that inflation-linked bonds impact this quarter was negative minus EUR 23 million.

So despite this drawback, we have been able to outperform our previous quarters and also same quarter last year in a significant manner, and this is mainly the result of higher commercial transformation results. As we already indicated that on earlier calls, the [ housing ] strategy of KBC allows us to indeed be very confident that our transformation result will continue to increase going forward despite the fact that rate cuts are kicking in.

Next to that, we also see that the lending income has grown further. In this perspective, it's mainly driven by volume growth. We have been growing 1% on the quarter and 5% on the year.

By the way, this is also a confirmation that we are very confident we will achieve the 4%, the corrected and the amended growth level on a year basis, 4% that we will definitely achieve that by year-end. Today, we are year-to-date at 3.5% of that loan growth. But also, I mean, in terms of the margin, it's quite clear. And it depends from country to country. So in certain countries, we do see margin increasing. But in general, there is pressure, commercial pressure on the margins on the lending business.

Consequently, also because of the fact that the interest-bearing assets have increased significantly with more than EUR 3 billion, the net interest margin has dropped. On the slide, you can see 2 points, but the reality is a bit more than 1.5 basis points -- sorry, and now stands at 208 basis points.

Let me come back to the net interest income. I already mentioned the inflation-linked bonds. We are still very confident that what we guided for will be reached in the fourth quarter as well and all the rest are more smaller numbers.

Therefore, let me not go into the detail and also let me skip the year-on-year difference. But all in all, this result on the net interest income is something we are very confident to see evolving in the same way in the next coming quarters.

Sorry, before I go to fee and commission, what about the core customer money? So as a matter of fact, what about the impact also of the Belgium State Note. In total, for the entire group, we saw this quarter a very strong EUR 8.7 billion inflow of core monies. This is translated as a shift on, in essence, current account savings accounts of roughly EUR 1 billion, which is flowing in, in 2 types of products. First of all, mainly the term deposits on one hand, and savings certificates on the other hand. In total, EUR 7.6 billion.

But also we have seen a very strong increase of the net inflow on the asset management and life insurance product, mutual funds, which is translated in an extra inflow in this quarter only of EUR 2.1 billion.

So it sums up to a whopping EUR 8.7 billion. And if you then make the calculation over 9 months of this year, you come to the conclusion that the customer money dynamic is a positive of EUR 14.4 billion in this year.

Let me highlight as well that over 9 months, we were to even -- despite the commercial pressure, we were able to increase the volumes on our current and our saving accounts with EUR 0.4 billion, which is better than what we have anticipated for at the beginning of the year in terms of shifts.

Now when I speak about these numbers in the third quarter, obviously, they are influenced by the recuperation of the maturing EUR 22 billion State Note in September in Belgium. You can see that on Slide 8. And well, the result of KBC is in terms of volume, absolutely excellent. So we had an outflow of EUR 5.7 billion. We recuperated EUR 6.5 billion, which means that we have been able to collect EUR 0.8 billion more than what we have seen in an outflow a year ago.

The split up of that EUR 6.5 billion is on Slide 8. EUR 6 billion went into term deposits. EUR 1.2 billion went in savings certificates. We had a shift in our current and saving accounts, and we -- that shift went partly into other funds, other funds like asset management products, but also life insurance contracts and [ short lives ]. So the total of EUR 6.5 billion.

Now this also means 2 things. First of all, given the very fierce competition, which happened during that period and as you know, KBC or perhaps you don't know, therefore, let me highlight it, KBC only participated in this competition during 14 days, whereas some of our peers were collecting over a month their funds. So the negative impact giving the fierce competition of the total action in September is going to be EUR 87 million, of which EUR 26 million in 2024. That means roughly 3.5 months and the impact in 2025 is EUR 61 million.

The EUR 61 million, for good understanding, will be partially offset by a couple of other things. We have summed up a list of potential things to be aware that given the fact that we have collected more than 6.5 -- roughly EUR 6.5 billion of deposits, that it will have a positive impact on our funding needs in '25. It will clearly also pay off in terms of our fee and commission income. And then last but not least, also on the maturity date of the State Note in '25, there, obviously, the things were fundamentally different because we will be in a completely different rate environment by that date.

Let me go to fee and commission on Page 9. Here, again, a very solid result. Once again, we have seen an increase of the fee and commission business generated through the banking services and the asset management services with EUR 18 million. That is 3% extra, of which 3% is also the evolution of our asset management services.

The asset management services are driven by, in essence, 2 things. Of course, the good market performance, but clearly, also the fact that over the year, we have seen already a strong increase and as you know, in terms of asset management margins -- sorry, asset management fees, that is built upon the stock as well.

In terms of the net inflow, I already mentioned, we had a very strong inflow this quarter, EUR 2.1 billion on the quarter. If I compare that with previous quarter, that is EUR 1.4 billion more. If I compare that with the same quarter last year, that is even EUR 1 billion more. In total, we are now at EUR 4.6 billion inflow of funds. That is absolutely a record.

As a matter of fact, when we had budgeted this year, we did not budget for EUR 4.6 billion for the full year. So in this perspective, it is even better than the position of last year which was a record result.

It also translates in gross sales, which are also at record highest, EUR 3.4 billion, and that's significantly better than what we have seen in the same period last year.

Let me go to the other contributing elements. Banking services are up significantly as well. This is mainly triggered by payment services, payment services, which are seasonally bound and given the composition of third quarter, which is intrinsically at least 2 months holiday period, there is no surprise that they are performing very well.

In terms of the asset under management, we now stand at EUR 269 million. This is 18% more year-on-year, just to express what I just said.

In terms of insurance business, well, insurance business has grown 8% over the year, which is the contribution in Belgium, 6% and more than 10% in the Central European currencies. So both have known a very solid growth.

The combined ratio stands at 89%, and that is negatively influenced by roughly 2%, given the impact of natural catastrophes. For good understanding, the natural catastrophes, I mean, in essence, the Storm Boris in Central Europe, it has had a very devastating impact. There are many casualties. And on top of that, we have seen significant damages to infrastructure and housing. For us, it translated in a cost price of EUR 77 million gross in terms of net impact. So after reinsurance, we are talking about EUR 33 million of pretax only for Storm Boris.

If I take into account all windstorms, including the ones in Belgium and others in Central Europe, then it is quite clear that the natural catastrophes are a significant part of our business on the insurance side, EUR 49 million after reinsurance total impact in this quarter.

In terms of the life insurance sales, I can be very brief. Excellent quarter, much better than previous quarter, much better than last year's same period, 28% up, respectively, 80% up, and this is driven by commercial campaigns, which we have followed in this quarter. And traditionally, when we do commercial campaigns on these matters, then it has a positive impact on the result.

In the meanwhile, unit-linked stands for 51% of the total production, whereas interest guaranteed rates stand at 42%. The difference, the balance between 100% and the numbers I just mentioned are hybrid products.

What about the financial instruments and fair value, super volatile P&L line? As you know, this quarter, there is a difference of EUR 45 million with previous quarter, mainly driven by the negative credit funding and market value adjustments, which are the result of a decrease in the euro and the Czech koruna rates. And this is, I think, the most important part I could say about this. The other one, which is also quite important, that is the dealing room result has performed a little bit better despite difficult circumstances and it has contributed not substantially more but EUR 1 million at least better.

Net other income, slightly lower than the run rate of EUR 50 million. Now it stands at EUR 45 million. So let's consider this to be normal and let's go to more important P&L lines, that is the cost side.

KBC has seen an increase of their costs of 6% on a year basis which is mainly driven by traditional stuff. So we have invested -- we are investing significant amounts in ICT, and we have beefed up those investments a little bit more in third quarter.

You have the inflation which kicks in and which is part, amongst others in Belgium, of an indexation of wages in the second quarter which are for the first time in the results in the third quarter, and we do see higher facility expenses and higher depreciation.

That is offset by a decrease of lower FTEs, but of course, not in total. In this perspective, we need to understand that over the period of 9 months, costs are flattish despite the inflation. So we are perfectly in line with our guidance and we are perfectly in line with the longer-term targets, which we have put on this.

Cost/income ratio stands at 43% without bank taxes, and that is also perfectly in line with the cost/income ratio of last year despite the whopping inflation, as you know. Certainties in life, bank taxes continue to go up. This time, this is mainly triggered by an intervention of the Hungarian authorities asking a EUR 37 million more bank taxes.

As a matter of fact, this is even a mitigated number. Perhaps you remember from the second quarter announcement that there were a couple of mitigating actions. Well, we have taken those into action and therefore, we brought down the impact of the Hungarian bank taxes by buying Hungarian government bonds. In this perspective, EUR 37 million is the end result.

EUR 9 million extra in Slovakia and then EUR 1 million in Czech Republic sums it up to EUR 47 million. The Bank taxes are then explicitly mentioned on Page 13 in all detail. It is significant, 13% of our total OpEx. And therefore, I mean, no further comment.

And on the next page, we have the asset impairments. Well, the good news is that the assets are -- the total impairments are EUR 69 million, which is split up in 2 parts, an impairment in essence on software, EUR 7 million, and the real impairments on loans are EUR 61 million.

Now that EUR 61 million comes of 2 parts. First of all, EUR 132 million impairments on the lending book. But in that EUR 130 million, we took a deliberate impairment on old nonperforming loans, amongst others, pushed also by the ECB, which is pushing for this already for several years with all the banks, not only KBC, this is a common denominator and a consequence of taking EUR 54 million, which in essence, 2 files, is giving us a release of 4 basis points potential increase on our Pillar 2 requirement going forward. So that remains stable. So it shifts from one side to the other.

Total remains then that we have roughly, let's say, EUR 78 million of impairments which are clearly in line with what we have seen in previous quarters.

The credit cost ratio consequently -- sorry, I forgot to mention one thing. EUR 71 million was released out of the buffer of geographical emerging risks, which means that the buffer still holds at EUR 168 million of provisions.

If you translate that in credit cost ratio, the credit cost ratio stands at 10 basis points all in, stands at 16 basis points if you exclude the ECL buffer, which is indeed significantly better than the longer-term guidance -- than the guidance which we have given, including the longer-term numbers in this perspective.

Impaired loans stands at 2.1%. If you use the EBA definition, it stands at 1.56% which is significantly lower than the European average.

Now all the other numbers are then also related to the -- no, let me first go into the CET1 numbers. So in terms of the capital position of KBC, we stand at 15.2%, which is a further improvement of our previous number with 1 basis point of the building blocks. I mentioned there on the slides, in essence, the risk-weighted assets have been creeping up, in essence because of volume growth on the lending business side.

In terms of buffers, we are with an OCR at [ 11.8% ], giving us a buffer of 4.4% and an MDA buffer of 4.1% coming out of an MDA ratio of 11.1%.

In terms of solvency and leverage ratio, well, we are at a leverage ratio of 5.7%, which is slight increase compared to previous quarter, mainly driven by the fact that we lowered our cash and cash balances with central banks. We have a liquidity ratio, which stands solidly above the requirements, 159% in the short term and 142% in the midterm liquidity ratios. And in solvency position of the insurance company, just slightly below 200%, which is mainly triggered by a wider spreads in government bonds area.

And given the fact that KBC is investing mainly in its sovereigns of the home countries, there is not an adjustment or not a full adjustment by the volatility adjustment because that is investing on the European basis and that is not necessarily concentrated in Belgium and, amongst others, Czech Republic.

Anyway, looking forward, well, we do see that the third quarter was known by a moderate growth of 0.4%, which comes in total for the full year on a growth of roughly 1% in the Eurozone. Well, we are well positioned because the Eurozone is split up in 2 parts clearly, that is Western Europe hovering around at 1%, whereas in Central Europe, the growth ratios are higher, most of the time, at least 1% higher.

So in that perspective, you also see that over 2025, same evolution can be expected. Growth levels for '25 roughly around 1.1% in Western Europe and then in Central Europe, at least 100 basis points higher. For certain countries like Hungary, for instance, Czech Republic, we expect even 1.5% higher.

On Slides 19 and 20, first of all, 19, the guidance. Well, we have stated that our numbers would be roughly EUR 5.5 billion ballpark. On the previous occasion, we said that given the potential impact of the State Note, we would expect that midpoint EUR 5.5 billion minus the impact of the State Note would lead us that the full year net interest income would be more toward the lower end of the range. Well, today, we are confirming our guidance that we will easily reach the EUR 5.5 billion midpoint.

As a matter of fact, given the impact of the State Note, giving the strong evolution of our transformation result and the continuous strong performance on the lending side, we are very confident to say that we will easily reach the EUR 5.5 billion going forward.

As a matter of fact, all the other elements which are on the slide in terms of guidance will be achieved and we can state that officially now even at the end of the third quarter, will be officially -- will be easily achieved going forward by year-end.

The longer-term guidance we don't provide yet with one small detail that is on the net interest income. Given the evolution of the transformation result and our lending book, given the expectations which we have going forward on GDP, we are quite confident that for 2025 on the net interest income side, we'll come with a net interest income of, let's say, roughly EUR 5.6 billion, and I would add to that, at least.

The further detail on this matter will be given, of course, at the back of the fourth quarter results announcement because we are in the middle of the process of our budget exercise and that budget exercise will be concluded in December. And we will update you more not only on '25, but also '26 and '27 going forward at the end of the fourth quarter -- at end of the announcement of the fourth quarter results.

I would end with Basel IV. We have conducted a full review of the Basel IV impact, where more and more details come to the surface now. We have used the numbers of the second quarter of 2024, compared them also with the second quarter 2023, which was the previous calculation.

Well, the situation remains more or less stable. You have here and there a little bit of small shifts because we now have more detail on all parameters, which are replacing proxies, which we used in the previous calculation.

And let me summarize it. The total impact is EUR 8.5 billion of risk-weighted assets fully loaded, of which EUR 5 billion is at the very end of the tail, so in 2033. It's related to the output floor. And to be very bold, that's a long time to go, so it will be possible to take a lot of mitigating actions in order to mitigate the impact of that output floor. The first time impact is the -- sorry, the first time application impact is roughly EUR 1 billion. And then over the period '26, 2033, we will see a EUR 2.5 billion impact going forward.

So more or less in line with what we announced earlier, but now with more detail and with more certainty.

I will skip the entire part of the countries, and I'll give back the floor to Kurt who will guide us through your questions.

[Kurt De Baenst, executive]

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

[Operator]

[Operator Instructions] We will take our first question from Giulia Miotto from Morgan Stanley.

[Giulia Miotto, analyst]

The first one on Slide 7. Clearly, this was very impacted by the state bond. How has that evolved in October? I would hope that you have seen the mix shift stabilizing or even improving with current accounts improving. And how do you see it going forward? So can we really say, okay, this was a one-off? Or is there further competition and pressure in the market?

And then my second question regarding this storm. So this is something that will repeat in the future, I guess, given climate change. So how quickly can you adjust the premium to factor in yes, the increased probability of these type of events?

[Johan Thijs, executive]

Thanks, Giulia, for your questions. Let me answer the first one. So what we have seen in the second quarter already. And then in the third quarter, it was repeated that in most countries, definitely in the non-euro countries, that because of the rate cuts, we do see term deposits flowing back to the current accounts and savings accounts. And this was an evolution which we already mentioned in the second quarter, which we have seen in the third quarter.

Now for Belgium, it is indeed and therefore, I mean, you already pointed to that, and Belgium, of course, this is impacted because of the state note, which is a completely different dynamic, what happened in Belgium. So in all the other countries, I would say, the evolution of [ end ] rate cuts triggered the event that term deposits are flowing back to the current account, savings account is confirmed in this quarter.

And therefore, we are pretty confident that this is going to go also in the same way in the quarters to come because we expect more rate cuts to come, not only in the non-euro countries, but surely also in the Eurozone.

[Bartel Puelinckx, executive]

As far as your second question is concerned, which I understand is how we'll be able to adjust the premiums following the storms. Well, we will have seen that basically, our gross written premium in non-life has increased by 8% or EUR 44 million over the year or year-on-year and this in all countries and also in all asset classes. But more importantly, both driven by increase in tariffs and increase in volumes. So we are able to pass through, indeed, the cost to the customer.

[Johan Thijs, executive]

Once a year.

[Bartel Puelinckx, executive]

Once a year, yes, of course, once a year.

[Operator]

We will take our next questions from Farquhar Murray from Autonomous.

[Farquhar Murray, analyst]

Just 2 questions, if I may. Firstly, I wondered if you'd give us an update on how you've seen the competitive dynamic in Belgium develop so far in 4Q following on from the [ state note ]? That's both on deposits and actually mortgages and particularly, whether you see any moves on the core deposit rate that may have surprised you.

Secondly, a more techy question on the insurance side. Obviously, 3Q saw a significant fall in interest rates, and I'm conscious that can kick through some volatility under IFRS 17 in non-life. So please, can you just run through the impact of lower rates on the current year discounting in 3Q? And if possible, what we might reasonably expect in 4Q?

[Johan Thijs, executive]

Thanks, Farquhar, for your question. Well, the first one is a very intriguing one. Of course, competition is something which is very volatile and which is changing, could change every day. What we do see is, first of all, in the third quarter, these are facts, that KBC was able to attract more monies than what we have seen losing in September 2023 in terms of the state note. So this is the first element.

What is crucial to understand is we closed our commercial campaign 14 days before others did. The main 2 competitors in this perspective, ING and Belfius continued longer, which shows that KBC is indeed having a commercial power, which is very significant in the Belgian market.

Going forward, we expect this to happen in the same way because in that perspective, also on the lending side, you can clearly see that KBC has been able to build its market share. to build its growth also in the Belgian market.

Now if I broaden the perspective a bit further into other geographical areas, we can see clearly in the third quarter, the same elements which I just depicted for the Belgian market in the Central European market. So we are growing our market share in general in most of our countries. Here and there, you have a little bit of a detail depending on the product, depending on the country. But in essence, we are able to further build our market share in terms of lending, in terms of deposits, but also in terms of other products in general.

Well, on your second question, if I understand well your question because I can interpret it in different ways. First of all, the interest rate environment has an impact on several parts. Of course, we do have -- we do see an impact of interest rates on our CSM, for instance, commercial service margin, which is intrinsically calculated on the back of evolving interest rates and so on so forth and has an impact on best estimates as well, as you know. So in that perspective, I can give to you that our CSM margin stands solidly at 16.2% -- 16.3%, sorry, which is in line with what we have seen in the previous quarter, besides the fact that last quarter, we had a one-off impact for something which is a model change. And therefore, I don't take it into account.

Other elements in terms of evolution of interest rates have no immediate impact on the non-life business, for sure not. And definitely, what I just said on the operational business, on the life side is translated by the CSM.

[Operator]

We will take our next questions from Benoit Petrarque from Kepler Cheuvreux.

[Benoit Petrarque, analyst]

Benoit Petrarque from Kepler Cheuvreux. So the first question is on the EUR 5.6 billion NII target for '25. So if my math are correct, so EUR 5.5 billion will imply EUR 1,360 million on NII for Q4, which is annualized EUR 5.4 billion, actually above EUR 5.4 billion. So could you walk us through the main moving parts for an improvement of roughly EUR 150 million in '25 on NII? And could you maybe also detail how much positive you expect from the replicating portfolio in '25 versus '24 and also in '26 versus '25? That would be extremely useful.

And then the second question is on the EUR 87 million guidance. Back of the envelope, I get to roughly 50% of the impact coming from the inflow in term deposits and 50% of that amount coming from outflows on current accounts. So just wanted to check that with you. I'm asking because I wanted to check whether you expect basically a reversal in the fourth quarter '25 of this negative effect and how much you expect from the EUR 87 million to be recovered in '26.

[Johan Thijs, executive]

Thanks, Benoit for your questions. Let me start with the answer, and Bartel will jump in. So on the guidance, first of all, for '24 and then afterwards for '25 and '26 and '27 as you requested, well, on the EUR 5.6 million correction of the guidance for '25, well, what we -- let me start with '24. What we have seen in '24 is, first of all, a very solid performance of our transformation result.

You have a couple of things which have influenced this negatively this quarter, and that has to do with, in essence, inflation-linked bonds; and second thing, the first impact of the state note be at 2 weeks.

For '24 last quarter, the impact of the state note will be more significant. In total, for the full year, the impact was EUR 26 million, as we have indicated in the presentation. But given the strong performance of the transformation result, given the solid performance on the lending side, we are very confident indeed to give the guidance of 5.5 -- more than EUR 5.5 billion in 2024.

Now this is crucial to understand why we are very confident to give a guidance of EUR 5.6 billion at least in 2025 because the transformation result is based indeed on a replicating portfolio influenced by 2 things. First of all, how you have hedged the position. We have indicated that earlier that we have taken a longer stance at the right moment. And the second thing on the shifts between current accounts, savings accounts and term deposits.

Now for 2025, given the fact that the vast majority is now locked in, in term deposits, we don't see those current accounts, saving accounts and term deposit shifts happening to the same extent of what we have seen them in 2024. That's why I already answered to Giulia earlier in this call. And the second thing is given also the fact that rate cuts are going to happen, we do see, like in other countries, that shifts are stopping anyway.

So on top of that, as of September next year, we have a maturity of the EUR 6.5 billion, which has come in, for sure. Part of those maturities will come earlier because, as you know, we have pulled in those monies on 2, actually 3 maturity periods, 6 months, 12 months and 13 months. So in that perspective, that will come in into the year. And therefore, we're very confident that given the strong transformation results, given the continued lending growth, which we have seen this quarter and given the fact that GDP forecast is assumed to be at least at the level of 2024, given the fact that current accounts, savings accounts, term deposit shifts are anyway mitigated by the numbers which are locked in the term deposits today, but also the fact that rate cuts have normally a negative impact on monies flowing in on term deposits, we are confident that it will be EUR 5.6 billion next year, at least.

In that perspective, we are currently conducting the exercise of the budget. The reason why we don't answer today is because we are still in the process of talking, amongst others, to our Supervisory Board. As a consequence, '26 and '27, we don't provide you any more detail today. We can't to be honest. And then it will be too early. And then secondly, we will do that on -- during the announcement of the fourth quarter results that is early next year as usual.

[Bartel Puelinckx, executive]

Okay. Thank you. And as far as the second question is concerned, basically, as you know, so we generated EUR 60 billion in mainly 2 products in term deposits. There was one on at 4% over 6 months and one at 3.8% over 13 months so take that into account. You know that we -- this came in due to the commercial action as a negative margin of roughly 80 basis points, so you can calculate what that would represent over the term deposits that we generated.

[Operator]

We'll now take our next questions from Tarik El Mejjad from Bank of America.

[Tarik El Mejjad, analyst]

Well done on the resilient numbers this quarter. I will come back to NII, please. And thank you for running us through all the moving parts. Makes a lot of sense. But there's 2 elements in there where I want to test a bit your conviction. The first one is on the volume growth. You already will be growing 4% this year in what you've been seeing as a quite promising year with lots of optimism from the kick start, right?

We are going to a more uncertain environment, and we can see within the corporates in Germany, in France already turning a bit more pessimistic. And your economy in Belgium and Czech Republic very much linked to that. So how really convinced that the incremental actually growth can be there to sustain the more pressure coming from the lower rates?

And the other area is the migration to -- or stabilization or you're even quoting actually flowing back to savings and current deposits. This is something we haven't observed in any jurisdiction actually, I would say. So is this -- I mean you sound confident that this trend will continue, but what's -- how really already convinced about that?

And the second point is on fees. You are delivering on your 6% CAGR, even exceeding that. How much -- sorry, on the insurance revenue, sorry, not the fee income, how much more upside do you think you can deliver on that?

[Johan Thijs, executive]

Thanks for the questions, Tarik. Let me go for the first one. So in terms of volumes. Well, the philosophy is the following. The growth this year in Europe -- GDP growth in the European domain was roughly 1%, actually a little bit lower, 0.9%, and definitely there, a split between the Western European part and the more, let's call it, Central European or Eastern European part.

The expectation for next year is that it will be more or less the same, but a bit higher. So from 0.9%, roughly 1% to 1% to 1.2%. So if -- the philosophy is the following. On the back of what we have seen in GDP growth this year, we are able to do roughly 4%. There is no reason to believe why we -- by the way, this is a track record for KBC for the last 10 years that we achieve at least the numbers in the GDP growth. So if today, '24, 0.9% GDP growth is resulting in a more or less 4% growth on the lending side, there's no reason to believe that the growth will stop next year when the GDP growth is going higher than what we see today.

The second element to that is that the split up between Western European and Eastern and Central European is in our favor, given our positions in Central Europe. So in that perspective, the growth forecast for Central Europe is significantly higher than what we saw in 2024.

So in this perspective, this is -- on the back of those numbers, this is a quite realistic assumption. How much of this indeed, we will give you at the announcement of the quarter 4 results where we then have the full detail of every country going forward.

In terms of migration, I understood in your question is that we don't have any evidence yet in any kind of jurisdiction that the migration stop between current accounts, saving accounts, term deposits is happening. But as a matter of fact, this is not entirely correct. What we do see in, for instance, Czech Republic and in Hungary, where they, of course, are further down the line in terms of interest rate cuts, you saw that the Czech authorities, like National Bank, and the [ major ] authorities have cut significantly their interest rates.

We saw immediately that the monies which are maturing on term deposits are floating back and staying there on current accounts and saving accounts. As a matter of fact, we saw the same thing happening as well in the second quarter in Belgium, and it is confirmed in the third quarter, be it that is distorted by the state note in Belgium and the commercial campaign, logically by the commercial campaign, which is following that.

So the evidence which we see and we all already told it on previous occasions that we used the situation in Czech Republic as kind of a guide for what's going to happen in the Eurozone because they're advancing the Eurozone with at least 6 months. Well, we do see there that's something which we saw in the second quarter will be confirmed in the third quarter and, therefore, likely will be confirmed in quarter 4 and quarter 1, 2 and 3, 4 of next year.

[Bartel Puelinckx, executive]

Then as far as your second question is concerned on the guidance in terms of insurance growth. Well, first of all, you have the guidance. It's at least 6% year-on-year, which definitely is the floor. So indeed, we expect -- as you have seen, we already have 8% gross written premium growth on the non-life and substantially more also on the life side.

Now we have always also indicated that our ambition is to grow, at least in insurance, thanks to our bancassurance model, even more, 50% more than the market. And what we see also is that in Central Europe, in some of the countries, that basically property insurance, et cetera, is not -- I mean, not all people have property insurance in Central Europe as is the case in other countries or in Western Countries.

And last but not least, I would like to also indicate that what we've seen so far is of that growth is that we see in the Central European countries, actually double-digit growth.

[Operator]

Our next questions comes from Kiri Vijayarajah from HSBC.

[Kirishanthan Vijayarajah, analyst]

A couple of questions from my side. Firstly, on the topic of M&A, you're seeing other banks talking about using the Danish Compromise to buy insurance, asset management type of businesses. I just wondered. How do you see that from KBC's perspective? Is that something that makes sense for you? Or do you think the regulator could eventually become a bit more cautious or conservative on banks using that particularly pulse? So just your thoughts on the Danish Compromise and M&A?

And then just quickly on the NPL backstop in Belgium. Just wondering if there's some more old NPLs in the pipeline that might get caught under the backstop rules in the coming quarters? Or should we assume if there is anything, that you'll just do some matching releases from the management overlays? You still have a decent stock of provisions there in your back pocket. So how should we think about the impact of the -- future impact of the NPL backstop?

[Johan Thijs, executive]

Thanks, Kiri, for your questions. Let me come back on the first one. The -- I mean, this is a very sensible topic, which you just raised. And I think what you just triggered, I think, is indeed something which we have to be very careful about. The Danish Compromise has a specific purpose and the specific purpose is how to deal with insurance integrated in banking environments.

So the Danish Compromise is there for already a while and straightforward, KBC has never used it in the extreme. In that perspective, we apply how it is meant to be applied. And then when I see recent evolutions, then this is perfectly possible in that context. But I don't know if this was the intention of the Danish Compromise.

So if I read some analyst reports or some other articles in newspapers that they start to use the Danish Compromise as a means to an end, and that is integration of pure banking and insurance -- sorry, pure insurance and asset management company within banks, not necessarily focusing on the model of bancassurance, then I think the supervisor might get nervous and might reconsider the position of the Danish Compromise.

So in brief, we use it where it is meant for. We never leveraged that, and we have no intention to do so.

[Bartel Puelinckx, executive]

As far as your second question is concerned on the NPL backstop. Indeed, as Johan has been explaining, this is mainly related to old NPL files where basically, the regulator is requiring banks to significantly increase their provisions on these files, actually by putting the collateral behind those file at 0 after 7 years.

If your question -- so what we have done is we've been booking now additional provisions on mainly 2 major files for a total amount of EUR 54 million in order to reduce indeed the capital and on the P2R. Do we have much more stock on this for the future? Well, that is -- will remain limited. And we will see what we'll do in the future on to what extent we will use additional provisions to reduce the backstop.

[Operator]

Our next questions come from Sharath Kumar from Deutsche Bank.

[Sharath Ramanathan, analyst]

I just have one left on fees and also [indiscernible]...

[Kurt De Baenst, executive]

Please, Sharath, can I ask you, because we hardly hear you, can you speak a bit closer to the microphone or a bit louder?

[Sharath Ramanathan, analyst]

[indiscernible]

[Kurt De Baenst, executive]

Sorry, Sharath, we don't hear you. I'm sorry. We hear you if you were talking to us from at least somewhere in Alaska. Could you try otherwise another line?

[Sharath Ramanathan, analyst]

Sorry. Am I audible now?

[Kurt De Baenst, executive]

This is excellent. Please go ahead.

[Sharath Ramanathan, analyst]

Sorry for that. I just had one more question left on fees and more so, asset management. Can you characterize the nature of these flows, whether these are driven by higher-margin products? So if you could comment on the sustainability of these flows, even albeit from record levels, I suspect as rates get lower, there is potential for a pickup. So color on that would be useful.

[Johan Thijs, executive]

So regarding the fees in our asset management business. So obviously, this quarter is positively influenced by what happened on the state note. That is for sure. And we also mentioned that in the detail on Page 8, that the inflow is, amongst others, on those mentioned funds. There, we do indeed include as well insurance, but mainly it is funds. So therefore, you have a positive impact in the asset management fee business for this quarter.

But nevertheless, if you look at the flow over quarter 1, quarter 2 and quarter 3, it is a continuous given that we are able to anchor current account, saving account monies on investment in asset management products and in life insurance product. We are also quite confident that we are able to do so going forward.

In that perspective, what helps, of course, is the strong performance of those funds in the market, and that performance means that it is yielding to customers much more, significantly more than, for instance, what has been earned on the state note. So that helps a lot.

Let's not forget that in the fee and commission business, we also have a contribution via the banking service, and that is a quite stable contribution, which is also definitely strongly supported by our activities in Central Europe where payment services are contributing a significant part of those banking services.

So going forward, we are quite confident that what we have seen in the quarters, whereby I make a small exception for the third quarter given the fact that it is positively influenced by the state note, that, that what we have seen is a solid stream of a business flow, which is anchored into the organization.

[Operator]

We will now take our next questions from Chris Hallam from Goldman Sachs International.

[Chris Hallam, analyst]

So just to follow up on the state note. If we take a step back and think across the whole period, from the big outflow last year to the win backs you saw in the third quarter this year, in your mind, does KBC emerge from all of this stronger, weaker or unchanged versus competition in Belgium? And how big are the competitive shifts in the Belgium market, if at all?

And then second is a follow-up to Kiri's question earlier on the Danish Compromise. One of your peers yesterday cautioned that if the Compromise was abused too much, it could be reviewed. I'd just be interested to hear your thoughts, i.e., if you're hearing or seeing anything about a time line for it potentially being reviewed.

[Johan Thijs, executive]

Thanks, Chris, for your questions. Let me start with the second one first because I just answered that one. And I'm not surprised that one of my colleagues yesterday made that comment. I didn't hear it for a good understanding, so I just answer on what you just told me.

But in my answer, I also indicated that if we in the sector are going to use the Danish Compromise in an extreme way, I would not be surprised that the supervisor would change its position -- or the regulator would change its position. It's not the supervisor. The Danish Compromise is there for a specific purpose, so let's be careful.

The other part on the other question on competition, and I invite also Bartel to step in, When it happened 1 year ago, the outcome was, even for the government, completely surprising. As you know, they went into market uncapped and the outflow which was then following that uncapped issue of the state note, which was very positively tax incentivized, as you know, was beyond imagination. As a matter of fact, it was even more outflow than the European stress test is asking the banks to withstand.

Now given what happened, and I already mentioned that in earlier calls, we immediately decided that when it would mature because that was fixed, that we would get our monies back. And this is what happened.

So if you look at the situation today, then at least you can say we came out at least at the same position. Now the reality on Slide 8 shows that we came out better than what we have seen in -- after the loss in September 2023.

So yes, I think we have showed our commercial performance, our commercial strength. And when we have collected more monies than what we have seen in an outflow, it is quite clear that somebody else in the market has lost some money to us. It is indeed a given. I can identify the banks, but I'm not going to disclose them publicly.

[Bartel Puelinckx, executive]

And if I may add to that, I mean, you've seen that it not only went into low-margin products such as term deposits, it will -- also in other type of projects, we generate more margin such as the fund business and of course, also the insurance business. So I just wanted to add that.

[Operator]

We'll now take our next questions from Anke Reingen from RBC.

[Anke Reingen, analyst]

The first is just on those deposits that you locked in at a negative margin. I just wanted to see what happens at the time those deposits mature. And just confirming you wouldn't lock them in again at a negative rate?

And then secondly, on the SME new business margin in Belgium, that's increased. And I was just wondering is that because the seasonality you pointed to in the past? Or is this also -- should they be more structural as rates are coming down? And could it widen further in Belgium in the SME segment? And is that something you're seeing in other regions as well?

[Johan Thijs, executive]

Can you please repeat your second question?

[Anke Reingen, analyst]

Just about the margin expansion on new business in SME in Belgium. Is that seasonal? Or is it structural as rates are coming down?

[Johan Thijs, executive]

So thanks, Anke, for the 2 questions. Sorry for the repeat because we had a lot of noise here in the room, and we couldn't understand your second question. Let me come back on the first part. The -- what about the situation in, let me call it, the end of 2025 when you have the maturity of the monies which are now in the -- or the inflowing state note monies?

Well, in KBC, we have used a wide set of products, which we brought to our customers. And we also used different maturity ranges. And so we have issued products on a 6-month basis, on a 12-months basis and a 13-month basis. Good understanding, we don't give the split up. The only thing you can see is the savings certificates because they're on 12 months. All the rest, we don't give the detail.

Now this means that the maturities are spread over a year and then we are -- when they are maturing, we are in a completely different rate environment.

First of all, when the state note was issued, we were still at 3.50% or 3.75% even when the state note will -- sorry, when these monies will mature, we will be at interest rate levels, which are significantly lower. So we do expect at least 2 to 3 rate cuts between now and then.

So the environment is completely different, and then we'll see how competition will react. And as you have seen in the third quarter, we will defend our position. But this time, it will be with a positive margin.

[Bartel Puelinckx, executive]

As far as your second question is concerned, related to the margins that we generate on the SME and corporate loans. When we -- indeed, when you look at the slide, you will see that over the long term, actually, these fees average out more or less at the same level. So from that perspective, is this sustainable? Well, if you draw a line across the margins, the answer would be yes.

[Operator]

We will now take our next questions from Johan Ekblom from UBS.

[Johan Ekblom, analyst]

Can I just have a clarification on the last question? If I understood you correct, you said that by the time the state bonds mature in September next year, you expect 2 to 3 ECB rate cuts is what you said. I mean if I look at the forward curve today, they're pricing in 6 cuts by then. So just to clarify what your rate assumptions are and what's embedded in the EUR 5.6 billion guide for next year in terms of either, well, I guess, an average and the year-end '25 policy rate would be super helpful.

[Johan Thijs, executive]

Thanks, Johan, for your question. Indeed, we do assume a whole series of interest rates cuts. By the way, we do not necessarily follow -- and therefore I said, at least, we do not necessarily follow the rate cuts of -- sorry, the position of the forwards. As you have seen in the previous quarters, they were mostly at the time more aggressive than the reality.

So in terms of where we think we are, and that's the reason why I used at least, we think that in the course of 2025, the interest rate -- the policy rate, sorry, of the European Central Bank will drop to 2%. That means that there are a whole series of rate cuts come and they are significantly -- it depends how much they're going to cut. [ 25 ] bps, I know that the market is now assuming that by year-end, there will be a rate cut of 50 bps. We'll see.

At least a whole series of cuts will follow, and we will go definitely down to a lower level of policy rates. Estimation in our case is by year-end '25, we will be at 2%. The forwards have a position. Also, in that perspective, I would say, wait and see reality.

[Johan Ekblom, analyst]

No, that makes sense. I just wanted to make sure that your EUR 5.6 billion was not based on 2.5% at the end of '25. But that's very clear.

[Johan Thijs, executive]

No, Johan. And let me add some more things to avoid any -- first of all, what you said is correct. And the second thing, if we give guidance, we always give it on forwards even if we don't believe the forwards. So it's always based on forwards.

[Operator]

It appears we have no further questions. I will now hand over back to Mr. Kurt De Baenst for any additional or closing remarks. Please go ahead, sir.

[Kurt De Baenst, executive]

Thank you. Given that there are no further questions, this sums it up for this call. I would like to thank you for your attendance and enjoy the rest of the day. Bye-bye.

[Operator]

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