KBC Groep NV

XBRU:KBC

Earnings Call Transcript 2018-Q4

[Operator]

Good day, and welcome to the KBC Group Earnings Release Fourth Quarter 2018 hosted by Kurt De Baenst, Head of Investor Relations. My name is Nigel, and I'm your main coordinator. [Operator Instructions] I would like to advise all parties that this conference is being recorded. And now I would like to hand the call over to Kurt. Kurt, please go ahead.

[Kurt De Baenst, General Manager, Investor Relations]

Thank you, Nigel. 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, February 14, 2019. We are hosting the conference call of -- on the fourth quarter/full year '18 results of KBC. Today, we have Johan Thijs, Group CEO, with us; as well as Rik Scheerlinck, Group CFO. And they will both elaborate on results and add some additional insights. As such, it's my pleasure to give the floor to our CEO, Johan Thijs.

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

Thank you very much, Kurt. Also from my side, a warm welcome to the announcement of the fourth quarter results of 2018 for KBC, which are also then as a consequence the full year results of the same year.So let me start with the number of the quarter, EUR 621 million. Given circumstances which were quite difficult in the month of December, this is actually quite good result. It is a result which is characterizing some performance in all our bank-insurance franchises, in the whole group. Let me emphasize a little bit what happened in that fourth quarter. It was, I mean, you could split it up in 2 parts, first 6 weeks were actually quite stellar. We have seen good sales in, for instance, our asset management business. And then the second 6 weeks of that very same quarter were quite rough, strong decline of stock markets, 11% down. We have seen a lot of turbulence in the financial markets. But nevertheless, EUR 621 million, which expresses a return on equity of 16% is, in that respect, a good result.Also, in this quarter, we experienced the outcome of the TRIM exercise, which has been conducted on the balance and credit books and which resulted in an impact of EUR 0.8 billion. Without that TRIM exercise -- without the -- with straightforward payout policy of 50%, which we have in our dividend policy, the capital ratio of KBC would have amounted to 16.22%. If you would exclude also the TRIM impact, then you would add another 14 basis points and so it would have come to 16.36%. And we also have to deny the impact, for instance, on our different benefit obligations, which by the way, already came in, in January of 2019 if you would include that as well. Then actually our common equity of Tier 1 ratio, which stands at 16.44. Now reality is reality. TRIM has been kicking in the impact of financial markets amongst others on defined benefit obligation as well. So therefore, the common equity stood at 16.22.If we translate that in the dividend policy payout, we increased the dividend policy payout to 59%, bringing the common equity back to 16% as indicated before. And that's resulted in the dividend payout of EUR 3.50 per share. If you would include the TRIM, if you would include the correction or the defined benefit obligation, of which I already said that it came in fundamentally in January, then that would add EUR 0.50 per share as well. So it would be, indeed, more or less a ballpark figure of EUR 4 per share. Anyway, EUR 3.50 per share will be the dividend and that's what we are going to propose.And let me go through the detail in every line, but in essence, as you can see the key takeaways, we have beaten on all the quality lines our expectations. So on Page 4, you have the building blocks. I'm not going to talk on that. Also on the one-offs, the exceptional items on Page 5, I'm not going to spend too much time. The most important one there is a settlement of an old legal file in balance on EUR 33 million. All the rest are something which we indicated already before so let's not spend too much time there, which brings us on the split between the bank and insurance company. And that is also a traditional ratio, 85% of the profit is coming from the banking side whereas 15% is coming as a consequence from the insurance side. Let me go to the first line, which is of significant importance, and this -- the net interest income line. Here I can bring some good news also here a quality improvement is further achieved. We have seen an increase of the net interest income with 3% on the quarter and 2% on the year. Even the quarter-on-quarter increase was driven by the, as we all know, the rate hikes in Czech Republic. And as a consequence, the interest rate income there increased significantly.But also, and I will repeat what I said on the previous occasions with disclosure to numbers, actually the net interest income generated through lending business has been going up as well. And that is most -- as usual, this is the combination of volume multiplied by margin. And on both sides, we saw a further increase. So the volumes were up on the quarter with 1%, which brings the year-on-year increase to 5%. If you look at, particularly mortgages, then the numbers, respective numbers, are 1% and 3%.Margin is up 4 basis points. Now it stands at 202 basis points, and that's a translation of an increase of margins in both business units, Belgium and clearly in the business unit Czech Republic, where it now stands at 325 basis points. So lending business up. The transformation result also up. Also first, funding cost came down, which is good news and then also a strong performance on the back of that increase in the rate hikes in Czech Republic. The dealing room results were also significantly up. So quality wise, good news on the net interest income side, and there's also something which we continued to state going forward in terms of our guidance for full year 2019.We guide you to what you guys have been putting forward in your forecast for 2019, which means a ballpark figure of EUR 4.6 billion for the full year.Then let's go to Page 10. That is the fee and commission business. And I mean, this is a no-brainer to understand that the financial markets and the turbulence in the last 6 weeks of 2018 have been kicking in significantly on the fee and commission business. The fee and commission business now stands at EUR 407 million of income, which is a decrease of 7% on the quarter and which is a decrease also of 2% on the year. Now how come? Actually, we always split up the fee and commission business in, as you know, 3 parts. You have the traditional asset management business, including the unit-linked business life. You have the banking services and the distribution side. Distribution side increases because the insurance company is growing faster than previous quarter. I come back to that in a second. But the financial services business, more or less, is in line with what we saw the previous time so let's not spend too much time on this matter. It's slightly up by EUR 6 million, if you compare it with the year, it's EUR 4 million down, but it's not too important. The important thing is obviously the asset management stuff. And here we do see a decline, EUR 24 million on the quarter, EUR 36 million on the year for the pure management fees. And the good news is that the entry fees went up EUR 5 million quarter-on-quarter. Now how come? We had a very strong first 6 weeks in the fourth quarter 2018. And as a consequence, the entry fees went up. This means that the total impact for the quarter-on-quarter comparison is EUR 21 million.This is driven by 2 things. A, the asset under management dropped because of the stock market decline, 20 -- EUR 30 million. The -- which is a decrease of 6% on the quarter. Now if you compare that with the decline in the stock markets of 11% that is still acceptable. If you look at the year-on-year comparisons, 8% down, this is also in line with what I just said on the stock market decline.So first of all, impact on asset under management, and the second thing is the management fees as such. As you know, they are influenced by the underlying asset allocation, which is mainly driven by the CPPI product, and that CPPI product has cashed out quite a lot of its underlying assets. It now stands at the end of the fourth quarter 2018 at almost 55% in cash, whereas in the third quarter, it stood at 16%.Now most things have a double effect and that double effect is just, as I translated, that is translated in a decline of the income on the asset -- sorry, on the management fees side, EUR 20 million. Now what is the good news or the better news than what I just explained? That is the impact of those stock markets changes, fluctuations have come in significantly already in January of this year. In the first weeks of this year, we recuperated EUR 4 billion of the decline, and that has also same positive effect on the underlying asset allocation of the CPPI.Just to mention one thing. At the end of January 2019, we had a reset in our CPPI products for EUR 1.5 billion. So that has a positive impact on the management fee margin as such.Let me keep it here for the management fees. I'm not going to dwell upon, as I said, the details of the payment services so on and so forth. But if there you have any questions, we will answer gladly on them afterwards.The next topic is the insurance business and once again so that's the third quality line, which has been delivering a good result. We saw a strong increase of the premium growth, on written premium, it's 9% up. On earned premiums, it's 7% up. And also we have seen a very strong performance in terms of quality of the lines that is a 88% combined ratio as a reference position, which is in line with last year. But to remind you that last year, we had a one-off release of provisions of EUR 26 million in the business unit Belgium which is not the case today. So in this respect, we have good growth and good quality, and so both indicate that the portfolio is doing very well.On the life side, we had a strong increase of the interest-guaranteed products. Perhaps I can better use here Slide 12 where you can see, indeed, that interest-guaranteed products were up in that respect, the increase was on the quarter 48%. It's quite a lot. It's also due to the savings campaign, which we traditionally hold in the month of October in Belgium.On the unit-linked business, it's better than previous quarter, but it's worse than previous year. And it has to do obviously with the very difficult environment. And that's an environment that also an area we pay the high taxes, which are offered for this kind of product by the Belgian government. So at this instance, the fourth quarter, unit-linked sales were at 33% of total life insurance sales in KBC Group. Switching to Page 13. It gives me the insight in the fair value of gains and here we have seen a strong decline, which is entirely driven by the adjustments on markets credit and funding value adjustment. So the mark-to-market there has been kicking in negatively. If you look on the quarter-on-quarter difference, we have a EUR 93 million on those markets credit and funding value adjustments, whereas if you compare it year-on-year, it's EUR 121 million.The other element there to bridge the difference between the EUR 93 million and the EUR 77 million is that the ALM derivatives had a positive contribution of EUR 21 million over the quarter and EUR 25 million over the year. So in that respect, they have been mitigating the impact that truly -- accounting impact of all those value adjustments. On the equity side, we also had a minus EUR 5 million position quarter-on-quarter and a minus EUR 20 million position on the year-on-year comparison, which is -- I think it's perfectly acceptable if you regard the stock market performance.The other element on the page is the net other income. I mean, this is always, more or less, the same. We see an uptick this quarter. If you compare it to previous quarter of EUR 20 million, that is mainly driven or entirely driven by a settlement of an old legal file in the business unit. Belgium already indicated that before, which stands at EUR 33 million and therefore, explains the total difference. All the rest is the same. We had the leasing company, the assistance company, all have been contributing perfectly in line with the budgets in the previous performance. So a normal quarter in that respect. So let's go to the outgoing money side. That is the, first of all, the cost side and also here another quality line where we have delivered strongly. We have a cost reduction in the fourth quarter compared to the third quarter, but also compared to the same quarter last year. We already indicated in previous quarters that we have been more uniformly spreading out the marketing expenses amongst others. But we also succeeded in lowering the stock expenses and -- with about EUR 13 million despite the fact that we have a very strong wage inflation in most countries. And with most countries I should actually say all countries. So in that respect, good performance. We also have less one-off cost, but that is far more -- far less important than what I said on the marketing and the staff expenses, and partially also we continue to invest in the digital transformation, which is obviously costing a bit more money than in the previous quarter.Now what does it mean in reality? The cost-income ratio stands at 57% if you exclude the specific items, which are the bank taxes, the ALM derivatives and the one-offs. So 57% in full year 2018 compared to 55% full year '17. But what is was far more important is that if you look at the consolidated impact of UBB, which was not entirely in 2017, if you adjust the EUR 43 million of increases on the banking taxes side, and you exclude also the FX impact, then for the full year '18 and the full year '17 comparison, costs are only rising 1.7%. And that's, I think, quite an achievement given the high wage inflation and given the series of investments, which we have been doing on the digital transformation side. So I think in this respect, cost management is a continuation of what we have been doing in the past and then it also starts to deliver its results.If you look at Page 15, I already mentioned the fact that the bank taxes has been going up, now stands at EUR 462 million, which is quite a lot. It's almost 11% of the total OpEx of the group, which is, I think, pretty high. And if you would exclude the bank taxes, imagine in an ideal world, then our cost-income ratio would drop to 50%, which I think is, indeed, very good even on the European platform.On Page 16, we have the asset impairments. Asset impairments totaled EUR 43 million, of which EUR 13 million is due to an impairment on the leasing activities in Czech Republic, has to do with residual values of financial car leases there. We already have some of those in the previous quarter. So it's not something new.On the lending business, we have seen EUR 13 million of impairments, which is mainly due to an increase of impairments in Belgium. We have a number of corporate files, 7 or 8 corporate files where we had an increase of impairments. This is actually also to be explained by 4 files, which totaled EUR 30 million. So I mean, that puts the EUR 48 million a little bit in the amount of the [ perspective ]. Anyway, what we have seen in other countries is some releases. This is true for Bulgaria. This is true for Hungary, but it's also true for Ireland, where we have seen a release of EUR 15 million, 1-5, bringing the total to EUR 112 million over the year. For the whole group, we have now a credit cost ratio of 4 basis points negative, which is, indeed, very good news and which is a continuation of what we have seen in the previous quarters and also seen last year. This is obviously not something which is sustainable. That is something which we guided already in the previous quarter and that's for '19, '20 and further on. The average credit cost ratio through the cycle is somewhere in between 30 and 40 basis points, not necessarily for next year -- for 2019 already, but through the cycle, it's 30, 40 basis points and not negative as we have seen previous 2 years. Just a detail on that. Belgium stands at 9 basis points; Czech Republic, 3 basis points; international market business unit at a negative 46 basis points, which is driven, obviously, by Ireland, almost minus 1%. Because of the sale of EUR 1.9 billion of nonperforming loans and British loans in Ireland, in our business entity in Ireland, we have strongly improved our impaired loan loss ratio. It now stands at 4.3%, down from 5.5%, which is also expressed in the 90 days past due bucket, which now stands at 2.5%, down from 2.3% -- 3.2%, sorry, which is, indeed, a strong improvement, but that was already indicated before. So KBC is clearly not a high NPL bank as defined by the ECB. We are under no way of scrutiny by ECB in this respect. In terms of the business profile, Page 18, you see a lot of numbers there with all the different business units. I'm not going to dwell up on this, but the only thing perhaps to mention is that's the number of branches stopped -- continues to decline. We saw a strong decline of number of open branches in Belgium, 75 down. We have seen Czech Republic also there, some further declines, and the same is true for all the other countries more or less in the same relative perspective.Then we go to the business units. I mean, the business units have all contributed, already stated that. I'm not going to go through the detail. But if you look at Page 37 where you can see the final outcome weighted in the allocated capital then you can clearly see that all business units at least contribute 22% and Czech Republic tops that with a whopping 39%. So they all performed quite well, and the emphasis is in every business unit a little bit different, for instance, in Czech Republic strong net interest income, strong fee and commission business, strong non-life business, strong life business, slightly growing cost, cost-income ratio is 46%. In Belgium, we have a, over the full year a big pressure on the net interest income, but that is mainly due to the short-term cash management, which went down a little bit. Lending business interest income was significantly up. The fee and commission business was down. The insurance business was up and the cost side was quite under control.And for international markets, it's more or less the same as Czech Republic. Interest income, significantly up. Fee and commission business is fundamentally up. Insurance business, extremely strong performance. And then on the cost side, it reflects the investments, which we're doing in 3 of those countries on the IT side by the implementation of an entirely new IT platform. So I would keep it here for the summary of the business units, but as I said before, any questions will be gladly answered by Rik and myself. In terms of the balance sheet, Page 38, we see a strong growth of the asset side, 5% growth. On the lending business, retail mortgage stands at 3%. On the liability side, deposits are growing up 1%. The detail is provided on the very same page as well. Let me summarize it. Where it needs to go up, it went up. Where it needs to go down, it went down. So we have been decreasing our exposure in Ireland on, as I said, the business is growing in mortgage is quite significantly there. Over the last 4 years, we've built up a portfolio of more than EUR 3 billion of mortgages. In Bulgaria, exactly the same thing occurs. We have been writing down some portfolios, more NPL portfolios and also been selling off those NPL portfolios. In that respect, we are clearly ahead of our original plan for the cleanup of UBB. UBB, which is now entirely integrated in the business entity of CIBANK or you could even say it's the other way around. CIBANK integrated in UBB because in terms of sizes like that, but also there we have 6 months ahead of plan. And also the cleanup of the legacy portfolio is at least 6 months ahead of plan.Going to Page 40 about the capital ratio. We already indicated that normally it should stand at 16%, if we would not have had a TRIM. And the correction on the defined benefit obligation, it would have been 16.44%. The reality says it's -- there is TRIM, there is a stock market and therefore, 16% after dividend payout of 3.5%, which is a continuation of our dividend policy, capital distribution policy which is at least 50%. And that also we intended, if we cannot make the capital work about say 16%, we pay out that capital at our discretion, which we did in the proposal to our AGM as indicated on Page 40. In terms of capital ratio, we stand now at 19.2%. Mind you that we have called our AT1. That will be called in March. The total capital ratio does not include -- we still have it in our books for a good understanding. But in terms of accounting rules, we have to exclude that from our total capital ratio a little bit of bizarre, but that's the case. So therefore, it drops to 19.2%. If that will not be the case then, obviously, this would have been a completely different number.In terms of leverage ratio, we stand at 6.1%. Also here, we have already the impact of the calling of the AT1, the banking leverage ratio stands at 5.2%. Now we see a combined group leverage ratio with the capital CET1 ratio then we would be, indeed, in a very strong position on the European platform. Solvency insurance is at 217%, which is also a further confirmation of the already excellent level of previous quarter and in that respect not something new. Funding side also nothing new. NSFR and the LCR ratio stands at essentially higher than the capital requirements by the regulators.We have our -- we have a 77% customer-driven liquidity, which is also a kind of guarantee in turbulent times. So in this respect, nothing new. Let's not spend too much time here.And then on Page 44, it gives you a nutshell overview of the full year results. Let me summarize it. EUR 2.6 billion of profit, which I think is quite good, 16% return on equity, which I think is quite good and I used the word 2x quite, that's an understatement. The cost-income ratio stands at 57%, combined 88% for the full year and then the ratios of capital have already explained. So in that respect, I think, indeed, the EUR 3.50 dividend per share are rightly so and are an expression of the confidence, which we have going forward. Now talking about that going forward, that's on Page 46. We do see, indeed, some depth in the European domain. Economic conditions despite the fact that they are solid, it's clear that the growth peak is behind us. The forecast for the European growth has been put downward by a lot of institutions amongst others, our own. And they are still okay, but clearly behind the peak. Nevertheless, we say that we continue to have solid returns for all business units. We are waiting, obviously, for an outcome on 2 important matters -- actually 2.5 important matters. That is the Brexit, and in March, obviously, the outcome on the negotiations between the Chinese and the American governments on their trade policies. We'll see what that will bring in May. We will have obviously also some elections upcoming. So we'll see where it goes, what this is going to bring and how it's going to impact the economic dimension in Europe. But nevertheless, the returns are considerably solid. We also guide for 2 accounting impacts, IFRS 16 will be having an impact as of this year of about 6 basis points. And then on Basel IV, we recalculated the numbers on the back of 2018. Full-fledged -- fully loaded impact at the year-end corresponds to a 9% risk-weighted asset inflation and a 1.3% impact on the CET1, but that is precisely the same as what we have seen in the -- on the back of the numbers of 2017. So there's nothing new here. As a lot of papers flowing, but I suppose that all of you have far more interest in asking questions and listening to our answers rather than me going through these slides. So I give the floor back to Kurt, who will guide us through the questions.

[Kurt De Baenst, General Manager, Investor Relations]

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

[Operator]

[Operator Instructions] The first question is from Benoit Petrarque from Kepler.

[Benoit Petrarque, Head of Benelux Equity Research]

It's Benoit Petrarque from Kepler. So yes, 2 questions on my side. The first one will be on Czech Republic. Most of your competitors are guiding for flat net interest margin in 2019. I was wondering what is your guidance on the net interest margin for this country. What you see on lending margins and deposit margins as well, seems that's our lending margin will be offset by higher deposit margins. But I wanted to get a feeling about -- or you feel the net will trend. And also if you see client actually a bit more sensitive to the right moves we have seen recently. So looking for remunerated accounts and a bit of more remuneration on deposits. That is the first question. And second one was on, let's say, again, on one cost and especially on Czech Republic in terms of wage inflation, what you see in 2019. Have you agreed with your collective agreement with unions? And maybe more generally what you see your overall group cost trending in 2019? And if I may, just a small one on the transformation results in Belgium, similarly to kind of EUR 10 million this quarter. And I was wondering what you mean by that because that's in volume deposits, volumes deposits are flat Q-on-Q. So did -- have you changed EBITDA duration on the deposit side? I was wondering on that.

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

Thank you Benoit for your question. It was a bit difficult line, so I don't know if we understood everything. Let me try to answer your questions on the interest positions on the different building blocks. So as you know, we don't give a particular guidance on each and every building block there. But for the NIM enhancements for the group, as I already said during the presentation, we give guidance for full year 2019 of a ballpark figure EUR 4.6 billion, which is in line with I think the consents of all of you. On the other hand, in terms of building blocks, the -- I mean, there's clearly -- we have seen in 2018 through the year pressure on different products in terms of margin. Deposit side is that, that margin pressure is -- I mean, it spreads too early, but what we have seen in the end of fourth quarter is that we see -- to see that level bottoming out in some countries amongst others, Belgium, which is not a detail. And also in the first weeks of 2019, we saw the same effect. In Czech Republic, the NIM increased obviously because of the repo rate hikes and very modest pass-through. So there's no big impact in that respect, and we don't -- I mean, that's what I -- we'd like to keep it because otherwise, I'm giving all the details on the building blocks, something which we, in principle, don't do. In terms of the second question, in terms of the costs, what about Czech Republic and how are we going to deal with wage inflation. Wage inflation is something which is happening in all the countries. Also in Belgium, let's not forget we had a 2% inflation index of the wages. In Czech Republic, it's a little bit higher as you know. Now the official numbers, let's be careful because the wage inflation in Czech Republic is mainly driven by the public authorities and the public domain. So we do not have that same impact in our wages in Czech Republic. And as we all know, the ultimate expense for our staff is a combination of what you pay per head and how many heads you have to pay. And in that respect, the guidance I can give is that in Czech Republic we are, indeed, optimizing the number of staff which are working for us. It already came down in the fourth quarter. In terms of the guidance given for the cost side, we stick to our guidance, which is translated into a cost-on-cost, year-on-year evolution of 1.6%, and we stick to that.

[Hendrik Scheerlinck, CFO & Director]

I want to comment to your third question, the transformation result in Belgium. On the volumes, indeed, overall, the -- it has not been such a big change, but there has been a shift from term deposit. So we had about EUR 800 million term deposits flowing out. And we had savings accounts increasing by EUR 800 million so similar amount. And of course, on savings account, we can do the verification and term deposits actually are negative in terms of yield and in terms of performance that these accounts are positive. So in that sense the volume has, indeed, increased from that point of view, from the point that we replicate. The second thing I already announced at last quarter as well. We do on a quarterly basis, an in-depth behavior analysis of the savings policy of our customers, and we see that in the low-for-longer environment that, indeed, money is more sticky than we would have in an environment where interest rates are going up. As a result of that we have, indeed, increased the volume of the deposit that we're replicating. So overall, your assumption that we have been extending duration somewhat is in that sense, correct because we moved somewhat from the lower duration bucket to a longer duration bucket.

[Operator]

The next question is from Stefan Nedialkov from Citigroup.

[Stefan Rosenov Nedialkov, Director]

It's Stefan from Citi. My questions revolve around capital. Number one, what was the precise TRIM impact in 4Q, in terms of basis points, or RWA? And what do you expect that to be in 2019 once the whole process is completed? Secondly, it looks like the capital was weaker, not just on the pension plan, but also on a negative mark-to-market on the equities portfolio. Could you just give us some color on how -- whether the decline in 4Q for the equities portfolio was outsized versus the general market? And what is the nature of that portfolio? Is that something temporary? And then lastly, if I may, just give us some color around the CPPI product, please, in terms of overall volumes. You did mention it's 55% cash, up from 16%. But is the overall amount less than 3Q?

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

Thank you very much, Stefan, for your questions. Let me answer the first one. The TRIM impact stands at EUR 0.8 billion, which is the equivalent of 12 basis points on the common equity Tier 1 ratio. Going forward 2019, there is a TRIM exercise conducted on the corporate book. They are still doing that, and we expect only the result after summer. We don't have a clue where it is going to lead us to because they don't disclose anything. They -- it's difficult to understand. They don't disclose anything at all and what they say is it's always good. That's what this communication is always about. What other line are they going to do as well that is on the financial markets, but that's also only to be conducted in the course of the second half of this year. So outcome will be -- also to be expected by year-end. So in 2019, I can't guide you a lot. I'm sorry for that, but the exercises are running, and we don't have any insight in the outcome.

[Hendrik Scheerlinck, CFO & Director]

And then, Stefan, on the impact of the credit value adjustments and funding value adjustments because these are the items that resulted in a somewhat lower income in the fourth quarter. And as Johan already said that delta versus the quarter before was EUR 93 million. So basically, what happened as a result of equity markets dropping and especially the long end of the curve dropping quite substantially on the interest rate side, the -- if we look at our swap activity that we have at counterparty. So these are mostly corporate counterparties, but these are also asset management funds. As a result of that, basically, the market value of the swaps amidst the counterparty increase. So that means our credit risk on these counterparties also increase. So the risk to default increases there. And the second part, given the spreads moving during the fourth quarter, then again, that also increases the credit risk on the corporate. So there was current value adjustment on the funding value adjustment. It is also a higher exposure to funding risk because the value of the swap against it, we provided collateral decrease so that means we have to provide more collateral against those swaps. And that comes at a higher funding value adjustments so these are the 2 main reasons.

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

And then going back on the question about the CPPI, the outstanding volumes at the end of fourth quarter were EUR 12.9 billion, which is, let me see, EUR 1.5 billion down on the previous quarter, which stood at EUR 14.6 billion. And if you compare it year-on-year, it's down from EUR 16.4 billion, so EUR 3.5 billion. We have, indeed, indicated that 54.7% to be precise is in cash, whereas on previous quarter 16.3%. Now EUR 1.5 billion is already reset at the end of Jan. We have other resets dates coming up in April, in July and October. And they're more or less are around EUR 1 billion each. So in that respect, you can expect the evolution of the CPPI going forward. Where is that money transferred to? First of all, you have a inflow in our Easy Invest product, and the second thing is you have -- we had, obviously, also some people, which put in the money back on a savings account. So we don't have any outflow out of KBC Group.

[Operator]

[Operator Instructions] The next question is from Kiri Vijayarajah from HSBC.

[Kirishanthan Vijayarajah, Analyst]

Yes. So firstly just a quick follow up on the TRIM. And -- so can I clarify, does that EUR 800 million out of your increase, does that actually flow-through into your Basel IV RWAs? Or do they just get absorbed when the output flows get applied there? And then turning secondly to Ireland and the compression in preprovision profits and particularly the kind of the revenue erosion. I know you've done a lot to derisk and you've solved NPL portfolios through the back end of last year. But my question is really, has the revenue base in the preprovision profits kind of now stabilized and actually should start growing from here because the volume metrics that you show actually look quite impressive, but it hasn't really translated into the P&L for that division.

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

Okay. Thanks, Kiri, for your question. Let me come back again on the TRIM. So the TRIM is EUR 0.8 billion as I said, and your question was, what about the impact of Basel IV? Now the output flows are not impacting KBC. So in this respect, the TRIM impact comes on top of the Basel IV impact.

[Hendrik Scheerlinck, CFO & Director]

And for Ireland, basically as you said, we have been derisking the portfolio quite substantially. As Johan said, that's EUR 1.9 billion of loans that are gone. And as we said in the past, that has a recurring negative impact on NII in the year 2019 of EUR 16 million so EUR 1-6 million. So that is the impact as a result of, indeed, selling that legacy. portfolio. And then we had because of the tracker mortgage investigation going on, we had additional OpEx of substantial amount in Ireland, and then we had a specific OpEx also related to the transaction -- to the sales transaction, and these are then elements that will taper out during the year 2019.

[Operator]

Your next question is from Alicia Chung from Exane.

[Alicia Marianne Chung, Analyst on the Pan]

Just a couple of questions for me. Firstly, just to go back on the cost and just to confirm your guidance around costs, which you said was, you were sticking to the guidance of 1.6% CAGR in terms of absolute costs. Is that for 2019, 2020? Or as in the expense of that time frame? Or can we think that in terms of 2019 itself as well? And are you able to give us a bit of color as to how you're going to get because, obviously, there are a number of headwinds not just yourself, but obviously, for our banks, in terms of -- the level of wage inflation that you're seeing across your geographical footprint and also in terms of the investment spend. And then also would that include any restructuring costs? And how should we think about that for 2019? So that's my first question on cost. And then secondly, you've talked a little bit in your guidance about the fact that we are now past the peak of the cycle, and you've talked about that on a number of occasions recently. Given where we are, what's your view on loan growth from here? Do you expect to temper loan growth in certain areas, whether by geography or by product? And how should we think about that going forward?

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

Thank you very much for your questions. So the CAGR is the 1.6% for the full period. It's a bit difficult give it year-per-year because we don't give it as you know, an explicit cost guidance for every year. But it is a 1.6% over the whole horizon. Now what do you need to take into account, and that is we have been front-loading a little bit of our IT investments and the digital transformation. And as a consequence, I mean, you always have a line effect between the investments and the return. As we have been investing in '18 already, quite substantial, '19, but we will do exactly the same thing. You will start to see the benefits of those investments of '18 coming in, let me say something in the middle of 2019, end of 2019. It's indeed true that we have some headwinds. And if we would go back in time where we gave the indication of our cost growth, we were not expecting wage inflation as we have seen them today. So it's more than what we expected. On the other hand, we have seen also a stronger growth, which, as you know, in the cost-income ratio translates differently. So that's a beneficial factor. So in that respect, yes, indeed, the cost forecast is kept at this level. And we will do our utmost as we have been doing in the previous quarters to obtain what we have guided before.

[Alicia Marianne Chung, Analyst on the Pan]

And just in terms of the -- sorry, just in terms of any restructuring cost we can expect going forward?

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

So we have had some restructuring costs in the third quarter in Czech Republic. Those restructuring costs on the short term not to be changed. So I don't see any big impact any day, any quarter soon. So in that respect, what has this put in, in the third quarter in Czech Republic is not an easy thing -- it will be repeated that going forward.

[Operator]

The next question is from Marcell Houben from Crédit Suisse.

[Marcell Houben, Research Analyst]

I have 2 as well. First one is on the capital. You've highlighted potential TRIM impact as well as the IFRS 16. Is there any other capital headwinds that you expect for 2019 such as the NPE guidance, for example. That was my first question. My second question is on trading of the fair value item. That's been quite low in 2018 at EUR 230 million. Can you give a little bit more color or guidance to what's going forward? It's the average of the last couple of years. Is that the best guess? Or is there certain drivers for this first trading revenue?

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

I'm sorry, but I think we should still answer the second question of your other colleague. So the question was loan growth, what do we expect? Because I, indeed, mentioned the peak of the cycle is behind us. We expect -- for this year we have 5% as you remember. We expect 4%-ish growth in 2019. So it's still okay. Remind you, I also said that despite the fact that to guide a cycle and the expectation in the European domain is still a solid growth. Now there's one big elephant in the room that is, if we would have fundamental impact of the Brexit. We still assume a soft-ish Brexit, which means there is a proper deal. If we would go into something completely different then all predictions are for [ up ] well.

[Hendrik Scheerlinck, CFO & Director]

And in terms of fair value gains, as again as you know, that is a volatile item. If you compare year-over-year, there were some restatements, we have said that. But then on Page 53, we give you a pro forma year-over-year and, indeed, the volatility that we have seen in the markets and especially in the fourth quarter were the main reason why the number came in at the level where it came in.

[Marcell Houben, Research Analyst]

Sorry. Can I just come back on that one, please? Rik, we were to consider that 2018 is a very poor year for this trading item. Of course, it's more even normalized going forward.

[Hendrik Scheerlinck, CFO & Director]

No. Again if you look at just what happened in the fourth quarter, so that EUR 93 million shift in funding value adjustment and credit value adjustment, that is in that sense quite exceptional. So if you would take that out in the number you had before that, in a normal volatile market, it's probably a better indication for where we should be, but as you know on the [ flip ], it's very difficult to guide.

[Operator]

Your next question is from Flora Benhakoun from Deutsche Bank.

[Flora A. Benhakoun, Research Analyst]

Yes. Two questions for me as well, please. The first question is regarding your common equity Tier 1 target. I see there hasn't been any update in here. You're still talking about the median 4K is looking at the full year '17. So the first question is whether we should expect potentially an adjustment of that target maybe with Q1 results, for example. And the second question is whether, you could give us a quick view on the -- where you stand on potential M&A.

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

Thanks, Flora, for your questions. Let me start with the common equity Tier 1 target. So indeed, we do update that target once a year. And as you already indicated, we will do so at the end or the back of the first quarter results, we'll give you that update because then all the numbers of our peers are available. So we can calculate our 14% capital position again. In terms of our M&A, where we are today is, yes. As you have seen the Hungarian government has come out with an indication that they are going to bring Budapest Bank to the market, and we are clearly interested in that. We have already identified our interest to the Hungarian government. So we're looking forward to see the bidding process and how the process will be ongoing. Only in the course of the next coming quarters, this should happen. We also look into some other opportunities in our core markets on smaller entities, but I cannot give you any further detail on that matter. And we are clearly not looking into expanding our geographical presence as we have said today. So to be more precise, we are not looking in countries beyond our current core markets.

[Operator]

We don't have any further questions waiting at the moment. [Operator Instructions]

[Kurt De Baenst, General Manager, Investor Relations]

If no more questions, this sums it up for this call. Thank you very much for your attendance, and hope to see many of you at the sell-side equity analyst meeting in London tomorrow morning at our offices in the city, Old Broad Street 111. This meeting starts as usual at 8:30 a.m. local time. And we would be pleased to welcome you there. In the meantime, enjoy the rest of the day. Cheers.

[Operator]

Thank you. That does conclude the call for today. You may now disconnect. Thanks for joining, enjoy the rest of your day.