Hello, and welcome to the KBC Group Earnings Release 2Q 2023 conference call. My name is Sharon, and I will be your coordinator for today's event. Please note this call is being recorded, and for the duration of the call, your lines will be on listen-only mode. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero, and you will be connected to an operator. I will now hand you over to your host, Mr. Kurt De Baenst, to begin today's conference. Thank you.
Thank you, operator. A very good morning from my side to all of you from the headquarters of KBC in Brussels, and welcome to the KBC conference call. Today is Thursday, the tenth of August 2023, and we are hosting the conference call on the second quarter results of KBC. As usual, we have Johan Thijs, our Group CEO, with us, as well as our Group CFO, Luc Popelier, and they will both elaborate on the results and add some additional insights. As such, it's my pleasure to give the floor to our CEO, Johan Thijs, who will quickly run you through the presentation.
Thank you very much, Kurt, and also from my side, a warm welcome to the announcement of the second quarter results. We will do it as usual. We start with the key takeaways, which are actually highlighting that the operational result resulted in EUR 966 million of profit, which is indeed an excellent result. As a matter of fact, KBC has been operationally firing on all its cylinders. The bank insurance franchise was doing excellent. We have been performing extremely well in all countries, which contributed significantly, each for their part, to this result. You can translate that differently. I mean customer loans and customer deposits both were increasing, which also triggered, given also the interest rate environment, higher net interest incomes.
We have been able to increase our fee and commission business, both on the asset management side as on the banking services side. We were able to increase our net results from financial instruments at fair value, and we were able to significantly increase further our income on the insurance side, both non-life and life. As a matter of fact, we were able to manage the, what I call, outgoing side of the PNL. That is, our costs were, despite very high inflation, well under control, and the technical side on the insurance side was excellent, with a combined ratio of 84%, whereas the impairments on the loan loss provisions were negative, which means positive, because we had some releases. This underpins our solvency position.
This underpins also our return on equity, which now stands at 16% on the quarter, and brings our cost-income ratio to 49%. As a matter of fact, giving all those positions, we were able to further and do what we have already stated in previous quarters, namely, that we are going to decide on two things, the final decision, at least, that is, what to do with the surplus capital of EUR 1.3 billion. Well, we received recently the approval of the ECB regarding a potential share buyback, and also the board has taken yesterday, the decision to execute that share buyback for the total amount of EUR 1.3 billion, starting as soon as possible and ending ultimately by the end of July 2024.
Next to that, we will execute the normal dividend policy for the year 2023, which means that we will pay out an interim dividend of EUR 1 per share in November, as usual. In terms of the capital structure, there are two things to mention. First of all, that we are considering an optimization of our capital structure, which means that we will do what a lot of other banks are doing in the European or in the Eurozone. That is making use of the ECB possibility offered to finance part of our requirements with AT1 and Tier 2 capital.
For KBC Group, that means that the potential AT1 basis points of our capital, CT1, is replaced with AT1 and Tier 2 instruments, we have taken the decision to consider this optimization and make use of it when it's optimal and when it is needed. It means that we do not immediately execute this option, but we announce to data market that we are considering this optionality. The second thing on the capital side is an add-on, which was following an intervention of the ECB, which is the consequence of TRIM exercise, which resulted, as we all know, in what they call the EBA IRRBB program, that has been leading to an increase of risk-weighted assets on mainly the corporate and SME portfolio in Belgium of EUR 8.2 billion.
The mitigating elements on this matter of EUR 8.2 billion is 1.7 risk billion risk-weighted assets release, which will be implemented in the quarter three, where this add-on will be implemented and the release, so the net effect of both combined will be EUR 6.5 billion. Next to that, we are talking with the ECB on a, what is called, simplification program on roughly the risk-weighted assets related to the sovereigns, that will. That is an expected risk-weighted asset release of roughly EUR 2 billion, which is going to be implemented before year end 2023.
The balance of all these numbers, 4.5 billion, is actually as, and if you, if you take into account all the upcoming legislation, is actually a front loading of Basel IV, which is normally implemented in the period 2025 until 2033. This 4.5 billion is perfectly, the balance of 4.5 billion is the perfect downloading of the substantial part of our first time application of the Basel for potential Basel IV impact in 2025. For good understanding, in KBC, we consider this EUR 8.2 billion of risk-weighted assets as a very conservative, not to use the word, overly conservative stance of the ECB. We are not necessarily agreeing with those positions.
Given the fact that we have a long tracker in this perspective, and that we see no deterioration at all in our credit portfolio on the Belgian corporate and SME side as we speak. Let me now go into some other things. I will be very briefly on matters which are on page, let me see, page 5, where we are talking about the split between banking insurance, which is at the normal level of 84.8 as versus, or 83.5, to be precise, and 16.5. This is, as I said, the normal split up. Very briefly on all the other matters regarding the evolution of the way we deal with our customers. Kate is going much faster than what we originally planned, which is good news. More and more customers are using it.
We now speak about 3.4 million customers using Kate, and they are using it pretty massively. More than 10 million conversations between Kate, between customers and Kate, next to the conversations which Kate has with the customers or the other way around. More than 10 million, of which 63% is fully executed, executed by the machine in a straight-through process manner. Which means cost savings and efficiency go here hand in hand with that statement. It also means that we are gaining efficiencies both on the sale as on the cost side. Last but not least, the customer satisfaction, which is translated in NPS scores, is, in this perspective, continuously increasing and now stands at least at the level of our bank branches.
We have been also been able to issue a second social bond in this quarter, and it also supports our sustainability performance, which is explained on page 6. On the one-off side, it's very, very simple this quarter. Actually, there were no one-offs, but one-offs which are related by government interventions on the tax side, which is mainly driven by the windfall taxes, requested, additional windfall taxes requested by the Hungarian government, totaling EUR 22 million. Modification losses also, as a consequence of government intervention on the lending activities again in Hungary, totaling EUR 19 million. Next to that, the most important chunk, which comes in as a one-off, is related to the Irish investment, divestment file, sorry, and that totals, roughly EUR 12 million.
If you compare with previous quarters, a big one-off, of course, in the previous quarter. Let's keep that in mind, that the transaction of the sale of our assets in Ireland to Bank of Ireland was kicking in significantly in this, the first quarter of this year for a total of EUR 370 million. Just keep that in mind when analyzing our results and definitely when you make that comparison with previous quarter. Let me go immediately to those things who do matter in our operational activity. First of all, the net interest income. Well, the good news is that net interest income is further up and now totals EUR 1.4 billion, EUR 7 million.
Indeed an increase. As we indicated already in previous quarter, that is that the increase is exponentially growing because of the way we deal with the spreading of our interest rate risk and our replicating portfolio, and the consequences of increasing ECB rates and turnover rates in on those portfolios. Next to that, we had a positive effect of the inflation-linked bonds. We also explained that at the previous quarter, that is now EUR 37 million of difference between the two, and has to do with the explanation which we gave previous quarter. Namely, that there was a lagging effect of the implementation of those inflation-linked bonds. Also positive is that on the lending side, we had slightly higher income, which is due to two things.
First of all, an increase of margins, for instance, on the mortgage side in the Czech Republic, a stable margin on the corporate SME business, combined with strong volume, that is 2% on the quarter, 4% on the year. Both elements also bring in our net interest margin to the level of 211 basis points, which is 7 basis points stronger than previous quarter. All in all, in that perspective, this was a strong quarter, which is also translated on the next page, where you clearly can see the evolution of our deposit side. You know that we have been providing guidance that takes into account, of course, a couple of elements.
First of all, the ECB rates, Czech National Bank rates, also the volumes, also very important, the shift between current accounts, saving account, term deposits, and potential outflow. Well, the good news, first of all, is that KBC has further inflows of deposits. We have EUR 1.1 billion of inflows, net inflow of deposits. Combination, current account, saving account, term deposit, and on top of that, we were able to attract EUR 1.1 billion extra money, which goes into mutual fund business. In total, for this quarter, an extra inflow of EUR 2.2 billion customer money. Now, in translation of the shifts, we do see that continuous shifts happen between, in essence, term, sorry, current accounts and term deposits, which are mainly linked to corporate SME business and private banking business.
That, that in, that, that shift between current accounts to term deposits is slowing down compared to previous quarter. We can clearly see that in all countries, and we explicitly see this in Czech Republic, where we are at the peak of the interest cycle. If you compare that then for the full year up to now, then you can clearly see that we had EUR 3.6 billion of inflow of customer money, which is split up, as you can see in the right-hand side of the graph, on EUR 2.8 billion on the mutual fund side, and the remainder is on the deposit side.
You can also see clearly on the evolution of the first half graph, that it is mainly the shift between current accounts and term deposits, which actually makes the numbers work, and the saving accounts is explicitly at zero. What about fee and commission business? Also there, good news. It increases further with EUR 8 million and now goes to EUR 584 million, which is split up 55% on the asset management side, 45% on the banking services side. This has to do with two things.
First of all, the integration of Raiffeisenbank Bulgaria into our numbers, but also the fact that under IFRS 17, commissions are no longer part of, fee and commission, but are booked on a different side, and therefore, the negative effect of a growing book on the insurance side does not influence those commissions. I think this, this, this, the picture which we currently have is more clear insight on how the performance is on our fee and commission business. As I said, both are growing, and on the asset management side, it's mainly driven by two things. First of all, the management fees, which are obviously linked also the assets under management. Assets under management were growing EUR 8 billion on the quarter, and EUR 14 billion on the year, which is a clear result of two things.
First of all, the performance of the financial markets, which had, of course, a positive impact of 2%. The other element that's far more important, that is the underlying performance of the sales. We had a strong increase of gross sales on two things. First of all, on what we call direct client money, which are the traditional funds, and then on the other thing, which is a lower yielding activity, that is the investment advice, which went up in this quarter significantly. As a matter of fact, it went up with EUR 3.4 billion. Now, what about the net inflow on the regular in asset management funds, so direct client, client money?
Once again, we had a very strong quarter with a net inflow of EUR 1.1 billion, which brings the total to EUR 2.8 billion. That is really good. As a matter of fact, last year, we booked a record in net inflow of EUR 2.9 billion. Now, after six months, we are already at EUR 2.8 billion, which clearly shows that the Q1 and Q2 performance was extremely well on the asset management side. The same thing I can say about the banking services, fee business, which was growing as well.
This is also linked to the fact that Raiffeisenbank Bulgaria was included in the numbers, but also and clearly, it is positively influenced with the fees which are generated by the payment services, higher network income, and also the business which is linked to credit files, the fees which are linked to credit files, were evolving positively. All in all, this is a strong quarter on the fee and commission side. What about sales, and what about performance technically on the insurance side? Let me start with the non-life business. Well, that was performing excellently. First of all, the growth of the premiums stand on a 13% year-on-year basis, which is indeed very high, and that is good news. It is driven by two things.
It is driven by the sale of insurance products to new clients or existing clients. Second, element is that part of the increases are linked to re-tarification of existing products at a higher level, which merely also translates the inflation, which is linked to the claims handling side. Talking about claims handling, 84% combined ratio is to use an understatement, excellent. It is clearly influenced positively by the underwriting quality of the book, and also because of the non-existence of important storms, windstorm, hailstorms, or floodings, have not been excessively part of our activity in the second quarter of this year. For good understanding, all the misery you could read in the newspapers of the first two months of this quarter, or the first six weeks of this quarter, had the same effect.
We were not part of the regions where all of this happened. This is a translation of exactly the same thing in the second quarter. Life insurance business, which was... and you remember that I was not really amused with the quarter one results on the life side, is now completely the opposite. We have been running commercial campaigns in the second quarter, and that clearly paid off. The sales on the life side increased with 50% on the quarter and 70% on the year. As a matter of fact, it was mainly driven by unit-linked products, which were more than doubling compared to previous quarter, and more than doubling compared with the previous year. In that perspective, it's quite clear that we did an effort in the second quarter.
The bulk of this effort was translated in unit linked production. On the financial instruments at fair value range, we have seen an increase of our income with EUR 25 million. I'm not going to go into the detail here, but let me say it as follows: this is mainly driven by a very strong performance on the dealing room side, and you could say, if you compare to the previous quarter, then it's a little bit lower. Yes, incorrect, but let's be aware that the Q1 was extremely strong. If you compare the same period of last year, then it's clearly up.
All the other elements are bits and pieces which are moving, but let me save some time not going into the detail, because most of the time it just shifts around with max EUR 10 million. On the net other income line, the difference is much bigger. We are talking about a difference of EUR 440 million, but as I said in the introduction, this is driven by two things, two one-offs. One, you know, that is the big EUR 370 million related to the sale of the Irish assets. Then the second thing was a recuperation, one-off recuperation of Belgian taxes, which were unrightfully collected by the Belgian government, and that was booked, that recuperation was booked also in the first quarter.
EUR 54 million of return, which would, or, or profit, sorry, which, is actually a translation of a normal level. The average level, excluding all those one-offs, is roughly EUR 50 million, so it's perfectly in line with that historical number. In terms of operating expenses, first message, it is slightly up, only 1% on the quarter. If you compare it with previous year, it is 12% up. Let me translate that differently.
If you look into the comparison with previous years, and you would exclude the one-offs, for instance, the costs which are linked to the M&A file or the divestment file in Ireland, the file in Bulgaria, and so on and so forth, then we do have an increase, which is roughly 9%, which clearly defines the impact of the inflation. Nevertheless, costs have been remaining under control because that level is lower than the average inflation throughout the group, and that is due to 2 things. We have been able to gain further productivity through our implementation of, amongst others, Kate, but also we have been able, as a consequence of that, to keep our FTEs under control, and in that perspective, lower the number of FTEs.
What was the other driver? That is typical seasonal, that is, IT cost, marketing cost, and some other costs which are linked to professional fees. For instance, second quarter is a quarter where we have the announcement of yearly results, and those fees are booked in the second quarter. In terms of bank taxes, well, I mean, this is a never-ending story. It only goes up. Another EUR 51 million, which is mainly due to the fact that windfall taxes have to be paid, additional windfall taxes have to be paid in Hungary on the insurance side this time.
In total, we are now having EUR 654 million of bank taxes, and the expectation for the full year is EUR 684 million of bank taxes for the entire year, which is a very significant amount of money. Let me go to the impairments. Well, as I already said in the introduction, the quality, the underlying quality of our lending book remains extremely solid. We have hardly any impairments on the regular book, and if you take into account the full book, including the buffers which we have taken in the, in the, in recent past, then it's even a release of loan loss impairments.
Totaling EUR 23 million, the result of EUR 17 million booked in Belgium, including the foreign branches, so overseas activities, which are, in essence, linked to one major claim. We do see that the improvement of several parameters, most importantly, the macroeconomic parameters, has triggered our model, which is underpinning our geographical and emerging risk buffer, which has triggered a release of EUR 40 million on that perspective. The combined sum brings us a release of EUR 23 million. As I already mentioned, we do have impairments on other things which have nothing to do with loans, but which are linked to modification losses, intervention of government, that's a different way to describe it, of EUR 90 million in Hungary.
We have written off EUR 11 million on a lease contract, which we had in Ireland, where the lease contract was a longer tenure than the remaining period for us in Ireland. Totaling EUR 31 million, sums it up to EUR 8 million of impairments. As a matter of fact, that translates in credit cost ratios, which are very low, to build 2 basis points when we consider no buffer on geopolitical risk, -4 basis points, which is a positive when we do consider the geopolitical buffer releases.
This is clearly below the guidance which we gave for this year, 20-25 dips, and for that reason, and for the reason that the underlying quality and the economic outlook, which we which we use, is of such a kind that we will not come to the level of 20-25 dips in the remaining 6 months of this year. For that reason, we have lowered the guidance to 10-15 dips going forward. Last word about the credit portfolio. The impairment loans ratio now stands at 2%. As a matter of fact, if we would use the EBA definition, it is only 1.4%, which shows that in this perspective, we are clearly better than the European median. On the next page 16, you have seen the, you can see the evolution of our buffer.
We still hold EUR 350 million in that buffer, which is roughly 80% of a full year credit cost ratio guidance, and therefore, it's on the, on the, on the safer side. As I said, the main reason for the free fall of EUR 40 million was driven by macroeconomic parameters. Going to the capital position of KBC Group, well, if you make the contributions on the income side, so the capital side, namely the result of this quarter, at 50% traditional payout ratio, we do have the up- dividend upstreaming on the, on the insurance side. Then we do have a couple of elements which are summarized under other, but have no impact.
If you take into account the volume growth, which was mainly driving the increase of risk-weighted assets, and then also a sum of parts, which are indeed, coming also to a zero conclusion for the book at other, then you see that the capital ratio stands at a very solid 16.5%. That 16.5% is translated on the next slide in the different types of buffer, and you can see the evolution. We do hold a buffer of 6% if you take into account, 10.5% of OCR level, and the MDA buffer goes to 5.1%, if you take into account all the elements which are described on the right-hand side. What are all those elements?
That is, indeed, we do consider to optimize this structure. That means that we are potentially using the possibility which is offered to the European banks, namely, to finance part of the Pillar 2 requirements with AT1 and Tier 2 capital. Using the possibility is something which we will consider going forward. We are not necessarily executing this immediately, all depends on other elements, other elements, amongst other market circumstances. On the next page, you can see the leverage ratio, which stands at a 5.4%, which is a very solid position, given the fact that we increased the size of our balance sheet because we have further strengthened our liquidity position, which stands at a solid 152%.
For a good understanding, this liquidity position remains very high, even after the repayment of EUR 11 billion of TLTRO. To be precise, EUR 10.9 billion was paid back to the ECB, which is almost the full remainder, is a small part left over. Still, despite the fact that we paid back EUR 11 billion, we have still 152% liquidity ratio, and on the NSFR side, it stands at 145%. Also, the insurance company has posted a very solid solvency ratio with 206%. We are clearly above the threshold of the ECB. That brings me to the forward-looking part that is, in essence, dealing with two things. First of all, the economic outlook on the, on the, on the growth side, looks, yeah, not that flourishing.
It is indeed a period of low growth, uncertain growth, and it is a little bit better than what was assumed by most economists in the beginning of the year, but still, it's still under pressure, so it still remains weak. On the other side, it's also quite clear that given the evolution of the core inflation, which is still higher and clearly higher than clearly higher than expected, and clearly higher than the expectation of the ECB, that is indicating that it will be there for longer than originally anticipated. As a consequence, it will have an upward pressure on the ECB monetary policy, which will potentially translate itself, according to us, in a further one rate hike of 25 basis points in the next coming months.
In what concerns our guidance for the year 2023, we have guided, and we have confirmed in this guidance, the outlook for the total income side, which we hold at EUR 11.15 billion. On the other hand, we have lowered the guidance of EUR 5.7 billion of net interest income to EUR 5.6 billion. On the next page, you can clearly see why this is. It has nothing to do with the evolution of the interest position of our book as such, because on the contrary, we have increased our outlook for the pure net interest income, which is linked to our activities, current account, savings account, term deposits, what have you. We do see clearly two things.
First of all, because we have been using money market opportunities, which means that we have been attracting funding and working on the carry with derivatives, swapping away the interest rate risk, we have gained money. The unfortunate thing is that according to the accounting rules, you have to book the, let's call it, typical banking products part on the NII side, and you have to book the derivatives part on the financial instruments and fair value side. Which means that the sum of the two parts, which is positive, is not seen in the NII line, but is seen in the sum of the financial instrument fair value line and the NII line, which is as such, negative.
That is clearly indicated on this graph, -EUR 0.1 billion. Last but not least, since we gave the guidance, the European Central Bank, the Hungarian National Bank, and the Bulgarian National Bank have changed their position on the minimum required reserves, which we have to hold with them. The compensations which were given on those MRRs are put to zero and have, as a consequence, a negative effect of EUR 100 million, a bit more than EUR 100 million on for us, which is translated in this graph as well. Using those external factors brings down the net interest income, despite the fact that the underlying net interest income is higher than originally guided. Concerning the longer term guidance, it's. Sorry, I forgot to mention on the guidance one other thing.
On the OPEX side, on OPEX side, we do confirm the 4.75 ballpark number, despite the fact that inflation is indeed higher for longer. The second thing I already mentioned, we bring down the guidance on the credit cost ratio to 10-15 basis points instead of the previously foreseen 20-25 bits. In terms of the long-term guidance, as you know, we only update that once a year, and that is always on the back of full year results. As a matter of fact, it's on the back of our, of our budgeting exercise. Well, we do not update those numbers, and we continue to see those numbers being realized to a certain extent.
Those are offsetting factors, are positive elements, and the full detail how that affects will be guided to all of you in the course of early next year on the back of the budgeting exercise, which starts as we speak. There are no material deteriorating factors as we speak, otherwise, we already would have updated those numbers. Which brings me to the next slide, slide 23, which is actually a wrap up on the performance of KBC Group, which I can summarize in one word, it was excellent on all elements, on all PNL lines. In all countries, we have delivered what we should deliver, what we have promised, and in that perspective, it leads to a EUR 966 million with solid liquidity and solvency positions.
I will close it here, and I will give back the floor to Kurt De Baenst, who will guide us through your questions.
Thank you, Johan. Let's open the floor for questions, and please restrict the number of questions to two, to allow for a maximum number of people to raise questions. Thank you.
Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on your phone line will indicate when your line is open. We'll now take our first question from Raul Sinha from JPMorgan. Your line is open. Please go ahead.
Good morning, everyone. Thanks very much for taking my questions. Can I have two, please? The first one, just on the capital threshold, Johan, I mean, given the front loading that we are seeing, of Basel IV, and also the decision, you're making as a management team to issue, you know, AT1 and Tier 2, should we now start thinking that, whenever the next review happens around the capital threshold for distributions to 15%, that, it's a given that it comes down? That's the first one. Then the second one, I guess, just coming, onto NII.
Obviously there are quite a few moving parts over here, I just wanted to ask for your broad thoughts around the profile, or the, or the peak NII discussion that we've been having with a number of banks. Obviously, if I look at your guidance currently as it stands for total income, which is on a CAGR basis, it implies, you know, your NII should have significant tailwinds next year. Obviously, you know, you still have replicating portfolio, I think, helping you. A little bit more color in terms of the growth in NII, despite, despite the sort of reduction in this year's guidance would be helpful. Thank you.
Thanks, Raul, for your questions. I will take the first one. Second one will be answered by Luke. Regarding the threshold, the 15%. I mean, first of all, I think your analysis is correct. What is happening now because of the risk-weighted asset add on, the corporate book, that is clearly a front loading, and I repeat what I said, we consider this front loading to be very conservative, and we still don't understand a couple of things in that decision of the ECB. It clearly means that it's a far more conservative stance, and therefore, it's a more solid stance in terms of our capital position, giving the risk profile of our book.
The second thing is, on indeed, if, if we would execute the AT1 and the Tier 2 fill up, then indeed, we have, have, double up in terms of our capital, if we would keep the CT1, and I fully agree with that position. Let me, let me remind you the usage of my words. I used 2x if, so therefore, it is a consideration which we changed compared to the past, because in the recent past, we always said we will fill it up with CT1, which is indeed more expensive, we know. We do consider and we will consider the execution of this when the momentum is right. It is not executed yet. That is a good understanding.
In terms of what that would mean, if we would execute it, if we would take into account, if we are implementing, of course, in third quarter, the front loading of the risk-weighted assets, then it approves the solidity on the risk-weighted asset side, and then indeed, it makes sense to consider the, the, the, the threshold of 50% downwards. The decision is always taken on a yearly basis after due consideration by our board, and that means it is not only this, what we are going to take into account when we are assessing the 15%. Obviously, you take into account market circumstances, also you take into account forward-looking elements.
I give you one example, if we would have a adverse effect somewhere, let me use something which nobody wants, when the war in Ukraine would escalate, then, of course, there is another element adding, and therefore, we will take a more conservative stance. That's not preempt on something which is still need to be decided in roughly eight months, but the optionality is created, I do agree.
Hi, Rahul, it's Luc here. I will answer the second question. The peak has not arrived yet for KBC. I can't tell what happens with other banks, obviously, but for us, an important driver of the fact that NII hasn't peaked yet, or will not peak in this year, is the fact that our transformation results, i.e., the replication portfolio of our deposits, is still growing very fast. Continuing to grow at more than 10%, as I mentioned last time. That will continue, and if you look at the country numbers, well, first of all, the group as a whole, NII is growing at 6% as a whole, but underlying transformation result is growing faster.
What you now see, it's not only in Belgium, that there is a strong growth in NII. It's going up by 11% quarter-on-quarter, driven particularly by the transformation results. If you look at Czech Republic, there we see there is a change, a corner has turned, and also there, we see an increase in NII of about 5%, also driven by an increase in transformation result. Yeah. You see the margin in Czech Republic is also increasing again, slightly, but is increasing again, as it does for the group, and as it does for Belgium.
The transformation results will continue for quite a while, and that is why, indeed, it will be a strong driver for our total CAGR growth for the full the next 2 years.
Next up, we have Benoît Pétrarque from Kepler Cheuvreux . Your line is open, please go ahead.
Yes, good morning. Just, just wanted to come back on, on NII, on your, on your EUR 5.6 billion guidance. I think that will imply EUR 1,450 million quarterly NII in H2. Yeah, there is some improvement, but that's a bit less than, obviously, we expected. Could you maybe run into the, the moving parts, you expect? I mean, you have a pretty strong, inflation-linked bond contribution, you know, what will that do-- what, what will be the trend in the future, and, and also looking at volume growth and margin developments for, for the rest of the year?
Then on your kind of EUR 11.15 billion total guidance on income, if I do the math, you have a H1 at EUR 5.83 billion. I strip out the EUR 400 million multiplied by two, I get, get to EUR 10.9 billion, and, you know, when I add back the EUR 400 million, which is included in the guidance, I get to EUR 11.3 billion, yet you get it for EUR 11.15 billion. You know, did you put some kind of conservatism in your in your top line guidance for the full year? Thank you.
For last question first, that's an easy one. You know, KBC, we tend to be conservative. Perhaps that gives you an idea that indeed there is some conservatism in there. The first question, the moving parts, as I mentioned before, the transformation results will also in the second, the third and fourth quarter, be, of course, an important driver. Inflation linked bonds will be lower than this quarter. This quarter was quite strong. We had a strong, increasing indexation. If we look, as we mentioned before, for the full year, you can expect an inflation of about 4%-5%. This is the Eurozone indexation we have to look at. 4%-5%, that means EUR 40 million-EUR 50 million for the full year.
If you look at the first two quarters, we already had about EUR 27 million gain on inflation-linked bonds. Therefore, if you then have the rest, the EUR 17 million-EUR 20 million for the next two quarters, that means about EUR 10 million per quarter in inflation-linked bonds income. Lower than the first quarter, but obviously much stronger than the first quarter, which was negative. What is also perhaps interesting is that we see lending income, which was a distractor, because volumes were increasing, but the margin compression was offsetting most, was more than offsetting the positive effect of volume increases. That seems to be turning now, with lending income small, slightly contributing again.
You see that there's still growth in the loan portfolio, about 2% overall, which is, around the numbers, it's slightly lower than that. It means that the 3% growth, that 3%-4% growth that we, envisaged, and we've always said it will be, probably the lower end.
... that probably 3% will be achievable. We see early signs of margin improvements in some areas, particularly in Czech Republic, where the mortgage, mortgage margins are improving again, and also, and that's for the group as a whole, Corporates and SMEs are either stable or slightly improving. The only drawback here is Belgium, where there is still quite a lot of margin pressure. That is the, the exception. That means for the group as a whole, lending income starts to contribute slightly again. These are the most important components. Obviously, you have these quartile elements, such as short-term cash management, that is difficult to predict, but we expect that will continue to be a strong, well, I wouldn't say a grower, but a good contributor to the NII.
That's, I think, in summary, the drivers that we see for this year.
Yeah. Thank you. Very clear. Thank you.
Next up, we have Matthew Clark from Mediobanca. Your line is open. Please go ahead.
Hello, Matthew Clark at Mediobanca. Question is firstly, on the EUR 1.7 billion risk-weighted asset release in the third quarter, could you give us some guidance on that, what that relates to? Then secondly, coming back to your target, 15% CET1 ratio and potential revisions, I mean, you made no mention of peer group capital levels when you were describing potential adjustments for the Pillar Two restructuring. Is that now gone? Is that now in the past and not really relevant, and you're looking more towards an MDA buffer thinking in order to set your target CET1 ratio going forward? Thank you.
Thanks, Matt. Let me, let me answer your, your questions, perhaps because, despite the fact that Luc is brilliant in making calculations, he made a small error. Before you put that in your Excel sheet, he said, on, on, on the inflation link bonds, -7 plus 30 is 27. It is -7 in the 1st quarter, 30 in the 2nd quarter, that is not 27, but 23. Otherwise, if you put that in your Excel sheet, it would be painful. Coming back to your questions, first of all, on the 1.7 risk-weighted assets release in quarter three, this has to do with several elements, this is linked to evolutions in our books, which are buffered in this quarter, which are released next quarter.
We got in the numbers in, what was it? End of June, when we were still having discussions with the ECB on the risk-weighted asset impact, therefore, we shifted that into quarter three. Coming back to the, what you called the capital target of 15%, for good understanding that it is not the capital target, it is the threshold which we use to define surplus capital. The capital target is something which we position against the OCR. The OCR, which is, if we would consider, if we would implement the, the Pillar Two requirement to be financed by 81 and Tier 2, comes down to 10.5%. We hold with the 60.5% today, and also with the 15% threshold, a significant buffer compared to that threshold.
When we are, when our board is going to make the assessment to review the threshold, they are going to take into account a lot of things, as I already answered in the previous, on a previous question. That there's market circumstances, economic circumstances, and so on and so forth, but also, and that will remain the case, how we position ourselves compared to our peers, and that means also the position of peer groups. KBC wants to be still, a very well-capitalized group, and amongst the best capitalized groups in the European domain. That will be, is, and will be also going forward, a trigger for the assessment of the threshold on surplus capital. The real internal capital target is lower and is defined on a buffer, which we put on top of the OCR.
Taking all those elements into account, peer group will be one of them.
Thank you.
Next up, we have Flora Bocahut from Jefferies. Your line is open. Please go ahead.
Yes, hello. First question is on the RWA relief. I mean, you just talked about the EUR 1.7 billion in Q3. Can you talk also about the level for the EUR 2 billion RWA relief you target, I think in Q4? How are you gonna do that? Is it going to potentially impair your organic growth potential for results? I'd like to get back to the RWA add-on of EUR 8 billion. I mean, you talked about the model review by ECB, but, you know, it's a huge number. It comes completely unexpected. It had not been mentioned before. Was it a sudden move by ECB? Can you maybe clarify what the risk weight is gonna be on that portfolio going forward? Like, was it extremely low and much below peers?
Just to try and better understand what happened there. Thank you.
Thanks, Flora, for your questions, I think indeed, these are very relevant questions. Let me, first of all, come back to the EUR 2 billion. We are having already for a long period, discussions with the ECB regarding what is called simplification of models. This is a process which is ongoing, I think, also with other banks, Clearly also with KBC. This discussion is in an end phase, Unfortunately, we were not able to disclose it already today because we don't have the final. First of all, the final decision is not taken yet by the ECB, Secondly, as a consequence, we did not receive the final discussion, the final decision, Therefore we cannot disclose the precise detail.
If we make the estimate and we take a range, then it is-- and that's the reason why we call it roughly EUR 2 billion, then it is indeed somewhere in that neighborhood, and we do expect that is on the basis of conversations which I've had with the ECB. We do expect this outcome to be there before the year end. Regarding the EUR 8.2 billion, that is indeed also a discussion which we have had with the ECB, and to be very straightforward, well, it came to us as a surprise as well, because there are no intrinsic triggers in our portfolio which show that this needs to be done.
Let me give you one example, also, if you look at the results of the stress test, which is mainly also focusing at corporate portfolios, as you have seen, KBC came out quite well, and we don't understand then why all of a sudden we had to discuss matters on the corporate portfolio in terms of risk-weighted asset increases. Discussion took place, also we pushed back, and we gave explanation why we think what the request was for that it was, and that it was not necessary, and that it was overly conservative. It's been back and forth for a couple of times, and we were informed by the ECB, in writing on the 13th of June, that there was, that there was still a significant increase, which we do not agree with from a purely technical perspective.
Now, how does it work? We had, we had a right to be heard. We executed that. It is 14 days after 5 weeks in total, we got back the confirmation on the corporate book, and as a matter of fact, it came in on Tuesday, last Tuesday. It actually works now like an add-on. It is an implementation, and we are now going to implement those recommendations, and with the data of KBC, further underpin why we think this is overly conservative. The ECB will assess those implementations. If they consider that we are right, then, the, the add-on will be replaced by the real numbers, which are part of the implementation. We'll see what that brings. This is, this is how it works technically. I'll give you my personal opinion.
For me, it's quite clear, and from a supervisory perspective, I even understand, that the ECB is using their, their, their powers to assess the books of banks in general, where they implement a far more harsher and a far more conservative stance, increasing risk-weighted assets in general. You can do it on, on, on, on corporates, you can do it on other books as well, and this is what has happened over the recent past. When I refer to TRIMs, that's one of it. This is a direct consequence of the execution of TRIMs and then the implementation of the repair program. They also confirmed to us this is a level playing field. That means that all European banks are scrutinized in the same way. It will be stepwise.
It will not do everything, everything at the same time, and we all know that already some of our peers have been subject to the same exercise and have been also announcing increases on risk-weighted assets. Giving the facts or giving the events which happened in the U.S. and in Europe recently, I'm talking about Silicon Valley Bank and the likes, and Credit Suisse here in Europe, from which were triggered by, in essence, liquidity issues. I can, I, I understand that the European Central Bank takes a more conservative stance on a lot of matters, and those matters are, amongst others, translated in further risk-weighted increase. As a matter of fact, it is an anticipation on a potential implementation of Basel IV. As a matter of fact, this is a certainty.
Basel IV is still under discussion, it's still not final, and there are a lot of moving parts. I mean, if ECB implements that in a download way, you know, Basel IV becomes without subject, or the discussion on Basel IV becomes without subject.
Thank you. That is very clear. Can I just ask one clarification? There's one element I'm not sure about. You state on the slide 4 regarding, you know, the capital optimization that you will fill the Tier 1 and Tier 2 buckets. Then on this call, it seems to me like the decision has not been made 100%. Just to clarify, will you fill them or you will, but you don't know yet when that will be?
I, I do apologize, Flora. Yes, you're right. The, when you read the text, it's clearly that it is will, but that we made an error. We should have paid more attention to that. It is clearly that we are using the possibility. We have always said in the past that we would not use the possibility because we don't need it, and we, we use the CT1. We are one of the outliers in doing so, and therefore we do consider the option now. In that perspective, it is an optionality created, which is bringing us 81 basis points potentially, but it comes to the execution only at the moment that we decide as well.
Thank you.
Next up, we have Amit Goel from Barclays. Your line is open. Please go ahead.
Thank you. I guess just one follow-up on that. I mean, as you mentioned, obviously, you know, being, being very conservative, I, I'm just curious on that capital bucket kind of optimization, why, why are you considering a less conservative stance? Whether or not that's related to the RWA effect, then what it would mean in terms of ability to achieve longer term ROTE targets and aspirations.
Secondly, just in terms of the pass-through assumptions and what you're experiencing at the moment, in terms of the savings accounts, just to check if you're thinking about an exit rate around the 40% mark, and then on the term deposits, it looks like the pass-through is already above the 80%-85%. What would bring that back down to the 80%? Thank you.
Thank you for your question, Ahmed. To be very honest, there was a lot of noise on the line, so I did not 100% understand your question, the first question. Let me try to answer on what I understood. If I'm missing some parts, please, please, step in. Yes, indeed, in the past we always used the very conservative approach, filling up our total Pillar Two requirement with CET1. In this perspective, we are now creating the optionality to fill it up, like most of the other European banks with AT1 and Tier 2. The only reason why we consider it is indeed the comparison on the buffers. We have 5.1% buffer on the MDA.
We have 6% buffer on the, on the, on the CET1, which actually, if you would consider to fill it up, you would bring that at the same level. Then also taking into account the discussions which were ongoing on the, the thresholds, everything needs to be combined, and in that perspective, we create the optionality. Just to give clear, clear view to the market, whereas in the past we always said, "We, we not will fill it up," we now say, "Listen, we do consider, we don't, don't exclude that optionality anymore." That's the only, the only driver for that message on the, on page 4. The second part, which is on the pass-through, I will hand over to Luc.
Yes. Hello, Amit. I'm not sure what you're referring to, because we've actually updated the pass-throughs on savings accounts, and as for the group as a whole, from previously 40 basis points, 40, to now, sorry, 40%, to now 30% pass-through on the savings accounts. That's for the group as a whole. We've increased the pass-through rate on term deposits for the group as a whole, from 80%-85%. The mix obviously is positive because the effect on the savings accounts is, is very strong. And that is a very positive contributor to the reason why we see an increase of the effect on volume and margins, as you see on slide 26, I think it is.
Is it answering your question or did I get it wrong?
Okay, got it. I thought for 2023, you have that 30% pass-through on savings and 85% on term.
Yeah.
I thought that still on the medium-term basis, you had 40% on savings and 80% on term, but is it the longer term?
No, no, no.
The medium term is also changed?
No, no, no. We didn't give any guidance on the pass-through rates for the next 2 years, and we don't do this now either, so we don't want to express any opinion on that. All what we're saying is that we looking forward, we just don't update the guidance, and we have never given any pass-through rates for 2024 and 2025.
Okay, got it. Thank you.
You're welcome.
Next up, we have Kiri Vijayarajah from HSBC. Your line is open, please go ahead.
Yes, good morning, everyone. Just a couple of questions on my side. Coming back to the capital, and, and these levers to offset the impact of the model review, you know, coming through in the second half, it does strike me that you've calibrated those levers to leave the net, net Basel IV impact largely neutral. I wondered if you had kind of additional levers in your back pocket, you know, just in case there are other unforeseen moving parts, down the road on capital, or do you think you've kind of maxed out on these various RWA optimization levers? Obviously, leaving aside the whole AT1, in the Pillar 2, stack, discussion to one side.
Secondly, just turning to the geopolitical risk provisions, and you've been releasing that at a fairly steady EUR 40 million or so a quarter. Is that something that we should sort of bake in at least for the next couple of quarters in there, you know, to try and make the overall full year number come, come within the revised guidance there on cost of risk? Thank you.
On the capital point for Basel IV, we don't think we've maxed out or anything. What we're saying is we now have EUR 4.5 billion. That's an increase on the add-on that ECB has given, is a front-loading of the EUR 7 billion we now guide for the first time application. There is still EUR 2.5 billion increase in the first time application as of the fourth quarter, let's say, of this year. It is still an increase. Can we manage that still down? Well, that depends. There's so many variables still, and we can take management decisions.
We think that the effects we can take as management have more to do with the fully loaded Basel IV impacts rather than the front, the first time application. If there are changes, yes, it could happen, but it will be more than mitigating or enhancing or improving the longer-term effects. Did that answer your question?
Yes, then, on the-
Then to 40.
Yeah.
Yeah, that's a bit more difficult to say because the the buffer that we have is now fully, well, fully is maybe a too, too strong a word, but it's model driven. That model has some knockout features. That could mean that if we see the stress levels in the different sectors that the model is monitoring, if that goes below a certain level, then it rapidly reduces to zero. It's not a linear effect, yeah. Therefore, it's a bit difficult to say when exactly you will reach that level where it rapidly reduces to zero. For unfortunately, I know this is gonna be difficult for you to then to model it.
I would, I would be still counting on releases as far as we see the economy evolving, counting on releases, but I wouldn't take too much of that. Yeah. EUR 40 million may be a good point, but to be honest, I am not entirely sure. Yeah, that is difficult to predict.
Okay, thank you very much.
You're welcome.
We have Giulia Miotto from Morgan Stanley. Your line is open, please go ahead.
Thank you. Good morning. Two questions from me, please. The first one on NII. We hear that the replicated portfolio will continue to be a positive. Do you disclose size or yield or duration of this replicating portfolio? First question. My second question, sorry, going back to this unexpected EUR 8 billion impact, I hear your frustration. Would you be, you know, sure that there are no more of these reviews to come, or could we be surprised again in the future, maybe by some more reviews? Thank you.
Okay. I will answer the first question. Would you give some idea of the replication durations? For the current accounts, that is around, and there's a difference, of course, country by country, and there are also tactical positions, but around 4 to 4.5 years duration. On the savings accounts, that is around 2.5 years. For the full book, it's slightly below 5 years. That's gives you an idea.
Thanks, Giulia, for your question. I will take the second one. Coming back to, indeed, the, the risk-weighted asset add-on, which is, was, which was unexpected. Are there any further increases to be expected, and to the same, I mean, there's always shifts, but I mean, to the same extent? At this instance, first of all, when we have discussions with the ECB, they stated that, at this stage, there are no further add-ons to be expected, definitely due to the same tune as we are currently speaking. Secondly, be also aware that, we got the approval in, on the share buyback, roughly, what is it, 10 days ago or 8 days ago.
That is a clear indication that there is nothing to come to K, to KBC, because they took into account, obviously, I think the risk-weighted assets, add-on, plus our profitability going forward. They took into account, for sure, the stress test, otherwise, we'd never give a share buyback approval, but they gave the share buyback approval. Not only, orderly, we don't have any signs from the ECB side that anything unexpected might pop up again. Secondly, be aware that they approved the share buyback, which is still a significant number, and that they have done that in a forward-looking way, so they have no indication given via the share buyback approval, that something unexpected might happen. Point. This is the answer to your question.
In general, I think there will be anyway, from the European Central Bank side, an upward pressure on the requirements for all banks in Europe, both on the capital side and on the liquidity side. This is on a different note, and this has to do with the experience of Silicon Valley Bank and likes, and Credit Suisse, you know what I'm talking about.
Thank you.
Next up, we have Anke Reingen from RBC. Your line is open. Please go ahead.
Yeah, thank you very much for taking my question. Just, firstly, on the Basel IV impact, you now say it's EUR 7 billion, January 1, 2025. And I think, if I recall correctly, the last guidance was EUR 3 billion. Just trying to understand, I mean, obviously, lots of moving parts, but that seems to be quite a bit of an increase. Is, is some of this, I think you have the latest guidance didn't give us a fully loaded impact. Would you think that more is now taking day one than over the implementation period, where I think the guidance previously was like EUR 8 billion?
Secondly, on net interest income on the EUR 100 million that shifted from NII into the trading on the fair value line, will that sort of like, is that expected to reverse in 2024? Just a brief question, I guess if you issue more AT1 and Tier 2, that will be a headwind to your net interest income. Is that something that's you think is negligible or something we should focus on? Thank you very much.
I will take the first question on Basel IV. The impact is actually very simple, why it has increased, and it is the reason is that we now believe, there is a political agreement on this, although not yet fully finalized, but we think there's a very high certainty that it will happen. That the weighting of the insurance company, as you know, we're using Danish Compromise, and our insurance company is deconsolidated under that method, and then risk weighted. It currently it's weighted at 370%. Initially, the proposal was that the risk weighting would go down in the first time application to 100%, as already some have at the moment.
Then gradually would increase over the life of the implementation of Basel IV until 2033, increase to 250%. Now, the agreement is that it would be immediately 250%, so no reduction first. That is the explanation why we have revisited the first application. That's the only reason.
Thank you.
Yeah, yeah. Okay, I'll answer then, or not. Thank you. Okay. Anke, thanks, and I will take the last part of your question, giving or the question about the AT1 and Tier 2 on potential headwinds. For good understanding, let me repeat what I said earlier. Decision on the optimization is taken, the execution is not a given as we speak. That needs to be considered given market circumstances on support. Be aware that AT1 has no impact on NII anyway, and Tier 2 has only a limited impact given the position of KBC. In terms of headwind, given the total number we are speaking about, is very marginal.
The EUR 100 million in terms of the fair value, that shift from NII into fair value result, will that reverse in 2024? Thank you.
No, no, no. Well, this, first of all, what is earned this year in the market, in the dealing room, will not be reversed. As you know, dealing room takes short-term positions, never long-term positions. They lock in those profits, and they are made for that period. There's no reversal. Will there still be then shifts of going forward? Well, not to the, probably not to the same extent, and maybe a reversal there could happen, that it goes back from fair value to NII, depending on the positions that the dealing room takes. Yeah. They, they, they always want to lock in a margin and arbitrage opportunity, and that makes a shift. What is it going to be next year? Difficult to predict, but it's all quite marginal, eh.
The NII shifts, given the total NII income, is quite marginal effects.
Okay, thank you.
Less than 2%, yeah.
Next up, we have Tarik El Mejjad from Bank of America. Your line is open, please go ahead.
Dear Tarik, I don't know if you are speaking, but, please-
Yes. Hello.
Okay, now we can hear you.
Yes, here we go. Sorry.
Please.
Sorry about that. First question, again, on Basel IV. Can you give us indication what would be then the fully loaded impact? I guess it will be the phasing will be then lower now. If you can give us a sense, although I understand it's not fully finalized. The second one on, on this, again, on this add-on, I mean, I would think we're all surprised, and we can feel frustration you have, but is it explained by the fact that you actually, when I look at compared to other banks in Europe, you didn't have many, we can call it Trim 2.0, or IB repair, whatever, adjustment in the last 2 years, where others constantly had 10, 20 basis points here and there.
Secondly, you sound very cautious about the sector as well, and others could be also impacted. Is this, is this, I mean, an impression you have in terms of results of the SVB? Because the message and the share buyback, as you said yourself, has been approved all around, and no indication of more, more capital requests. What makes you feel that, that this is something that would be generalized? Thank you.
Take the question on Basel IV. Indeed, given everything, on a static basis, you know, we don't give any guidance anymore for the fully loaded effects, eh. We did give guidance a while ago that it would be EUR 8 billion, but that no longer is a number we can confirm or deny, as I sometimes say. It is clear that the EUR 4.5 billion is not only front loading of the first application, but also for the fully loaded application. Also there, if EUR 8 billion would still stand, then it would be EUR 4.5 million less, yeah, obviously. It's also front loading of the fully loaded part. Tarek, good morning again.
I will take your second question on the add-on, and I think indeed, you hear the number of questions. It's a very important topic, and I fully agree with that. First of all, is it due to the fact that, apparently, when you compare the previous exercise, terms exercises, we got away quite well? I don't know, to be honest. I don't know, first of all, what the output was, of the term exercises for my colleagues in other banks. That's the first thing. I know the publications, but, you know, in, not in detail. The second thing is, obviously, I don't know the assessment of the ECB.
... on those TRIM outcomes and further analysis, which they are doing. What I do know is how they look at our position and how they discuss with us, and to be very straight, I already said it, it sounds very conservative. From a supervisory perspective, I understand, because, you know, the more conservative the capital position or the risk-weighted assets position, the lower the risk, and therefore also, the lower the impact on the supervisor when something is under pressure. I, I mean, I don't have to explain that. In the talks which we have with people which are responsible for KBC, also with senior people responsible for KBC at the ECB site, it is quite clear that they are not a big fan of models in general.
That in that perspective, you know, it has nothing to do with intrinsically the fact that it is KBC, it has just to do with the view that their approach is far more standardized, let me use the word standardized, across the board. In that perspective, giving also what happened in the recent past, where it shows clearly that supervisory measures taken can strengthen a banking sector, which is definitely the case in Europe, which was not necessarily the case in the US, to use an understatement. That is indeed something which you have to bear in mind all when we are discussing with our supervisor. What they're going to do with other peers. I already saw a couple of examples in the recent disclosure of a couple of our peers.
I'm not saying that this is going to be now the standard going forward. What was said to us when we were having discussions with ECB, they said it's by the way, it's it will be. The argument, of course, is what about level playing field? Because we are in a market and in a competition with each other, and the regulatory impact in the risk-weighted assets has obviously an impact on, on, on lending, has obviously an impact on pricing. What about level playing field? They always confirmed that it is a level playing field. All the rest, you can interpret yourself. I think that giving the lessons learned on Silicon Valley Bank and Credit Suisse, that the conservativeness on the supervisory side is not going to come down.
Okay, thank you very much.
We have Marta Sánchez Romero from Citibank. Your line is open, please go ahead.
Good morning. I've got two quick ones. The first one is on your MDA buffer target. Do you have one? What is it? I think pro forma for the buyback and the RWA inflation, it's 3.20% now. The second question is just another one, quick one on deposits in the Czech Republic. Do you think that the cost has peaked, or do you have an idea about betas, where we're heading to, or given that rates may start coming down, we've left the peak behind us? Thank you.
To answer your first question, we do not have an MDA buffer target internally. We don't have that, no. Second, are you going to take the question? That was on the pass-through rates or on the costs? I didn't really understand the beta.
Okay.
Yeah. On the betas for Czech Republic, that's why I think I understand your question. There, obviously a bit difficult to be very clear, but we do not think that pass-through rates will further increase. Yeah. May even drop a bit. Yeah. There are in- indications that this may be possible. Yes. That means we are at, maybe the peak of the cycle there. Any further questions?
Yes, we do. Next up, we have follow-up questions from Benoît -
Yeah
... Pétrarque from Kepler Cheuvreux. Your line is open, please go ahead.
Yeah, just follow-up questions on my side. On, on, on this buyback approval, I mean, did this be linked link it to the EUR 8.2 billion risk-adjusted, risk-adjusted add-on? Sounds like in terms of timing, it's very close to each other. It has been playing for quite some time, so just wanted to check that with you, if that was okay. you take an add-on, and I give you the buyback type of discussion. second one was just on the pass-through rate in Q2 on average for the group, that would be useful. Also on the EUR 8.2, I just wanted to check if this is for large part linked to corporate risk. Thank you.
Thanks for your question, Benoît . To be honest, I was not, I mean, I was not aware that it could be indeed a trade between share buyback and a risk-weighted asset add-on. No, it's clearly not the case. Absolutely not. The request of the share buyback has nothing to do with the risk-weighted asset add-on, first of all. Secondly, it has definitely not been a trade between one or the other, at all. The assessment of the ECB takes into account all other elements and the main concern, and this is applicable to all banks in Europe, that is when you do a distribution, extra distribution of EUR 1.3 billion of your capital, going forward and definitely taking into account also more adverse circumstances, does that not hamper your solidity as a group?
Does that not hamper your solvency position?
... In essence, that is the analysis the ECB makes, and therefore they obviously take into account what they had in mind. At that time, we were not aware of the number, for good understanding. They take into account risk-weighted asset add-ons, which they would implement upon us. What number they took into account, we don't know. We only got the decision in, as I said, yesterday, sorry, on Tuesday. It has not definitely not been a quid pro quo from their side.
Perhaps on the pass-through rates then for the full year, a few things. First of all, we given, given the pass-through rates on the term deposits, which we believe for the full year will be 85%, 40% for the savings accounts. For the current accounts, we haven't given any guidance, but you know that most of the current accounts, there is no pass-through at all. If, there is a bit of pass-through for corporate SMEs, but that is even there, not, very outspoken. You can have an idea, you have the deposits, that's also disclosed on the website. You can then calculate what the overall, pass-through rate is versus the central bank rates.
Give you a bit more information on the savings accounts, the pass rate of 40%, we are close to that in Czech Republic. As I mentioned before, we think it has peaked and probably may come down a little bit, but not to a great extent. In Belgium, that is very visible, we have 90 basis points we pay on the savings account. Compared to the current ECB rate of 3.75, that means currently a pass-through rate of 24% in Belgium. Sorry, 30% pass-through is on the savings accounts. I made a mistake here. It's 30% pass-through on the savings accounts. You can calculate on the total pass-through. Peak in Czech Republic, we are 24% in Belgium.
Then you can see what that means for the rest of this year in Belgium.
Next up, we have Guillaume Tiberghien from BNP Paribas. Your line is open. Please go ahead.
Yes, good morning. Thank you. Can you help us understand a little bit the movement of NII in the corporate center? You highlight obviously higher funding costs of bonds and participation, and also higher sub-debt cost. Are these negative NII meant to be gradually reallocated to the divisions, or just disappear or just stay there? Thank you.
No, these, these are indeed costs that you mentioned, and there's no intention to reallocate those. These are group decisions taken to strengthen the positions of the group. For example, the participations, we should not contribute the cost of that to, for example, Czech Republic or Hungary. These are investor costs and not operational costs. So we do not allocate that to the to the business units.
Should we assume the -EUR 66 as a new normal run rate, or there's underlying some other income that might offset this -EUR 66?
Well, that will depend on the issuance that we do for the next few quarters in the senior hold, holdco. That's gonna drive it, but I think this is gonna be more or less, gives you an idea of what the costs should be going forward if rates stay the same. Yeah, that is important.
Okay. Thank you very much.
Next up, we have Sharath Kumar from Deutsche Bank. Your line is open. Please go ahead.
Good morning, and thank you for the presentation. I still have 2 questions pending at my end. Firstly, a clarification on the dividend. Even if we end up, say, at a CET1 of below 15% at year-end, I assume you would still pay 50% of the underlying profit. Within this, the Irish capital gains, that would be excluded in your underlying profit. Just wanted a clarification on that. Second is on buyback. I hear you when you say that it will be completed by August 2024, but any further clarity on the pace of execution, maybe more front loading this year? Any thoughts would be helpful. Thank you.
Thanks, Sharath, for your questions regarding the, the, the normal dividend distribution. No, I mean, the normal dividend distribution is, has nothing to do with that 15%. That is, as we always say, at least 50% coming out of our profit, and therefore, it is not influenced at all by that 15%. The threshold of 15% is just triggering definition of surplus capital, so everything above is considered surplus capital. This is considered for distribution, and the, the consideration will be filled in with the, at the discretion of our supervisory board, and that is then an extra dividend, which can then go either way, to cash or dividend or a blend.
Regarding your sub-question on the Irish capital gains, as you know, the Irish capital gain was put into the share buyback, in the $1.3 billion. You're right, there is indeed part of that $1.3 billion Sorry, part of that capital surplus linked to Ireland is also booked in the, in the, in-
... the first quarter of this year, so in book year 2023, and therefore indeed it is double counting. We are giving intrinsically extra dividend on this basis in the course of 2024 on the back of the full year results. It's a little bit of double up. Now I forgot your second question. Ah, okay, the execution of the share buyback, and else we would be doing front loading. Sorry, I forgot it. You know, on the, on the, the share buyback, so we will try to start it up as soon as possible. Let's say in the next coming weeks, and the execution will depending on the market circumstances.
We have a full year to execute the total amount, and in that perspective, market circumstances will define how that is executed.
Thank you.
Next up, we have Cor Kluis from ABN AMRO or ODDO BHF. Your line is open, please go ahead.
Hello, good, good morning, indeed Cor Kluis of ABN AMRO. A couple of questions on the 15% capital return. You return all the capital above 15%, basic three by the end of the year. Given all the data that you provided there's a few questions on, on, on that, on that one. First of all, you talked about a possible, I'm not sure, of course, but a possible reduction of that 15%, if that would be reduced, is that then relevant for this year, or are you talking about the reduction of the 15% possibly for next year? Will it be relevant for the February next year for the determination for the capital return, or is it, we talk about the year after?
That's, that's my first, first question. Second question is on the share buyback. I see of course, the share buyback has not yet been deducted from the CET1 ratio, the way that you presented. Of course, it will depend a little bit how the share buyback will be executed. How will you... Sorry, the first question on that one is how will you deduct the share buyback from the CET1 bond ratio? Is it really up from from the end of Q3, that, that the whole amount, the EUR 1.3 billion, is deducted, or will you deduct it gradually when you when you execute it?
Then related to that, to that, to that question, assuming, of course, that you have not yet fully executed the whole share buyback by the end of the year, how, how will you take this into account for determining the 15%? Because if it's, if it's not yet executed, this amount is not yet fully deducted. Do we take a pro forma CET1 for determining the 15%, or how would you work with, with that? Those are my questions.
Thanks for your question, Cor. Let me answer the first one a very straightforward way. The 15% threshold on capital is defined for the year where it is executed. The 15% is for the execution of 2023 result. The decision of the board, which will be taken in the course of the first quarter of next year, will be executed over the book year 2024. The second thing on the share buyback, we will start it up in 2023, quarter three, which means also that we have to fully deduct that from the numbers, the CET1 as of that moment, next quarter it will be fully deducted.
Okay, very clear. Thank you.
It appears that there are no further question at this time. I would like to turn the conference back to Mr. De Baenst for any additional or closing remarks.
Thank you, operator. Let's close the call. Thank you very much for your attendance, and take care and enjoy the rest of the day. Cheers.
That concludes today's conference. Thank you everyone for your participation. You may now disconnect.