Hello, and welcome to the KBC Group earnings release first quarter 2023 call. My name is Laura, 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. 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, Kurt De Baenst, Head of Investor Relations, to begin today's conference. Thank you.
Thank you, operator. A very good morning to all of you from the headquarters of KBC in Brussels. Welcome to the KBC conference call. Today is Tuesday the 16th of May, 2023. We are hosting the conference call on the first quarter results of KBC for the first time under IFRS 17.
As usual, we have Johan Thijs, our Group CEO with us, as well as our Group CFO, Luc Popelier. They will both elaborate on the results and add some additional insight. As such, it's my pleasure to give the floor to our CEO, Johan Thijs, who will quickly run you through the presentation.
Thank you very much, Kurt. Also from my side, a warm welcome to the announcement of first quarter results. As usual, we're going to do this on the back of a couple of slides, which starts with the overall view and the highlights.
Let me open with saying that indeed we posted an excellent net result of EUR 882 million on the first quarter of this year, which is significantly better than last year, and is also significantly better than the average of the all quarters last year, including the fourth quarter of 2022. The main reason is that we have done excellently on our commercial bank insurance franchises in all our core markets. We performed very well.
Also the result is significantly positively impacted by the divestment of our activity in Ireland, which has contributed on a net basis EUR 370 million to the first quarter of this year. There's also a negative impact as usual in the first quarter of the year.
We have posted a EUR 571 million impact on bank taxes, which is significantly more than what it was last year. All in all, EUR 882 million is the result, and that is indeed excellent. Let me come back to the highlights. That is, we have seen strong performance on the customer loan side. Also on the customer deposit side, we have seen a year-on-year increase, and also a slight increase on a quarter basis. We have seen a higher fee and commission income.
We do see a slightly lower net interest income, but that lower net interest income was fully in line with the expectations, given the fact that there were a couple of one-offs influencing negatively this 1st quarter, and this will be offset in quarter 2, 3, and 4, making us come back to where we guided in the beginning of this year.
It's also true that the auto diversifying factor next to the fee and commission business, the insurance business, was performing excellently on the level of the non-life insurance company side with extreme strong sales and good combined ratio. It was less on the life insurance side, but this is entirely due to the commercial planning agenda, the agenda which drives the commercial actions in the different business entity.
Costs were well under control with the 38% cost-income ratio before bank taxes. It does very well, and that is one of the record low numbers which we have seen over the history of KBC. We had releases on the impairment side, and all of those numbers combined have improved further our solvency position, both on the bank and the insurance side, as well as our liquidity side.
To summarize it, return on equity stands at 15%, cost on income ratio at 38% before bank taxes and the CET1 ratio stands at 16.1%, whereas the short-term liquidity ratio stands at 152%. Let me go back then.
Let me go further with then a couple of other things. I will shift immediately to the slide on the one-offs, which is slide 6. This means that we have indeed a very fundamental one-off this quarter. I already highlighted the fact that the divestments of the KBC Bank Ireland subsidiary has triggered a EUR 370 million net impact on the P&L.
This is due to 405 net other income increase and then a couple of one-offs which are related to that transaction, which are driven by either OPEX, either taxes, that brings the total of EUR 370 million. Talking about taxes, we had also a temporary extra windfall tax and insurance tax in Hungary, totaling EUR 79 million.
That was only partially recuperated or recovered with the EUR 9 million, which we got back from the extra ordinary deposit guarantee contribution, which we had to do last year. Also the good news on the tax side was that the banking sector in Belgium won a court case against the Belgian state, we were able to recuperate EUR 48 million of unwarranted paid bank taxes in Belgium in 2016.
That sums it up to a total exceptional in this quarter of EUR 340 million, that is indeed quite significant. Let me also highlight one specific element, which is also very important that is, as you know, we published a press release about this. We lost a historical legacy file in Czech Republic.
We had to, as a consequence of that outcome, we had a extra impact, negative impact, which we had occurred in February of this year of EUR 149 million. This is mentioned on this table as well.
Given the fact that our external auditor consider this to be a subsequent event of the year 2022, we had to restate the numbers, and that restatement makes the booking of that impact of EUR 149 million to be done in the fourth quarter of 2022. That is also in this list. Mind you, it was happening in 2023, but it is booked in the fourth quarter of 2022, leading to a full restatement of our numbers, full restatement of our numbers 2022.
Let me go to the detail on those numbers. As I said, net interest income was down on the quarter 7% and was significantly up on the year 10%. Let me explain the 7% down. The 10% is easy to explain because it's mainly driven by growth in on one end side, and then of course, a rising interest rates on the other side.
The decrease of the 7% was entirely due to one of the facts which we were well aware of and which we took into account when we were calculating our guidance given by the beginning of this year.
All these events are in essence, first, the TLTRO benefit, which is no longer there in the first quarter 2023, whereas it was in the past, that it has an impact of EUR 41 million in this quarter. The second one is that Ireland only contributed for one month in this quarter, whereas it contributed for full in 2022.
That means that we do have a difference of EUR 31 million, EUR 33 million, sorry, on this quarter. We had a significant impact because of an accounting effect on the inflation-linked bonds of EUR 44 million this quarter. This is something which is temporary and which will be recovered in the quarters to come.
It is indeed purely linked to the way how those inflation-linked bonds are calculated for accounting-wise, so it will be fully recovered in the next coming quarter. We confirm that on the inflation-linked bonds, everything which we took into account in our guidance of 2023 full year net interest income is still there.
Also the negative impact, which was perfectly calculated and expected, was the fact that we had a higher pass-through on the saving accounts in Belgium. We shifted from 11 basis points to in essence 60 basis points at the beginning of this year. This impact, of course, is on the total saving account book of EUR 61 billion, very significant, and that kicks in in the full quarter, which was not happening as we know in the fourth quarter of last year.
Those elements are the perfect explanation why we had a decline of those, net interest income. If you would exclude those, then you would see an increase our net interest income with roughly 10%. In terms of, the last element, which is specific for this quarter, is, it sounds a bit ridiculous, but it is not, that we had two working days less, and that has a negative impact of EUR 15 million, in total.
This sums it up for the quarter-on-quarter. I will not make the comparison on year-on-year to save some time. On the net interest margin, obviously you have the same effects. We do have a decline of six basis points, but that is also driven by Ireland.
If we would exclude Ireland from these numbers, we have a slight deterioration of 4 basis points, respectively, on the quarter and 17 basis points on top on the year. In terms of volume growth, also on the lending side, we see a clear growth of 6% on the year, which shows a strong performance over the last months.
It shows that we have a quarter-on-quarter growth of 0%. It clearly indicates the fact that the economy is growing, is bottoming out and the economic growth is indeed slowing down, and that is translated in those numbers. You can see the shift between retail and term loans.
Mind you that the term loans are negatively influenced by one single loan, which was granted by Belgium to the Czech Ministry of Finance. That loan of EUR 1 billion. If you would exclude that, then the growth would be indeed slightly positive also on a quarter-on-quarter basis. On the customer deposit side, the growth is 3% on the year.
What is more important is the decline of 2% on the quarter-on-quarter growth. We have to mention here the reason why, because this is entirely due to the fact that in our foreign branches, mainly the London branch, we have seen outflows in this quarter to the total amount of EUR 6.9 billion. If you would. This is in essence very volatile money which is related to professional overnight deals.
We most of the time called it a short-term cash management. You remember that from previous calls. That money was no longer there. EUR 6.9 billion, if you deduct that number from the deposit account, then you would see a slight increase. For good understanding, to show you the volatility in this quarter, we already had money to the tune of EUR 3.8 billion flowing back in.
In terms of where we are. By the way, if you would exclude those, that EUR 6.9 billion, then the -3 becomes slightly positive. If you would look then at what is really important, that is on the next slide, the inflow or outflow of core customer money. Well, we can clearly state that we have seen an inflow of core customer money.
In order to explain that, we dealt, and that you can see on the light blue side, we dealt with the different buildings block of core money. First of all, we saw a decline of current accounts, EUR 7.1 billion, which is in essence a shift from those current accounts to term deposits, which you can see rising EUR 6.1 billion.
On the saving accounts, that remains slightly positive growing with EUR 0.6 billion. If you would make that sum, then you see a slight decline of the total deposits. Now, the reason is very straightforward. The reason is that what we call anchoring, that is we guide our customers with their monies on current accounts, saving accounts and so on, towards mutual funds.
We have seen an extreme good inflow of core money into mutual fund business. In essence, EUR 1.8 billion. If you make the total evolution of all those monies, you see at KBC Group level an inflow of EUR 1.3 billion net.
Let me highlight again the caveats we took into account. First of all, foreign branches are included, which is purely volatile money as I explained. Secondly, we took into account that, of course, in Ireland, where we are divesting, the outflow was EUR 0.2 billion. Also, we excluded any potential positive impact of foreign exchange rates. That is quite significant given the strong performance of the Czech koruna and to a lesser extent, Hungarian forint. We excluded that as well.
Still after that, we see an increase of our volumes, core direct money of EUR 1.3 billion. Let me go to the next topic on the P&L site, that is the fee and commission business. We had an extreme good performance in this quarter, despite the fact that we had very volatile circumstances in the markets.
We all remember the turbulence which was linked to the collapse of a couple of U.S. banks and to the takeover of Credit Suisse. We have seen despite of the turbulence, we have seen a net inflow of EUR 1.8 billion on the asset management side. This is really good because if I go back to my statements on the first quarter of 2022, I at that time mentioned that we had a record inflow, net inflow of EUR 1.6 billion during that quarter.
Well, we have beaten that inflow with another EUR 200 million in this quarter, despite indeed the very difficult circumstances which we were facing. If you translate that in the evolution of the asset management services, then the fees were up at 5% on the quarter. They were compared to last year, slightly down, and it has entirely to do with the starting positions of the assets under management.
You know how it works. Also, the banking services performed extremely well with an increase of 5% on the quarter. Also, if you make the comparison with last year, then there is a positive uptick of roughly 9% as well. In terms of the total amount, as I said, it is EUR 27 million up, which is nicely divided over the two topics.
You will no longer find the fee and commission business being negatively distorted by the commissions of the insurance companies. This has to do with the definition of IFRS 17. Commissions are now posted on another line, no longer in this fee and commission block.
I think honestly, this is now reflecting much better the commercial activities of the bank and also on the insurance company. In terms of assets under management, we went up with EUR 11 billion to EUR 217 billion now, which is an increase of 5%, which is almost nicely split up between net inflows and the performance of the markets +3%. Talking about the insurance activities, let me start immediately with the non-life insurance activities.
We had a very strong quarter in terms of sales, 11% up. This is attributable to all countries. In all countries, we had double-digit growth on the non-life side. What is also important that this growth of 11% is not only positive on the growth side, but also in terms of quality. We do see a record low combined ratio of 83% posted in this first quarter.
Even with that low number, it is negatively distorted by the windfall tax, which is charged upon the Hungarian business. In Hungary, the gross combined ratio stands at 115%, which is entirely due to the windfall taxes. If we would exclude those windfall taxes, then in Hungary, the combined ratio drops to 83%, and the group combined ratio drops to 81%, which is indeed an excellent number.
Talking about the life insurance company, well, we do see a different picture there. On Branch 21, interest guaranteed products, which is mainly driven by the Belgian business unit. We do see a growth which is comparable with the growth of last year and which is slightly down compared with the growth of previous quarter.
What is far more important is we do see a decline of the unit-linked business quite significantly quarter-on-quarter and roughly 25% down year-on-year. The reason is very easy to explain. We did not have any commercial actions in quarter one on the unit-linked portfolio. We do have like normal in every year at a quarter four, always commercial actions, also last year we had some commercial actions ongoing in the first quarter.
This is entirely driven by the commercial calendar, and this will be changed, as you will see, in quarter two, where we do have commercial actions running. In terms of the financial instruments at fair value, actually, it's similar to what it was previous quarter and previous year, so it's roughly the same total amount.
The components which are underpinning or which are underlying to the total amount of EUR 90 million, here and there shift a little bit. In essence, we had excellent results on the dealing room side. We had quite good results on our XVAs, and also in terms of our unit-linked activities and our market development activities. There was almost similar results than last year and last quarter. It is not big shifts there.
In terms of the net other income line is a completely different story. There we have an absolute increase of the number. I already mentioned the fact that we have booked a one-off gain on the sale of our Irish activities of EUR 405 million. Next to that, we do have also a one-off recuperation of Belgian bank insurance taxes of EUR 48 million, which was booked in this quarter.
The sum of both is EUR 455 million. If you would deduct that from the number 498, you would come back to EUR 45 million, roughly EUR 45 million, which is actually the run rate of net other income. I also want to highlight again quarter 22. I already mentioned that.
We had a negative impact of an old legacy file in Czech Republic of EUR 149 million, which was concluded in Q1 2023. Because it was defined as a subsequent event, we had to restate the numbers of 2022, and that is translated also in this quarter with EUR -103 because of the impact of that legacy file of EUR 149 million gross.
To summarize, if you would exclude the one-off effects, which had a significant impact, then we are kind of normal in terms of the net other income line. Far more important in that perspective is what about costs? If you look at the cost side, then you will see that the costs are significantly influenced by inflation.
That is for obvious reason than with an upward pressure year-over-year. We do have a downward evolution of our costs with EUR 66 million on the quarter-over-quarter comparison, which clearly indicates that KBC is, as always, managing its costs very, very tightly.
The reason of this decrease of cost is driven by lower staff expenses, i.e., lower FTEs, and also that we have spent less than in the fourth quarter on the IT side, but I would not really refer to that, nor I would refer to marketing expenses because it's typical seasonal. Be aware also that the consolidation of this group is different because in one quarter you will have Ireland in, the other quarter you will have Bulgaria in.
For instance, in the first quarter of this year, you have full consolidation of Bulgaria, which was not the case, for instance, compared to last year. In terms of cost-income ratio, that tells you a bit more about what is now the situation. We are at 38% before bank taxes. If you would include all other costs, all bank tax, but would exclude certain non-operating items which are in essence linked to the transactions in Ireland and in Bulgaria.
If you would exclude those, then our cost-income ratio stands at a very excellent 50%. Far more important is the 38, because that excludes the bank taxes. On bank taxes, I can, as always, give you almost a guarantee that the trend there is upward, this time 11% higher.
We do expect that by year-end, we have to pay EUR 690 million in total of bank taxes, of which indeed EUR 571 million was already paid in this quarter. It is roughly 14% of our OPEX group wide. On slide 13, you can see the detail on every country or on every business unit in terms of the percentage of the operational expenses.
Let us go to loan loss impairments. Well, we have once again an excellent quarter, which reflects the quality of our book. In essence, if you look purely at the loan impairments, all loans combined in KBC Group, we had a release of EUR 3 million, which is giving also circumstances, is indeed super well.
In terms of impact on our buffer, you remember that we had set aside a buffer of roughly 1 year, full year of loan losses of EUR 429 million. The fact that we did have releases on our regular book also meant that we had a couple of releases on this, what we call geographical and emerging risk buffer. Well, that release was in total EUR 21 million, and that is bringing our total releases this quarter at EUR 24 million.
Besides, impairment releases on the topic, order of EUR 2 million brings the total to EUR 26 million, which is indeed an excellent result. Translate that in credit cost ratio. Without the buffer, we are at 0 basis points, including the buffer for emerging risk, we are at minus 4 basis points.
In terms of the impaired ratio, we are improving to 2%, which is of course driven also by the, the divestment in Ireland. If you would apply the EBA definition, KBC stands at 1.5%, which is clearly below the European average. In terms of the emerging risk buffer, you can see on page 15, the detail.
You can also clearly see that we have releases in every particular line, the direct exposure, which we as you know, we have no direct subsidiaries in, in nor in Russia, nor in Ukraine, nor in Belarus. We have some trades finance activities which we wrote down immediately when the war started. That money is coming back, and also this quarter we had a release there of EUR 4 million.
In terms of all the other lines, what we call bucket C, D, and E, we did see money flowing back in because of, yeah, things which we anticipated for are not happening. Let me state it differently, the conservatism which was part of this assessment is indeed conservative. In total EUR 36 million.
How come that we only booked EUR 21 million in this PNL for this quarter? Well, it has to do with Ireland. EUR 18 million of that buffer was linked to Ireland. That buffer is now gone because of the divestment of Ireland. That EUR 18 million is for obvious reasons, not reflected in the PNL today, but it is reflected in the transaction price with Bank of Ireland.
On page 16, you have an overview of the gas supply and how we are currently positioned. Let me summarize this page. It clearly indicates that at European level, also in our core countries, the current provision of gas and gas supply is much higher than it was a year ago. As a matter of fact, we are at a quite comfortable level given the time of the season.
We are at the end of the winter, beginning normally now to boost those supplies to prepare for the next winter. Let me summarize it as differently. Given these numbers, it is very likely that we will not run into an energy shortfall as we have experienced in October last year. As you remember, that drove up energy prices and inflation in a very significant manner.
Taking into account what is on this slide, you can translate that the likelihood that this will happen again in quarter four of this year is very remote. Going to page 17 brings me on the capital position of KBC Group. Well, given the profitability, when we assume a dividend payout of 50%, the at least, then our capital is now increasing to EUR 17 billion.
If you look into the risk-weighted asset evolution, which is positively influenced by the sale of KBC Bank Ireland, and then set off partially, only partially by volume growth of FX trends, then it's quite obvious that our capital ratio grows significantly to a solid 16.1% CET1 ratio, fully loaded under the Danish compromise. It is clearly above our 15% reference position defining surplus capital.
Indeed, we do have more than EUR 1 billion extra surplus capital compared to where we were, than where we were with the 15%. The 15% is not restated because KBC stands with its policy that we want to be amongst the better capitalized financial institutions in Europe.
When we do the calculation of the median of that European banking sector, we come to the conclusion that the median is roughly around 15%. For that reason we do not redefine the surplus definition of our capital, so it sticks at 15%. Translate that in buffers. That is on page 18. You can clearly see that we have on top of the MDA level, and that is the lowest number of the 3 potential definitions of MDA buffer.
We have more than EUR 5 billion of buffer, which is clearly indicating that KBC is solid capitalized. It's also translated into our MREL position, which is somewhere further in the back. We currently stand at 30% MREL position, which is clearly higher than the requested target of 27.86% request to be fulfilled by the 1st of January of 2024.
Solid capital position. What about the liquidity position? Sorry, what about the leverage position? I forgot to mention that one. It increased also very significantly. It is also related obviously, to the sale of Ireland, now stands at 5.5%. Also the insurance company with 207% is also in a very solid area. What about liquidity?
We have a 152% liquidity LCR ratio and also on the midterm, 139%. These are very solid numbers if you compare them with the request of 100% leads of the ECB, we have solid buffers. To say it differently, on the short-term liquidity, we do have a buffer, a liquid buffer of EUR 92 billion. Coming to the period to come, well, we do see that economic growth is slowing down and it is what we do see now today, it is potentially not going to go into a recession. What we do see is recently a restatement of in our core countries of GDP numbers slightly upward.
For instance, the Belgian GDP growth has been restated from what it was 0.7%, 0.8% to 1% now. We also see that in Central European countries. We do see inflation stabilizing, and there is a trend towards actually bottoming or topping off the inflation. The downward trends will continue. There is a persistent core inflation which is still too high compared to the European Central Bank target. That clearly indicates also that interest rates will remain higher for a longer period than was originally anticipated by the market.
As a consequence, we have guided in the beginning of this year for the full year 2023 on the net interest income side, on the total income side, and then also on the credit cost side and OPEX. There is, we are perfectly on track for those numbers, and we as usual, don't update every quarter but give an update twice a year.
Therefore, the numbers on the guidance are the same as was guided in the full 2022 year result announcement. The only change which was there, as you might remember, is the fact that we restated those numbers taking into account IFRS 17. All the other slides are linked to Belgian, Czech, and international business unit. I'm not going to dwell upon that detail, but I would like to stick it to this presentation, and I'll give back the floor to Kurt who will guide us through your questions. Please, Kurt.
Thank you, everyone. The floor is now open for questions. Please restrict the number of questions to 2, to allow for a maximum number of people to raise questions. Thank you.
Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Thank you. We'll take our first question from Flora Bocahut of Jefferies. Your line is open. Please go ahead.
Yes, good morning. The questions I have I mostly on the excess capital distribution. Firstly, if you could clarify the amount that we are talking about here, because in the Q4 slide pack, I think you were mentioning the intention to distribute an additional EUR 1.4 billion.
Obviously, we've had the subsequent event since. If you could clarify what amount we are talking about today and on which I think you are still awaiting the ECB approval. Around the timing of that distribution,
Let's assume you get the ECB approval over the next few weeks, would you consider distributing that intra-quarter, or are we gonna have to wait until Q2 results are published in August for, you know, the distribution to be made? Lastly, still on that subject, if you could clarify how you're thinking around the mix on that distribution, and if we can expect it to be entirely done via a buyback? Thank you.
Thank you very much, Flora, for your question. I think it's indeed a very obvious question. Let me give answers to those different elements which you highlighted. First of all, indeed, originally we announced a share buyback of EUR 0.4 billion surplus capital, which was 15.4% capital ratio, 0.4% above the 15% threshold, 0.4% on roughly a bit more than EUR 100 billion of risk-weighted assets makes it EUR 0.4 billion indeed.
Plus then the surplus capital, which was linked to the transaction in Ireland. That transaction brought us roughly EUR 1 billion of capital, and the two combined gave you the EUR 1.4 billion. That is what we announced on early February.
I don't know the precise date anymore, but with the announcement of the Q4 results. Unfortunately, we had that subsequent event which happened at the end of February in Czech Republic, and that was EUR 0.1 billion, as a matter of fact, EUR 149 million precise.
If you deduct that number from the EUR 1.4 billion, then it brings the share buyback level at EUR 1.3 billion. In essence, it's just mathematics. What is far more crucial is the second part of your question. What about the timing and what about the distribution? We filed a request for a share buyback as announced on the basis of the quarter four results.
The second thing is that we had that subsequent event. You know that the delay the regulator has to, or the supervisor has to adhere to is roughly 3 months. When we did the resubmission of the file, we had to restate the full Q2 numbers of... sorry, the full 22 numbers of that file as well. We resubmitted a file to the ECB.
We got a couple of questions for clarification after this resubmission. You could say that by the end of March, the file was complete because the 3 months only start counting as of the moment that the file is complete. We do expect, let me say it differently.
The timeline by which the ECB is going to answer our request is foreseen end of June, max, ultimately beginning of July. We do expect that answer in that period. Now, in terms of positioning, as of the moment, we have the answer in of the ECB, our board will take a decision, and that decision then will be communicated to the markets.
Ultimately, it depends a little bit on when we do get the answer of the ECB in. That answer will be ultimately given to the markets, of course, on the August announcement, and that is, I think, the twelfth of August of the Q2 result. That is for sure the ultimate deadline. In terms of what it then will be, will it be a full-fledged share buyback? Will it be a mixed distribution with interim dividend?
That is at the discretion of our board, but it's obvious that while we are waiting for the approval of the share buyback, that the share buyback is clearly also part of that distribution, for sure.
Okay, thank you.
We'll now take our next question from Benoit Petre at Kepler Cheuvreux. Your line is open. Please go ahead.
Yes. Good morning. The first one is on the, you know, the shift into term deposits. I think you mentioned +EUR 6.1 billion at group level. You know, we were aware that this shift was happening in Czech Republic, but apparently it is also happening in Belgium now. Could you maybe quantify the shift you've seen in Belgium specifically?
I think you've provided the guidance of EUR 150 million to allow a pass-through for going down from 40% to 30% on savings accounts. Is the shift you actually see now into term deposits in line with, you know, your basic assumptions around NII for the full year? Or does that go maybe a little bit faster than expected?
That's the first question. Then the second one is on these thresholds for, you know, share buybacks and special distribution. I was wondering here because, you know, could you maybe change the cut of date for kind of deciding about what the threshold will be on 2024?
I mean, we are still in Q1... Well, Q2 2023. Now you decide on keeping the threshold, basically for 2024. We also know that many peers are going to buy back shares this year. It sounds like KBC is going to run a bit behind the pack, let's say, on distribution.
The question is, I understand that your median is still around the 15%, but given that your peers will buy back shares this year, I guess the CT1 ratios will come down on average. Could you maybe, you know, give us your impression on whether it's adequate to have this cut of date already now? Okay, I'll leave it here. I've got some questions on cost, but it's already too. Sorry.
With regards to the shifts to term deposits and the pass-through changes, I will answer that question. When we looked at our guidance, we had of course a certain shift to term deposits in our minds, obviously. That is, that speak for itself. You also saw what assumption we took on the pass-through rates.
Now, in reality, the shift has had to term deposits is a bit more than we expected. On the other hand, you can see that the pass-through rates are well below what we assumed in our assumptions. That is why those two, we at the moment think they more or less compensate each other. We did not feel there's any material impact to change the guidance at this moment. You're going to ask the other question? Okay. Johan will answer the second question.
Thank you, Luc. Thanks, Benoit, for your question. If I may add one more element to the answer of Luc because you specifically refer to Belgium. If we look at the market share of term deposits, beginning of the year and end of the quarter, then the market share is still below our national market share on deposits to KBC.
Which means that the move which we have seen in the first quarter is actually a catch-up because the market share at the beginning of the year was substantially lower than our national market share. Going back to the share buyback thresholds or the capital distribution thresholds, that's a better description, I think. For the 15%, there are two questions.
First of all, what about the cutoff date, or you called it cutoff date, could it be earlier? Secondly, is it with 15% not too high? Well, let me start with the answer to the second part to explain the first part. As you know, and we will not change that position, we always want to be amongst the better capitalized financial institutions in Europe.
We therefore have a peer group of similar financial institutions to us. That is also something which we constantly monitor. I mean constantly. It's not only once a year. We do that on a regular basis. What we have seen is that that median of that group is indeed around 15%. It's roughly 15%.
Which clearly indicates that what you indeed triggered in your question, that if they are facing capital distributions, that that capital distribution is not yet executed by those institutions. If it becomes clear that that capital distribution is happening, then, of course, we will adjust the numbers of our peer group and we will see further evolutions.
On the basis of that, we will take decisions. In principle, we'll take that decision once a year, as you know, in the first quarter. That decision is influenced by the peer group setting, but also by the circumstances. The circumstances which have been very rough in the first quarter. God knows what is going to happen quarter two, three, and four.
Let's hope it is not going to be as rough as what we have experienced after the fall of a couple of American banks. Taking into account the situation, we will take a decision, and that decision is not necessarily bound on the date, but is clearly the logical or the common way to deal with it is indeed once a year, but it is not 100% bound to that if we do see that our peers are indeed doing what they said they were doing and bringing dow n their capital ratios.
On the, on the remark on the, on the uncertainty, one of the drivers, I think, why, we are waiting for the share buyback decision is also that ECB calls for in their official communications towards the markets.
We all know that they're looking in the supervisory measures which are going to be reviewed after the turbulence in the financial markets over the first quarter. They are not pushed by any urge to give to the markets very rapid answers on capital distribution. For them, it's better on the safe side than on the sorry side.
Sorry to come back on that because obviously you have a large bond portfolio. Does that wait on the decision of the ECB, you know, what interest rates will do? Is there any link to kind of postponing or analyzing a bit more the interest rate risk or anything, any ideas on this?
Of course, we are not sitting around the table with the ECB to discuss matters, that is at their discretion. Until now, we did not get any questions on that position of our bond book. As a matter of fact, because KBC has super high liquidity buffers, and as you can see, we continuously strengthening those buffers.
By the way, this is also linked to the business model because we have a surplus, significant surplus of deposits. Because of that buffer, we do not have any issues with that amortized cost bond portfolio. Until further notice, we did not get any particular questions from the ECB side.
Okay, great. Thank you very much.
Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Thank you. We'll now move on to our next question from Amit Goel at Barclays. Your line is open. Please go ahead.
Hi. Thank you. Two questions. One, actually just coming back to the 2023 NII sensitivity. You know, of that EUR 0.9 billion, I guess, benefit that you see, how much of that comes from Belgium and what's the Czech component? If you could give us some color on that, please. Within that for those two regions, what you're seeing in terms of quarterly development.
The second question, just trying to understand in terms of the terming of deposits, versus the low beta on the savings accounts, you know, how does that work in terms of, you know, is it not better just to pass on a bit more on the savings to see a little bit less terming or, do you see these things as completely independent? Thank you.
On the NII sensitivity of EUR 0.9 billion, it's obvious that this will mainly be coming from euro, the euro transformation results. That is both in Belgium, but also partly Slovakia and Bulgaria, because Bulgaria's lev is linked to the euro. The contribution of Czech Republic and Hungary will be relatively low. That's first question.
The second question on your term deposits versus giving a bit more on savings accounts is of course the metier, the work that our treasurers together with the business do all day long, day in, day out. Looking at refining the pricing on the various products and making sure that the mix is optimized.
This is the work we do every day, obviously. This is the conclusion of that work, and of course driven by competition and the customer behavior. There are some parameters we don't always control, like it is in sailing out.
Thank you. For the Czech contribution, would that be a positive contribution?
Well, for the full year, I think as I stated last time as well, we think that for the full year, the interest income from Czech Republic would not be materially different, so higher or lower. Materially, I'm stressing that it depends on certain circumstances, but it will not be material both in positive or negative sense.
Thank you.
Thank you. We'll move on to our next question from Kiri at HSBC . Your line is open. Please go ahead.
Yes. Good morning, everyone. A couple of questions from my side. Coming back to this mix shift, from the current accounts into, I guess, predominantly term deposits. I'm just wondering, does that trigger a big change in your behavioral model assumptions behind your reinvestment portfolio? Because it looks like you're actually able to keep nearly all of the deposits in-house, more or less.
I'm wondering, you know, just what's been happening. Have you been shortening maturity duration on the reinvestment portfolio? Actually, it's all fairly steady state versus last year. Secondly, just on your LCR ratio, it doesn't look like it's changed very much in the quarter, and a little bit surprised just because, you know, you no longer have to do the intra-group funding for Ireland anymore. Just some of the moving parts, please, on the LCR ratio and why that's not really improved in the quarter. Thank you.
Okay. On the mix shift, there we have actually lengthened duration, not actively, but passively because when we see outflow out of current accounts to term deposits. We obviously pay out of the short end of the curve where we have invested, yeah. Either our ECB cash with the ECB or very short-term bonds that matured within one month, two months, three months.
It's as a result of that actually duration lengthens somewhat, and that is passively done. It's also part of our treasury strategy, yeah, when interest rates rise, that we gradually increase duration. This is now passively done. At some point, we may even do that actively, but that is not yet decided. On the LCR has not changed.
Well, the main reason for that is that we also repaid TLTRO of more than EUR 2 billion. Secondly, with the short-term cash management opportunities, these have been reduced and also had a compensating effect on the LCR.
Great. Thank you.
Thank you. We'll move on to our next question from Anke Reingen at RBC. Your line is open. Please go ahead.
Yeah, good morning, and thank you for taking my question. Just following up on that interest income, you said the underlying growth quarter on quarter was 10%. If you maybe can just talk a bit about the trajectory on the course of the year to reach your full year target. Within your NII guidance, you have this assumption about 3%-4% loan growth.
I just wonder how sensitive the loan growth, or the target is to the loan growth assumption, given the start of the year has been quite low, even on the underlying basis. Just lastly, on the new business mortgage spread in Belgium, is that mainly, is it because of the delay to pricing, or is this competitive pressure? Thank you very much.
On the underlying growth, that is if you make an adjustment for all the let's call it one-off components that Johan had explained at the TLTRO, which was EUR 41 million in the fourth quarter, which we no longer benefit from. If we make it like for like, and we exclude the benefit of TLTRO in the fourth quarter.
For Ireland, if you exclude Ireland's interest income both in the fourth quarter and in the first quarter, and that's a delta of EUR 33 million. You make a correction for the number of days, not necessarily the full EUR 15 million, but for example, half of that. You make a correction for inflation-linked bonds, because inflation-linked bonds are tied to an index, which is a monthly index.
On the quarter, it can be very volatile, and we had a negative indexation, so negative inflation. That is not normal. Actually, it is now restoring itself. If you make a correction for that, and that is not much, then you look, you have a like-for-like NII. There, you said if you calculate it, your like-for-like NII would be around 10% quarter-on-quarter.
That means that the underlying growth is quite high. As you look, if you make a detailed analysis of the presentation we made, you'll see most of the net interest income does not come from lending income, because that was a negative contribution. Does not come from ALM, sorry, ALM, yes.
Does not come from improved funding costs, because we have higher cost for our funding of participations. Majority comes from transformation result. That is logical because the reinvestment yield that we have is not at the ECB rate, but is, of course, a mix, or reflecting the replication bond portfolio and the cash with the ECB. That means that this will continue even if ECB rates are plateauing, close.
There still gonna be some increases, but plateauing. The reinvestment yield or replicating portfolio will continue to rise. Yeah. Secondly, we've had a pass-through change in Belgium of 50 basis points from 11 basis points to 60 basis points. We do not see these jumps happening every quarter. That means that, we continue to see good growth in transformation result in the coming quarters.
The loan growth, how important is your loan growth assumption within your NII guidance for the year?
Yeah. The loan growth, of course, has a role, but it is dwarfed by the transformation result. Yeah.
Okay. Thank you.
Perhaps, Anke , if I just fill in also the last part of your second question, because I refer to Belgium. Yes, indeed, that is due to competitive pressure that the margin on the mortgage business is coming down. The reason is twofold. First of all, there is, given the interest rate increases in the market, there is lower demand, and that lower demand is clearly showing in Belgium as well, but also in other countries.
The second thing is that because of the ample liquidity which is available combined with the lower demand, there's a very strong competition. Within that strong competition, we do have been able to increase our market share with 10%, which is good news, but it has obviously also a price tag.
What is also the good news, if you look group wide and you go a bit further than Belgium, we do see that, for instance, in Czech Republic, and you know that in Czech Republic, they were running a little bit ahead of the ECB in terms of the positioning of the Czech policy rate. There we had seen the same effects.
The margin came down significantly. The production plummeted, giving the 7% policy rate. What we do see now is in the, in the, at the end of the first quarter, that margin is recovering in Czech Republic and that volumes are picking up a little bit, including picking up of market share on top of our normal natural market share.
Thank you.
Thank you. We'll have a follow-up question from Benoit at Kepler Cheuvreux. Your line is open. Please go ahead.
Just actually two follow-up questions. On the inflation-linked bonds to start with, you know, how fast this item will kind of reverse the negative will reverse in the coming quarters. Also assuming inflation stay on the kind of low side month-on-month, are we going to get a sharp reversal or could the trend be different?
You know, staying on this inflation topic, obviously the Belgium inflation has been extremely low month-on-month, even I think negative somewhere in January. You know, how much indexation are you going to pass in the coming months to the Belgium staff? I guess that could be close to zero, as from, you know, February, March, just wanted to confirm that. Thank you.
On the inflation-linked bonds, as you know, we had a very strong growth in the fourth quarter of in the index. The index went up by about 3.4%. The backlash of that was in the first quarter where we've been down by 0.7%, so negative.
That will redressed itself because for the full year we expect inflation in Europe to be above 4, between 4%-5%. If that is the case, then inflation-linked bonds will for the full year be approximately around EUR 40 million-EUR 50 million if we go to 5% inflation. Because we have about EUR 1 billion of these inflation-linked bonds.
Therefore you can see that the income from inflation-linked bonds should adjust itself in the next few quarters. It's not going to be nicely spread obviously each quarter, but for the full year, we're not gonna be very far off. You wanna answer the question? Yeah. You want to answer your second question.
Benoit, on your second question, indeed, the evolution of the Belgian inflation was completely different than what we see in, at the European level. Now it was indeed negative in one month. It will be now adjusting and it is clear that it's coming down significantly, roughly around 3% now. Going forward, obviously there is a persisting component into that is everything which is related to non-energy prices. Let's be aware of that.
What your derivative question is out of this is clear, the answer is positive. It means that it is indeed adapted in a certain way. You know how it is calculated in Belgium. It is not the inflation of the last month. It's a comparison over a longer period, a 3-month average and so on, so forth. It is not the entire inflation.
It's what is called the Health Index in Belgium, which is a subset of the traditional core inflation, will be indeed applied on the wages in Belgium, which I mean, is a big chunk of our costs. Yes, you're right. If this trend continues, it will have a mitigating effect on our cost evolution and other elements, which are Belgian related. On the wages, you're right, it is automatically indexed, so it will have that automated. Solely, it will have that immediate effect as of the moment it is applied.
Thank you very much.
Thank you. We'll take another follow-up question from Flora at Jefferies. Your line is open. Please go ahead.
Yes, thank you. 2 follow up, please. I'd like to talk about also on the cost line, the bank taxes. You provide us with the guidance for this year. You know where you expect basically close to EUR 700 million. As you mentioned, it's a huge amount. It's 14% of your cost base. Towards 2025, I think we can expect the windfall tax in Hungary to go away.
I guess the Single Resolution Fund will have a decline significantly in terms of the contribution. Can you maybe clarify what number we can expect for 2025 compared to the roughly EUR 700 million of this year? On provisions, you stick to the guidance, you know, of 20-25 basis points for this year x the ECL, but in Q1 it's minus 4. Why do you think there is gonna be a significant deterioration in the next nine months, please? Thank you.
Thanks, Flora, for these questions. Again, bank taxes are indeed up. We guided EUR 690 million, which is roughly EUR 120 million than what we have recorded in the first quarter of this year. You're right. It's 13.8%, to be precise, of our operational costs, which is a lot. Going forward on 2025, what about the future? What about windfall taxes?
You may choose an analysis on what is potentially possible on the windfall taxes indeed forecasted to be applied for 2 years. Also the Single Resolution Fund contributions should come to an end in a certain period, also roughly in that timeframe of 2 years. The question is, what is going to happen?
I think this is by far the most difficult forecast to make. To be very straightforward, I don't count on any reduction of the bank taxes and what kind of form or shape going forward. This is perhaps a very, let's hope, a very conservative stance. Given the state of a lot of budgets of governments are currently in, given the profits banks are making, I don't count on a lot of leeway from the political side.
Anything which will fall away from the bank taxes is a benefit, but we don't take it into account in our guidance at all. Coming back to guidance. Yes, indeed, you're right. Currently, we do have a guidance on the credit cost ratio of 20-25 basis points. Whereas in the reality we do have -4.
As I said, we did not update. We do not update every quarter. Our guidance is we only do that in principle once a year, and we adjust it at best in the middle of year or when we do have a fundamental material change. In this perspective, the guidance of 20 to 25 basis points on the credit cost ratio indeed looks very conservative.
Thank you.
We have no further questions in queue. I will now hand you back to your host for closing remarks. Thank you.
Okay. Thank you, operator. This sums it up for this call. Thank you very much for your attendance and enjoy the rest of the day. Cheers.
Thank you. This concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.