Good day and welcome everyone to the KBC Group Earnings Release for Q2022 Conference Call hosted by Kurt De Baenst , General Manager, Investor Relations. My name is Judith, and I'm your event manager today. During the presentation, you'll have to remain on listen only. If you need assistance at any time, please key star zero on your device. I would also like to advise all parties, this conference is being recorded. Now let me hand it over to Kurt. You may now proceed.
Thank you. A very good morning to all of you from the headquarters of KBC in a sunny Brussels. Welcome to the KBC conference call. Today is Thursday, the 9th of February, 2023. We are hosting the conference call on the fourth quarter and full year 2022 results of KBC. 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, warm welcome to the announcement of the quarter four results of 2022, which is as a consequence also the announcement of the full year results of the very same year. Let me start with, as always, the overall view of the quarter four. We are posting today an excellent result of EUR 818 million on the quarter, which is indeed giving circumstances a very strong performance. Return on equity stands at 14%. It also clearly indicates that once again, the machine has been firing on all its cylinders. This time it is really true. We have been performing extremely well in all our franchises, bank and insurance across the Group. What does it mean?
That means, for instance, that we have been growing significantly our lending book, more than 8.5% over the year. We have been growing our deposit book more than 9.5% over the year. We have been performing our insurance sale on the mobile side more than 8% a year. The life insurance business was significantly up in the fourth quarter. It was more than doubled on the unit link side. We have been growing our investment products book significantly, 21% more net inflows compared to last year, which was a record year. It was really excellent. The quality of our books remained super solid with a combined ratio on the insurance side of 89%, also with a credit cost ratio of 0% in essence.
If you take into account the prudence which we put into our buffer for emerging and geographical risk, it stands now at EUR 429 million, which is a credit cost ratio of 0.8%. In that perspective, it is really solid. We have been, as a consequence, also posting a very strong solvency ratio of 15.4% and more than 200% on the insurance side. That goes hand in hand with very strong liquidity numbers as usual. We also have, as a consequence, a update of our outlook for the future. We'll come back into the detail later on. Let me first switch to the consequence of all of this that is on page three, the capital deployment.
We will propose a total gross dividend of EUR 4 per share to our AGM for the accounting year 2022. That is then a sum of an interim dividend of EUR 1 per share, which we already paid out in November of last year, complemented by a final dividend of EUR 3 per share. That brings the payout ratio of the total dividends, including the 81 compound to 60%, roughly. In consequence and in execution of our announced capital deployment plan for the year 2022, we also envisage to distribute the surplus capital above the fully loaded capital target of 15%. That means that is roughly EUR 0.4 billion. We will also distribute that to our shareholders. In that perspective, that decision is final.
How we are going to distribute that is subject to an ECB approval for a share buyback. We are proposing today that the EUR 0.4 billion is going to be distributed anyway, but it can be distributed in the form of a share buyback and/or an extraordinary interim dividend. The share buyback, as I said, is subject to approval of the ECB. When we have that approval, the board will take a final decision in the course of the next coming months. For the accounting year 2022, if you add the surplus capital, the EUR 0.4 to that, we will end up with a payout ratio of 75%. As we have communicated last week, we also concluded in this first quarter of 2023, the closing of the sale of our activities in KBC Bank Ireland.
You know that we are having an agreement with Bank of Ireland Group for practically all the assets and liabilities on our books. That means that we will generate accordingly a capital relief of approximately EUR 1 billion. For that EUR 1 billion, we do envisage to distribute this EUR 1 billion. That decision is also final. The question is in which form. Because we are proposing a share buyback as well, which is subject to approval, we are waiting for the final decision to be taken accordingly in the course of the next coming months. In that perspective, the EUR 1 billion will be distributed either in the form of a share buyback, either in the form of an extraordinary interim dividend, either in the combination of both.
Let me go a little bit further into the business of 2022. First of all, as I said, the bank insurance model has been contributing at its max. We have a traditional split up between the bank and the insurance company, where the bank now stands for 83%, 17% for the insurance company. We also have a very strong performance of all the innovation which we have put forward in the last years, and that is now really paying off in several ways. The first and most obvious way, and that's something which our customers see on a daily basis. That is the usage of Kate, to be very open and transparent, the usage of Kate by our customers. We have, in the meanwhile roughly 3 million customer.
At the end of last year, it stood at 2.9. We have much more customers using Kate than we originally planned. Also the number of transactions which we have with our customers, more than 11 million transactions with our customers in Belgium. That is much more than what we originally anticipated for. The great news in that perspective is that the implementation of Kate goes with two other triggers, and one of those triggers is the Kate autonomy, which means that Kate can take the decision To answer the question of the customer, to provide a solution without any human being interfering. That is now at 56% of all the questions which we receive from our customers in Belgium and 51% the Czech Republic, which has a significant impact on our efficiency.
The second thing is the implementation of Kate goes hand-in-hand with the implementation of straight-through processing. Because as I said, Kate takes a decision, provides a solution to our customer, and that is without the interference of a human being. It means also that in terms of straight-through processing, any question is answered in a straight-through processed way, and that is boosting our efficiency and our productivity. Last but not least, KBC has been always very active on the front of sustainability, and that also clearly pays off in several things. We were already ranked high by agencies in terms of our sustainability score, but also in 2022, we now put it to the next level. For the first time ever, we have what we call a green budgeting for the year 2023.
The full implementation of the green strategy is now governance-wise, fully implemented in the Group in an operational manner. Consequently, we were one of the 19 companies worldwide who received the Terra Carta Seal , and we're very proud on this one. We published a report on the climate targets, which we foresee for the nearby future to reduce the CO2 emissions of our book, of our lending book and our insurance book. We are now shifting that capital target book or the capital report into the Science Based Targets initiative approach, which is another step up. Last but not least, also, the Carbon Disclosure Project gave us the top-notch score of A, which is also a assessment of our sustainability activities. On the next page, you get an overview. I'll skip that. I'll go to the exceptional items.
As a matter of fact, this quarter is pretty unexceptional in that perspective. We had a couple of exceptionals, mainly driven by, for instance, the modification losses because of the cap which we have to face on the interest rates in Hungary, sorry, that is EUR 25 million negative. That is offset by a couple of positive one-off which are related to, for instance, our transactions in Ireland, also to the fact that in the UK, the corporate tax has risen 6 points percent from 19% to 25%, that increases our DTA to the tune of EUR 15 million. Offsetting all of this brings us to an exceptional of zero and after tax of +EUR 4. It's completely negligible.
Let me now go into the more important stuff, which is driving our P&L, and let's start with the obvious one, that is net interest income. The net interest income is up significantly, 20% on a year basis, 9% on a quarter basis. We already indicated on the announcement of the quarter three results that the impact on what we call the transformation result is very significant, and that is indeed now starting to have further impact. As we promised in the third quarter, is now taking place in the fourth quarter, and that will continue to do in the quarters to come. Why? Because our replicating book is shifted gradually into the higher rate environment.
Be aware that a vast majority of our replicating book is still subject to the low interest rates, given the maturity profile of that book, is nicely spread over time. As a matter of fact, we generated EUR 140 million more transformation results on the quarter. On the year, it's a whopping EUR 280 million. As a matter of fact, if I look into the pure lending activity, the lending activity was pretty stable. There's one fundamental remark here. The lending activity was down because of the decline of the Irish book, where we had, of course, given the process which is ongoing, which was ongoing, and which is now concluded, we build down the book significantly in the meanwhile.
In Ireland, we did not pursue any commercial activity anymore in that book for obvious reasons, and therefore the lending income has dropped in Ireland itself with roughly EUR 25 million. The other lending activity kept up quite well. We have seen indeed volume-wise, a slowdown in the fourth quarter, giving the consequences of the war and the energy crisis. We still had quarter-on-quarter stable growth of the lending book, both on the side of mortgages. As a matter of fact, mortgages was up 1% on the quarter and on the side of SMEs and corporates, where it was indeed stable. If I look at the total growth of the year, it's 7% including Ireland, 8.65% excluding Ireland.
If you look at the deposit side, we had a very strong quarter, again, with a positive inflow of 2%, and we had a year-on-year result of 8%. If I exclude Ireland, because there as well, we started to shift the portfolios to other banks. In the fourth quarter, we have a growth of 9.6% on the non-Irish book, which is very significant and also shows that KBC is considered to be a safe haven, which means that in difficult circumstances, i.e., a war environment, a lot of customers trust KBC or entrust KBC with their deposits, which in current rate environment, clearly pay off on the P&L side.
In terms of the net interest margin, no big surprise to say that the net interest margin was up 20 basis points on the quarter, 25 basis points on the year, and that is fully translated by the interest rates because there is still commercial pressure on the rates most of the time on the mortgage books in all the countries. Fee and commission business. First glance, it's down 3%, 6% on the year. It's definitely triggered by the year-on-year comparison triggered by the impact of the war on the assets under management. They declined significantly compared with one year ago. If you look on quarter-on-quarter, they went up with EUR 1 billion.
Here we have the first indication that in terms of the fee and commission business, which is linked to the sale of investment products, that that is triggered by actually a good performance on the investment product side. Entry fees were up. Asset management fees was slightly down, so the sum of two parts was roughly stable. The reason why the fee and commission income total of EUR 451 was 12 million lower has to do with one single element, and that has to do with distribution fees which are paid mainly in this perspective to, first, the insurance business. Insurance business was doing extremely well, and commissions which are paid out in that perspective are deducted here.
The second thing, also in the fourth quarter, you have the seasonal impact of commissions which are paid out in Czech Republic, amongst others, to Czech Post, and that is deducted also from the fee and commissions business there. Business-wise, investment products doing fine despite the difficult circumstances, despite the big volatility on the financial market. The second thing, on the banking services, the interest, Sorry, the fee business was up mainly because of payment business and secondly, on the security side, KBC security side had an extremely strong quarter, given their ECM activities. Assets under management already mentioned, EUR 1 billion up. This is due to a price, pricing effect of the markets, but also because of net inflows.
I was not expecting to be very open a positive inflow in the fourth quarter given the volatility. In reality, we saw a further inflow of asset management sales to the tune of EUR 0.3 billion, totaling for the full year 2022 an inflow, net inflow of EUR 2.9 billion, which is 21% more than 2021, which was in itself a record year. Over the full year, KBC was able, group wide, to boost its investment sales and its life insurance sales and generate as a consequence then the higher return on the fee business.
For a good understanding, out of the 2.9 billion net inflows, we had a very strong performance of the regular investment plans, which, and this is a gross number, were inflowing EUR 2.3 billion over the year. That is indeed the main reason why the numbers are so good, because regular investment plans are smaller amounts. They are absolutely not impacted by a lot of volatility in the market and therefore remain stable also going forward. That's a very important one given the given the uncertainty which is still part of our daily life, I refer especially to the war in Ukraine. Let me go to the insurance sales. Non-Life is keeping up the pace of the previous three quarters with a growth of 7% on the written premium, 8% on the earned premium.
I think the latter number is more important than the former. It is also, once again, posting a very, very good quality on underwriting, 89% combined ratio despite the impact of the natural catastrophes which we had in the course of the year. 89% is due to all business units, so Belgium, Czech Republic, Slovakia, K&H, and DZI are hovering around that 89% and is actually a translation that the entire book of KBC, which is, by the way, underwritten in the same way according to the same underwriting schemes, that it is indeed performing all countries extremely well.
In terms of the life sales, I said in the previous call that I was disappointed on the results of our performance on the unit linked side, well my colleagues in the group picked that message up and performed extremely well. To give you an idea, we more than doubled the unit linked business over the quarter, but also over the year, we actually doubled it, as you can see on the graphs. In terms of the Interest guaranteed products also there, we had a very strong increase on the quarter, and it is slightly below what it was in position last year. To sum it up, we have a growth on the quarter of 85%, and we have a growth of 35% roughly on the year.
It's an excellent result also on the life insurance side. Going to financial instruments at fair value, let's keep this short. We had a strong increase of roughly EUR 60 million on that P&L line, which is mainly driven by the higher dealing room income, EUR 95 million extra, which is driven by the higher rates and the volatility in the market. We had a EUR 26 million increase on the equity instruments because we actually had a very low result in the third quarter. We have the usual volatility on the ALM derivatives and on the XDAs, which are mainly triggered by the increasing interest rates, and therefore, the better performance of KBC on the funding side, which has a negative impact on those ratios.
On net other income side, it's actually perfectly in line with the normal run rate, which is in principle between EUR 45 million and 50 million. The difference between 50 and 44 is EUR 6 million. That is the explanation can be given because we had one provision of EUR 7 million for an old legacy file, which is a legal file in Slovakia, which is coming to materialization, and that deducted from the 50 brings you to 43, which is perfectly in line with the result which we are posting here. Far more important is the operating side, the operating cost side. That is on page 11. We have posted today a cost of EUR 1.16 billion. If you deduct the taxes from that, it's roughly EUR 1.5 billion.
That's 10% up on the quarter. If you exclude, of course, Raiffeisenbank (Bulgaria) to make the comparison with the same quarter last year, if you exclude Bulgaria, you exclude the one-off, then we do see a growth of 7%. As a matter of fact, if you exclude those elements, we have a cost income ratio of 54%, which is better than the cost income ratio of last year. If you exclude the bank taxes because they went up significantly, we have a cost income ratio of 48%, which is substantially better than the 51% of last year. How come cost increase? There will be no big surprise when I say inflation pressure is there. We had a much higher inflation than we originally anticipated at the beginning of the year in all countries.
Also, let's say it as follows: we anticipated cost evolutions of the year 2023 and 2022. For that reason, we just exceeded the guidance which we gave to the market. As a matter of fact, if we would not have done so, we would have been perfectly within the guidance of the market. Let me say as follows, what is the impact on this matter going forward? Traditionally, on the quarter, you have season effects, IT, marketing expenses as before. We continue to invest on the IT side for innovation purposes because of several reasons. We are continued to build a tech company within the bank, and as a consequence, a bank in technology. We are clearly building also marketing platforms for brands and for consumers to close the gap between demand and offer.
That will give all of them, including customers, including companies, the reduction possibilities on cost and on time spent. The trigger of all of that is Kate and the further implementation of the Kate Coin. In that way, also, we want to be entrusted with customer data, so to give them the power over their own privacy within all legal boundaries. This is the core of our investments on the IT side. As I said, because of this, we will trigger productivity gains, and that will benefit the KBC Group in the nearby future, as it did in the last two years. In terms of the bank taxes, well, there are certainties of life. Bank taxes have gone up to a whopping EUR 646 million, which is 13.4% of our total OpEx.
You can see the split up over the countries, but in essence, this is driven by two things. First of all, interventions by government. Hungary, in that perspective, was an outlier again. The other thing is, of course, the impact of the growth of our deposit book, because, for instance, in Belgium, the taxes are calculated on amongst others, the deposits, and that growth triggers automatically higher bank taxes. Going to the assets impairment side, another set of good news. First of all, the impact of the war, we don't see it yet reflected into our book. That means that over the quarter, we actually only had to book EUR 440 million of impairments.
As a matter of fact, if I look into the detail of those, of that lending book, then the EUR 40 million is actually translated into one single file, which costed us EUR 35 million, and that explains almost in full the EUR 40 million. Otherwise, we see no deterioration of the quality of our book and nor in the PD shifts, nor in the staging processes. To be also on the more cautious side, we further increased the buffer for geographical and emerging risk with another EUR 42 million, which brings it now up to EUR 429 million.
When we take into account the guidance which we give for next year on the credit cost side, then this buffer, EUR 429 million, actually is the same as a full year provisioning for 2023. Last but not least, we also had an impairment of EUR 51 million on what we call other, that is the earlier mentioned modification losses in Hungary related to the cap on the interest rate side, and then a EUR 21 million impairment on intangibles that is traditionally on projects, but also on buildings which we have, for instance, in Slovakia. A goodwill impairment on a small goodwill impairment in Czech Republic of EUR 5 million on a FinTech activity. Credit costs I already mentioned, the pair loans will not surprise.
It is very low, 2.1%. This is according to KBC definition. If we would use the EBA definition, which is not as stringent as ours, then we would have a credit non-performing loan ratio of 1.5%, which is clearly below the European average of 1.8%. On pages 14 and following, you have the detail of the geographical buffer, I suggest that I'll skip the essence of that. The only thing I want to say on page 14 is the buffer which is put in there, we have to adjust that each and every time according to the evolution of the portfolio.
You can see that on certain of those buffers which we put forward because there was no negative evolution, we are releasing already certain of those buffer parts because indeed, the evolution is much better than what we have put forward at the beginning. On the business profile, page 16, you see the overview of our book. Clients continue to grow in numbers, also the loans and the provisions. The loans and the deposit already mentioned, we are growing the book respectively 8.6 and 9.6% when we do not include Ireland. What does it translate into capital? Well, on page 17 you see the evolution of capital. The capital position CET1 fully loaded now stands at 15.4%, clearly above the surplus targets which we have set at 15.
It is due to the fact that in essence volumes went up. We had a couple of positives as well, for instance, on our markets risk-weighted activities and all in all, the risk-weighted assets remained pretty stable at EUR 110 billion. If you translate that into buffers, then You can see that on page 18. We do have a buffer of roughly EUR 4 billion compared to our MDA restriction. A good understanding, because of the changes in the in certain of those underlying elements, our OCR buffer now stands at 11.31 and our MDA level stands at 11.83. To be very complete, as you know, we did an issue of a Tier 2 instrument in the course of this 1st quarter in 2023.
If I would take that into account, the MDA buffer goes up from 3.6 to 4%, bringing it in total to EUR 4.4 billion. In terms of, the leverage ratio increased as well to 5.3%, clearly above different, above the regulatory target. 203 basis points will be extremely low. 203% on the solvency ratio, two of the insurance company, the drop is mainly driven by the impact of the interest rates. It's a bit counterintuitive, but because of the interest rate curve, the impact is negative on the solvency ratio for the most significant parts. Equity markets have performed extremely well, and that is then mitigated by the volatility adjustment which brings it down as well.
It is rock solid, because of a couple of intrinsic model-driven moves, it is now at 203%. LCR stands at 152%, whereas the NSFR mid-term stands at 136%, which is also clearly above the targets which we have imposed upon us and which are also triggered by the supervisor. Let me go to the forward-looking guidance. We give guidance today on two elements. First, the year which we are dealing with, 2023. We have brought our guidance to 9.4% ballpark figure, which is including the positive one-off of 0.4% for the conclusion on the deal in Ireland. For a good understanding, this is better than what we originally posted for in the guidance.
In your guidance, most of the time it was included 0.2. It now comes to 0.4. That brings the total ballpark figure to 9.4%. In that 9.4%, we give an update of the net interest income which stands at EUR 5.7 billion. That is a significant increase compared to the numbers of 2022. Consequently, also of inflation, the OpEx is now guided at EUR 4.4 billion ballpark number, which brings indeed the jaw of KBC for this year. In principle, we don't speak about jaws. The jaw for this year is substantially higher than what was originally assumed in the market.
The credit cost ratio, is currently estimated for the year 2023 at the range of 20-25 basis points, which is slightly below the through the cycle target. The reason why it is adapted is because we do see clearly also in the first part of this year, the first month of the, this year, no further deterioration of our portfolio. Given the further improved economic circumstances, we put the guidance at what it is, 2025. We also update the Basel IV guidance. There is a lot of uncertainty on Basel IV. The decision process is currently ongoing at the level of the European authorities.
Taking into account what we know and what is still under debate, on our balance sheet end of year, last year, we will have a impact of approximately EUR 3 billion. The previous approach, which was on the static balance sheet, is now updated to the balance sheet of today. Be aware, what you see here is the impact of the dropout of Ireland. The further guidance which we give is on the NII sensitivity that is on page 21. First of all, we give you a full insight where we are with our net interest come 2022, how that goes down to the net interest income, like for like, and what the impact is of the positioning of the increasing interest rates.
We give you a insight taking into account a pass-through of 40% on the saving accounts and a pass-through of 80% on the term deposits at KBC Group level. In order to give you an idea what it means in terms of sensitivity, if the pass-through would change, so if we would go up or down, the interest sensitivity brought to 30% pass-through on the euro-denominated saving accounts brings us a EUR 0.15 billion positive impact. If you would increase it with 10%, then of course you have to reverse the sign. This is for the year 2023. Consequently, with all the evolutions, we give a guidance on the longer term. As always, we do this on the basis of three years, and therefore the guidance on total income stands at 6%.
The tie, the guidance on OpEx comes to 1.8%, which creates a jaw of 4.2%. This an increase of our previous guided jaw, which was 4%, at least. The cost income ratio goes to 43%, which is also improvement. We keep the ratios of combined ratio below 92% or max 92%, and the surplus capital definition remains the same. The long-term financial guidance, the through the cycle remains for the credit cost ratio, 25 to 30 basis points . All the others, I'm not going to repeat them. You can read them this update because they did not change, they're just the regulatory requirements. Let me come back to the long-term guidance. We have used for the long-term guidance the forward rates to make that calculation.
The reason why we did so is because there is a lot of uncertainty in the market in this respect. When we saw the decision of the ECB last week, Thursday, since then, also the forward rates have been moving up and down, both directions coming to an end, which is higher than what it was on the, what is it? The third of February last week. We have taken into account that guidance of the forwards of the third of February of last week. In the meanwhile, indeed, the forwards have come up with 25 basis points. This guidance, which we just have given, is in that perspective, on the more conservative side. All the rest of the package give you two details.
First of all, it gives you the detail on the countries, or the business unit as you wish for quarter four, gives you an overview of the full year result. Let me skip both, but let me say that the full year result stands at roughly around that number, EUR 2.9 billion, which is roughly 10% more than what it was. The driver is the sum of what I said on the quarter four, kind of. I prefer not to repeat it again. That will make the floor available for you for asking questions. Please, Kurt, guide us through the questions.
Thank you, Johan. The floor is now open for questions. Please restrict the number of questions to two to allow for a maximum number of people to raise questions. Thank you.
Everyone, if you wish to ask a question, please key star then one on your device. If you then decide to withdraw your question, simply key star two. Star one to ask a question and star two to withdraw it. The first one is coming from Benoît Pétrarque . Please go ahead.
Yes, good morning. Benoît Pétrarque from Kepler Cheuvreux. Well, thank you for this very good presentation. I just wanted to chat again on the Civil Guidance. First of all, on the NII 2023, you seems to assume a 40% pass-through rate, which sounds like very conservative. I just wanted to check if this is a 40% average over 2023, or is that a kind of gradual increase to 40% during the year? Just wanted to check that because it sounds like the EUR 5.7 billion is again well, very conservative. On the guidance on total income, you know, ex one-off, you go for EUR 9 billion in 2023.
I think your 6% cargo assumes EUR 10.2 billion in 2025. Could you maybe talk about, you know, the gap? I think it's EUR 1.2 billion extra income in two years, so that's quite significant. Could you talk about, yeah, the exact interest rate assuming 2025, also the kind of customer behavior embedded in that guidance. Then just the final question is on the cost side. You know, where is your regulatory cost, you know, say trending in 2023 and 2025? You know, I think some banks are removing their contribution to SRF. I just wanted to check where you are on this. Thank you.
I'll take the first question, everyone. Johan will follow up. On the pass-through rate, yes, indeed, we think we've been conservative because we've applied the 40% pass-through immediately. Currently, we are not at that stage at the group level. It depends, of course, country by country, but if you took a group level, we're not at that level at the moment. We've applied it immediately in this analysis. Do you take the other one on the EUR 9 billion? On the non-NII increase between 2023 and 2025, You've got, of course, insurance, which is particularly on non-life grow, continue to grow at a good rate, and you see what's happened in the last two years, growing at 7%-8% premiums.
We see that continuing in the next few years, obviously with a combined ratio which is well below 100%. You know, our target is a maximum by 2025 of 92%. That contributes quite a lot at that growth. That's quite an important driver. The second one is fee and commission income. That will also grow, particularly in the later years, 2024, 2025. 2023 will be growing. Will be growing, not as strong as the later years. That is because obviously we start with a much lower assets under management and with a low base. We have to increase quite a lot this year compared to last year to have the same average assets under management and then do better.
We think we are going to increase our fee and commission income there, both asset management and other services as well. These are two biggest drivers that explain the further delta between 2023 and 2025. You want to take it, Johan?
Good morning, Benoit. If I add to that, because I was not sure if you were asking on non-NII side, but I explained that also the total income side, of course, on the evolution between now and 2025, the NII side will have a very positive impact. That very positive impact, I mean, there's no big surprise here, is going to be driven by the evolution of the interest rates. As I said, the guidance which we have given is the forward rates in the meanwhile.
The forward rates have increased, so on the, on that side, it's even a little bit conservative. By the way, we in KBC think that the evolution of interest rates will be a little bit different than what is put or what you can read today in the forward rates. We fully agree with what is, for instance, on the short term, I mean, the next, let's say, 9 to 12 months. We think on the longer end, there we believe that there will be more upside pressure on inflation, amongst others, triggered by the economy, which is not going to go down that deep as the market originally anticipated. I'm referring to a recession period, which is not, knock on wood, going to materialize. That's one element.
Second element, China is clearly into the market again, will be also present on the energy market again, more than it was in the recent past. Thirdly, obviously you have the Inflation Reduction Act in the United States, which is clearly driven as a subsidy towards more economic development. Europe is currently debating the alternative or the answer to that. Let's, I think, I mean, the common understanding is that Europe has to act to protect also its economic output. As a consequence, if this economic output will be delivered, you will have on both sides of the ocean also upward pressure on commodities and/or on energy prices.
There will be an upward pressure, and because of that upward pressure, inflation will be higher than we think what is assumed. Consequently, given the context which is given by the central banks also recently, we think also that even in the longer term, there is more upward pressure on the interest rates going forward. For that reason, we think that the forward rates are on the conservative side. Coming back to your second question, you referred to the cost and what about the regulatory cost going forward. You know, in total cost for 2022, we had a purely regulatory cost, which is what we have to pay to our regulators to make them function. That is 40 million EUR. We put forward in our budget a constant evolution in that perspective upward.
The regulatory cost on the other hand can be translated as an indirect cost, which is, for instance, the cost on the amount side. That went up significantly in 2022. Like in every other financial institution, we see costs increasing there. There is a but, at the KBC side, because KBC has, Probably you'll know, developed an AI application, 3, 4 years ago, and that is run across the group and also in the meanwhile has been externalized into a separate company which is dealing with other peers of ours, to see if they are interested. Currently, we are running 2 pilot process, pilot tracks with other banks, where they are using our software for AML.
The impact in KBC going forward is that that software, which is far more efficient than the existing software, depends a bit on the country we were talking about, 3%-15% more efficient, that will bring down the indirect regulatory cost, for instance on the AML side. We have taken that into account, into our cost calculations. If I would extend my story, everything what we do in terms of investments in innovation will have a positive impact, not only on the regulatory costs, or the indirect regulatory costs, but also on the non- the direct non-regulatory costs will have a positive impact on the productivity in that domain.
That's clear. Yeah, on the bank tax, you expect a relatively flat level in the coming two years, or are you showing some drop at some point?
This is a very difficult question because there are a couple of elements which, first one is, of course, we don't have under control what the governments are going to decide. It was at the beginning of the year, it was not foreseen that, for instance, Hungarian government stepped in and increased the costs. All the other elements which are on the table and which are known, for instance, Czech Republic, where the decision has been taken, has been put forward, that has been taken into the books. For you know that for Czech Republic, that the impact on KBC will be very limited. As a matter of fact, for 2023, it will be hardly, it will be non-existing. What is going to be the decision going forward?
We really don't know, because, you know, what we cannot exclude is that governments step in and because of their budget steady constraints, they are pushing up the bank taxes for the financial industry. For that reason, we also obviously guide our OpEx without bank taxes, because we have no grip on bank taxes, and I already said a couple of years ago that it would be unfair to save the increase of bank taxes by cutting FTE and cutting into the muscle of your organization. The answer straightforward is, we don't know.
There is a kind of an inflationary aspect, for instance, on the bank taxes in Belgium because they are calculated on the number of deposits which we hold, and the number of deposits KBC, as you know, is very attractive for customers. We will have there anyway an upward pressure. All the rest depends on the, I mean, the change of opinion of supervisors, not supervisors, sorry, politicians in essence.
Great. Thank you very much.
The next one is coming from Tarik El Mejjad . Please go ahead.
Hi, good morning. Two questions, please. I'll just come back first on the bank taxes. You sound cautious about your ability to actually have these bank taxes stopped or precisely the SRF contributions. Is that because you are a Belgian bank and historically in Belgium that things tend to be a bit harsher than the other European country? I mean, why you think that will not stop? Do you think that there's risk that this could be renamed or recycled in Belgium specifically to another tax? If you go into slide 12, within the EUR 646 million, how much is the SRF actually, namely, is it EUR 154 or there is other parts that's falls into that? The second question is on the capital return.
Can you explain why you didn't distribute the EUR 400 million excess above 15 with full year results as you did last year? I mean, this is part of the ordinary policy. I presume you could have done it. Why pursuing the share buyback route while you trade at a hefty premium to book and the incentive for that is lower and you can just do with cash given the, your excess capital. Thank you.
Thank you for your questions. Let me ask the answer to definitely the first one. On bank taxes, and you're right, we have a split of the bank taxes between straightforward bank tax, and I'm talking about what is on the slide 12. The straightforward bank tax, which as I said is calculated amongst others in Belgium on what they call eligible deposits. That's one thing. You have two other contributions which are part of that. That is the contribution for the Single Resolution Fund, and the second one is the Deposit Guarantee Fund contribution. If I look, and you specifically refer to Belgium, let me give the answer for Belgium.
You look at the numbers on page 12. We have in total EUR 349 million of contributions for Belgium. That is split up EUR 177 million of taxes, 74 million of Deposit Guarantee Fund, and EUR 98 million of contributions for the Resolution Fund. When I was referring to the previous question, we are not indexing the 349 because of the illusion of the deposit, of the bank tax. We are talking about EUR 177 million. In Belgium, there was a rumor last year that the government was reconsidering the distribution, the DGF. The contributions for not additional, Deposit Guarantee Fund.
That conversation is not decided yet, and we'll see how that evolves going forward. Everything else I cannot answer because I have no clue what the government's going to do. In terms of the second question you asked, so the capital distribution. The capital distribution which is now put forward is indeed split up in two parts. You have one part of which is linked to the surplus capital, the 15%, and that's indeed EUR 0.4. The second part is, of course, the free fall of capital, which is linked to the sale in of the assets in Ireland. We took both together indeed, because indeed we are considering a share buyback, and we are discussing that.
We have discussed that with the European Central Bank, but we keep the optionality open. That means that first of all, we await the decision of the European Central Bank, which will happen in the next coming period. The authorities have in principle three months to decide that, giving the constructive dialogue which we have had with the authorities, we have good hopes that it needs not to take the full three months, but we'll see. On the basis of that we will take, that is the new information we will get. We take immediately a decision when the decision of the ECB comes in on what we're going to do and how we're going to distribute the capital. You have all the optionalities on the table. The final decision is taken to distribute the capital.
It will go anyway in forms of cash. I will see on the optionality if it is approved by the ECB of that optionality of a share buyback is taken, yes or no. The decision is going to be taken both combination of the free fall, and we did not wait for the full year for the first quarter results on the EUR zero-point billion of surplus capital of the year 2022.
Okay. Thank you. Just to understand, you ask for the share buyback approval, and then if you get the share or you're confident to get it, then you decide if you'll do a buyback or in cash or combination. Is that right?
Correct. That is also, and that's what is mentioned on the side. That is the final decision by the Board is precisely that what you just described.
Okay. Thank you.
The next question is coming from Kiri Vijayarajah . Please go ahead.
Yes, good morning, everyone. A couple of questions from my side. Firstly on the Czech NII outlook, and actually not so much the margin, but more on the loan demand in the Czech Republic, because volumes seem to have stopped growing in the quarter. If rate cuts do come through later on in the year, do you think there's some pent up demand, you know, with customers in the Czech Republic maybe holding back, waiting for borrowing costs to come down, and therefore you could see a bit of a resurgence in volumes in the Czech Republic? My second question is actually really just a quick clarification.
When you talk about the EUR 1 billion capital release from Ireland, does that include or exclude the EUR 400 million one-off gain that's gonna be going through the P&L in the first quarter? You've stopped disclosing Ireland as a separate division, so it's not clear if you can get to the EUR 1 billion purely from the RWA release or not. Just some clarity there, please. Thank you.
In the Czech Republic, on NII, the loan demand is decelerating. We come from a very high growth rate throughout 2022. Last quarter was a bit subdued. That also had to do with year-end effects. Typically corporates tend to repay short-term loans to reduce their balance sheets and then tend to draw down again after year-end. That's one element that plays a role, but there is clearly a deceleration. However, if we look for the full year, we see that there is an increasing demand and that there will be an increase in production and also growth in the portfolio. Not at the level that we experienced last year and the year before, but certainly at a good level to increase NII further again.
We think on top of that given the at least stabilization and perhaps even reduction in interest rates, that will help our margins. As we saw when rates were increasing that we had low margin pressures. When rates decrease, we have the opposite effect due to a lagging cost of funds effects. Overall lower growth than last year, but still decent growth, and portfolio will grow in our view for the full year in Czech Republic and probably at slightly better margins. On the capital in Ireland. Are you gonna take this? Oh, okay, sorry. The capital in Ireland, the EUR 0.4 billion capital gain is included. The EUR 0.4 billion capital gain plus the EUR 4 billion risk-weighted asset release together gives you approximately EUR 1 billion of capital release.
To avoid any misunderstanding, because one might, the numbers are exactly the same. We do have next to the EUR 0.4 which Luc was referring to, we have also, and that's pure coincidence, EUR 0.4 surplus capital in 2022. In the accounting year 2022 of surplus capital, that EUR 0.4 of surplus capital is, comes on top of the EUR 1 billion. I think, yeah, indeed, just to stress that it is because it's pure coincidence that it's 2x, 0.4. Okay?
Got it. Thank you, guys.
The next one is coming from Flora Bocahut . Please go ahead.
Yes. Good morning, Flora Bocahut from Jefferies. I'd like to come back, please, first of all, on the distribution, just to make sure, you know, we understand, your point, correctly there. Basically the distribution delay, you know, regarding the EUR 1.4 billion here is entirely due to you waiting for the ECB approval, but nothing else. When you say in the slide pack that you envisage the distribution, we should actually understand that you intend to do that distribution barring on the ECB approval that you expect in the coming months. If you could just clarify that this is, how we should understand it. A question on capital, just to check, two elements.
The first is the IFRS 17 impact, because you mentioned in the slide pack that you will provide us with more explanation in mid-April, but at least the capital ratio impact, can you maybe give us a number already? Just to check that you still intend to update the capital target in Q1, like you do every year. Thank you.
Good morning, Flora. Just to answer your first question, Luc will take the second one. The answer is yes, indeed. You're right. Your analysis is correct. On the surplus capital and on the EUR 1 billion decision to distribute it to shareholders is positive. Only the format we have a little bit of different process because we need to get the optionality of the share buyback approval by the ECB. The decision on the distribution is taken. There is no doubt about that.
On the IFRS 17 capital impact, there will be no impact as we work with the Danish Compromise, and we use the historical book value of the insurance company. That means that for capital calculations, the insurance is deconsolidated and then taken as a financial participation as book value. Any IFRS 17 changes in the net asset value of the company do not affect, as a result, the core Tier 1 of the group.
Very clear. Thank you. Just the update on the capital target we can expect in Q1?
Sorry, Flora. Yes, indeed. We are going to update. Because we're a bit of confusing capital target, you mean the definition of the surplus capital ?
Yes.
Yes, indeed, we are going to update that as well.
Perfect. Thank you.
The next one is from Raul Sinha . Please go ahead.
Hi. Good morning. Thank you for taking my questions. Just the first one on following up on capital threshold, the 15% for distributions. Obviously you've already said that this is linked to the average capitalization of your peer group. But when we look at your own capital stack and perhaps look at the Basel IV impact within that, it looks obviously to be quite small. It was already small, but obviously now it's even more smaller.
So should we be anticipating that there is now more scope for a reduction in the 15% threshold going forward? That's the first question. The second question I have is just a clarification point around the pass-through? When you say 40% is your assumption, can I ask what has been your experience so far? For example, in Q4 of last year, what was the actual pass-through at the group level, and perhaps in Czech Republic, which seems to be at the higher end, within your trophies. Thank you.
Good morning. Thank you for your question. Coming back to the definition of the surplus capital, the 15%, as I said, on the answer to Flora on the previous question, we will give you an update on that matter on the back of the first quarter results. For good understanding, we take into account several measures. You refer to the average of peers. It's not the average, it's the median. In that perspective, we will give you the full update. It's very early days to do it today, and we're not going to do so. Just to clarify on the Basel IV impact, which we mentioned in our document, the Basel IV impact is the first time application impact. It's EUR 3 billion.
The impact of that is of course to be balanced given the fact that we take into account our peers because, you know, we want to be amongst the better capitalized financial institution in Europe. All is relatives given the impact of our peers going forward. As I said, we will give you an update on the surplus capital definition of 15% in the months to come.
On your second question, the pass-through rates, we do not give any specific percentages, but as I've mentioned before, at the moment, and that also counts for the fourth quarter, obviously, the group-wide pass-through on the savings accounts and the 8% on term deposits taken together, we are well below that at the group level. Of course, the difference, but there are difference country by country. You can imagine that where interest rates are very high, the pass-through rates are higher. Where interest rates are lower, pass-through rates are lower. But overall, we're below the level that we, he is showing the sensitivity analysis in the package.
Thank you.
The next one is from Sam Moran-Smyth . Please go ahead.
Hi. Good morning. Yes, two questions, please. Firstly, on costs, if you apply the 1.8% CAGR out to FY 2025, you come to around EUR 4.4 billion, which is, you know, dead in line with your FY 2023 guidance, EUR 4.4 billion as well. Could you perhaps talk us through how you plan on keeping costs flat from 2023 to 2025, especially given earlier in the call you stated the inflation could be more persistent and certain elements of your cost base are immediately linked to that. Secondly, on NII in Belgium. Is the Q4 amount reasonable run rate for FY 2023 in the context of you've tagged higher reinvestment yields, which conceptually should grow, but also the current passer is below your full year expectations for next year. Just some clarity on those dynamics would be helpful. Thanks.
So thank you for your question. We had a bit of difficulties to understand because the line quality was very poor, but we think we understood it. Anyway, first of all, the first question on cost. If you apply the CAGR, you end up indeed at EUR 4.4 billion. We understood that the question was, how will you manage to keep it flat given the guidance of EUR 4.4 in 2023? Well, indeed, there are several reasons why we are achieving that EUR 4.4 flattish level. First of all, be aware that the composition of the book has changed. Will change, sorry, between 2022 and 2025.
First of all, we have the exclusion of Ireland, which is still part of 2022. That makes of course a significant difference. The second one is that we will, regardless of Ireland, further reduce or further increase rather the productivity of our book. We will have on the back of the innovation, which we have been investing in over the last years, we will have a fundamental improvement of our productivity by per FTE. In the recent past, it was roughly 1% a year. We can use that as a kind of a guidance. We don't disclose the detail for the period to come. That's one thing.
Second thing is we do have a second effect, and that second effect is the integration of OTP in Slovakia, which still has to materialize. That will materialize in 2023, mostly in 2023 and 2024. We have of course the integration of Raiffeisenbank Bulgaria in UBB Bulgaria, sorry, and that will materialize in 2023 and 2024. Those two evolutions are also to be taken into account as well. Last but not least, we have also. There was an earlier question, and I don't remember precisely who asked it, but it's an important one. It was Mr. Pétrarque who asked it.
That is the effect of the implementation of AI solutions amongst others on the regulatory side, and that is AML, which was a fundamental cost driver in 2022. Regulatory costs on the AML side, which were significantly up in 2022, if you do just extrapolate that going forward, you overestimate that because the impact of the AI solutions which we have and which we, by the way, commercially use in our subsidiary Discai, that is going to have a positive impact as well. Small detail, but it's a significant number. Be aware that we had a one-off bonus of EUR 41 million in the year 2022 because of the payouts of COVID-related bonuses to our staff in 2022, which we do not foresee in the years 2023, 2024, 2025.
Your second question, we were debating here. I don't think we understand because there's discrepancy in the interpretation here, what your question was. Did you ask whether we could extrapolate the fourth quarter growth? Was that the question?
I can reclassify. Hopefully, the line's a bit better. It's just about NII in Belgium and whether the Q4 amount could be extrapolated into FY 2023.
Okay. I'll give the complete picture. First of all, you cannot extrapolate the quarter on quarter growth in at least on the fourth quarter, because in the fourth quarter we still had the benefit of EUR 27 million of TLTRO in that number. Yeah. You, if you would take it today again, the next few quarters, that would be overestimating the NII. That's one element that you need to take out. On the other hand, we still see ECB rates that have increased further compared to what we had as on average in the fourth quarter.
ECB rates, you have to look at what the ECB, average ECB rate was in the fourth quarter, and then look at what the average ECB rates will be in the next quarters. There will still be quite an increase in the average ECB rate between the fourth quarter of last year and the first quarter of this year. That has of course quite an immediate effect on our NII, since a portion of our corporate and so our current account and savings accounts are reinvested in cash at the ECB. That will have an immediate effect, but not everything. Afterwards, we have, of course, the reinvestment of our application book.
That will mean that the growth we will see in the first quarter will still be very strong, but then, reducing a little bit, quarter by quarter, because then the other effects of reinvestments of your portfolio, of your application book will take over. Please do not just say you will have 16% growth each quarter. That's impossible.
The next one is from Guillaume Tiberghien. Please go ahead.
Thanks for taking my question. The first one relates to your comments you made about using forward rate on the 3rd of February. What would be the impact if you take the forward rate now because you said it's a little bit more favorable. The second one is a clarification on the dividend 2023 paid in 2024. Is it fair to assume that because you take into account the EUR 400 million gain on Ireland in the EUR 1 billion distribution, when you consider the 2023 earnings to pay the dividend 2023 and 2024, you will remove this EUR 400 million? A clarification on Basel IV, you said EUR 3 billion saved in 2025. Do you still stick to the EUR 8 billion fully loaded? I'm not sure I've seen anything on that. Thank you.
Thank you very much for your question. On the, on the forwards, yes, indeed, there is a difference. I said it's roughly, I think it was 23 basis points average, so roughly 25 basis points. Unfortunately, we do not give that sensitivity. That work we leave up to you. Ok ay?
Then the question on the capital gain, the EUR 400 million, technically, you're right, that is profit for 2023, and 50% of that is our policy will be paid out next year. There's a bit of double counting, but we'll take that into account when we decide on the capital distribution next year. Having said that, and that is always our basis, given the good profitability, we always want to have an ordinary dividend, which is stable, which doesn't. It's not very volatile.
But we have sufficient profitability to ensure that there is stability there, even if we have to make a technical correction of the EUR 200 million, so the half of the EUR 400 million capital gain, even if we had to take that into account as a correction, we will have more to be distributed, normally a lot next year if you see the, what the guidance is than just 50% of our dividend, of our profits. The question Basel IV, yes, you're right. We have not given any updates, on the long-term effect of Basel IV, so the fully loaded effect.
The EUR 8 billion is now outdated and can no longer be used. Why? Well, we thought about doing the same again on the balance sheet for this year, static balance sheet, but the problem is that there are so many effects that are currently under discussion and smaller decisions. We've seen small decisions by the European Parliament and the Council and the Commission can have quite big effects on the results on Basel IV. We now abstain from this because there it can be volatile, both plus and in minus, both ways.
You're saying it could be better than eight, but could be worse than eight, so you don't know, so you stick to...
We don't know. There are so many amendments. I think 1,900 amendments have been submitted. It is really difficult now to see what the end game will be. If we now give a number, it could be really outdated by a big margin in six months' time.
Fair enough. Thank you very much.
Welcome.
The next one is coming from Marta Sánchez Romero . Please go ahead.
Good morning. Thank you very much. I got a follow-up on costs. Could you please share what is the weighted average inflation per year that you've got on your, in your targets? Because the 1.8%, again, it seems low versus your old one, particularly when we compare what you were saying on inflation going forward. The second question is regarding the debate between buybacks and special dividends. Could you please remind us what is the preference of your core shareholders? Just a third one very quick on the Czech Republic. Are you saying that NII will grow in 2023? Thank you.
Okay. We don't give a weighted average inflation, but to give you an idea what our estimates were for the guidance, is that in 2023, the average inflation for Belgium will be around slightly more than 5 percentage points, 5%, sorry, 5%. Compared to now in 2022, 10%. This is the harmonized inflation. We should be careful about that because local inflation sometimes is different from this, but it's harmonized, and that is the average between 2022 and 2023. It is not inflation between the beginning of 2023 until the end of 2023, but the average compared to last year, 5.2%. Czech Republic for 2023. Sorry, maybe I should say for 5% for Belgium, going down to 3% in 2024 and then 2% in 2025.
Czech Republic, 7.5, slightly more than 7.5% for 2023, coming down to 3% and then 2%. Slovakia, 10%, coming down less fast, 9% afterwards and then lower. Hungary, we keep at 8. We think it's going to go up at 18%, 18, and then fast coming down to 4%, to about 5% and then 3% by 3.5 by 2025. Bulgaria's 10% and going down also to 3% and 2%. That gives you an idea of what our estimates were for the basis of our guidance.
Thank you for your questions. On the question is what is the preference of our core shareholders? Well, we still have to discuss with them. I don't know what their preference is. Clearly the optionality is created. It was already decided by our AGM last year that we could do potentially a share buyback. Also the reason why we reached out to our, sorry, the supervisor ECB, is clearly to have that optionality on the plate. What the preference is, we will let you know as soon as the decision of the BC, ECB is in, because we will take immediately a decision in that perspective.
At the moment we've got no further questions. Just a quick reminder everyone, if you wish to ask one, please do so.
Sorry, there was one last question that was posed on the NII evolution in the Czech Republic. I think it's a very interesting one and a very difficult one to answer as well, because there are different opposing effects. First of all, of course, on transformation results, that game is over and we will now probably have reducing interest rates rather than increasing interest rates. There we'll have to see how the pass-through rate can be reduced as a function of reduced reduction in interest rates. That's very difficult to model. Secondly, on the other hand, and that is a positive effect, we still see some decent growth in the loan portfolio, as I mentioned before, and probably also improving margins. If rates come down, then margins go up again.
What will be the end effect? There will be certainly not huge increase, but we don't see any huge decrease either. It's very little predictable. We don't give any precise numbers. That's indeed something where you should not expect a huge growth from. Again, we don't think there's gonna be a huge downside either.
We have no further questions at the moment.
All right. This sums it up for this call then. Thank you very much for your attendance, hope you remain healthy. Take care and enjoy the rest of the day. Cheers.
Thank you. Everyone, that concludes your call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.