Good day and welcome everyone to the KBC Group earnings release 1/3 1/4 2022 conference call hosted by Mr. Kurt De Baenst, Head of Investor Relations. My name is Cody, and I'm your event manager today.
During the presentation on your lines, you remain on listen only. If you require assistance at any time, please key star zero on your telephone and the coordinator will be happy to assist you. I would like to advise all parties that this conference call is being recorded. Now I would like to hand over to Mr. De Baenst. Please go ahead.
Thank you, operator. Very good morning to all of you from the headquarters of KBC in Brussels, and welcome to the KBC conference call. Today is Wednesday the ninth of November 2022, and we are hosting the conference call on the 1/3 1/4 results of KBC.
As usual, we have Johan Thijs, Group CEO with us, as well as Group CFO, Luc Popelier. They will both elaborate on the results and add some additional insight. It's my pleasure to give the floor to Johan, who will quickly run you through the presentation.
Thank you very much, Kurt. Also from my side, a warm welcome to the announcement of the 1/3 1/4 results, 2022. First of all, probably you already have noticed when you opened the slide deck of the presentation of the 1/4 results. This time it was different. We have a completely new design and look of the presentation.
I hope you like it because it's more condensed. It's actually at least the same information as previously, but it's far more graphical. I hope you like this, as I hope that you'll ultimately like the results, because we posted an excellent EUR 776 million net result in the 1/3 1/4. This is due to actually the bank insurance model once again performing extremely well.
It is once again a token of high diversification, and high diversification always pays off in difficult market circumstances, which we have been facing indeed in the 1/3 1/4. Not only to mention the war in Ukraine, which has definitely triggered some consequences both on the inflation side as on the GDP side.
Taking that into account, EUR 776 million was a return on equity of but more than 14%. That is also translated into a further strengthening of our capital position. We have excellent liquidity positions as always. Also if you look at the underlying lines, I can easily say the bank insurance machine has been performing on all its cylinders. For the first time we have the integration of Raiffeisenbank (Bulgaria) into the results, so it's fully consolidated.
I will come back to that later on when I'm going to explain the detail of the lines. In essence, let me summarize it as follows: we have seen a clear increase of our operational business, customer loans, customer deposits were on the rise, as was the net interest income.
We have seen an extremely good performance on the insurance side, Non-Life , with excellent sales and excellent quality. We have seen excellent results on the impairment side, which allowed us to put away monies indeed for the future potential impact of the war on our book. We have kept our costs under control.
As a consequence of all of this, given the good quality of our capital ratio and performance, we are indeed again confirming that we are going to pay out an interim dividend of 1 EUR per share as on the 6teenth of November of this year. Not to forget about all the initiatives which we have taken on the sustainability side.
KBC issues inaugural social bonds in the 1/3 1/4, and we also published in September the new climate targets in our climate report. What is so special about this is because this is a climate report with indeed also a limited assurance. Now let me go to the further detail. Let me begin not with the traditional numbers, but with the success of the bank insurance model.
17% of the total results were linked to the insurance business, which is more or less in line with the Long-Term average. It clearly indicates that because of the positive impact of the interest rates on our banking activities, the insurance activities, mainly Non-Life, kept up the pace and they are confirming again the bank insurance model.
What is also good to see is that we have added in November 2020 an extra flavor. KBC has been investing indeed a lot of money on the innovation side. That clearly pays off. The latest innovation was the launch of Kate, and Kate has been taken up in the meanwhile in all countries into the business applications, and it is taken up massively by our customers, much more than we anticipated.
It's really boosting our customer satisfaction, but also it is increasing in that perspective our efficiency. 2.5 million users in the meanwhile in Kate, of which 1.5 million users are actively using Kate. That is also translated for us in an important way in what we call the Kate autonomy. This means that Kate will provide the solution to the answer of the question of the customer without any human interference, front office, back office of KBC.
That autonomy now stands at 54% in Belgium and 63% in Czech Republic. To give you a kind of framework. What this means, the original target, which we put forward in 2020 November when we launched Kate, was 33.0% by 2023.
We are exceeding our target big time, and therefore we have increased the target now to 75% by 2023. Which means that every four questions a customer asks, 3 of them can be answered by Kate autonomously.
Which has a big impact, of course, on our efficiency, on customer satisfaction. Because that is also a Straight-Through process, it has a positive impact on our cost center. Talking about Straight-Through processing, we had a target of 60% by 2023 of our main activities transactions. We have now we are coming to the level that we have that target in reach. Because after 6 months in 2022, the 9 months numbers are not publicly available yet.
We are at 47% of our business being Straight-Through processing, and that is quite a significant change. That is indeed very important for customer satisfaction and our efficiency. I already mentioned the climate report, which is mentioned on page 3. It has a limited assurance by our external auditor. On page 4, you see all the detail.
For those who have not read the report yet, I recommend warmly to do so because it indeed triggers what we are going to do and how we are going to do it going forward. As you all know, ECB is also, in that perspective, clearly indicating what the position will be in the near future. Much more attention from the regulatory side or the supervisory side to this topic, and much more requests to be precise on target.
Exactly what is mentioned in this climate report. In that perspective, indeed, we have taken an advance on the statements of our supervisor. On page 5, you have far more detail, but let me skip that and go to page 6 to indicate that in terms of exceptional items, it was rather, limited is not the right word, but it is offsetting each other so that the ultimate impact of the exceptional items in our result in the 1/3 1/4 is only EUR 8 million after taxes.
Now, what does it then mean in detail, for the first line, that is net interest income. Here we do have the good news that the net interest income has increased at 4% on the 1/4 and 17% on the year.
This is, of course, influenced positively by the integration and the consolidation of Raiffeisenbank (Bulgaria), totaling EUR 33 million net interest income. Obviously, it's also positively impacted by the increase of the interest rates, and that is translated in fundamental increase on our transformation result. Talking about the core business, good news, we have further increase of our lending business now stands at 9% year-on-year, which was a 2% growth on the 1/4.
This is both on the commercial lines business and the mortgage business. We have seen a strong growth. That strong growth impact is partially mitigated by the fact that we see in certain of our markets that the margins are under pressure. For instance, in Belgium, the mortgage lending business was done at a lower margin.
We saw a positive side on the SME and corporate margin. On the other hand, in Belgium, in other countries, this is different. For instance, the margins are severely under pressure in Hungary because of the interventions of the government, and we do see also a bit further declining margins in Bulgaria. The margin for the total book net interest margin now stands at 190 basis points, 1 basis point lower than the previous 1/4 and 10 basis points higher than last year's same 1/4.
This is negatively influenced, of course, by also KBC Bank Ireland. First of all, the margin went down in Ireland. Secondly, and that's something which is obviously related to our decision to exit the Irish market.
The impact of not further pursuing business growth on the lending side and mortgages in Ireland, nor to go for deposits, is having a negative impact on our net interest income. That is translated, of course, negatively as well in the net interest income and respectively in the net interest margin. Let me keep it there and let me go into the fee and commission business.
Also there, good news. Fee and commission business was up 3% on the 1/4 and slightly down 1% on the year. The negative trend for the year is obviously translated by the impact of the war on our assets under management, which have come down over a year basis with roughly EUR 25 billion, and that translates, obviously, a negative impact on your asset management fees.
Now, let me come back to the 1/4 and make the comparison with previous 1/4. What is the good news? The good news, first of all, is that we have seen, again, despite the very difficult circumstances, despite the very difficult financial markets, we have seen, again, net inflows totaling about EUR 510 million in the 1/3 1/4, which is excellent news.
If you sum up the 3 quarters for this year, we have a EUR 2.6 billion net inflow, which is more than a billion more than what we have seen last year. You remember that we were pretty satisfied with last year. Even given the difficult circumstances, we have seen a strong inflow.
Now, what is good about that is, of course, that we have what we call regular investment plans, which are totaling EUR 1.7 billion of net inflows in the first 9 months of this year. That's clearly a translation of the successful shift from one-off investments to a more spread out saving type of investment product. The asset management services actually stabilized on the 1/4.
What went down is the entry fee slightly with EUR 2 million because of the decline of the gross sales, which is a translation of the very difficult market circumstances. What went up significantly is the fees generated to banking services, mainly through the payment services.
We saw a strong increase there at about EUR 20 million in total for the banking services, which was pushed also by the integration of Raiffeisenbank (Bulgaria), totaling EUR 12.5 million in that particular bucket of the fees. What went down or what is declining, that is the fees which we have to pay for distribution.
It's always a bit painful because the more successful we are on the insurance business, the higher the deduction of the fees in distribution, because that's One-To-One link. We had a minus 6 million euro growth of the fees, which we had to pay for banking and mainly insurance business, and that is obviously negative for the end financing. That success is negatively influencing the fee and commission business total.
Let me summarize it, actually a good performance, strong inflows, and in that perspective, actually a positive surprise given the difficult market circumstances we are in. One last detail, 44% of our products sold in asset management are what we call responsible investment products. I already mentioned the insurance business.
There, I can easily say that the Non-Life insurance business is doing extremely well. The growth was up 8% year-on-year, and this is driven by all countries. At least they are at 5-6% growth. That is Belgium, and then the Central European countries are significantly above that, with, for instance, Slovakia and Czechia having a 20% growth year-on-year, which is quite strong growth. What is also very good is the quality of that business is really well.
We have an excellent combined ratio of 86% over 9 months, which is extremely well. When you compare it to the record year 2021, where we had 87% of combined ratio. Mind you that also in 2022, the result was influenced negatively by a windstorm in the, what was it? First 1/4, EUR 90 million. That is indeed having a negative impact.
Despite of that, combined ratio is below, definitely below the target and only at 86%. With understanding, all countries have combined ratios below 90%, which is good news. On the life sales, we see clearly the impact of the war and clearly the impact of turbulence on the financial markets. Unit-linked was down significantly 15% on the year.
Other life sales were down 15% on the year, and the unit-linked business was down on the year 31%. If you compare it on the 1/4, it was down 16%. That is a reflection of the very difficult circumstances on the one hand, and the other hand is also reflection of the seasonality. The summer period, July, August, September is clearly not the ideal period for investing from this perspective.
What is good news is that we see a change because of the interest rate increases on the interest guaranteed business. It's up 3%, which is clearly indication that clients are now back again on the interest guaranteed products given the rise of the interest rates in the Eurozone.
Financial instruments fair value, we have a result of EUR 56 million, which is a decline referring to the top results in the first 1/2, EUR 33 million compared to previous 1/4. This is in essence driven by 2 things. First of all, a less positive change in the ALM derivatives, which is about EUR 20 million difference compared to previous 1/4.
Let me summarize like this. It's mainly to do with the ineffectiveness of hedges. What is far more important is the decline in our dealing room result for these kind of financial instruments, which is a decline of EUR 58 million, sorry. That has to do with the position which has been taken, an interest rate swap position which has been taken on the Polish zloty.
It's an older position which has turned against us. For good understanding, this is not a realized loss, it's an accounting loss, which is coming back in the next coming quarters. This is of a temporary kind, which is booked in the 1/3 1/4.
If we look at net other income, you see a similar decline at first glance, but in reality, it's actually quite stable if you look at the underlying results. For good understanding, the business which generating normally EUR 45-50 million is indeed happening in the 1/3 1/4 again. There is a but. The but is that we sold a substantial part of low-yielding bonds in Czech Republic, which were then the proceeds of that sale was then reinvested in high-yielding bonds for the future.
That means that we do have a shift of net interest income low to net interest income high for the future, which is then booked in this particular line, net other income for a total of minus EUR 43 million. If you would correct that, then the 2 becomes 45, and that's precisely on the Long-Term average. If you look at the EUR 90 million in the second 1/4, mind you that there was included a One-Off of EUR 68 million linked to the sale of real estate in an insurance book.
Also there the comparison is if you deduct the numbers perfectly in line. Let me go to something which is far more important. That is the operating expenses. Is that we were able to keep our cost very good under control.
We all know that inflation is kicking in negatively in a massive way, and that we have the particularity of the Belgian markets where inflation is automatically indexed into the wages. Definitely in the financial sector, this is already a given. It happens every 2 months that you put in the inflation into the wages of your staff. 10% average inflation in Belgium can be indeed translated in a fundamental increase of the cost.
We were able to offset that increases by, for instance, also, seasonal lower ICT expenses and marketing expense, but also by keeping a very tight look at our FTEs and as a consequence, the cost increase is only limited to 6% if you take out all the One-Offs, if you take out the bank taxes, and if you look at the underlying costs. Why the One-Offs are excluded? First of all, because of Bulgaria.
Raiffeisenbank (Bulgaria) has been included totaling EUR 26 million of costs. Secondly, of course, you have the impact of Ireland, where we have taken a couple of One-Offs, which are linked to the sales process in total EUR 21 million. The number is negatively influenced with the total EUR 47 million.
If you take that out, and you start to look at the underlying cost, then the increase is only 6% year-over-year, and that's really good. It is also translated in very good cost income ratios, 54% cost income ratio when you spread out the bank taxes over the year equally, because you know, it's mainly booked in the first 1/4.
If you would exclude bank taxes, we would be only at 48% of cost income ratio, which is definitely much better than what it was in last years, where it was 51%. Let me translate that. We have been able to maintain those costs under control. We have been able to mitigate the impact of inflation. If you look at the comparison with the increase of income, the jaws has widened.
We have got more positive impacts from the increase of the interest rates than from the increase of inflation. Let me say something about bank taxes. You know, it makes a man becoming depressed. If you look at the number and you include the contributions for, amongst others, deposit guarantee scheme, local or European, then we are estimating now EUR 657 million of total bank taxes by the end of this year. That is 14% of our total OPEX, and that's indeed a lot of money.
On page 12, you can see the detail per country or per business unit, and that's clearly indicating what we speak about, a lot of money. We also know that certain governments are inspired by those bank taxes to either further increase them or to completely change them going forward.
We have already seen initiatives in Hungary which are already part of the result. We have seen initiatives in Belgium, where they did not increase bank taxes, but where they reduced the deductibility of the bank taxes from the corporate tax. Mind you, it has not an impact on the number before the taxes, it has only an impact on the number after taxes.
We have seen a bill passed by the Czech parliament last Friday, and that has also a review of the bank taxes going forward. In total, I would say the impact on KBC Group is limited to, you know, a couple of tens of millions EUR per country.
In that perspective, it is only slightly increasing the number which we have here in this presentation of EUR 657 million for the year 2023, 2024 and forward. In terms of the loan impairments, also they are good news. As a matter of fact, we have no impairments. On the contrary, we had EUR 24 million of releases of provisions on our lending book, which is once again a sign that the underwriting of KBC in all jurisdictions is of good quality.
That is also translating itself in difficult circumstances, which we're in maintenance of our provision level. On the contrary, that we are able to release part of that provision because we don't have any impairments.
We do anticipate now on the scenarios which we have put in the market in the second 1/4 after the second 1/4 results of this year, that there might be a change, a shift in that perspective. In the traditional cautious stance of KBC, we are putting away provisions for what we call geographical and emerging risks.
We have increased that buffer with EUR 103 million, which is now totaling EUR 387 million of provisions. Now, let me translate that differently. That's more or less 19.5%. It's not percent, 19.5 basis points of our lending book, which is slightly below the Through-The-Cycle average of 25-30 basis points for a full year.
What we are doing is we are setting way after 9 months, almost a full year through the cycle, provision level for eventual claims going forward. The good news, on the other hand, is also that we do see, as we speak, and we remain cautious, that the scenario which we put forward, mild recession or deeper scenario, deep recession scenario, respectively, with the probability 65%, 40%, 45% and around the number, that we are starting to see the first sign that Europe will be able to deal with the energy deficit, which is created by the fact that the Russians have cut the gas, inflow into Europe. That we are seeing more and more positive signs on that side.
We become a little bit more positively biased towards the fact that Europe will be able to deal with the energy deficit, which has a positive impact on a potential outcome for the nearby future being a mild recession scenario. Now, let me translate the credit consideration differently. The book itself, the lending book itself has a credit loss ratio of -0.03. So 3 basis points minus, and the minus here is a good sign. If you take into account the buffer which we are creating, we have a 5 basis points scenario.
Compare this with the Through-The-Cycle 25-30 basis points. Then indeed, the guidance which we gave between 10 and 25 basis points for the full year 2022, we will be more tailored towards the, let's say, the lower end of that guidance rather than the higher end. The impaired loan loss ratio stands now at 2%. If you would translate that strictly to the EBA definition, it even will go to 1.4%.
On the pages following 14, 15 and so on, you can see that the split up of the EUR 387 million. Just important to say that in the EUR 387 million, we also included the EUR 60 million of Raiffeisenbank (Bulgaria). On page 15, you see that's a very important one. You see the evolution of the gap.
First of all, consumption. It's the first graph, the stock levels and how they have been filled up in the meanwhile in the different jurisdictions where we are present, including certain countries as a reference, for instance, Germany.
You can clearly see that Europe is saving more gas than or is saving gas. That is something which was expected by the European Commission anyway. They are filling up their stock levels and the national gas covered in that perspective is sufficient to deal with the next coming quarters, i.e., with the next coming winter. Probably we'll make it for the winter of 2023, and then we'll see what happens in the winter of 2024. On page 16, you have the detail per country.
The only thing which I would remind you is that the loans are negatively impacted by the fact that we have a 5% decline in Ireland, and we have a negative impact of 25% on the deposits because of Ireland and because of everything which is linked to the sale agreement which we have with Bank of Ireland and the sale of our deposit business.
Second thing is on the deposits in Belgium, you see a negative number there that is purely done with balance sheet management, where we have changes Short-Term cash management. These are our foreign branches, and we have pushed them back into our limits for reasons of balance sheet and of course also for reasons of other financial instruments which we have to issue.
Talking about financial instruments, let me go immediately to page 17, where you have the capital position, and that capital position is now 15% after full inclusion and absorption of Raiffeisenbank (Bulgaria), which totals roughly 1% of capital. In principle, the number would have been 16%, if we would not have done the acquisition in Bulgaria.
That is translated on this graph. You can see the goodwill, you can see the impact of the Risk-Weighted assets. With risk-weighted assets now totaling EUR 110 billion, the increase is driven straightforward by volume growth, acquisition of Raiffeisenbank (Bulgaria), and we have seen an improvement of the asset quality because of a better collateral position rather than a change of model. That's the good news.
In terms of where we are on buffers, that's always super complicated because, you know, there are different measures to take that. We have taken the most strict interpretation now, and that means that we do have a buffer of 4.4% on the CT1 side, with 15% compared to the 10.6% imposed upon us by the supervisors.
The detail you can find on the right-hand side of the slide, but if you then look at the other measures which are defining an MDA buffer, then you see on the Tier 1 capital, 3.9% and a total 3% of the total Tier 1 capital. Which also means that we can increase that buffer if we want to by issuing more AT1 and Tier 2.
You know that KBC on purpose is having a shortfall in that perspective. We are going to review that position going forward. In that perspective, we do have sufficient buffer compared to our risk to our MDA levels, and we have for sure more than the 4% buffer compared to our absolute minimum by our supervisors. In terms of leverage ratio, because of the decisions which we took on the foreign branches, 5.2% is rather very solid.
We have 227% Solvency II ratio on the insurance company, which is coming down from what it was, 242%, and that is fully influenced by the evolution of the interest rates, and that is also having a negative influence by the decline of the equity markets, respectively 11% and the remainder for the equity markets.
LCR and NSFR are superior to our absolute minimum. In that perspective, they are very comforting. That brings me to the Forward-Looking statement. First of all, we confirm our group guidance for 2022. You can see clearly on page 20, what we have confirmed today, EUR 8.4 ballpark figure, EUR 5.05 ballpark figure for the NII.
We have our OBEG guidance confirmed on EUR 4.15 billion. In the footnote, you can clearly see what the assumptions were taken. We have absorbed in that assumption the new position of the ECB regarding the TLTRO at all. We have corrected the volume growth, which was originally guided for 7%, but we have surpassed that 7% already year to date.
We have now estimated the growth for year-end at 8%. What we did not change is the forecast on the policy rates of the ECB and the longer term rates of the ECB. We kept it constant than what it was, 150 and 250 basis points for 2023. In that perspective, this is a very conservative stance.
In that perspective, I could say that the guidance which we have given for 2023, we will be at the higher end of those numbers. The Long-Term financial guidance we did not change because the interest rates are changing every day. We are in the middle of a budgeting exercise. In that perspective, we did not change that at all.
What I would like to remind you here is that, it is conservative because the interest rates which are included here, are on the low side, 2.50% for the longer term, whereas the market currently is expecting, roughly 3% going forward. In that perspective, this is conservative. I would like to remind you that we are guiding explicitly 4% jaws. We do indeed consider this to be perfectly realistic.
On the other hand, given the interest rate increases which we are seeing, which are not absorbed yet in this forecast, we think it will be indeed at least 4% jaws. This is something which is not taken up in the consensus yet, I assume. Therefore, I would like to explicitly mention that. We did not change that in the detail.
We did not change it in the guidance for the sensitivity because the interest rates positions are completely changing. We will do that on the back of our fourth 1/4 results in the beginning of next year, where we'll give you the full detail on these slides. The Long-Term financial guidance, the sensitivities, but also 2023 going forward.
I would like to keep it here and hand the floor back to Kurt De Baenst, who will guide you through our questions.
Thank you, everyone. I will open the floor now for questions. Please restrict to 2 to allow for a maximum number of people to raise questions. Thank you.
Everyone, your question and answer session will now begin. If you wish to ask a question, please key star and one on your telephone. If you decide to withdraw your question, simply key star 2. Once again, if you have any question in mind, you just need to press star and one. Thank you. The first question is coming from the line of Giulia Aurora Miotto, Morgan Stanley. Please go ahead. Your line is open.
Hi, good morning. 2 questions from me. The first one is on asset quality. I look at the numbers and then, you know, I think about the macro picture of CE. I almost come in, but I think of course they're real, but you know how is it possible, and which areas of concern do you see going forward? Or truly you think you know this incredibly benign environment can continue? That would be my first question.
Cost. You mentioned inflation, you mentioned wage increases in Belgium, of course, but also bank taxes. Are we now done with bank taxes or is there anything else that you would expect on the horizon which could change next year? Thank you.
Hello. Good morning, Giulia. I will take the first question. On asset quality, the areas of concern, well, will not be surprising. First of all, of course, all the areas which are vulnerable to the gas prices. This is, for example, the chemicals industry, electrical equipment, to some extent, the metals industry, machinery, heavy equipment, these types of sectors.
On the other hand, when we look at mild recession, we're also looking at the service sector, particularly the entertainment and leisure sector. And the aviation industry as well, because aviation, of course, when there's a recession, there will be less flights, and that combined with high fuel prices will also get a hit.
These are more or less the sectors that we're looking at. I'm not gonna go in all of the sectors, but it gives you a sense on one hand. Then secondly, we look obviously at the retail side, at clients which are very vulnerable to higher energy bills on the one hand. And for some which have variable rates or where the fixed rate comes to an end between now and next twelve months the impact of higher interest rates as well.
And there we purely look at the cash flows that we see from clients, and we stress those to see which clients are more vulnerable. I hope that answered your question. I will take the second question, Giulia. On the cost side, indeed, we have 2 sides of the story.
First of all, we will give you a full guidance on where we will be with costs going forward in 2023, as I said, in the beginning of next year. To give you a little bit of flavor, first of all, we were able, in 2022, to manage the impact of inflation in 2 ways. First of all, in Belgium, we can't because it is automatically indexed, as you know, and as you pointed out in your question.
The alternative there is, we were able to manage other parts which we have control of. That is FTEs and of course other investments which we are doing. In that perspective, we will continue to do the same in the year going forward.
The only thing which I would like to highlight is that we see, and that's something which is not new with other financial institutions, what we do see is, of course, that there is a constant increase of the cost on the regulatory side. Compliance, I already mentioned sustainability. It is taking more and more FTEs and so on support.
Despite the fact of that increase, because we already saw that massively in 2022, we were able to mitigate the impact. Central Europe is in that perspective even different. The East is more or less in line with what I just said for Belgium, but the impact of the inflation is clearly not automatically into the salaries.
We are able to lower the increase of the salary, the wage cost substantially below the average inflation, which is true in Central Europe. As you know, it's more than 13, 14%. We are able to manage that downward significantly. That's one thing. What about bank taxes? First of all, what I said about bank taxes, I repeat what I said.
It is only for 2023 starting and, except one country that is Hungary. It's not necessarily bank tax, but the impact on our P&L of the decision taken by the government is already kicking in 2022. All the other countries, we're talking about 2023-2024 period. That's Belgium or, 2023-2024 and following, for some other countries.
Belgium has said it's not about tax increase, it's about a decrease of the tax deductibility. 80% is no longer Tax-Deductible. That has an impact on the income taxes. It has no impact on the Pre-tax results. We're talking about a couple of tens of millions EUR for 2023. For Czech Republic, the bill, as I said, has been passed.
There we talk about bank taxes, and as you know, it is related to the results, and the impact is also in that perspective, limited for KBC. It is only applying as of 2023 and following years. Slovakia, the talks have been started up. There is no concrete bill passed in parliament.
There is no concrete number yet out, but the estimated impact is also limited in terms of, I speak about a couple of tens of millions of EUR. We don't see any further increases in that perspective in the short term.
Thank you. The next question is coming from the line of Sharath Kumar, J.P. Morgan. Please proceed.
Good morning. Thanks so much for taking my questions. The first one is on NII. Firstly, to recognize that your NII guidance has been quite accurate, usually much more accurate than your peers. Obviously, in the last call, there was a lot of questioning around this too. Just to say, you know, well done in terms of NII guidance.
Can I ask a question about slide 55 and your new NII sensitivity, which is obviously lower as inflation moved up. You talk about even more comparative pass-through on that slide. I'm just wondering if you could give us a little bit more color in terms of what you mean, within the changes to your assumptions.
Secondly, I was wondering if, in terms of the capital moving parts, if you might have any more color for us in terms of when Ireland will close. Just that there's obviously quite a material benefit to your capital ratios whenever that deal comes through.
I was wondering whether or not we should expect any distribution linked to Ireland to still be as per your normal full year results board decision. Do you think that related to Ireland, this could also be maybe a mid-year event, just given how big the capital benefit might be? Thanks so much.
Thanks, Sharath Kumar, for your question. I will take the first one. Coming back to, first of all, first part of your statement, thank you very much for the compliment. I remember what happened after the second 1/4 results, and I'm pretty pleased that my chief economist was right. That indeed, our guidance was quite accurate, as you stated.
What is a bit unfortunate is page 55, because that should not have been in the pack because it's an old slide, and this is not the relevant one. What we actually are stating is we confirm, we have not changed the guidance whatsoever for the Long-Term guidance, and we have not changed the guidance for page 55.
What was in the pack was an old slide with very different assumptions on interest rates and on pass-throughs and so on and so forth. In that perspective, we did not change at all. We did not take a position on the guidance for the longer term, nor for page 55. We will do that at the end of the fourth 1/4 results publication early next year, where we give you the full detail on and the longer term guidance and the sensitivities and also the net interest income and cost side of 2023.
Okay. Now we'll take a question on Ireland. We expect indeed a very strong capital release as a result of the completion of the sale of most of our assets and liabilities to Bank of Ireland. We expect the completion to happen in the first 1/4 of next year. We will only decide on how we'll deal with the capital release at that time.
We do not want to make any already projections before we make sure that the completion has happened. We will probably give a bit more guidance when we are releasing our fourth 1/4 numbers, as we usually give then our view on capital deployment. That will then be part of that.
The next question is coming from the line of Flora Bocahut from Jefferies. Please go ahead.
Yes, good morning. The first question I have is going back to the revenue guidance for 2024. I think you have slightly changed some of the assumptions you made on the NII. I'm not talking about the rate sensitivity slide here. I'm talking about the ECB rate, which you now expect will be at 2.25% already by the end of this year.
That's just 1.50% before. Obviously, the loan growth is also surprising positively this 1/4. As you mentioned, Johan, on the introductory remarks, you consider a terminal ECB rate at 2.50% while the market is closer to 3%.
The question is, given you've left, you know, the 2024 revenue target unchanged, despite all this, can we say that the risk to that guidance is to the upside or are there headwinds somewhere else that have appeared that we need to be aware of that would explain, you know, why the 2024 guidance is left unchanged at this stage? The second question is a very simple one. It's looking at the Czech NII. Should we consider that you are at the peak NII in the Czech Republic already? Thank you.
Thanks, Flora, for your question. Indeed your analysis. I'm answering the first question. Your analysis is correct. The guidance for 2022 was updated, and it is indeed 2025 taken into account. I said 250 when I was talking about the 2023 number when I said it during the presentation of the slides. Indeed, the guidance was given and updated for the volume growth.
It was increased from 7%-8% because we're already past the 7% as we speak. Going forward, we did not change the position, not on the sensitivity. We just kept the slides as they were, including the Long-Term guidance for 2024, and your analysis is indeed correct.
The market is higher as we speak. That depends a bit on the source. Roughly 3% for 2023. Yeah, 3.20% for the more bullish ones. The longer term is for 2023 at, let's say around that 2023, 2024, around that 3%. Our position in the guidance for 2023 is indeed only 2.50%, and therefore, this is conservative.
In terms of the specific lines of income and costs, which are the consequences of our calculation of the draw, we will give you the update of the details on the split lines of income and cost on the back of our budget exercise, which is currently running and which is taking into account indeed higher interest rates and also changed numbers on inflation, not only for the position of 2022, because that's the starting position, but also for the position of 2023, 2024 and following. For that reason, we did not change the slides on 2020 and on the sensitivity.
To answer your question very short, when you refer to the draw and when you take into account the numbers which we have used as in the economic scenario, the question was: Is there an upside or we see any headwinds? The upside is indeed the thing which we are facing. I'll take a question on the Czech NII.
Indeed, if the interest rates, we expect the some of the deposit rates not to change anymore, and it's now at 7%, then indeed I think we've reached the peak. Of course, there is always a probability which we see as less than 50% that there will be a further increase. Our view is that it will remain at 7% for the next few quarters.
There's also a risk that the Czech interest rates will come down, and that's why we've already started to increase the duration of the replication book as a result of which, also the peak has been reached, as well. Yeah. I hope it answers your question.
Yes. Thank you.
Thank you.
The 1/3 question is coming from the line of Benoit Pétrarque
Yes, good morning. Just to come back on the 7% guidance, 'cause it was not only 2.5% on Eurozone rate, that was also Czech rates going down to 5.25, 2023 and 3.5, 2024. Based on what you know, recent comments from the Czech National Bank, do you see upside to that figure? Just to come back on the question on the Czech NII, I mean, there are some well cautious guidance on Czech NII from some of the peers talking about much weaker loan growth and also the pass-through rate starting to peak up.
When you say we've reached the peak, do you think it's going to remain relatively stable on the back of what you've done on the replicating portfolio or could we trend down in the coming quarters? That's the first type of question.
Then just on the pass-through in Belgium. It seems to be extremely low. You know, no banks really reacting. What is your view on the pass-through versus maybe the broader picture in Europe? Is that fair to assume that the Pass-Through will remain very much well, luckily under control in Belgium, thanks to basically the market concentration and the behavior of banks.
If I may, just on the asset margin, I think you see less asset margin pressure, no pressure in most of the markets. You know, is that a timing issue or do you think something more fundamental going on the asset side? Thank you.
I will continue on the Czech NII then. Yes, when we say a peak, it doesn't mean that it will come down necessarily. That will depend on many variables, and one of them, as you mentioned, is the pass-through rate. So we did see also a pickup in the Pass-Through rates. On the other hand, we also see still good deposit inflows, albeit mostly on term deposits, but also on term deposits we get a good margin.
It's difficult to say in the balance what the total effect will be. I think the biggest impact will be from lengthening the duration where we are giving up a little bit of the Short-Term interest rate benefit, moving into Long-Term bond yields.
Obviously, we therefore lock in a strong interest rate for much longer periods. That is, I think, also an important driver to take into account. Have we reached a peak? Yes. Is it going to come down next 1/4 already? That is very difficult to say at the moment, and longer term, we prefer not to give guidance because we also then need to look at the loan growth. The loan growth there has been very strong in Czech Republic. It will, of course, decelerate given the mild recession or base scenario that we foresee.
Nevertheless, we still foresee good growth next year and at margins which and that's maybe already an answer to your second question, which should recover, given that a large part of the margin pressures was a result of the very strong increase in interest rates. That will not happen anymore next year. We should see a recovery there, and that together with loan growth should also support NII.
All these moving parts, it's very difficult to give a guidance on. That's why we're now doing the full exercise, and we'll come back with more guidance in the first 1/4. Or sorry, for the final fourth 1/4 results in February. Topping up Luc's answer with the pass-through in Belgium. Yes, indeed, you're right.
We don't see any pass-through yet on the banking, the larger bank side. As you know, with the four big banks in Belgium, we cover roughly 75%-80% of the market in that perspective. What is going to be the situation going forward? It all depends on the evolution of the interest rates.
We have taken a very strong position in August, which is confirmed today on the rates increases. We'll see. It's very difficult to talk about the future because that is not allowed guidance-wise. I can talk about the impact on net interest income, but I cannot talk about what we're going to do commercially because that's not allowed by law.
In terms of net interest income and so on, so forth, we have given you an idea where it will be for 2022. As Luc has said, we will give you the full detail within literally 3 months. At the end of the fourth 1/4 results.
Yeah. The asset margin? In Belgium, any specific stuff there?
Sorry, I forgot about that. We, as I said during the call, if you look at the margins which, by the way we also published today, the pressure is definitely on the margin in mortgages, which has come down in the 1/3 1/4.
The good news is that we see on all the other products in the Belgian market, the margin going up. We saw the margin increasing on corporate business. We saw the margins increasing on the SME business, and we saw the margin increasing on smaller portfolio, which we have as consumer finance. In that perspective, there is an upside, and the upside is not uniform because the mortgages was going down.
Also would remind you the explanation Luc has given, also on the situation going forward, that will apply to a certain extent also to Belgium, definitely on the evolution of volumes and the link between volumes and margin.
Great. Thank you very much.
The next question is coming from the line of Kirishanthan Vijayarajah, HSBC. Please go ahead.
Yes, sir. Good morning, everyone. A couple of questions from my side. Firstly, just a broad question on capital return, because we're hearing that some other banks are perhaps facing some challenges or at least question marks from the ECB when they're planning aggressive Forward-Looking kind of capital return aspirations.
Is that a change in tone from the ECB that you're also coming across maybe? Or do you feel, at least from your side, you know, the tone hasn't really changed from the early summer of this year? Secondly, on coming back to Ireland, can we just have your latest update on the speed at which the cost base also falls away? I know the RWAs you're talking about first 1/4 next year.
Just wondering how much OPEX we should factor in for 1Q, 2Q next year. Qualitatively speaking, are you finding it consistent with your kind of original expectations in terms of exiting the cost base in Ireland? Because there does seem to be some quite lumpy costs along the way as you're sort of exiting that business. Just some clarity for what to pencil in on the cost side in Ireland for first 1/2 of next year. Thank you.
Thanks, Kirishanthan, for your questions. Coming back to the first one, the capital return and then the position of the ECB. Well, I've read, like you, all the articles in the newspapers and on the websites of the different newspapers that indeed ECB is giving a couple of banks a harder time on their, you called it aggressive capital return.
So it's clear, and that is, I think from a supervisory perspective, quite logical, that the ECB is taking a cautious stance in current situation of high inflation, low growth, potential recession and deep recession, that they take a very cautious stance towards capital returns. I'm not going to use your word, but I'm just going to quote you.
If you then use the word aggressive capital return, then definitely the ECB is going to be cautious. In that perspective, I'm not surprised by a couple of statements which I read in the newspapers that ECB is asking at least a lot of questions about potential capital returns and so on, so forth. In that perspective, KBC sticks to its position.
First of all, we are well capitalized. We are profit generative with at least 250 basis points of capital a year. That gives us a kind of comfort position. As I said, we almost put away full through-the-cycle buffer for potential impact of the deteriorating economic situation in our lending book. We stick to our capital returns, which we have put forward.
That is, you know, at least 50% of our profits will be returned to our shareholders. We will define surplus capital as of 15%. If you cannot make it work, like we did, by the way, with the acquisition of Raiffeisenbank (Bulgaria), then we will also consider that for return to our customers. To our, not customers, for heaven's sake, to our shareholders.
The way we do it, we have all instruments available, that is in cash or we have had an approval of a share buyback by our AGM last May. That is also one of the possibilities. We will discuss all methods with the ECB when the time that is needed. As I said, I'm not surprised by their stance. On Ireland, Kirishanthan Vijayarajah,
good morning. The costs at the moment are relatively high and business as usual. You see the total costs for the 1/3 1/4 are EUR 52 million, but that includes indeed some One-Offs. Underlying, it's close to EUR 40 million at the moment. That will run down once we can achieve completion.
Now, the rundown will not happen from one day into the other because we have to let people go over time. We have to run down the operations, turn back licenses and so on. That will take some time. Then we'll come to a more steady state in a few quarters. To give you concrete results, we will be averaging down to about 15%-20%.
Sorry, EUR 50 million to EUR 20 million per 1/4, in a steady state after the completion. Obviously take into account that will not happen in the second 1/4 immediately. You have a rundown period necessary for that.
Great. That's really helpful. Thank you, guys.
The following question is coming from Namita Samtani of Barclays. Please proceed.
Hi, morning. Thanks. 2 questions, please. Firstly, on NII, if you want. Apologies, but we can't hardly hear you. I mean, we hear you very, very silently, and to be honest, it's quite impossible to understand you.
Any better now?
That's much better. Please.
Cool. So just on NII in FY 2022, specifically in reference to the guidance of a EUR 73 million benefit expected from TLTRO in 2H. Notably that's unchanged from the guidance given at Q2. Just in the context of your Benelux peers guiding towards some negative impacts in Q4 from hedge unwinds, wondered if you could provide some color on whether that EUR 73 million is kind of net of any potential expenses, or is it just solely capturing the arbitrage up until the twenty-third November?
Secondly, on costs, should we expect a roughly equal 3% CAGR out to FY 2024 each year? Or do you expect some kind of disconnect between the inflation levels expected in FY 2023 and then the timing of any kind of Cost-Cutting measures? Thanks.
Hi, Samtani. So thanks for your questions. Coming back to the first one on the TLTRO III. Yes, indeed. We have adapted our guidance as was in the. I don't know which page that is. I think it's page 20. In the footnote, it's mentioned there. Yes, indeed, it's page 20. So it's 73 now, whereas in the previous guidance for the remainder of the year, the previous guidance was EUR 74 million. That takes, indeed, into account what you indicated in your question, the new policy regarding TLTRO from the ECB.
Now, the reason why the updated number is so close to what the original number was, the original number was 74, is that the TLTRO changes only kick in now, and that, of course, what we have been seeing is because of the interest rate increases, which are much sharper than what we originally assumed in our scenario.
We have actually gained more profit in the first part of the second 1/2 of this year, and that we now have a negative impact as of the twenty-third of November, and that's setting each other off. For that reason, it's EUR 73 million. Of course, the impact going forward on TLTRO in 2024 will be then completely different as a logical consequence of the position taken by the ECB.
On the cost side, while we don't expect a nicely spread increasing costs over the years in line with the 3% CAGR, but it will be more front-loaded. Obviously, because the inflation was very strong initially, we think it will then reduce over the next 2 years, 2023 and 2024, much lower than in 2022.
The biggest effects will be in 2023, and then we will also see not only lower inflation rate and therefore lower pressure on costs, still at a higher level than usual, of course. Secondly, we will also see more and more the effects of the productivity gains that we already see coming through. That will be even more visible in the years, in the year 2024 compared to 2023.
Thank you very much.
The next question is coming from the line of Matthew Clark, Mediobanca. Please go ahead.
Good morning. Could you just talk a bit about the outlook for Hungary next year, given the higher gas reliance, maybe they're perhaps more vulnerable to the economic downturn. How do you think about that, and how is that reflected in your group guidance? Thank you.
Thanks, Matthew, for your question. Hungary is indeed in a very particular situation, and we have seen several interventions from the government, both into our P&L directly, but also economically. Therefore, indeed, we have a close look on what is happening in Hungary, and we have taken that into account fully in our guidance. It is indeed absorbed.
Okay. Thank you.
We have one more question, which is coming from the line of Farquhar Murray. Please go ahead.
Morning, all. Just one question from me. Again, coming back to the customer spread in Belgium. The lack of pressure on deposits is obviously improving the liability margin, but the counterpart seems to be the lack of movement on mortgage rates, pressuring the asset side.
Is there any reason why the system is responding in that way and the competitive dynamic around it? I kind of understand the lack of competition on deposits, but I'm just wondering what's driving the inertia on the mortgage rates and whether actually maybe the capping rules are part of that. Thanks.
Thanks, Farquhar, for your question. I'm a little bit surprised about your conclusion. Perhaps misunderstood it on the inertia of the mortgage rates, because you know there's super strong competition on the mortgage rates in Belgium.
For that reason, it's the only topic, I mean, the only product line in lending in Belgium where the margin has declined. All the other margins are going up. That is because of the severe competition which is ongoing.
If I misunderstood your question, please rephrase it, but the detail in that perspective, you can see on page 25 of the slide deck, where we disclose the competition as you could call it in Belgium on the mortgage and on the corporate and SME loans business. If I misunderstood your question, please could you then rephrase it?
I don't think we necessarily. We may be talking at cross purposes. When I mean inertia, I mean the lack of movement in the mortgage rate, which is then driving the margin down, as you say, which obviously looks like it's super competition. But the other side is if it was everything was so competitive, why wouldn't we be seeing a bit more competition around deposits on that side? Is it just the markets are very divorced from each other at present?
Yes, indeed. I mean, first of all, of course, every bank has its own strategy, and that means also every bank has its own strategy on both sides of the balance sheet. Also on both sides of the balance sheets, that has an influence on how you position your products.
Now, I said earlier on the question about deposit book, I need to be careful what I say because I could give commercial guidance, and that is forbidden, as you know. But the end conclusion is that until further notice, we do not see any strong competition amongst the major banks in the deposit book.
We'll see how that evolves going forward when interest rates increase further, because you can imagine that on a regular basis, we do have articles in the newspapers in Belgium indicating that deposit rates should increase for customers. The second thing, the commercial pressure on the mortgage business has been severely strong.
You can see that on page 25, 4, 2, 4, 6, 8 quarters in a row. That obviously also comes to an end at a certain moment, and then you should have a change of position there. It's kind of linked, but as far as we are seeing it now, it is still behaving independently from mortgages and customer and corporate loans, and it's clearly also independently behaving between mortgages and deposit rates.
Okay. That's helpful. It's funny how you don't see articles saying that mortgage rates should go up. Thanks.
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All right. This sums it up for this call. Thank you for your attendance and hope you remain healthy. Take care and enjoy the rest of the day. Cheers.
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