Hello and welcome to the KBC Group Earnings Release First Quarter 2025 Conference Call. On today's call, we have Mr. Johan Thijs, CEO, Bartel Puelinckx, CFO, and Kurt De Baenst, Head of Investor Relations. Please note this call is being recorded, and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad. If you require assistance at any point, please press star zero, and you will be connected to an operator. I will now hand you over to your host, Mr. Kurt De Baenst, Head of Investor , to begin today's conference. Thank you.
Thank you, Operator. Also, a very good morning to all of you from the headquarters of KBC in Brussels, and welcome to the KBC conference call. Today is Thursday, May 15th, 2025, and we are hosting the conference call on the first quarter results of KBC, the updated dividend and capital deployment policy, as well as the acquisition of 365.b ank in Slovakia. As usual, we have Johan Thijs, Group CEO, with us, as well as our Group CFO, Bartel Puelinckx, and they will both elaborate on the results and add some additional insights. As such, it's my pleasure to give the floor to our CEO, Johan Thijs, who will quickly run you through the presentation.
Thank you very much, Kurt. Also from my side, a warm welcome to all of you on the announcement of the first quarter results of 2025. We do that with the traditional start, with the key highlights. We posted this quarter a EUR 546 million result, which is, as you know, heavily distorted by the upfront booking of actually all bank taxes for the year 2025. As a matter of fact, EUR 539 million bank taxes were booked in this quarter, gives you a completely different picture of the EUR 546 million. Now, to summarize what that actually entails at EUR 546 million, I can clearly say that, once again, the commercial bank insurance franchise of KBC has been firing on all its cylinders. As a matter of fact, also, the diversification has worked perfectly in this quarter.
The income is in a 49%-51% split up between interest-bearing income and non-interest-bearing income, showing what indeed diversification this group can deliver. If I look in the detail, then we'll start with net interest income, which is indeed a very strong number again, and it's clearly ahead of our guidance. Also, in that perspective, as it's ahead of the plan which we had for this first quarter. It is driven by a very good customer loan increase, 2.43% on the year. If you compare that with the guidance, which we gave 4%, then it's indeed a very strong performance. On top of that, we saw a customer money, core customer money inflow of EUR 2.4 billion in this first quarter. What is even more important, I would say, is that we do see what we indeed assumed and announced at the back of the fourth quarter.
We do see that there is a shift coming from term deposits to saving accounts, further underpinning net interest income for the quarters to come. In other P&L lines, we have a strong performance on the fee and commission basis, where we do have a record sale in the investment products. It is the best quarter ever in that perspective, with a net sale inflow of EUR 2 billion. We did have also very strong results on the insurance side, with a 9% growth on the non-life side and a whopping 39% growth compared to last year, which is indeed also a record high. We do have a higher net result of the financial instrument fair value and also good performance on the net other income. All P&L lines actually have been doing better than planned and have been delivering results which are strongly underpinning our guidance.
In that perspective, if you look at the other side of the P&L, the outflowing monies costs are under control. They are slightly up compared to the same quarter last year, but they are lower than what we originally planned for this quarter. It has to do with the seasonality of the first quarter last year, which was extremely low. We do have a cost-income ratio of 41%, expressing what I just said on that good performance. We have lower loan loss impairments, and we do have, consequently, also an excellent credit cost ratio. Consequently, we do have a very solid liquidity and solvency ratio. It is, in that perspective, then also no surprise that we, despite the volatility and the turbulence on the financial market and in the macroeconomic domain, we do reconfirm the short-term and the long guidance today going forward.
Last but not least, we also update the dividend and the capital deployment policy. I will go into that in a second. Let me then immediately switch to that dividend policy and that capital deployment. Straightforward, we are having—let me start with the dividend policy. We are having a clearer definition now. We take into account also certain limitations which were linked to the current dividend policy, namely the at-least triggered, amongst others, the ECB to say that we could not consolidate interim the profits which we made in our results and in our capital—so not in our results, in our capital ratio, I mean. This annoyance we have overcome by redefining that dividend policy and the payout ratio will be, including the AT1 coupon, going forward as of this year 2025, between 50%-65% of consolidated profit.
Just for all clarity, if you look at the 65%, if you look at the payout of dividends which we have done over the last 10 years, including share buybacks, including surplus capital distribution, including regular dividends, including all the one-offs which we did over the last years, the average is just below that 65% threshold. It means indeed we are stretching it to what was done in the past as well. Traditionally, we pay EUR 1 interim dividend per share in the month of November, and that completes the dividend policy going forward. Once defined dividend policy going forward, we do also redesign our capital deployment. Also here, we take into account a couple of things which were linked to the previous capital deployment, which had this merit quite clearly.
We worked at that time with a threshold for the definition of surplus capital that was, as you know, the 15% CET1 ratio. We abandoned that philosophy, and we actually come back to a dividend policy which allows us now to better manage our capital, better manage our capital, taking into account how we want to deploy better our capital going forward. That is both in growth and remuneration of our shareholders. Translated into the capital deployment policy as of 2025, that philosophy now means that we remain and we want to be amongst the better capitalized financial institutions in Europe. This is a crucial one. You know this was part of our policy in the past and will remain definitely our policy in the future.
On the back of that philosophy, amongst the better capitalized institutions, our board will have every year a decision to be taken at its discretion. What are we going to do with the capital deployment? The focus there is also clearly on organic growth and M&A. Just to emphasize what that means, if I look over the last five years, what we did on organic growth, then the asset growth, lending growth, is roughly 5% a year over the period 2020 till 2024. That obviously consumes also under the Basel IV regulation that consumes quite a lot of capital. Last but not least, we want to do M&A. Four years ago, we did the acquisition of Raiffeisen Bulgaria, and now today we announce another acquisition, namely the acquisition of 365.bank in Slovakia.
Going forward, the board will take that decision at its discretion with the focus I just explained. There is an absolute minimum threshold of 13% unflawed fully loaded CET1 ratio, and we will start to use, as of now, the AT1 and Tier 2 buckets to be filled up and SRTs to manage our risk-weighted assets in a more optimal way, which is, as I said, now possible given the new capital deployment policy. As a matter of fact, using the SRT can be translated in that we are asking a grant from the ECB, from the European Central Bank, for a first SRT on KBC side by the end of this year. Coming back to the M&A side, let me immediately go into the other news, which is important to be announced today. That is the acquisition of 365.bank in Slovakia.
KBC has reached an agreement with the owners of 365.b ank in Slovakia for the acquisition of 98.45% of that institution. That comes to a total consideration of EUR 749 million to be paid. The total value stands at EUR 761 million, and it is going to be paid in cash. The bank itself is a retail-focused bank. There is a bank which transformed itself over the last years, clearly from a, let's call it, more universal bank to a more digital and retail-focused bank. What is important to understand is that the combination together with our subsidiary in Slovakia will give us a top three position in that banking environment with a market share of roughly 16%. It is also giving us a leadership position on the retail banking side.
That's quite clear, and it will definitely give us the possibility to further strengthen the bank insurance model going forward in that country. In perspective on the financial side, we pay 1.4x book value and 9.4x price earning, and we are able to realize a significant amount of synergies, which is translated as EUR 75 million pre-tax, and which allows us to have a return on investment of roughly 16%-17% as of the year 2028, when we do assume that those synergies will start to kick in. The return on equity on this deal is roughly 15%, and it also is calculated as of the moment that synergies kick in. This means that we do consider an integration process going to take place over the period of the next 24 months.
The track record of KBC, as you know, is that we deliver certainly within the promises which we make, has been proven recently, but also in the earlier past when we did acquisitions in Bulgaria, amongst others. In terms of accretiveness, this deal is EPS accretive as of year one onwards. EPS accretion is 1%-2% of the first two years when we do the full integration. Afterwards, when the integration is done and the synergies start to come up to speed, the EPS accretion is at least 3%. Both calculations are made on a very conservative basis. Capital impact for the group is at closing roughly 50 basis points and perfectly in line with our capital deployment strategy. Of course, you will understand that this transaction announced today is subject to approval by the regulatory authorities.
Given the experiences we have with previous deals, we assume this to be happening before the end of year 2025. On the next slide, you see the overview of the diversification which we have in KBC Group. Once again, we can confirm that also this quarter, despite very strong growth on the lending side, despite a very good performance on the transformation result side, we keep up with other income to make the diversification of our income almost equal to the 50/50 split. Actually, 49% net interest income linked and 51% for the non-interest-bearing income. The same is true for the diversification on the geographical part, I will not go into that deal. Also there, we have a strong growth in Central Europe compared to the Western European market, in essence, Belgium.
On the next page, you see the split up between the bank and insurance activity: 74% on the banking side, 26% on the insurance side. That is more and better than the traditional split of 85/15. As you probably can already understand, it is also linked to the fact that bank taxes are kicking in more heavily than insurance taxes in the first quarter. Kate is doing super well. It goes much faster than we anticipated. What is far more important, customers start to use it more and more. 5.5 million customers are using it on a daily basis, but also they start to like it much more. The NPS continuously increases, and the autonomy of Kate is not strange to that.
Kate's autonomy, the ability to answer questions of customers without any KBC employee interfering, now is at 70% in Belgium and even 74% at Czech Republic. We do assume this to grow further when we will launch Kate 2.0, which is going to happen in the course of quarter four, quarter one next year. In that perspective, just to give an idea, Kate realizes roughly 100,000 sales autonomously every quarter. Over the last 12 months, we have realized 383,000 sales via Kate or via Kate Leads. It boosts your revenue. Last but not least, Kate is doing today, if I can calculate it in a very conservative manner, Kate is doing today the work of 300 FTEs on a daily basis, the equivalent of that. Next slide is about all the other things which are related to sustainability and some other positions which we have.
Let me skip that and immediately go to the exceptional items. We have one exceptional item qualified. That is the extra windfall taxes, which was defined on a temporary basis by the Hungarian government, kicks in for EUR 53 million. After tax, that is EUR 50 million, a bit less than EUR 50 million. Unfortunately, we do think that it's not certain that it's temporary, so it could be that it becomes recurring. We'll see going forward. Let me start with roughly 49% of our income. That is the net interest income side. Today, if you look at the straightforward numbers, today we are posting a result of EUR 1.421 billion over the quarter, which is significantly more than it was in the same period of last year and a little bit lower than what it was previous quarter. That is entirely due to two things.
First of all, the one-off booking of a net interest income, which was linked to a change in the Bulgarian entity of EUR 9 million and the number of days which are lower in quarter one. If you look, if you would exclude those two numbers, the net interest income also nominally would be higher this quarter than in previous quarter. As a matter of fact, if you look at the underlying building blocks, and one of the two main drivers here are lending income and transformation result, the analysis is quite straightforward. We have seen, again, in the first quarter of this year, a higher commercial transformation result than previous quarter. The growth is 3%, perfectly in line with the guidance which we gave.
As a matter of fact, the EUR 1.421 billion net interest income this quarter is lower than the own assumption which we made for this quarter and which was the basis of the total guidance which we gave earlier this year for the total net interest income. Same can be said about the lending income. The lending income was higher than previous quarter, and it was driven by a very strong loan growth, so a very strong volume increase, 2.43% correction of FX included. If you would exclude the FX impact, then it's even 2.7%. Compared with the guidance on full year base of 4%, it is indeed a strong result. That growth is realized in all countries, and the growth is also realized in that perspective in mortgages and corporate lending business. One country is doing a bit better than the other.
I can go into that detail later on with questions if needed. If I look at the dealing room, also there is stronger performance than previous quarter, so also there is a very strong contribution to net interest income. What are the offsetting factors? I already mentioned EUR 50 million negative impact of the lower number of days. And then inflation-linked bonds suffered, but we expect this to come back in the course of 2025 quarter two, three, and four. All other things you can read on the slides, but in essence, the two main drivers of net interest income are performing better, and that's the strongest message I can give. Net interest margin standard 205 basis points, which is slightly lower than the 208 basis points, but that can of previous quarter, but it can entirely be explained by the one-offs which I was referring to.
If you correct those one-offs, the net interest margin would be even a little bit higher than the 208 basis points of previous quarter. On the deposit side, I will switch to the next slide, which gives you an insight on the detail. Core money went up with EUR 2.4 billion, and that's a combination of two parts. First of all, EUR 2 billion inflow on the investment product side, which is indeed, as I already said, a record high, but also we do see a positive contribution of EUR 0.4 billion on the deposit side. And that's actually good news because traditionally, the first quarter is one of the weakest quarters in that perspective. Why? Quarter four is driven by extra payments which are done by employers to their employees, which is called mostly of time third month, 13th month, and so on and so forth.
That comes in around the Christmas period. The second quarter, mostly of time, is driven by the payout of bonuses and variable compensation, and that comes in the second quarter. In between, you have a quarter where all the year bills need to be paid and so on and so forth. Nevertheless, we saw an increase of EUR 0.4 billion. What is far more important, that comes from a positive inflow on the saving accounts, which is fueled by the maturities of term deposits in the first quarter. Also, in that perspective, very important to notice that in the maturity of those term deposits, the first part of the monies which were recovered in the state note in Belgium came to maturity.
The important thing there to notice is that what we already assumed and also explained in guidance which we gave is happening in reality, but even stronger than what was guided for. Only 38% of term deposits which are maturing, monies coming back from the state note, are reinvested in low-yielding term deposits. The remainder, be it 60%, is most of that is invested in saving accounts yielding higher than what the term deposit is delivering. As a matter of fact, that also boosts net interest income going forward because, as you know, we have the bulk of that state-owned money maturing in quarter three of this year. In terms of fee and commission, that is then the immediate bridge to the next slide. We had a very strong quarter, EUR 690 million, which is substantially more than what it was in the same period last year.
As a matter of fact, it is 12% higher. If you compare with previous quarter, perhaps you say, "Wait, wait a second, it's a little bit lower." Here again, we have booked two one-offs in the fourth quarter last year. You remember from the call at that time that we had roughly EUR 20 million year-end effects, which was, amongst others, exceptional performance fees which were booked in Czech Republic and, amongst others, also one-off in Hungary. If you would exclude the EUR 20 million, you can clearly see that net fee and commission business is EUR 10 million up on this quarter. How come? It is driven by, in essence, two things: the investment products, so the asset management production, both on the asset management, sorry, on the management fee side, and on the entry fee side, we saw an increase of that money combined to roughly EUR 8 million.
That explains the difference with previous quarter. As I already said, we have a very strong growth of the net sales, EUR 2 billion up, which is indeed a record high. That is also supported by a further strong inflow from the regular investment plans. I call this the saving account amongst the investment products, EUR 439 million in this quarter. Indeed, also, other services have been doing very well. Definitely, on our trading platforms, we had record results on our trading platforms, both in Belgium and in Czech Republic, with a very strong increase of the fees there. As a matter of fact, we have 26% more volume than last year's fourth quarter, which was in itself already a record quarter again. Indeed, we do have a strong increase in fees consequently, which are linked to that as well.
Seasonally high payment services in fourth quarter cannot be matched in the first quarter. There we have a little bit of offsetting factors, but nevertheless, the sum of all parts is significantly higher than what it was. Currently, we stand at EUR 273 billion assets under management, which are, of course, a little bit down, and that is fully driven by the turbulence in the financial market. You can imagine yourself what is the cause of that turbulence because all of us have been suffering the statements of the American president. Anyway, let's go forward. We go to the insurance business: 9% growth on the quarter, 8% if you exclude the FX effect. On the non-life side, also coming with a very good quality, 86% combined ratio, which levels almost the 85% combined ratio of previous quarter.
As a matter of fact, if you would exclude the fallout of the storm borders on the claim side in 2025 first quarter, then the combined ratios would have been equal. Nevertheless, it is substantially lower, better than our guidance of 91% combined ratio. In terms of the life sales, whatever quarter you take, quarter one, quarter four, it is substantially higher this quarter. This is due to a very strong performance on the unit-linked side due to commercial campaigns in Belgium: 39% up on the quarter, 32% up on the year, driven by both unit-linked and interest-guaranteed products. Indeed, it is a strong performance. The split-up between unit-linked and interest-guaranteed products, we now stand at roughly 66%, 31%, and the remainder is hybrid products. Let's go into financial instrument fair value. It can be short about that.
It is significantly better than what it was, but it is mainly driven by the dealing room income, which was up thanks to interest rate fluctuations. All the other elements are mentioned there in detail. The MVAs, CVAs, and FEAs were up EUR 5 million. Also, on the derivative side, we had a better performance in EUR 13 million. Given the volatility of those numbers, I think you are more interested in other elements of the P&L. Therefore, I am also not going to dwell too much upon the other income, which is perfectly in line with the overall average of EUR 45 million-EUR 50 million if you take into account a one-off gain which we booked on the real estate side, roughly EUR 9 million. Let me come then immediately to costs. Costs are significantly up compared to previous quarter because of the bank taxes, which in itself are at EUR 539 million.
I perhaps let me finalize this one. The bank taxes, EUR 539 million, are higher than before. Why? Because the free fall of taxes, which are linked to the resolution fund that is consumed by the Belgian government, EUR 42 million higher contribution to the deposit guarantee scheme, which brings the coverage to 1.8%, which, as you know, the requirement by Europe is 0.8%, so it is significantly higher. This will come to an end, by the way, in the course of 2025. What is also kicking in this perspective is the fact that we recovered more from the state note and covered deposits are the trigger for these taxes. It is offset a little bit by what is lower in the single resolution fund at other countries, and the total sum is an increase of EUR 19 million.
We do estimate for year-end this to be at EUR 692 million, which is a whopping number. Let me come back to the essence of the cost without bank taxes. If you compare it with previous quarter, it is lower, but that is obviously also triggered by seasonality. If you compare it with previous year, then you do see an increase of 4%. There is a small but to add. First of all, the costs at the level of first quarter last year were extremely low in the pattern of the year. Therefore, the 4% is exaggerated. As a matter of fact, if we do have our cost planning for this year led to the guidance of 2.5%, then the current cost position of EUR 1.106 billion is lower than our internal planning for 2025 quarter one. It is perfectly in line with what we do expect.
Another thing to mention that is, if you make the stronger performance on the income side and the cost side linked two ways, first of all, the cost-income ratio stands at 41%, which is indeed better than our guidance. The second thing, if you look at the jaws which are realized in this quarter, then we stand now at 4%, which is better than the guidance which we gave of at least 3%. Or you could say it's in line because it was at least 3%. In that perspective, cost evolution is better than planned, but you need to have some explanation to see it normally. Bank taxes, I elaborated on the first on the previous slide, so let's skip this one. We come to the asset impairment side. Asset impairments were very strong. They stand nominally at EUR 38 million.
Let me express that differently to make an understanding easier. It is 8 basis points credit cost ratio, which is substantially lower than the guidance of somewhere in between 25 basis points and 30 basis points. If you look into the detail, then you see that on the lending book it is EUR 83 million. But in that EUR 83 million, we did a further cleanup of the very old NPLs, backstop it is called, and of the EUR 83 million, EUR 41 million of that backstop were taken into the number. The underlying loan loss impairments were actually substantially lower.
In terms of the ECL buffer, which is, as you know, 100% model-driven, the parameters which we use, also the forward-looking macroeconomic parameters like growth, GDP growth, inflation, and so on and so forth, even if we take those parameters forward-looking into account, then there is a decrease of EUR 45 million of that buffer, which brings down the total impairment at EUR 38 million. What is left over in the buffer is EUR 72 million for emerging risks and so on and so forth. In terms of impaired loans, a further decrease of the impaired loans ratio, we now stand at 1.9%, of which roughly 1% is 90 days past due. If you compare that with the European definition, EBA definition, we stand at 1.4%, which is indeed lower than the previous quarter and which is indeed lower than the European average.
Let us go into the impact of Basel IV on the risk-weighted assets. We guided earlier several times on the basis of a static balance sheet. This time, we do have indeed again a static balance sheet, but the latest observation, which means also that the impact which we guided for in reality is lower. The first-time application impact is EUR 0.9 billion, of which the vast majority is linked to the growth of the balance sheets, and that is translated in risk-weighted assets for the operational risk. The first-time application is also coming down, now stands at EUR 1.6 billion, so total EUR 2.5 billion, bringing the impact of Basel IV for these two elements at 37 basis points. All the rest is output floor, that is 2033. We do not consider this in all our numbers. Why?
First of all, it's a long time to go and a lot of measures can be taken to mitigate that impact. The reality is, when you take the original guidance which we had, which was indeed conservative as always, and you look at the guidance which we give today, which is still conservative, then it's already substantially lower, given the changes which have been happening over the last one and a half, two years. Now, what does it result in terms of capital? As I said, the original position of last year, Basel III, was 15%. If you take purely the impact of Basel IV, then that ratio would drop mechanically to 14.6%. Today, we post under Basel IV a 14.5% capital ratio, which is entirely driven by the growth of our loan book. As a matter of fact, the number is a little bit artificial.
Given the much higher bank taxes we had to pay, the growth of the loan book is kicking in in full on the risk-weighted assets, and the profit is reduced by EUR 539 million because of the bank taxes. When you also look forward, and we give you some idea of what that might bring in the nearby future, we will have, first of all, higher profit retention. Second thing is that we will also upstream from Belgian GAAP, the insurance profits. We do this in principle only quarter two and quarter four, so therefore it's also a distortion of this 14.5. Last but not least, we are also going to have two elements. First of all, the positive impact of the deferred tax assets, which are linked to the liquidation of KBC Bank.
We expect this to come in in the third quarter of 2025 for roughly 20 basis points. Last but not least, we are going to fill up with the capital management, balance sheet management by using AT1 and Tier 2 instruments, and for sure going to use the tailwinds of the SRTs in the course of 2025, more focused towards year-end, so the fourth quarter of this year. If you translate that in OCR and MDA positions, the OCR now stands at 10.83%, and the MDA stands at 11.47% because of the fact that we did not fill up the AT1 and Tier 2 buffers yet, which brings us at very solid buffers of 3% at least. Depends on which you use. If you use the OCR buffer, then the OCR numbers, then the buffer stands at 3.6%, which is roughly EUR 4.5 billion.
Leverage ratios remain very solid with 5.4%. Liquidity ratios have a buffer of at least 40% -50% compared to the absolute minima. Also, the solvency ratio of the insurance company increased slightly to 210 basis points, which brings me to the forward-looking part. Economically, there is a lot of turbulence out there. Financial markets are extremely nervous, and this obviously has to do with the policies of the American Trump administration. You have the tariff policies, which Liberation Day were very rough, which in the meanwhile have been halted and have been in certain instances even significantly lower. We will see what will happen going forward.
Also, we do see at the European side reflections that indeed Europe has to reunite and rethink its previous policies, which have then resulted in statements about the rearm policy and statements on the German side of spending more than what they did before. The Schwarze Null is, in that perspective, no longer an absolute minimum, and therefore economic growth might be boosted by infrastructure investments, among others. In terms of where we are, we look towards the future with a little bit better numbers than before. We do expect that the European growth GDP will be still moderate. We talk about an average of 0.9% this year, similar next year and slightly higher in the year beyond.
In terms of the split-up, it's important to notice that in the central European parts of our group, growth is at least 100 basis points higher than the 0.9% I said a second ago. That depends a little bit on the country. Certain countries will be clearly above 2% growing. In terms of the impact of the tariffs, KBC is, in that perspective, pretty okay positioned. If we take a very conservative stance on our loan book, and therefore we take granted loans, not outstanding loans, then the potential impact is limited to roughly 7% of our book. Let me repeat it, it was done in a very conservative way. We have very limited exposure on the U.S. dollar in bonds and in equity. In that perspective, also the impact will be limited.
Therefore, given what I just said of the economic growth, given what I just said on the exposure, we do consider our short-term and long-term financial guidance as valid, and therefore reconfirm that today. I think this sums it up for the part on the group. All the countries, I leave open for potential questions, and therefore I give back the floor to Kurt.
Thank you, Johan. Now the floor is open for questions. Please restrict the number of questions to two, to allow for a maximum number of people to raise questions. Thank you.
Ladies and gentlemen, as a reminder, if you'd like to ask a question or contribute on today's call, please press star one now on your telephone keypad and to withdraw your question, it's star two. Also, ensure your line remains unmuted locally. You will be advised when to ask your question.
As the host mentioned, please limit yourself to two questions per participant in order to give everyone the opportunity to ask their question. The first question comes from the line of Benoît Pétrarque , calling from Kepler Cheuvreux. Please go ahead.
Yes, good morning. Yeah, two questions on my side. The first one is actually on the guidance, the at least 5.5% income growth for 2025. When I look at the Q1 and the momentum, the loan growth, I've got the impression that this is a very conservative figure. If I do the math quickly, I get towards more of kind of actually 4% operating growth for the year. I know it's early in the year, but do you share this impression that, yeah, you are on the conservative side on the income side? That's question number one. Number two is on the excess capital.
Try to get a grip on or kind of value the excess capital is a bit more complicated than before. You have on one side a minimum of 13%. On the other side, you want to keep an eye actually on the, I guess, on the peer group because you want to remain one of the best capitalized banks. How do you reconcile, let's say, the absolute level minimum of 13% and potentially the necessity to look at or keep looking at a peer group level to make sure that the CET1 ratio is not going too low? Then actually on payout ratio, just to clarify the 50%-65%, when are you at 50% and when will you be at 65%? Is that a function of a low CET1 ratio?
For example, more 50% payout on 13% and probably more 65% when you are, say, above the 14% level? Thank you.
Good morning, everyone. Also, from my side, as to your first question, Beno ît , the answer is clearly yes. I mean, we always have been quite conservative when we put forward our guidance. I can confirm that indeed the 5.5% total income growth is to be considered as conservative. If you look at indeed at the NII that came in at EUR 1.421 billion and you multiply that by four, you will already see that we more or less achieve the guidance of EUR 5.7 billion. If you add to that, of course, also the lending income, which Johan has been indicating, where we already achieved a 2.4% organic growth, having a positive impact on that side as well.
Supported also by the strong performance on the insurance business and the net fee and commission income as indicated by Johan before, the answer is clearly positive.
Regarding your second question, Beno ît , on the capital side, yes, indeed, the change in the policy and you highlighted actually all the particular parts of the change, so well spotted. The reason why we changed it is precisely the reason why you asked the question. It gives us indeed much more possibilities going forward to manage the capital, including M&A, organic growth, and remuneration of shareholders in a more suitable way. Let me translate what that means. First of all, in the past, ultimately, it started to become very mechanical.
You already highlighted the peer group, but also I would add to that the 15%, which actually does not allow us to give us a bit of freedom in terms of management of our balance sheets. SRTs do not make sense in that perspective. Also, the AT1 tier two does not make too much of sense. Therefore, we dropped that mechanical approach, including the mechanical approach of the peer group. That also means that yes, we will be amongst the better capitalized financial institutions. Yes, we will observe what our peers are doing, taking into account also regulatory changes. For instance, Basel IV impact, we do not know yet in full detail because we have given quite some guidance, which is not necessarily a given for all the peers. The peer group is now used as an indication of where we should be, not as a mechanical exercise.
The story about median and so on and so forth is gone. It is a judgment made by our board. What about then the dividend policy in that perspective? You asked, when is it 50%, when is it 65%? What you can learn from that is very simple. Previously, we called it at least, which I think still is a very good approach, but it unfortunately triggered the regulator to say, "Listen, when it's at least, then there is no possibility to bring in interim profits into your capital ratio," which is a little bit painful, and therefore we changed it. At least is now translated as a range starting from 50%, which is at least 50%.
On top of that, the 65% comes from when you look into what we did over the last years in terms of capital distribution, you take the regular dividends, you take all the surplus capital which we distributed, you take into account the share buyback, you take into account all the one-offs which we did, then we are at roughly 63%. The 65% is an indication that the good remuneration, I think we were amongst the betters in that perspective in our peer group, that it is concentrated also into our dividend policy going forward. The 65% in that perspective is a translation of the good remuneration of the past. When will it be 50%? When will it be 65? That is a decision which is going obviously to be taken by the board at its discretion, sorry. It is not mechanical.
They will take into account what are the growth opportunities, what are the macroeconomic positions, and so on and so forth. The capital optimization policies kick in there as well. Then last but not least, obviously, it is a good balance between capital optimization and also shareholder remuneration. It gives you much more freedom, and it allows us to be amongst indeed the well-remunerating institutions, better remunerating institutions in our context. By the way, in that perspective, also the return which we are generating will help us to go forward with the same policy. We generate between 200 basis points and, let's say, 275 basis points -300 basis points of capital before distribution every year again. Yes, I think at the minimum 13%, sorry. You also refer to the minimum 13%. How do we need to consider that?
You need to consider this as it is defined as just the minimum. It means that if you are going to drop below that 13%, then our board will take a decision how to replenish that. The replenishment is done at the pace that the board will decide, taking into account the parameters I just said. What are we in the economic environment? What is the geopolitical pressure? And so on and so forth. Let me add one more thing to that. The 13%, where does it come from? You know, if we fill up the AT1 and the Tier 2 buckets, our MDA level will stand at 10.8%. We have more than 2% safety buffer compared to that minimum, the MDA minimum for distribution of dividends.
That gives us a lot of comfort in defining it as a minimum threshold with flexibility I just defined. It gives the board a perfect possibility to manage all the things at the same time, that is, and growth and organic growth and acquisition and the good remuneration of shareholders in a non-mechanical way.
Great. Thank you very much.
The next question comes from the line of Sharath Kumar calling from Deutsche Bank. Please go ahead.
Good morning. Thank you for taking my questions. Just sticking on capital, would it be a fair way to interpret your 13% minimum as the possibility of holding an M&A buffer, say, around 50 basis points perennially given these opportunities do not come across consistently? In terms of just sticking again with capital, could you again quantify what are the kind of benefits that you're expecting from SRTs?
The second one is on loan growth, more on the sustainability, particularly in some of your CEE markets like Czech Republic. Thank you.
Thanks for your questions. Let me take the first one on capital. The 13%, as I just said on the previous question of Benoît, the 13% is the minimum. The minimum in that perspective is something which you really have to understand as a minimum. We do not explicitly have M&A buffers in that perspective. We do not qualify in a mechanical way. Listen, we are today at 14.5%. That means we have 1.5% delta with the minimum. That 1.5% is a buffer for M&A. That is not how it works. You need to consider it is, as I just said, we do have an absolute threshold of 13%.
If you're going to break through that for one or the other reason, then the board will take it in their consideration and at their concession how we are going to replenish that and by when. That's how you need to understand it. If we tomorrow have an acquisition possibility which will consume us 2% of capital, you know, then we'll drop through that ratio and the board will take that decision then, as I just said. It is not that the buffer is predefined as the delta between where we are today and the threshold of 13%. No, it is defined in a more flexible way.
The flexibility I explained on the previous question has been triggered by a lot of elements that is, amongst others, where we are in terms of profit generation, so capital generation, where we are with the environment where you live in, where our peers are, and so on and so forth, and the possibilities which we have on M&A. Okay, SRTs was the next question. Sorry, almost forgot. As I said, we are preparing to launch our inaugural SRT. Until now, we never used it because it did not make too much of sense given the fact that we were above 15% with our capital position. As of now, because we do not have that threshold of 15% anymore, it does make sense to optimize our balance sheet and to optimize the capital usage and the capital consumption. Yes, we will do an SRT going forward.
The first one is currently being prepared and will be launched for approval to the ECB. We hope to again launch it in the course of the fourth quarter of this year. The approval process is pretty long. We'll see how long it takes in reality. How much we are going to do in that perspective, we don't disclose that detail. It is an optimization of our capital structure. We have no intention to massively use SRTs going forward. The reason is very obvious. We don't need it. We do generate, given our profitability of roughly, let me round the number, 280 basis points -300 basis points of capital every year before distribution. SRTs are an optimization, not a tool in itself to absolutely generate capital.
Good morning, Sharath . As far as your second question is concerned relative to loan growth.
Indeed, as you have seen, we generated over the first quarter an organic growth of 2.4%. This is to be compared with the 4%, of course, that we set as a guidance for the full year. Please do not extrapolate that. This would be, of course, far exaggerated. What we see is actually strong loan growth in all the countries. Basically, both in the corporate business as also in the retail business, the mortgage loan growth overall is 1.5% out of that. A significant part is also on the corporate side. We expect that to continue, however, not at the same pace. Secondly, in terms of what you also should take into account, that is, in terms of the margins for the loan growth, we see that margins somewhat come under pressure, particularly in Belgium on the mortgage portfolio, where the margins are still below the backbook.
We also see some pressure on the corporate loan growth, basically the margins on the corporate loans. In the Czech Republic, it is a bit the opposite in the sense that we see good growth in the mortgage business. Margins are somewhat under pressure, but well above the backbook. Also on the corporate side, good growth at very decent margins. In international markets, mortgage business is growing more than strong, particularly in Bulgaria. Margins are somewhat still subdued on the corporate side. We also see quite nice growth at margins that are really decent. That as far as the loan growth is concerned.
Thank you.
The next question comes from the line of Julia Mewster calling from Morgan Stanley. Please go ahead.
Yes, hi. Good morning. I have two questions as well. The first one on the synergies, actually, on the deal.
They seem quite high to me, also because the bank you are buying has a lower cost income than your local bank. What gives you confidence on achieving those? Secondly, you've been quite open about talking about the potential to acquire the Belgian insurance Ethias. I was wondering if you have any update on that. Since you're on the topic, if there is any other file on your radar in the short term, if you could flag it. Thank you.
Good morning, Julia. As far as your first question is concerned about the synergies, basically, we estimate synergies to come in at EUR 75 million pre-tax as of 2028. Obviously, after tax, this is roughly EUR 53 million. Basically, the synergies are covered by the fact that we see strong cost synergies.
When you look at the geographical overlap, which is 100%, this definitely offers quite important cost synergies. Also, quite important funding synergies, which are as such given. Of course, the remainder is related, but there we are conservative to revenue synergies. We feel comfortable. As Johan has been highlighting, this is not the first time that we are integrating, of course, an acquisition. We have always been able to deliver on our plan and our business case. Also this time, we feel relatively comfortable, or we feel comfortable, I would say, of achieving those synergies.
Also, good morning from my side, Julia. Your second question regarding Ethias. Yes, indeed, we are still very interested in that potential acquisition. The Ethias file, as you know, might generate indeed for KBC quite some extra surpluses on the insurance side.
We are more or less of the same size, both on the life and the non-life side. It would add tremendous value. The file as such, which I think I highlighted already earlier, is today not in an urgent, let's call it a rush state to sell. The Belgian government, which was triggered by some press articles, is no longer under pressure to find a substantial amount of monies to finance, among others, the defense side. That urgency is not on the table, I would say, between brackets anymore. Therefore, I think the government has some time to prepare that launch because strategically, over the longer run, Belgian state is in the hands of the Belgian state. You have several assets which you can question why it is still there.
Therefore, I think that regarding those assets, amongst others, Ethias, a final outcome of that preparation will be there in the course of 2026. My guess, positioning of the Belgian state early 2026. Clearly, my answer is yes, we will be interested in that file. We have been prepared for it. Also now, given the fact that 365 is concluded, we can now hopefully focus on other M&A acquisitions. If it is possible that Ethias is one of them, we definitely will be involved.
Thanks. Is there anything else on your table at the moment for 2025?
For 2025, in the short term of the size of Ethias or similar sizes at this stage, let me say it differently. Today, I have nothing concretely. As you know, we also flagged our interest in assets in Central Europe in the recent past.
Until now, they are not for sale. When it will happen, we clearly are interested in further expanding our activities in our core countries. We include Romania to that and Ethias we just talked about. Concretely, today on my desk and my colleagues' desks of the M&A department, I have no concrete files of this size on the table today.
Thank you.
At least not in negotiation. I mean, in preparation, we have plenty of them, but that's what you understood.
Yes, thank you.
The next question comes from the line of Kyri Viajarza calling from HSBC. Please go ahead.
Yes, good morning, everyone. A couple of questions on my side, both on Slovakia, if I could. Firstly, just a follow-up there. What specifically the breakdown of that EUR 75 million between cost and revenue synergy assumptions?
I just want to get a feel for what you're assuming in terms of, for instance, the bank assurance opportunity. Because it sounds like the bulk of it's coming from cost and funding benefits rather than any kind of big uplift in cross-sell. Secondly, it sounds like 365 is very much kind of the challenger bank, whereas your KBC Slovakia ČSOB is more the kind of traditional incumbent bank. How should we think about the customer positioning, the cultural fit of putting those two very different banking models together? Thank you.
Good morning, Kyri. I will take the first question. We do not disclose, of course, the exact numbers, but I think your assumption is correct. The bulk of the synergies will come on the one hand on the cost side and on the other hand on the funding side.
As usual, we have been relatively conservative on the revenue side.
Going back on the second part of your question, Kyri, the title of bank and why it is so interesting for us. There are several reasons it is super interesting for us. First of all, the bank, given its market share and its positioning, brings us to the number three position in terms of net loans, among others. The bank itself, you called it a challenger bank. I do not know what your definition is of challenger bank. Let me give you mine. That is the one who chases, definitely price-driven, all the stronger incumbents. That is not really the profile of 365.bank. They were not a price breaker. In this perspective, they are more or less in line with what we do in our, for instance, deposit gathering.
What is definitely true for 365.bank, it is actually driven by two components. You have an agreement with Slovak Post where you do have 1,400 postal offices which have a particular type of clients, as you can imagine. This is a very strong one in terms of deposit gathering without being a price break. A second thing is that 365.bank, let us call it the 365 part of the bank. That is a completely different bank, and that is something which we like a lot. They have been doing a tremendous job on the digital side. Be aware that roughly around the number now, roughly 58%-60% of the clients of 365.b ank, of the 365 part of the bank, sorry, roughly 60% of them are digital customers and digital onboarded customers.
It brings them very close to what we do in KBC, what we do in Slovakia with Kate and with KBC. In that perspective, it is a perfect match with what we do. Taking all this into account, the institution 365 is perfectly integrable. As Bartel just said, in our synergies, we do not assume big numbers. On the contrary, we intrinsically never do on the revenue side, but there is quite significant potential on the revenue side once the KBC model is in place, both on the bank and on the insurance side. We can build on the strength of 365 also on the digital side.
That's very helpful. Thank you, guys.
The next question comes from the line of Farquhar Murray calling from Autonomous. Please go ahead.
Morning, all. Just two questions, if I may.
Firstly, coming back to 365.b ank, I just wondered if you could give us a sense of the actual nature of the contractual agreement with the postal bank in terms of how long that exclusive distribution agreement lasts and whether there might be a renewal point on it, and maybe more broadly, how it fits into your strategy for the bank further out. Secondly, just coming back to the capital return policy, possibly a little bit of a semantic question, but if I look at the 50%-65% payout ratio, should I think of that as purely dividend, or does it actually pick up buybacks? I'm just wondering how I should think about the mix between dividends and buybacks going forward and whether buybacks are now truly exceptional. Thanks.
Okay, thank you very much for your question.
As far as the contract is concerned with the Slovak Post, this has been recently extended to at least 2036. From that perspective, this is quite long. Basically, there is an opportunity to take out or to terminate the contract, however, with a three-year pre-notification on our side. From that perspective, I think it's pretty well covered. You've also seen that the Post has also a small share in the capital, and that is, of course, confirming, of course, also the strategic alliance that 365.bank has with the Slovak Post.
Coming back to your second question, Farquhar, the 50%-65% dividend range and then the form of that dividend range, we do not exclude anything whatsoever in that perspective. The dividend payout can be in cash, can be in the form of a share buyback, and so on and so forth.
What and how that will be each and every time considered by our board, they will take those decisions and on the payout and on the form of that payout. Just to give you an idea, share buyback now, what we did with the acquisition of 365.bank, that is more EPS accretive than, for instance, a share buyback. If opportunities are there for doing acquisitions with EPS accretion as we have seen it of the level of 365, then a share buyback will not follow.
Thanks a lot.
The next question comes from the line of Tarik El Mejjad calling from BofA. Please go ahead.
Hi, good morning, everyone. Just a couple of questions on my side as well. First, on the capital, I mean, thanks, God, you dropped this median of benchmark. That is good news.
Now, I'm not sure the new dividend policy is that clear, to be fair. I mean, minimum of 13%, that sounds to me very low, and it doesn't square with your main as well criteria to remain among the highest capitalized banks. I mean, 13% is the new 10 of years ago, and 220 basis points buffer to MDA sounds as well quite low. How do we think, should we think about a real minimum and just a backstop, I would say, as you describe it, minimum? Then looking at your consensus versus distribution, clearly, market was hoping for a top-up buyback on top of 63% payout in the next two years.
Let's say if you build capital faster and you've highlighted all the moving parts, is there still a possibility to do more distribution, not to convert too much from your minimum CET1 of 13% or 14%? If you can remind us what are the size of these moving parts you highlighted, i.e., the dividend upstream, the DTA usage on the exit of Ireland, SRT for this year. My second question is on Slovakia. I mean, yeah, it puts you in a top three position in the country, but this is not the best quality bank, I guess. Cost of risk is quite high versus the quality you have in your existing footprint. Is that the kind of profile of banks you're looking for where you see a lot of upside to improve profitability and then extract the synergies?
When I look at the multiples, it looks a bit pricey, though. Happy to hear what you say on that. Thank you very much.
Thanks for your questions, Tarik. Let me come back to definitely the first part of the question. What is the 13%? You called it, is it a kind of a backstop? I do not know what your definition is of backstop, of course, but the 13% is a minimum. I explained that earlier. It means a minimum is a minimum. If you go through it, then you will take a position how to replenish. That is how you should see it. Why we qualified, how we qualified the 13%? We qualified it as something which we feel comfortable with when you take into consideration our 10.80% OCR level, MDA level, the threshold for dividend payments.
We have more than 2% buffer to that. That gives us comfort. The 2% is derived on the basis of our risk profile, our stress test, and so on and so forth. It gives us quite a lot of comfort with the 13% and also the flexibility which we give around the 13%. In terms of how we are going to deal with that, in terms of how we are going to deal with all the monies which are above, it comes back to the definition of amongst the better capitalized financial institutions. As I said, it is no longer dogmatic, a median, which gives you zero flexibility. It gives you zero flexibility to manage your position, to manage your balance sheet, to manage your M&A ambitions, and so on and so forth.
We left that, and I understood that you were very grateful for that. I agree with you. The flexibility now gives us much more possibility. In reality, when you generate roughly 200 basis points -300 basis points of capital before distribution every year, you will for sure have also made that calculation that if we do acquisitions, we will go back and forth with our capital ratios between the level of 13% and whatever it may be. Also, when we, and that is the second part of your question, what happens if we do generate a lot of capital, we do not consume it in acquisitions going forward, then the board will take a decision what we are going to do with that amount of capital, which we cannot make at work, nor via organic growth, nor via organic growth is there anyway, but via M&A.
Of course, they will take a decision in the different possibilities they have. That is, distribute the money via cash dividend, distribute the money via share buyback, and so on and so forth. Correct what you said. Indeed, in the short term, clearly, you have an outlook of improvements of the current capital position, amongst others, the DTA, which comes in in the course of the third quarter of this year. We divested Ireland. Everything is done. Now we are bound to an Irish process from the Irish, one of the other departments of the Irish government. That is just an administrative process. We are pretty sure that we will get that roughly 20 basis points over the course of the third quarter. The SRTs will start to kick in as of quarter four. You are right. We will improve our capital position.
Come back to the question of Julia. By then, we have more insight on what is going to happen with the assets in the hands of the Belgian government. That will, of course, trigger some capital impact. We will have by then also the approval of the authorities of the ECB regarding the Slovakian file. Therefore, it is what I call active capital management, and all possibilities are there. Straightforward again, if it is surplus capital, which one day the board decides to distribute because there are no possibilities, it can have any shape or form. For good understanding, the definition of surplus capital in this perspective is something else than the 15%. Who takes the second one, Bartel, you or me? Okay. Bartel.
Good morning, Tarik.
As far as your second question is concerned, concerning quality of 365, first of all, when you look at 365, you will have noticed that they have been significantly building down their corporate portfolio, and they have been refocusing mainly on their mortgage portfolio. It has become predominantly a retail bank with a mortgage portfolio of good quality. The corporate portfolio has been built down significantly with 24% over the past three years. Secondly, they, of course, also have a consumer finance book, which is profitable. We, obviously, during the due diligence, looked into the quality of the loan book. In parts, there has been some disposal of, we have been taking out, certainly on the corporate side, some of the assets in order to bring them in line with our risk appetite.
Going forward, this is a bank that will mainly grow in the mortgage business, in consumer finance. The higher NPL ratios, of course, are due to the fact that you have proportionally higher consumer finance, which is indeed always at a higher NPL, but as such is manageable. Going forward, we believe that this is a strong asset in terms of the pricing that you highlighted as indicated. We, obviously, take into account in the pricing the evaluation of the future cash flows that could be generated from this entity. On top of that, you also need to take into account the synergies. We never pay out the synergies or the full amount of the synergies. These are synergies that we will continue to generate going forward.
When you look indeed at the return on investment that comes in at 16%, the return on equity in 2028 of both entities combined will move towards the 15%. Last but not least, the entity will also be earnings per share accretive of, as Johan has been highlighting, 1%-2% over the first two years, but more than 3% as of 2028. These are numbers that I think demonstrate that the price is right and that the quality is not poor.
If I can add to that, Tarik, because you also added a forward-looking question to the last part of what Bartel just explained, how we're looking for assets that are of quality inferior to what we currently produce as KBC.
That makes the exercise or the return on investment mostly at a time, definitely when the price is in line with the quality of the asset. That makes, of course, the return on investment potentially higher. KBC has a track record indeed of bringing in assets which have a performance which is lower than our performance. The track record is that we are able to do the integration and then afterwards have the same performance or a higher performance than what we had before or than what we have at KBC. The answer is yes. It does not matter. As long as the price is right, we will be able to grow the company according to the standards of KBC. As a proof, I would like to refer to the previous acquisitions which we have done in the past where we delivered that promise.
Thank you.
If I can just follow up on the capital bit. In your thinking about your position of capital, do you integrate as well the phase-in, the EUR 1.6 billion left between 2026 and 2033? And how would that, you think, come through your balance sheet? Is it early part of the range or more towards 2033? Because that is left around 25 basis points of capital, so impact on Basel IV, right? X output floor.
So, the EUR 1.6 billion is part of the capital ratio, of course. So, we took that fully into account. That is the 37 basis points. That is spread over the period between 2026 and 2032. It is a pretty long range. This is static. It means it is not taking into account any kind of management actions. It is pretty on the conservative side. It is spread over the period. It is not necessarily all in 2026.
So, it's a more, I mean, it's super conservative and management actions are not included. I can assure you there will be management actions.
Great. Thank you very much.
The next question comes from the line of Johan Ekblom from UBS. Please go ahead.
Thank you. Just wanted to come back to the capital, I'm afraid. Just looking at the capital ratios you're discussing now, I mean, if we look across Europe at a 14% performer for the transaction, that looks to me to be average at best. And 13% would put you firmly in the bottom quartile of comparable peers. So, even though you do not have the direct link to the peer group, you do talk, or you made it very clear that it's still a relative game. So, how does that feel? Should we think of there as being no excess?
I guess it goes back to Tarik's question on whether the 13% is just the backstop. I'm just trying to gauge when the board sits down at the end of this year, how important is the thinking around the relative that we had of last year, which I think from memory you said it was slightly north of 15% post Basel IV day one, it's maybe mid-14s or something like that, right? Is that still how we should think about it? You just have more flexibility now to dip down towards the 13% if opportunities for faster organic or inorganic growth comes. Maybe related on the capital, have you quantified, I haven't done the calculation myself yet, just how much additional tier one capital and tier two you expect to issue and if there's anything on timing related to that?
Then my second question is just a super quick one on 365. You said that they've been running down the corporate loan book and you've kind of gone through that. Should we expect the corporate loan book to remain in runoff? Or are you happy with the corporate loan book they have today?
Thanks, Johan, for your questions. Let me answer the first one on capital. First of all, I understand your question, but for good understanding, let's reset the mindset. There's a constant mix-up between the 15% and the 14% of today. Pro forma, it's indeed 14%. Be aware, the 14%, which the pro forma is numbers after the approval of the acquisition of 365, is under Basel IV, whereas the 15% is under Basel III. Let me translate what I just said. The 15% of yesterday is actually 14.6% today.
In that 14.6% is included the full deduction of Basel IV, not only first-time application, but also what Tarik just asked, the impact of Basel going forward in a very conservative way, which is fair. When we make peer comparison today, we only have the first-time application. If you compare this with your peer group, you said, "Listen, you're in the bottom part or you're in the last quartile or whatever quartile," then it is on the basis of first-time application, which is less conservative from what we position today. Taking into account peer comparison, it is no longer strict. We have the median of a peer group, full stop. It is not at all.
It is giving where we are, what our position is, how we compare to a series of other banks, and under Basel IV, full integration of Basel IV, be it the first-time application plus the 26%, 20%, 32% position. That is what we take into account. Clarity on that one, we will get in August when everybody's positioning is on the EBA stress test. Then those numbers probably will get public and we have a better insight. Today, we feel super comfortable with our position on capital, the 14.5%, even when we include the pro forma impact of 50 basis points on 365. We still feel comfortable with our capital position, even taking into account the position of peers. In terms of AT1 and tier twos, yes, of course, we are going to fill those buckets up. And those buckets filled up is roughly 30 basis points each.
That is, if you translate that in amount, that is roughly EUR 400 million per issue, AT1 and Tier 2, which we will conduct in the course of on the right momentum, so in the course of 2025. Then just on a very short answer on 365, the corporate loan book, which is still there, we will continue to grow. That is the ambition of the merchant entity to be a full-fledged bank in Slovakia that is not only a retail. Bartel had given you full explanation on that. It is retail and corporate banking. With the part which is still in the books, roughly EUR 430 million, we feel super fine. The quality in that perspective has been assessed according to the standards of KBC. We will grow the combined entity on all cylinders in that perspective.
Thank you.
The next question comes from the line of Anke Reingen calling from RBC. Please go ahead.
Yeah, thank you for taking my question. And apologies. It's again about the capital. But just imagine we get to year-end and you assess your capital position. So, there's the 50%-65% payout ratio. And then is there room to pay out above that 65%? And where would you assess to go to? I guess the 13% is relevant if you do an acquisition. But would the additional excess distribution then be a function of you wanting to stay above peers? I'm sorry, I understand the whole mechanics change, but obviously, I want to try to model your plans. And then just a small question. I can't find how much you actually accrued in the first quarter, if it's 50% or 65%. Thank you very much.
Thanks for your questions, Anke. The last one is very simple. 50% accrued in this quarter. Coming back to the first part of your question, the 50%-65% is the range in which the dividend will be defined. It is a range. Once again, the reference which we made to all the dividend payments in the past was bringing us to 63% average. In that perspective, all share buybacks, all surplus capital distribution, and so on and so forth are captured within that 50%-65%. Your question was very explicit. Give me some guidance so I can model the mindset of your board. This is a brief translation of what you asked. I can, unfortunately, not give you that model. Listen, the flexibility, which is now defined, is in such a way that the board has all possibilities.
The guidance which you clearly give is dividend is between 50% to 65%, and the 65% is actually an umbrella which covers all the payments which we did in the past, including the surplus capital. That should give you comfort. The second thing is, is it excluding that the board will give you more than 65%? The answer is no. Is the board going to do that? I cannot give you the answer because it will be decided at the discretion of the board, taking into specific elements. The elements are very straightforward. Where are we with our capital deployment? Sorry, with our capital position? What is the ratio? How do we forecast the economic growth, the economic circumstance which will trigger our profit contribution and therefore our capital generation? What is on the table on M&A? Is there nothing on the table?
Is there in the foreseeable future nothing on the table? You will generate extra capital which you cannot make at work, and the board will take a decision. Will that lead you to more than 65%? That is possible. It is not excluded. You have much more flexibility. The flexibility is needed. Why? Because otherwise, it does not make sense to have SRTs on your plate and to have also the AT1 and tier two possibilities filled up. This model or this capital deployment policy gives the board much more flexibility to run in a flexible way, taking into account the dynamics of the market which we operate in, the possibilities on the M&A side, and the remuneration of the shareholders.
To give you a little bit of certainty, therefore, we give you the 50% and the 65%, and the reference point of the 13% as the absolute minimum. This is how you should see it, and that is how you should model it. The answer straightforward to your question is, is it possible to go beyond 65%? Straightforward, the answer is yes. Is it straightforward and possible to go below 13%? No, but it is not the intention, of course. If there are circumstances we do see, then they will consider the replenishment, and then dividend policy will be applied according to that.
Okay. Thank you very much.
The next question comes from the line of Flora Okoth calling from Barclays. Please go ahead.
Yes, thank you.
The first question I wanted to ask you is the outlook for 2027, which you've reiterated today despite the announced acquisition. Just to check if that is because basically the benefit of this acquisition into 2027 is being offset by the fill-up of the AT1 and Tier 2 buckets here. Just a clarification on this, actually, could you just confirm if the AT1 cost goes below the net income while the Tier 2 would go into the NII? Another question on M&A. Only two quick ones on this. The first is, could you tell us what is the main criterion you're going to consider in any M&A deal? Is it the return on investment? If it is, what is the limit in terms of return on investment that you wouldn't consider an M&A deal if it's below?
I'm just trying to reconcile the dots here because it looks like you want to potentially prepare the bank for additional M&A, but this deal is going to close near the end of this year. You have potentially Ethias if it happens early next year. Would you still have room for additional M&A in the next 12-18 months if those two deals happen? Thank you.
Good morning, Flora. First of all, to be absolutely clear, we will update, of course, our 2027 guidance with the first quarter results of next year. This has not been included in the guidance, so that will be an update. I think your assumption is not correct. I mean, this is not going to compensate for potential or for making up the guidance as we gave you. You should not take that into account.
Second, your second question was related to the AT1 and Tier 2. As Johan has been highlighting, we have currently a 64 basis point shortfall. Thirty-three is going to be covered through AT1, which indeed does not go through NII or the P&L, but through dividend payments. Basically, the Tier 2 is indeed going through NII, and that is 31 basis points.
Flora, for your second question, what are the drivers when we do acquisitions? ROE as such is not priority number one in terms of driver. The assessment which we make is more or less always the same. First of all, we look from a strategic perspective. That is, it needs to be a bank or a shares company in essence in the countries which we define as core country.
Therefore, the countries where we are present, we added to that Romania. In the next step, we will, so within that framework, we will then look at the possibilities to generate return on investment or return on equity. You can translate the latter as return on risk-adjusted capital. Therefore, we do consider indeed what you actually highlighted, that in the medium term, we need to be able to generate the returns on the risk-adjusted capital, which we are used to in the group. If I would use a proxy for that, the return on equity for KBC has been north of 50% or more in the last, what is it, 10 years. That is the driver which we aim for. There is also a part of the answer which I gave to an earlier question. What is the driver?
Do we prefer to have poor quality or higher quality acquisitions? It all boils down to what we can make of it. In that perspective, the track record shows quite clearly that we are able to realize those returns once we put the KBC machine into the integration modus. Regarding the capital position which we have by year-end, it will be definitely, and that is what we already guided for in the presentation itself. The capital position which we have today, 14.5%, can be enhanced going forward by the integration of the profits which we make on the bank insurance side, first place, second place, because of the optimization techniques which we can apply. You deduct the 50 basis point proforma for the acquisition of 365.
You come to the conclusion that we have substantial capital left over, for instance, for acquisitions of, amongst others, potential candidate Ethias. Even when you would deduct the impact of Ethias, we still are superior to the thresholds which have been defined, amongst others, the 13%. Let's not forget, and we're quite confident about this, we are also able to apply the Danish compromise when we do acquisitions of insurance companies within the group.
Thank you. Just to follow up on that last answer, please. I meant not in terms of capital, but in terms of the management focus on M&A. If you already have two deals going through, do you have room to focus on a third one, even if you have capital available for that?
The answer is yes. It depends on which asset you're talking about.
For instance, if, and let's be careful, I mean, does it not make to sound that we already acquired Ethias ? That's not the case at all. That is not even, as I said on an earlier question, that is, at this instance, not a file on the table, priority will be, or the focus will be probably in the course of 2026. Even when Ethias would be in our books and I deduct the impact of that on capital, we still have significant surplus compared even with a 13% minimum. Compared with the MDA level, we still have a significant buffer to that as well. The answer straightforward to the question is yes, we have buffer.
Okay. Excellent. Thank you.
The last questions come from Amit Ranjan calling from J.P. Morgan. Please go ahead.
Yes, hi.
Good morning, and thank you for taking my questions. The first one is on ECLs. You have reduced outstanding ECL for geopolitical and macroeconomic uncertainties. Can you talk about the thinking here and if you have built any impact in your models for tariffs? The second one is on NII. If you could remind us of the NII sensitivity, please, to check and Eurorate. You talked about the shift from term into savings deposits. Is that a trend that you expect to continue? What assumptions have you built in your NII guidance for that? Thank you.
Good morning, Amit. As far as the ECL, the macroeconomic buffer is concerned, yes, we indeed released EUR 45 million, which might be counterintuitive. Today, we still have EUR 72 million in the macroeconomic buffer.
The reason why we released is very simply we already had taken, so as you might know, we moved indeed to the model approach, which means we wanted to have a less subjective approach. Nevertheless, back in November last year, we intervened with the elections of Trump on the conservation buffers. What we now would like to do, what we simply did is we released that conservative approach to allow the model to fully operate. Now, as you know, that means most of the features of the model are driven by parameters that are delivered by Eurostat. We simulated those because there is always a two-month delay in the Eurostat figures. We came to the conclusion that indeed the EUR 45 million release was still appropriate. As far as the NII sensitivity is concerned, we already guided last time, but also we maintain that guidance now.
What we guide is that basically a 25 basis points drop on the short end of the curve would lead to an impact of roughly EUR 50 million. We still expect a continuous shift of the term deposits towards the saving accounts for the very simple reason that also the policy rates are expected to continue to drop. When policy rates drop, people are less intended to maintain or to block their funds for a longer time. Therefore, we indeed expect a continuation of that shift from term deposits to saving accounts, as we already see today, because when term deposits come to maturity, we see that actually only 38% of what matures is reinvested in term deposits, and actually 40% goes back to KAZA and the remainder mainly to the asset management business.
Thank you.
Can I please, Anke, can I come back to your question? Because Kurt pointed out to me where the confusion perhaps comes from. It was on the accrual of dividend. I confirm what I just said. We do have 50% accrual of KBC Group level profits. You need to be aware, if you look, and therefore potentially your question, if you look at the detail in the back on page 18, and you make the calculation of what we accrued and how much profit we have in the numbers, then, of course, it is not 50%, but it is 61.5%. The reason why this is is that the accrual is done on the group level, 50%, and the profit which is in there given the Danish compromise is only the bank upstreaming. The insurance upstreaming, it is a technical one.
The insurance upstreaming of profit is only quarter two and quarter four. Therefore, it might look that the accrual is 60% or 61.5%, to be precise. Just want to give the clarification, but intrinsically, what we are accruing at group level is 50%.
All right. There are no further questions, so I will hand you back to Mr. De Baenst to conclude today's conference. Thank you.
All right. This sums it up for this call. I would like to thank you for your attendance and enjoy the rest of the day. Bye-bye.
Thank you for joining today's call. You may now disconnect.