Kbc Group Sa Unsp/Adr

Hello and welcome to the KBC Group Earnings Release First Quarter 2024. My name is Natalie and I will be your coordinator for today's event. Please note this call is being recorded and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your questions. If you require assistance at any point, please press star zero and you'll be connected to an operator. I will now hand you over to your host, Kurt De Baerts, General Manager, Investor Relations, to begin today's conference. Thank you.

Thank you, operator. A very good morning to all of you from the headquarters of KBC in rainy Brussels, and welcome to the KBC conference call. Today is Thursday, May the 16th, 2024, and we are hosting the conference call of the first quarter results of KBC. As usual, we have Johan Tijs, Group CEO, with us, as well as Luc Poplier, Group CFO, and they will both elaborate on results and add some additional insight. As such, it's my pleasure to give the floor to our CEO, Johan Tijs, who will quickly run you through the presentations.

Thank you very much, Kirsten. Also from my side, a warm welcome to the announcement of the first quarter results 2024. And as usual, we'll start with the key takeaways. And let me begin immediately with the announcement of an excellent 506 million euro net results for the first quarter 2024. Well, one of the reasons why I say it's an excellent result is that it is heavily distorted by bank taxes, which are As you all know, mainly booked full-year bank taxes are mainly booked in the first quarter. That is a whopping €518 million. And if you would correct that, then indeed, this is an excellent quarter, which is even better than what we have seen in the previous quarters. And it's perfectly aligned what we saw with last year's quarter. Let me translate a little bit differently. It's a return on equity of 14%-ish. If you equally spread the bank taxes, But it's also quite clear that if you look at the results, it's once again approved that KBC Group is much more than a net interest income bank. Diversification of our results is, again, stellar in this quarter. As a matter of fact, the bank insurance franchise has been firing on all its cylinders. We have seen a very good evolution of our net interest income. We have seen growth on our customer loans and on our customer deposits. We have seen a strong growth on our fee and commission income. We have seen a strong growth on the insurance side, both non-life and life. We have seen very limited net impairments on our loans, and we have seen a decline, which is positive news, on our cost side. So in that perspective, it's no surprise that our capital position has grown to 15.2%. but because we have decided to pay out a surplus capital of 280 million euro roughly, which will be a 0.70 euro dividend per share, and that 15.2 is resulting after the payout, after the cash payout, into a common equity tier one ratio fully loaded 14.93%. Also on the liquidity side, we stand super strong with ratios which are north substantially north of the regulatory targets. Let me highlight the most important one. The short-term LCR stands at 162%. Also, the insurance company, 202% of Solvency II ratio is extremely well. So, as a consequence, I will go to the dividend policy immediately on the next page. We have indeed decided to execute what was announced in our capital deployment plan 2023. That is, the dividends which already have been concluded in total €4.15 per share, but also the amount above the 15% threshold. After discussion and decision by our board, they have decided to bring an extraordinary interim dividend of €0.70 per share to the shareholders, and that will be paid out on the 29th of May. This brings the total cash payout ratio for KBC Group at 59%, excluding the effect of the share buyback, which, as you know, is still running. In this perspective, we also have the discussion about the dividend policy for 2024. Well, that remains unchanged, which means that the payout ratio policy dividend and 81 coupon will stand at at least 50% of the consolidated profit for the accounting year, and we will continue to pay an interim dividend of €1 per share in November as an advance on the total dividend. Regarding the capital deployment, also that one remains unchanged. That means that the definition of the surplus capital is unchanged and remains 15% of the CET1 ratio. And the surplus capital, what's going to happen with that is going to be a discretionary decision by our board in the same period of the year 2025, and that will be then either distributed in the form of a, if the decision is taken to be a distribution, either in the form of a share-by-back, a cash dividend, or a combination of both. Regarding the capital deployment, we also give you further information that given the introduction of Basel IV, where we already have disclosed the impacts at the end of quarter four last year. That impact and the introduction of Basel IV will also trigger a review of the dividend policy and the capital deployment, including the threshold in the course of 2025, and that will be announced more or less in the same period as today, but then next year. On the next slide, you can find a couple of elements which are quite crucial for the operational activities of KBC Group. The split up between the banking and insurance profit is more than the average, or let's call it the through-the-cycle effect. We have now 26% of our profit coming from the insurance side, but it's mainly driven by the bank taxes, obviously, which are booked in the first quarter. In terms of the operational activities, the impact of our AI-driven assistant, service assistant to our customers, Kate, well, that impact is growing significantly. It goes, as I said before, much faster than we originally anticipated, massively picked up by our customers. We have now 4.5 million users across the group, which we are using Kate on a regular basis, and we have more than 41 million interactions between customers our customers and Kate, which means that more or less, and this is definitely true on the Belgian level, more or less 45% of all interactions between KBC's customers and KBC is now done via Kate. And that is after an introduction three years ago. I think this is a very remarkable result. Kate becomes also more and more smarter, which means that the autonomy, she is able to answer all the questions of our customers without any interactions. of our people, so it means that 41 million conversations are picked up by Kate autonomously to 65% of the total, which means two-thirds of all questions are provided solution for by Kate without any interaction from somebody of the back office, which ultimately generates productivity gains, as you can imagine. The other way around, when Kate addresses our customers on different elements, amongst others product-oriented approaches, well, we do see a... quite significant uptick there in terms of sales, but also in terms of contact ratios. So 16% of all the signals which have been sent out by Cade are picked up by our customers and are translated into an ever-increasing sale. So also in the first quarter, we had more than 30,000, as a matter of fact, more than 32,000 sales extra on top of the normal sales of our branches and our direct channels. And that is a 16% contact to contract ratio, which is quite significant. By the way, over the last 12 months, Kate concluded 85,000 sales in total. Going to the next page where you see the different building blocks of our net result. Well, the most interesting part of that is the split up between the revenues net interest income, so interest bearing, and all the others. Today, KPC stands at a split of roughly 50-50. So, as a matter of fact, 50.5% is related to net interest income and all the rest is then related to insurance and asset management and business, which means, indeed, there's a very diversified income and less vulnerable to fluctuations on the interest side. Looking at the exceptional items, well, in this quarter, we have... roughly 69 million euro of exceptionals, which is mainly driven by extra taxes, temporary taxes on the Hungarian demand. For the rest, we have a couple of smaller uptakes linked to Raiffeisen and linked to the euro adoption in Bulgaria. In total, before taxes, 76 million euro, after taxes, 69 million euro. Let me now go into the next slide. Sorry, it's also related to a couple of things which are linked to sustainability and then our digitization position, which are then judged by third parties. As you can see, KBC is a frontrunner in many aspects, but I think you guys are much more interested on the details of our income line rather than on the number of awards which we are winning. So let me go immediately into the net interest income, and that is totaling now $1,369,000. million euro, which is an increase of 1% on the quarter and 3% on the year, which is a clear sign of a further increasing reinvestment yield. So the transformation result, as we call it, is indeed picking up positively. This is driven by a couple of things. Let's face it, two things. First of all, loan volume growth is up 4% on the year, 1% on the quarter, which is excellent news. And it's underpinning here, indeed, what we guided for, at least 3% growth. So we are perfectly in line with that guidance. In terms of the margin, the commercial margins on the lending business, well, there is clear pressure on lending margins in our different franchises. So it depends a little bit from country to country. But it's quite clear that the general trend is that there is a downward push on those lending margins, which brings also the lending income slightly down compared to what it was, for instance, a quarter ago, despite volume increases. In terms of the NIM that is increasing with nine basis points, it now stands at 208 basis points. This is a translation of the impact of the different elements. Be aware that the NIM is calculated only for the banking business. And the banking business, as you can see in the graph on the left side of your slide, is increasing by €13 million. So it is also taking into account only that, not all the other effects. One of the offsetting effects in the net interest income is linked to the negative FX effect. So we have an €11 million delta compared to previous quarter and the number of days, which is a minus €8 million. I always find it funny that they can have such an impact, but it clearly shows that we are using every day to produce what we have to produce. So if you take those negative elements into account, adding the temporary effect of the inflation link bonds, which have a negative quarter on quarter minus 26 million euro, then in total, this sums up 45 million euro, which is distorting the total net interest income in a kind of, let's call it one of manna. In terms of the growth of the deposit base, well, the deposit base is growing 1% on the quarter and 1% as well on the year. And that is good, given the strong competition, which is ongoing in many of our countries. In order to see what the total effect is, I go to the next slide where you have a nice overview of the total evolution of core customer money. So we set aside the FX impact. which is quite significant. This is mainly due to the depreciation of the Czech RUNA and the Hungarian foreign. And of course, also we take into account the foreign branches, in fact, on the deposit side, where we had major shifts from current account saving accounts to term deposits. And that is, in this perspective, mostly of temporary kind and very volatile. For that reason, we take them out of the picture. If you look at the core monies, then we see a shift of current account saving accounts to term deposits, which is in total 3.5 billion shifting. And this is an expression of the strong competition, which is ongoing in several countries. This is still in line with our guidance, but clearly to the higher end. And as a consequence also of that element, we do see that as a downward pressure on the guidance which we have given. On the other hand, it's clear to see that the total evolution of our core customer's deposit is 2 billion positive. And that is underpinned by a strong increase, again, of our mutual fund business, 1.9 billion extra, which is extremely strong, definitely, also when you take into account what has already happened last year, even then, is even an improvement. So all in all, we do see shifts. from current accounts, saving accounts, towards term deposits, true in most countries, and this is on the higher end of our range. We do expect, and for that reason, we don't change our guidance. It is a flawed guidance on the net interest income, as we already explained at the end of last year. We are perfectly in line with that guidance, be it that we will be somewhere between 5.4 billion, 5.5 billion, rather than towards the tail end of that guidance, 5.3 billion. So let me immediately shift to what I already referred to, that is the fee and commission income. Well, the fee and commission income was up 14 million euro, which is a quite strong number, definitely after the stellar results of last year. But this is driven by two things. First of all, the strong performance of the assets under management via the financial markets, they were up 14 billion on the quarter and 41 billion on the year. This is, of course, a very strong number. As I said, it's market performance driven, but what is also quite crucial, that is the net sales. We had 1.9 billion net sales extra in quarter one of this year, which is even better than the result of last year, which was a record result. So indeed, our investment products machine has been firing all the cylinders and was also given the performance of our funds to the benefit of our customers as well. To give you an idea, 1.9 billion is, amongst others, translated by our regular investments plans, which is a crucial element in underpinning the stability of those sales. They are totaling roughly 0.4 billion, so 383 million to be precise. But also, if you look at the gross sales, then we do have an increase of 38%. on the quarter, and we do have an increase of 43% on the year. And as you remember last year, it was an absolute record. So indeed, quarter one was extremely strong. In terms of the responsible investment sales, if that is also worth to be mentioned, 44% of all sales are responsible investments. Now, translating what I just said on the assets under management into Fee and commission, well, strong performance on the assets and management side means that we have seen a strong growth on our management fee. A strong sale side is also translated in a positive growth of our entry fees. And that brings also the asset management business, 15 million euro up prepared by the previous quarter. What is lagging a little bit behind, but this is perfectly normal, that is the... banking services and mainly the payment business. Payment business compared to quarter four is comparing to a seasonal high number. Traditionally, a year end with all the payment transactions and all the credit card transactions is a stellar result. So in that perspective, it's not surprising that it's a bit lower. In this perspective, it was 13 million lower. which means if you take that into account, then the 614 million fee and commission is even more positive than it at first glance looks like. So good performance in that banking service business amongst others on the retail brokerage businesses, both in Belgium and Czech Republic. There are a couple of other details when I'm talking about differences of one or two million euros and not worth to mention it here. So let me skip to the other diversifying factor that is the insurance business. page 10, we do have, again, a strong increase of our sales on the non-life side. 9% up on the year, which is indeed very strong, and it's actually true for all the different building blocks in the non-life insurance business, and it's also true for all countries which are part of our group. So we speak in Belgium of roughly a bit more than 8% growth, and in Central Europe, all above 9%. So all above 10% growth. In terms of the underwriting quality, well, that is, again, extremely well. It stands at 85%, which is substantially below our target, as you know, 91%. And it's also a definition of the underwriting quality, but also the fact that we were not confronted with any major storm. We had some impact on the flooding side, but we are not confronted with big natural catastrophes as we have seen them, for instance, two years ago. So good growth and good underwriting quality. Same can be said on the live sales. This is an absolute record result in the first quarter. You know that traditionally we have some campaigns in quarter four, and even that was beaten in this quarter. We have a strong growth of 12% on the quarter and a significant increase of 60% compared year-on-year. This is due to a couple of commercial actions which we did in the private banking domain in Belgium and the launch of a new structure fund in Belgium, which has clearly paid off. Unit-linked business was growing significantly. They were up 34% on the quarter and more than doubled significantly. So this is indeed something which is, to use an understatement, extremely well. Let's translate unit linked in total. They are now 32%, 34% of all sales, whereas the hybrid products, which is a small portfolio, is increasing as well. So the split up class 20, sorry, we'll use the international language, interest guaranteed products, versus unit linked is now standing at 34 versus 66. Going into the financial instruments at fair value, as always, super volatile, and also this quarter is not an exception. We have seen a very strong dealing room income, whereas we do see much more volatility, this time in a positive way for all our MVAs, CVAs, and FEAs. And there is a negative impact of about 84 million euro, which is linked to the market of the ALM derivatives, including other. So in this perspective, this can be explained, or the vast majority of this shift can be explained by three or four smaller elements, a couple of elements, which are linked to interest rates in Czech Republic, which have been decreasing in the short term and having been increasing on the long term, and that has a negative impact on our position. Some amortizations of swaps amongst others, the Hungarian foreign swaps, some cash desk activities, which we have in Brussels, where we have been using cross-currency swaps, and therefore you need to mark the market and the evolution of interest rates has an impact, and then also some parts which are linked to the ineffectiveness of hedge counting. If you sum that up, then it's almost impossible That's the most significant part of that €84 million of difference between quarter four and quarter one. In terms of the cost side, we are going, oh, sorry, I forgot one thing, the net other income. I usually forget that. Why? Because it's always the same run rate. So we are now at, what is it, 58 million euro, which is clearly on the level of the traditional run rate of roughly 50 million euro. The comparison by last year, for good understanding, doesn't make too much sense because that quarter was characterized by two one-offs. First of all, the one-off gain of 405 million euro on Ireland and then the recuperation of bank insurance taxes in Belgium to the tune of 48 million euro. So the difference, It's fully explained by those two elements combining 453 million euro. So if you deduct that, then it's perfectly aligned. And therefore, it was a reason to forget this result. In terms of the cost side, far more important. Well, also here, it shows again that we are able to keep our costs under control. Let me start with the cost income ratio. It stands at 43%, which is pretty good and which is also perfectly aligned with our guidance. As a matter of fact, it's substantially better than our guidance, given the fact that the operating costs are decreasing 9% on the quarter and 1% on the year, which is due to a couple of things. If you compare it on the quarter, definitely with seasonality, most of the time quarter four is characterized by a couple of things which are booked traditionally in that quarter, ICT, marketing, professional fee expenses, and so on. But also, most of the time, a little bit catch up on the facility side. All those elements have been improved in quarter one, and that clearly defines on a minus 9%. If you make the comparison on the quarter one last year, be careful. Ireland is included in that comparison. And Ireland now, we have been handing over our license in April. So we have been building down massively our headcount. And that is now clearly paying off in 2024 in terms of the cost reduction. So if you take all those elements into account, then I can say, Well, we have been able to keep our costs under control. We have been able to keep our FTEs under control, not only in Ireland, but also the other countries. And as a consequence, we have outperformed the income, sorry, the increase of inflation, which is automatically linked to certain of our personnel staff, as you know. And we have been able to bring that cost income ratio to a low 43% better than what we guided for. In terms of bank taxes, already highlighted the total amount of €518 million, if we already flagged on earlier occasions, that despite the reduction of the European Single Resolution Fund contribution, which is bringing us €121 million benefit, this is consumed by other tax increases in some other jurisdictions. As a matter of fact, this is consumed by roughly... 28 million euro additional national bank taxes in Belgium... only for the bigger banks... then another 28 million euro in Belgium... because of an increase of deposit guarantee scheme... and then another 11 million euro... because of the tax deductibility... which was brought to zero for those bank taxes. But if you add them up... then the 1 on 21 million euro... is consumed for roughly 70 million euro... a bit more than 70 million euro... in this perspective. So in total we do expect... the bank taxes, bank and insurance taxes, I should say, to be roughly €638 million by year end, which is a striking number. Translated in a different way, expressed in terms of our OPEX, is 13% of that OPEX, which you can see on page 13. Let me go into loan impairments. Well, here also some good news. Despite the fact that we had one or the other big file in the newspaper in Belgium, the results on the impairment side, besides those files, were actually really good. So we have seen 43 million euro impairments of our lending book, which is related to a couple of larger corporate files, as I said, mainly in Belgium. But on the other hand, given the improvement of macroeconomic factors, we had a release of 27 million euro in our geographically emerging risk buffer. the sum of the two parts total 16 million euro, which brings the credit cost ratio to four basis points, which is clearly below the 25 to 30 basis points, which is the longer-term average. And as a matter of fact, we said significantly below that long-term reference. Well, we are perfectly in line with the guidance which we have given. So in this perspective, can basis points Credit cost ratio, when you exclude the release of the buffer, for good understanding, after the release, the buffer stands at €223 million, which is 11 basis points of our total lending book equivalent. As a matter of fact, it's still half of what we had on the long-term average credit cost ratio. Impaired loans stand at 2.1%, whereas 1% is 90 days past due. All in all, if we sum up all these things, we end up with a capital ratio, as I said, of 15.2%. But given the fact that we decided or the board decided to pay out the surplus capital, 280 million euro, if you take that into account, then the capital ratio stands at 14.93% and is built up on SNC on page 15. in all detail. So a slight increase of the risk-weighted assets, which are mainly driven by volume, and a couple of other things which are reflecting FX changes and model changes. But the number is pretty limited, so the impact in that perspective is bringing it all to 14.9%. Translated that in buffers, giving the fact that we have also filled up a couple of buffers and you know that we have been quite active in the MREL market. Our MREL buffer is now standing at 3.7%. If you look at the different building blocks, the total capital buffer stands at 5.2 billion. OCR level is 10.9%. MDA buffer is 11.20%. Which brings me to actually the liquidity ratios and the leverage ratio. The leverage ratio stands at 5.4%. The liquidity ratio is substantially higher as what is requested. I already mentioned that. We have substantial buffers compared to the legal requirements and the insurance activities because of the impact of the interest rates evolution. Strong performance acumen in the market has slightly increased. shifted downwards to 202%, which is double of what we had requested by the supervisors. Looking forward, well, it all starts with the economic outlook, of course. I mean, there is clearly pressure on the economic growth. We have seen a very difficult fourth quarter in that perspective, slight contraction that is picking up now. But we don't expect a significant growth improvement in the course of this year. It will be better. than what we have seen last year, what we are going into the territory. Depending a little bit on the different countries, for Belgium, we do expect to have an economic growth of 1.2%. Central Europe, in essence, is roughly 1% to 1.5% higher than that. But in the total Eurozone area, mainly driven by Germany, where we are not present, we do expect a growth of roughly 0.5% this year. Inflation seems to be under control, but is very vulnerable given the geopolitical tensions, potential supply structure, which might be linked to that. It is speaking with two words. We all know that the evolution of inflation is downward, and that is obviously influencing as well interest rate cuts. There's a lot been said about this. We do expect, indeed, a first cut at the ECB level now in June, and then we will see. We do expect two further cuts in the course of this year, probably the last one at the year end. So, impact of that to be seen and we will, as all of you, follow closely the news related to that. Coming to our guidance, the guidance was built with a specific purpose as we normally always did. That is, we give guidance once a year and we try to deliver and over-deliver on those guidances. That was also the concept which we put forward at the end of last quarter. So we worked with floors on the net interest income, on the revenues, and on everything which is linked to growth. And we worked with ceilings for everything which is linked to costs. So the guidance in this perspective is indeed not updated because all the elements which I have explained until now are confirming this guidance on the net interest income side. I already mentioned we will be higher end of the range which we gave clearly above the floor of 5.3%. and more or less somewhere between 5.4 and 5.5. And on the insurance revenues, we are above. The operating expenses, we are below. And the cost-to-income ratio, we're clearly below as well, including the impairment ratio. So in this perspective, I think also, sorry, Basel IV is also unchanged. You know, we have given guidance in this perspective and taking into account what I already said. Nothing has to be updated here. So I'll skip the part on the countries, and I'll give back the floor to Kurt, who will guide us through your questions.