Kbc Group Sa Unsp/Adr

Hello and welcome to the KBC Group Earnings Release Second Quarter 2024. My name is Caroline and I'll 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 mode. However, you'll have an 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 0 and you'll be connected to an operator. I will now hand over the call to your host, Kurt Dibans, General Manager, Investor, to begin today's conference. Thank you.

Thank you, operator. Also from my side, 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, August the 8th, 2024, and we are hosting the conference call of the second quarter results of KBC. As usual, we have Johan Tijs, Group CEO, with us, as well as our Group CFO, Luc Poppelier, and they will both elaborate on the results and add some additional insight. As such, it's my pleasure to give the floor to our CEO, Johan Tijs, who will quickly run you through the presentation.

Thank you very much, Kirsten. Also from my side, a warm welcome to the announcement of the second quarter results. As usual, we start with the key takeaways and, well, Second quarter of this year, 24, was again a quarter with an excellent net result. €925 million was posted over this quarter, and this is a result of KBC firing on all its cylinders. We have been in that perspective doing, once again, a highly diversified bank insurance asset management integrated model, and that is indeed returning positive results. Let me highlight a little bit more in detail what it means. So we have seen in this quarter a strong growth of our lending book. We have seen a customer deposit inflow, which is a very important one, as we all know, giving the interest rates. This resulted in higher net interest income. It also allowed us to increase our guidance on the full year 2024 for the net interest income. We now put it at $5.5 billion more detail about that later on. We do have an increase of our fee and commission income as well as our results from the sale of our non-life insurance business. There is an upward move of our financial instruments at fair value. And on the positive side as well, be it a negative number, we have a decline of our costs, which means in this perspective, indeed, a positive outcome. Cost income ratio now stands at 42%. before the bank taxes and that is really perfectly in line, a little bit better even than our guidance. In that perspective also the loan loss ratio is perfectly in line with what we guided as a matter of fact, substantially better and there's no surprise to see that we do have a solid capital and liquidity position. The letter allows us also to announce an interim dividend of one euro per share which will be as normal distributed on the 1st of November. For completeness sake, I also want to highlight again, we already announced that with a separate press release, that we concluded our share buyback for the total of 1.3 billion and that it was finalized roughly, what is it, eight days ago, so the end of July. Now, in summary, good results, return on equity 15% and all the other ratios are very solid. If I go in like traditionally, over a couple of things highlighting what it is built up, 85% on the insurance side, sorry, 85% on the banking side, 15% on the insurance side. That would be the day if we would have 85% of our income via the insurance company. But also very important, that is the productivity gains which we continue to book via the usage of AI and via the users of our service bot, Kate. 4.8 million of our customers are using it on a regular basis. That also means that 4.8 million of customers are confronted with the fact that Kate becomes smarter and smarter. Two-thirds of their questions are solved by Kate without any interference of a human being, which generates a lot of productivity gains and also generates a good NPS score with our customers. Kate is also more and more involved In sales, over the period of 12 months, she concluded 137,000 directly, concluded 137,000 of sales, which is quite a strong number and is, for good understanding, an average over 12 months. And if you look at the detail, you see that it is ramping up towards the end of that period. In other words, it is not something which is not going to improve going forward. In that perspective, also to highlight that KBC was nominated amongst others by the Financial Times as one of the sustainability leaders in Europe, which also qualifies us for supporting our customers better in the transition towards a more sustainable economy. And that is, as we all know, a very crucial element. And in that perspective, we can play ultimately a role. On the next page, you can see the diversification of KBC Group. that is the split up between the net interest income and the asset management income and insurance income. The split up is roughly 50-50, which means that indeed KBC has a very diversified position on its income side. In terms of the strategic focus, I'll skip that because this is the things that you already know. And then on the one-offs, slide, which is the next one. This quarter is characterized by hardly any one-offs, so we can give you a full picture without excluding too much of detail on certain elements. Let me go through the biggest P&L contributor in terms of exposure and size. That is net interest income. Net interest income is up 10 million euro on the quarter. And that is an increase of 1%, which is driven, and that is something which is very important going forward, which is driven by a continued increase of our commercial transformation result. And that is indeed good news. It is up 10 million euro, which is driven by two things. First of all, the reinvestment yields, which are creeping up. And then the second thing is that we also saw again, or we saw, and that's a very crucial one, Core deposits flowing in, I'll come back in a second to that, but also a positive move on current accounts and saving accounts in the second quarter. Next to that, also increase of our lending income. The lending income was up on the back of strong growth of our volumes. We guided the market that we would see for the full year a growth of roughly 3%. Well, if you look at the numbers on the graph, then we have seen 2% on the quarter growth. 4% on the year. And if you look at the total number for the year to date, we had a 2.48% growth, which means that also that perspective, we will update our guidance and we will bring the 3% to 4% for the full year. The volume growth was partly offset by the pressure, which is still going on on the commercial margins. That is not for every country the same. But in essence, if I would summarize it all, there is still commercial pressure on those margins, and that is mitigating the positive impact of the higher volumes. But nevertheless, the interest income generated out of the lending book in the combination of the two elements is positively evolving. For good understanding, the total margin on the net interest side is now 210 basis points, which is two basis points higher than it was previous quarter. In terms of the other positive contributor, we have €27 million of net interest income on inflation-linked bonds, which is significantly better than previous quarter. And we have lower funding costs on our participations. What are elements which are partly offsetting? We do see indeed commercial pressure on the margins on the lending side, but we also had some commercial pressure on the saving side in Belgium. where we do have a payout in this quarter of our loyalty premium, our fidelity premium. On the other hand, we do see the commercial pressure on the term deposits, where we have a slightly lower net interest income side. And then we do see slightly lower net interest income side on actually the subordinated debt and the wholesale funding cost, which is linked to our LCR management. And then same thing can be said about short-term cash management, which is also linked to that short-term cash management as well as the evolution of the interest rates. But let me highlight more in detail the evolution of the things which really matter, and that is the evolution of our deposit side. You can see that on the next slide. In the second quarter, we did have an inflow of $5 billion of current accounts, saving accounts. Split up 3.6 billion on the current accounts and 1.4 billion on the saving account. This is an important one. And if you look over the quarter, then we can clearly see that the trend has shifted over the quarter. In May, we had a kind of stable evolution. That means no further shifts because that was mainly it in the past between current accounts, saving accounts and term deposits. And then in June, we had a strong inflow, mainly also in Belgium, of that deposit side. So it is not contributing yet to the net interest income in the second quarter. It will start to contribute to net interest income in the quarter three, four and following. In that perspective also, we do see a decline of the term deposits. This is mainly triggered by Czech Republic and to a lesser extent, Hungary. And that is also a consequence of the rate cuts which are happening in those countries. As you all know, the Czech National Bank as well as the Hungarian National Bank have cut in several steps significantly downwards their policy rates. And that is immediately translated in the attractiveness of term deposits, be it less attract and therefore people start to deposit more monies from their deposits on back again on their saving accounts. We do see that trend clearly in both countries and that has translated itself in the decline of 1.9 billion on the term deposit. Let me say it differently. We do see indeed a slowdown of the shifts between current accounts, saving accounts and term deposits, a slowdown of the shifts between higher yielding buckets to lower yielding buckets. If you translate that over the full year, then you see the same trends. be it different numbers for current account saving accounts and term deposits, and in total we do have 5.8 billion core money flowing in. But it's clearly indicating that the shift is happening, or the trend is happening with a clear shift. First of all, more volumes, and secondly, lower shifts from current account saving accounts to term deposits, which is indeed going forward an important message to bring. Side step I would like to make, that is obviously we are very aware of what is going to happen in the next quarter, in the month of September, because in Belgium the state note matures and that is clearly going to have an impact on our commercial approach going forward as well. Let me shift to net fee and commission income. 623 million euro is 9 million euro more than previous quarter. That is 1% up and it is 39 million euro more than previous year that is seven percent up and that is driven driven by two things first of all the increase of the asset management services fee or the management fees as it is called and second thing is the fees which are generated through banking services let me start with the former so the management asset management service increased significantly and it is mainly driven by higher management fee entry fees good news there is margin went up and it is driven by sales the the sales are compared with the record sales of the first quarter and therefore it's slightly down but be aware also in the second quarter we had a positive inflow of customer monies of 0.7 billion euro which brings the total for this year to 2.6 billion i said last year when we had a record uh performance uh that had something was uh Quite extraordinary. Well, we were almost at the same level in the first half of 24 compared to the absolute record of 23, 2.8 billion versus 2.6. In that growth is also, once again, to be highlighted, the success of the regular investment plans. You know how it works. Well, out of that inflow in roughly 0.4 billion is dedicated to the regular investment plans. In terms of the bank services, it's actually positive news on all the sides. The payment fees were up, the network income was up, and the credit file fees were up. It was slightly lower securities fees, which is mainly to do with the commercial activities in that perspective, and then traditionally the higher distribution fees on the banking products were partly offsetting this. In terms of the insurance business, non-live up 8% written premium, 9% earned premium, with a good underwriting result of 87% combined ratio, which I think is indeed an absolutely good number. Live insurance business, at first glance, because the number clearly says it's down 15% and 19% comparison year-on-year quarter. On the other hand, let me nuance that a little bit, this compared with an absolute top performance in quarter one of this year and quarter two of last year, and both quarters were driven by explicit commercial campaigns on the unit link side, on the private banking side, and then the seasonality of the interest rates products is also not helping really the performance in this quarter. Nevertheless, we had an excellent result in this quarter. And to express that, if you combine the first quarter and the second quarter this year, you compare it the same half year or last quarter, then we have sold 200 million euro more than last year. So in this perspective, also the life insurance sales side. was doing very well in this quarter. For good understanding, the margin which we have on that product is further increasing. CSM now stands at roughly 17%, 16.9% to be precise. Financial instruments of fair value, well, positive evolution on the quarter, 58 million up. And this is mainly driven by two things. First of all, quite good performance on the dealing room side, but we compared it with an absolute top performance in the first quarter. The difference there is €41 million, and we have on the derivative side a strong increase, so it's €1 million positive, but you compare it with an absolute downer. In the first quarter of 2024, the difference is more than €100 million. Well, I can give you the full detail, but this is mainly driven by a couple of technical things like the ineffectiveness of our hedge accounting and also AVEX results on dividend payments upstream from Czech Republic, both of them, are explaining more than half of that detail. All other things have to do with interest rate option and interest rate swaps and the cash dial of Brussels. I mean, the combination of the things I mentioned is 80 million euro. So explaining the full detail on this matter. Let me also give you a short notice on the short comment on net order income. 51 million euro is perfectly aligned with the historical average, which is roughly 45 to 50 million euro. So this is perfectly aligned. So let me not waste any further time, but go to the cost side. If you look at the cost side, very good performance. Costs are super well controlled in this quarter. If you compare it with the same period last year, then the costs are down 2%. I exclude for good understanding bank taxes. And if you compare it with the previous quarter, then it's up 1%. But, you know, seasonality in this perspective doesn't make it easy to compare costs. quarter on quarter. Now, let me give you a bit more detail. The reason why the evolution is what she is has to do with the fact that staff costs are obviously influenced by inflation, but that inflation is partly offset by the fact that we have been continuously monitoring our FTEs and have been bringing this down. Inflation is also impacting ICT costs, and also there in that perspective, we do some mitigating actions, and all in all, If you translated all those mitigating actions and the inflationary pressure, then you end up with the numbers which are there. There is an important comparison differentiating parameter year on year, and that is the impact of Ireland. Ireland was in 2023, also in the second quarter, and is no longer or to a substantially lower extent in the second quarter. And that explains the big difference between year on year comparison. If you would exclude that, then the cost evolution would be Also there, we do see some impact of the FX position. But costs are well in control, and this is also explained by the cost-income ratio, which now stands at 42% down compared to the 43% of last year. On the bank taxes side, well, there are certainties in life, which means that bank taxes are constantly upward-pressed. And also we see this again, we have extra bank taxes in Slovakia and we do have additional bank taxes in Hungary. As you may have noticed also that the government in Hungary has decided that there is an extra levy to come. That extra levy is potentially mitigated by the fact that banks can buy bonds to offset at least 50% or max 50% of that extra levy. Well, if we bring everything into account, then the potential impact of, first of all, the prolongation of existing tax, secondly, the impact of the new levy is up to 40 million before mitigation by buying bonds. So, with this perspective, this is really the max number. And last but not least, we had a decrease of the deposit guarantee scheme in Belgium because the lower number of deposits, which were in reality there, in comparison with the reference which was used by the Belgian government to calculate those taxes, that has resulted in a 32 million euro of decrease of the taxes. Ultimately, at year end, we do assume that we're going to pay roughly 640 million euro of bank taxes, which are on the next page explained in a split up per country or per business unit. Let me shift to impairments. Impairments are at a very low level, and if you compare it with the super low level of previous quarter, then it's slightly up. What we do see in the lending book is €58 million of impairments, which is slightly up compared to previous quarter, and it has to do with two files, two corporate files in our foreign branches, which are totaling the two combined. The split up is 50-50, €29 million. On our normal lending book, the vast increase is related to two files. If you would look at the other remaining part of the lending book, we hardly see any impairments. And what is also very crucial, we don't see any major shift or any worth mentioning shift on the PD side of that lending book going forward. There's also translated an impaired loans ratio, which is 2.1%. If you use the EBA definition, it's 1.47%, which is clearly lower than the average of Europe, which is 1.9%. Credit cost ratio, as I mentioned, stands at 10 basis points if you exclude the buffer. If you would include the buffer, it stands at 9 basis points. Now, mentioning the buffer, we have an increase of our buffer of 14 million euro. The ECL buffer now stands at sorry, the ECL, Geographical Emerging Risk Buffer, stands at 237 million euro after that increase. Why increase? Well, that has to do with the usage of parameters. One of those parameters is inflation. You might know that in Belgium, despite the deflationary trend, there was for this quarter an uptick of inflation and that uptick generated together with lowering the confidence of the consumers, it triggered an extra increase of the buffer of 50 million euro in Belgium. We did apply the same model for other countries where we saw a release of buffer and the combined total is 14 million euro upward. We expect this buffer to evolve as we speak in the next coming quarters. If you sum up all those bits and pieces and you look at the capital side, then our capital ratio stands at the end of the quarter at 15.1%, which is an excellent result. Now, the increase of the buffer is mitigated because of the strong growth of the volumes. So given the fact that we have grown stronger than we indicated, we do see our risk-weighted assets, which are linked to our operational business, so linked to the growth of our lending book, So it's a stronger increase than what we guided. Why is that? It's mainly because it's driven by growth in the corporate segment. And as you know, the corporate segment is heavier risk-weighted than, for instance, the retail segment. And that is translated as a stronger increase, resulting in 15.1% capital ratio. In terms of the buffers, which you can see on the next page, we now have buffers on the OCR side of 4.2%. and on the MDA side of 3.9% without using the optimization of CRD5 Article 104. KBC has not filled up all the buckets, definitely not on the 81 side. Therefore, remaining 35 basis points can be used as well. In terms of the leverage ratio, we stand at 5.5% and on the liquidity side, we have very solid buffers compared to the required levels. of the authorities, 160% short-term cash management, 139% on the mid-term cash management, and the solvency side of the insurance standard, 200% and a very solid 200%, which is double of the requirement of the authorities. The small decline has to do with some concentration risk. It's not even worth it to mention it, but it is still at a very high elevated level, 200%. Which brings me to the forward-looking part. Well, there are two sides to the story. What about economic growth and how does that impact our way going forward? You know, we do expect that in the euro area, growth will be, we will call it moderate. And that moderate growth will bring it ultimately to roughly a bit more than 1%. Also going forward, 25, 26, we think it will be in the same area, 1.2, 1.3%. It depends a little bit where you are in Europe. If you're in Western Europe, it will be a little lower. If we are in Eastern Central Europe, where obviously for us a big part of our productivity is located, we speak about a bit higher growth levels, roughly 1 to 1 of 50 basis points higher. On the inflationary side, despite the deflationary trend, we do see an inflation position which is slightly above the required level of 2%. of the central banks, we speak about 2.2, 2.3%. So in that perspective, we do expect further rate cuts to happen going forward starting in the Eurozone in September and further rate cuts in Czech Republic and Hungary according to what they have been announcing earlier. We do see that trend evolving. How do we translate that into our guidance? Well, you know, giving what I said also on the inflow of deposits, a couple of compensatory elements which could be there amongst others, the competition, and I think that is the strongest element which we have to observe and that will be influencing where we ultimately are at the end of this year. We are putting our guidance now at 5.5 billion ballpark compared to the previous guiding which was saying floor 5.3, ceiling 5.5. So we go to the upside in this perspective and we clearly also upgrade the 4% on the landing side. All other elements we have chosen not to change them also because we are going into a planning process anyway going forward and that is also indicating why we did not change the guidance on the longer term or the mid-term. That's for two reasons. First of all, huge volatility on the forwards, which are obviously impacting the income side. And then secondly, also, we in principle only updated longer-term guidance once a year, and that is always on the back of a budget exercise, which now starts in September. Potentially, one of your questions might be, what about the impact on risk-weighted assets, giving Basel IV and the consequential postponement of the ever-to-be Well, we will update those numbers on the back of the third quarter results. So, announcements will be done on this matter in November, and then we will include all the elements I just highlighted. For KBC, the average TB impact is hardly, let me use the word negligible, so it is having very little impact. I would keep it here, and I'm not going to go into the detail of the countries, but I will give back the floor to Kurt, which will guide us through your questions. Thank you very much.