KBC Groep's (KBCSF) CEO Johan Thijs on Q4 2015 Results - Earnings Call Transcript

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KBC Groep NV (OTCPK:KBCSF) Q4 2015 Earnings Conference Call February 18, 2016 4:30 AM ET

Executives

Wim Allegaert - General Manager, IR

Johan Thijs - Group CEO

Luc Popelier - CFO

Analysts

Matthew Clark - Nomura

Benoit Petrarque - Kepler Cheuvreux

Robin van den Broek - Mediobanca

Flora Benhakoun-Bocahut - Deutsche Bank

Andrew Coombs - Citigroup

Jan Willem Knoll - ABN AMRO

Kirishanthan Vijayarajah - Barclays Capital

Johannes Thormann - HSBC Global Research

Albert Ploegh - ING Financial Markets

Operator

Ladies and gentlemen, welcome to the KBC Fourth Quarter 2015 Results. Following the presentation, there will be a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded on the February 18, 2016.

And I would now like to hand over to Mr. Wim Allegaert, Director of Investor Relations for KBC Group.

Wim Allegaert

A very good morning from the headquarters of KBC in Brussels, and welcome to the KBC earnings call, today is Thursday February 18, 2016 indeed and you are on the KBC conference call for our fourth quarter results. I’m Wim Allegaert, Head of Investor Relations. We have Johan Thijs, Group CEO, and Luc Popelier, Group CFO, on the call. And they will comment on our results and give some additional insights in the financials of KBC.

We will need roughly 30 minutes to guide you through the presentation for the analysts, which was posted this morning on our corporate Web site KBC.com. After this, there is of course time for questions until around 10:30 Brussels time. This conference call is taped and can be replayed until 4th of March. This quarter again, as usual, Investor Relations and the CFO are organizing a sell-side analysts meeting in London tomorrow morning at our offices in the City, Old Broad Street, 111. This meeting starts half an hour later than is usually the case, so at 9:00 AM local time. Obviously we would be pleased to have you over. We will take time to take in your questions there and comments and give some more insight on our financials.

It is my pleasure now to give the floor to Johan Thijs.

Johan Thijs

Good morning to all of you, also from my side. Welcome to the disclosure of the fourth quarter results and also, as a consequence, the full-year results. Let me start with talking to the first part of the presentation that is I start on Page 3 with the key takeaways. We have this morning announced the result of €862 million in the fourth quarter of 2015. Just looking at the number, this is an excellent result. Obviously this number is influenced by some one-offs and also by a good underlying performance. The one-offs is something what was already announced at the end of third quarter. That is a result of €765 million, as a consequence of the liquidation of KBC Financial Holdings. And also now we disclose further one-off, the goodwill impairment for €344 million, but later on more about that.

The other key take aways is that our business performance is actually quite good in terms of performance. Mostly, and to wrap it up in one sentence, all business units, all bank insurance franchises have been performing very well. They have been driving up their volumes. They maintained their interest income, slightly higher than previous quarters. They have been performing in line with the guidance which we have given on the fee and commission business. Costs remained under control. Non-life performed excellent, not only in terms of volume, but also in terms of quality, with a good combined ratio. And Ireland has done similar things in terms of their provisions they’re perfectly in line with the guidance which we have given before.

As a consequence, capital ratios further went up and now stand at let me round the number, which is the in-between number between phased and fully loaded, 15%. And is clearly higher than the expectations or the absolute minimum of the ECB Combined National Bank, which stand at 25%, also leverage ratio and liquidity position up fairly solid, so in that respect we are perfectly in line with earlier targets and earlier guidances which we have given. As a consequence also, we maintain our guidance on dividends proposal, so no dividends for year 2015 and as of 2016 dividend payout of at least 50%.

On Page 6, I would like to start with first some remarks on the particular one-offs on the fourth quarter 2015. The biggest one is obviously the one on capital, where we have been, as you know, paying back the state aid and that has, obviously, an impact on our capital ratios. But after pay-back of state aid, we still remain very solid, 48.9%, 15.2% respectively, for fully loaded and phased in capital ratios. That’s rock solid. Far more important for the fourth quarter results in terms of P&L is obviously the liquidation of KBC Financial Holding. We already elaborated on this on the previous quarter. I’m not going to go into the detail, but important is that this will have a positive impact of 19 basis points on our fully-loaded common equity Tier 1 ratio under the Danish Compromise for the year.

And that also, given the fact that this €765 million came into our P&L, we used the momentum generated by this liquidation to assess, in a very, very conservative way, some elements on our balance sheet. Amongst others, the goodwill which we had in some Central European countries, amongst other, Slovakia, where we assessed Istrobanka, part of the merger in [indiscernible]. And where we impaired for €191, million we assessed Bulgaria, both CI Bank and DZI where we assessed in total for €150 million and a small one, Hypotecni Banka which is a subsidiary of ČSOB in Czech Republic, where we also assessed the debit for €2 million. So on the back of this windfall we assess in total for -- we impaired in total €344 million, on goodwill. We also make some other further assessments and some other stuff, amongst other, the data center in Hungary, which we impaired as well for €20 million. Last but not least, because of legislation in the Czech Republic regarding the European Single Resolution Fund, we also booked another €15 million as a contribution to that same fund, on top of what we already booked in the first three quarters of 2015. I'm not going to come back to all of this in the next part of the presentation.

Now we're going to talk about the underlying results and that's start with Page 7, the split-up between the bank and insurance company. This is actually more or less in line with previous quarters where the split up was 85% bank and 15% the insurance company. It's quite similar this quarter, so let's not spend too much time on this. So let's go into the more important elements, which is start with, the net interest income. So we have been able in the fourth quarter, to keep this net interest income at the same level as it was and slightly higher even, as it was the fact in the third quarter. If you look at the banking side it's even €10 million higher than before than in the previous quarter. And this is because of, obviously lower funding costs but also further rate cuts on saving accounts in all the core countries except Czech Republic where it already happened in the third quarter. And last but not least, this net interest income was also clearly driven by extra volume growth, both on -- definitely on the lending side, the volumes were clearly up and next to that, the positive elements were offset, partially because of the hedging losses]on the prepayments in Belgium.

The net interest margin went down with 4 basis points it now stands at 195 basis points. A small caveat to take into account that 4 basis points is mainly driven by the fact that the prepayment fees are actually taking in obviously, much more stronger in the previous quarters and been driven up -- driving up the net interest margin quite significantly. So therefore if you would exclude the prepayment fees, then the margin would only drop the 3 basis points, and this is definitely also true for business here in Belgium, where the prepayments obviously had the biggest impact. So, another important element is the fee and commission business, mainly driven by, amongst others, asset management, asset management fee, entry fees.

The good news is that the fee and commission business is perfectly in line within guidance which we had provided at the end of the third quarter that was set at €363 million to €370 million we are just with €371 million at the high end of that range. It is down 3% on the quarter, it is now 9% on the year and this is mainly driven by the market circumstances, clearly driven also by lower management fees, as a consequence but also lower unit-linked life business and then clearly the impact of the reduction of our CPPI production, which is linked to the performance of the financial markets, and the performance of the underlying assets in those products. Possible surprise is that we do have an increase of our assets under management with €9 billion. This is driven by two things, namely, the net inflow 2% up but also positive price effect of 2%.

For the whole year, let's understand clearly what the impact of the full four quarters was, it is an increase of the fee and commission business quite significantly but also the increase of the assets under management 12% is quite substantial. So in that respect it remains an important top-line driver and this in that respect also for 2016, still to be expected to be top-line driver. Clearly, this asset management business is driven by market circumstances and given the turbulence on the financial markets in the first part of this quarter 2016 quarter, first quarter I mean, it is clear that recovery to previous levels is clearly now postponed, it is delayed for a certain period and therefore we do see that this will take another time to come back to levels like for instance we have seen in the early quarters of 2015.

In terms of the insurance business, I already indicated that non-life business is another very good year. The non-life growth that it does not make sense to compare non-life premium income quarter on quarter but still, even then it was slightly up on the year. It is 5% up and far more important is that the quality of the book is of an excellent nature, 91% combined ratio, is better than last year and it's clearly better as what we have seen in the previous years as well. On the life side, the quarter-on-quarter result was significantly better. We are talking about a growth of 54% now and that is mainly driven by the business interest guarantee that we can see on Page 11, the bottom of the page. There you can see that the life business, the purple blocks, guaranteed interest is growing substantially higher, 66% on the quarter. It’s driven by a campaign which was initiated in Belgium. The unit-linked business was up 7%, if you compare the numbers on a yearly basis, then interest guarantee up with 13%, whereas the unit-linked business is down 4%. Mainly driven by the market circumstances, and unit-linked now accounts for 34% of the total life sales.

In terms of the fair value gains, and in terms of other net income, and gains realized on AFS assets, it’s a bit of a mixed bag here. First of all the fair value gains, this number is significantly down, compared to previous years. It’s up compared to previous quarter. But let’s be careful here, because this number is as well, heavily influenced by the transaction of, the liquidation of KBC Financial Holding. We have to take into account here, translation differences for the tune of €156 million, clearly influences the number on the fair value gains. Another element, which was part of that accounting part, is the impact of the ALM derivatives, this €12 million positive, compared to the previous quarter, which was only €2 million.

There is a positive change in the market credit and the fair value adjustment, and we also had a better dealing room income, €20 million plus, compared to previous quarter. By the way the market credit and fair value adjustments were €58 million up compared to the previous quarter. In terms of gains realized on available for sale assets, we do have €30 million realized, of which €25 million came out of shares. This is compared to a run rate of, let’s say, €48 million per quarter over the whole of 2015, more or less in line with what we have seen the previous years.

In terms of net, other net income, also nothing special to mention. The normal run rate here stands somewhere in between €45 million and €50 million. So it’s perfectly in line with that normal run rate. And, therefore, I would suggest not to spend now too much time on this topic. Operating expenses. The operating expenses, if you look at the previous quarter, are up, significantly up, but this is due to seasonal effects. This is a traditional, every year occurring event. So the seasonal effects are always almost the same, in this respect I can mention marketing cost and also some professional fee expenses.

What is important here to mention is that the ICT costs are up in the fourth quarter. And this is due to, and that’s something which we already mentioned previously, this is due to the transformation. KBC is now investing in transformation into a new visible environment. Those costs have been going up quite significantly. And if you compare them on a yearly basis, then you can see that, first of all, the total costs are remaining flat, slightly down even, €4 million down. And the ICT cost difference between 2014 full year and 2015 full year, only for the investments on the digital part, are €30 million extra.

We have also added in the fourth quarter, some restructuring charges in Czech Republic and also, some extra costs for the pension schemes in Belgium, which are driven by legislation and new laws in Belgium. In terms of cost, there’s also, again, mention the fact that we have booked an extra €15 million for the contribution of the European Resolution Fund. This is, as I mentioned already, due to the fact that the law was not really known and that we had anticipated, and that this anticipation now is adjusted with another €15 million. All the numbers come to conclusion in a cost income ratio of 55% for the full year, which is slightly up compared to previous year, but is perfectly in line with our longer-term target.

The costs are obviously normally driven by banking taxes. On Page 14, you can see the impact of the banking taxes, split up in the different business units. In total, they now stand for 10.7% of the OpEx, which is a very big number. This is driven by some countries. In Hungary, we all know that the banking taxes were quite elevated. That is now going to change as of 2016. But in Belgium, we also see that the impacts of the banking taxes are very significant, €222 million, totaling 9.5% of OpEx, which is extremely significant.

On Page 15, we are talking about the impairments now and the credit cost ratio. First of all, the impairments are up. But be aware, this is mainly driven, obviously, because of the momentum which we used to impair the goodwill. That is counting for €344 million. And the other impairments, definitely the impairments on loans and receivables are substantially -- therefore, substantially lower, if you compare it with the same period of last year, they're seasonally up compared with the previous quarter but that is something, indeed, happening every quarter, so that's nothing in itself which is surprising. The good news here is that if you look at, for instance Ireland, then we do see that €16 million extra provisions were added. If you compare this with 2014, then it's substantially down and it makes a big difference and if you compare it for the full year in Ireland, we see that the impairments total €48 million. Referring to the guidance which we have given between €50 million and €100 million, this is perfectly in line, it's a bit better.

As a consequence of market circumstances and also the consequence of the windfall which we have seen because of the liquidation of KBC Financial Holding, we also impaired some other stuff. First of all, available for sale shares, €21 million and then €29 million of which the biggest part, the biggest chunk is related to impairment on the Hungarian group data center, €20 million. We had some other stuff, software in Czech Republic for €5 million that was part of that impairment as well. Credit cost ratio, far more important, is currently at 23 basis points for the full year. This is an excellent number. If you compare that with previous year, it is substantially down. But also, if you compare it with the long-term average, long-term we're talking about 15 years, then the long-term average stands at 54 basis points, which is significantly higher, more than double what we have been facing in 2015. Impaired loans ratio, both on the straightforward impairments or on the 90 days past due have been coming down, reflecting the quality of the portfolio and also there we do have to mention that this is good news.

In terms of the business units, I'm not going to go into the detail of each and every business unit more or less I can say what is true for the Group is the same for all the business units. So, volumes up, interest income slightly up, the margins, here and there, under pressure, depends from country to country. The credit cost ratios are perfectly in line with historical perspective. And clearly, also the fee and commission business is in line with the guidance which we've given. Costs, same thing, most countries under control, some even a little bit down. And in that respect, perfectly in line with what I told at Group level.

Let me now sum up all these elements and turn to Page 46 or perhaps, first Page 44, where we do have an idea of the profitability per business unit. Belgium has a ROAC of 26%, Czech Republic has a ROAC of 37% and what is clearly and far important and also very important that is that international markets is positive. If you compare the two numbers '15 and '16, we are talking about a turnaround which is very substantial in amount €400 million but also here clearly to mention, Ireland is positive and contributes quite significantly the ROAC.

For the full year, for the business unit international market stands at 18%. By the way, the ROE of the Group, KBC Group for 2015 stands at 22%. If you exclude the one-offs, it stands at 19%. Strong solvency and good liquidity is the consequence of what I explained over the last 15 minutes. The capital ratio stands at 15.2% after full repayment of state aid under the phased-in approach, Danish Compromise. If it was fully loaded then it drops to 14.9%, which is clearly above the regulatory minimum, 10.25%, which is imposed upon us. If we would take into account everything which is scheduled for the next coming years, then the regulatory minimum would go up to 11.25%, and they clearly have a buffer. So we feel quite solid and quite comfortable with those capital ratios and the position KBC is in. It's once again confirmation of the soundness of this Group.

In terms of the full capital ratio, Page 48, it currently stands at 19% on a fully-loaded basis. But on the regulatory requested phased-in basis, it stands at 19.8%. You can see the building blocks it's 15.2% common equity Tier 1. The additional Tier 1 and the Tier 2 numbers have changed a little bit, because of the payback of the state aid. So perfectly in line with our target and again a reflection of the sound situation KBC is in. In terms of liquidity no big surprise. Liquidity numbers have been good in the past, and are confirmed today to be also quite, to use an understatement, quite good, 73% of the funding is customer driven.

On Page 50, you can see the short-term net -- short-term funding needs that they are covered by almost four times. Liquid assets also there, nothing to be concerned about both the longer-term and the short-term capital ratios, NSFR, LCR are clearly exceeding the target imposed upon us by regulators. So in a few sentences to wrap up the fourth quarter, it has been a good, visual -- extremely well visual result, €862 million. But also, if you would exclude the one-offs, then it’s clear that the fourth quarter has been a strong commercial bank insurance result, driven by all the core countries. All the countries we currently are in are now profitable. And then the big countries, the big contributors, they once again confirmed their earnings track record. KBC is a rock solid company, starting from their liquidity, and their capital position.

The rest of the pack is composed of overviews on all the different elements which I discussed, but then on a yearly basis. Here and there, I already mentioned some of them, so I suggest not to go through them. But we are obviously happy to answer all of the questions, if any, on this particular part. But as a sum-up, I can say that is, for 2015, that's actually on page, what is it, Page 54? It’s actually clear that what has been said on quarter 4 is more or less true for the full year. We had a good income, net interest income position. We had, despite the pressure on the margins, good, and combined with good volumes, this net interest income going up slightly.

We had an excellent year on the fee and commission business, 7% up on a yearly basis, assets under management 12% up on a yearly basis. This was driven by definitely the first part of the year, when the markets, the financial markets were quite positive. We have had higher gains on our financial instruments at fair value. And definitely, if you exclude the one-offs, obviously the life business was slightly down 5%. Quality-wise, if you look at the value of new business, it was up, so quality-wise, it was good. Non-life business performed extremely well, 5% up in growth, very good combined ratio.

Costs are under control and the level of loan loss provisions over the full year is, to say the least, excellent and that translates in capital ratios which we already discussed above. So as a final setting, I just repeat what we said on the dividends. We already mentioned that, several quarters, we are not going to propose any dividend for the year 2015 but as of 2016 we are going to return to a dividend payout to the tune of at least 50%.

I now hand over the floor to Wim who will guide us through all of your questions.

Wim Allegaert

Thank you, Johan, for the explanation. Now we can open the floor for questions. So please as usual restrict the number of questions to two to allow the maximum number of people to actually raise their questions. Thank you.

Question-and-Answer Session

Operator

Your first question comes from the line of Matthew Clark from Nomura. Please ask your question.

Matthew Clark

It’s just a question on, well, two questions. Firstly on the CPPI funds, can you just say what investor appetite you expect going forward this year? And if you expect limited investor appetite in those funds, do you have other similarly lucrative funds that you can sell to your customer base, so just a measure of customer appetite for those high-margin funds, please. And then second question is on dividend. You stuck with the no dividend for 2015. Are you completely ruling out an interim dividend to be paid during 2016 with respect to interim profits or is that a possibility? Thanks.

Luc Popelier

I am going to answer the first question on CPPI and alternative products and I will pass on the other more important message on dividends to my CEO. On the CPPI, yes, it remains, well, CPPI is actually, we believe, a very good product and has withstood the test as we saw in last year where people are indeed safeguarded from further crashes if they have equity exposures. So it remains a building block. Having said that, we are diversifying away from CPPI to some extent into other alternative products which we have developed, as you may know we have the largest range of funds in Belgium and maybe even Europe that we can propose and we have built new building blocks, such as flexible funds and life cycle funds.

Matthew Clark

Do they earn the same entry fees?

Luc Popelier

Sorry.

Matthew Clark

Do they earn the same entry fees as the CPPI funds?

Luc Popelier

They, on average, are a bit lower but they are less cyclical than CPPI. CPPIs have high fees but as you can see in the last few quarters, they have much higher variability than most of the other funds that we offer.

Matthew Clark

Thanks.

Luc Popelier

You’re welcome.

Johan Thijs

And then on the dividend, so indeed we repeat today that we are going to have a payout of 50%, that is of at least 50%, that is obviously for the full dividend payout. Regarding the possibility of an interim dividend the answer is clearly yes, that is a possibility but we are only six weeks into the New Year, so it’s a bit difficult to make already a clear statement about that. But it’s clear that an interim dividend is one of the possibilities.

Operator

Thank you. Your next question comes from the line of Benoit Petrarque from Kepler Cheuvreux. Please ask your question.

Benoit Petrarque

Two questions on my side. The first one will be on the cost side. In November '14 you've announced a plan, an investment plan of about 500 million and you said at that time that you will spend most of the amount in the first two years. Could you update us where you are currently and in '15 in terms of how much you have invested so far? How much you still need to invest in '16 and maybe residual amounts in '17? And also update us on the cost cutting expected from those plans, when that will -- when it will start to be visible basically on the cost base? But that is basically just to clarify the cost side and investment plan, please. On the fee and commission, sorry to come back to that one but if we think about Q1, I guess most CPPI product on cash, given the market volatility. How should we think about Q1 quarter on quarter? Do you think Q1 should be higher versus Q4? I know that Belgium has introduced speculation tax on January 1. Do you think those things could impact you short term? But just globally, how you think about Q1 and without giving us any specific guidance, what is the trend, basically, because you are coming from very high level in Q1 last year and I just wanted to double check on that. And then on the 50, you've done about -- you've generated about 50 bps -- 57 bps fee margin in Q4 in Belgium on the AUMs. Can we assume this is a very low level and probably a too low level for 2016? Thank you very much.

Johan Thijs

Let me start with the first one on the cost side. Yes, indeed we announced in June 2014, the investment program on the transformation of KBC Group. So where are we today? We announced at that time that we would spend 0.5 billion at least 0.5 billion in this respect and indeed the biggest chunk of that would be spent in the first two years, being '15 and '16. So where are we now today? More or less I give you rounded numbers. In terms of spend, we actually spent about, and I'm only talking about ICT costs. You need to be careful with this. This is pure ICT, it is not relating to the costs. So it's not referring to the cost which are related to those ICT spend costs because normally, if you spend IT you need to have always some business people to make things happening and that part of the cost is not mentioned. The rule of thumb, it's not entirely correct but you could easily say for €1 spent on the IT side you have €1 extra on the business side. And so on the IT side we did spend about €125 million in 2015 on our digital transformation. This includes all business units and this is slightly slower than our expectation which we have put forward in our earlier guidance of €0.5 billion.

Now, what is the reason? That is up-staffing of people is crucial to drive your IT investments and there we had a little bit of delay in the first one or two quarters -- one, definitely the first quarter 2015 and then it took up quite significantly. But €125 million was spent and if you compare that with, for instance, because already we're spending in 2014 as well and we talk about a quite significant difference of at least €30 million compared to 2014, IT side. So as a matter of speaking, if you look IT and business-wide you could say that the IT investment difference '14, '15 is about €60 million, we have been making up, as you can see, quite a bit of that because of cost savings. We are pushing down the legacy costs quite significantly and it is the ambition, clearly, to what I would call the run the bank costs, also in the period going forwards, to bring them down max at the same level. What are we going to spend going forward? Indeed the first two years, '15 and '16 were the most important ones so this year again is a very important one and if you look at the longer term -- because the 0.5 billion was the first period.

If you look at longer term, you take everything into account so investments on the IT side, investments on big data, investments on those transformation on the insurance company, they would expand the time frame to 2020 and I think at least 0.5 billion is at our way in terms of further investments. The second question was dealing with the expectation for the first quarter 2016 on the CPPI side, or in general on the asset management side. It is clear and that was explained already in a previous quarter, that financial markets do influence two things which are important for our fee and commission business in this respect. First one is sentiment, what is the appetite with our customers to step into investments products which are not saving accounts. That’s the first element.

And the second element is obviously that as you know, the fees on the CPPI are influenced by the asset, the underlying asset distribution and you are right, big chunk of that CPPI is now transformed into cash. The exposure to cash brings down the fee, the management fee, and therefore it has an impact. That impact was translated in €371 million fee income. If you compare this with, for instance, the first two quarters of 2015 then you clearly see the impact of that, of those two elements combined. Going forward to 2016, we are six weeks down the road. Six weeks in which the financial markets have been quite turbulent, which have been putting pressure on, indeed, sentiment, no doubt about that, and also have been putting pressure on our underlying asset distribution in our CPPIs. So more cash, at the end of 2015, 67% of the CPPIs, in total €24 billion, were in cash this is now higher after the first six weeks in 2016.

So in terms of where we do expect it to be after six weeks, and if this would continue now for another six weeks, for the full quarter then it’s clear that the impact on our income, our fee and commission income on the asset management side will be driven down, and if I would put it a kind of a guidance to that, I would expect it to be down, let’s say, somewhere in between 5% to 10%. If current circumstances which we have seen in the first quarter would happen for the next coming six weeks, so for the first quarter if that would continue as we have seen it that would be down 5% to 10%.

Benoit Petrarque

Sorry, 5% to 10% quarter-on-quarter?

Johan Thijs

Quarter-on-quarter, sorry, you’re right, yes, you’re right. Obviously if things change, then it turns easily the other way around, therefore we are a bit careful. The reason why I say it, we have guided €360 million, €370 million the previous quarter, the last week of the last period of the last quarter was a bit better and therefore we immediately had an uptick. So it’s that volatile, so we are a bit cautious, but now you know a little bit where it will be heading to, and you have an idea in terms of the first quarter of 2016 for the fee and commission business compared to previous quarter.

Benoit Petrarque

Yes great, just if I go back to the first question, so you say €125 million in 2015, that’s the investment, the IT cost. So globally 2016 should be roughly similar, right, it’s about the same figure?

Johan Thijs

Can you repeat the last part because?

Benoit Petrarque

Now you say 50% of the €500 million will be booked in 2015, 2016, that was your original plan, now you have booked €125 million in 2015, a bit in 2014, so I could assume about €125 million to €150 million investments, IT investment in 2016, is that correct?

Johan Thijs

Yes, indeed.

Operator

Your next question comes from the line of Robin van den Broek from Mediobanca. Please ask your question.

Robin van den Broek

I was just wondering about the earnings model in your fee business, as stated before, a lot of your products still attract a 3% entrance fee. How sustainable is that in the current low yield environment? Do you see competitors move there are you in line with competitors? Maybe some color on there, and could you maybe indicate what the size of the entrance fees were in H1, 2015 versus H2, 2015? And secondly, on Ireland, now it seems that GDP developments are pretty positive there, you still have a pretty sizeable provision there. Can you maybe indicate what will drive releases, when would you see potential for releases at earliest, is it ’17 or further down the road? Thank you.

Johan Thijs

On the entry fees, I think 3%, I’m not sure where that comes from, but it’s on the very high side. The entry fees can be anything between, depending on the product, between 1% to 2%, 2.5% max, on average it’s much lower than the number you are mentioning. The first half entry fees were obviously very high, that is because there were not only high net sales, but also a lot of switches from one fund to another given the very strong market environment, and people made gains, crystallized those gains, and reinvested in a new fund. Obviously in the second half that has not happened to that same extent, on the contrary, and people tend to stick more to their investments, not crystallizing any loss, and therefore less switches also occurred, obviously in line also with less net sales, or net entries. We don't give any further guidance on the exact entry fee amounts, first half versus second half unfortunately, nor how much that entails for the complete total fees.

Robin van den Broek

But is there any assumption you make on net inflows going forward, maybe that's the way to look at it? And then an average entrance fee of maybe 2%, or -- is it just basically to capture the entrance fee from net inflows rather than the switching element?

Johan Thijs

No, the net entries -- net sales are just a part of it, it's an important driver is also the switches between funds, people who move from one fund to another is also an important driver. And then coming back to your second question which was about Ireland, what about provisions and when are we going to see some releases on provisions. First of all you're right, and so it's -- Ireland is in a very favorable position now, it -- Ireland is a country with GDP growing very well, unemployment going down, employment going up. And therefore indeed we do see a positive impact on our portfolio, we do see that our portfolio quality is improving, [indiscernible] go down, non-performing loans go down, et cetera. And as a consequence we know that we have some room in our provision as of today.

Now, we never ever said that we had no overlay, it's clear it is there and we have been always very conservative in how we should approach this, and this is something which we are going to continue to do. What we have been doing also recently is as a consequence of an overall recalibration of the impairment models, the overlay is now much more integrated over a variety of parameters. And it is -- there are no plans to release the overlay in the near future but we obviously keep monitoring the market. One of the reasons, I think I said it earlier on a call, I definitely have said it several times on a road show. One of the other reasons why we are extremely conservative on this one is that because of the capital model which Ireland, the Central Bank of Ireland is using, and they are referring always to the downturn LGD. It is not favorable for a foreign group to release provisions because we need then to tie in extra capital to keep the balance there, taking into account what is happening, taking into account what is happening on the market also in our own situation, and it's clear, yes, we do have overlay.

Robin van den Broek

Okay and nothing on timing maybe?

Johan Thijs

Sorry?

Robin van den Broek

And you cannot say anything on timing? Because I think there was also something about restructuring and people having to move back to the regular payment plans basically before you can move from NPLs to performing again?

Luc Popelier

No, we don't give any guidance on this. Indeed it is true that we have to wait until the restructuring period has ended, and then another one year probation before they can move back to the good book. So very difficult to estimate when exactly that will be and, of course, we have ideas, but we don't disclose this, given the uncertainties around those moves.

Robin van den Broek

Okay, thank you.

Operator

The next question comes from the line of Flora Benhakoun from Deutsche Bank. Please ask your question.

Flora Benhakoun

Thank you. Good morning. So, two questions from my side as well. The first question is on capital, so I've noticed that the end-thread target is 11.25% and I was wondering whether you could give us an idea of the management buffer that you would consider above it, knowing that, typically, we've seen so far between 50 and 150 basis points management buffer for peers. And the second question is regarding NII, whether you could give us any trend regarding 2016 performance in terms of margin, and in terms of volume, loan growth, what you expect there? Thank you.

Johan Thijs

So, we're going back to your first question on capital and on the potential management buffer. So, the capital you referred to, the 11.25% is obviously the fully-loaded capital minima, so that is already taking into account the full domestic SIFI buffer, or as it is called by ECB, OSII buffer. I think they should give somebody especially for finding out those names. But anyway, the buffers included, all of them are at 11.25%. Yes, indeed we do take into account a management buffer but we don't disclose the exact number. And what we can say about it is that we do consider this to be a dynamic buffer. Dynamic buffer depending on circumstances, dynamic buffer depending on also uncertainty which is out there, I'm referring to regulatory initiatives, I'm referring to [indiscernible] guidelines, I'm referring to all of those new initiatives taken by whomever out there as a regulator. It is clear that with the capital position which we do have, we have headroom and therefore also we can confirm our dividend policy to be at least 50% as of accounting year 2016.

Luc Popelier

On the second question, NII trends, well obviously the NIM, the net interest margin, will be further under pressure, that is clear, given the very low interest rate environment and the lower reinvestment deals as a result thereof also in 2016. That is clear. On the other hand, you do see that volumes, loan volumes are increasing quite strongly. We believe that can continue, and that should offset, at least to some extent, that NIM pressure. And also, we should be focused on the hedging results. As you know, we have hedging losses in 2015 as a result of the prepayment of mortgage loans. Those prepayments now come to normalized levels, but the full effect of the hedging losses will now be fully visible in 2016. Whereas in 2015, first of all, you still have an increase of these hedging losses and you have the prepayment fees to offset those hedging losses, that will not occur any more. So that’s another element we have to take into account. But the volumes on the loans, the increasing volumes, plus also lower funding costs also in 2016, should, to a large extent, offset those two features.

Operator

The next question comes from the line of Andrew Coombs from Citigroup. Please ask your question.

Andrew Coombs

Yes, good morning. Three questions please. First, just returning to the fee and commission outlook, I know on the third quarter conference call you stated that we shouldn’t annualize the fourth quarter fee base as an estimate for 2016, you suggested that would be too pessimistic. Now given your revised commentary about the delay in the pickup in fee and commission income, and indeed your previous comments about it being down 5% to 10% Q-on-Q in the first quarter, should we assume that your stance has changed there in terms of your 2016 outlook as a whole for fee and commission income?

And perhaps you could also elaborate a bit more on the sensitivity of that revenue base to broader market conditions? And I appreciate that part of that’s behavioral given the entry fees, but any color you can give would be useful. Second question would just then be on costs, given the cautious outlook on fee and commission income, given the interest margin pressure you just mentioned, is there an ability at all to either postpone some of the investment spend that you’ve earmarked and/or to accelerate some of the cost save initiatives?

And then the final question would just be on capital return. If we look at your core Tier 1 ratio, you’re well ahead of the minimum capital requirements, that excess capital that you’re holding is obviously a drag on the Group ROE, so perhaps you could elaborate on your latest thoughts in M&A? And indeed is there a time frame over which, if you can’t locate any attractive targets, that you’d then consider returning more of that capital to shareholders, either via buybacks or special dividend? Thank you.

Luc Popelier

Okay, Andrew, I will take the first question. The fourth quarter, we indeed last time said we should not analyze this, so we stick to that point of view. But we do see that there is a delay in recovery, which we also mentioned in our presentation, given the market circumstance. But we do believe the fee and commission income will remain important growth driver for the future. So everything will shift now by six weeks, maybe a few extra weeks. But fundamentally, fee and commission income should go up over the next few years. But obviously we are a hostage of the vagaries of the capital and equity markets.

Johan Thijs

In terms of second question, costs, if I did understand your question very well because it was a bit difficult to understand, cost is obviously driven by a lot of elements. We have been talking about the investments, which we are going to do, and it is clear we are not going to cut back on those investments what we are doing. And the obvious reason why is simple, it’s a safeguard for our future, so therefore no cutbacks. We will even continue to put pressure on realizing all those investments in order to safeguard our commercial viability.

The other thing is clear. That is that everything which is not related to that part of our story so those parts which I referred to as investments for our digital transformation, all the rest, which is not part of that is under heavy scrutiny and will be, we already did so we will continue to do so, not only in Belgium or Czech Republic, I’m talking about all countries. Legacy costs are under serious scrutiny and the ambition is clear, they have to come down, for several reasons. Not only a financial one but also to kill the complexity, which is often related with those costs.

In terms of your third question, what about capital and what about difference -- or the importance of the buffer between the absolute requirements requested by the ECB National Bank and their current position. It's quite funny that you say that we have a bit of a drag on our ROE. I think our ROE today is not too bad with 19% we will be quite okay I think. In terms of what we are going to do with our capital, we have several options. The first one is clearly to be -- keep in mind that a lot of things out there are still volatile. I'm talking about all the potential initiatives taken by several entities, EBA, ECB, some other institutions as well, also some accounting rules. As long as that volatility is not cleared out, we will take a conservative stance. We are not going to run the Group into difficulties by being too aggressive or by being too little conservative in that respect. That would be extremely unwise.

On the other hand, if we have a bit more clarity on that side, then it's clear in that the options which we do have in terms of capital deployment are looking into M&A, which we have been doing also in the last six to eight quarters, but clearly linked to our core countries. And it's clearly linked to our profitability targets and to our franchises. So strengthening our positions where we need to strengthen them, and do it in such a manner that it improves, both on the mid-term and the long-term, our returns. Everything boils down to if nothing of this is going to happen, yes, then we do have a buffer. And that we, yes, will consider the target which we have put, at least 50%, we will reconsider it again. If capital is not used in the Company, then we will deploy it to our shareholders.

Andrew Coombs

I guess the follow-up question would be if you are focused on some of that regulatory and accounting uncertainty, are there any specific items within that you are most concerned about and what is the timeframe that you think you will get clarity on those? Thank you.

Johan Thijs

We have to allow that obviously also other people to ask questions, so we will be very short on this one. We don't give guidance. There are plenty of reports out there which are going to -- which are describing impact on all banks. Those reports are not necessarily correct and not necessarily correct also for KBC and as we flagged, the volatility and the proposals which are on the table, so please, no guidance.

Operator

Your next question comes from the line of Jan Willem Knoll, ABN AMRO. Please ask your question.

Jan Willem Knoll

Just getting back to the NIM, on the NIM in Belgium, you mentioned that your NIM was helped by lower funding costs on the maturing term deposits in Belgium. Can you quantify this impact, please, and what sort of impact do you [envisage] in Q1 and the rest of 2016? How many term deposits will mature this year and what do you pay on these, on average? Then on the NIM in Czech Republic, we saw a pretty steep fall in the NIM, quarter on quarter, due to front book margin pressure and low interest rates. The NIM dropped by 21 basis points since Q1. Can we expect a similar pace of decline in 2016? And what can you do to mitigate these NIM pressures? Lastly on the competitive environment in Czech Republic, we continue to hear about pressures on asset margins and liability margins. What is your outlook here? A second question on credit costs, credit costs have been exceptionally low obviously. This is, I guess, in good part a function of the low interest rate environment. I know you don't give any guidance on the credit cost ratio from a numbers' perspective. But maybe you could qualitatively talk about how you think the credit quality trends will develop going forward, especially if interest rates stay as low as they currently are that would be appreciated. Thanks.

Luc Popelier

I will take the first question. The term deposits were the main factor that mitigated the NIM pressure in Belgium. We had about 1.2 billion of expensive term deposits which matured, obviously there were other term deposits which were taken on board, particularly with institutional money and large corporates but I'm focusing now on retail term deposits. This was a reduction, so there was also some rollovers with that much lower margins. And that will continue to be a feature for 2016, as I mentioned before. There will be quite some deposits, expensive term deposits maturing in 2016. On top of that, we also have some senior unsecured bonds which are maturing which also carry still high spreads which will either not be refinanced or refinanced at much lower margins that's not an important litigant going forward.

Jan Willem Knoll

And sorry, can you -- sorry to interrupt but can you give any numbers on the maturing term deposits in 2016? Both in terms of volumes and in terms of what you pay on these on average

Luc Popelier

We don't give any guidance on this.

Jan Willem Knoll

Okay.

Johan Thijs

But we will try to make your day with the credit cost ratio. So you're right, it was indeed 23 basis points, quite low definitely compared to the 15-year cycle which is a bit more than 53 basis points. What you can expect, if you look on the peer data for several years and it’s not for 2016, I’m talking now on a range of several years, then I think that the credit cost ratio range would be somewhere between 30 and 40 basis points. But that’s not guidance for 2016 this is an expectation for a series of years.

Jan Willem Knoll

Okay. And just on the NIM in the Czech Republic, we saw a pretty steep fall there in the last couple of quarters.

Johan Thijs

Well the NIM pressure in the Czech Republic obviously has to do with the commercial margin pressure on the loan side. On the one hand, you do see much more competition, particularly on mortgages, although there is a bit improving now. But on the other hand also, the very low reinvestment yields. The Czech Republic had even high, lower yields than the Belgium Government bonds, so that’s another drag on that NIM.

Jan Willem Knoll

Yes and any comments on the competitive environment in Czech Republic?

Johan Thijs

I think you’re referring to the new entrants, the smaller players.

Jan Willem Knoll

Yes, and especially lending book margin pressures.

Johan Thijs

So what we have seen is that those players have been getting now the market shares and they now currently have a market share. So [indiscernible] our lending book it’s about 7% on deposit side, but what is very important to notice is that those new players are bringing down their rates as well. So there are several reasons why obviously they have also the pressure on their P&L, but because of their size, which is now becoming a little bit more significant, that is that we do see that they are on the radar screen of regulators as well. In terms of our own way of dealing, are we under pressure here? Luc has answered that indeed something of the lending book is feeling that pressure but also on the deposit side, we will further continue to cut rates, we have done so in the third quarter. We are going to do so in this quarter as well. And that is because we do offer not only one single product, we do offer a whole range of investment products starting with the current account, saving accounts and ending with asset management life insurance products.

Operator

Thank you. Your next question comes from the line of Kirishanthan Vijayarajah from Barclays. Please ask your question.

Kirishanthan Vijayarajah

And firstly, just a clarification on that 5% to 10% quarter-on-quarter decline in fees, does that apply to just the asset management fees, or does that apply to your total fee and commission base? And given the volatility that you’re seeing as a result of being quite successful with the CPPI products, are you actually reining back on pushing that product outside of Belgium, in places like the Czech Republic? I think you in the past mentioned you were trying to increase penetration. Are you now winding that back a bit given the volatility we’re seeing? Thanks.

Johan Thijs

The answer is indeed that we do see the impact on the total fee and commission business. Part of the business is obviously driven, an important chunk of that business is driven by asset management, let’s say about 70%, 75%. The other part which is important, that is the banking services where we do have everything which is related to, all fees related to credit and guarantees, payment services and obviously security services. To say something about securities, obviously that is also seasonal, not every quarter has the same impact. So the guidance which we have given on the fee and commissions business [indiscernible] for the first quarter 2016, you should consider that for a total amount.

Kirishanthan Vijayarajah

And then in terms of the penetration outside of Belgium?

Johan Thijs

We will continue, sorry I forgot to answer that. We will continue to develop our production the way we did it in Belgium and all the other countries as well.

Operator

Thank you. Your next question comes from the line of Johannes Thormann from HSBC. Please ask your question.

Johannes Thormann

Johannes Thormann, HSBC. Two questions left from my side. First of all, while understanding the impairments in Bulgaria, I struggle to see the reasoning in Slovak Republic or Slovakia because of the good macroeconomic background. Are there any issues within your company or could you give us some more details on that? And secondly, just on your Irish strategy. We are now in 2016 and you promised to give us an update in 2016. At what point in time will you make a decision on the three options you're holding? Thank you.

Luc Popelier

On Slovakia, the uptick in the fourth quarter was due to just one file, a large file. And if you look at the total impairments in Slovakia then actually they’re still much in line with what you would expect in the and actually in line also with the fourth quarter of last year, a bit of an uptick there, but not too much.

Johannes Thormann

Sorry if I interrupt, I meant the goodwill impairments.

Luc Popelier

The goodwill impairments, sorry, I misunderstood. On the goodwill impairments, there is an important part that has to do with the technical factor of how you allocate the cash flows, which were contributed by Istrobanka to the total cash flows of the Slovak Republic, little bit technical, it's been a big driver, where you have to assume a certain percentage because Istrobanka as such does not exist anymore. And we have attributed a larger proportion to the Istrobanka case, to the Istrobanka cash flows, than before, sorry, to the net asset value than before. Maybe it is something we can take offline also tomorrow, because it's a technical feature.

Johannes Thormann

Okay, thank you.

Johan Thijs

A pretty straightforward answer your question on the impairments of goodwill, is there an issue in the country, the answer is clearly no. They made a profit of € 82 million which is higher than the year before. Coming back to your second question, 2016 is indeed the year which we refer to for a strategy update, but we are going to be profitable in 2016 as a guidance, and at the end of that period we will update you on strategy. When are we going to make an explicit statement about that? That is at the end of year 2016, so that will be the first quarter of 2017 where we will make a clear statement what we are going to do.

Johannes Thormann

Okay, thank you.

Operator

Thank you. The next question is comes from [indiscernible]. Please ask your question. We move to the next question from the line income Albert Ploegh from ING. Please ask you question.

Albert Ploegh

Good morning. Basically more a clarification question if I may that's on the dividend outlook. You've basically been stressing a couple of times the at least part of the 50% payout ratio. Given what you already flagged, the regulatory and accounting uncertainties that are still out there, is it fair to assume that you want to have some more clarity to be able to at least pay more than the 50% or is it already comfortable enough with the knowledge today to indeed think of a higher payout ratio than the 50%? Also on the payout ratio, looking ahead a couple of years, are you more in favor of a progressive payout ratio or in the case you basically decide on more capital return to shareholders that this could basically be a one-off top up of the payout ratio? Thank you.

Johan Thijs

In terms of the at least, at least is at least, I cannot add more to that to be honest, I'm sorry. We clearly look into what are the driving factors and it is clear if you look where KBC Group was five years ago, if you look where we are now, we are not going to take decisions just to boost dividend payouts and then run into difficulties if regulators push through what they have in mind. That would be extremely unwise, and this is definitely not something which we are going to pursue. We want to be a solid, sound, very sustainable company and that is reflected in our guidance of the at least 50%. What is then the ambition, one-offs or a very sustainable increase of dividend payout? I think both elements are possible but all is relative to what is the driver. If you have one-off effects influencing your results then it makes clear that you can consider your payout ratio to be influenced by that one-off effect. If it is on the basis of your profitability, it is on the basis of your sustainability profitability then it makes much more sense to consider the 50% in a sustainable manner to drive it up. As a consequence my answer is twofold it's sustainable in this respect.

Albert Ploegh

And maybe one follow-up question maybe can also be taken offline tomorrow as well. It's on the hedging losses that you referred to on the Belgium mortgage book. Can you maybe give a little bit quantification what has been taken in 2015 P&L and what net delta would be going into 2016?

Luc Popelier

[Indiscernible] discuss a bit more tomorrow, but what I can say is that the fourth quarter is now more stabilized number which could be a good measure for the next [control] for 2016 as a run rate.

Wim Allegaert

Thank you very much for your questions, we took a bit more time than initially scheduled, but I think that we take it as a good sign. We can certainly discuss a bit more tomorrow as well in London. Our next appointment in any case is in three months time at latest, but I would also like to flag the publication of the full annual report which is on March 31. So leaves me with thanking you for attending the call and speak soon.

Operator

Ladies and gentlemen, that concludes this conference, thank you for your participation. You may disconnect.

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