Wim Allegaert - Investor Relations Johan Thijs - Group Chief Executive Officer Luc Popelier - Group Chief Financial Officer

Jean-Pierre Lambert - Keefe, Bruyette & Woods Benoît Pétrarque - Kepler Cheuvreux Stefan Nedialkov -Citi Albert Ploegh - ING Giovanni Carriere - Autonomous Research Johannes Thormann - HSBC Francois Boissin -Exane BNP Paribas

Good morning, everyone on this relatively sunny morning in Brussels, August 8, 2013. My name is Wim Allegaert.

I am managing the Investor Relations office. During today’s conference call, KBC management will comment on the second quarter results.

And we are in the company of Johan Thijs, Group CEO; and Luc Popelier, Group CFO to elaborate on the results and add some color to the figures. We will take roughly 40 minutes to guide you through the presentation for the analysts, which can be found at our corporate website, kbc.com.

And after this, there is of course time for questions until around 10:30 Brussels Time. The conference call is taped indeed and as mentioned and can be replayed until the 22nd of August.

Investor Relations and our CFO, Luc Popelier have organized the sell-side analyst meeting in London today at our offices in the city. That’s Old Broad Street 111.

We will start at 4:00 PM local time, and you are very much welcome there to join us, to discuss our performance in greater detail, with a cup of Earl Grey tea or dark roasted coffee. I give the floor now to Johan Thijs.

Thank you very much, Wim, and also from my side good morning to all of you. And we will go to the presentation, which is as Wim already mentioned provided on our website.

Let’s go immediately to slide three, where we will start with the key takeaways. And to step in with one single sentence I think we can say that we have had a strong performance in this second quarter.

We are reporting today a profit of €517 million. And moreover, which is also of crucial importance, I think is that we talk about our adjusted net results, we are talking about the profit of €485 million in this quarter, which is an increase compared to previous quarter with 35% and which is bringing us to a return on equity of 15%.

Now, this is due to several effects, but in essence, it is due to the strong commercial performance of our bank insurance franchise in all of our core markets and our core activities. We have a stable net interest margin.

Commission and fee income has performed quite well to use an understatement. We have solid gains on our financial instruments.

The quality of the non-life insurance portfolio is excellent. The cost income ratio is at a level of 50%.

Also it can be called excellent, and what is also quite crucial is we are reporting today that our impairments are lower than the previous quarter. Also there once again we will confirm our guidance, which we have been given at the beginning of the year.

In this quarter, we booked €88 million of loan losses in Ireland which allows us to confirm the earlier given guidance of the full year loan loss provisions in the range of €300 million to €400 million. On the previous occasions, I always added to that, that we expected to be more close to €400 million rather than €300 million, and we repeat this today again.

On top, we have been able to perform quite well in terms of capital and liquidity. Actually, given the fact that we have paid back the Flemish State Aid for €1.2 billion plus a penalty – and these are rounded numbers €600 million.

We are now at a pro forma common equity level of 11.8% Basel III fully loaded. What does pro forma mean besides the payback of Flemish State Aid is also including the signing of the KBC Banka deal our affiliate in Serbia, and it is including the partial transfer of the shareholder loans which took place at the 2nd or 3rd of July.

Liquidity position is strong. I will come back to that later on.

And also we have been able to once again improve our position in terms of buffering the long-term – sorry, short-term wholesale funding. Also in terms of de-risking our portfolio, we have been able to significantly reduce our CDO exposure.

We have been reducing it with €4.6 billion, but later on, I will go through the details. So, let’s immediately go then to a bit more detail in terms of KBC Group.

And therefore, I would like to go to slide six. On this slide, you can see that the difference between our net result and our adjusted result only accounts for €32 million, what we were actually already indicating in let’s say a year ago, that this would become closer to each other.

The €32 million comes down actually as a sum of three parts, €180 million is related to the revaluation of our structured credit portfolio and that is actually created by two elements. First of all, the improvement of the credit spreads for the valuation of the CDOs, and on top of that, due to the fact that we were able to reduce the CDO exposure, we have had a contract-negotiated a while ago with the Federal State of Belgium in terms of the protection scheme.

And part of that negotiation was related to a reduction of future premiums subject to several conditions. By reducing CDO exposure that we did in this quarter, we were able to trigger that contract and to recoup €88 million after-tax of future premium payments.

So, the €180 million is composed of those two elements. On top, we have had two negative elements.

The divestments here that was already indicated, that there were still some open corrections on the absolute banking deal. And here we also included €20 million impairment on subordinated loan, we have outstanding at NLB.

Last part of the building block here is a further negative mark-to-market on our own credit risk. What about the split up between the bank and the insurance activity, there we always tend in the same range, somewhere between 70% and 80% profitability – profit, sorry, contribution by the bank and between 30% and 25% for the insurance company.

Now, we have it at a level of 80/20% so perfectly in line with that range. So, I would not dwell too long on this.

Let’s go more into the numbers which are of importance, and that’s first of all, our net interest income. It comes down slightly with 2%, but this is mainly related to a technical effect, which has an effect at this quarter of €40 million.

The true performance of our interest income is obviously influenced by the lower reinvestment yields, but we have been able in this quarter to keep our margins at a very sound level. You can see this in the net interest margin, which remains at 172 basis points.

And on top we were able to increase our commercial volumes in terms of deposits and also in the car markets in terms of credits. On top, we have been further, and this was voluntarily we have been further decreasing our loan portfolios in our non-core foreign branches.

And for that reason, obviously that has an impact on the net interest income as well. And also the legacy portfolio and Project Finance, which is centralized in Ireland, has also been further billed down.

So, from that perspective, net interest income is actually performing quite well. It’s fully in line with what we have been giving as a kind of guidance in earlier occasions.

The second element contributing to the top line is the fee and commission income, which has also performed at the same solid level, high level of the previous quarter. So, for a second quarter in the row, we are performing very well in terms of fee and commission income.

This quarter fully related – excuse me, fully related to the management fees to the mutual funds business, whereas in previous quarter, we did see some substantial effects in terms of class 23 products in life insurance, but because of the impact of the new tax rates, which has been demanded by the Belgian Federal Government at the beginning of the first year, we do see a decline in those sales. Thanks to the bank insurance model this shifted back again into the sale of mutual funds, and for that reason, we have a very solid and a very high level of fee and commission income.

Also, in terms of assets under management remained quite stable, if you compare it to the last year, this is mainly thanks to the positive pricing effects. In terms of the insurance business, here you can already see some indication of what I just said.

First of all, in the earned premiums, I mean, this is a mixture of nearly non-life insurance premiums and life interest-guaranteed products. You can see, and there is always difficult, for an insurance company to compare quarter-to-quarter, but let’s compare it year-on-year.

You can see a positive growth in the non-life business of 3%, and a voluntary deliberate drop in the interest guaranteed products of 35%. In terms of quality, the insurance business non-life was doing very well and the combined ratio stands at 91% despite the fact that we’ve been suffering in Czech Republic a flooding.

We will get some more details later on. But despite of the fact, combined ratio stands at 91%, which is an excellent result.

In terms of written premium, we do see that the life, sorry, the non-life insurance performs quite well. Like-for-like basis, we have a growth on yearly basis of 6%, be aware that making a comparison between quarters actually has – it doesn’t make sense in insurance company non-life.

This is purely due to the seasonal effects. In the life business, here you can see the effect of the new taxes, so the unit linked products have been substantially decreasing compared to last year.

As a reminder, last year production was exceptionally high, but still the impact of the tax is obvious and overall, we do see still that unit-linked business is accounting for a bit more than half of the total sales life sales in our group. In terms of the contribution straight from the balance sheet, also there is positive news to mention in terms of fair value financial gains on the financial instruments.

We do see a strong contribution of €256 million, which is mainly driven by the mark-to-markets of the ALM derivatives and, definitely, if you compare it with previous, sorry, with the same quarter in previous year, then the performance is quite strong also in terms of the gains, which we’ve realized on available for sale assets is quite a performance compared to last year. If we compare the previous quarter, we now stand at €46 million, which is mainly driven on the sale of Belgium available-for-sale assets of Belgian bonds, government bonds and Belgian equity and it is compared to previous quarter, a drop of €50 million, but in the previous quarter that wasn’t exceptionally high where we had to use the momentum to reduce exposure on Belgium paper and used the momentum of the lower interest yields at that time.

In terms of operating expenses, also there we stand at with our cost income ratio at an excellent 50%. Now, when we make an adjustment because of the high results, which we have been realizing on the mark-to-market on our ALM derivatives, if we would exclude those, then we would be having a cost/income ratio of 56%.

Now, that 56% is an improvement compared to last year and is perfectly in line with the guidance, which we have given or the ambition which we have expressed for 2015 having a cost/income ratio of 55%. So, we are very well on track.

In that 56%, once again, I have to add but, because that it’s of course distorted by another tax rise in some of our countries where we are active and present. First of all, in Hungary, the operating expenses went up because there was – once again added a new tax both in the financial transaction levy and as you know, we have taken the full bank tax for the full year and we have booked that in the first quarter of 2013.

Also, in the second quarter of 2013, we have taken the full hit of the additional transaction levy, which would be spread out over four quarters, in four installments in the last quarter of this year, but we have taken it fully. Now, if we would exclude those one-offs and we have a look at our true costs, then our operating expenses dropped about 1% year-on-year and dropped about 3% quarter-on-quarter, which actually means that taken into account the inflation, which is in Belgium leads to the wages.

So the indexation of the wages is part of the cost as well. We can say that our costs are under good control, and that we’re well on track with our ambition to bring the cost/income ratio down to 55% in 2015.

In terms of quality of our portfolio, first of all, asset impairments, you can see that the asset impairments came down significantly, €100 million. This is mainly the result of lower impairments for the corporate business in Belgium, but also lower impairments in KBC Bank Ireland, €88 million is €11 million lower than previous quarter and substantially lower than last year.

And this allows us to, once again, repeat the guidance which we have been giving, range €300 million to €400 million, closer to €400 million for the full year. On top, we had also some lower impairments in KBC Finance Ireland for our Project Finance portfolio and this brings the result to a drop of €100 million.

In terms of credit cost ratio, we now stand at 75 basis points. We have to mention that this is obviously seriously influenced by the performance in Ireland, the credit cost ratio in Ireland, and by a few large corporate files which – have been booked in the first quarter, in corporate business in Belgium.

If we’d exclude Ireland, and we would exclude one single corporate file in Belgium, then our credit cost ratio stands at 46 basis points in the first half of this year. This is also – what we do see in this credit cost ratio this is a bit higher than last year.

Last year, the credit cost ratio was, I would say, extremely low. What we do see is that in the SME business in Belgium, we do see a deterioration of the credit quality.

This is linked also to other elements which take place in Belgium. On a global view, we could say that and we can see that in Belgium for the last five, six months, we have seen defaults peaking month after month, and this is also reflected in the credit quality of our SME portfolio.

So, some deterioration, but still credit cost ratio only stands at 46 basis points. In terms of non-performing ratio, we do see a slight increase to 50, sorry, to 5.5%, which is primarily driven by increase in Slovakia.

They still increase non-performing loans in Ireland, but we come back to the later on. And some changes also in the group center on portfolios which are currently billed down.

This is actually it for the group level. Now, to go bit more into the details of the several business units, I give the floor to Luc.

Thank you very much.

Many thanks, Johan. Good morning to everyone.

And I’ll be focusing now on the different business units. First of all, the Belgium Business Unit, which is on slide 16 to start with and obviously, Belgium is following the same trends, as Johan was just explaining, given that it accounts for the bulk of the results.

So, our Belgium Business Unit also had a strong improvement in results due to a number of factors, being slightly higher net interest margins, strong net fee and commission income. Also the mark-to-market of our ALM derivatives, obviously, gave a big boost.

And we had excellent cost income ratio of 44% in the second quarter of 2013 and year-to-date it even is 45%. So, I think an extremely good result in Belgium.

And last but not the least, significantly lower impairment charges quarter-on-quarter. I’ll give you a bit of detail further on.

If we then look at the different components, slide 17. Net interest income quarter-on-quarter a bit down, but the technical item that Johan talked about was related to Belgium, which is the biggest – has the biggest impact on this decrease.

There was also a slightly lower loan portfolio particularly in the foreign branches, but also a bit in the Belgium corporate branches. The commercial margin, however, remained very resilient.

And as you can see on the next page, the NIM increased from 1.17% to 1.19%. This was due to primarily more volumes on current accounts, not so much in increasing margin.

But the volume increase in current accounts which, of course, is a higher-margin product than, for example, term deposits. And we also had a very solid loan margins both on mortgages and investment loans.

If you look at year-on-year, there is a stronger decrease and there we still have – we’re still suffering from the lower reinvestment yields. Also, with lower income on the insurance side, but obviously that is compensated to a large extent by lower guaranteed interest as well and volume decreases in the foreign branches.

And year-on-year, the NIM still decreased because of the lower investment yields. Fee and commission income, a slight decrease quarter-on-quarter primarily again, as Johan already explained for the group as a whole due primarily to lower unit-linked life sales, but also due to less transfers from units guaranteed to unit-linked and switches within the unit-linked portfolio.

Having said that it is still at a very high level as you can see, because the first quarter was also a very strong quarter in terms of fee and commission income. And therefore, you can see that year-on-year, we have a very strong improvement of more than 21% year-on-year, driven obviously by higher management fees and entry fees, more entries, but also more switches, high pricing for certain products, a better product mix, where there is a shift from lower margin products into higher margin products, such as CCPI and equity funds and a bit more volume as well on the asset management side.

The net results from fair value again mostly driven by the ALM mark-to-markets on the ALM mark-to-market derivatives accounts for the biggest impact in the quarter-on-quarter comparison. Year-on-year however mark-to-market is one component but also the CVA and MVAs were negative in the last year second quarter 2012 and now positives that made a big difference as well.

But to compensate a dealing room income in the second quarter of 2012 was exceptionally strong, and I would say that this quarter, the second quarter of 2013, there was a more normal income in the dealing room comparable with the first quarter of 2013. Operational expenses, quarter-on-quarter decrease of 6%, but that was mainly due to on the one hand lower bank taxes, because we could recoup a portion of the funds we had in the old deposit guarantee fund.

We could recoup a portion of that, but secondly we – and that’s operational, we also had lower ICT expenses quarter-on-quarter. Year-on-year, there was an increase of about 1%, that was primarily due to higher bank taxes in Belgium.

If you can see the volume trends, we see that quarter-on-quarter in terms of loans and deposits, there was hardly any growth, although there in the SME and in the retail sector you do see further growth in Belgium, year-on-year, there is still some further growth with the exception of the loan portfolio, mainly due to a further reduction and a deliberate reduction of our portfolio in the foreign branches. If we then look at I would immediately go to the slide 18 the NPL ratio, I just discussed the NIM already.

There the NPL stays at about 2.3%. The credit cost ratio, however, increased from 28 basis points to 49 basis points, that was mainly due to – well, there are few aspects, there are some adjustments, which were made in the second quarter to the IBNR, where it was no more made more point in time, but even if you close the technical effects the credit cost ratio would be lower, but still there is a deterioration, particularly in the SME and in the corporate book.

Combined ratio excellent at 89%, there was an increase in the second quarter because of higher major claims, fire, in the first instance also workers’ compensation. And there were also a range of higher normal claims, mainly in car insurance, both MPTL and CASCO.

Particularly the fire, but also work compensation impact was mitigated by very positive ceded reinsurance results as we had reinsured a large portion of those claims. If we then go to Czech Republic on slide 20, also here a strong increase quarter-on-quarter, 11%, mainly due to first of all slightly higher net interest income, but then also due to net gains from financial instruments at a fair value and lower impairment charges.

There were less life claim, less results from insurance because of flux, and I will go in detail a bit later. If we then look at slide 21, net interest income was positive 0.8%, almost 1% extra quarter-on-quarter, despite a negative foreign exchange impact of about 0.5%.

That increase in net interest income was primarily on the corporates and SME side, particularly on the SME side with higher volumes and higher margins. On the corporate side, it was mainly due to prepayments where certain commissions are accrued as net interest income.

We do see further pressure again on retail deposits, so there was lower net interest income from retail deposits quarter-on-quarter. Year-on-year, it’s a 5% decrease, but 2% of that can be explained by negative foreign exchange evolution.

The remainder about 3% is due to primarily lower reinvestment yields, which we could not compensate fully by a higher net interest income on corporates and SMEs. There was increase in volumes and margins, but that was not sufficient to withstand the lower reinvestment yields.

Fee and commission income, a slight decrease of 8%, mainly due to lower entry fees on mutual funds and lower sales fees for the sale of pension funds. Year-on-year, however, there was a strong increase of fee and commission income.

If you exclude the FX it’s 9%, but if you exclude the FX impact, the increase was even 12%, and that demonstrates the second quarter as the first quarter of this year were very strong in terms of fee and commission income due to higher entry fees and also lower fees to external distribution networks we have to pay. On the operating expenses, decrease of 1%, 0.4% again explained by foreign exchange impact and some other technical elements.

If you exclude all the technical elements, then you see a stabilization of the costs in Czech Republic. Year-on-year, however, the slight decrease of almost 1% is masked by the foreign exchange impact, minus 2% and had a positive impact.

So, underlying, there was an increase of 1%. That was due to on the one hand higher bank taxes.

On the other hand also slightly higher staff and ICT expenses which were not fully mitigated by lower marketing expenses. Asset impairments, you see a decrease quarter-on-quarter quite significant from €22 million to €9 million.

That difference is mainly explained by a model change, although there is also a better portfolio performance. If you look at the volumes in Czech Republic, it’s still quite healthy both on the loans and deposit side and both on a quarterly basis and year-on-year basis.

The NIM has slightly decreased 3 basis points quarter-on-quarter, but remains quite resilient. The slight decrease is due to the pressure as I have explained before on the deposit margins and despite the reduction in the rate on the savings accounts, which happened end of March of this year.

Year-on-year, you do see a more pronounced reduction from 3.26% to 3.04%, so 22 basis points lower. And that is due as I explained before to the lower reinvestment yields, which mainly has an impact on the margins on our current account.

NPL ratios, a slight increase, the credit cost ratio amounts to about 0.3%. I did explain that this is due to one technical effect.

If you would take (indiscernible) would be at 0.4% which is still quite good, but you do see a slight deterioration against last year. Combined ratio at 102%, obviously impacted by the flooding, where we had technical charge on the flooding of around €16 million.

However, we have a very good reinsurance protection, and therefore, the net impact in the Czech Republic is €4.4 million. We have retained some of the further exposure in our captive Group Re to the tune of €1.5 million.

So, the overall impact for KBC Group of the flooding is €5 million negative. If you look at International Markets Business Unit, slide 24, a strong improvements quarter-on-quarter mainly driven by Hungary and Bulgaria.

In Hungary because the full year bank tax had been taken in the first quarter. We did have an additional tax in the second quarter, a one-off financial transaction levy, but there was – if you take the two together, it’s still a strong decrease about €21 million in bank taxes quarter-on-quarter so that had a big impact.

And Bulgaria was quite negative in the first quarter and now positive results in the second quarter due to a large impairment we had in the first quarter on a bond in which they invested and which had defaulted. Also a bit helped improvement, it was bit helped by a better performance in Ireland mainly due by reduced loan impairments around €11 million better.

We then go to the next slide, 25, you could see credit cost ratios improving overall, mainly driven obviously by Ireland. There is deterioration in Slovakia, but that is driven by particularly one exceptional large corporate file.

And in Bulgaria, we see also a duration that’s more due to a range of effects in the portfolio. In Hungary and I would have some more details, Hungary, the credit cost ratio remains stable.

NPLs go up from 18.1% to 18.5%, obviously driven by the further deterioration of the NPL ratio in Ireland. If you look at the total loan book, it fell 1% quarter-on-quarter and 5% year-on-year.

That was mainly driven by Ireland. On the deposit side, however, we see a strong improvement in almost all the business units, with the exception of Bulgaria where there was a deliberate reduction of the deposit side, but overall, in the other new business units, a strong increase particularly in Ireland.

If we then look at Hungary, the Hungarian loan book on slide 26, we see that there is a further deterioration NPL ratios slightly decreased, sorry, slightly improved, but that is due to two opposing effects. On the one hand, a further improvement of our portfolio of the SMEs and corporates companies, quite a strong improvement, but that is offset by a negative evolution in the NPLs on the private loan book and the retail loan book particularly in the foreign exchange home loans.

Credit costs, you see that there’s a high, next to the high, but the stable NPLs with two underlying trends, you see high risk actually coming down quite considerably that is mainly due to strong improvement on the corporate side. But we do see that even in the retail loan book, although there is a migration to the NPLs.

Obviously, that there is also an improvement in the retail portfolio in terms of the high-risk portfolio, which also gives you a pointer to what we see and that is, there is a – in retail portfolio, a strong core book, a strong core book of people who are very resilient and remain current. But to the book, the part of which, which had been in default previously continues to be in default and is the grade of that book is worsening.

The tax burden as already explained had also an impact in Hungary. We had a full year bank tax paid in the first quarter of recognizing the outcomes in the first quarter of €43 million.

There was additional one-off financial transaction levy was charged and which we recognized in the second quarter of €22 million post-tax. And on top of that, we have an increased financial transaction levy.

As you know, starting from the 1st of August which will be around €40 million post-tax for the full year 2013, €60 million of that has already been recorded in the first half. If you take all those taxes together, we will be paying bank tax so extra tax on top of the corporate taxes of more than €100 million in Hungary.

On the municipal loans, may be some interest, end of June, we have transferred around 46% of our portfolio of municipal loans, which were taken over by the state at particular and we still have around €165 million on our books. Foreign exchange housing loans, as you know, there are discussions towards, on potentially, new law.

We do see that it seems to be focusing on the foreign exchange housing loans, not on home equity and our foreign exchange housing loan portfolio is around (indiscernible). On Ireland, you see a further deterioration, as expected, of the non-performing loan ratio, 24% first quarter, now 24.9%.

Across almost all the segments, owner occupied mortgages, but mortgages, and also SME and corporate mortgages where NPLs are going down further. However, that is fully in line with our expectations.

Loan loss provisions have been €88 million in the second quarter. And we believe that for the full year, we will be within the range of €300 million to €400 million.

And again, as Johan already explained, we believe that come up at the higher end of that range for a number of reasons, also to do with further CBI guidelines. There is also a continued successful retail deposit campaign where deposits have increased by €0.6 billion since the end of 2012.

We now spend €2.7 billion, and we are gaining further in new customers quarter-on-quarter. That makes for the business units.

If we then look at the divestments and de-risking, we first have the reduction in risk-weighted assets. Further reduction risk-weighted assets, going from €98.6 billion in the first quarter to €93.9 billion in the second quarter, so minus €4.7 billion.

That minus €4.7 billion is, first of all, driven by a reduction of – well, the sale of Absolut Bank, €1.8 billion, reduction in risk-weighted assets. The next one is actually volume changes.

Volume changes partly because of the foreign branch reduction also a reduction in Belgian unit corporate branches and also due to some reduction in Hungary, the loan portfolio in Hungary. There was also an impact of – slight impact on the credit risk side on the CDOs.

But the largest impact of around €800 million is on market risk. €800 million risk-weighted asset decreased because of the CDO collapses.

If we then look at the CDOs on slide 32, I first have to point out that the reporting format has changed, where we now reported the net CDO exposure which is our real risk that we are running. That means that the claimed and settled credit events and the hedged portion of our CDO portfolio has been netted off and this gives our net – therefore, our net CDO exposure, for which we still obviously have the government guarantee of now €5.9 billion.

Obviously, we had some tranching in there. So, against that €6.3, not only do we have a – get a state guarantee, but we also have markdowns of €0.4 million – sorry, €0.4 billion.

That’s an improvement in the outstanding markdowns driven by lower credit spreads, on the one hand, but also a CVA reduction on MBIA where we reduced the CVA from 80% to 60%. And that meant that the CVA goes down from €370 million to €102.4 million.

That reduction of CVA, obviously, is the combination of the percentage reduction, but also the positive credit spread evolution. The €6.3 billion net CDO exposure means that we have collapsed the CDOs by €4.5 billion.

A number of CDOs have been collapsed in the second quarter. The costs of that were immaterial and set off by some fee reduction we got from the government.

So, the overall impact has been positive of those collapses. We continue to look at our CDO exposure in an opportunistic way.

So, if we believe we can further collapse CDOs that the netted negative impact is limited, where we take all aspects into account, not only P&L, but also the cost of the value of the state guarantee and the risk weighted asset reduction, then we will continue that strategy. As a result of the collapses, you can see that the sensitivity of our P&L toward those CDOs has further decreased quite significantly.

In the second quarter, a 50% widening in corporate and ABS credit spreads would result in €142 million negative P&L impact, whereas in the first quarter that was €200 million. On the capital position, capital has again strengthened quite considerably, not only because of the good results, but also of the strong reduction in risk weighted assets that results in a common equity ratio fully loaded at the end of the first – second quarter of 13.3% on a pro forma basis, where if we take into account repayment of the State Aid that we did €1.2 billion plus €0.6 billion of penalty on top of that, the sale of KBC Banka, and the removal of a portion of the shareholder loans, then our pro forma Basel III fully loaded common equity ratio would be 11.8%.

Obviously, that still includes the yeses. If we take those yeses out, we would be around 9% excluding those yeses, fully loaded.

On the leverage ratio, leverage ratio is 3.7% for KBC Bank Consolidated. This needs some explanation based on the current CRR legislation.

So, it’s not taking into account the consolidated document that has been published by the EBA because, first of all, it will have a limited impact for KBC; and secondly, it's a consultation paper and, therefore, not a approved document, whereas the current CRR legislation is an approved document. We are applying the strictest interpretation.

So we have used a fully loaded Basel III common equity ratio, so not a total ratio but a common equity ratio. And there, we still have 3.7%.

So if we would have a more liberal interpretation of the leverage ratio that would be significantly higher in that case. That's important to compare with some of our peers.

I am not going to dwell too much on liquidity position. As you can see, liquidity position remains to be very strong has actually improved a little bit further given that we continued to have further inflows on the current accounts primarily, but also some savings accounts.

So, I would say, that our liquidity position remains very, very strong indeed. And I will leave the floor back to Johan for some wrap up.

Thank you, Luc. So, as a final conclusion, I could say that this quarter is characterized by a very strong commercial performance in terms of banking and in terms of insurance and this in actually all countries.

And, therefore also, we could say that we will maintain our guidance, which we have been giving earlier that this is the expectation for the Belgian and the Czech markets for the near future, so stable and solid returns. We also still continue to say that we expect a turnaround potential for the international market business units in the near future.

And also, this quarter was reflected once again with our adjusted results, our underlying results, which are confirming our strong track record. Capital and liquidity is solid.

And we have been and we will continue momentums on de-risking our portfolio in the near future as well. So, if I look forward to then what I just about Belgium and Czech Republic is continuous, stable and solid returns.

We expect, and this is what we have said on the earlier occasion as well, breakeven returns by the way this is for 2015 for the international markets business unit and we do expect in the midterm returns above the costs of capital. Our targets for Basel III common equity ratio fully loaded remains at 10%, and our liquidity ratio with LCR and NSFR, our targets there, at least 100% and 105% for the NSFR also respectively by 2015.

Adding to that, we continue to work towards a cost income ratio of 55% in 2015. So, actually, I would keep it there.

And I give back the floor to Wim who will guide us through the Q&A session.

Thank you. So, indeed, now the room is open for questions.

Please limit yourself to two questions, so that we can have as many people as possible able to ask their questions. Thank you.

Yes, good morning to you. I will have to ask three questions.

The first one is related to the level of Basel III core equity tier 1 which you have at 12.4% on phased in. How do you see the potential for reimbursement in light of well first of all the level of 9% required by the Central Bank?

And secondly of the upcoming stress tests, do you feel that you need to be cautious and keep above the requirement in your targets to consider potential reimbursement? The second question is related to the remaining shareholder loans, is there some iron on the fire or in the fire for the moment are you working on solutions for the remaining parts?

And finally, the good results in fees and commissions, do we see for the moment the same drivers in the third quarter as we saw in the second and do you see a run-rate repeat for the rest of the year? Thank you.

Thank you, Jean-Pierre for these questions. First of all, to answer the first one in terms of further reimbursements, as you know, we are adding an agreement with Europe in order to payback the balance of €2.3 billion of the Flemish State Aids in seven equal installments I mean, for a period 2014-2020 with our power of capital generation to earnings I think this is perfectly feasible.

And then so the question arises like you did are we going to do an earlier repayment? We will definitely look into possibilities but we will not announce today that we are going to do an accelerated repayment of that state aids at this stage.

There are several reasons why and one you have mentioned yourself, first of all, there is an upcoming stress test, which is guided by the ECB and the asset quality review. And at this stage, it is very unclear it's very uncertain, which are the parameters, which are driving this test.

So, it would be quite – it will be quite un-prudent to go for the further reimbursement on knowing what exactly this asset quality review would mean. So, we are taking our buffer above the 10% threshold of 1.8% as a safety buffer.

And we will see what it brings in terms of asset quality review and then reassess our situation. In terms of the remaining shareholder loans, currently we are not pursuing any further transfer of those shareholder loans, but we will never say no, so if the momentum arises, then we could consider, but at this stage like you said there are no irons in the fire.

And then in terms of fee and commission income, as you know, that we don’t give guidance on these individual elements for the year to come, but to do a kind of a gesture, we do see that there is quite some interest in these type of products also in the third quarter and we do see and that is more a general feeling. We do see interest amongst clientele in our core markets in terms of these types of products.

Great, thank you very much.

Yes, good morning. This is Benoît from Kepler Cheuvreux.

Yes, two questions. First of all on the CDO you have collapsed €1.5 billion this quarter, what is the strategy going forward?

I noticed you are pretty cautious every quarter, but again, you have kind of surprised with a big collapse. So, I mean, is there room for more collapses going forward, and could you remind us how much risk weighted assets you have on your CDO book at the end of Q2.

And then just on mark-to-market on the ALM derivatives, the €120 million positive this quarter. I think most of the press actually including this figure in the total income reported, but if I look at 2011 and 2012, it has been pretty negative always.

So, it turns a bit positive now, I mean, what will be the big drivers going forward? Could you give some sensitivity to interest rates, for example and I mean do you consider that as an economic results or just one-offs?

Thanks.

Perhaps on the first question in terms of CDOs, for good understanding, we reduced our risk weighted assets to €4.6 billion, sorry, sorry, nominal exposure – sorry, nominal exposure with €4.6 billion, which resulted in a drop in risk weighted assets of €0.9 billion. Your question was twofold also on what is then the remaining risk weighted assets for the portfolio depending on Basel 2 and Basel 3.

Under Basel 2, it stands at €5 billion. Under Basel 3, it stands at €5.5 billion.

Now, what is our risk strategy for the future in terms of further collapsing of CDOs? Like Luc already said during the presentation, we will look into this in a very opportunistic way, which means that we will consider every momentum and we will then consider the impact on our P&L, the impact on the fee above capital, and the – for going on, on potential positive outcome for the future and as a combination of that, we will take decisions, which are then appropriate and what has been positive contribution as a sum of all these parts.

So that’s actually it about CDOs. I’ll give Luc the floor to answer the mark-to-market.

Now, just on the CDO, I mean, do you see some strong improvements in Q3 on spreads, also what is happening in the U.S. now, I mean, could you protect and we expect some significant collapse again in the third quarter.

Well, it’s difficult to look in my crystal ball, but obviously if you look at the first indications for the third quarter credit spreads have improved further. This is not, of course, a guarantee for the future, as you know.

Maybe just one additional element on the reduction of the CDO portfolio, so €4.5 billion in risk – in nominal amount, that’s indeed €0.9 billion reduction in risk-weighted assets on the credit side, sorry, on the market side. But on the credit risk side, because of MBIA, is also €0.4 billion reduction as well.

The combination of the CVA and the, sorry, combination of that of the better improvement of the rating and of better credit spreads, obviously and that is €0.4 billion. So in total, the reduction in CDO is €1.3 billion.

And on the ALM derivatives, Benoit, the ALM derivatives are mainly due to the fact that the number of hedges we have against our mortgage portfolio are fair valued and we cannot account, we don’t have any hedge accounting for that so they just are fair valued in our books. And that since we mostly have payer swaps that means that if interest rates rise, that we have a positive impact.

And if interest rates decrease, we have a negative impact. And therefore, we saw the negative results in 2011 and positive result in 2012.

Obviously, we could close that position and then take the remainder of the value over the life of the swaps, but this is also a portion of the ALM derivatives are also a hedge against the AFS revaluation reserves, which do have an impact in Basel 3 on capital, as you know, but do not go through P&L so, this is a mitigating effect.

So is that fair to assume, if interest rate goes up, you might see some more positives, actually offsetting the negatives we see on the negative valuation on the debt securities.

Exactly, not fully, it’s not a full hedge, but you do see these are –they have a negative correlation.

Okay, yes, thank you very much.

You’re welcome.

Yeah, hi guys. It’s Stefan from Citi.

Good morning. I got three questions.

Hello, hello?

We’re still here. No problem.

Okay. Sorry, I’ve been just kept on hearing the conference organizer.

So, okay, question number one, on the CDO, how much of the €4.5 billion was actually due to maturities rather than collapse? And in terms of the collapse for the third and the fourth quarter, is that really driven by spreads or more for – or much more by demand in the US, Europe, etcetera?

And a second question on the risk-weighted assets, you guys used to give us guidance on the other increase through the end of 2013 and, as of the last quarter, that was €8 billion. I don’t see that guidance in this quarter’s presentation.

If you can just give us is that €8 billion still €8 billion, or is it higher, or is it lower? And lastly, just to confirm the €325 million of shareholder loan commutation, which happened in early July, that is not in the 11.8% core equity Tier 1 on the Basel III that you have reported?

Thank you.

On the CDO reduction, that has been fully attributed to collapses. No organic or maturing of any CDOs.

So that was your first question, I think. Second question, on the €8 billion buffer, well, as indeed rightly pointed out, we have removed our guidance for the full year because the, well, we’re already in the half – first half of the year is already gone and we’re getting closer to the end of that year.

And we felt that it’s now up to you to get a better view on why we should be at the end of the year. I think it’s quite obvious that we are going to reach our targets.

The guidance we gave previously is for to reassure you that we would be able to repay State Aids as planned. We have now done so.

And therefore, I think the guidance also is no longer necessary.

Right. So, just as a follow up, in terms of the €8 billion, I believe half of that used to be on your expectations for Belgian mortgage risk-weights going up.

Have you – via your recent model changes in the loss given default parameters, have – it just sounds like risk-weighted assets actually come down in Belgium. Could you just give us some color?

Is that €4 billion of additional risk-weighted assets still coming through, or are you kind of half there or not at all?

On the €8 billion buffer, we previously said this €8 billion buffer is not allocated to anything. We did discuss a number of potential negative impacts that could be.

One of those were, as you mentioned, an increased risk-weighted assets on the mortgage side. But it was just an example, it was no guidance.

And we still don’t give any guidance on how much buffer we should have and where it should be needed for.

Okay, fine. And last question.

I didn’t hear an answer to the pro forma 11.8% for shareholder loan removal at the beginning of July. Is that still at 11.8%, or is that 12.1% or so?

The common equity ratio on the Basel III is indeed 11.8% under the pro forma basis. And in the pro forma basis is included the signing of the KBC Banka deal in Serbia, which is having a smaller effect, but also included, and that is obviously a bigger effect, is included the repayment of the Flemish state aid.

And that is included the impact of the transfer of – and that was actually your question, the €325 million of shareholder loans. So that is included indeed in the pro forma number of 11.8%.

The reason I was asking is, because in slide 85, you give us €1 billion for shareholder loans; while on the slide 86, you only give us €700 million. Okay, I guess we can just take this offline later.

If you’re there till the afternoon, Stefan, I will explain that. It can be easily explained.

But I think it’s quite technical and would bore other people here on this conference call.

Okay.

So, I will explain this afternoon.

Fine. No problem.

Okay, thank you, guys.

Thank you, Stefan.

Yes, good morning, it’s Albert Ploegh from ING. Basically two questions, the first on the outlook for the net interest margin in your core markets, Belgium and Czech Republic.

Can you maybe give us somewhat more insight in let’s say assets re-pricing, trends, and also on deposit margins, whether we should still expect some further expansion in the third quarter as maybe some of the deposit re-pricing is not yet fully visible? The second question also related to the earlier question on the upcoming asset quality review.

I know the parameters are clearly not yet known, but what is your general impression on your portfolios and especially on the comforts on your Ireland exposures? Thank you.

In terms of net interest margin, we expect this net interest margin and that’s actually also perfectly in line with the guidance which we have been giving in previous quarters. We expect this net interest margin to stabilize.

I mean, the reinvestment yield is the remaining challenge, although it's slightly improved given the rise in the long-term rates, but that will only start to kick in as of quarter three. The commercial margins remain healthy.

We do also see that our market shares remain solid, and we will continue, like we have been doing over the previous quarters, we continue to focus on these commercial margins taking into account our commercial market share position. So yes, we strive to further optimize, but for the full year, we don’t give the full guidance on the net interest margins.

And I lost your second question.

Yes, on the asset quality review?

The asset quality review, yeah. In terms of asset quality, you're perfectly right that at this stage, we don't have any certainty, at least also not any true guidance on the parameters that will be used for the assessment of our assets.

So I would actually say your guess would be as good as mine at this stage. And I think it's not wise to look in a crystal ball and to make now an explanation, declarations with, at the end of the day, when the parameters will be disclosed.

It wouldn't make sense. So in terms of our quality in Ireland where you were referring to, I think we have given some explanations and the explanation which was done by Luc, and I can continue to do so.

Now, in this part of the answering and otherwise, we will continue to do this afternoon in London. But when you do think that given the guidance for the full year, we remain at the same quality, and we're quite convinced that given the fact that non-performing loans will continue to rise during this year, potentially also a bit at the beginning of next year, which is I think perfectly in line with what you and your colleagues are thinking on Ireland that is that in that term, we don't expect nasty surprises in terms of asset quality review for Ireland.

And for the rest, I would suggest let’s wait until those parameters are disclosed by the ECB.

Okay, thank you very much.

Yes, good morning. Two questions, the first one on the CDOs, I remember that in the past, one of the obstacles to collapsing them was the fact that you'd have to get the agreement basically pay or reimburse the government because of the collapse of the guarantees.

Now it slightly looks like you've actually booked a gain. So first, I'd like to ask you how you achieved that and second whether it is possible, at least we should expect additional gains as you collapse the rest of the portfolio?

And then secondly, on your core tier 1 and the transfer of shareholder loans, it sounds like in order to get core tier 1 ratio fully loaded is very strong. It would have been very strong regardless of the transfer of the shareholder loans, which is obviously positive, but it will be nice to have.

So I wonder why was there an explicit linkage or a delay around the end of the quarter and you waited for the shareholder loan to be refund before being allowed to repay it because it just sounds like you really didn't need it. Thank you.

So, first of all on the CDOs, in terms of collapsing the CDOs, there is actually no link with the agreement, which we have for the protection with the federal government. No link whatsoever, so that is the collapsing of the CDO is only driven by our judgment and that judgment is based on, on basis of the impact on our P&L – first of all, momentum, obviously, and then secondly, the impact in our P&L which is most of the time negative and the impact on our capital position.

And then combined with that, we take also into account what we forgo a potential upside. So, there is no restriction whatsoever from the agreement which we have on the protection with the federal government in collapsing the CDOs.

We indeed trigger the PPA, which was driven by certain conditions on CDOs which we currently have collapsed. We don't disclose the names of the CDOs we have collapsed, but actually the €88 million which we have been booking now in this quarter was driven by a recuperation of premiums, future premiums due to the collapses of those CDOs.

What we are going to do for the future is exactly the same. I mean, we will apply the same strategy.

It's purely opportunistic. We will continue to look into possibilities and those possibilities will be judged to their contribution P&L wise and capital wise, and also on what we give up as future income.

In terms of the impact on the common equity ratio due to the transfer of the shareholders which was at 0.3%. Yet, indeed, to be very frank, we have been doing this because we had given guidance to the market that we were repaying, Flemish State Aids and I will be very open now.

We will be repaying state aids, Flemish State Aids in an accelerated way. So our intention was to do this before year half.

At that moment, we were quite convinced that our capital ratios would stand firm, which actually is the case as you could see now, but because we made a promise, our local regulator used momentum to squeeze us a bit. And for that part, we have transferred shareholder loans and there was a leak in the press as you know, which cost us a few days and, therefore, we announced on the 30th of June that we were not fulfilling our promise we made by the end of June, but that two days after we concluded the deal with the shareholders.

It’s a bit unfortunate and very open now I know that, but given the circumstances, I think we did a good deal, we created shareholder value and we support furthermore shareholder loans. That's one of the reason, sorry, we support furthermore our capital ratio.

That's one of the reasons why we don't make a promise today what we are going to do with the future of the shareholder loans. But that's, as I answered on the previous question, we have no irons in the fire right now but we will look into the opportunity, if any.

Alright, thank you.

Good morning, everybody. Johannes Thormann, HSBC.

Two questions, first of all, on your cost of risk, did you see a peak in Ireland now in Q2 or do you still expect a continued deterioration of portfolio quality? And then secondly on Hungary, you're one of the few profitable Western European players in that country, but is there any point where you would probably draw a line to your activity and say we have to exit this country because political activity is completely against all stakeholders’ interest?

Perhaps on the first question, credit cost ratio, I see this more in terms of NPLs because it's more difficult to see how credit ratio exactly would evolve. But then in NPLs, we do see worsening further.

We had thought that the peak would be at the end of this year as we had guided before. It’s probably going to be shifting a little bit towards early 2014.

Given that, as you can see the arrears remain a bit higher than we had expected before, although they seem to be stabilizing, we don’t see the continuing decreasing trend anymore. So, we believe the peak will be there in terms of NPL formation rather more early 2014.

Okay.

On the second question, I think Johan will answer this.

Indeed and the situation in Hungary, I mean, like we have disclosed today, once again Hungary has contributed a positive way, I mean, our bank over there, K&H has contributed more than €20 million in profit in this quarter despite the fact that we have been taxed additionally. What the way forward it means for us in Hungary, I mean, we have a good bank over there with good quality on the portfolios performing commercially quite well.

So from that perspective, it is indeed a good investment. Also, the insurance company is performing very well in Hungary.

So our bank insurance model is, from that perspective, quite a good statement now. To make statements about the future of Hungary at this stage, it is early days and I would actually also refrain from that, but it is clear that the political environment in Hungary will makes us – makes not only us, but the banking and the insurance industry in Hungary makes our lives difficult there and we are hoping for a clearer and a blue sky in the near future.

Sorry, for a follow-up, which would be driving this clearer, blue sky in Hungary?

Us driving the clearer and blue sky, you mean?

Yeah. What about factors would be leading to a clearer and blue sky in Hungary versus the current environment or whatever?

I mean, it would be definitely clear that if the initiatives taken by the government and also the promises made on the government in terms of the tax and the extra tax raises, if those promises would come true, I mean, there was a promise to the banking sector that banking tax would be half this year and would be definitely change in 2015 – 2014, sorry. If these promises would come true, then it is definitely clear that the sky becomes more bluish.

On the other hand and I’ve forgotten to say this in my previous comment, what we do see is that the Hungarian economy is performing better and also the debt position of the Hungarian government is coming in very favorable areas. So around that perspective is indeed a country, which is performing reasonably well, but to make our sky and our is in, I think in general terms, the banking insurance industry in Hungary, if it would to be more bluish, then something should – could be done about the way the sector is taxed.

Okay, thank you.

Yes, thank you very much. Good morning, everybody.

This is Francois Boissin from Exane BNP Paribas. Two questions, please.

First on the CDOs, can you help us understand what the maximum positive capital impact could be in a very favorable scenario, both in terms of earnings and capital and I think last quarter basically you hedged a part of your CDO exposure and I just wanted to understand what the mechanics would be. And my second question is regards basically the evolution of loan loss provisions that you are seeing for the rest of the year, in particular, in Belgium and in CEE given what you are seeing currently.

Okay, I will take the first question. First on the CDOs, the – well, the maximum reduction in risk weighted assets is we would collapse everything, obviously, that’s a hypothetical situation, but suppose that would happen, then we would release around, a little above €2.5 billion – or around €4 billion of risk-weighted assets is slightly higher if we’re talking about Basel 3, but not that much, so around €4 billion risk-weighted assets.

Obviously, I stress this is a hypothetical situation if we would collapse all the CDOs immediately. And then of course, minus the costs that you incur, if there are any, which need to be deducted from the capital release in order to get the net result, that’s one element.

If you’re also referring to what are the potential upsides, the only potential upside is on page 32, we see the outstanding markdowns is €0.4 million, and I think that gives you a good idea of what the maximum upside should be. It’s around €0.4 billion if everything goes very well and between now and the end of 2017.

And what about the hedging that you put in place last quarter?

The hedges, well, the hedges have been netted off. So this – we’ve given – this now gives you the view of all the un-hedged exposures because the hedge is really gone.

There is no risk any more in those hedge positions.

Okay good and about the loan loss provision trends?

Yes, I think, Johan will answer this question.

Yeah. So, in terms of the credit cost ratio for the loans in general, as you know, we don’t give guidance on the credit cost ratios for Belgium and also for the individual countries in Central Europe.

But I can give you some flavor. What we have seen in the previous quarter and what we do also expect for the quarter forwards that is that, first of all, in terms of quality of the portfolio of the private person’s loans that I’m talking about essentially about the mortgages.

I mean, there is no big impact and we do see that will be fluctuating around, let’s say, 3 basis points to 5 basis points in Belgium. In terms of the other side of our loan book in Belgium, I mean the SME and the corporate.

As I mentioned during the presentation, there is some pressure on the credit cost ratio there. What we did see that is that in Belgium, in general, the number of SMEs that are defaulting on a monthly basis is reaching each time a new peak, and also, that is reflected in our portfolio.

And so, our credit cost ratio particular for that area went up this quarter. This was compensated by a better credit cost ratio for the large corporate risk.

But we do also expect this pressure on the SME credit cost ratio to come also into the fact for the next coming quarter. In terms of Czech Republic, our other core market, actually we stick to our guidance which we have given in previous occasions.

We would say that our credit cost ratio would end up in the area of between 50 and 60 basis points. And last but not least, we reconfirm the guidance which we have given on Ireland somewhere between €300 million to €400 million, be it closer to €400 rather than to €300 million for the full year.

Thank you very much indeed.

Many thanks for all these questions. We took a bit more time than initially announced, so, apologies for that.

We are happy to continue the conversation this afternoon at 4:00 PM at Old Broad Street, 111. So hopefully, we see as many as possible of you this afternoon.

Thank you.