Wim Allegaert - Director Johan Thijs - Chief Executive Officer, Managing Director, Executive Director and Member of Nomination Committee Luc Popelier - Chief Financial Officer, Managing Director and Executive Director

Benoit Petrarque - Kepler Cheuvreux, Research Division Eleni Papoula - Berenberg, Research Division Anton Kryachok - UBS Investment Bank, Research Division Andrew P. Coombs - Citigroup Inc, Research Division Flora A.

Benhakoun - Deutsche Bank AG, Research Division Johannes Thormann - HSBC, Research Division Riccardo Rovere - Mediobanca Securities, Research Division Kiri Vijayarajah - Barclays Capital, Research Division

And we are hosting the Conference Call on the Second Quarter Results of KBC for 2014. I'm Wim Allegaert, I'm General Manager of Investor Relations.

And we are in the company of Johan Thijs, Group CEO; as well as Luc Popelier, Group CFO. And they will both elaborate on the results and add on the financial insights.

We will take roughly 30 minutes to guide you through the presentation for the analysts, which can be found at our corporate website, kbc.com. After this, there is, of course, ample time for questions until around 10:30.

This conference call is taped, and can be replayed until the 25th of August. Investor Relations and our CFO are organizing a sell-side analyst meeting in London tomorrow morning at our offices in the city, Old Broad Street 111.

This meeting starts at 8:30 local time and we would be pleased to welcome you there. There will be room to discuss the financials further with a good cup of fresh brew.

And now, I give the floor to Johan Thijs.

Thank you very much, Wim. Also from my side, good morning on this conference call on the second quarter results for KBC Group.

I will talk you through the slides using the pack which is available on our website, as Wim mentioned. First of all, actually to wrap up the quarter, second quarter in one single sentence I would say this quarter is a quarter with a strong output, strong business performance and resulting in a net result of EUR 317 million.

And adjusted net result of EUR 287 million. The only unfortunate thing of this quarter is that the Hungarian law on consumer loans has changed and it had an impact, which is provided by us in a very conservative manner.

But the impact is EUR 183 million after-tax. And that distorts the normal number.

Otherwise it would have been indeed also visually very, very good. The reason why our minimum change, this is a strong performance as actually due to the mere fact that the underlying parameters of our group bank and insurance are doing quite well.

And that will be explained in full detail. I'll hand off the slides.

Last but not least, also this quarter is once again characterized by a good insolvency position and a good liquidity position of our group, both the -- all the ratios which are reflecting those statements are performing very well. I will go into the detail later on.

I will flip to slide briefly. On Slide 6, where we make the distinction between the net results and adjusted net results.

There I can see that the gap is very little, EUR 29 million, only characterized by the 3 traditional elements. We had a positive impact of our legacy CDO book of EUR 30 million, also divestments are performing quite well.

And because of the good performance of KBC the mark-to-market of our own credit risk was down EUR 8 million. But all in all, you can see that both elements are converging to a result like we have said in the past would be the case.

Now in terms of the split up bank insurance, it's almost traditional. We're talking about 70-30 spin-off, which is fully due to the fact that the bank result is distorted by the Hungarian impact.

I will not spend too much on the split up between those 2. Let's talk about the more important parameters.

Then we're talking about Page -- what is this, Page 8, this is net interest income, and there I can actually, probably, announce that we have indeed had improvement in our net interest income by 5% on the quarter and 7% on the year. This is due to several elements, the split up between, on the one hand side, the volumes and, on the other hand side, the margin.

Both have performed actually quite well. Let's talk about the volumes first.

What we have seen in most of our markets is that both on the liability and the asset side of the balance sheet, we have seen a positive growth, dashingly, when we are talking about end deposit and volumes with our clients, with our private customers, with our SME, and with our corporate banking customers. When you look at -- have a look at the table at the bottom of the page you can, for instance, see that loans are shrinking, total loans if you compare them year-on-year basis.

This is fully due to the fact that we have been deliberately reducing our loan exposure in our foreign branches because of the definition of noncore, as we have said in the past, and because of the impact of the sale of the shareholder loans, which were part of the 2013 results. If we would exclude those, then the growth would be up to 2%, which is reflecting indeed the positive volume evolution.

Also in the mortgage side, we do see a positive evolution and the same thing can be said on the customer deposit if you only look at the retail, the core customers in the retail, and the SME corporate customers. So volumes are doing very well.

And the other element, net interest margin is up with 5 basis points and now stands at 205 basis points, which is, if you compare it over the previous quarters, a steady growth up to this level. This is due to hard work on the commercial side, meaning that commercial margins have been worked on.

We have been installing further rate cuts on our saving accounts, and we have been pushing indeed the margin on our commercial loans and taking into account the growth ambitions, which we still have. And therefore, the margin went up to 205 basis points.

On top, obviously, we have been able to decrease our funding cost, and that is true for the senior debt, but also, let's not forget, we have been calling our Tier 1 instruments, which have a positive effect on our funding cost. So combined elements together interest income up, which is good news.

The other important element is written down on Slide 9, in which is the fee and commission income. Here you can see, also an increase of about 3% of the fee and commission quarter-on-quarter.

If you compare with last year, it is 1% up. This is mainly due to management fees, but also linked to new entries.

Be aware that the impact year-on-year is a bit distorted by the evolution on unit-linked products. But all in all, we do see a positive trend here, also positive trend if you compare it over the past.

This is also reflective in our assets under management, which were up 4%, due to quarter-on-quarter, and up even 11% on the year. The effect is actually split up and pricing effects and net interest on the quarter, 1% up.

So also there, some good news. The insurance side.

In the insurance side split up between the non-life and the life business, first of all, let's have a brief look at the non-life business on Page 10, and we need to be aware that in 2013 we had a one-off in our group reinsurance business in Luxembourg, which was a bit distorting the number. And actually if you would have excluded them, we would have a steady growth of about 2%.

Far more important on the non-life side was the impact of some natural catastrophes, which occurred in the second quarter. And the biggest one occurred in Belgium.

During the Pentecost weekend a hailstorm had some significant impact. If we take into account the net impact of that catastrophe we're talking about EUR 41 million.

Despite the impact of those events, the combined ratio at the group level stands at 93%, which is excellent, which also reflects the underlying extremely good quality of our non-life insurance portfolios in all other countries. On the life side, I'm going to use Page 11.

At the bottom end of the page, you can see the spit-up between the unit-linked business and the interest guaranteed products. As you know, our policy is to be very careful with the interest guaranteed products, also taking into account the longevity risk in the long term, and the longer-term interest rates.

We do remain provenant on this product. On the positive side to mention is that our energy which we have put into the unit-linked business has paid off.

In this quarter it is up now compared to the previous quarter with about 20%. And this is a road which we are going to follow in the next falling quarters.

So going back to the other parts of the income line. First of all, the fair value of -- the gain from our assets in terms of fair value, there you can see that the quarter was qualified by an increase of EUR 20 million.

If you compare it with the year, there's a big distortion and this distortion is fully linked the impact of the mark-to-market of the ALM derivatives. If you compare it with last year, we're talking about an impact of EUR 183 million.

There are some other impacts as well compared to previous year, for instance EUR 24 million on the market value adjustments. And on some other impact which were related to the asset entities.

But referring to the quarter of -- the first quarter of this year, the positive impact of EUR 20 million was due to, for instance, the positive impact which we have seen in the ALM derivatives, the positive impact there was a EUR 26 million difference, despite the fact that the ALM derivatives still take the EUR 57 million negative in this quarter. On the other elements, I would like to go to the available for sale assets, and the gains which we have realized on them.

We're standing now at EUR 49 million. The EUR 49 million can actually be split up almost 50-50 between gains made on bonds and gains made on shares.

EUR 23 million on bonds, EUR 26 million on shares, which is actually quite normal if you compare it with the average gain, which we have realized over the years 2012 and 2013 third quarter. So this EUR 49 million is, let's call it, quite similar to the run rate which we have seen on the previous 2 years.

It's far more important to mention on this slide is the impact on other net income. First of all, this is seriously distorted because of the correction in the provisions, which we have booked on our consumer loans in Hungary due to the inaction of the new law in Hungary.

Impact, as I already mentioned, after tax was EUR 183 million. I am going to dwell on this number in a little bit on this particular slides, so I'm not going to spend too much time now explaining why and where it comes from.

But on the other hand, what is in other net income, if we would exclude the impact of Hungary, it is entirely due to some normal activities, let's call it like that. So our other lease business, our assistance company, which is part of the group.

Our real estate developments have been performing in a normal way, in a normal manner, and have been contributing all in all together for EUR 49 million positive, which is the normal run rate for these activities. On top, we have also here a one-off, which is due to a settlement of a final conclusion better -- we won the court case on an old file from those Belgium courts.

The positive outcome on this one single settlement was EUR 31 million, which is part of this other net income, and which is part of the result of the Belgium business unit. So in this respect, normal circumstances, besides -- except one single element, and that is Hungary.

On Slide 13, we are talking about the operating expenses. Now on Slide 13 is expressed how the evolution of the operating expenses is ongoing.

We do see a decrease compared to the quarter, with 4%, and we do see a slight increase compared to previous year with 1%. The reason why the cost income ratio now stands at 64% for the quarter and 63% for the first half year is entirely due to the fact that one-off elements amongst other, the Hungarian situation and the mark-to-market of the ALM derivatives is completely distorting the income side of this ratio.

And therefore, the ratio is now 64%. If you would exclude those one-off elements, then the adjusted cost income ratio stands at 55%, which is in line with our targets for this year, and which is also in line with the previous quarters.

Why did the income -- sorry, why did the cost side of this ratio went up with 1%? The reason is entirely due to some particular elements, amongst others, the increase, slight increase of staff expenses in Belgium.

This is also due to the fact that we are up-staffing for our digitalization program in the whole group amongst others also in Belgium. We have seen some higher marketing expenses in the Czech Republic and in Ireland, and we do have seen also invoices coming in, which we have to pay for the work, which is related to the HR exercise.

The invoice at Belgium was EUR 5 million in that respect, and then, obviously, the other bank taxes are kicking in, in this total ratio quite significantly. But all in all, the costs are good under control and, therefore, are in line with our targets and with our guidance, which we have given also in the previous quarters.

One extra word on the impact of the banking taxes. As we have done in the previous quarters, just to indicate what is the impact of these factors currently we stand at EUR 196 million for the year, which have been paid, which is 10% of our total operational expense.

So it's quite significant. Excluding those, if you allow me, excluding those from our ratios would mean that the 55% adjusted cost income ratio would drop to 50%, which is indeed a very good number.

In terms of asset impairments -- flipping to Slide 15. In terms of asset impairments, we do see actually, once again, that we have a very good quarter.

Asset impairments, we are mainly talking about asset impairments on the credit -- impairments on the credit side. Here, we do see actually a very good evolution.

We do see very low credit cost ratios in Czech Republic. We do see low credit cost ratios in Belgium.

We do see also a better credit cost ratio in the other countries. And the only reason of increase from EUR 107 million to EUR 134 million for the part of the credit impairments is due to Ireland, where we saw an increase of EUR 14 million, which I'm going to explain further on in the presentation.

So all in all, credit cost ratio is now -- it stands at 34 basis points, which is very good, which is very low, and which is, I think, an excellent result. Also if you have a look at the 6.2% and you take into account that this increase is due -- entirely due to the increase of the ratio in Ireland, which is also due to some model changes, we can say that this performance in terms of the credit portfolio is excellent.

This is, as a matter of fact, the whole wrap-up of the underlying components in KBC Group. Now if we would spend a little bit time on the business units.

And I'm not going to go into the detail of each and every business unit. Then I would say, starting with the business unit Belgium, actually the business unit Belgium has performed very well.

They have had a good result, the good results stands now at EUR 383 million, which is better than previous quarter. But also this good result is entirely due to the good performance top line.

Commercial business, good volumes, both on the cost side and on the loan side. Definitely when you take into account the one-off effects, which are parts of the results in Belgium.

It is due to the fact that commercial margins have been doing quite well, the margins are driven by commercial -- some commercial margins, and also, of course, the impact of the decreasing funding costs of KBC Group. We do see good performance in the Insurance business.

I referred already to the Life business, but also despite the hailstorm, the impact is of course, negative on the combined ratio. And despite that storm, the combined ratio stands at 97%, which is, given these circumstances, still a very good result.

And in terms of the technical performance of the credit portfolio, excellent result. Now the credit cost ratio in Belgium stands at 15 basis points, which is indeed very, very good.

And if you build for -- have you on the cost side also there, once again, we can say that the costs are well in control. Obviously, here we do have some distortion because of the ALM derivatives, which are kicking in the business units for EUR 62 million.

And therefore, the distortion to cost income ratio, but if we adjust for this number, than the cost income ratio in Belgium, despite the fact that we are up-staffing for the digitalization profile -- program, quite significantly the cost ratio corrected stands at 50%, which is very good. In terms of the Czech business unit, which is explained as of Slide 28 -- 27 and following.

Also the Czech Republic has performed very well in this quarter. It stands at a very good result, EUR 140 million.

And also here, I can almost repeat what I have just said for Belgium. Good volumes, both in terms of loans and deposits, extremely positive numbers there.

And margin has been a bit under pressure on the deposit side. But we have been able to ramp up the margin on the commercial side in terms of our new productions, so the margin is still at a very high level, a bit under pressure, but still very good.

The fee in commission business, assets under management are doing very well. And also, we do see that the impairments on our loan book are very low.

4 basis points is indeed excellent, to use an understatement. And is further reflection of what we also already has seen in the first quarter, expressing the good, very good quality of this loan book.

Costs are under control and now stand at 47% gross income ratio, which is also very good. And therefore, the overall performance of the Czech business unit is excellent.

Going to Slide 33, and following the International Markets business unit. I'm going to be very briefly about the countries, Slovakia and Bulgaria.

Both have actually been performing very well according to our budget and according to our expectations, both on the commercial side. And on the technical side, loan loss ratio, also the insurance ratio, combined ratio were very well.

Actually all in all, these 2 countries are performing according to our expectations. I think we need to spend a bit more time on the other 2 countries.

And let's start with Hungary, which is driving, obviously, our results by far and I am going to take Slide 40, which is ruining our results and deteriorating our result by far the most. First of all, the technical numbers are explained on Slide 40, which I do express the underlying result of our core business, our core activities, what we can say there is that also volumes are doing quite well, that both on the asset side of the balance sheet as on the liability side on the balance sheet.

Fee and commission income is doing well. So the underlying business intrinsically is doing fine.

So normally, we should have announced a positive result for this country. We do see that the NPLs are coming down.

The quality is improving hence more. But as we all know, the 4th of July, the Hungarian Parliament approved a new loan, which has an impact on all consumer loans in Hungary.

In regards of the fact if they are foreign currency denominated or Hungarian foreign denominated. The impact of this law is quite significant in 2 -- actually in 2 fields, and the way it is calculated it could be considered as being a third field.

First of all, as you know, the act has forbidden the use of the foreign exchange rate margin in consumer loans by the way of using the spreads. Therefore, by declaring this to be void, all these loans should be retroactively calculated on the basis of the average exchange rate margin, and this has, obviously, a negative impact.

On top, banks have been implying evolutions of the interest rates to their loans, and this is also assumed by this law to be unfair. And therefore, the burden of the proof that the changes the banks have been applying to those loans, to their customers is on the shoulders of the banks, and they have to approve.

They have to approve that what they have been doing was explained in their contracts and was as defined by the law as fair. Also there, there was a potential impact, and one we have taken in KBC in this respect a very conservative stance.

We have provided fully for both elements. Already now in the second quarter.

And for the FX changes, but also for the interest rate changes, we have provided fully in this quarter. This is what was in the law.

In the law was also indicated that the way how it should be settled and how it should be calculated would be explained in the course of this year. But very recent, just before, actually, we are making this announcement, the Hungarian authorities published on their website, a methodology which they consider should be used to calculate both elements.

Now this way of calculating is not negotiated with the Hungarian Banking Association, which was, by the way, promised by the Hungarian authorities and therefore still under discussion. But also here, we in KBC have taken a very conservative stance, and we have also fully booked, fully provided for this methodology like it is published on the website, despite the fact that they are going to challenge this methodology and that we are fully supporting the way how it should be calculated according to the Hungarian Banking Association.

Three parts, EUR 160 billion for the first two; the last one, EUR 70 million brings us to EUR 231 million of provisions. After-tax it brings this number to EUR 183 million, which is fully provided for, as I just explained in a conservative manner, in the second quarter.

I can also add to that, that we -- and this is also part of our statement -- that we're going to fight into challenge these decisions of the Hungarian CURIA. We will do this in consultation also with Hungarian Banking Association, and we are very pleased to see that the ECB made an announcement on its website recently, where they indicated that they have some disputes and understatement issues with the way how the Hungarian authorities are dealing with this matter.

And that they have also problems and are very critical about the way the Hungarian authorities have been applying and have been using the European directors to come to this conclusion. So with this statement, we support it.

So let us support it by original stance that we will definitely challenge this decision. And therefore, we do say that what we had provide for is very conservative.

The second country, perhaps, one more thing to mention, we are by this decision of the Hungarian, I forgot this to mention, by decision of the Hungarian authorities, we will drop below 0 in terms of P&L, but our solvency position remains above the required levels. Second country to mention in the business unit in international markets is Ireland.

In Ireland, we are now on Page 43. You can see the book of loans, and you can also see there, the nonperforming loans.

In the Irish impairments, we have seen an evolution from EUR 48 million in the first quarter to EUR 62 million in the second quarter, which is a deterioration of EUR 14 million. Now this deterioration can be explained by several elements.

First of all, and that has to do with the retail portfolio now. We have been applying further and for a pursued implication of the EBA methodology and EBA guidelines, which were issued by the end of 2013.

And we have been further pushing forward to these -- this methodology in our retail book. On top of that, we have been adding some more conservative methodology changes in our modeling.

And therefore, this has had an impact on the shifts of our PD classes and, therefore, also had an impact on our retail book in terms of impairments. This is explained, amongst others, on Slide 46.

And where you can see the moves on the PD classes, if you compare the PD inline class, which is the performance classes. Of the exposure, was the first quarter EUR 834 million.

This quarter, it stands at EUR 556 million. This is fully explained by the 2 elements I just mentioned.

And it shifted partly into PD 1 to 8 classes, but majority is shifted into PD 10 class, which is then provided for. In this respect, I can say that the total impact on the retail portfolio, if you compare quarter-on-the-quarter, was a bit better.

We are quite positive on the further evolution of the retail portfolio, and this is underpinned by several elements. The first one is mentioned on Slide 44.

That is the overall evolution of the Irish market, which is reflected in the property prices, which are still going up and we do see this occurring also in other parts, not only Dublin, but other parts of the Irish country. We do see also that the Irish company continues to pick up, and this is now also very modestly, but still this is reflected in the domestic demand, which is important for our portfolio.

This is also reflected in the employment rate, which is going up. And last but not least, this is also reflected in the arrears and the evolution of our arrears, which is expressed on Page 45, where you can see that arrears are coming down now for the -- actually, in the second quarter, the fourth month in a row.

But I also can disclose today that in July we have seen exactly the same evolution and that in July is actually the fifth month in a row that our arrears are coming in. So in this respect, we're quite positive about the evolution in our portfolio, the retail portfolio.

In the corporate portfolio, we have seen -- and now we are on Page 47. In our corporate portfolio, we have seen a slight deterioration, which is about EUR 16 million, which is due to some shifts into nonperforming loans, and this is mainly due to deleverings.

The size has decreased over the portfolio anyway by about EUR 150 million. This has to do with the deleverage of the portfolio.

But on the other hand, the shift of classes PD 9 into -- and PD 10 into nonperforming, and 11, 12 is reflected in an increase of the impairments of EUR 60 million, something which we closely are monitoring, and mostly, therefore, are closely following up. These are the 2 main drivers of this business unit, and, obviously, do have an impact on Ireland.

All in all I forgot to mention this, we stick to our guidance, which we have given at the beginning of the year, that for the total year the impairments will be in the range of EUR 150 million and EUR 200 million. Also in the previous quarters, I've always added to that, that we will be to the higher end of the range, and do indeed confirm this today, we will be closer to EUR 200 million in this guidance, as I have said in previous -- on previous occasions.

Very briefly, Group Centre has performed much better. This has to do with several affects, and that is mainly due with the net funding cost of the participations, which has improved with the loading of the subordinated debt, which has come in as well.

All in all, if you wrap up all these elements and you reflect this in terms of solvency, that it is clear that our solvency situation has further improved. On Page 52 is explained that we are now at 12.9% common equity ratio Basel III fully loaded.

And this under the Danish compromise, which is, once again, an improvement compared with the previous quarter. And then, our fully loaded Basel III leverage ratio now stands at 4.65%, which is also an excellent number, definitely if you compare it with European peers.

So in terms of capital position, quite well. Positive evolution once again.

And on liquidity position, this is once again, a confirmation of previous quarter. Excellent results, the LCR and the NSFR target stands above our budget -- above our targets, 109% for the NSFR, 123% for the LCR.

34% is driven by customers and what is short-term wholesale funding, it is more than 4x covered by high-quality liquid assets. So in this respect, strong performance from both sides.

So to wrap it up, the second quarter is an excellent quarter. It is great result, driven by strong commercial performance, good underlying technical results, both on the banking side and on the insurance side.

We once again proved that we're able to balance market shares growth with margins, and this is reflecting the solid capital and a robust liquidity position. It is very unfortunate that the Hungarian Law kicked in.

Otherwise the end result, 317, would have been really impressive. I would like to keep it there, and I would hand over the floor to Wim, who will guide us to the questions.

Thank you. So now the floor is open for questions.

[Operator Instructions] So the floor is open now.

Benoit Petrarque from Kepler Cheuvreux. Two questions.

First one will be on the solvency ratio, 12.9% is higher than expected. If you take out stage reports and take the penalty to account, you will probably come to 9.7%.

It seems pretty close now to the 10.5%. Actually, it looks like you could actually get to 10.5% end of this year already.

Those actions you view on the state repayments. And also coming back on the detailed definitions change, because you see also probably pushing your view on capital a bit forward, is that a right size in definition change or is that in regulation?

Is that a one-off item or is that permanent? I just wanted to clarify the DTA impacts.

Just to try to understand why it's coming, it is coming up. So that was on solvency.

And then the second question is on the dealing room income in Belgium. I think, you have a loss of EUR 6 million on the trailing and fair value income.

If I add back the DLM [ph] you're already getting back from Ireland securities, I come to something that's short of EUR 60 million. It seems to be a little bit low versus the normal run rate you've shown us in the past.

So where are you now in dealing room income going forward? What do you think is going to be your kind of new run rates?

I remember we were at more in excess of EUR 100 million in the past. You probably said, EUR 75 million recently, and now it's seems that we're even lower than that for the second quarter?

Thank you very much for the question, Benoit. We're going to take the first part of your first question and then hand over the floor to Luc to give you a bit more detail on the technical side of question 1 and question 2.

So referring to indeed our 12.9% and taking into account the remaining state aid. Our policy and our guidance in terms of what about further paybacks of the remaining Flemish state aid actually remains the same.

What we will do is actually, we do have an agreement in European Commission that we have to pay back the remaining state aid in 7 -- 6 remaining equal installments for 2014 in the tune of 303 -- EUR 333 million a year plus 50% penalty. The 333 for this year is already paid.

But we have indeed some room now in our numbers to further accelerate this repayment in the coming time. As you know, in 2015, we're not going to take coupon on this and, therefore, the reason is a bit sharpened towards this year, what are we going to pay back, knowing that we are paying coupon on the remaining state aid.

The only ignition element to fully -- 100% fully answer your question is what about the impact on the AQR? And what about the impact on the stress test?

I'm quite confident that the stress test for us will not pose a problem. But I can imagine that the National banks and, as you know, with National Bank here in Belgium will hand over and control KBC by November to the European Central Bank.

I can imagine that National Bank will not take a decision now before they know the ultimate impact of the AQR and the stress test. So in that respect, I do expect then that we will answer further questions of ours in this matter by, let's say, October, hopefully earlier, but October.

And, I think, as you know, we need an approval for any further repayments, that even if we would have the intention, we have to wait for the answer of the National Bank. So yes, we do have room, but we do have stress test upcoming, where the National Bank will be very cautious in answering and pre-emptying on a decision.

In terms of the technical details, I will hand over the floor to Luc.

Yes, with regards to the definition change, it's actually a new methodology we applied. We have been quite conservative in the previous calculation.

But what we have now done is set off DTAs first with deferred tax liabilities. And then only deduct the net DTAs, which then result from that.

So that provides for a EUR 300 million extra over reduction RWAs. That estimate is the reason there's a methodology change in completely in line with regulation.

We've checked it with many instances also with regulator. So that is fully in line.

Of course it's a one-off, if DTAs stay at the same level. With regards to your dealing room income, you're indeed right that we're a bit below average.

Dealing room income, particularly in Belgium, was slightly below what we could call on average. But particularly in the Czech Republic dealing room income is quite weak also.

It was also the case in the first quarter, by the way. So we expect that the normal run rate in Czech Republic should be higher.

But currently it is impacted by low volatility in the Czech environment, and also by the fact that the foreign -- the Czech koruna has depreciated and been managed at a quite low level by the Czech National Bank. So it shouldn't be higher in Czech Republic.

For Belgium, it should also be a bit higher than was this quarter, the normal run rate for the next years to come, obviously, is a bit more difficult to predict, given that there is tighter regulation, which is built in the National Belgium Banking law. But we should still have quite good, decent income going forward.

So EUR 75 million a quarter is kind of a run rate for you?

Well, I don't want to give you any specific numbers, but that's probably a little bit on the high side.

Just 2 questions. Firstly, on the net interest income.

It seems that the key driver of the net -- of the higher interest income quarter-on-quarter was really the international division, whereas we have seen basically stable or flat net interest income in both Belgium and Czech Republic. So I was just wondering if you can give us any more color on how we should think about the evolutions at different dynamics and for net interest income in both these countries.

So that's the first question. And the second question is on Hungary.

And what -- whether you think there is actually a risk of additional loss fees, and coming from the potential conversion of the retail foreign currency loans in 2014, and if you have done any scenario analysis, depending on different conversion rates and whether you can, I don't know, give us a range if you have quantified the risk of additional losses coming out of Hungary?

Okay. I will first go with the first question on net NII.

You're indeed right. If you look in the face of it, net interest income is primarily driven by international markets.

But I would also mention Group Centre, actually the biggest driver. Group Centre where the subordinated debt cost has further decreased considerably, given that we have now a much higher impact from the -- well the reduction of the call on the Tier 1, the old style Tier 1 that has a very important impact.

And secondly, the cost -- the funding cost of participation, and, last but not least, also the senior debt cost, which has come down. And also a large part in Group Centre.

But you're indeed right, net interest income has improved in International Markets, particularly Hungary and Slovakia. Although, Ireland you see that as well.

But it has more to do with the, first of all, reduction in liquidity costs in Ireland. As you know, they are funded out of Brussels for a large part, and the liquidity cost attached to that funding from Brussels has gone down, in line with the overall funding cost of the group.

There is also a technical element with regards to reserve interest in Ireland. But in Slovakia, you see really a good margin development and also margin loan growth.

In Hungary, a little bit lending margins, but also lower spreads paid on term deposits. On the earnings conversions?

On the earnings conversion, Johan will take the lead.

On the question on Hungary, what about the indeed missing part of the law, that was already indicated before by Hungarian, or by statements of Hungarian senior people in the Hungarian Government, that they were thinking about considering at least of the for the convergence of the FX loans into Hungarian forints as a whole. Now I refer to Slide 42, where we do mention our exposure and we do have total EUR 1.5 billion of FX loans in our book being split up in 2 parts, actually.

The retail traditional 3-day retail housing loans, EUR 600 million and EUR 800 million from equity loans and there is a smaller portfolio on car loans. But, I mean, this is just our important -- the far more important point for answering your question is actually what will happen.

And that's a bit of a big question mark. Statements which were made publicly, but also personally to me, when I had meetings with Hungarian politicians and people of the Hungarian National Bank were indicating that they were indeed considering, but that it was not sure that how they were we going to deal with it.

And the uncertainty is reflected in several elements, amongst all of the conversion rate, what is going to happen. Is it going to be converted to Hungarian forints at par, question mark, or below par.

I cannot imagine that it will be converted above par. The second element is, obviously, who is going to bear the costs.

And that is a crucial one. Statements which were made, and, I think, also if you look what has happened with the FX positions of the municipalities, there the government has taken a significant part, not to say all of it.

The statements which were made were always reflecting that few parties were involved, being the authorities, being the banks, obviously, but also being the customers. And that potentially each of these parties would take part of the burden.

How much is the question mark. Now last but not least, is also how you -- how you're going to convert it and then which time frame.

And that is the third element which is crucial to give a normal answer to your question. The -- potentially, the interest margin that a bank would be -- the question could be used to correct the interest margin on the new loans, but also could have impact on the outstanding capital, for instance, so the outstanding principal.

All these elements are very uncertain, and these are still part of thoughts, not even part of negotiations, between, for instance, Hungarian Banking Association and the Hungarian authorities. But this is something which will probably take place in the next coming, let's say, quarters -- I mean, the discussions, and we'll see what the outcome is.

So in this instance is, it is very difficult to give a normal answer to your questions and I would, therefore, also not do that. But be aware that we are closely monitoring and we are following and participating actively in the talks between the banks in Hungary and the Hungarian authorities.

I just had 2 questions, please, if I may. Firstly, on the NII outlook, can we expect to see further benefits from lower wholesale funding costs, and whether those benefits would be enough to offset pressure flow from lower reinvestment yields going forward.

And secondly, on Ireland, you've commented that provision charges this quarter perhaps have been slightly more elevated than the normal run rate. But given that the house prices are improving, underlying economy is improving, could we expect to see slightly more provisioning charges in 2015, '16, than you previously communicated?

So I mean, thanks for your questions. The first one on the NII outlook.

We will indeed enjoy further benefits from lower wholesale costs. I refer for example to the call of the Tier 1, which will, next quarter, be for the full quarter, which will benefit and, obviously, there are some further maturing debts, not that much but some, which also will benefit, and the reduction of our costs on term deposits will continue as we go.

That will offset, we believe, the further pressure on lower investment yields. So the next quarter or 2, we feel quite comfortable that the NII -- NIM net interest margin should remain stable and obviously, depending on volumes, NII can -- could develop well as well.

Going further, if low interest rates would continue in 2016, obviously, it is going to be more difficult to keep on fighting that lower reinvestment yield.

And coming back to your question on Ireland, indeed as you rightfully pointed out, the evolution of the Irish housing market is positive. And what is in that respect, quite important is that also external parties amongst others and as the board had indicated that this trend of housing prices going up by 12% a year, that this trend would be continued for the remainder part of the year.

But also for the next coming years, be it that the increase will be more in the area of 5%, whereas we've seen over the previous 2 years, far more important increases. But still, message is indeed positive.

And therefore, your question indeed is that the expectation towards the, let's call it, run rate on our retail book is different 2015 and '16 compared to 2014. Whereas we do guide high-end EUR 200 million of loan loss reservations for this year, we do guide for next year in the area of somewhere in between EUR 50 million, EUR 100 million and the same is true for 2016.

So therefore indeed, we do figure in, the positive impact, which we do expect in our portfolio. And which is reflected, by the way, in the evolution in our arrears, which is positive for the fifth month in a row.

I have one question on Belgium and then one on Ireland. Firstly on Belgium, going back to the NIMs margin, but specific to that region.

You recently cut your savings rates by about 10 basis points at the start of August to follow on from the cut in April. But I think you're now down to 0.25%.

So just wondering if you think there is more you can do there, or if you think that has really run its course now. And also just turning to the asset side of the equation, if I could.

Slide 20, you're starting to see a slight decline in the product spread on new production, but in corporates and mortgages, perhaps you could elaborate if that's competition driven or exactly what is causing that. And then turning to Ireland, my question will be just looking at Slide 43, your coverage on an adjusted basis, including the PD 10, as well as 11 and 12, is unchanged.

And yet you do reference that house price inflation, which is centered on Dublin is now broadening. Given now I guess, firstly, can I ask what you're peak to trough house price assumption currently is?

And secondly, when do you think you might start to see coverage ratios actually declining there?

Going back to your first question about the interest margin in Belgium, indeed this interest margin has been -- for the second quarter, has been underpinned by rate cut, in April on saving accounts. And we have indeed announced that we have cut north of 10 basis points, bringing down this interest rate to 0.25% on our savings as a [indiscernible] accounts as of August.

Indeed, if your question is -- I mean, that's what your question was related to, what about the next coming periods. This is all related and this is all directly linked to, of course, the evolution of the interest rates, the short-term interest rates in Europe, on the market.

In that respect, we have been following a policy and we will continue to do so in the future in that we will follow closely and the market boost financially -- the financial markets and, secondly, the competition in our home markets, in this case in Belgium. So, answering your question will be depending on those 2 elements.

And we will indeed go for sound commercial margins, taking into account evolution in the future. Going back to your question relating to the evolution on Page 20 of our credit margins on our loan book, the top part of that slide indeed reflects the positive evolution in the second quarter.

Once again, 2 basis points up for the whole portfolio. And your question was more specifically, referring to the bottom part of the slide on the new production, where you do see part of the margin coming down.

It is clear that you cannot expect us to further increase and just extrapolate. For instance, the evolution of the margin in the mortgage book, which is a dark blue graph in -- on Page 20.

And that you cannot extrapolate that straightforward into the future. This is impossible given the competition.

We do see our market share being slightly growing, stable in certain periods, where we push the margin very hard. But stable growing over time.

And this is a play which we're going to continue in the future. But given competition, given also the more uncertain environment, I don't expect that volumes will be increased in such a way that we can easily push up margins further like we have in doing over 2011 and 2012.

The second thing in this respect is the commercial portfolio and the effect. Part of it first quarter was seasonable.

The other affect, which is here and is duly linked to the corporate book, not to the SME book, but the corporate book. And that is a decrease of the margin, but a strong increase in the volumes.

So those are directly linked. And so if your question is what about the evolution, it is a play between market share and margin and the margins are in this respect, influenced by competition.

But as a wrap-up, I do repeat what I just said. The total margin on the whole book is up about 2 basis points, and this has to do with the maturity of loans at very low margins, which are replaced by mortgages, and SME, and corporate loans at higher margins.

And therefore, the effect on the portfolio remains positive.

Okay, on your next question on Ireland, we have a peak to trough assumption in our model, but this is now, we're making it very simple, about 53%. That's 10 percentage points higher than the CSO index.

I have to warn of course, there is this buffer that is certain, but you also have to look at the underlying portfolio compared to the portfolio being used for the CSO index now. On the other hand, the 53% excludes a number of things like sales costs and some haircuts for, for example, refurbishment of homes that we've been contemplating to the market.

On your next question, when coverage ratios will then stop declining, well, it is difficult to predict. Obviously, coverage ratios decline because of the migration from the loans from the good book, PD 9, into the bad book, PD 10, given that these are relatively good loans, the coverage ratio naturally decreases.

When it is going to stop is very hard to predict.

The first question I have is on the outlook for fees and commissions, because they were strong again this quarter. And especially whether we should expect some seasonal moves, because if I look at the previous years, typically they tend to be lower in H2 compared to H1.

So basically, the question would be whether you are seeing the H1 performance can be repeated in H2 this year. The second question is still on the NII in the Group Centre.

If I understand correctly what you said earlier, we haven't had yet a full quarter of benefit from the lower cost of funding coming from the call of all the high rates, so should we expect some further improvement going forward into the NII in the Group Centre? And just if I may, 2 very quick clarifications, if you could just quantify the impact of the real estate gain and the positive outcome on the legal case, I think, you implied on the call at quarter EUR 160 million positive and also on the other values [ph] Ireland, which are down quarter-on-quarter.

It seems to be due to some changes in the methodology that you did I think, that's what I understood. Wish you could maybe just clarify on this as well.

Coming back to your first question, being the outlook for the fee and commission income, as you know, we don't guide specifically on fee and commission income. But no, when we obviously, when that follows, the fact that they are not guiding that something is going to come.

But as you know, the policy of KBC remains intact, and that is that we are offering all of our customers a whole pack of investment products. We're not talking about only saving accounts or term accounts.

We're talking about the whole range. And the whole range definitely includes asset management products and life business products.

And therefore, it remains our policy also in the next coming quarters, next coming years to further with emphasis on this fee and commission income. So therefore, I would say, without giving you normal guidance, the evolution as you have seen, is quite positive.

And for the next coming periods, I would say, it will be steady. And it will also, and this is quite crucial in this respect to understand why we remain cautious it, that is, it will also be affected by the overall sentiments of customers.

And then referring to the sentiment, which is influenced by, amongst others, instability in our environment, geopolitical events which occur, which can and might disturb that sentiment, that is obviously influencing. But given normal circumstances, one can expect this to be steady growth.

And for your -- the second part of the question was the seasonality. The seasonality obviously, and that is a tradition, which you can see and it is reflected, by the way, in the slides as well.

The third quarter is always seasonally a bit a factor because of the peculiarity of that period, you can see that on the slide. But all in all, for the whole year, I do expect to call it as such pressure on continued focus on sales on this area and steady, stable growth, taking into account events which can occur.

Okay, on the NII Group Centre, yes, we will now enjoy a full quarter of the call of the old style Tier 1. Does it mean that net interest income will, therefore, increase?

Not necessarily. Obviously, we would hope so, but there are some headwinds as well.

First of all, the reinvestment deals continues to be low. So that's one element.

And secondly, we do see some competitive pressures on margins, in Czech Republic, but also in Belgium on the corporate loan side and a bit on the SME side. But as I said before, we believe that NIMs should remain at least stable for the next few quarters.

And normally, NII should also hold up quite well. On the real estate, the net other income in the under group, the real estate gain was EUR 12 million before tax.

And the old [ph] file, the legal case that we won and was settled, was EUR 31 million. The other RWAs reduction in Ireland had to do with the migration from the loans, from the good part of the book into the defaulted part of the book, as a result of which RWAs reduced.

That is the main factor for that movement. I think these were are all your questions.

Johannes Thormann, HSBC. Just one question.

Looking at your credit cost ratio, how far do you think it can decline in a quarter and probably in a good year on a group level?

Are you actually asking for guidance?

Your feeling, what you think probably not for any year, but what do you think in the mid-term. I don't want to hear 2015, just if you think what is the best possible outcome?

Well, as you know, we don't give guidance on the longer-term and definitely not in this respect. I suggest look at the numbers as we have seen them.

I'm actually going to say similar things of what we have said in the previous quarters, in terms of Belgium it's clear that we're not going to be at the same level as last year. And also this is, in that respect, we understood for Czech Republic, we have said 4 basis points.

This is not sustainable, and I can probably tell us well, this will probably not be sustainable in '15 and '16 as well. In terms of the other countries, Hungary and Bulgaria for this year, we do say, and also this will be true for Slovakia Republic, they will be lower than what we have seen last year, but any further guidance besides Ireland in nominal terms, we don't give.

Couple of questions from my side. First of all, before you were mentioning you will try to fight the lower investment yields.

And now, when I look at the movement of your balance sheet, I see that deposits are going up nicely, actually more than nicely, I would say, in this semester. When I look at your held-for-sale assets and available-for-sale assets, they go up nicely in this semester too, and mostly in fixed income securities.

And when I look at fixed income securities, it looks to me that it is mostly public bodies, so I would suppose is it is mostly sovereign. So it looks like that you're investing the excess deposits, because loan growth is going -- is not growing much in sovereign.

So what does it actually mean fighting the lower investment yield, because it looks like you are investing this liquidity, something which the yields are just collapsing and is unlikely to improve? And more or less linked to the same topic, the fact that you've covered the deposits, the cost of the deposits, and the fact that the deposits are growing nicely, could you eventually switch a portion of these deposits into something like off balance sheet asset management, where you have new capital consumption and maybe better margins than are invested in sovereign exposures?

Well, on fighting the low yield investments, indeed you're right. We see that despite a reduction in straights on saving accounts, for example, money continues to flow in, not only in savings accounts but more and more also in current accounts.

We indeed invest more and more, therefore. in securities, excess liquidity in securities.

How we have done in the past, and we've been clear that we've been diversifying away from the classical home country government bonds slightly into other asset classes, on the one hand, and the recent -- well, since end of last year, we've also been diversifying away a bit more into Italian and Spanish government bonds, which so far has been a good decision. But, obviously, that can also only go so far as it goes.

We also have limits on the exposure we want to have on these type of countries. So we can't continue that forever.

On the deposit side, yes indeed, it is our ambition to switch the savings -- part of the savings accounts and current accounts into other asset classes, particularly asset management product and life insurance. This is working, as you can see, with, particularly, the asset management, where we have net new inflows more than EUR 1 billion in the last quarter.

Also interest rate guarantee products and life unit-linked are recovering. So that is working.

But, obviously, there is still some hesitance from our clients to move out of the very, as I see, safe savings accounts and even current accounts into investments. So there's still some reluctance also, obviously, inspired by what is happening around us in the world.

People are conservative.

If I just may use 30 seconds of your time. Given that you are required, if I remember correctly to risk weigh sovereign exposure, would you be able to tell us what kind of risk weight you are using for Italy and Spain?

Well, we are -- as you know, National Bank of Belgium has been the only one who forced us to risk weigh our government exposure. It has always been the case for non-home-country exposure, and we now have to risk for home-country exposures as well.

We have to follow our normal RB models, which we are applying. We don't disclose particular percentages for different countries.

Firstly on capital, you've got almost EUR 1.5 billion of your cash reserves including your regulatory capital, if I calculated that right. And how do you think about the volatility that brings to your regulatory capital?

And do you think as a result of that you might to need to run with more of a buffer above that 10.5% minimum? And second question's on going back to Ireland, that looking at deposit growth numbers.

I think on Slide 35, you're showing 3% quarter-on-quarter, but that's actually quite dramatic slowing from kind of double-digit growth in Irish deposits you were posting earlier on. So I wondered what's happening there.

And are you finding it a bit to be tougher to win deposits in Ireland now?

I will ask perhaps to answer the first question on the AFS reserves. Overall, there is indeed about EUR 1.5 billion of AFS reserves.

But we are applying the Danish Compromise, which means that the KBC Insurance part is actually deconsolidated in the regulatory capital calculations. And only the capital that we invest in insurance is deducted from our capital.

So the only element of FX reserves which is in regulatory capital is on side of the bank and that is around EUR 0.5 billion. Does it mean that we have to increase our buffers?

We already included last year -- last quarter's about EUR 300 million, and we had already included a buffer for volatility of that number. That's going up now, but it doesn't mean that we have now changed our buffer.

Okay. And Irish deposits?

Sorry, can you be -- please we had some noise on your question. Can you please repeat your second question?

Yes, the Irish deposit growth numbers, on Slide 35, you got 3% quarter-on-quarter growth. But If I go back to previous quarters, I think you were doing double-digit growth in Irish deposits earlier on.

So I just wondered what was going on there. And if you -- are you finding it tougher now to continue growing at the old pace of Irish deposits?

Okay. So on that side, there is more competition from other situations.

Secondly, we have greatly decreased our rates. As you know, we have been one of the top payers for deposits.

We've changed our position in that respect. And, obviously, that also has had an impact.

There's also a temporary lull in the fact that we ought to concentrate more on current accounts, and we've been installing new programs to increase the number of current accounts. So we hope to make that deceleration up by attracting more current accounts with higher -- obviously, higher margins.

Excellent, that sums it up for today. I understood, that was the last analyst wanting to ask a question.

So it leaves me with only thanking you for today's attendance, and hope to see as many of you possible tomorrow in London. We can buy you coffee, and we can answer your questions.

Thank you very much, and goodbye.