Wim Allegaert - Director of IR Johan Thijs - Group CEO Luc Popelier - Group CFO

Jean-Pierre Lambert - KBW Anton Kryachok - UBS Tarik El Mejjad - Bank of America Farquhar Murray - Autonomous Benoit Petrarque - Kepler Riccardo Rovere - Mediobanca Johannes Thormann - HSBC Guillaume Tiberghien - Exane Flora Benhakoun-Bocahut - Deutsche Bank

Very good morning from KBC headquarters. Welcome to the KBC call.

Today is August 6, 2015 and you are on the KBC conference call for the second-quarter results of KBC for 2015. Today we are in the company of Johan Thijs, Group CEO; and Luc Popelier, Group CFO.

And they will comment on our results and give some additional financial insight on KBC. 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, obviously, time for questions until around 10.30 Brussels time. This conference call is taped and can be replayed until August 21.

As usual, investor relations and our CFO are organizing a sell-side analysts meeting in London tomorrow morning at our offices in the City, Old Broad Street, 111. This meeting starts at 8.30 local time and we would be pleased to have you over.

We will take time to listen to your thoughts there and answer your questions on our financials, while enjoying a croissant or an espresso. And now it's my pleasure to give the floor to Johan Thijs.

Thank you very much, Wim. Good morning to all of you.

I'm very pleased to talk you through the second-quarter results of 2015, hereby using the deck which is provided on our website. Let me start with the most important thing.

Yes, it was a good quarter with €666 million and we are not superstitious. We can say this was an excellent, very exceptional good result for the KBC Group.

And the reason why we are actually quite pleased is that the result is actually due to very good quality underlying. As a matter of fact, all of our bank insurance activities, in all our core countries, have been performing quite well.

And what they have been doing good on the commercial side was also of good technical quality. This quarter's also characterized by a serious uptick in our capital ratio.

We now stand at 16.4% under the FICOD methodology. We are standing at 16.7% under the Danish compromise, which is a very solid position, even considering that we have EUR2 billion of State aid still in those numbers.

Leverage ratio is also very good. And liquidity has been historically quite solid and that will be confirmed, and is confirmed, in this quarter.

Allow me to talk you through the details and starting with a detail, I will be referring to-- I will skip sometimes a page, but always refer to the page number. Let's start at page number 6, where we actually have the split up of KBC Group in the bank and insurance activities.

The split is now 82% for the Bank, whereas we do have 18% for the insurance company. That's a bit lower than historical.

But there is no significant difference, so let's not dwell too much on this. On the left-hand side of the same slide you can see the net result.

And, as we already mentioned in the first quarter, we are no longer going to split up the net result on legacy, on credit, that kind of stuff. We only have one result.

No adjusted result any more. And that is also having another impact.

Whereas in the past the income related to capital market activities was actually in the adjusted result. But under the financial instrument at fair value it now is split up across several components.

Vast majority of it will be taken into account in the net interest income, but we will provide more detail in the net interest income part. But I just want to mention this; that we made a little slight change without a significant impact on the numbers overall.

Anyway, let me start with the net interest income. Here the net interest income is slightly up compared to the previous quarter.

If you definitely look into the net interest income on the banking side, then it's €6 million up compared to previous quarter and it's substantially up compared to the same quarter of last year. There are several reasons why the interest income has performed quite well.

That is mainly because of lower funding costs and that we have further continued to commercially cut the rates on the saving accounts, amongst others, in Czech Republic. But also we were able to push up the loan volume and the deposit volume, as is mentioned on the bottom of the slide.

So at the quarter we had a loan growth of 1%, both in the mortgage loans, as in the other loans, which is very good. If you look at the same number on a yearly basis we're talking about 4%.

Given the economic growth, which is still quite moderate, this is actually a very good number. And also on the deposit side we have been able to increase our position quite significantly, so 2% up over the quarter, 8% up over the year.

And if you look into the different business units, there again one can say that all business units are doing very well in gathering deposits. Now on the negative side, the pressure on the net interest income, and this is a repeat of the previous quarter, that's mainly due because of the Belgian book that is because of the hedging losses which started to kick in, hedging losses on our mortgages refinancings.

What we do see in Belgium is that still we do have refinancings of those markets' loans, but the number of loans which we do have to refinance is decreasing. There was also a positive impact of €25 million, a bit lower than previous quarter, in terms of the prepayment fees, but hedging losses start now to kick in.

And also we do see that the dealing income, which now makes part of this net interest income, is a bit lower compared to previous quarter. But, all in all, very good results.

Other elements, volumes were up quite well. The other element, obviously, is then the interest margin.

We do see pressure on the interest margin; 4 basis points down. It still stands 2 basis points higher than the same number last year but still there is pressure on that net interest margin, mainly due to the lower reinvestment yield and because of the hedging losses already mentioned in Belgium.

So the net interest margin here, we do expect this to be further under pressure because of that lower reinvestment yield and because of those hedging losses. Going forward, it means that 2016 will be further under pressure.

But, for this quarter, excellent results on the net interest income side. The other element which is contributing very positively to the €666 million is the fee and commission business.

Again, we did see an increase of that fee and commission income 1% in this quarter, 20% over the year. I think this is the 11th quarter in a row that we do see an increase of the absolute amount; standing now at €465 million.

This is due because of strong business performance, so management fees were up. We also see some other elements; in terms of security transactions this year, an increase.

We also saw higher transactional services in Hungary, amongst others. Therefore, this is a mixed bag but mainly the most contribution, obviously, comes from asset management products and unit-linked products.

So, again, this is a very good result and is also partially reflected in the assets under management, which now stand at 204 billion. This is slightly down compared to the previous quarter but it is fully due to the price effects, because the net entries were positive, 1% up, compared to previous quarter.

If you compare it with the previous year, it's obvious this is substantially higher than last year and is 18% up, mainly due to net inflows and also partially because of pricing effects. Anyway, good result on the fee and commission business and the other element on the topline is the insurance side.

Here I'm on page nine. Here we do have a bit of a mixed picture.

Let me start with the overall result in life. This goes down and that has to do, obviously, with the low interest rate environment that obviously affects the interest-guaranteed products.

In the interest-guaranteed products, Luc will give you the detail later on, we are 12% down on the quarter, 11% on the year. But that obviously has an impact on the total income of the insurance companies.

Important in this respect, because it's a perfect diversification for the banking book, is the non-life business, which is doing actually quite well on two dimensions. First of all growth.

We do see an increase of 3% here, which is, given market circumstances, a good result. Low growth is something which we do see recurring in most insurance markets in Europe and also in Central Europe.

3% up. It actually is split between Belgium, more or less 3%, and then the other countries in Central Europe they are all up more than 5%, but Slovakia where it's up at 4%.

So growth-wise, excellent performance but also quality-wise a very good performance. 86% combined ratio is very good.

We are now half a year down the road and in facing a period but also some hailstorms, some larger claims, but still the ratio was only at 86%. And this is extremely good and this is, indeed, something which very encouraging, also with a view on the yearend combined ratio.

On page 10 you have the split up, but I already mentioned something, a split between the unit-linked and the interest-guaranteed products. Unit-linked was slightly down 4%.

The reason is clear. This is a portfolio mainly driven by Belgium, heavily taxed, 2%.

And there is a perfect alternative, which is the asset management product, which we already spoke about and which was performing very well. So, all in all, this is within expectations.

This is within expectation, given market circumstances and, therefore, actually quite acceptable. On page 11 we talk about the fair value gains on financial instruments and this is a very positive one.

This is mainly driven, €90 million in the quarter, by the mark-to-market of the ALM derivatives. Interest rates have gone up.

We have taken a position, indeed, which is positively influenced by that interest rate move. And €90 million makes a difference, compared to previous quarter, of €93 million, which explains a substantial part of the difference of €122 million between quarter 1 and quarter 2 of 2015.

The other difference, as explained by the mark-to-market of our market value adjustments, our funding value adjustment and our credit value adjustment, totaling €32 million. Actually, in that respect, one could say the balance, after deducting those one-offs, is perfectly in line with the previous quarters.

It's perfectly in line with our expectation. We did not realize a lot of AFS gains.

The result was quality-wise already very good. We only realized €33 million via shares and only €4 million-- that's a rounded number, it's three something-- about bonds totaling €36 million, which is substantially lower than previous quarter.

But, as I said, that was already of good nature and the €36 million is about, let's say, €10 million lower than the run rate over the previous three, four years per quarter. Other elements to take into consideration is other income, which is double of what we do see as a run rate.

The run rate is explained by results booked in small entities within our Group, the leasing company, assistance company in Belgium, some real estate companies. Those have been performing perfectly in line with the expectation, totaling €55 million; a bit more than the run rate.

The one-offs which we have seen in the second quarter have come back because of some of our legacy activities. We have earned €11 million on agreements, which was included when we sold Fidea.

We had a €5 million release on another file, KBC Banka in Serbia. And we had a positive €8 million release on the reserves, which we booked after the Curia decision in Hungary on the FX loans, so we have freefall the previous quarter, I think, €3 million and €8 million now.

That is, indeed, reflecting the very conservative position which we took at the time with our reservation of €231 million in 2014. Now the remainder is due to one single file, which is actually a deconsolidation of income which was related to real estate.

So, let me say, other net income, normally perfectly in line with the run rate, due to a few one-offs. This has jumped up with almost the same amount as normally expected.

Other good news is on page 12. When we are talking about the operating expenses, please do me a favor.

Just only look at the light blue bar, because that's the true operating expenses without the banking taxes. Those operating expenses are well under control.

If you look at the cost-income ratio, adjusting for the one-off effects and one-off effects are the banking taxes and the ALM derivatives, then we stand at 52% in the second quarter, which is very good and which is perfectly in line with our longer term target of 52%. If you would take everything into account, then it would be 47% cost-income ratio in the second quarter.

But, once again, don't do this because it's distorted a little bit by some elements. The reason why it's good is that, indeed, we do have very strict programs running in terms of cost and cost evolution.

That is starting to reflect itself in, for instance, lower expenses in Czech Republic, where we do see a quite substantial release of staff having a positive effect on the expenses. We do see lower expenses in marketing and some other activities in some of our countries.

And, all in all, the operating expenses not only have been stabilizing, €3 million lower as previous quarter, so have been stabilizing in this respect. To keep in mind as well that is a change that is mentioned at the bottom end of the page.

We have, because of IFRIC 21, already in the first quarter taken upfront a large part of the banking taxes. We now further took other banking taxes upfront, totaling €83 million for the quarter.

But, next to that, we further aligned our-- receiving a recommendation of the ESMA and the FSMA, which is the financial services authority in Belgium. After receiving their recommendation, we further aligned our accounting treatment of the payments for a deposit guarantee scheme totaling €29 million upfront.

So that is taken into account in the costs as well and that negatively distorts the numbers. So, in that respect, one could definitely say that our costs are under control.

What we are paying in terms of taxes, you can find the detail on page 13. It's obviously a bit distorted because of the upfront taking of some of these costs.

But, nevertheless, it's quite impressive €347 million for the Group, totaling 10% of the total operational cost. That's tremendous.

That's an extremely high number. And also in Belgium it totals 8.2% of our operational expenses.

That's very significant. If we would not be paying bank taxes, imagine that situation.

Then our cost-income ratio would drop to 46%. That's at the level of Scandinavian banks.

Let me talk about other elements which we do control. That is asset impairments, on page 14.

€149 million is €72 million higher than previous quarter. Now, nevertheless, I'm very pleased with the number because, actually, it's a very good performance.

The €149 million. So the €72 million extra is €64 million for the loans and receivable.

Other elements are some impairments which we took on assets, but it's not that important in terms of materiality. €64 million on loans and receivable is negatively influenced by impairments which we took on our IBNR, or changes which we took on our IBNR position because of model changes.

That's €34 million, of which €21 million is for the Belgian business unit and €11 million is for the Czech Republic. Totaling all these extras, the credit-cost ratio only stands at 30 basis points, which is, if you look at it in a historical perspective, quite low.

If you would exclude the model changes which we have introduced, then we are talking about only 22 basis points credit-cost ratio, which is, indeed, again in the historical perspective, substantially lower to what we have seen. And it's also substantially lower compared to the 10-year or 15-year average, which we do calculate, which stands at around 50 basis points.

Other changes which we have seen in the loans and receivable are actually due to Group center and the ADB file, there is one bigger file, €90 million, and some restructurings in impairment files in KBC Finance Ireland totaling €33 million. That fully explains the difference between the first and the second quarter.

It will be no surprise that, therefore, also the impaired loans ratio drops to 9.3% and, clearly, indicates the improving quality of our loan book. So, all in all, good results for the quarter and this is reflected in most of our countries.

Talking about the business units, which starts as of page 15, I'm not going to talk you through the detail but we will be happy to answer any kind of question in that respect on all the business units. Allow me to jump briefly to some of the most important elements.

Business unit Belgium, excellent result; €525 million. Great performance.

Actually, what is true for the Group is true for the business unit Belgium. Interest income very solid, volumes up and fee and commission business quite good.

The insurance quality in non-life, excellent growth; almost 3% up. Life down.

Credit-cost ratio well under control. If you take into account the IBNR changes, then the credit-cost ratio stands at a very, very low position.

The costs are well under control. Actually, very well performed on all parameters.

Czech Republic, a little bit lower than the previous quarter but if you would correct the adjustment made on the IBNR provisions, then it's almost the same. Adding €11 million to the 127 brings it almost at the level of the previous quarter.

Also there volumes are up quite significantly, performing very well. The only caveat which we have here is that net interest income is okay, but net interest margin is clearly under pressure.

It dropped because of competition we do see in the market and because of the lower reinvestment yields. So that's perfectly in line with what we said at Group level.

Also there all the other elements are very okay. And, clearly, costs are well under control.

Actions are taken, also, going forward. And the credit-cost ratio stands -- definitely, when you exclude the €11 million of IBNR provisions, it stands at a very low level.

Good news also to mention on the business unit international markets. With a profit of €68 million for the quarter, this is really good, totaling €92 million for the first half of 2015.

It's perfectly in line with our guidance that the business unit will be profitable for this year. The good news to mention is that this profit contribution is actually due to all countries, which means also that Ireland has contributed positively to this result.

Okay, it's only €2 million and probably it's not sustainable for the year but, still, it's also showing there's some light in the dark tunnel. The growth of both credits and deposits are very good.

They are perfectly in line with our ambition, which means that we don't -- in some areas, we don't want to grow our corporate loan portfolios, which is the case. The detail is on page 34.

The deposits are increasing quite significantly, as you can see in all of our countries. And, therefore, we're very pleased with the results obtained.

Also credit-cost ratio is very acceptable now. That's obviously to do with Ireland.

And perhaps let me spend one word on Ireland. We do see that our credit cost in Ireland is dropping significantly.

The provisions taken in the first quarter is €16 million, including the changes on the models proposed. That is slightly up compared to previous quarter but remember that in the previous quarter we had a write-back.

So totaling, actually, the total provisions for Ireland a bit more than €20 million; €23 million. We have guided before for Ireland to have a full-year provision standing somewhere in between €50 million and €100 million.

And, therefore, we-- and, on top of that, we added it will be closer to €100 million than to €50 million, so the higher end of the range. We feel confident now to say that the guidance remains the same, being in between €50 million and €100 million for the full year but that it will be closer to €50 million than to €100 million, so that we are now guiding for the lower end of the range.

Also commercially Ireland is doing very well. Collect deposits now almost €5 billion and also having very positive evolution in the number of new customers.

So confidence is getting back amongst the Irish, definitely regarding KBC Bank Ireland. I will keep it here for the business unit international markets.

We do have the business unit group center, which has a negative result of a bit more than €50 million. This is mainly due to the [divisional] staff split up.

And, as you can see on page 42, the main contributor there is the holding of participations. Also some instruments which we use at Group level for hedging -- for treasury management, contribution is this respect positively.

Obviously, the cost of subordinated debt is in. But I'm not going to go into all the detail.

The only thing I have to mention here is that on some legacy files we had higher loan impairments. Already mentioned ADB, already mentioned KBC Finance Ireland.

And that is booked in this business unit. So, all in all, also quite acceptable result at Group center, perfectly in line with our anticipation.

Adding up all these elements brings me to our capital position and that has seen huge uptick. We are now under the Danish compromise at 16.7%, which means that it was an increase at 1.6% over the quarter, 1.6 percentage points for good understanding.

Clearly, this is positively influenced by the results. We did see some negative impact because of the interest rates increasing having an impact on our AFS reserve.

But the main contributor, obviously, in this uptick has to do with the release of add-ons which were imposed upon us in 2012 by the National Bank. Add-ons totaling €3.8 billion for conditions which were set for the change into IRB advanced at the time.

Those conditions were all fulfilled and the regulator has approved the freefall of those add-on, totaling €3.8 billion. The balance, because we had a freefall of more than €5 billion, the balance is mainly due to the over-the-counter derivatives positive evolution there because, amongst others, of the interest rates, some other elements kicked in, some change in positions which we have taken totaling €1 billion of freefall of risk-weighted assets.

It is clear that with the 16.7% we clearly exceed the target set by the ECB standing at 10.5%, we do see also a positive evolution in our leverage ratio, now standing at 6.7% for the Group. It is a bit lower for the Bank, 4.8%, but this is due to the policy which we do follow for the Bank.

As you know, we do upstream all our profits to the Group and the Group is actually the place where we do manage our capital position, so, all in all, a very good quarter in terms of both the common equity ratio and the leverage ratio. Liquidity is also-- I'm sorry I forgot to mention perhaps one element on page 46, where we sat in June 2014 the total capital ratio target at 17%.

You can see on page 46, clearly, that we are beating this target already. We are now at 21% of the total capital ratio.

Even if you would exclude state aid, then we still are having a number which is superior to the target. The buildup, I'm not going to go into the detail, it's mentioned on the slide, but it clearly gives us comfort to have a capital position like this.

The next page gives the split up on our liquidity position in terms of who is providing that. And 76%, which is a little bit higher than the previous quarters, is coming from our customers, which is obviously quite reassuring.

But also, if you look at the next page, where you do see the short-term funding which we use and you look at instruments which are eligible for conversion, then we are having a huge buffer there. We now stand at 352% of buffer, which gives an enormous comfort, definitely when you take into consideration the previous page, seeing that most of our funding is attracted not via the markets but via our customers.

It's no surprise that the liquidity ratio stands very solid. Both NFSR and LCR are exceeding by far the targets which are imposed upon us by regulators.

This is the detail and we'd like to keep it here. Allow me to wrap up.

This was a very good quarter. I will say that bank-insurance model is a machine and we have been performing on all cylinders and we have been performing in a very efficient way.

So this is again proof of our earnings track record and this is again a boost for our capital position. Liquidity remains extremely solid and we actually are very pleased with that.

And, therefore, all the guidances which we have given in the past are confirmed, as mentioned on page 51. I would suggest to keep it here and the team here is happy to answer any of your questions.

Please.

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

Please limit your number of questions to two so that we can have as much people as possible asking questions. Thank you.

Yes good morning to you I have two questions and they are both related to asset management operations. The first one is, can you give an indication of the cost-to-income ratio of your asset management?

I know it's integrated with the bank-insurance concept, but previously in previous disclosures you indicated it was 30%. That's a few years ago.

The second question also to asset management is, the revenue margins were roughly similar to the previous quarter at 70 basis points. So how do you see that margin evolving?

And is there a way to know the percentage contribution of entry fees and switch fees this quarter? Thank you very much.

Thanks for a question first of all, the question on the cost-income, you referred to the number 30%. That is definitely not correct.

That is far too high. We don't disclose the detail on the cost-income ratio, but what I would be willing to say is, indeed, that the cost-income is much lower than the 30%.

On the other hand, if you take into account, obviously, only the asset management company, it makes sense to talk about the cost-income ratio at Group level, because the asset management is a fully integrated entity within KBC Group. We also take into account other costs, which are related to the sales of asset management products.

And those costs are made, for instance, in a distribution network. But I think that's not -- for your sake and I think for your calculations, you're definitely referring to only the cost-income ratio of the asset management company and that is clearly not 30%.

It's much lower.

And Jean-Pierre, on the direct new margin going forwards, we see a number of elements. First of all, what we saw in the last two quarters is an increase in margins due to a positive product mix on the one hand.

And secondly, very strong equity markets, as a result of which, in the CPPI funds in particular, the portion of equities and, therefore, the management fee that we could charge was higher. Going forwards there may be some reversals.

We already saw that clients in end of June, with the uncertainty in the markets, started to go to CPPI products at higher protection floors, where the cash element of the funds is higher. And that has, obviously, a negative impact on the margin that we could charge.

We also see that strong increase comes from discretionary and, particularly also, advisory management, where margins are lower. So, going forwards, margins could potentially be a bit under pressure.

Obviously that, we believe, should be compensated by continued good volume growth, obviously under current market circumstances.

And related to the proportion of switch fees and entry fees in the total?

As you know, we don't provide information on entry fees specifically. You get this information on security and asset management fees in our quarterly reporting but, unfortunately, we cannot disclose the entry fees.

Just two questions, please. The first one is on capital.

You've delivered another very strong quarter of capital build and this obviously leaves you well placed to repay the outstanding state securities that you have in your capital structure. But after that is done, I was just wondering what would be the main factors that you will take into account when determining your payout expectations for 2016?

And, specifically, I was wondering whether you need to see more clarity on the recent proposals from Basel around risk-weighted amortization? Or do you think this is not a risk for 2016, let's say, capital outlook?

And then the second question, please, on credit margins. In Belgium it looks like margins on new business have reached broadly the same level as where the back book is.

So I was wondering, if we ignore the pressure that is coming from lower reinvestment yields at the moment and just focus on commercial margins, what's your outlook on evolution of commercial spreads in the second half of the year and 2016 in Belgium? Thank you.

I will take your first question on our capital position. Yes, indeed, it's true that with, let's use the FICOD number, 16.4% we're clearly above our target or our absolute minimum of 10.5% set by the ECB.

So that means that we have a substantial buffer now and that buffer will be used in first priority now to pay back state aid. That's clear.

We stick to our guidance which we have given that we are going to go pay back of state aid by yearend for several reasons. And this is also partially in answer to the second part of our first question.

That is, what is the capital outlook for 2016? What we are dealing with is obviously an environment which is volatile in terms of risk weightings on certain asset classes.

The second-- I'm talking about the Basel report you were referring to but also talking about other rumors which are in the market; that is floors on mortgages, or extra risk weightings on mortgages. And if you look at the documents, which are now the-- consultative papers, which are now out on the difference for the interest rate risk on the trading in the banking book, we are talking about very substantial numbers.

That's the second element. We do see in the market some regulatory thoughts on operational risk also there.

And the pressure is upwards, so all these elements are in a phase of consultation. Perhaps it's not wise to say but, anyway, my personal opinion is that the first draft of some of these documents which we have seen is probably too harsh and it will be played down when reality will be taken into consideration.

But, still, there will be clearly an upwards pressure on the risk weightings going forward. And this will definitely be the case also in 2016 and also years following.

Some of those consultative papers speak about 2018 as ultimately the year of implementation. Anyway, so there is some pressure.

Next to that, before we take a decision on state aid, we will need to know what the absolute capital minimum is going forwards, the capital target set by the ECB, and that will be ultimately known in November. So, for that reason, we do say the decision on the capital payback will be taken by yearend.

The other element is, what after the repayment of the state aid? It's clear that KBC is a financial institution which is able to generate substantial amounts of capital.

And we have already announced in 2014, second quarter in June, and happy to repeat that again, in that what we're going to do with the surplus capital is clear. It's either used -- it's, by definition, used for building organically business, that's clear.

But it's used by either looking into opportunities to invest and to strengthen our bank-insurance model in our core markets. So on the short term, we're talking about the next following years, we are not interested to embark any new countries.

And, clearly, if there is no opportunity which fulfills all the prerequisites which we impose on that, that's to contribute positively to our ROE, that's to contribute positively to our franchises and so on, if there's no opportunity open, then we will pay out all surplus capital on top of the 50% dividend payout which we already announced. So it's clear 50% as of 2016 as a given.

If we don't have opportunities, there will be definitely consideration to pay out more.

Thank you.

And, perhaps on the credit margins going forwards, yes, you see clearly already, as something going on for a number of quarters now, that there are margin pressures. Undoubtedly, we've warned them for that before and that is continuing.

So the trends downwards, we believe, will continue. Further, as we saw the last quarters, with new production margins now being more and more below the back book, in some segments it's still above the back book, but obviously, the biggest-- for example, in the mortgage loans we still have margins above back book but the margins on the mortgages are, obviously, lower than the overall margin for the total loan book.

So there will be continued pressure. Obviously, as you can see, particularly in Belgium, that should be compensated by increased volumes with an acceleration we can see of the volume growth; a slight acceleration in the second quarter compared to the first quarter.

So we get more confident about the loan growth going forwards.

Just a couple of short questions, please. First, on Ireland.

So what has changed from Q1 that you reduce your guidance in terms of costs of risk? Yes, maybe the situation's getting better but I think this trend has been observed already a few quarters.

So are you changing anything in your model? Or -- just to have a sense on that.

And secondly, on M&A. So, if I understand well from my colleague's question before, is this -- so what did you say, that you didn't spot any opportunity?

Or if you don't spot any opportunity in the future you will pay most of this as capital? I just wondered because you have been talking M&A topic for a while and just see what are the opportunities, where and how that you will?

Thank you very much.

On Ireland, I will take that question. Well, the result is just an analysis of what happened in the first six months.

We have now further data to make us believe that we will be at the lower end of the range, given that house price evolutions are still going into the right direction, although a bit more patchier, as you know. And we also see what's happening.

So further improvement in the quality of our credit portfolio, which makes us more confident that we will have less provisions going forward. Equally on the corporate loans, where we feel more confident that lower provisions need to be taken in the next six months.

And Johan will take the other question on M&A.

So for a clarification on the previous answer on M&A, actually twofold. I will start almost from the beginning.

Yes, we are looking into the opportunities. We have been doing that now for a while and the starting position is our current exposure geographically.

That means we have defined our core countries and if we can find assets or if we can find entities that can strengthen our position there, and I'm talking about the bank-insurance positions, then we will definitely consider. But there's a big but.

Opportunities have been given in some of our core countries, but did not qualify in terms of our quality requested. Quality in terms of strategic fit, Quality also in terms of our financial requests; what is the return, what is our ROIC, etc.?

So this is an ongoing process and recently we have acquired a small leasing activity in Slovakia, which fully qualifies for all the parameters and, therefore, we did acquire that company. So M&A is something which we do consider and also we did so in the recent past but also will do so in the near future.

Now, we are capital generative, as I already mentioned, and as you can see also in this quarter again. So the priority here is clear in that state aid payback is priority number one.

I talked about it on the previous answer. The remainder, it is clear that definitely also, after the payback of state aid, when opportunities arise we will consider.

We have a dividend payout of 50%, which was already announced in June 2014. As of 2016, will that dividend payout be a given?

And if there are no opportunities and we do generate capital after taking care of all the extra rules and requests of our regulators, then we will definitely consider to payout more dividend, as we already announced in 2014.

Just two questions, if I may, both specifically related to the RWA reduction of 3.8 billion but, arguably, I think, going back a little bit to Anton's question a little earlier. Firstly a very simple question.

When you come to making the decision on the state capital repayment at the end of the year does this specific reduction in RWA --?

Excuse me, could you speak a little bit louder because it's a very unclear line. We can hardly understand your question.

First question is very simple. They're both related to the RWA reduction of 3.8 billion.

And firstly very simple one, which is when you get to the end of the year and make the state capital repayment decision, does this 3.8 billion reduction in RWA make that easier? Or are you inclined to look through it, given the Basel IV discussions in the background?

And then secondly, how much ECB oversight was there around this reduction in RWA? And, arguably, does this take us closer to a level playing field, which is something you've discussed before?

Thanks.

As Johan already said before, that when we are looking at repayment of state aid but also at further capital transactions or dividend payout, M&A transactions, that we do take into account uncertainties going forward around RWAs, so that actually answers your question that we will look through the reduction of 3.8 billion and see what that means going forward. If, for example, the standardized approach would become-- or a percentage of the standardized approach would become a floor, obviously the reduction we have now would not help, potentially.

It depends on which pockets that you see RWA reduction. But that's something we have to analyze further, so yes, we do not fully take into account this reduction when we look at repaying the state aid.

Your other question is the oversight. Well, this has been a formal decision by the National Bank to remove those add-ons.

Obviously, given this is a formal decision, this should be in full collaboration with all the other regulators and I remember why this actually happened. When we moved back in 2012 from IRB foundation to IRB advanced, we were actually entitled to a reduction of around, from memory, €10 billion.

But effectively, rather than allowing us to move to that lower number, they put on an add-on at the time of approximately €5 billion. Now we finally, after all those number of years, we get the release of that.

So that's fully in line with what happened in 2012.

Many thanks and apologies about the line.

No problem thank you.

So the first question on my side will be on net interest income. You flagged the impact of low rates for some quarters.

We all know that will be an issue. But could you be a bit more specific in terms of NII pressure you expect in H2 and also maybe next year?

Could you tell us, for example, how much bonds will mature and will be reinvested in the coming quarters? And also how much you can still reduce your funding costs going forward?

That would be very useful. And then the next question will be just on follow up on the 3.8 billion risk-weighted asset reduction.

Does that put you in line with peers? Or, just to clarify that, this add-on was just a Belgium regulatory decision and now it just puts you in line with other banks, right?

Just to clarify that. Thanks.

Let me tackle the first one. The net interest income, as I said in the presentation, is indeed positive; the evolution at least.

It's a combination of several elements and Luc has already mentioned the volumes. We do expect volumes to continue evolving in the right direction.

But, on the other hand, you obviously have the pressure on the net interest margin itself and that is twofold, so you have the commercial side and you have, let's call it, the side which is related to our reinvestment returns. On the commercial side, we do whatever is possible.

We do maintain our policy of driving margins and market share in a combined fashion and, therefore, margin is more important than pure market share. We do see that, given market pressure, sometimes it works positively.

Sometimes it is a bit more difficult. We have seen in this quarter that it has been a bit more difficult.

Market shares were up but the margin was slightly down. So in the end the fact was it was flattish.

But it's clear that competition is quite strong. When the economy picks up we'll see what happens, but we are quite positive of the volumes.

We are less positive about the possibility to even increase margin. That is definitely way beyond expectation.

Now I understand your question about the bonds and the maturity of those bonds. I do understand your question about costs of funding, etc.

But, unfortunately, we don't disclose the detail on those questions. So I do apologize but we are not going to give any further detail on the maturity of our bonds.

The funding profile itself is mentioned in the pack. You can see on page 76 we do have the profile of our wholesale funding buckets with the different maturity dates and also with the different types of instruments.

There you can already have an idea of what it can be, but further detail is not provided.

Perhaps, I think, you had a question on the refinancing costs? Oh, risk-weighted assets.

Yes.

In line with peers. The other question on RWAs, whether they are in line with peers is difficult to say.

We do not unfortunately get any other information on our peers and, as you know the composition, particularly of the corporate and SME portfolio, can widely differ in composition and, therefore, also attracts widely different RWA identities; therefore, difficult to compare. Unfortunately we don't have those comparisons.

Perhaps, Benoit if I just want to add one single comment. We know very well that the ECB has actually taken a stance of creating a level playing field amongst the European financial institutions, at least risk-wise.

As this is approved by the National Bank and the National Bank cannot approve anything without a rubber stamping of the ECB, adding to what Luc just said, we don't know the detail but it has been approved by the ECB, which has a policy of having a level playing field amongst the European banks.

A couple of follow ups from my side; first of all, staying on the risk weight, is it fair to assume that a 3.8 billion reduction in risk-weighted assets is entirely due to corporate, if I'm not mistaken? The other question I have is, if you keep generating, let's say, 500 million or 600 million of profits a quarter, when we talk about growth opportunities, maybe the core countries that you have identified -- [indiscernible]

Johannes Thormann HSBC. Just a question on the capital.

Could you update us on your views around the discussions for Basel III? Are you currently, in your talks to the Belgium regulator and ECB, getting the feeling that it will be rather leading to higher floors or higher leverage ratio?

And in terms of the ESRI repayment, what is -- what you fearing? Would you want to keep a buffer significantly above the 17% or rather on the Common Equity Tier 1 ratio of 10.5%?

Thank you.

Thank you for the question. Now on Basel III, obviously we do have a lot of discussions with the ECB and with the National Bank here in Belgium.

The unfortunate thing is that we never see the back of their minds. They always keep the discussions quite open.

It is clear, and that is no big surprise to all of us I think, that there will be an upward pressure in terms of risk weight at the end of the day. So, in that respect, the discussions which we do have and the discussions are many fold, not only about risk weights but also about what will be, for instance, a systemic buffer, what will be the absolute capital minimum going forward.

There we don't have the detail, at least not provided to us, even unofficially. So they keep their mouths quite shut.

Now the expectation, and that's what I mentioned in the call, the expectation is that on the absolute capital minimum going forward is that ultimately in November, hopefully a bit earlier, we do have the -- it will be ultimate in November, we do have the absolute minimum imposed upon us by the ECB. The expectation is that we do get some insight in terms of absolute capital, minimum Common Equity Tier 1, let's say, end of September, early October.

So that will be possibly guided to us in that period. The question what we do take into account if we consider the ESRI payment is actually the Common Equity ratio.

Total capital ratio, of course, also very important but the Common Equity Tier 1 ratio is actually by far the most important parameter in this respect and is also the parameter which is tightly followed up by the regulators. All other elements which we do see approaching us, we have been discussing already in this call the risk weights on the basis of some consultation papers.

Also there the regulators don't express their own opinion. They do see what is happening.

They listen to our comments. They take them perhaps into account but they don't comment themselves personally.

I had a question on your comment with regard to interest rate risk in the banking book. You say that the current draft by the Basel committees could lead to a very sharp increase in RWA.

Does that mean you're not as well hedged as some other banks? Or is that just an industry-wide issue?

And can you maybe try to quantify your first thoughts about how bad that could be? Thank you.

I think what we've done is we've just taken the consultation paper as it is at the moment and when we apply those we have now more detail in the consultation paper to make rough calculations. Obviously this is full of assumptions but we do see this could lead to a strong increase in RWAs and, therefore, capital.

We believe there are some inconsistence in the consultation paper, which make banks, such as KBC but also others which are retail orientated and, therefore, have saving accounts and current accounts relatively larger than others who are more corporate orientated, that they are more penalized. The reason being that there is a very strong conservativeness on the duration that is attached to those current accounts and savings accounts compared to the assets in which they are invested.

We believe that this is unwarranted and again, this is a consultation paper. We need to give our comments on this.

I'm sure this will be rectified going forward, so, therefore, it's an industry-wide concern. As you know, they've been discussing about interest rate risk in the banking book for 10 years already and it has not been solved yet, so it could take a while going forward.

Could it be an increase of EUR20 billion or EUR30 billion of RWAs?

I really will not comment on this because, again, this is very early days. It's a consultation paper, the calculations we make are on a number of assumptions and it would be unwise and unwarranted to provide any numbers at this stage.

Two questions from me, please. The first question is once again about potential RWA inflation coming from regulatory risk.

I was wondering-- you've mentioned earlier that you expect a significant, very substantial I think you said, increase in RWAs as per the current draft published by the Basel committee last year. I was wondering where, in particular, do you think your RWA inflation is going to come from, whether it's from the fundamental review of the trading book, so on market risk, or whether operational risk or credit risk?

That's my first question. The second question is on the dividend.

I was wondering whether it would be possible for you to pay an interim dividend so that, for example, with your first dividend payment for the year 2016, instead of a 2017 dividend payment it could happen already sometime in the year 2016. Thank you.

On the risk-weighted assets, well, we don't provide granular information but obviously where we are most at risk, and you'll not be surprised by my answer, are the mortgages. We have very low risk-weighted asset density.

We feel it's warranted but, obviously, if floors are being implemented then the mortgages-- and I mean the policy in Belgium, obviously, because outside Belgium there is no issue, but there we could be hit by any floors that will be introduced. For the rest very difficult to measure where we would be more vulnerable.

I think mortgages are my main one.

And then on your last question about the dividends, obviously it has some advantages to where you propose paying out our dividend streams, but it is far too soon now to elaborate on this one. I think that we will do so at the appropriate timing but today is a bit too early.

Just on this latter comment, the question was more on the possibility -- like technically, is it something you could do as per the current framework or not if you wish to do it, but technically is it potentially --?

Sorry to interrupt, technically it's indeed possible to do so but to make the comment more explicit it's a bit too early.

We understand that was the last question so that sums it up for today's call. Many thanks for everybody listening in and asking questions and obviously we hope to see many of you tomorrow in London tomorrow morning.

Thank you very much and have a nice day.