Wim Allegaert - IR Johan Thijs - Group CEO

Farquhar Murray - Autonomous Research Anton Kryachok - UBS Jean-Pierre Lambert - KBW Benoit Petrarque - Kepler Cheuvreux Andrew Coombs - Analyst Bruce Hamilton - Analyst Johannes Thormann - HSBC Global Research

Good morning from KBC headquarters in Brussels and welcome to the KBC call. Today is Monday, November 16, 2015 and you are on the KBC conference call for the third quarter results for KBC for 2015.

I'm Wim Allegaert, I'm Head of Investor Relations. Today we're 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 redesigned and upgraded corporate website, kbc.com. After this there is of course time for questions until around 10.30.

This conference call is taped and can be replayed until November 30. As usual, investor relations and the CFO are organizing a sell-side analysts meeting in London tomorrow morning at our offices at 111, Old Broad Street in the City.

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.

And it's my pleasure now to give the floor to Johan Thijs.

Also from my side good morning to all of you, we’re here to announce the third quarter results of KB C Group but allow me to start with something else because the results were good but what do those results matter if you look at what else happened over the weekend in Paris. Just like you we have been following these shocking events incredulously.

These horrific attacks and dreadful suffering caused - have touched all of us very deeply and especially as they go against the very values of respect and tolerance that we all of our KBC and KBC colleague subscribe to. So therefore our thoughts are with the victims and their families and friends and we wish to express our deepest sympathies to the victims and their families and their friends.

Let me come back to then the third quarter results. Actually the third quarter was again a very good quarter with €600 million of profit bringing the ROE at 19.5% which is almost the same as previous quarter with 19.7% and that very good quarter was driven mainly by actually good NII definitely when you take into account the difficult market circumstances which we were in.

We have been increasing our volumes in both deposits and credit, there was a slight pressure on the net interest margin but also there we could manage to the certain extent we have seen good net sales, net inflow of fee and commission incomes but the big hit was mainly due to the market circumstance and I will explain about this later on. We have seen a good performance in non-life also of good quality expressed in the combined ratio, we have seen good technical performance in the bank both on the cost of income and on the excellent level of our impairments and it will be no surprise that next to the good management our risk weighted assets, our common activity Tier 1 ratio has further strengthened to 17.4% under Danish Compromise.

We feel quite comfortable with what has recently announced by the National Bank in Belgium in terms of the O-SII formerly domestic SIFI buffer of 0.50% for 2016 until 2018 to 1.5%. We’re waiting the common equity Tier 1 decision of the ECB but as it stands today we feel very comfortable with that expected outcome.

Last but not least we have liquidated KBC financial holding in the United States and on the back IFRS and Belgian tax regulation this will have a positive impact of €673 million in probably the fourth quarter with also a slight positive impact in 2015 of 16 basis points but more on this later on. Let me allow to talk you now through the details.

I will not use all the slides which are provided in the pack but let me go into slides number 7 which is the slide on our net interest income. The net interest income was slightly down 3% on the quarter, 5% percent on the year in-line I think with the expectations.

The reason why this interest income came slightly down has to do with several effects but the major ones are the prepayment fees, we do see in Belgium that the number of prepayment on mortgage loan has come down and as a consequence we do have lower upfront prepayment fees to the tune of €12 million euro. The next to that of the hedging losses on previously financed mortgages are now kicking in obviously and next to that we have seen because of the low interest rate environment, lower reinvestment yields and further decrease of the net interest income of €5 million in our dealing room.

This was actually a bit offset by the increase in volume and that's actually the good news, clients are showing their trust to KBC and this translated in a further increase on both the deposit side and on the landing side. We have seen a growth of 1% on the quarter, 3% on the year and deposits even 7% on the year which is quite substantial.

The 0% and the cost to growth on the quarter has to do with the fact of a lot of term deposits coming to maturity €1.5 billion very expensive term deposit maturing, so that is in that respect a wanted effect. The net interest margin came down to 199 basis points compared to the 206 off previous quarter, this has to do with sudden effects which already explained so the lower reinvestment yield also the hedging losses which taken but also the pressure in some of our markets on the commercial margin on our product.

We have seen that this effect is not in all the markets of the same kind. We have seen it clearly in Belgium, on the Czech Republic on the other hand the market was slightly up the same is true in Slovakia, some of the market in Central Europe had a similar effect.

So that's not a general effect in all the markets but the competition remains fierce. Let me make one clear side step on the net interest margin.

One has to take into account obviously the prepayment fees, the upfront prepayment fees which have been realized over quarter. If one would exclude those prepayment fees because in the second and the first quarter of this year this prepayment fees require substantial if you would exclude those, the difference between the previous quarters can almost be halfed.

In other element which is worth to discuss is the next page about the fee and commission business, first of all the net inflows has been increasing which is the good news, the sales that we're doing actually very well. But given the very difficult market circumstances we have seen the double effect.

First of all we have seen that the number of switches have come down significantly and that's definitely true after the turbulent on the financial markets in August and September. Those switches have kicked in quite significantly, next to that we have seen the management fees coming down.

Anyway also giving those difficult markets circumstances and we have seen the security transactions coming down as well. Second element which has been playing a role that is the impact of the CPPI portfolio which has what I call a variable management fee, the management fee structure is related to the risk exposure in the funds sold in total KBC has €25 billion of CPPI portfolio and because of the difficult markets circumstances substantial part of that 25 billion has been transferred into - from the risky assets into risk-less assets let's call it cash, as a consequence the management fee on that portfolio has dropped and has an impact on our income.

Now the year-on-year effect has more or less the same elements of explanation so I will not go into that as well. The assets under management came down to €200 billion which is driven by a negative price effect of 3% partly offset by the net inflows of plus 1% because those two effects kick in as off let's say half of August and September, the full effect still needs to be materialized in the quarter going forward.

So under the assumption that the financial markets don't move so that the current position remains the same. We thought it would be wise to give some guidance in the market in terms of the fourth quarter which means that the estimate for the net fee commission income on this basis will be somewhere in the range upto €370 million and this guidance we gave because we think that the effect which I just explained will kick in fully in this quarter given market circumstances as we have seen them at the end of the third quarter.

Let's not forget that those positions which I’ve just explained amongst others assets under management still hold a position which is 11% higher than the position of last year than position of 2014 and also the impact on the year-on-year results on the fee and commission itself was only 5% lower than the same quarter in 2014. Fee and commission income is one thing, insurance income on the other side here we do have two different impacts, I'm on slide 9, first of all the premium income on the earned premium went up for the non-life business with 3%, the good news there is that all business units, all countries have been increasing their income in non-life quite significantly, 4% in Czech Republic, 5% in Slovak Republican, even 13% is quite important.

Also on the life side, we have seen that the Central European entities have been growing their book with substantial amounts, we’re talking about increases of more than 50% there. So the bank insurance model is working and paying off very well.

In Belgium we do see a pressure on the life side on the quarterly basis it was down at 9% and it has to do with two elements obviously on the interest guaranteed products because of the low interest rate environment and secondly on the unit link business because of the impact of the taxes and the combination with that with the low interest environment has obviously tremendous negative impact. Also on slide 9, that is the quality of the sales in non-life, the combined ratio over the quarters stood at 89% which is next to excellent results and it's a perfect testimony of our underwriting skills and on slide 10 you can see the detail between life interest guarantee and life unit link you can see that clearly the impact on the unit linked products is very negative.

That also has the impact on the fee and commission business today in the unit linked products only amount 45% of the total life insurance sales. What brings us to the next slide where we're talking about the fair value gains is clearly a case that often given the market circumstances that this has very significant impact on the quarter if you compare it with the previous quarter, the impact is €132 million.

The difference between the third and second quarter is actually split up and the parts we had an impact of €88 million because of the evolution of the interest rates, the evolution that kicked in on our mark to market of ALM derivatives. Second impact was the market value adjustment and counter-party value adjustment and defining value adjustments - the fair value adjustment sorry which had a difference between the two quarters of €20 million and then next to that we had poor performance in our dealing rooms generating a difference with previous quarter of €30 million.

So the total difference is between the second and third quarter is fully explained by those elements. In terms of how much gains we have realized on our AFS books, it's €44 million more or less in line with previous quarters and the reason for that €44 million will be found in €38 million gain to be realized on shares.

What has to be we realized €6 million on bonds. As I said it's perfectly complete in line with our run rate, run rate stands about - depends a little bit on the year, let's call it €45 million so in that respect.

It's perfectly in line. The other net income stands at €96 million which is double of the of the run rate and so let's first look into what has been realized on let's call it in the traditional other income business we have been realizing there €47 million euro which is more or less in line with the run rate in auto lease, in systems company, in real estate - all activities have been performing as expected.

We had also €49 million of one offs which had to do with settlement from legal files both in Belgium and in Hungary but also with the adjustment of some legacy and that has to do with credit bank Poland amongst others and in Luxemburg but also with an adjustment of €7 million of the provisions of Korea decisions on the retail loans in Hungary so that is kicking in as well. So those one offs include total €49 million and actually this is also almost the same in terms of one-offs as previous quarter where it was €50 million is perfectly in line with what we have been seeing in previous quarter.

This brings me to the operational expenses. The operational expenses went down.

So that’s very good news, the cost income ratio in the quarter stood at 51% and 54% year-to-date which is perfectly in line with our long term target of 53%. So that is actually indicating that our costs are well under control.

If you look at the decrease of 8% you could split it up into two parts, first of all the lower banking taxes in this quarter about 6% and let's call it traditional operating expenses which went down 2% on the quarter. If you compare to the previous year and same quarter then it is 4% down also there needs to keep in mind that composition of the two books are not entirely same but anyway costs have been performing in a very good manner and as a matter of fact costs are well on control.

What's the reason why these costs have been declining, several aspects are here to be mentioned, but let me also indicated that it is happening on the back of investments in our digital program. The digital program which is preparing our future and those investments which have mainly been happening in the business unit Belgium and the business unit, Czech Republic have been taken into this book and still these costs are let's say well under control.

All the other elements I'm not going to mention I could mention something about marketing expenses or pension costs in Belgium depending on the quarter on quarter and year-on-year but I suggest to skip those, you can easily read it, this all is mentioned in the slides also the fact that the banking taxes have been distributed a different manner. I'm not going to dwell about that on this slide.

Very important, when I talk about the banking taxes that is indeed on the slide 13, it is indicated where we're with a banking taxes and as you can see this is of a very substantial manner our current banking taxes represent 10.2% of the total OpEx of KBC group which is very, very substantial. If you would exclude those our cost income ratio would drop from 54% to 48% which is a completely different number.

So in that respect the bank is actually kicking in tremendously and it's not only because of what sometimes Hungary but also indulge in the banking taxes represent 8.6% of the total expenses in the business which is very important. On slide 14, we’re going to talk about the asset impairment and there again we do have good news, the impairments on loans and receivable have come in quite a tremendously.

The difference between the two quarters on the loans and receivable is €120 million, the difference between the two quarters is €100 million so it fully explains that difference and this has to do with the fact that the gross impairments have come down, that we do have seen impairments also in Ireland coming down. The impairments in Ireland now stand at €9 million compared to €16 million previous quarter and compared to €47 million in the third quarter of 2014.

In total for Ireland we’re upto nine months €32 million of impairments and therefore we maintain our guidance for the full year to be somewhat in the neighborhood of €50 million and the guidance is given at €50 million to €100 million, remember that we always that we will be probably at the higher end, we have reviewed that already in the previous announcement of the second quarter that it would be somewhere in the neighborhood of €50 million and we maintained that guidance for the full year 2015 for Ireland. The credit cost ratio as a consequence dropped to 23 basis points, if you look into an historical perspective then this is a very low number and it's a very good number which actually transfers or translates the quality of our credit book into very appreciated number I think.

The split up over the different countries is it such kind that currently in Belgium we do have a credit cost ratio of 21 basis points, Czech Republic is also in that neighborhood 15 basis points and also for Ireland we're with 30 basis points well ahead of what we originally thought. Also due to the impaired loans ratio stands at 9% of which 5.2% are nine days past due also has clearly an improvement compared to previous quarter and has a clear improvement with previous years.

So in that respect everything is perfectly going on the right track and is a notification of the quality of our underlying book. As of page 15 and following, we do have the performance of the business units.

I'm not going to go into the detail of the business units but allow me just to briefly indicate some highlights. First of all on page 17, you can see the business unit in Belgium, the news there is that there is a difference of €170 million between the two results but keep in mind that this difference is fully due to the impact of the financial instruments on fair value, €92 million is related to the mark to market of the ALM derivatives, €36 million is related to counter party value adjustment, market value adjustment and fair value adjustment and then the impact of the dealing room was €34 million, some of those numbers brings us at €168 which is the full explanation almost a full explanation of the difference between the two.

Next to that, obviously the impact on the management the fee and asset management fee and commission business was mainly related to the business unit that’s good news, strong trust of our customers in our franchise. Loan values went up 2% on the quarter, it was quite substantial.

We do see here, economy and at least KBC picking up because the growth on year-on-year basis is 5% so we do see an acceleration of that growth, we do see customer and deposits picking up because the minus one is only related to the maturity of a long term deposit that is 7.5 million billion if you would exclude those and also we would have seen a growth in customer deposits. And then there is a bit of pressure as we already mentioned and cost are well under control so that the good news.

On Czech Republic I can mention that they have seen an increase, Czech Republic here on page 27, Czech Republic, we can see an increase of their profit if you would exclude €12 million because of renting back an earlier taken provision from the European resolution fund contribution even then you can see a fundamental improvement of the result. This is on the back of a good performance on net interest income, good performance on the volumes increase of loans with 2% on the quarter, 10% on the year was quite significant.

Also on the deposit side excellent results and on the credit quality and the combined ratio perfectly in-line with target ultimately very good results there as well. The good news is also on international markets.

You could see on page 33, fundamental increase of the profitability of that business unit originally we had guided for this business unit to be there in profitability at the end of the year. We can clearly state it will be profitable by the end of the year and the profit is growing.

Also there the volumes are growing which you can see on page 34, the volumes in deposits and in markets are growing in those markets where we want them to grow amongst others in Ireland we’re doing a good job in collecting mortgages and building our franchise. Ultimately, let's go into this solvency and liquidity position of KB C Group which is expressed as of page 45.

The risk-weighted assets have been managed in a very good manner in the quarter, stable, slight increase not worth a mention. They get into counter profitability on the quarter means that our common equity Tier 1 ratio under the Danish Compromise has been growing to 17.4%.

Now, if you for the sake of the calculation we would deduct the full stated than the capital position from an equity Tier 1 fully loaded drops to 14% which is substantially higher than the regulatory minimum and even if you would take into account the 50 basis points which for 2016 will be added because of O-SII domestic SIFI buffer of the National Bank then we feel very comfortable with our current capital position. The expectation for the new capital target, SREP target from the ECB is foreseen for the end of November.

We don't know it yet what it will be, decision will be taken and communicated at that period but given the 14% capital ratio which we currently are in and we can state that we feel comfortable even with the new SREP target to be expected in November. I can give you the details on fee cost or give you the detail also on the full deduction.

It's actually doesn't make too much of a difference. We're very solid and even with all the calculations that solidity is a given.

Brings us to the leverage ratio we spend the 6.9% leverage ratio for KBC Group, also for the sake of calculation we have deducted the food state aid, you can see that we’re at 5.6% leverage ratio which is also very good. Also the different number for the bank is mentioned 4.8% and on page 47 you can see the total capital ratios standing at 21.7% as split up into different blocks and also there you can see the remaining part of state aid you could also make the distinction between with or without state aids for the sake of calculation.

So also there we feel very comfortable with these numbers and means that our capital targets are fully reached. On page 48, we're talking about a solid liquidity position, it remain solid, it was solid and this also is customer driven 76% on the next page 49, you can see the split up between the LCR and NSFR also there, we’re clearly ahead of targets and if we would need wholesale funding, short term funding, you can clearly see that we do have in an eligible buffer of 362% which means it's very good.

Let me wrap with a quarter with an ROE of 20%. I can easily say this was again a very strong quarter on the back of all bank insurance and these which have been performing very well is there's again a confirmation of our earnings track record.

And it's translated in very solid capital and robust liquidity positions, even if you would exclude the full state aid. So in that respect, I would say it's a very good quarter.

After the quarter, we of course have been working hard on preparing the new quarter but also on other elements. And we do have to announce today a post-balance sheet event, namely that KBC will liquidate KBC Financial Holding in the U.S.

You'll remember that KBC has suffered some big losses in the period 2008/2009 mainly due to activities in a derivative business which were allocated and located in KBC Financial Holding in the U.S. Now because of the decision taken together with the European Commission to bring down our risk profile, we have been cleaning up our CDO book, our derivative book and as the last step in that process we're currently liquidating KBC Financial Holding.

The loss has occurred in 2008 and 2009, but because of the IFRS rules, the accounting rules and because of the tax rules in Belgium, we have now to book a DTA in probably the fourth quarter. That will result in a gain in the IFRS P&L of €763 million which is composed actually of two blocks, €912 million as the recognition of the tax loss carry forward DTA which is then partly offset because of the translation difference of the euro to the dollar.

That can change a little depending on the moment of realization. But the impact is clearly net more or less €763 million.

We're going to see an increase of the IFRS equity of €912 million, but because of them and that's very complex, because of the accounting rules. we need to deduct the tax loss carry forward DTA fully from common equity, but balancing first with the DTLs on a pro rata basis.

And after this, you will end up with €658 million deducted from common equity, whereas the remainder will have an impact on the risk-weighted assets. What the impact ultimately of all those movements is expressed in the table.

You can see that initially for 2015, we will have an impact on our capital of 16 basis points and for the next years following, we will have also gradually an impact on our capital depending on the profitability of KBC Bank NV which was the mother company of KBC Financial Holding. I would suggest to keep it here, but together with my colleagues we're happy to answer all of your questions.

Thank you very much, Johan. So this now opens the floor for questions.

Can we kindly ask to restrict the number of questions to two to allow maximum number of people effectively asking questions? Thank you.

Just two questions for me. Firstly, just turning to slide 19 on the new production margins, I just wondered if you could explain the quarter-on-quarter decline in the mortgage margin.

Does that reflect a campaign by KBC or just broader pressure in the market? And then just on fee and commission income, the guidance you've given for the fourth quarter is €360 million/€370 million.

Can you just explain the dynamics of that? And in particular, should we expect that quarterly run rate to persist in 2016?

I think in previous equity corrections we've tended to see a rebound, but I'm just wondering if the dynamics of the product have changed that at all. Thanks.

Sorry. We had a very bad line so we didn't fully understood your question.

But we will try to answer the part which we have understood and then you can always step in to clarify a little bit of your question. Sorry.

So if we've understood, it was your question on the production margin, particularly on mortgages, why the production margin new mortgages reduced further. There are two elements.

First of all, with the interest rates so low and competition high, there is obviously always competitive pressure. But secondly, the offer period which we offer is quite long; it's about 30 days.

And each time that interest rates go down, the offer is rejected by the client and he goes elsewhere; and each time the interest rate goes up, then the offer is taken up and we can only hedge at the moment that the client is taking up the mortgage, he's accepting the offer. And that in a volatile market makes it more difficult to manage your margins.

So there is a second aspect. On the second aspect, obviously, we're more in control and we're managing that better nowadays and we think that will have a positive impact on margins.

Obviously, competitive pressure is more difficult to manage, unfortunately, so that will - remains to be seen. But we hope that margins would become slightly better on the mortgages side.

And then coming back to question 2 and also there we had a very bad line. But what we understood was the question about €360 million/€370 million guidance which we have given for the fourth quarter, how that comes and if we could consider this to be the run rate for the next coming quarters in 2016.

So indeed, the €260 million and €370 million guidance is on the back of two elements. First of all, due to the difficult markets and circumstances we do have seen as of August, half of August, let's say, we have seen a tremendous number of switches dropping in compared to the previous quarter.

You have to know that we already stated in earlier disclosures of the first and the second quarter of 2015 that market circumstances were very, very bullish. And the clients, obviously, were switching and locking in their profits and therefore were generating profits for them but also fee and commission for KBC.

Now those circumstances have changed and definitely in September we have seen clients not - there was no substantial profit any more to lock in, so we have seen a tremendous amount of switches dropping away. Next to that is the impact on our CPPI portfolio.

CPPI portfolio stands at €25 billion. The CPPI portfolio has a valuable management fee structure which is related to the riskiness of the underlying fund.

Because of the protection which we had built in the products and declining market circumstance, that riskiness of the products is reduced and therefore automatically the management fee follows. And that has a significant impact on the management fee overall.

Then there were some other elements which were due to unit-linked production was very low and generating about €20 million less fees; but also, on the KBC securities side which had a very bullish first half of 2015, we have seen a little bit - a few million euros lower fee business. Now this results in a guidance for the fourth quarter, because of the effect which we have seen in August and September will now fully kick in in the fourth quarter, but then for three months.

The assumption which we make is that the market circumstances remain as they are. The first element, obviously, is that if the markets would pick up that would have an impact, but you cannot fully extrapolate a positive impact to all the portfolios, because of, for instance, the CPPI portfolio.

Because if the underlying funds are cashed, they will not switch immediately into equity or into more riskier assets. And therefore, the management fee will remain a certain period, let's say, fixed on a lower level.

Taking into account what I just said for the fourth quarter, you could not easily extrapolate that for 2016. Let's not forget that even with the guidance given for 2015 fourth quarter, the total fee and commission business 2015 compared to 2014 is plus 6%.

So what about 2016? We don't give a guidance for 2016, but in giving the explanation I just gave, you can make some calculations yourself, but it's definitely not the case that you can extrapolate the fourth-quarter run rate €360 million/ €370 million, the average of €365 million, you cannot extrapolate that 4 times for the fourth quarter in 2016.

It doesn't make sense at all.

Just two questions, please, firstly, to follow up on fee and commission income development in the quarter. If we look at your assets under management, they were down only 2% q on q and yet we saw a much more substantial drop in fees and commissions.

I hear your point around the change the asset mix, but it would be very helpful, please, if you can provide some sort of a breakdown between the upfront fees that you generated in Q2 and Q3 and also the drop in the underlying performance fee and management fee. I remember in the past you've talked about CPPIs having margins of more than 100 bps.

I was wondering whether this has changed substantially or not in the quarter. That's the first question, please.

And then the second question on capital. I understand you are still waiting to hear from the ECB with regard to the final outcome of SREP, but have you thought about what kind of buffer would you like to have above the combined SREP plus domestic SIFI buffer once you know the SREP requirement?

Is it likely to be 50 basis points, 100 basis points or more? Thank you very much.

Okay. On the fee and commission income, you indeed rightly observe that assets under management - that asset management fees dropped more dramatically than the assets under management itself.

The main reason, as you point out, are the entry fees which have come down very strongly given already the explanations by Johan. People are letting clients to switch out of products when they make - where they don't make a gain, whereas in the previous quarters, they all had good runs on their investment portfolios and naturally, they take gains and reinvest in new products, particularly on the CPPI where they move from one fund with lower protection floors to funds with higher protection floors.

Now we see the reverse where people who are in a, for example, CPPI fund, but it also equally accounts for other funds, they do not have gains and then they sit on the investment rather than switch to a new investment. That is a big - a main reason for that big drop in entry fees.

You will find [indiscernible] there are also some slight margin pressures on the fees itself on the asset management products. This is not necessarily the case in Belgium.

Then on the assets under management, it's coming down, mainly driven - well, a little bit by price effects, but also by the shift in the CPPI product where we move out of equity into money market funds in particular and that has also a dramatic effect on the fee earned; indeed, way above 100 basis points. That is still the case, but obviously, quite a drop compared to what we earned on CPPI funds in the first two quarters.

And I think Johan will answer then the other question.

Yes, indeed. The question was on capital, the ECB and the SREP.

So as said, the ECB will take a decision for all the 120 banks under the SSM at the end of November. They will announce it also in that period, so let's say end of November, early December.

We have all received a letter, so we have a clue where it stands, but we cannot, as you know, communicate about that. But taking into account what we know, taking into account where the market is in terms of CET1, for all the banks amongst the SSM banks, the management buffer will be - the targets which we will disclose to the market will be communicated by the ECB.

So if the ECB comes out with X, our target will be X. We will take on top of that a dynamic buffer, obviously, but the dynamic buffer will depend on the market circumstances; the market circumstances also taking into account where we're with our SREP number compared to our peers.

So we will not have a buffer of, say, 100 or 150 basis points on top disclosed of the SREP. It will be dynamic.

Two questions, please. Can you indicate within your guidance for the fourth quarter for fees and commission the percentage you expect of contributions from entry and switch fees or a kind of range?

I think in my estimates in the past it has been up to 30%, so I was wondering where you would see contribution of entry and switch fees in your guidance. The second question is related to the Danish Compromise.

You saw the consultative paper by the ECB. And apparently, the intention is to maintain the Danish Compromise which goes against, well, the expectation I thought KBC had.

So perhaps some comment on why this outcome and how you saw the dynamics of that. Thank you very much.

Regarding the guidance which we have given on fee and commission and your request for the further split up between on the one hand side entry fees versus switches, you referred to earlier guidance which we have given in the past, but to be honest, I don't recall any guidance whatsoever on this matter because we don't provide guidance.

Sorry. It was my estimate.

Okay. No, we don't provide guidance.

And coming back to your second question, the Danish Compromise. Yes, indeed, it was our anticipation that the Danish Compromise would be replaced with the deduction added.

This was on the back of some statement of Mrs. Nouy earlier on.

The stance now of the European Central Bank is that they are not indeed going to replace the Danish Compromise with the deduction method for 2016. As a matter of fact, we do think that it will take even a little bit longer, a few years extra.

Nevertheless, the impact for KBC would be non-material and as a matter of fact, we always take into account deduction methods which is also, by the way, disclosed in your pack.

I should also mention, Jean-Pierre, that, yes, indeed, the Danish Compromise will not disappear immediately, as Johan is saying, but it could be that a completely new proposal will be on the table. As you know, they are exploring ECB with the EBA and the European Commission intermediary proposals between the Danish Compromise and deduction methods.

So this, of course, is a positive for us in that sense but it does not look like Danish Compromise will remain there forever, although it will take longer before something else will be put forward as an alternative.

Yes. I've got two questions.

The first one will be on the capital. So you mentioned a dynamic, a buffer, that's clear.

But looking at where you are now, 14%, can we expect a full state repayment next month or is that still too early for you? And in terms of risk-weighted assets, uncertainties, could you just wrap up on where you are now and what you think will be major uncertainties for the coming quarters or years?

And then I'm not sure I understand correctly what you are going to do on the U.S. financial holding.

If I understand correctly, you will book a large DTA. I think, Johan, you mentioned the recurring impact or future impact on common equity Tier 1 ratio.

Is that linked to the realization of the DTA as you generate profit going forward? Could you just clarify a little bit; or you will be able to actually use the DTA, what entity needs to make profit to do that?

Thank you.

Coming back to the capital part and the question remaining state aid, I would be keen to disclose what we have asked the ECB because the request is out for a payback of state aid and how much is a bit too early to mention because when they are discussing today about the SREP target, they also, for KBC in particular, will discuss what we will be allowed to pay back in terms of state aid. I feel very unfortunate that I cannot mention what we have requested for because I don't want to put our ECB under any kind of pressure that could backfire.

And, therefore, you need to understand that I cannot disclose what we have requested for, but it is a substantial amount. In terms of risk weights - indeed, risk-weighted assets, we're looking into what is going to happen in the near future.

Obviously, all of us are waiting for a series of regulatory measures which will be taken over the next coming years. We talk about Basel IV.

We're talking about IFRS 9. Most of them kick in in 2018 or even further.

And all of us know that all these measures are quite uncertain in kind. We have big discussions ongoing.

There are some indications that the Basel IV rules are completely revised at this instance and that the earlier impact calculations which you could reason and investment banks reports are currently no longer valid. So in that respect, yes, things are upcoming and for KBC in essence, we know that the biggest impact could be on the floor, for instance, on the mortgages side whereas, for instance, the market activities' impact would be negligible for KBC.

Nevertheless, we're managing without those regulatory impacts. We're managing very carefully our risk-weighted assets anyway.

And then the second part of the question - okay. The financial holdings, what is happening, so we have had, KBC Financial Holding, as I explained earlier on, we have had Financial Holding as an overarching structure for our credit derivative business, as you know.

Big impact was suffered there, to the point €8 billion, at a time in 2008/2009. Going forward, we have been cleaning up our legacy book of our derivative business and now we're entering the last phase.

And this last phase, as I said before, is actually the liquidation of KBC Financial Holding. Now as a result of this liquidation and after selling all assets and paying any outstanding debt, KBC Bank NV which is the sole shareholder, will get any cash resources remaining in the company.

The Belgian tax law then provides that lost and paid-up capital that KBC Bank sustains consequence on that liquidation of KBS Financial Holding is tax deductible for the parent company, so for KBC Bank NV. To this end, we have submitted at the beginning of September an application to the Office of Advanced Tax Rulings in Belgium and they granted their approval on November 2, 2015.

On account of this tax loss and under IFRS, KBC Bank must recognize a gain the form of indeed a deferred tax asset in our income statement, probably in the fourth quarter of 2015. And the timing depends on when the competent American legal authorities take their decision.

Now as a result of that liquidation, we do have FX losses on the capital of KBC Financial Holding that needs to be recognized in the IFRS result as well. On balance, the post-tax impact on the result of €763 million and that can be recognized after some balancing between DTAs and DTLs, deferred tax liabilities, in our capital position common equity Tier 1 as well.

And the impact is for 2015 16 basis points. Now indeed, going forward and depending on the profitability of KBC Bank NV, again, we will realize again to the same tune some capital impact on our common equity Tier 1 in the years following.

So probably, we can fully absorb that equity position over, let's say, the course of the next four to five years. That depends a little bit on the profitability of KBC Bank NV.

Sorry. What is the amount which can be realized in the next four years going to capital?

Is that the €700 million?

That depends on the profitability of KBC Bank NV.

And what is the main driver of --? I will assume the profitability of KBC Bank NV is driven by just the profit of the Bank which should be sufficient, I guess.

Well, it depends on the profitability of KBC Bank NV as a legal entity and fortunately not under IFRS, because the tax laws in Belgium are based on Belgium GAAP. So you have to look at the Belgian GAAP results and that excludes a number of elements like value gains and losses and so on.

So it's a big more complicated than this. Secondly, a number of items within KBC Bank NV which are profits under Belgian GAAP, like for example dividends, are tax exempt.

This is quite a large amount because KBC Bank NV receives all the dividends from sales of BK&H [ph] and so on and those you have to exclude. And that is why Johan was mentioning a period of four to five years before these extra DTAs are absorbed.

But the main profits are obviously driven by KBC Bank Belgium NV.

We should not see this liquidation as being a condition for a large part of the state payment or --? Is that linked or--?

No link at all.

My first question would be on the Belgium net interest margin, a 10 basis points decline q on q to 1.86%. I think you said at the start that broadly about one-half of the decline is due to lower prepayment fee income.

Perhaps you could break up the other one-half between the other factors that you flagged, such as lower reinvestment yield, the hedging losses on mortgage refinancing and the commercial loan margins. Which of those three was the prominent driver?

And then my second question would be regards to dividend, your 14% core Tier 1 ratio today against a 12% minimum requirement as it stands by 2018. So you have significant excess capital already before you take into account future organic generation.

You previously flagged one-third would be used to repay the state aid. We're nearing the end of that process.

One third on organic growth and M&A and then one-third on dividends, in the event that you don't identify any M&A, would it be reasonable to expect that the ordinary dividend of greater than 50% payout for 2016 could to be supplemented even by buybacks or special dividends? What would be your plans for that excess capital?

Thank you.

Yes. On the decrease in NIM, is about one-half is due to the prepayment fees, as you pointed out.

On the other element, we don't give a specific breakdown but the most important element there is the transformation result, i.e., the much lower reinvestment yield and in combination with the fact that the increase, particularly on the current accounts, these volumes are not reinvested in long term assets as we believe that additional current account deposits are quite volatile in nature and, therefore, are invested on a short term basis. And that also has quite an important impact on the margins.

So that's the second element which is a major driver. And lastly, but to a much lower extent, is some margin pressure on the loan side.

And then going back to your question about the dividend, yes, indeed, we have guided before that in terms of priority we're obviously focusing on state aid payback and that obviously we need to finance our own growth. We will be highly capital generative, as you have indicated; about 200 bps a year, you could easily - before distribution, you can easily calculate that.

So in that respect, our capital position of today, 14% after full deduction of state aid, is indeed very solid and, therefore, could indeed confirm already what we have stated in the previous quarter and what we're confirming today that a dividend payout of 50% is a proposal which we're going to do to our shareholder meeting. Now what we will do further on, that depends on a lot of things.

It has to do with - you were talking about excess capital beyond that distribution of 50%. It all depends on situation obviously where we will be in.

One of the previous questions was dealing with the regulatory uncertainty. Let's face that as well.

So I think it's far too soon to make statements about that today. So I will stick to our guidance and the guidance was 50% payout 2016 onwards.

First one just going back to the sort of fee and commission line. I guess looking at the Belgian division, it looks like the fee margin is only at 60 bps, so it's pretty much the lowest we've seen for well, if not ever, certainly back over the last three or four years.

And at peak, you were nearer 80 bps or there - at 75 bps to 80 bps in the first half. So when I think about next year, are you basically saying, given the various moving parts, we should assume that 60 bps would mark the low end of the possible range and towards 80 bps would be the high end depending on market conditions?

Is that a better way to think about the possible margins or has there been any structural drop in the level of fee rates you can achieve in that book? And then second question just on the cost to risk in Belgium.

Obviously, that showed further welcome improvements. But do you think - what's the sustainability there in terms of where you think you can run in terms of cost of risk in the Belgian region looking out over the next couple of years?

Thanks.

On the fee and commission income, we don't see it the way you are suggesting. This is first of all a combination of seasonal effects and market circumstances.

It is not something that we would see as a structural element going forward. We do believe that if you look at the number of switches that we're - if you look at the longer time period at lower range, that's indeed the case, so we should have a better performance going forward.

That doesn't mean necessarily next quarter, but over a longer term. Secondly, assets under management structurally should go up given the savings that we're experiencing in our core countries and the fact that we still have a large amount of money deposited on savings accounts and current accounts, so there's a structural move there And again, as already mentioned by Johan, we're now very strongly invested within CPPI in cash products, in money market funds.

That is something that is also seasonal and given the market circumstances that should also improve going forward, but giving a guidance within 60 and 80 basis points is not something that we look at in that way.

And coming back to your last question on the cost of risk of Belgium, indeed, your analysis is correct; that is that the cost of risk in Belgium is at a very good level which also have obviously because of the impact of the Belgian business unit and the total of the Group is translated in the overall position of KBC Group. But what is true for the Group, namely that for the cost of risk we don't give guidance going forward, it's definitely there as a consequence also true for the business unit Belgium.

We don't get any particular guidance on the cost of risk for that business unit nor for the others. What I can say is that, obviously, KBC has always been into and definitely the last several years, it has been closely monitoring its underwriting skills and underwriting capabilities and that is something which has not changed and it will not change over the future.

Johannes Thormann from HSBC. Just one question also on cost of risk, we have seen a big volatility this year from probably 23 to 44 basis points and then now back to 11 basis points of credit costs on customer loans.

What would you consider in a normal environment your normal cost of risk if you don't want to give any forward-looking guidance for the next quarters?

Perhaps it would make sense to have a look at page 57 in the pack where we do have the loan loss experience of KBC Group spread out over the years and then spread out over a period which is not in the detail but goes back from 1999 until now. Obviously, for several reasons, we do have had some volatility in our cost of risk and that is clearly driven by Ireland, obviously, but also driven by the markets - the particular markets which we're in.

If you look at, for instance, the credit cost ratios which I mentioned on page 57, then it's far less volatile for, let's say, the bigger countries, Belgium and Czech Republic. And as a guidance, we don't give guidance on - as I mentioned on cost of risk, but if you would like to have a view on what our overall average over the last 15 years was, it is 54 basis points.

But there the guidance stops.

Now the insurance contribution to the NII also looks a bit weak and has been slipping there. And I guess given where yields are today, should we expect a bit more compression on the insurance contribution to NII?

And then just following up on the liquidation of the U.S. entity.

You've given us the capital impacts, but is there an impact on the leverage ratio we should also be thinking about there? Thanks.

Perhaps answering the first one; yes, indeed, your analysis is correct. As you know, for an insurance company, you always have two sides of the P&L impact; one that's technical, that is mainly driven by the risk part of the insurance business, non-life and the risk part in life.

It's clearly performing very well on that risk perspective, so there, the income is even increasing and up compared to previous years. And then the second part of the business is indeed related to your investment income and that investment income is under pressure, as we have explained in general for the net interest income.

So what is particularly true for the net interest income, lower reinvestment yields, lower interest rate environment, is definitely true for the insurance company. We have been mitigating that quite a lot by bringing down the interest guarantee on our products.

It now currently stands in Belgium at 75 basis points, but it's clear that if the interest rates remain at this low level that the net interest income will remain under pressure and that we further will mitigate that by looking at the interest guarantee in our products.

Then on the leverage ratio, there is a limited impact in the sense that equity and capital therefore goes up, but on the denominator, obviously, nothing changes. It is a holding company which is already very limited in its activities and its assets and by liquidating nothing with the absence the cash is moved from the U.S.

into Belgium, so the denominator does not change. It's only the equity which changes slightly.

Excellent. That sums it up for the call today then.

I would like to thank everybody for attending the call and we hope to see as many of you as possible tomorrow in London. Thank you very much and have a nice day.