Wim Allegaert - General Manager, IR Johan Thijs - Group CEO Luc Popelier - CFO

Tarik El Mejjad - Bank of America Merrill Lynch Anton Kryachok - UBS Jean-Pierre Lambert - KBW Bruce Hamilton - Morgan Stanley Andrew Coombs - Citigroup Benoit Petrarque - Kepler Cheuvreux Flora Benhakoun - Deutsche Bank Bart Jooris - Degroof Petercam Johannes Thormann - HSBC Kiri Vijayarajah - Barclays

Thank you, a very good morning from the headquarters of KBC in Brussels. Welcome to the KBC call.

Today's Thursday, May 12 and you are on the KBC conference call for the 2016 first quarter results of KBC. I'm Wim Allegaert, I'm Head of Investor Relations.

We're in the company of Johan Thijs, Group CEO and Luc Popelier, Group CFO, to comment on our results and add financial insight on KBC. We will need roughly 30 minutes to guide you through the presentation for the analysts which was posted this morning on our 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 via our website as from this afternoon on, until May 27.

Finally, I'd like to add that Investor Relations and the CFO are organizing a CFO and analysts meeting in London tomorrow morning at our offices in the city, Old Broad Street 111. This meeting starts at 08.30 local time and, obviously, we would be pleased to have you over and are looking forward to the dialog tomorrow to learn from your questions and insights and add color to our story and that, of course, with a cup of coffee or tea.

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

Thank you very much, Wim. Also from my side a warm welcome to the announcement of the first quarter results of 2016.

Let me guide you through the slides. I will start with page 3 where we have the key takeaways.

Actually, if I have to wrap up the quarter in a few sentences I would say it is a very strong quarter, definitely, given the very difficult market circumstances and the turbulence on those markets and the modest growth on the economic side and the volatility which we all have been suffering. The result stands at €392 million which is definitely, if you take into account the huge amount from Bank taxes of €335 million which we have book in the first quarter which is a good result.

This is mainly driven by the full bank insurance franchise in all our core markets and all our core countries. All countries have been delivering in a positive manner to this result which is great news.

Ireland is included in that as well. They all have been contributing to a return on equity which is 12%.

If you exclude the upfront banking taxes, you spread it out uniformly, then it would have been an RoE of 17% which is, given the circumstances, an excellent result. The essence of that first quarter is actually that we have been maintaining our commercial strength.

We have been pushing our bank insurance model and we have been delivering on our cost side. Big positive surprise will be, indeed, also the quality of our loan book which is expressed in a 0.01% credit cost ratio.

Liquidity was, as usual, very strong. Also, our solvency side, at Group level, both at the Bank and insurance level, is very solid with a common equity won of 14.6% on the phased-in Danish Comprise methodology and at 210% under the Solvency II methodology.

So, this is actually the wrap-up. Let me talk you now through the details and let me start with the traditional split-up between the Bank and insurance Group.

Actually, the split-up is about 87% for the banking side and 13% for the insurance side. This is mainly due, because it's a bit lower than normal and normal we're talking about, let's say, at least 15%, up to 20%, for the insurance side.

This is mainly driven, because of the terrorist attacks in Belgium which have been provisioned for in a very conservative manner. If we exclude those then the contribution from the insurance side would be 18.5%.

So, quite perfectly in line with what we have been seeing in the previous quarters. In terms of the P&L contributors, let's start with traditionally the biggest one, that is the net interest income and the net interest margin.

We're now at page 7. The net interest income was €1 million, up compared to previous quarter.

Not a lot, but given the market circumstances quite an achievement. This is due to, amongst others, lower funding costs but also further commercial actions which we have taken, both on the volume side, volumes were up in all our markets which do matter.

We want volumes to go up both on the lending side and on the personal deposit side. It's mentioned at the bottom of that very page, so year on year growth on the loan side is 4%, on the deposit side it's 3%.

But also because we have been able to keep our margins at a very sound level, we were able to push up our margin with 1 basis point. It now stands at 196 basis points in the Group.

Despite there is pressure on the margins, we were able to keep that margin at this level. This is due to further rate cuts on savings accounts, but also on a push-up on the margins on the lending side.

What is impacting negatively, obviously, those net interest income position that is the reinvestment yield which continue to suffer from the low interest environment, and the competition which is quite fierce. In terms of margins going forward, let's be straightforward with this one.

We do expect further pressure on this margin going forward, so in the next coming quarters. But also, next to that, we continue to push for sound margins.

As you know, in KBC, profitability stands before market share, so that will be a policy continuation which we have been doing over the last few quarters. In terms of fee and commission business, page 8, we do see a €346 million of contribution in the first quarter.

This is perfectly in line with the guidance which we have been giving at the end of the fourth quarter, we guided a decline of 5% to 10%. If you look at the banking result, then it's actually a decline of only 2%, so in that respect we have been doing quite well.

The main impact here is, obviously, the very volatile environment which we have been suffering and that has been translated in lower management fees for the mutual funds and the unit-linked insurance products, on one hand side. But also, on the other hand side, lower entry fees for the mutual fund business and that is mainly driven in Belgium and also in the Czech Republic.

Coming into the Czech and Slovakian environment, there we have seen some changes in the regulations which do have the impact on the fee business generated in the payment industry. Also, there we have seen some negative impact.

The other element which is hampering the evolution of the fee and commission business is driven by the commissions paid in the insurance side. You can see at the bottom part of the top graph, minus €76 million commissions paid.

That is €6 million more than the previous quarter, that's substantially more, €17 million, than last year same quarter. This has to do with the success which we have seen in the insurance sales and that is both from the non-life side and the life side, both sides we have to pay commission obviously.

Life side was doing very well and that contributed positively also here to the entry fees, we're talking about unit-linked. But, because the insurance business overall was gaining traction and was generating quite a lot of income, not necessarily in the fee and commission part, commissions have been reduced in a more severe way.

So perfectly in line, also, if you have a look at our assets under management, it's slightly down €207 billion compared to previous quarter. It's almost the same level as a year ago.

That has to do with the lower net entries. That has, obviously, to do with the price effect on a yearly basis, price effect is 5% on the year, on the quarter basis, price effect is 1%.

In terms of fee and commission business going forward, we do expect that we will see a positive trend change there. We're slightly more positive for the quarters to follow.

This has to do with the composition of our book. As you know, CPPI products are an important part of that portfolio and it is also having an impact on the asset management and management fee business.

We do expect markets, of course, if they remain like they are today, we do expect that markets will have a positive impact on the fee and commission business, also on the CPPI side management fees going forward. In terms of the insurance business, I already elaborated a little bit in the fee and commission business.

Actually, the insurance business has known a very strong quarter, both on the non-life side as on the life side. This in two aspects, first of all, the sales were up, both from life and non-life side and let's perhaps start first with life.

Life business was totaling €426 million, I'm talking about earned premiums now, page 9. If you talk about written premiums, it's far more unsubstantial, then we're talking about €587 million.

Now, this is driven - and that's very important, this is driven by both unit-linked and interest-guaranteed products. Both were up on a yearly basis, respectively 28% for the interest-guaranteed products and 24% for unit linked.

Even if you compare it on the quarter and as you know the fourth quarter is always - because of seasonal reasons, it is mainly driven by Belgium. In Belgium we do have a seasonal campaign in the fourth quarter which is called saving campaign.

It was at the same level as the fourth quarter of last year which is quite an achievement, in terms of interest-guaranteed products and it was up 29% compared to that same fourth quarter of last year in unit linked. So quite a strong performance, both on the non-life side which you know is a perfect diversification from - away from the net income for the Group.

The performance was, on the sales side, very strong, we have seen an increase of premium with 6% or 7%, it depends if you talk about earned or written premium. Let's talk about earned premium, then the growth was 7%.

It is quite an achievement. The conclusion there is that it's not only Belgium which is performing well, but, clearly and this is now for the third quarter in a row, Central Europe is picking up.

We have put a lot of energy into that in the previous year and now it starts to pay off. In Central Europe, to give you some examples, we have seen an increase in Czech Republic of 9%.

We have seen an increase in Slovakia Republic of 12%, Hungary 26%, and Bulgaria 12%. What is quite important, that is also combined with a good technical performance, because the combined ratio actually stands at 82%.

Now 82%, that is without the impact of the terrorist attacks in Brussels and there I need to have a little bit of explanation. If you would include those terrorist attacks, then the combined ratio stands at 91% which is okay-ish, so it's substantially lower than our target of 95% - its early days, first quarter.

But we have provisioned €30 million in Belgium for those claims resulting out of the terrorist attacks and that is quite conservative. Probably you know that terrorist attacks in Belgium are settled via a fund - a fund for terrorist attacks.

The fund is picking up the first €300 million or actually, it's financed the first €300 million by the insurance industry. We made a reservation for the full amount, €300 million, plus taking into account our market share which is about 10%.

So that's where €30 million's coming from. This is probably overly conservative.

We expect it to be lower. But anyway, it's better in these kind of claims to take the most conservative stance, therefore €30 million, resulting in a combined ratio of 91%.

Anyway, so insurance was doing very well which brings me to the other part of the income side, that is the fair value gains and the other income. In terms of the fair value gains, it's a little bit of a mixed picture there.

The fair value gains in this quarter stands at €93 million. It's very difficult to compare it with the previous quarter, because that was completely distorted by the liquidation of KBC Financial Holdings.

Therefore, it's perhaps better to look into the underlying building blocks. First of all, we have seen in this quarter a positive contribution of our ALM mark-to-market ALM derivatives.

It's €20 million in this quarter, compared to previous quarter, €12 million. We also have seen a one-off benefit, because we unwinded the previous TLTRO that has been - the hedge, sorry, of the previous TLTRO.

If you would unwind the TLTRO, that would be something completely different. No, it's the hedge and that has contributed €21 million.

Next to that and there's also very good news, we have seen a much better income on our dealing room, resulting in actual contribution of €29 million. We have had a model change in the own credit risk, €12 million.

And then, we had a big negative impact of about €54 million on the mark to market of the credit risk, the market value adjustment and the funding value adjustment. So if you compare that result with the first quarter same previous year, then we do see also a fundamental improvement.

That has also to do with mark to market ALM derivatives, mostly of that is explained by those mark to market ALM derivatives, but also a positive change in the MVA, CVA and FVA. Anyway, available for sale asset, no big surprise, it is €27 million, of which €21 million generated by shares, mainly due to the sale of a package of shares in Euronext.

The available for sale side on equity, obviously, has been impacted by the very volatile market. We come back to that later on, when we talk about impairments.

We have been impairing shares to the tune of €24 million. So in that respect, it is an almost blank zero result on the sale of the equity site.

The other building block of this part of our income is called other net income. That is due to results realized in Autolease, in an assistance company, real estate company.

It's €51 million. Let's not waste too much time there, because it's perfectly in line with the normal run rate which is about €50 million.

Good news also to mention on the operating expenses. I'm on page 12 now.

Operating expenses, obviously, when you do not take into account the banking taxes, the banking taxes are extremely high, €335 million, because of the IFRIC rule. You know that we have to take them upfront.

That's true for Belgium, Czech Republic and Hungary and Bulgaria. The exclusion of the banking taxes, if you purely look at the operational cost, the good news is that they are down 7% compared to previous quarter.

This is mainly driven by lower marketing, lower ICT, but, clearly, also by lower staff expenses. Also, if you compare it with the same quarter last year, they're slightly down, 1%, €10 million.

That is mainly driven by staff expenses. So we have been, indeed, working on a reduction of FTEs and that is starting to pay off.

In terms of banking taxes - perhaps something first about the operational expenses. We have to be aware that the 7% reduction in costs, compared to previous quarter, so Q4 2015, cannot be easily extrapolated going forward.

That has to do with some seasonal effects. The invoicing, amongst others, of IT costs are normally picking up in the second quarter.

Also and it's very important, that one big cost contributor is obviously the staff expenses. Staff expenses in Belgium, as you know, are linked to inflation.

Inflation is quite high in Belgium, 1.6%. As of second quarter, inflation will start to kick in, in the cost of staff, amongst others, in Belgium.

So in that respect, we do see some upward pressure. But obviously, the monitoring and the focus on cost reduction remains the same as we have been doing over the previous quarters.

In terms of banking taxes, page 13, they now result in 9% of our OpEx. So if you would adjust the banking taxes completely, then our cost income ratio would drop from 57% to 50% which is quite substantial.

Also, if you see the split up the country which is mentioned on this slide, it's always, more or less, 8% or 9% of total, except in Hungary, where the banking taxes are, obviously, substantially higher than in the other countries. Banking taxes going forward, we do expect banking taxes to be, in total, €417-ish million.

One caveat, the Belgium Government has decided to review the total banking taxes to be paid by the banking sector in Belgium and the revision is upward. So there is an expectation and we do not know the final numbers yet, but there's an expectation that there will be, for the whole banking sector, an increase of about €50 million of banking taxes.

We'll see where it ultimately lands, but the expectation is, indeed, higher banking taxes also for KBC. In terms of quality of the lending book, I'm on page 14 now, the low - the asset impairments.

Let me start with loans and receivables. The asset impairments are very low this quarter.

They only stand at €4 million. So it's 4, without a zero, €4 million, 1 basis point of credit cost ratio.

It's no surprise when I would add to that, that this is, going forward, not sustainable. We do expect this to go up.

We have been guiding already in the past a run rate somewhere in the range of 30/40 basis points, we stick to that. But the first quarter is known or is characterized by an extremely well-performing loan book.

In terms of split up, this is seen in all countries. We do have seen a write-back of provisions in Hungary, but also in Ireland.

I'll come back to that within a second, I mean for Ireland. All the other countries are performing very, very well in terms of their loan-loss ratio.

Also, in the impaired loans ratio, it is continuously improving and now stands at 8.2%. If you would pick out the loans which are 90 days past due, also there, with 4.7%, the number is declining.

In this respect, declining means positive news. I already mentioned the impairment on shares, €24 million, it's quite significant and has to do, of course, with the volatility of the market.

As of the next pages, we're going to talk about the performance of the business units. Now, allow me not to walk through those slides individually, let me summarize it.

What I've said for the Group is true for Belgium. So net interest income stable, the volumes up, margins up, insurance performance very well, costs under control, and impairments very low, so a good contribution in terms of profit.

In Czech Republic, a very good contribution, because you have to take into account there as well, upfront banking taxes, €28 million, in terms of volumes, extremely well, in terms of margins, 5 basis points up, in terms of costs, well under control, in terms of impairments, very low. Therefore, the contribution to the result is excellent.

Then, the international markets business unit, €60 million of profit, where you have to take into account €61 million of banking taxes, quite a lot, same amount as the total profit contribution, but also there great news to mention. If we want the country to push its volumes up on the lending side, they do.

If we want the country to push up their volumes in the customer deposit side, they do. Amongst others, we're talking about Ireland.

All countries are contributing positively, Slovakia €20 million, Hungary €12 million, you have to take into account €31 million of banking taxes upfront, and €4 million for Bulgaria. Last but not least, Ireland €23 million which is great news.

Actually, I can say some words about Ireland. First of all, interest income is up 10%, the volumes are up in deposits, €300 million extra, the margins are up, the profit is €23 million, is significantly up.

That's because of a release of provisions, due to the increase of the housing prices. Honestly, we have been putting a little bit of more conservatives in our provisioning, otherwise the releases would have been higher.

So in that respect, also the cover ratio is up. And last but not least, the macroeconomic parameters of the country show positive signs.

Unemployment goes down to 8%. Growth is about 5%, going forward, next coming years, even considered to be sustainable, 3%/3.5%.

The housing prices are hovering a little bit around an average, but have been significantly up over the last few years. So as a manner of speaking, Ireland is on the path of recovery.

We, therefore, continue to have our guidance for Ireland that it will be profitable by the yearend, and, that our guidance which we have earlier given on the loan-loss provisions, in the range €50 million to €100 million is, clearly, the bottom end of that range. Let me then sum up all those results in terms of a liquidity and a solvency position.

I'm sorry, I skipped a slide about the balance sheet, deposits and the volumes. But I talked about it in detail.

Per country, you can easily walk through it yourself, it speaks for itself. The liquidity and the capital ratios, then let's start with the latter.

The capital ratio has come down in the phased-in Danish Compromise methodology, from 14.9% to 14.6%. This is due to two elements, actually.

This is driven by an increase of the risk-weighted assets, risk-weighted assets driven by good commercial performance. I'm speaking here about credit side, but also on the market risk, the risk-weighted assets have been going up a little bit more.

And then on the available capital side, profit contribution which is obviously distorted by the taxes, amounts for 0.3%. But that is offset by two things, first of all, the dividend accrual, 0.2%, and then secondly, because of the low interest rate environment we have been reassessing our defined benefit obligation on the pension side and that is eating away also 0.2% of that available capital, so of that profit contribution for the first quarter.

The two things combined, a slightly down available capital, an increase of risk-weighted assets about €0.7 billion, reduces in a reduction of 30 bps on the capital side. So 14.6% is the end number.

This is still very good, if you compare it with the European peers. That is also reflected in our leverage ratio which stands at 5.9% at Group level, 5% at banking level, you know why the difference is there.

This is actually a good result and is perfectly in line with our expectations, and, definitely substantially higher than our targets imposed upon us by the ECB national bank, standing at 10.25% or 11.25%, depends if you look into it from a phased or a full approach. In terms of total capital ratio, we now totally stand at 19%.

All the buckets and targets which we have defined, common equity AT1 and Tier 2 are perfectly aligned with our guidance earlier given. In terms of liquidity, KBC has always, as you know, been a very liquid Group in terms of customer funding, stands now at 74%.

Also, if we have to go to the markets we do have an eligible buffer of 306%, so more than three times the buffer on short term which should be needed if we were to go into the market. No surprise that the NSFR and the LCR ratios are very solid and are substantially higher than our target, at least 25% higher than our target.

So allow me to wrap up. This has been a good quarter, definitely if you take into account the very difficult market circumstances, definitely if you take into account the huge amount of banking taxes which have been paid.

The good news is that our machine has been turning on all the cylinders and that the bank insurance model now really is paying off. If asset management is doing a little bit less, then life side is picking up or non-life is picking up.

So that's great news, that's all for some kind of guidance for the period following. If we look forward, then we see that we will expect solid returns from, actually, all countries.

So it's not only Belgium and Czech Republic, but it's also the international markets business units. They're all already positively contributing to the result, and also Ireland is doing this for the second or third quarter in a row now, €23 million.

We stick to our guidance earlier given, but it's now at the bottom end of the range in terms of loan-loss ratio and it's definitely positive. Liquidity and solvency have been remaining a positive and we stick to our guidance in terms of dividend.

We do guide that dividend payout for the year, for the 2016 and following, will be at least 50% going forward. I would like to keep it here.

I see that I'm perfectly in line with the guidance Wim has given me on the timing, it was 30 minutes, I used 29 of them and I give back the floor to him.

Thank you, Johan. So we'll open the call now for questions.

Can we kindly ask to restrict the number of questions to two, in order for the people to ask about - well, for - to have as many people as possible to ask questions? Thank you.

I've a couple of questions. First of all, in terms of your dividend policy.

In Q4 you suggested or hinted the potential interim dividend from this year. Can you comment on that?

And can you confirm or so give us some colors on it? And in same topic, higher than 50% is very vague.

Is there any chance that it comes higher than this level? Second question is on the asset quality.

I think it's obvious, for everyone, that such Q1 level is not sustainable. But, in the other hand, Ireland you still guide for €50 million loan-loss provisions, but you had a write-back in Q1 and looks quite high.

So what we will do we need to see more to guide for lower number than that? Thank you.

Thank you for your question, answering the first one in terms of dividend, so let me go back to our guidance which we have been giving now for quite a while. In terms of dividend payout, it's 50% at least and that's what we have been guiding now already for, I think, four quarters in a row or five quarters in a row and we continue to do so.

The reason and because of part of your question was, can it be more? Now, if we say, at least, it means at least and that starts with 50%.

The reason why we do not change that is obvious, there is so much uncertainty out there in terms of regulatory pressure. We all have been reading again new consultation papers of EBA regarding Basel IV.

We all are looking what is going to happen with the floors which they are going to put under certain asset classes. We're all reading stuff about IFRS 9, we're reading stuff about IFRS 4, and nobody actually really knows.

So the uncertainty in there remains and it was the main driver a few quarters ago, last quarter and this quarter, why we stick to the guidance of it will be at least 50%. The buffer which we do have, indeed, is something which we're happy, very happy, with, and it's something which we keep in mind when we're talking about the regulatory uncertainty.

In terms of interim dividend, we repeat what we have said last quarter. That is, indeed, that we do look into every kind of possibility.

The interim dividend is a possibility. We just repeat what we said last quarter.

It's a bit early days, I said last quarter as well, that is for making a final judgment on the interim dividend. That's something which you need to have a little bit of patience extra.

It's a bit too early, we're just after the first quarter, but it is a possibility. And then in terms of asset quality, yes, indeed, in Ireland we have had some write-backs.

Those write-backs are mainly driven by the evolution, amongst others, of the housing prices. That is built into the model.

Therefore, if the housing prices move, we take a nine-month average there, then the impact is translated into our releases. So in that respect we have been, indeed, releasing some of our provisions automatically because of that increase and because of the nine-month average.

In terms of further releases of provisions, also there we keep a very conservative stance. As you know, we have been doing this already for a series of quarters.

We observe the situation as it is. If the situation of recovery is sustainable then we will reconsider, but in this instance it's far too soon.

Okay. Just a very quick follow-up on the divi questions, you mentioned all the regulatory uncertainties, that's fair.

But is there any also uncertainty about your M&A policy and in a sense not distributing and not deciding quicker on dividend, because you might want to acquire something that's could be quite sizeable?

A straightforward answer is, there is nothing on the table which is quite sizeable. But we have been talking about our capital deployment already in the past with clear statements.

We have several options. Of course, we're going to finance our organic growth and, as you have seen, the organic growth is quite important in our core countries.

Next to that, we do have the possibility that if something will be available, I mean in terms of acquisition out there and it could strengthen our franchise in two ways. It needs to be a core country and it needs to fulfill our technical financial requirements, then we will look into it, that possibility remains.

But it's not the reason why we're not more explicit about our dividend payout ratio, not at all.

Just two questions, please, on revenues. The first one on fees, given your strong track record in guiding fee development in the next quarter, may I please ask for slightly more specific guidance on how you expect fees to rebound in Q2?

In the current market conditions, is it realistic that we can go back the level of fees, at the Group level, that we've seen in Q3/Q4 last year? And the second question, please, on net interest income.

Previously you were talking about some headwinds from the refinancing of the mortgage book into lower rate. Have all of those headwinds materialized in the numbers already?

Or do you expect more to come later in the year? Thank you.

Okay, Anton. On your fee and commission income I will give you a bit more guidance, although I'm surprised you say we have a strong track record in giving guidance fee and commission income.

I think we did it for only one or two quarters, yes, Kurt [ph] corrected me. We do expect a modest recovery in the second quarter.

Why? Well, the main reason is that in the CPPI funds there has been an important reset date where more than €5 billion of cash was reset into a mixture of equity and bonds.

The markets after that reset have, fortunately, not dropped, but they haven't recovered strongly either, but have not dropped. So that remains in a mixture of bonds and equities and that has a very positive impact, obviously, on the management fee that we have at the moment.

We also expect some other more seasonal aspects. For example, security fees should improve a little bit compared to the first quarter.

For the rest, in the entry fees we do expect also a modest recovery. But, obviously, it's still early days and May and June are very important months in terms of sales.

Therefore, I'm a bit cautious, but we should also see an improvement in entry fees as well. Okay, now Johan will give an answer to the second question.

The second part was dealing with the net interest income and also the impact of refinancing amongst others. So in terms of net interest income going forward, we, indeed, see further pressure on that net interest income.

Obviously, net interest income is driven by two things. First of all, it is driven by volumes and in that respect we're doing quite well, as you have seen.

We continue to work on that side despite a heavy competition and we do continue to do our utmost to keep those levels of volume increases at track. The other element obviously is margins.

Margins you have also there two aspects. You have competition, clearly and that competition is - let's talk about the two big contributors that is Belgium and Czech Republic.

That contribution is very, very strong and that's great news. Definitely, in Belgium everybody is suffering the same things, so they are all looking at two things, one end side volumes and the other end side by margin.

We were able, in Belgium, to keep that margin - we're actually pushing it up a little bit, so it's in total 1 basis point higher, has to do amongst others also with mortgages. We have detail in the pack available, you can see it, where you can see that the mortgage margin was up quite significantly.

This slight pressure on our market share and you know how we deal with that, we have a target which we focus on. We're still ahead or still in line with that target, clearly, so it's not at the dispense of our market share fully, but still.

And then the second thing is and that's definitely true for Belgium that is the refinancing of mortgages. What we have seen is actually in the quarter a mixed picture.

In the first two months the refinancing of mortgages was acceptable. First month it was perfectly in line with historical numbers.

I'm talking about historical numbers except 2014 and 2015. Then it started to pick up in - and slightly pick up in February and it took up significantly in March.

We have been having a refinancing in total for €1 billion now in this quarter. This contributes, of course, because of the penalty fees, but has a negative impact because of the hedging cost.

The fortunate thing is that because of 50% of those refinancing are mortgage which already have been refinanced in the past. So margin is going up, but the cost price, so the hedging cost, still kicks in but at a lower level than previously.

So in that respect, yes indeed, we do have refinancings, and, yes indeed, those refinancing are related to the market and the low interest rate environment. For the other countries, Czech Republic and all the other ones, clear, I already said it before, there is pressure on margins.

Ireland is the exception there, but there's pressure on margins and volumes are very good, so that's compensating. I would like to keep it there.

Sorry, can I just confirm that you said some of the refinancing on the mortgage side that is happening in Belgium is now actually margin accretive, because the refinancing from low margin business?

Yes, correct and it was already given in the past. You need to know that when those loans were originated back 10/15 years ago, margins were very, very low.

We're selling now mortgage at a higher level than they were originally sold and that's the reason why the margins are accretive.

That is a commercial margin, because we still make the hedging loss on the hedge side. So net we're still making a loss on refinancings, obviously, just to clarify.

My question is related to the defined pension benefits, the movement. Can you give some explanation, if you want, on the pension's size, what kind of amount are we talking about?

If the movement was related to the low interest rates or mark-to-market movements? And if you expect those movements reverse in the coming quarters or this a permanent adjustment?

Thank you very much.

Yes, the main movement is the result of a lower interest rate applied in the model that we introduced partly due to the further reduction of interest rates, obviously, but also because there was an overall review of the model at the end of last year, an update, therefore, in this year. Therefore, it has a bit higher effect than usually is the case, but that's the main reason for that.

Whether it can reverse next quarter, that's a very difficult question to answer, because I don't know what interest rates are going to do. But it shall be dependent mainly on that aspect.

Just going back, thinking strategically again and going back to potential consolidation, I think you've previously said that Belfius was theoretically appealing, from a political and social standpoint on execution could be tough. But I wonder if you could update on how you think that process would go and whether I've got your current thinking correct?

And then secondly, just looking at the insurance business which obviously had strong momentum, the solvency ratio, I think you said is at 210% down from 240%. What do you think is the appropriate level?

That still looks pretty well capitalized. And, why the reduction or help me understand the reduction through the quarter from I think 240% at yearend?

Thank you.

Let me start with the first one on Belfius, I'm actually in the wrong position now, because actually you should ask this question to the Minister of Finance who is the owner or least a representative of the owner of that bank. We never ever made the comments about Belfius.

We only stick to what is common sense. That is if something comes in a core market, to the market, then we will look at it.

If it does make sense, we will consider it, if it doesn't make sense, we will not pursue. All the rest, I cannot answer.

I'm sorry, I'm not in a position to answer that. You should ask this Minister Van Overtveldt, he probably can provide you the answer.

On Solvency II, we have a reduction of 231% to 210%. The main causes were, first of all, a different treatment of exposures where we had an implicit guarantee of local authorities, so we have a higher capital requirement as a result of that.

The second main driver was interest rates which reduced which had a higher effect on the technical provisions then on the asset side, so net a negative impact. These were the two main drivers.

So does this mean that we know - what does it mean with regards to the potential excess capital we would have in the insurance company? Well, as I said before, we aren't going to come out with any target at the moment, given there are still some uncertainties.

We're still learning how Solvency II behaves in different environments. I think we're not only learning, but also our regulator is learning by applying this now in practice.

So as long as we're learning, we're reluctant to give any guidance on how - what our target should be and how much excess capital then we should have in the insurance company or would have in the insurance company.

A couple of questions on volumes, one on the insurance side and one on the banking side. Firstly, given the strength of the insurance sales in the first quarter, particularly on the guaranteed interest and unit linked on the life side, how sustainable do you think those stronger sales are?

Obviously, you normally get the usual seasonality in Q4, but do you think we could see the Q1 volumes in Q2 and Q3 there? And then on the banking side, I'm interested in your thoughts on Belgium mortgages where you've seen no growth Q on Q.

Also, in Ireland, you've seen a 2% decline Q on Q there, the redemptions continue to outpace new production, so when do you think that might change? Thank you.

Let me come back on your first question. So the question is that sales in the life business on the interest guaranteed products, is that sustainable, yes or no?

First of all, it is sustainable in the way how we deal with it in KBC. I was explaining that we're driving our bank insurance model with the customer intention at the center of our - as the point of gravity actually.

What does it mean? It means that we approach a customer with a full pack of investment products.

If he wants to do an investment, we will offer him the full range, starting with demand deposits, starting with saving accounts, term deposits, but also asset management products and life insurance products, he chooses. Now, it's clear that when the customer is not that entitled to go into asset management, probably with the bank insurance model it works back perfectly well and that's what we have seen in the first quarter again.

Asset management sales, mutual fund sales were actually not up to the level what we have seen in the first quarter and second quarter of last year. But it's fully compensated by the life insurance business, because that is yielding - definitely in Belgium we have a very particular regime with the exemption of the withholding taxes.

So that is yielding interestingly enough for our customers and, therefore, they step into that. Is that sustainable?

The answer is yes for the policy, for sure. So I mean if a customer has to invest, then you need to look at the sum of the asset management bond business and the life insurance business.

So there it is clearly sustainable. Is it going now to switch from asset management or life insurance business?

Actually, I don't mind, as long as it is with us, if it is with KBC. The other thing is the non-life business which has been doing very well, also in this quarter, is that sustainable?

The answer is straightforward, yes, it is.

Just a follow-up would be, given your guidance on fee income, where you do expect a small improvement from here and you said part of that is due to higher entry fees, does that mean you expect to pick up in asset management, but with an offset on the insurance side, given your comment you've just made?

Not necessarily, because the impact - we're talking about net inflow here and in asset management we have two-sided correction. You have, first of all, the management fees where we do expect - and as Luc has answered on the previous question, where we do expect some positive change.

We have just had a reset date for quite a substantial amount and it will have a positive impact on management fees. On the net inflow, all depends on the volatility of the markets.

So we do not expect this to have a necessarily negative impact on the life insurance business. But if asset management picks up tremendously, then obviously you will see this translated in less insurance sales, for sure, and the other way around.

On the mortgage side, that's well picked up in such a fast - in such a short period of time. Indeed, it has been relatively flattish, slightly up.

The reason is that we had the weaker production in January and February, but that is now offset by much stronger new production in March and April. We do see there is a net outflow in terms of refinancings.

There is a lot of competition on the refinancing side and there, we're losing some of the refinancings to competition, for us it's a matter of the balance between volume and margins. We always make decision what/how the bottom line is protected, that is for us much more important than volumes.

A last element is that there is a - due to the refinancings we had in 2014/2015, most of our customers opted for a shorter duration, so they keep installments at the same level, but shorten the repayment period. As a result of which, we have a faster build-down of our portfolio, that is also an affected place.

The first one will be on the guaranteed product on the life side. Clearly, you have been able to post very strong sales.

I had the impression that the market was really down. I was looking at the Branch 21 market in Belgium and I think most of the players have been positing negative figures in the first quarter.

So I was wondering why you are so strong there. I was also wondering about the profitability on this new inflow, where are you putting the money?

I think you probably had a guarantee rate below 1%. But I was curious about the overall profitability of this product and if really makes sense to sell this product in the current low interest rate environment.

Second question is on NI. I think in the past, you said that NI will be under pressure, you repeat that again.

Now clearly, this quarter, you're able to offset some of the pressure with loan growth. You have been repricing your savings money.

Now, we're close to 0% in Belgium. So is that fair to assume that the drag from low rates will be a little bit more intense in the coming quarters?

And do you think you can offset the drag by loan growth? I'm pretty surprised to see - positively surprised on the loan growth and do you think there that will continue?

And linked to that, I was wondering when you're going to start growing the loan book in Ireland. I think the loan book has been tracking there for some years and is that - are we going to see some positive growth there?

Thank you.

Let me first come back to your first question, the guaranteed interest products in life. Indeed, your analysis is correct, that some players in Belgium have been putting negative growth numbers on that life book in the first quarter in Belgium.

The reason why we do have positive numbers is, actually, again, the bank insurance model. So the capacity which we have to switch between asset management products and life insurance products which is also driven by market sentiment and customer sentiment, is clearly expressed in the difference in our performance and the difference with other market players.

Why they have become negative, I cannot comment on it. I don't make an analysis, I'm not positioned to comment on that.

But I can clearly comment the position KBC and that is, sure, that we're going - that we're using our bank insurance model here to the max. The question about profitability, as you know we have the lowest interest guarantee in Belgium, 75 bps.

The reason for that is that what we sell is driven by, first of all, customer interest, but secondly, also by profitability. We don't sell stuff which we then don't make money on.

So the profitability is perfectly in line with our targets and that's because that portfolio is invested, obviously, in some government bonds, but also in some corporate bonds and, therefore, is generating enough margin on - not only on, let's call, a management, but fee perspective side. I know that is in life business not called like that, but anyway, then you know what I'm talking about.

And let's not forget entry fees in those products is quite significant. We're talking about 2% plus.

So profitability is, in that product, still perfectly in line with our appetite and risk is perfectly in line with both customer and KBC's appetite.

When you refer to the bank insurance model, do you mean basically you prefer to have basically cash invested in Branch 21, rather than having cash sitting on current accounts or short term savings money, basically on which you probably lose money?

Obviously, the answer is - if you ask me, then the answer's obviously yes. Why do I say if you ask me?

Obviously, it's the customer who decides. It's clear that the customer appetite and you referred also to the rate on the savings account in Belgium is close to zero, it's actually close to the bottom and the bottom in Belgium is 11 basis points.

Therefore, a 75 basis point yield, be it on a product which is sold normally with time perspective of eight years, to exclude the withholding tax, makes a lot of sense. In that respect, also a lot of customers and that's what we see, are tempted to step over from, let's call it, cash positions, savings in accounts - current accounts, into life insurance business because it's, first of all, government guaranteed up to €100,000.

Secondly, it's yielding a very attractive yield for them compared to the savings account. Therefore, it does make a lot of sense for them as well.

And then perhaps on the second question on NII. Well, obviously, the environment is increasingly challenging, given the very low yield environment is continuing.

As before, we believe that we can partly compensate this with volume growth and, also, by further reduction of funding costs, particularly. Again, it's not a surprise, the further roll-off of term deposits - expensive term deposits in the retail space in Belgium, where we still have expensive term deposits rolling off of around €800 million per quarter for the next three quarters in 2016.

Also, in 2017, we have further corporates of these term deposits rolling off. A new feature obviously is the refinancing of a TLTRO.

We have about €2.7 billion - slightly more than €2.7 billion of old TLTRO 1 which we're going to refinance, and, also, have a positive effect already this year, given the first pricing effects from the old one to the new one, and perhaps also some shifts from - in our funding plan towards additional TLTRO drawdowns. That explains why we should be - continue to fight the NII - the lower reinvestment yield.

How this will end up at the full year, we don't give any guidance, but obviously it remains a challenge.

Now, on loan growth in Ireland, you have any signs of pick up there?

So what you have seen in Ireland is a further continuation of the management of our legacy book, both on the retail side and definitely also on the corporate side, so therefore it's shrinking. What we do see is that we're performing very well in terms of the new production on the mortgages.

That means that we're taking up there more than our market share. We keep it at sound levels, in terms of loan to values and in terms of debt service ratio.

This is perfectly in line with our internal target which is making Ireland become profitable and making Ireland become a positive contributor to our return on equity. So yes, it is growing.

In terms of production, no, it is declining, because we're managing our legacy book downward.

Two questions from me as well. The first question is on the credit cost ratio.

If I look at slide 14 of your slide pack where you show the credit cost ratio since 2009, it's been decreasing almost constantly every year except in 2013. It's obviously abnormally low this quarter.

But I was wondering whether you could maybe guide us why you expect it to be on the full year, closer to full-year 2015 or full-year 2014? And the second question is on the regulatory changes.

On the discussion we had early on this call on the dividend payout you mentioned that there is high uncertainty regarding regulation. So I was wondering whether you could maybe elaborate on this which potential regulatory changes would be particularly costly for you.

When do you think we will get more clarity from a timing perspective? And third, do you think that if your [indiscernible] base goes up and what we call Basel IV, do you think that the regulator could potentially lower your threat ratio?

Thank you.

In terms of the credit cost ratio, indeed, it's only distorted in the year 2013 by the substantial impairments which we took extra in Ireland. Otherwise, the line is a perfect regression line.

I think correlation is close to 100%. The sustainability of that 1 basis point is obviously zero.

The guidance which we have given for the full year, is somewhere in between the range - let's call it, the range 30 to 40 bps which is normal and if you compare it with our through-the-cycle guidance and the through-the-cycle guidance is at the back end of the presentation, it's about 52 basis points, so it's a bit better than the over - through-the-cycle credit cost ratio. In terms of regulatory pressure, regulatory pressure, I mentioned already during the slide presentation, the regulatory pressure is indeed still - first of all, it's there, there's no doubt.

Second thing is that the regulatory changes which are upcoming, are still very uncertain. I'm talking about all of them which I mentioned during the slide presentation.

I'm talking about Basel IV, I'm talking about IFRS 9, I'm talking about IFRS 4 and so on which are due to be implemented or 2018, 2019 or 2021 or sooner. I'm talking about Basel IV.

My expectation is that we will have some clarity there by - in the course of this year, third quarter, end of this year, on Basel IV. So it's very, very difficult to give you perfect guidance on where it will land.

What I can say that is that obviously KBC is most vulnerable in the risk-weighted assets discussions about floors on mortgages. That's what I can already state.

That's obvious. We're not that vulnerable for risk-weighted assets in the market risk side.

All the other things, operational risk, that changes every week so it's very difficult to comment. There are some reports floating around in the financial world, you can have a look at them.

Some are wrong, some are right. Nobody knows exactly what it needs to be, so it's very difficult for me to guide you in that jungle.

We'll see. The regulators will - Madame Levine [ph] made several statements recently about the impact on risk-weighted assets and about regulatory changes.

We stick to that guidance.

Two questions mostly on timing side, coming back on your guidance for the year on the run rate of credit costs. Do you expect already an immediate pick up in the second quarter?

How should we see that evolve during the year, because you also say that the outlook for Ireland is good and you could see some more releases of provisions there? And then also on timing, you talked about more clarity on the - let's say, the regulatory side for the banks.

When do you expect more clarity on the regulatory side for insurance? How long would your learning period for Solvency II behavior be?

There's also the stress test from EIOPA. When could we decide on, let's say - when could you decide on a flow back of capital to the Group from the insurance?

Yes, sorry, we were just checking who was going to give which answer. I will take the first one on the run rate for credit cost ratio.

At the risk of repeating ourselves, this is not sustainable. The current run rate, how it will evolve quarter by quarter, is very difficult to predict, given that we also have a corporate loan portfolio and corporate loan portfolios can suddenly have relatively high impairments and can have, on a quarter basis, shifts on the credit cost ratios.

Now as Johan also said before, the run rate we believe in the long - through the cycle with the current portfolio we have should be closer to 30 to 40 basis points. But obviously for this year that will not be the case, given the very strong start of the year.

We don't see any big issues in the pipeline either. So it's going to be well below that.

How much exactly is difficult to predict. Certainly, if you want me to already start to predict the second quarter, that is difficult.

But it gives you a guidance of how you should look at this for the full year. Johan?

I took the long straw for answering question two. It's about solvency and about the - you called it regulatory uncertainty and solvency.

First of all, solvency, intrinsically - Solvency II, intrinsically, is - by definition and by conception is volatile. In that respect, the changes which we have seen and which have been explained already by Luc, answering a previous question, is quite normal, given its conception.

That evolution is actually triggering us not to put already a target in the market. It is clear that, with the 210% Solvency II ratio, KBC is a very - has a very solid insurance company.

Even when it comes down with 20% that is - it obviously is quite a lot, but it's not really threatening or it's definitely not really worrisome, if you take into account the reasons why and you take into account the build-up of the Solvency II calculation methodology. Regulatory uncertainty, in that respect, is also, of course, kicking in, with the methodology changes which are predicted by regulators for, amongst others, IFRS calculation purposes.

But as you probably know, those regulations have been - or those propositions have been discussed and have been postponed until 2021, if I don't make a mistake. Therefore, there's still some time to go and that time to go is, indeed, long enough to reconsider positions earlier taken.

What about upstreaming of capital - of the insurance capital or the surplus insurance capital in the Group? That's something which we have been doing also in the recent past, as you probably remember.

That's something which we constantly monitor. But therefore, also, we need to have a bit more clarity on where it will end, in terms of the volatility and the shocks or the jumps in the Solvency II ratio, before we take a final stance there.

Both things will go combined. First of all, targeting, and second thing is reconsidering surplus capital and how to upstream it in the Group.

When would you expect to get that clarity?

We need a bit more time to consider how volatility evolves. We're now one quarter down the road since the official launch of Solvency II, so give us another few quarters.

Just two question, one follow-up on fee income. Is it fair to assume that you could reach a level seen in the second half of last year in the next quarters again?

And then, reaching a level of H1 2015, is this rather timeout, because you have to - the entry fees are still far lower than at that point in time? And secondly, just on your tax rate.

After the low tax rate this year, what - this quarter, what could be a good rate for this year and next year? Thank you.

Coming back to your first question. Actually, what you're asking us is, give us guidance on fee and commissions and I translate it now very straightforward.

I do feel sorry, but we have been doing so well previous two quarters which was exceptional. We continue now with our previous policy not to guide fee and commission.

I'm sorry, you have to do it with the explanation which we have been giving, how it is built up, how it is evolving. Both of us, you and ourselves, we will be watching and monitoring the market to see if volatility kicks in, yes or no.

On the tax rate, the only exceptional item was a DTA, that positive DTA of €80 million. So if you take that out, you can then calculate what the normal run rate would be for the first quarter, but give you a bit more guidance.

Of course, it really depends on where profits are made. Different countries have different tax rates, different treatments of various revenue levels and cost side.

So - but usually around 27%/28% should be a good guidance.

A couple of questions on capital, at the moment, you've got - you're running with loan growth around 4%. So looking out for the next year or two, is 4% a good number for RWA growth as well, because if I look, historically, you've done pretty well at keeping RWA growth more - lower than the loan growth numbers?

But I guess that was partly because you were still de-risking over the last few years. And is - so what's the sensible assumption for RWA growth versus loan growth for the next couple of years?

And then, just a quick numbers question. When I look at the AT1 coupon, clearly, you're including that in your guidance on a payout ratio.

But the 1Q accrual for the AT1 coupon's very low. So what number should we be thinking about on a full-year 2016 basis?

And then, when I look at the stock of AT1, it looks, roughly, already where it needs to be. So is that - is the 2016 AT1 coupon level pretty static for 2017 and 2018, please?

Thanks.

On the AT1 coupon, Luc?

Yes. Maybe on the loan growth first, well I think it will be difficult to - well, first of all, the loan growth of 4%, yes, that could be also good guidance for risk-weighted assets, given that if we don't see any changes in the composition - on the composition of the credit portfolio which we don't see, so no major PD migrations or changes in mix, if that is constant then that would be a good parameter.

Obviously, we're growing stronger in Central and Eastern Europe where risk-weighted assets tend to be a bit higher than in Belgium. Would we be doing as good as we did in the past on managing that RWA growth?

Well, we should not forget that, in the past, we moved from a foundation to advanced and we had a benefit of about €12 billion of that. That was only partly granted when we moved from foundation to advanced.

The balance which was €3 billion to €4 billion, was only released last year. That will not repeat, going forward.

Last but not least, we have, obviously, worked on refining our capital model in the last few years and that meant that we also moved more and more to advanced. Now, with the new regulations coming up, you see that there is a shift again away from sophisticated models and more and more introduction of standardized models.

Therefore, I don't expect we will have further refinements, generally speaking, in RWA efficiency or more efficiency improvement on the model side. So that's on the RWA growth.

On the AT1 coupon, what we accumulate - accrue each quarter is the normal run rate, so around €52 million per year. That boils down to around €13 million, I think, also for the first quarter.

So we don't see any change there.

Thank you. So that means that we can close the call now.

I would finish by thanking you all for your attendance on the call. I hope to see as many of you as possible tomorrow morning at our offices in the City.

Thank you very much and talk to you later.