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

Anton Kryachok - UBS Jean-Pierre Lambert - KBW Nick Davey - Redburn Alex Koagne - Natixis Benoit Petrarque - Kepler Tarik El Mejjad - Bank of America Pawel Dziedzic - Goldman Sachs Alicia Chung - Exane BNP Paribas

Good morning from the headquarters of KBC in Brussels. Welcome to the KBC call.

Today’s Thursday, August 11 and you are on the KBC conference call for the second quarter results of 2016. I’m Wim Allegaert, I’m Head of Investor Relations.

We have Johan Thijs, Group CEO on the call today as well as Luc Popelier, Group CFO, and they will comment on our results and answer your questions you might have on KBC. We will need roughly 30 minutes to guide you through the presentation for the analysts.

This is a presentation which can be found on our corporate website, KBC.com which was posted there this morning. After this, it’s question time until around 10.30.

This conference call is taped and can be replayed via our website as from this afternoon on, until 2nd of September. Finally, I would like to add that Investor Relations and Luc Popelier are organizing a Sales Side 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 see you there and are looking forward to the conversation. We’ll make sure that the coffee is freshly brewed.

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

Good morning ladies and gentlemen, also a warm welcome from my side on this conference call. We are happy to announce the second quarter results and we will start as usual with some key takeaways.

Let me start first by saying that the second quarter results of KBC Group has resulted in €721 million of profit which is a very good result given the very difficult market circumstances we all are living and working in. Expressing the €721 million in a different way would mean for instances what’s the other way, we stand at 17% which has given the cost of capital of our group quite good results.

This result is due to the well performance of all our countries including Ireland, it is because of the well performance in all our business activities, banking and insurance, asset management leasing whatever. Obviously the same is true for us, what was true for some other financial institution this result is positively influenced by the reconsolidation of the Visa Group.

We have a one-off of €84 million, we have some follow-on offs in this result as well from DTAs, Belgium was impacted by some flooding €24 million. And we have also a negative one-off the Belgium government has decided again for new banking taxes which contribute negatively €38 million in our result.

Now other good news I mentioned is, because of the good results, KBC has sort of improved it’s good and very solid capital position with another 30 basis points as usual our liquidity has been very good and is again confirmed to be very good as well for the quarter. And last but not least, on the back of this good profitability, we have adjusted our dividend policy.

We do confirm our intention to payout at least 50% of our consolidated profit but we also are going to add as of this year an interim dividend of €1 per share which will be payable in cash in the November of the accounting year. Let me guide you through the detail of the different building blocks and let’s start as usual with page 6, split-up between the Bank and the insurance company, let’s not waste too much of time here.

But as you can see, the vast majority of the profit of €721 million is booked at the banking side, split-up between the bank and the insurance, normally 80:20 now it’s 90 versus 10. But this obviously influenced by some one-offs, the Visa is booked at the banking site, some DTAs as well.

The negative side of the Brexit which we have seen is booked at the insurance side quite and also the flooding impact at the insurance result. If you would exclude one-offs, we’re closer to the 16% to 17% contribution which we normally see for the insurance group.

Not too important to waste more time, far more important I think is the contribution of the different building blocks technically. And then I’m starting with the net interest income and the net interest margin which is on page 7.

The good news to mention is that despite very difficult circumstances we were able to keep the net interest income for the fourth quarter in row, quite stable actually it’s slightly up. It is €3 million higher than previous quarter and it is little bit down compared to year ago.

But I think this is a major achievement given circumstances. This good result is on the back of lower funding cost, amongst other term deposits which have been going down with €1.6 billion.

But it’s also influenced by the additional rate cut which we did at the beginning of the quarter on saving accounts amongst others in Belgium and in Czech Republic. This is also positively influenced by higher upfront payment fees because we did see in Belgium that repayments of mortgage, refinancing of mortgage loans was indeed picking up compared to the previous quarter.

The consequence of that is indeed that we do receive higher prepayment fees. It’s about €7 million higher than previous quarter.

We also have seen in that, the other good news to pick up on the volumes, in terms of volumes on the lending side we have seen a growth of 1% quarter-on-quarter which is expressed in a 4% growth year-on-year both on the mortgage side and on the commercial side but also we have seen a pick-up in volumes on the current accounts. Last and not least, anticipating the very difficult circumstances, as we already indicated in previous quarter result announcements.

We have been further strengthening our ALM management which means that we have created little bit more bond exposure. And therefore the positive impact starts to come, starts to crystallize in the quarterly results amongst others second quarter.

Obviously the difficult environment is offsetting part of those positive elements and that is clearly for the lower-for-longer interest rates kicking in, in the reinvestments which we have to do, we still, because of the prepayment, obviously the hedging loss of previously refinanced mortgages. And there is no doubt that there is pressure on the commercial margins.

Now, in terms of those margins, that pressure is mainly on the mortgage book and that is true for most of our countries. It’s definitely true for Belgium, Czech Republic and clearly for Slovakia, where the price war is ongoing.

The impact in total of all those commercial pressure on the mortgage book, on the total book being a combination of commercial and mortgage loans is 2 basis points reduction to 194 basis points compared to 196 basis points previous quarter. We do expect that pressure is going to maintain going forward for the next quarters, whereas I do also understand that most of the peers, most of the colleagues understand that the name of the game in an environment which we are currently are in, is toward margin pressure rather than downward margin pressure.

The other contribution which is very important for the banking side is, explained on Page 8 we’re talking about the fee and commission business here. And also there, we have guided previously that we are having an upward trend now and this is confirmed today, we have €360 million of fee and commission return in this quarter which is €14 million better than previous quarter.

This is due to the fact 70% of those fee commission number is related to asset management business. This is clearly related to higher management fees from both mutual funds and unit-linked insurance products because of the reset date of the CPPI product.

This is also due because of the highest fees credit files which was mainly generated in Belgium. And this is also due to higher fees for the payment services.

On the other hand, we have seen in this quarter lower entry fees definitely on the mutual fund side and the unit-linked life business and also on the security side, KBC Security side we saw that the fees are coming down definitely compared with the second quarter of last year. In terms of the total impact on our assets under management, we now stand at €207 billion which is flattish compared to the previous quarter that is an outcome of two effects, we have seen in net outflow of about 1%, which is compensated by the positive price effect.

And if you compare it with last year, we do see an increase of 2% because of the net inflows and because of a slightly negative price effect that is adjusted downwards a little bit. But still in terms of what we expect going forward, as indicated already in the previous quarter, we think that the first quarter of 2016 was actually the bottom taking into account a very turbulent market circumstances and that is proven in the second quarter.

Trend wise, we are not going to give an explicit guidance, but taking into account what we have seen and how we have built up the asset management portfolio, definitely CPI products, we think indeed that the bottom of the cycle was reached in the first quarter. And that the peak of the cycle is not something, that’s something which we’ve seen in the first quarter, second quarter of 2015 is not something which we are going to see going back soon.

In terms of insurance, we are on Page 9, I think. In terms of insurance also there, there is good news to mention and in this respect it is a bit of a flip side of the coin as well, that is the claims side.

In terms of growth, well-performing life insurance portfolio was this year growth of the non-life premium year-on-year by 7%. This is due to 2% growth in Belgium and then 6% to Czech Republic.

But if you look at the other central European countries, we do see a growth of double digit numbers, 12% Slovak Republic, 34% Hungary and Bulgaria 11%, which shows clearly that the bank insurance model is working very well. Also in terms of the life business, we do see a very good quarter.

Definitely if you refer to the same quarter of last year, we do see an increase of 33% which is quite an achievement given the circumstances we’re all working in. If you compare that to previous quarter then it’s slightly down.

But as you remember, last quarter was driven by some campaigns and was actually a top quarter in that respect, making that reference is a bit unfair comparing second and first quarter results. So, good results in terms of peak quality.

Underlying the portfolio non-life performed very well. And that’s true for all countries.

The combined ratio as in all countries, year-to-date, are well below 100%. On average for the whole group, it stands at 95% which is a combination of all countries mainly driven by Belgium, Belgium stands at 96%.

And that number is heavily influenced by the impact of natural perils, national catastrophes, mainly flooding. We had some very bad weather in May and June in Belgium.

And that resulted in ultimately €24 million of claims. In Czech Republic we were facing a hailstorm that was impacting the results of €2 million.

But despite €26 million of storms and floods claims, the combined ratio stands at a very solid 95%. So, in the last line on the income side, revenue side builds with the fair-value gains.

Also here we did see an up-tick, we have €154 million for the quarter which is potentially more than previous quarter and a little bit down compared to previous year. The main reason why this quarter is performing very well compared to previous quarter is a change in models for the market credit and fair-value adjustments.

This is resulting in delta compared to previous quarter of €56 million are quite significant. Nevertheless, also on the dealing room side, we see an improvement of the result compared to previous quarter of €5 million, definitely in the very turbulent environment, which was characterizing the second quarter, this is a good achievement.

What was influencing a bit more negatively that fair-value gain result was the lower number of ALM derivatives compared to previous quarter, its €7 million downward review. And that is obviously impacting that result.

Next to that we had negative change in OCR but it’s fully offset by the FX gains which we made on our liquidation of IRB Finance. On the other hand the gains which we realized on our bond and equity portfolio was quite significantly up, as I already indicated this seriously influenced by the capital gains which we made after the restructuring of Visa Group.

84% after tax, if you also take into account the capital gain which we made on the reduction of the equity portfolio and that is at the insurance company, €25 million then you have actually the whole explanation of the €128 million explained now. The €25 million FX gains were actually made as an anticipation of a potential Brexit, we saw to be bottom part of our equity portfolio anticipating a potential Brexit.

But unfortunately as you know the Brexit came true and also there we saw some further impairment on our equity portfolio but I will come back to that within a second. Other net income is now at a run rate, run rate is roughly €50 million, we stand at €47 million, not much to mention besides the traditional outcome of the leasing company, the assistance company, real-estate company, we also released some provisions on some litigations for the previous legacy portfolio of CDOs which was resulting positively that part of the income with €10 million.

Far more important is the cost side, the operating expenses, positive news to mention is that we have been maintaining and we have been managing our cost in a very good manner. The costs are little bit up compared to previous quarter and that is mainly driven by bit higher marketing expense but clearly bit higher ICT expenses and that is due to the fact that we are as indicated already before complete transforming the bank and the insurance company towards a more digital flexible HR bank taking into account the changing customer behavior.

But also if you compare it with previous year, and I’m referring to Page 12, the light blue bars. Then you can see that we saw a decrease of our cost compared to same quarter different years.

That’s the good news. That is mainly driven by also saving on staff expenses.

And be also aware that, on the cost side, operating expenses are driven far - by far by the expenses of staff. In Belgium the biggest contributor of the cost side, since second quarter again we have an indexation of our wages, wages linked to the inflation.

And in Belgium as one of the exceptions in Euro, the inflation is rather high and therefore impact on salaries, are, there. Nevertheless, this was almost fully compensated by further savings on FDs and on other elements.

Unfortunately all those savings have eaten by an extra banking tax in Belgium. The banking tax is due to a change of the way the banking taxes are being raised in Belgium.

And the Belgium government has passed substantial amount extra which boils down to an extra €38 million banking taxes for KBC in Belgium. And that brings actually the total of banking taxes to more than 10% of the operational expenses, which is a lot.

And which is something which we should definitely keep in mind when we judge on the total cost income ratio. Talking about cost income ratio, it kind of lease stands if you take out the banking taxes at 56% in the second quarter that compares to the 55% of the previous year.

And that actually shows that circumstances which had pressure on the income side that we are able to manage our costs in a proper manner. Talking about the banking taxes, on Page 13, you do see the detail per business unit.

And you can see indeed that on average it’s 10.5% of the group, split up for country you can make the judgment yourself what it means in terms of pressure on the operational expenses. In terms of asset impairments some other good news to mention.

The impairment stands at actually a very low level. If you purely look at the impairments on provisions, then we’re talking about €50 million.

Now you could say this is substantially up compared to previous quarter but let’s be fair previous quarter €4 million quite ridiculously low. And the €50 million on top is influenced by a model change on the IBNR side, €25 million.

So, let me translate it differently, the €50 million is 7 basis points credit-cost ratio which is as you can see on the graph is over the - what is it, seven years, eight years, historic low. And it’s also reflecting the good quality of our credit book in general.

In that respect, we have to ask that this low credit cost ratio is true for all the countries. We have seen a 7-basis point cost in Belgium, 9-basis point cost in Czech Republic, international markets stands at 3 basis points, which means if the standard fee base is fine, it means that also Ireland as a good provision, as a good kind of the cost ratio.

As a matter of speaking, as a matter of fact, and Hungary, and Ireland have seen a relief of provisions, both stand at a positive €1 million, which means that indeed the guidance which we have given earlier for Ireland, that the total provisions for the year ‘16 would be somewhere in the range of €50 million to €100 million previous quarter, we also adjusted. That would be the lower end of that range that we will review that range downwards.

And that we put the guidance for Ireland, full-year provisions somewhere in between the range of zero €40 million. Also mentioning here in the impairment side, the credit cost side which we have to mention but it’s also the impairments on mainly equity here, €20 million is booked on the AFS side and that is mainly driven because of the equity side, in Belgium KBC Insurance because of the Brexit.

I forgot to mention that on the provision side, also the loan - impaired loans ratio improved, now stand at 7.8% again reflecting the improved quality of the book. As of page 17, we do see the business units’ results.

Do allow me to very briefly tell you what it means but not to go page by page through those numbers. Summary of the business units is actually simple.

What I said for the group is mainly true for all business units. So net interest income is slightly down in Belgium but some countries even slightly up, so let’s call it stable, well-managed.

What we do see is an increase in volumes on the deposit side, what we do see is an increase in volumes on the landing side. One country is stronger than the other.

But in general they all are growing. Those countries where we don’t want to grow the portfolio, where we’re building down the likes, portfolio, they are managing their portfolios in that respect perfectly in line with our ambition.

In terms of NIM clear, all countries same message that is pressure on them is clear and that’s mainly due to the mortgage portfolio. The name of the game internally is clearly margins need to go up because that’s the only way we can maintain the current position of our net interest income.

This is true definitely, I mean, stable and growing margins definitely true for SME. And corporate book that’s true for all countries, and as I said, mortgages under pressure, exception is Ireland.

The fee and commission business is doing okay, it’s growing slightly. Insurance business, I already explained, it’s true for all countries.

And then, as a consequence of the low price cost ratio, all of them do have a good credit cost ratio. So, all countries are profitable, all the countries are generating a very good return on allocated capital.

Which brings me to the capital position and that is on slide 47. No big surprise.

I think good result is translated in a good capital ratio. It’s even better we improve that 30 basis points our capital ratio if you regard the capital ratio in relation to the regulator minimum on a fully loaded basis, then we do see that we are substantially higher, which is also good given the very hostile and very uncertain environment which we are currently in.

It confirms our position as a very solid well-capitalized institution which is also confirmed and also proven by the recent stress-test, the EBA stress test on which we communicated earlier via separate press release. Also, in terms of the leverage ratio, we have slight improvement.

We are now standing at 6% leverage ratio of group level, which is again a confirmation on the solid position KBC is in. In terms of liquidity, also there - sorry, I skipped the total capital ratio, 19.3% also substantially higher than our minimum capital ratio of 17%.

The build-up is the traditional one, nothing changed there, 81 and Tier 2 have been positioned quite similar to what it was. And the only change is that the total number increased.

In terms of liquidity nothing new to mention. Again, solid results, mainly driven by the fact that our funding is generated through our customers for a total of 74%.

And if we have to go to the market, we do maintain a very solid buffer of 278% of our short-term funding can be covered by available liquid assets, so that’s a very comfortable and very solid position. We managed it down a little bit which has positive impact on our ratios NSFR and LCR which are currently standing superior to our internal target of 105% in a substantial manner.

So, allow me to wrap up the quarterly results. This is a strong result that is driven of a very well - driven by a very well performance of all our countries and all the bank insurance activities.

Yes, indeed here and there you have a one-off but if you would exclude the one-offs being Visa, the DTAs and then also the banking taxes which we have to pay, then you would see that we had more than €620 million which is a superb result. €721 million confirms the underlying earnings track record of the previous quarter and shows that KBC is indeed a well-performing bank insurance group with a very solid capital and a very robust liquidity position.

Looking forward, we do confirm that position and we do expect that given the very difficult market circumstances, which means there will be economic growth but it will be what we call it subdued environment, so very low. We do expect also that the market environment will be very volatile because of several reasons, political tensions elections whatever.

Volatility will be given on the financial market and therefore the environment will be quite rough. But we still envisage that we can continue to build on our strength that our profitability in all countries, definitely very solid returns of the two biggest contributors being Belgium and Czech Republic.

We have already guided Ireland that loan payments would be downward revised. And that we are easily reaching our equity and liquidity target is also something which we are confirming the way forward.

Now, on the back of that profitability, and on the back of that track record of profitability, we have redefined our dividend policy. Today, we confirmed that given the high uncertainty, giving the uncertainty not only on the political, economical and financial markets but also on the regulatory environment.

We do confirm that given our profitability we intend to payout a total dividend of at least 50% of consolidated profit. Now, the payout ratio needs to be understood as the combination of the dividend and the additional Tier 1 coupon which as you know is about, is €52 million of, it’s €52 million.

So, we do confirm that payout ratio but we update and we introduce an interim dividend as of this accounting year. This interim dividend will be a fixed amount of €1 per share which will be paid as an advance to the total dividend.

This interim dividend will be paid-out in cash and will be paid out in November of the accounting year. And in doing so, we actually thought our shareholders and showed you of a more evenly distributed cash flow.

I’m sorry there is something wrong with my microphone. I hope I’m still reaching you.

So, in terms of the dividend, it will be paid out on the 18 November 2016. Now, actually this is my last slide before I hand over the floor to you, perhaps my microphone just broke down to give me a signal that I should stop to give the floor to others.

But Wim, on this occasion please.

Thank you, Johan for elaborating on the results, which brings us now to the second part of the call, which is the question time. So, the floor is now open for questions.

Can we kindly ask you to restrict the number of questions to two in order to allow maximum number of people to actually raise questions? Thank you very much.

Good morning and thank you so much for the presentation. Just two questions from me please.

The first one on the excess capital distribution, given that the interim dividend just brings forward a part of the annual dividend that you are planning for the full year, it doesn’t really change or doesn’t really solve the issue of excess capital. How shall we think about excess capital distribution going forward?

Do you think you might choose other tools to distribute the excess that you have built up? Or do you need to see more regulatory clarity before you can do so?

Thank you. That’s the first question.

And the second question on the fee and commission income outlook please. You’ve highlighted that you’ve seen some outflows in your AuM base.

I was wondering how did the CPPI portfolio changed quarter-over-quarter; whether you’ve seen some outflows there and when is the next reset period for the part of the book, so that we can think about the development of fee and commission income in the second half of the year? Thank you.

Thank you very much for your question. I will take the first one and Luc will take the second one.

In terms of excess capital distribution, at first glimpse of course we do have excess capital definitely if you compare our current ratio of 14.9% with the 11.25% which is posted by the regulator. The question is that 365, is that excess yes or not.

To be honest, we don’t know, we don’t know. There is a lot of uncertainty in the markets.

There is, a lot of things ongoing. I refer to the political instability.

I refer to the geopolitical tension which has definitely impacting our environment, economic growth, interest rate environment etcetera. That is clearly also I forgot to mention, even the Brexit and the potential impact on that one.

There is clearly also as a consequence of the policy of different central banks, it’s a pressure on the interest rates which is clearly pushing them lower for longer. And some even say lower for much longer.

So in that environment it will clearly indicate some pressure on income. But in terms of excess capital, we’re talking about something else.

We’re talking about what will be the potential impact of unknown events and then I’ m talking about a; what is on the regulatory side that we expected. We are all are awaiting for Basel IV, what will be the impact, what would be deeds, not only the impact but what will be Basel IV intrinsically entail.

We are waiting for IFRS IV, IFRS 9, a lot of things on the table which we don’t know the impact of. It would be very unwise to anticipate or not to anticipate a potential outcome.

And that’s what we currently are doing. As long as that regulatory uncertainty is not clear, I think it’s unwise to play with the cash capital distributions.

So as of the moment that we don’t have more clarity that we will make further explicit statements on excess capital distribution, in the meanwhile, we just continue to grow and finance our business as we’re doing this on the same way as we have been doing in the same quarter. What I just said is a confirmation of what we said previous quarter and the quarter before that and so on.

There are currently other tools on the table for excess capital distribution because I just defined that excess capital is something which you can only decide when you have all elements on the table, those elements are not out there. There are no other tools today to distribute what kind of capital whatsoever.

Thank you. That’s very clear.

Okay. On the fee and commission income on the CPPI in particular, there, yes, we have first of all seen some outflows as you saw.

Part of that was due to the CPPI where we deliberately moved people out of CPPI particularly those who were fully in cash and would remain in cash until next preset date. So that was a deliberate strategy of our advisory people.

The outflow on the CPI was about €1.3 billion but a large part of that went into other mutual funds, particularly into balanced funds. There was still net outflow into savings accounts, where we recognized that clients have an even lower risk appetite and some of them preferred to keep their money on an account at the moment.

Having said that, next question on the reset date is, there is about €3.7 billion which will reset in August. And some, I think in the end of October, beginning of November, €4.5 billion as well.

And that obviously will improve the margin mix and will have positive, give positive support for the fee and commission development.

Thank you. And what is the size of the CPPI book now please?

It’s now about €22 billion.

Thank you.

Yes, good morning. Two questions on my side.

The first one is on loan pricing. If I look at the loan yield for 2015, in the case of KBC it was 2.95%.

And if I compare to other players in the area, for ING it was 3.69%; BNP 3.78%. I’m just looking at loan yield.

So, indeed, it seems like you have scope to although there are business mix differences in some, but it seems at first sight you have scope to increase margin. And I was wondering what are the reasons which would prevent you to expand your margin, what are the obstacles?

Second question is regarding Brexit. What is the impact on fees and commission you think this quarter?

What is the - I mean securities, of course. What would be potentially the impact on the Irish business?

Which part of your portfolio would seem more vulnerable? These are the questions.

Thank you.

For the first one, I propose because I don’t recognize your numbers, it would be better to see where your get your numbers from and how we can give you guidance on where the difference and deltas could potentially be with some of our colleagues. So I would prefer to discuss that offline.

On the Brexit impact, Johan, do you want to respond?

On the Brexit vote, first of all, as of this quarter you saw that we don’t prefer to give any guidance anymore. We did so in the last few quarters.

Just because of the strong impact of the environment on our fee and commission development and the fact that market started to overreact, we started to guide. I think now, with the reversal of the trend which we are also guided for, I think we are in a noble situation.

We always said that fee and commissions going long-term will be a stronger growth driver obviously with some cyclical elements around this. And this means that we’ll for the next few months still be, the fee interest income will still be a function of that volatility in the markets and risk appetite.

The only thing I can mention as I mentioned before in the previous question is that there will be a reset date for the CPPI product, about €3.7 billion in August. And another €4.5 billion in end of October, beginning of November, that rest will go into both partially equity, partially bonus with an increase in margin, so it gives some support.

And sorry, for the Irish business?

Yes, on the Irish business, it’s difficult to see what the overall impact will be. We think overall there is a small portfolio of U.K.

loans but it’s mostly in home loans and very small one. So we’re not exposed strongly to commercial real-estate unlike some of the Irish competitors.

They potentially are indirect the fact given that the Irish economy is quite dependent on U.K. economy.

So the indirect effect there will probably be some. But very difficult to see at the moment how strong that will be.

But it’s mostly indirect credit related.

Thank you very much.

Yes, good morning everyone. Two questions please, both on the stress tests.

The first question’s on your capital outcome. It seems like in the stress test, an 80 basis point move in interest rates hits your capital base by about 160 basis points.

So, I just wanted to see if you could comment a little bit around that sensitivity; if you think the EBA has captured the right sensitivity of your capital. And if it has, if you could just talk more broadly then about, I suppose, that 340 basis points of excess capital that we’ve been mentioning already this morning, quite how big a management buffer you think you need to run if you have that level of capital sensitivity to relatively small moves in the yield curve?

I know we’re all talking about flat yield curves forever, but just in the off-chance that that doesn’t happen. The second question is then on the net interest income side from the stress test.

In the baseline scenario, I think there’s a mention that you lose about €1.6 billion cumulatively from NII over the three years from the marking to market of - I think it’s just the bond portfolio, but it says assets. If you could just talk us through the experience of that baseline scenario and if that €1.6 billion of reinvestment yield risk is an accurate number that we can use?

Thank you.

On the capital impact of interest rate movements is primarily on the bond portfolio as you said because obviously with the excess deposit we have, we have a large bond portfolio and although a large portion is out to maturity, there is still lot of bonds which of course take that hit. We believe this is a stress test and it does not take into account any management actions if this interest rate movement would occur in reality.

There are some factors which are not fully captured by these models, only partly for example are LM derivatives. This captured some extent but not fully.

And also the fact that our pension obligations would also decrease is not entirely captured by the stress tests. So that has to take it with a pinch of salt.

Obviously we remain vulnerable that’s correct. But this is truly a mark-to-market effect, not affecting our P&L.

On the question on the interest rates on the baseline, I would prefer to discuss this a bit more offline because we can become quite technical on this. So if we can discuss either offline today or tomorrow morning in the group, that would for me I think be better for the whole group here.

Okay. If I could just ask one quick follow-up on the capital sensitivity, you say take it with a pinch of salt, but if we were to think then 130 or 150 basis points sensitivity to an 80 bps shift in interest rate, how does that inform your management buffer going forward, because, clearly, you wouldn’t want to have a capital base that’s sensitive to that small shift in interest rate, so?

Yes, absolutely. We’ve always said that we want to have a management buffer, dynamic management buffer over and above the minimum requirements.

And part of that was, as we always said was the volatility of our assets and liabilities to an interest rate movement for example or spread movements for that matter. We should also take into account and obviously this is not captured in the solvency requirement that we’re also the insurance company, which also is dynamically managed and has a longer duration liabilities.

So if interest rates were to move, our technical provisions would come down and would be an offsetting factor. Obviously, unfortunately and we have stress test at ECB, not captured in the Danish compromise and not currently.

But we look at it from an economic perspective as well.

Understood. Thank you.

Thank you.

Yes, hi to everybody. Two questions from my side as well.

The first one is on the dividend. I’m just trying to understand if what you are looking for is to grow your dividend on annual basis from the base set in 2016, so it won’t be only a function of the payout ratio, but also to grow the absolute level of the dividend.

The second question is linked to Ireland. I think that’s going back on the page 40.

We see like the exposure in PD 10 is increasing, or is decreasing quarter-after-quarter, but the provisions attached to that are increasing. I’m just trying to understand if you are trying to increase the coverage ratio over there, or if the decrease that we are seeing in the absolute exposure is linked to more reversal going forward.

Thank you.

I didn’t catch your first question quite entirely, could you please repeat it?

Yes, sure, sure. I’m just trying to understand if you’re going to grow your dividend on absolute level from the base you set in 2016 onward or if you will just rely on the payout ratio as guidance?

So, what we announced today and what is the confirmation we said before is that our dividends will be at least 50% of our profits. So our consolidated profit.

We don’t give any in that respect any further guidance or what it will be nominally because we don’t give profit guidance. So in that respect nothing has changed and we are, I mean, it will ultimately boil down to our profitability by year-end and then you can compare ‘15 and ‘16.

So, guidance is same, at least 50%. And that at least is triggered by the uncertainty in the markets and that will be decided by our board and approved by our AGM.

Otherwise nothing has changed.

Okay, thank you.

On your next question on the PD 10, the impairment, sorry the exposure in PD 10 slightly decreases as you saw in cover ratios increase. The two affects, first of all, there is a positive migration of PD 10s out of the impaired book into the performing book on a net basis.

These are usually the best loans obviously with lowest cover ratios. That’s the first element.

The second one is some adjustment in the model where we slightly change the strategy for certain pools from a cash - sorry from a retained to an exit strategy, but this is just a minimum impact but it also increases the coverage ratio there as well.

Okay. Thank you.

Yes, good morning everybody. Two questions on my side, the first one is on the volume growth.

How should we think about volume growth, loan growth in the coming quarters? You have been able to post, I think, 4% in Belgium, 10% in Czech Republic.

This is very strong. I was wondering if you could clarify the outlook, also in relation to what you’ve said on the necessity to improve the spreads on the asset side.

And then the second question will be on the deposit volumes, 5% Q-on-Q in Belgium; 3% in Czech Republic. Clearly, this is going very strongly.

But I was wondering if you could tell us a bit about - talk about the profitability on this margin all the deposits you are getting in. Is that a loss-making new business for you?

And then just briefly if you could clarify if you have time, why Solvency II ratio went down to 187%, seems that you have changed the different tax liability assumption in the ratio, and it’s a big drop quarter-on-quarter. Thank you very much.

Going back to the first question, indeed we have seen strong volume growth in majority of our countries. And you referred to Belgium and Czech Republic but also in some other countries we have seen a strong growth.

And the good news is that this is due to both mortgages and commercial loans both in SME and corporate banking side. What the expectation is going forward is that obviously I mean, then we have to look at different countries, let’s start with Belgium first.

It is clear that the growth we have seen is obviously linked to two things. The first one is, the reputation of the bank and that is rock solid and after the stress test it’s probably even further improved.

And the second one is obviously economic growth and a combination of economic growth with pricing. As you know, KBC’s policy is intrinsically simple profitability is the priority number one.

And we are not going to go into price wars whatsoever. What we have as message clearly is also that given the low interest rate environment, we have to work on the margins.

And what we do think is that we can follow the growth at least keep the pace which is seen in the previous quarter but that we are not going to boost that growth despite of our margins. That’s definitely given.

By the way in Belgium, we have seen a small decline in the mortgage side and that is due to the fact that in the Southern part of this country Wallonia, CBC Banque has built up this market share quarter significantly. And they have done this at lower margins.

But that policy is under review as well. Same is true for Czech Republic, and all the other Central European countries, their margin is indeed quite crucial.

The pressure is on the mortgage side, the SME and the corporate banking business are doing quite well. And we are able to build volumes at the base of our market share or even most countries slightly higher than our market share.

And this is something which you can expect going forward as well. And in terms of deposits, yes, indeed, we have grown our deposit book.

Luc has already explained in Belgium where part of that deposits come from, that is from the outflow and asset management that is parking fortunately the majority on current accounts, where we still are profitable. On the saving accounts that’s another story.

And that is obviously loss-making. The two elements, first of all that is the lower interest rate environments for our asset side.

And the second one is we have a floor in Belgium over 11 basis points which is the absolute minimum which we have to pay to our customers. Next to that and some people tend to forget that it is everything which is deposited on the saving account we have to pay banking taxes as well and if you make the combination of all that, that’s loss-making, no doubt.

Therefore our policy remains the same that is we do consider saving account as a parking lot for money. And if customers really want to keep their money for a longer term then they actually should better invest in other products which yields more for them and which obviously also has a positive return for KBC and then I’m talking about asset management for our Life Insurance products and for more sophisticated customers market dealing with products.

Regarding your second question, the Solvency II ratio, yes indeed it has dropped. One has to make a remark that and it is a quite technical one.

The reason why the Solvency II ratio has dropped to 187% is almost purely technical because of a change of a regulatory requirement. Now, the regulatory requirement is imposed upon us by the National Bank and therefore we are an exception within the European framework, it’s a kind of let’s call it gold plate, no, no, let’s not call it, it is gold plating by the National Bank of Belgium.

And they actually limit the DTAs as very brief summary and give you a far more detailed explanation of the study technical. Actually what they do is the details which have saving taken into account of the calculation of the Solvency II ratio are now limited to the extent of the DTAs.

And therefore that cap kicks in. Without the new methodology imposed upon us by the National Bank of Belgium, the Solvency II ratio would stand at 208% coming from 210% which is actually stable.

So, it’s because of a regulatory change which is very particular for the Belgium National Bank.

Great. Thank you very much.

Hi, good morning. Two questions, please.

First of all, on dividend, I agree with Anton that there’s no excess capital distribution with the new policy. However, I think it’s still a big statement paying earlier - committing earlier to dividend than waiting for February next year.

However, would that be - mean that, actually, despite all the headwinds from regulation, regulate and all the stuff you listed that mean that even M&A is not any more on the table? Actually, you’re not seeing anything imminent, so you can distribute capital earlier, so the first question.

Secondly it’s on the NII. Are you I mean, following Fortis Belgium, in terms of re-pricing of your mortgages?

Also in terms of LCR, 132%; clearly, you can go lower than that, probably closer to your 105% target. So what would be the tailwind from these two positives?

And how that would offset the pressure from lower investment yield? Thank you.

Thank you for your question. Coming back to the first one, the dividend question, is M&A off the table?

I mean, actually our policy remains the same, already in the previous quarter we stated that KBC is in current position profit generating as seen in all countries, we’re profitable. But we would like to strengthen our position in some of those countries.

The ambition on the banking side, we want to be top-three top-four. And we’re definitely not there in some countries.

How we are going to do that, ultimately and per definition we’re going to grow organically. And that’s what we currently are doing.

I would also like to refer to my previous answer - answer to the pervious question. And this is something which we’ll continue to do in the future going forward.

Now, if by occasion some assets will come to the table being portfolios or being companies. In core countries which are our core countries then we will look at those files.

So that’s not off the table. But we will continue to do that assessment in a very sound, let’s call it KBC way.

That means, if it adds value, so it needs to add strategically value, needs to fit into our retail SME and corporate book, both on banking and the insurance side. If it comes at a fair price, so that it can contribute in the long-run but also in the medium-term run to our returns, then we will consider.

If it does not fulfill those characteristics or features, then definitely we are not going to invest. So to make it 100% clear, we are not going to embark on a new adventure in a new country, new can be defined as another country than one of our five or six core countries which we do have.

And then coming back to your second question on the re-pricing of the mortgages, yes indeed we see and this is true for the Belgium market where you were explicitly referring to. But it’s also true for the Slovakian market where you have indeed price and going on.

We do see re-pricing ongoing in Belgium in the second quarter. If we give you a little bit of more detail then actually the peak in 2016 of re-pricing took place in the first quarter, at the end of the first quarter it was peaking.

Now it’s coming slightly down. But the total amount because the three months were actually quite big in terms of re-pricing where it’s quite significant.

And more than €1 billion whereas the previous quarter was around €911 million, is now €1.3 billion. Now the re-pricing is done under certain, at a certain cost no doubt.

The guidance which we give around that is that for every €1 billion that we do refinance in the mortgage business is will cost on the hedging side €13.5 million, we compensate that because we sell at higher margins €7 million. And we do have a one-off, so only one year benefit of about €8 million on the prepayment fees.

Now, it means that the first year of prepayment, make profit and that contributes positively to the result but as of next year, the refinancing in ‘14 are going to contribute negatively. The same thing is true for the peers, if it’s Fortis, if it’s Belgium, if it’s another bank they all have the same amount of refinancing.

The only difference is we do not step in aggressively. As a matter of fact, because our policy of margins, we do see some outflows on our re-financing towards our peers because we stick to a sound margin.

I read in the newspapers by the way that also the CEO of Fortis Belgium declared that the name of the game for them is also margin.

And on the last question LCR, yes, we have relatively high LCR at the moment. In order to get that we in June had some volatility due to Brexit, and in such circumstances we always prefer to have strong liquidity that for IV also improve the LCR ratio which accounts a bit more longer-term, well longer-term more than one month funding.

Could become down potentially but it is the fact that LCR is quite volatile, given its percentage and driven by balance sheet items which are volatile particularly in the dealing rooms. And so, we always have a buffer substantially above what we call €105 minimum target.

Okay, I mean, if I can just maybe be more precise on the M&A questions. I understand your policy, but it was more about, I was referring, to be fair, to big M&As.

In Belgium it’s Belfius or PTSB in Ireland, and where are you in this? Thank you.

So far as my knowledge reaches Belfius, it’s not for sale. And as far as my knowledge reaches PTSB is not for sale.

So it’s a hypothetical question.

Okay, that’s very clear. Thank you.

Good morning and thank you for the presentation. I have just a few follow-up questions.

The first one is on dividend. I appreciate you already talked a lot about it.

But can you perhaps explain how will you go about calibration of the payout ratio at the level of more than 50% for this year? Will it take into account only ongoing profitability and capital consumption or is there anything else?

In other words, do you see any reason why at this point in time you would still see a benefit of strengthening of your capital ratios? Then I have a second - a follow-up question on M&A as well.

You mentioned in your opening remarks a couple of times, political instability as a factor that still plays into how you think about deployment of the capital. Does it impact right now, the way you think about potential M&A within Europe, but also within CE?

Thank you.

Thank you for your question. Going back to the first one, I do fear that I’m not going to add too much to what I already said.

In terms of calibration, what is important that something which is indeed influenced by a lot of elements that is how much uncertainty is there in the market and how big is the impact potential impact of that uncertainty? That is obviously when we take into accounts all the elements to calibrate then definitely the regulatory impact is on the table.

I referred to salary reports which have been issued on the back of Basel IV proposal papers you can do the assessments yourselves. But it goes from big impact to rather small impact for KBC but it is uncertain.

The other element which is clearly there is that another element of uncertainty is what will the ECB decide on the capital ratios for the banks going forward. So 2017, we will be informed at the end of November officially.

We are currently at 9.75 plus 50 basis points domestic SIFI buffer by the National Bank Belgium, so 10.25, fully loaded 11.25. Is that going to change?

I don’t know. We’ll see.

We hope for the better. We have buffer for the worst.

So we’re comfortable but we still we don’t know. And then obviously if you relate it to the previous question of one of your colleagues, we are growing our business and indeed did grow is organic.

M&A is the potential possibility due to very strict conditions, but if it would occur, that obviously also impacts our capital position. Those are the elements which we are going to use for calibration but uncertainty is by far the biggest driver.

And then coming back to your question on M&A is the political environment influencing our decision? As far as the situation is today most of our countries are not being impacted by the political and geopolitical tensions which do occur.

But obviously if that would change, then we take into account assess assets or file, clearly the political situation to consider if it’s worthwhile to pursue, yes or not. But at this instance, I don’t see big issues in the current countries in which we are present to offset any kind of potential interest.

Thank you very much. Can I just follow up on the regulations?

You mentioned that this is still a risk factor on your side. Now, during the last quarter we’ve seen a number of political declarations.

One of the most notable was from European Finance Ministers that essentially put the statement together suggesting that the Basel IV should not have a meaningful impact on capital position of European banks. Do you see this dialog also at the level of - do you see this maybe message repeated when it comes to dialog with your own regulators, because you mentioned that you have more visibility on the regulations in your opening remarks?

I mean, I can give a comment, this is taped by the way, I can a give a comment about politicians have said in the past and how much they have realized of that. I think that is a common understanding and they have to be very careful with what they do with regulation in order not to hamper the economic development in Europe, definitely after the Brexit so that’s another issue to deal with.

But I mean, if we have to anticipate uncertainty, amongst others driven by regulation, then we do it in a conservative way at KBC group. We have been in 2008 and ‘09 and this is where short of capital and we don’t bump in.

This is the situation that we are short of capital again, because of either element. So, honestly, we’ll see.

All statements made, one of them will be potentially true, I don’t know which one. And therefore we can’t tell you at this time.

Okay, that’s very clear, thank you.

Good morning everyone. Just a couple of questions from me.

Firstly, in your slide pack following the EBA stress test you showed that on a constant balance sheet you would lose about €100 million in NII per year. Do you think that’s a fair assumption of the annual drag you are facing annually on NII in a lower rate environment pre any volume growth?

And then the second question is just on KBC Ireland, obviously again another decent set of results there. Do you have any updated thoughts on your plans for the subsidiary and as you think about your plans for KBC Ireland, you’ve probably seen some of the press commentary that RBS has reiterated that Ulster Bank is a core part of its business post Brexit and it would be open to considering potential tie-ups.

Having TSP is not pursued for sale but governments do approve increasingly open to M&A options. Do you have any initial thoughts on either these two companies that would rule-out any discussions with them as well?

Thank you.

I will take the second one on KBC Ireland, so our policy in terms of or strategically in terms of Ireland has not changed. So stick to where we are, to where we were sorry that is we’re making Ireland profitable.

And the first two quarters have shown a €53 million profit so that’s on a good track. And we are in that respect quite comfortable that we will achieve that profitability which we guaranteed or which we guided for the market by year-end.

As on the back of that profitability, we emphasize that in Ireland we have as a consequence several options. And the options I mean, we can, then we will stay in Ireland, running a profitable bank which is now becoming a full retail bank, growing profitable manner that’s precondition number one this is the case and that this option number one.

The second option is indeed that you do it in a far bigger way and there is a consolidation we do Royal Bank of Scotland, some other options are potentially on the table. We’ll see, we’ll consider but I already indicated in answering some previous questions how we look at M&A and how it needs to contribute to our results.

So, merging just for the sake of our merge or taking hope for just for the sake of a takeover doesn’t make sense at all. So that’s a separate judgment.

And then tackling the two other options for Ireland that is becoming a bank insurance group, you know what it means. And then in Ireland the third option is if all of this is not able, then we will axe Ireland no doubt.

But we will give you further clarity and strict guidance as we sat on the back of the second, on the back of the full-year results of 2016 so that will be somewhat early ‘17.

And then on the, your question on the NII, in the EBA stress test I would not prefer to go into detail on this perhaps, we can do that tomorrow or offline with the investor relations department. But just as a general comment, the EBA stress test is based on well, some very strict parameters.

And methodical constraints, I’m sorry, which in reality will not happen. For example, we cannot pass on the cost of increased funding to our customers when interest rates rise, then normally we would reflect that in the deposit prices as well and we are constrained there.

So therefore we have our lending portfolio, interest rates on that is also capped and so on. So, it’s a hypothetical situation which in reality we believe can be managed differently.

Secondly, when we compared to the life situation we’re in now, what does it mean for us, well the scenario is actually completely different there. ECB stress test assumption and the baseline and at worst scenario interest rates are increasing mostly strongly depending on the scenario whereas now we’re facing a low-yield environment which is completely a different situation.

So it’s difficult to compare what it will do in the real world for us at this point in time.

Okay, thank you.

Thank you very much. This basically sums it up for the call.

Unfortunately we have to stop here. It leaves me only to thank you for your attendance and the interesting questions.

And we look forward to see you tomorrow at 8:30 at KBC at Old Broad Street. Thank you very much.

And enjoy the rest of the day.