Wim Allegaert – Investor Relations Johan Thijs – Chief Executive Officer Rik Scheerlinck – Chief Financial Officer

Pawel Dziedzic – Goldman Sachs Jean-Pierre Lambert – KBW Stefan Nedialkov – Citigroup Tarik El Mejjad – Bank of America Alicia Chung – Exane Rajesh Kumar – Societe Generale Matthew Clark – MainFirst

Yes. Good morning from the headquarters of KBC in Brussels, and welcome to the KBC call.

Today is Thursday, August 10, and you are on the KBC Group earnings call for the second quarter results of 2017. My name is Wim Allegaert.

I’m Head of Investor Relations. Today, we are in the company of Johan Thijs, Group CEO; and Rik Scheerlinck, Group CFO.

Both will comment on our results and answer questions you might have on KBC. As usual, we will take more or less half an hour to guide you through the presentation to – for the analysts, which was posted this morning on our corporate website, kbc.com.

After this, it is question time until around 10:30. This conference call is taped, and you can replay the conference call via our website as from this afternoon on until the 25th of August.

I’d like to mention as well that Investor Relations and Rik Scheerlinck are organizing a sell-side analyst meeting in London tomorrow at our offices in the city, which is Old Broad Street, 111. This meeting starts at 8:30 local time.

It will be an excellent opportunity, we think, to delve a bit deeper in our financial results and have a dialogue about this. We’ll definitely make sure there’s freshly brewed coffee, and we would be very pleased to have you over there.

And for now, it’s my pleasure to give the floor to Johan Thijs.

Thank you very much, Wim. And also from my side, a warm welcome to this call of the second quarter results of 2017.

And we do it on a traditional basis, which means that we always start with the key takeaways. So let me open with saying that is, indeed, €855 million profit for the quarter, an exceptionally strong quarter.

It translates itself in a ROE of north of 20%. And for the half of year, we have been posting, as a consequence, 1 point – almost €1.5 billion of profit, which gives us an ROE of 20% for the year-to-date, which is a very, very, indeed, good result.

If I only look at the second quarter results, then I would like to add that in that result, actually, only one-off is really included, and that is an adjustment which we have made on the modeling of our provisions in Ireland. This is an – actually, an annual review of totaling €40 million positive impact.

But all the rest is actually boiling down to our traditional business. Let me quickly, very briefly go over some of these topics.

We have been seeing our customer volumes in terms of loans and deposits going up. We have been seeing our net interest income performing in very difficult circumstances very well, with a slight increase.

We also give you some more color what it actually means in terms of our announced ALM management, amongst others. Fee and commission business has again performed at a very high level.

We have been performing very well in the non-life insurance business, but also quality- wise – not only sales but quality-wise, an extremely good result. And then last but not least, the impairments have been coming back quite significantly.

We have for the full group, for this quarter, a write-back of €71 million, which is quite exceptional. Also, as a consequence, this is driven by a write-back – a further write-back of loan loss provisions in Ireland.

Because of the one-off I earlier mentioned, we are going to review our guidance given only 1 quarter ago, and it’s now updated to the range of €160 million to €200 million for the full year. It will be no big surprise to say that liquidity position of KBC, which has always been strong, has been further improved but also, and it’s a very important one, that our capital position, with 16.7%, actually stands at a very high level.

This is the first quarter where we have balance sheet-wise consolidated the acquisition of UBB, Interlease in Bulgaria. We have not consolidated P&L-wise.

That is going to happen in the third quarter of this year – as of the third quarter of this year. And capital-wise, we have been able to fully absorb the acquisition of UBB, costing us 50 basis points in only 1 quarter, which, again, is an expression of the capital-generative power of KBC Group.

I’m also very pleased to confirm what we earlier set in all occasions, amongst others, at our investor event in Dublin in the 21st of June, that is that we are going to pay out an interim dividend of €1 per share in the course of November and that we stick to our guidance in terms of our dividend policy being at policy – sorry, being at payout ratio of at least 50% of the consolidated profit that is to be booked by the year-end. Let me then talk you through a little bit more into the detail.

Traditionally, we also give you a split-up, on Page 6, of bank and insurance is a traditional one as well. For this quarter, most of the time, the split-up is about 85% versus 13% for the insurance company; this time, it’s 87% versus 13%, so quite a normal quarter.

And let us not waste too much time here, and let’s immediately go into the NII. NII is slightly up quarter-on-quarter, down year-on- year.

In essence, it is very simple to explain. We continue to see the low interest rate environment putting pressure on us and the reinvestment yields.

We do see pressure on commercial margins in some of our core countries, not all of them. And we do see significantly lower upfront prepayment fees in the mortgage business and actually has almost completely dropped that.

So prepayments are gone, and as a consequence, the prepayment fees are back to normal levels. What we do see in the positive side, on the other hand, is that we are still able to lower our funding costs, and we have seen a further good performance in terms of our growth of our assets and liability side.

Mortgages are up 2% on the quarter, 4% on the year. And deposits are up for the rest of the activity 2% in the quarter and 8% on the year, which is a quite good performance.

Now let give you a little bit more flavor by looking into the detail of the net interest income and also on the net interest margin. Actually, if you look only at the banking side, the net interest income is 2% up on the quarter, and that is, given the very difficult circumstances, actually good news.

Also, we have emphasized that already in previous quarter, and this time, we also give you a bit more flavor in terms of a slide in this PowerPoint presentation. We have been further working and arbitraging on the difference between the euro and the dollar.

So we have been playing on that carry, and we have been taking positions in that respect to further boost our total profit. Now the impact of doing so is a bit different line to line of our P&L.

We are issuing certificate of deposits in dollar, swapping them into the euro and then, obviously, deliver on the carry difference between the euro and the dollar. The problem is that the bottoming of the dollars generates negative NII, but as the FX swaps generate positive outcome, but that is booked under the financial instruments at a fair value, so in other line the impact of doing so net is at 15 – roughly €15 million per quarter.

So that is roughly €50 million per quarter in the first quarter but also in the second quarter. So profit-wise, we are talking about a positive impact.

The net – negative impact of this arbitrage on the NII is €48 million – sorry, €45 million, which is clearly depicted in the graph on Page 7. But if you want to have a clean graph where we make the adjustment, you have to look at Page 78 in your annex, where this is depicted without the impact of what we call the dealing room activities.

So 78, you can see the full detail. Now if you would adjust all those elements as if they were not to happen, we would have €50 million indeed as profit.

But we would have €1.73 billion of net interest income, which is €20 million more than previous quarter but which is also €2 million more than same quarter previous year, which actually shows the great – I mean, the actual performance in terms of the net interest income. The same effect is true for the net interest margin.

So we have been doing what we have been doing, and that has a downward pressure on our net interest margin. So the 186 basis points, which you can see on Page 7, are negatively influenced by the positions which we have taken in the dealing rooms.

If you would adjust that position as if it would not have happened, then our net interest margin would go to 195 basis points compared to previous quarter, 194 basis points compared to previous year. 194 basis points means that we have been able to manage away the impact of the low-interest environment.

That detail is provided on Page 78. The reality line to line is on Page 7.

So in that respect, I think indeed, it’s quite an effort with a very positive result. Another element which contributes a lot to the P&L line is the fee and commission business, and again, we do see a very strong quarter.

€430 million is a – It’s €70 million more than previous year, so it’s quite an achievement. And it’s only slightly down compared to previous quarter, which was a top quarter over the last couple of years.

So in that respect, it’s perfectly in line with what we saw in the first quarter, and it is on the back of a – the launch of a product – a new product mainly in Belgium called the expertise Easy Invest. That is extremely successful in the sales, in cash and management.

This increase – well, let me continue on the €430 million. €430 million fee and commission business is also generating us net – extra net sales.

If you compare the net sales with previous quarter, then we have been doubling our net sales. If you compare the year-to- date, which we’re talking about, that’s half year of 2017 net sales with the full year-to-date of 2016, we’re talking about a times – almost a times 3 effect, so it’s substantially up compared to previous quarter; it’s substantially up compared to previous year.

In terms of other elements, a bit more detail there. Quarter-on-quarter, year-on-year difference a little bit.

We have a little bit lower quarter- on-quarter securities-related fees, but still the security-related fees are at a very high level. We had an exceptionally strong first quarter.

If you compare it with previous years, it’s substantially up. We are talking about €9 million extra.

Other elements are mentioned in this slide, and we’re not going to dwell on this. Assets under management stand at €215 billion.

That is a slight decrease on the quarter, but that has to do with the fact that the new business generates – the Easy Invest product generates a different type of approach. And we do see some outflow in group assets.

That’s mainly driven by the life business, which are investing in govies or other stuff which are no longer taken under the assets under management and the reduction of investment advice, which is shifted into the new product Easy Invest. And that has obviously an impact under – upon assets under management.

What about the insurance business? We have there a bit of a mixed picture.

The non-life business, which is a perfect diversification for our life business amplicyclical, is doing extremely well. We see on the premium growth, earned premium, plus 6% year-on-year, plus 7% on the written premium.

We do see also, and that’s very important, quality-wise, we have a stellar result, 84% combined ratio, very long time now insurance business, not in my mind, a combined ratio after 6 minds – after 6 months, which is only 84%, so this is an excellent result. This is true because of business unit Belgium, but it’s definitely also true because Central Europe, where the sales in non-life business are really picking up, Czech Republic, plus 13%; International Markets, plus 17%, 1-7.

Also quality-wise, both entities, International Markets and Czech Republic, are performing sequentially better than the combined ratio target of 94%. The life business is a bit of a different story.

We are on Slide 10, where we – sorry, on Slide 9 – no, Slide 10, true, where we see the life sales going down substantially. We are talking about a decline year-on-year of 26%, which is quite significant.

And if you split that up between interest guaranteed products and unit-linked products, then you see a minus 36% for the year-on-year results in interest guaranteed and a minus 8% for the unit-linked business. Reason is quite simple: the low-interest rate environment, which has been taking in the success of the alternatives which we can offer as a bank insurer as KBC and expertise product, 35 basis points interest guaranteed in Belgium is obviously not that attractive if you compare it with the possibilities which are offered under the asset management umbrella.

So in that respect, logical consequence from the bank insurance concepts, the unit- linked business is hampered by high tax levels. 2% tax needs to be paid upfront, so that is definitely hampering the evolution of unit-linked.

Clearly, we will have an eye on that for the quarters to follow. Let me go to Slide 11, where we talk about the fair value gains.

Here, you have double consequences. We see an important performance improvement here, €249 million for the quarter, which is substantially more than previous quarter, but it’s also substantially more than previous year.

It has been boosted by two things. Let me start with what I already explained, the dealing room income.

So dealing room income, both in Belgium and Czech Republic, has been performing extremely well. In Czech Republic, impact of the de-packing of the Czech koruna and the positions which we have taken have played a significant role.

We have benefited extremely well from this event, causing a strong increase of the dealing room not only in the first income – not only in the first quarter but also in the second quarter. And then the other element which played an important role is the positive change in ALM derivatives.

We are talking about a €73 million positive impact compared to – €72 million positive impact compared to previous quarter but also a substantial positive impact because of the – because of the comparison with the second quarter. Fair value gains stand at a €62 million because mostly the realization of fair value gains on shares, and we are talking about €44 million out of the €52 million; €8 million is realized on bonds.

The other net income is almost in line with the run rate, which normally stands around €50 million, so this is a very normal quarter. The first quarter, as you remember, was positively skewed by a positive outcome in legal file.

So in that respect on income, normal. In terms of operational expenses, we are currently having year-to-date cost/income ratio of 53%, which is doing, compared to our long- term target, perfectly well.

Long-term target stands at 54%, so it’s perfectly in line with our plan. The impact of the bank taxes on that cost/income ratio is obviously of an enormous size an enormous size.

The number which I am talking about has been flattening out those taxes over the year. If you look at pure operational expenses, then we do see an increase of 3% on the quarter, 5% on the year, and that is mainly driven by higher staff expenses, mainly in Czech Republic, and also the higher ICT costs.

Both are related to the staffing up and the expenditures which we are doing on our digi track – on the digitalization track, which we have been talking about in Dublin at the – during the investor event on the 21st of June. So in this respect, we are perfectly on plan.

In terms of taxes, you can see on Page 13 what the impact of the banking taxes are. 11% of our operational profit is now related to bank taxes.

If you would exclude the bank taxes out of the operational expenses, which I think makes a lot of sense, then our cost/ income ratio would drop to 47%, which is clearly a very good and a very low number. But they are what they are, we have to pay them, so let’s keep them in mind, 11% of our operational expenses.

Other good news is on the side of the quality of our loan book, Page 14, we are talking about the asset impairments. The nitty-gritty stuff is the impairment on AFS is €2 million and also impairments which we took on the revaluation of some leasing activities in CSOB.

But let’s forget about those, it is talking about €7 million, not worth to talk about it. What is worth to talk about is the impairments on the loan book.

And we have, as I said in the introduction, for the first time since I remember, a write-back for the whole group together combined for the full quarter. €78 million is a quite substantial amount, and this is driven, yes, indeed, by Ireland.

We are talking about the write-back of EUR-back of €87 million, which is mainly driven by the retail book but also partly, as a consequence, by the corporate book. And this is due to, amongst others, the further improvement of the quality of the book.

As you know, Ireland is, as a country, performing quite well. We do see that reflected in the number of customers which had nonperforming – which were nonperforming in the past and which now are returning to performing, that’s indeed good news; but also in the increase in housing prices, housing prices, which do influence our modeling and our models.

So in that respect, we have been recalibrating also one of those models, taking into account the evolution, amongst others, in housing prices, and therefore, a one-off of €40 million is included in that €87 million. As I already stated, the review of the guidance is a consequence.

We just shifted the one-off into the guidance which we earlier gave. So the €120 million up to €160 million for the full year in terms of loan loss provisions is updated with a one-off which we realized.

The annual revision, €40 million is included, so the new guidance is now €160 million to €200 million going forward for the full year in Ireland. I remind you, we also saw some write-backs in other countries.

We are talking about Belgium, €4 million; we are talking about Hungary, €9 million, which I think is indeed an exceptional result. And as a consequence, the 0.10% credit cost ratio of KBC Group is obviously very good but is definitely something which is not sustainable going forward.

In terms of our – improvement of our impaired loans ratio, we’re now talking about 6.9%. This is influenced by the consolidation of UBB.

And if you would exclude ABB – UBB, then we would have a impaired loan loss ratio of – sorry, an impaired loans ratio of 6.5% so clearly, further continuation of the improvement quality-wise of our book. In terms of the business units, which are explained as of Page 15, to save some time and to do – free up some time for questions, I’m not going to go into the detail.

It will be no surprise if I say that all business units performed very well: Belgium, €450 million of profits; Czech Republic, €183 million; and the International Markets, €177 million of profit, driven by €99 million, Ireland; €25 million, Slovakia; €47 million in Hungary; €8 million without UBB in Bulgaria. We expect UBB to add for the second half this year another roughly €15 million to €20 million to the results of CIBANK for the third and fourth quarter to come.

All the other elements, net interest income, fee and commission business, also fourth. I can easily translate by saying, listen, actually, what we set for the group is true for the most of the business units.

In terms of – let me then go to – let me see which page we are, I suggest to go to – immediately go to Page 42 where you can see the returns per business units, which are quite high: 26%, Belgium; 47%, Czech Republic; and 30% for International Markets, clearly depicting what I just said. And then the balance sheet is explained as of Page 43.

Volumes are up 4% on the year on loans, split up between retail and commercial loans: 2% for the retail; as consequence, mortgage commercial loans are slightly above 4%. And 8% on deposits.

On Page 44, you can see the detail per country. Also there, it’s clear that in those markets where we want to grow our book, it is growing.

And because of – because the consequence of the build-down our legacy activities in Ireland further continues, we are able to further build down our legacy exposure. The negative growth of the loan evolution in Ireland is fully explained by that, so we’re building half down on legacy that we are building up the new book in terms of loans.

In terms of our solvency and liquidity position, I am at Page 45 now. Let’s talk about fully loaded.

KBC now stands at 16.7% of the common equity Tier 1 ratio under the Danish Compromise. That is very well if you compare it with the 10.40% pro forma regulatory minimum, including the 100% basis point guidance pillar 2 pillar.

We are talking about a substantial overperformance. If you compare it with our own capital targets, which stands at 40.60%, clearly performing very well in that respect.

Again, repeat, this is after the acquisition of UBB, so we fully absorbed the 60 basis points of UBB in one single quarter. In terms of our leverage ratio now stands at 5.7%, which is same as previous quarter.

This has been influenced, obviously, by a number of positions which we have taken to – amongst others, to go for the improvement of our NII at – and financial instruments at fair value trades, so that has been boosting our balance sheet a little bit. And as a consequence, our leverage ratio now stands at 5.7% for the first quarter and the second quarter of this year.

But indeed, this is a good number. Page 48, we talk about capital ratio.

Currently, it stands fully loaded at 19.8%, way ahead of our targets, so also not too much news to tell there. Liquidity-wise, KBC Group is doing extremely well.

68% of our funding comes out of customer bases, which gives us a very solid basis to work upon. And if you look at the wholesale funding short term on Page 50, it’s depicted that what we need is easily covered by very liquid assets, if need be, can be realized overnight, 400% coverage, which is obviously a very good result.

It will be no surprise that our liquidity ratios, both on the short term and long term, are exceeding substantially the regulatory requirement of 100%. That is depicted in the table on Page 50.

And it is a further confirmation of the very liquid position of KBC Group.

So let me wrap up the quarter. It was a very good quarter with an exceptionally strong result.

The bank insurance model, again, has proven all its qualities, and all the countries are contributing to this result. It’s indeed good news.

It enables us to boost our profitability, confirming solid capital and very robust liquidity positions. The way forward is, in that respect, actually the same as what we said in the first quarter.

We expect that the contribution of profitability for all countries will remain very strong. And it’s also clear that the business unit International Market is indeed now a solid third – becoming a solid third advantage for our group.

There is something extra. So after the second quarter in Belgium, the Belgian government, in its conclusion on the budget for 2017 and 2018, was reviewing certain aspects.

And one of those elements which they concluded was, amongst others, the reform or the planned reform of the Belgian corporate income tax regime. As you know, Belgium has currently a 30 – around – let me round the numbers to 34% tax rate, corporate tax rate.

And the government is – has planned to reduce that tax rate to 29% in – as of the accounting year 2018 and to 25% as of the accounting year 2020. Now this obviously, if you want profitability, is good news.

This has an impact, and the impact is twofold. There is a slight impact on the capital side.

We’re talking about a little positive shift upwards of 0.2%, so 20 basis points. That has to do with, amongst others, the revaluation reserves which go up; in effect, that risk-weighted assets go down.

But the biggest impact – and that is fully related to the way the calculation goes for the deferred tax assets. The biggest impact is short term, that we do have a negative P&L impact as of the fourth quarter of €230 million, again, because of the lower tax on the tax loss carryforwards has an impact your DTAs, and that needs to be calculated IFRS-wise going forward.

Now the €230 million will be obviously recuperated over time in function of your profitability. And as of 2018, we will start to benefit from the lower income – from the lower corporate tax rate.

And the expectation is that we can recoup that €230 million by the end of 2020. So in a couple of years’ time, that will be recuperated.

And as of then, this will have a positive impact on our P&L. I would love to keep it there, and I give back the floor to Wim, who will guide us through your questions.

Thank you, Johan. So we’re going to open the lines now for questions.

[indiscernible] limit the number of questions you asked to then will, will be sure that maximum number of peoples can actually rise the questions. Thank you.

So I understand the floor is now open for questions.

Good morning and thank you for the presentation. I will have two short questions.

So first is just a follow-up on the comments you just made about the tax reform. So would you be able to help us quantify exactly the benefit going forward, because obviously it’s not essentially clear from outside what impact the tax reform will have on your effective tax rate.

You mentioned that you will be able to regain €230 million loss this year by the end of 2020. So do you see essentially an uplift or – of a benefit of €60 million, €70 million per year going forward?

And also a follow-up on the tax reform. If you look at the dividend payout this year of 60%, can you confirm that this negative charge of €230 million will be taken into account, so you – the fact that dividend might be a little bit lower?

And then the second question is on your cost. You also made remarks in your opening statement that the costs were higher on the back of ICT and staff expense related to the digital investments.

In Dublin, during your Capital Markets Day, you mentioned that around €250 million should be allocated to the projects this year. Can you update us of how much of that number has been already spent in the first half in the second quarter of this year?

Thank you.

Thank you very much for your questions. So let’s start with question number one, the tax reform.

Yes, indeed, we do have the negative impact and the recuperation, as I said, by 2020. Obviously, that is due to a lot of elements.

First of all, the loss carryforwards, then – you can find them in our annual report. But also as it take into account our profitability going forward.

Now we cannot provide you the full detail because we don’t give guidance on our profitability going forward. But let me, as a kind of an example, give you a little bit insight how it could be implemented by using 2016 as a reference.

Then if the tax drop would go from 30 – so the first half from 34% to roughly 29%, then we would have a positive impact of €66 million, which is actually split up over different countries. But that will give us too much – I don’t spend too much time on the detail.

Be aware that not all countries have the same impact because of their loss carry forwards. We can provide you the detail if you want to, but we do that – we prefer to do that offline.

If we go down to the next of 29% going to 25%, you will have an additional impact of roughly €69 million. And that is also different country per country.

But summary, €69 million. And indeed, your analysis was correct, if you add the two together that we are talking about, combine a €135 million roughly.

And then its math. And then if that continues going forward, you are recuperating net present value wise indeed the €230 million in a period of max two years.

So going forward, indeed, it has a positive impact. But as I said, because we don’t give profit guidance, we cannot give you the detail on what it means going forward.

The other element was the dividend payout, how we are going to deal with that. So indeed the €230 million will go through the P&L and that will obviously influence our profitability going forward.

Are we then going to pay out less dividend? That’s another question.

So our policy is confirmed today, we are paying out at least 50% of our profitability of this year. So answering straightforward to your question, yes, it’s part of our profitability.

What about the total amount of dividend? That’s something else that has to do with what we are going to pay out in terms of payout ratio, and that’s another decision.

It is at least 50%. Then on the cost side, I will hand over to floor to Hendrik, who will give you the full detail.

Good morning, come from my side as well. Yes, indeed, as you mentioned correctly in the Dublin Investor Visit, we announced an extra expenditures for digitalization and transformation at a rate of about €250 million per year.

And if you look at the expenses for the first six months, we are on plan in our expense for those investments.

Can I come back for one second. When I was explaining I made an error.

I said about the impact when I talked about the €60 million, the €69 million, I said it is having a different impact if you look at different countries, I was talking about different business units, business unit Belgium, business unit Group Centre, obviously, it is only a tax reform for this matter of [indiscernible] in Belgium.

Understood. That’s very clear.

And maybe if I can come back just to your answer, you mentioned you are on track when it comes to spend. But does it mean that roughly half of that was – is in numbers already or not?

I guess my question is because I try to understand if there will be inflation of your cost base in the second half of the year purely on the account of allocation of this spend over different quarters?

Yes, on track means that we are about half, sometimes we have timing differences. But when you look at operational expenses, you look at six months versus six months, we are up 3%.

So that is actually in line with the expectations and in line with what we have told you in Dublin.

Alright, that’s very helpful. Thank you.

Yes, good morning. Two questions then on my side.

The first one is about the treatment of NPL in Ireland’s. Once these NPL get performing or how do you treat the NII?

I mean, you have about 40% of impaired loans. Are you booking the NII currently, I mean, the interest income?

Or is it switched into reserves? The second question is in fees and commission.

There’s a big jump quarter-on-quarter in banking services. I mean, we are talking about from €268 million in the first quarter to €407 million in the second quarter.

And the comments in the management’s report is an increased stock lending activity. So I’m just curious about this, is this asset management?

Or is it related to insurance equity investments? And what if – is this a one-off?

Or is it a new product you introduced? Or is it – why is there such a big jump?

Thank you.

Jean-Pierre, thank you for the question. On the first question the – what do we do in terms of net interest income on the cured assets.

Indeed, once the asset gets cured, once the client starts paying, that indeed is then coming back into net interest income, so the part that is net interest income.

So in other words, you’re not booking net interest income for about 40% of your loans in Ireland, is that correct?

No, indeed, so nonperforming loans are not booked at net interest income. So they’re not performing, we don’t accrue net interest income on nonperforming loans.

And then, Jean- Pierre, with your second question, just to be sure that we understand your question right. You’re talking about the difference between one – quarter one and quarter two in terms of the banking services?

Yes, that’s right. This – banking services, there’s a big jump in income, which is associated with increased stock lending activity?

Yes, that is indeed true. There’s indeed a big uptick there in both income as in expenses.

And that has to do how we have to deal book accounting wise with stock options has to do with the client indeed who wanted to convert to shares. And because of the technical consequence, we can give you the full detail of that, but I prefer to do that offline.

We have indeed that uptake, which you see in the quarter one, quarter two difference.

So the pair of one-off is seasonal effect, is it?

Yes, that’s purely seasonal, that has to do with one position a customer has taken and that’s purely technical from an IOS perspective.

Thank you, very much.

Hi, guys. Good morning.

It’s Stefan from Citi. two questions on my side.

On Slide 70, I believe of the presentation you talked about your capital deployment strategy and in particular how you would invest your excess capital? And I believe this is a comment you made in Ireland as well, but it’s definitely now on Page 70.

You say that you would invest only if the investment is positive to the group ROE. So my question is, in the past, some of you have made comments that M&A, for example, would be done if it’s simply increases the cost of equity for the group.

And today you say, black and white, that you would only do it if it accretes to the group ROE. So which one of these is accurate?

Is your benchmark your cost of equity? Or is your benchmark your existing group ROE?

And on my second question, it has to do with the PNL spreads in Belgium on the front book are coming down, both mortgages and commercial lending. Obviously, you don’t give us the actual numbers.

It’s kind of hard to read the numbers using a ruler and a pen. So if you can just give it to us, is the front book above the back book at the moment?

Is it tracking the back book or is it below both mortgages and commercial lending? Thank you.

Thank you for your question. And let me first answer the question on the ROE and the investments, how is that related.

Actually nothing changed, knowing this is what we also said in the past. What we are doing is we are considering when we do an investment, several elements.

First of all, we are not going beyond our geographic footprint, and the second thing is actually more strategic and financial. So as it is strategically.

And then the second part, does it fit financially? And what the latter means is that obviously we want to do investments and we look not only in the short term, I mean, we also look at the midterm in terms of the contribution of that potential acquisition.

I’m talking about two things there, return on investments, and then coming back to your question, return on equity. What we cannot do is look at what we currently have is return on equity, which is 20%, and then say, listen, every investment needs to contribute at least 20% because otherwise we are not going to do it.

This is not what we mean with the sentence. What we are saying is through the cycle ROE and every assets which we have needs to contribute on the three levels, but not including the financial aspect.

So positively through the ROE is indeed meant not point in time but through the cycle. Let me also emphasize that if we consider acquisitions, every acquisition is indicated taking into account the standards of KBC, all of them, meaning the way we stear our business, and that includes return.

As you know, we don’t have a ROE target outstanding.

Okay. Great, thank you.

And Stefan, when we look at the evolution of the margin on the production for mortgage is indeed, we can confirm that the margin on new mortgages are still above the back book. For commercial mortgages, they have been coming down in the second quarter.

They are still higher than the portfolio as a whole, but they came down from what in the second quarter.

Thanks, very much.

Hi, good morning everyone. Couple of questions, please.

First of all in terms of the reform on the Belgium corporate income tax. That’s clearly positive but within the budget, did you identified any potential negative for banking sector, i.e., higher tax levies or any other contributions?

Secondly, on the capital return strategy. I mean, clearly your capital buildup has been faster than expected.

You’ll probably finish the year higher than 16%. So you have 16.6% target, including the 200 basis points buffer for M&A, but that was like for sort of midterm target.

Now that you will get there probably in first half next year, would that mean that, I would like to have your thinking about the 50% payout target you have for 2017. Would that influence your thinking there?

And also in terms of M&A, you mentioned few times that permanent TSP in Ireland or other options could be on the table, but the pricing was quite high and so on. Now these shares went down massively for the last few months.

Would that be of interest? Or your new strategy in Ireland is purely digital and organic growth?

Thank you.

Thank you, Tarik. Great questions.

I mean the first one is very difficult to answer in terms of the tax reform. Indeed, the impact of the tax reform is positive.

And definitely in the case of KBC where our profitability is close to stellar, that will be having a positive impact. There are other elements in the what I call the summary agreement in the – of the government.

But the problem is that it is – it’s so unclear that nobody really knows what is going to happen. So the details of what they are doing is still to be worked out.

One of them that has big attention in the Belgian press is the reform in terms of extra taxation for private individuals for their securities accounts. But what it really is, what it really means, and I know it from first hand, so the Ministry of Finance itself, that still needs to be worked out in the course of the next coming six months.

So it’s very early days to comment on that. In essence, all the things which we know today which are part of the summary agreement of the Belgian government has little impact on KBC.

The only caveat I said is we don’t know yet what it really means in terms of the extra tax on the personal level. We have fought the dirty player, in that respect as a management business amongst others.

And because the detail is not known, needs still to be worked out, I cannot comment on that. The other question in terms of capital, I think your analysis is correct.

So the reference capital target which we have set in Dublin, 16.6%, will be reached somewhere in the course of ‘18. And I mean, in terms of capital distribution or deployment of capital, actually nothing changes.

Perfect example of what we said in Dublin, and what we said in Dublin, what we showed this quarter is actually proving that what we said was a perfect guidance going forward. In terms of M&A, I never said that we were looking at PTSB, definitely not.

But I mean, you’re right, the prices have come down massively. We don’t only look at price, we look at quality.

And PTSB is currently not on our table.

Very clear, thank you.

Just a – couple of questions for me. Firstly, on fees.

Obviously another strong quarter on fee this quarter. Can you give a sense of how much of this was driven by entry fees on the new discretionary product versus management fees and others, vis-a-vis, helpful to get a sense of the actual sizing there?

And then secondly, just going back on NII. Obviously, we have seen extreme activity.

The net interest margin has been broadly stable over the last few quarters. How would you see the dynamics of the net interest margin in the banking business playing out going forward given the dynamics between the reinvestment yield and lending margin pressures versus the lower funding costs?

Can we expect more stable margins going forward ex the dealing room? Or at least towards the end of this year into next year?

And then what thereafter? And then also secondly, are you able to give us any sense of the net interest margin sensitivity to rising rates in the Czech Republic?

Thanks.

Yes, thank you for the question. On the first question, so the shift from mostly CPPI into the new discretionary products, I think we already guided you in the first quarter or we told you in the first quarter that the run rate is about €25 million per day.

So if you look at the first five months since the product is in existence, we have shifted between €2.7 billion, €2.9 billion in assets under management from other products, mostly CCPI, into the new discretionary product.

And then going back on your second question, we’re talking about NIM, I understood that you want to have guidance in terms of NIM in general, but also specifically for Czech Republic, as was it only related to Czech Republic?

No, for the group in general, and then also taking out Czech Republic.

Okay, thank you. The – in terms of NIM, it is clear that, purely NIM, if you making traction of the dealing room impact, so the trades which we do on the euro and on the dollar, if you make an exclusion of that, we still will place a pressure on the NIM going forward, and that has to do with a low-interest rate environment, which is kicking in clearly on our reinvestments.

And then secondly, also commercial pressure will be there. The commercial pressure is a bit different country per country, so it’s quite difficult because we don’t give an explicit guidance on NIM.

Difficult to purely say what it is. Some countries goes up, some countries is clearly that we have a downward pressure.

And – but let me say, NIM, the expectation is indeed in general, slightly downward pressure, which we offset by volume growth, but that’s another story. Then we talk about NII.

In terms of Czech Republic, you indeed have rightly pointed out that they are performing very well, 301 basis points for the quarter, which is higher than previous quarter. This is positively influenced by the positions which have been taken in terms of the euro and Czech, krona debunking and that is positively contributing €9 million.

In terms of the net interest margin, it depends a bit in Czech Republic. Again, on the products, we do see on the mortgage downward pressure, but we are very – we are able to manage our SME in corporate business quite well in terms of the net interest margin.

The level of 200 – 301 basis points is actually rather on the high side because the trade speciality on the Czech, krona, and so they will probably fade out in the course of the next coming quarters. And they will generate a little bit of downward pressure, without that trade, I would say slightly downward pressure.

But at the level of 300 basis points be far away from the 186 basis points, which is the level of group.

Thank you.

Hi and good morning all. Just one question from me, please, on your funding plans.

You have it in your Tier 1 and Tier 2 bucket. But you’ve got large Tier 2 call coming in early 2018 plus you’ve got some €3 billion issuance from ATR internal emerald target.

So can we expect some sub debt later this year or say in 2018? And what about holdco senior?

You got decent maturities coming in ‘18 and ‘19. Any plans out there?

Thank you.

Yes, thank you for your questions. So indeed we have been looking at the possibility to issue some Tier 2 this year, and we expect to do some in the second half of the year.

On the holdco senior indeed, we are watching carefully our emerald targets, as you know it is not final yet, so we are still waiting for the final number, and we will keep issuing at the pace in line with what we have been doing this year and last year.

Okay, thank you.

Hi, thank you for taking my question. One of my questions was regarding the dollar euro play that you were describing earlier.

Could you please describe it again, since I didn’t get it as well earlier? Also, I wanted to ask about the NIM per share on the commercial lending margin, probably if you could go back on it again, as to what will you see going forward?

Thank you.

So thank you for your questions. Going back to the arbitrage on the euro and on the dollar and the euro.

So what you actually do is, by the dealing room in Belgium we issue certificates that are typically short term. We have been actually issuing about €10 million, $11 billion in that respect picked up by customers.

We have been – what – and that is generating obviously a negative net interest income. We have been swapping that to the euro.

And that – there was swaps obviously on that basis, we do generate positive outcome. Because yet – as you know, 2 lacs because of the negative interest rate on the euro, the paying of the minus becomes a positive, we have the positive on the dollar and that generates us positive income.

The excess liquidity which we have to be deposited back at the ECB to pay there for a negative interest rate. And the whole balance of this exercise is positive as a consequence.

And the problem – only problem which we have is the positive one is €60 million, as I said. The only problem which we have and that made that a bit difficult the first quarter to understand, that is net interest income which is negatively generated is booked online, the positive income of the FX swaps is booked in the financial instruments at fair value, so we have been booking – we need to book that our x, y’s in two different lines, and therefore the confusion starts to happen.

But as I said during the presentation, Page 78, you see the net interest income without the trades in the dealing rooms in Belgium. And then on the commercial loan business,

Yes, so basically, what we have been seeing depends really region per region, country per country. As I said on the mortgages, there is pressure on margin but we are still able to book new loans at higher levels in the bank book.

What we see on the commercial side depends country-by-country and Belgium as I mentioned already in the last quarter, we have been seeing some pressure on the corporate and the SME side. In the Czech Republic, actually, we have seen on the commercial lending side stabilization or even a very slight uptick in the margin but it has to do with the product mix.

And also in the other countries in Central Europe we have actually seen on the mortgage side, stable to somewhat increasing margins in Hungary, somewhat decreasing in Slovakia, but not dramatically. And then on the commercial side, flat till up a little bit on the higher SME side.

Thank you, very much.

Good morning. Couple of questions, please.

Firstly coming back to the dollar euro arbitrage trades. What maturity are you issuing?

And I’m just trying to understand how much longer this can persist because it look like there were dollars euro dislocations at the end of September and end of December, but the basis swaps seems to have normalized. I am just wondering how long we can expect this to persist or whether it runs substantial course in the next few months if you only took out 6 months paper or something like that?

So any thoughts that would be helpful. And then secondly, could you update the 13.6% peer level reference CET1 ratio for where it is at the half year stage, I think you indicated that, that would be a moving target, so I just want to know whether that’s moved or not?

Thank you very much for your questions. So the issuance of the instruments for the dollars euro trade are typical of the short-term instruments to the 3 months, so in that respect it’s quite clear.

How long it will last? We actually – we are working and arbitraging on the carry between the dollar and the euro and as you know, this would can and will continue a little bit longer.

Obviously, this is also triggered by the demand from our customers side.

Are you taking principal rest of that?

No, no, not at all.

So it’s hoping to last.

Yes. The second thing was the peer level which we used for our own capital target of 14.6%.

As we stated in Dublin, we review that principle once a year. And we only have announced within June it’s a bit to already review it, so it’s 48.6% going forward.

Okay, thank you.

It’s me again, just 2 quick follow-up questions. Could you share with us what was the split between entry fees in 2Q and management fees as well?

And secondly, just on Ireland, of your NPL ratio which is running at around 40%, how much of that is due to waiting for loans to officially be declared performing? And are we talking about potentially the NPL ratio declining quite meaningfully in the next 1 to 2 years?

Or is there a fundamental reason why you still have, basically, the highest NPL ratio in Ireland?

Yes. Stephan, on the entry fees versus asset management fees what we have seen in the second quarter is about 20% entry fees and about 80% asset management fees.

On the Irish side, what you have seen in the second quarter, the impaired portfolio on the retail side dropped by €161 million. In the first quarter, it fell by €191 million.

We see that the cure rate in our portfolio is picking up a little bit, that has to do with the microeconomic situation in Ireland and with the employment picking up. So I think what you going to – what you have seen in the first half of the year is probably going to accelerate somewhat in the second half and then continue next year.

Thank you. And just to clarify on that.

So there’s no – any element of technicality here in terms of people paying but still being classified as an NPL because technically the ECB requires you to wait a certain amount of time before it becomes a performing loan again?

Indeed, there is no technical elements, but as we also stated in previous quarterly results announcements, we are quite conservative in the way how we deal with those periods, so the observation periods. But the pure straightforward answer to your question is no.

Yes. I wanted to come back with negative change in market credit and funding value in the financial instruments at fair value.

In the presentation, you mentioned the derivative portfolio. So I was wondering if you could describe the composition of that portfolio.

Is it in treasury, ALM, insurance, banking? If you could give some flavor of what’s behind that.

Thank you.

Yes, that’s a very detailed technical question but actually the bulk of that position was a treasury position and it had to do with actually Czech crown, euro swap, where in the first quarter basically you have seen a significant widening of spreads between – in the swap. And that widening of spreads came back to the normal position in the second quarter and that is actually the bulk of what you see in that line.

Thanks very much.

Okay, so since there are no further questions, then this sums it up for the call of today. I’d like to thank everyone for listening in and asking questions.

And I hope to see as many of you, if possible, tomorrow in London at 8:30. Thank you very much, and enjoy the rest of your day.