Wim Allegaert - IR Johan Thijs - CEO Hendrik Scheerlinck - CFO

Flora Benhakoun - Deutsche Bank JP Lambert - Keefe, Bruyette & Woods Benoit Petrarque - Kepler Cheuvreux Stefan Nedialkov - Citigroup Pawel Dziedzic - Goldman Sachs Bruce Hamilton - Morgan Stanley Rajesh Kumar - SocGen Credit Research Alicia Chung - Exane BNP Johannes Thormann - HSBC Alex Koagne - Natixis Nick Davey - Redburn

Thank you. Very good morning from the headquarters of KBC in Brussels and welcome to the KBC call.

Today is Thursday, November 16, 2017. And you are on the KBC Group Earnings Call for the third quarter results of 2017.

My name is Wim Allegaert. Today we are in the company of Johan Thijs, Group CEO, and Hendrik Scheerlinck, Group CFO.

Both gentlemen will comment on the quarterly results and answer your questions, questions you might have on KBC. As usual, we will take a bit more than half an hour to guide you through the presentation for the analysts which can be found on our corporate website KBC.com.

And after this there is question time until around 10:30 Brussels time. This conference call is taped and can of course be replayed via our website KBC.com until the end of this month, November 30th.

I would like to mention that Investor Relations, Hendrik Scheerlinck are organizing a sell-side analyst meeting in London tomorrow morning at our offices at 111 Old Broad Street. And this starts at 8:30 local time.

This quarter again it will be a very good opportunity to delve a bit deeper in the financial results and discuss further with us. The stewards will have coffee available to facilitate the conversation and we would be very pleased of course to have you over.

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

Thank you very much Wim. Also from my side a warm welcome to this conference call.

We will start as usual with key takeaways for KBC Group and so let me start with first of all the overall results of the third quarter of 2017 which ended with a strong €691 million which is given circumstances very good results and which is also translated in a high ROE of 19% over the first nine months of this year. The third quarter result was influenced as always by one-offs, but allow me to mention too that actually we have a release of provisions at the nonlife and the life insurance company in Belgium which are due to accounting standard changes and which total €49 million.

But on the other hand we also had a additional provision which we already explained in a separate press release of €54 million in the provisions which we booked and which are relating to the tracker mortgage review which is currently ongoing in Ireland as you know on mortgages which have been originated before the summer of 2008. If we combine the two one-offs then actually the €691 million is negatively influenced for €5 million -- more or less €5 million.

So in essence key takeaways, actually the commercial franchises of KBC Group in all our core markets and core activities have been performing very well. Both on the bank, the insurance asset management side things are doing very well.

We have seen customer loan volumes increase, same is true for the customer deposits. We have seen actually a very good net interest income performance.

Definitely if you take into account what we have been doing in the dealing rooms which as you know we explained it already on the previous occasions which has a negative impact on net interest income but which has a clearly positive impact combined on the P&L. We had a good performance in the fee and commission business, definitely if you take to account that July and August are holiday months and that obviously has a negative impact on your sales.

We have good results in the dealings which translates at high fair value income on the financial instruments. And in terms of quality both the insurance company nonlife combined ratio 83%, excellent.

Cost income ratio of the bank stands year-to-date at 54% which is perfectly in line with our target and then the impairments which are low for the whole group they are heavily influenced obviously also by a net impairment release of €26 million in Ireland which is perfectly in line with our guidance which we earlier gave for the full year. You remember that we said €160 million to €200 million will be the range for the provisions, loan loss provisions releases in Ireland full year.

So we keep that guidance also for the remainder of the year. And what we have seen in third quarter is perfectly indication for doing so.

Now it will not be a big surprise, good performance once again translates in a good liquidity and in a good capital position. The capital ratios, full loaded phased-in both hover around 16% for the full group but as the leverage ratio of the group stands at 5.8%, both excellent numbers, liquidity wise we are far beyond our target in that respect.

We are very pleased to also announce the €1 dividend per share. Now let me go into the details.

Normally we always start with the bank insurance split-up. This is obviously also influenced by the releases on both the nonlife and the life side.

Actually we are now standing at 81% of profit generated by the bank versus 90% of the insurance company. But this will be further on explained.

So I prefer to switch to the net interest income, which is on Page 7. Honestly I actually prefer to start at Page 8 where we do the correction for the net interest income generated through the dealing rooms.

You know that we are doing, trading on the basis of the difference in currencies between the euro and the dollar and the Czech koruna and the euro. And that has two legs, those traits, one leg is a negative one which is the net interest income side and positive one is the fair value income on those financial instruments.

Now the combination of two creates positivity on the P&L. But for reasons if we split up that explanation of P&L block wise I prefer to start at Page 8 where we exclude the impact of that dealing room activity.

And as you can see on Page 8 the net interest income has been going up in the third quarter. This is due to, amongst others, the impact of UBB.

But even if you exclude the impact of UBB then you can see that actually the net interest income is flattish which is given circumstances quite good. The traditional explanation for the impact, the net interest income evolution still holds.

What we do see is the impact of the low interest rate environment which clearly kicks in on the reinvestments. What we do see is competition which is quite strong.

We do see indeed that margins are under pressure in certain markets, definitely in the mortgage business. This is true for Belgium, Czechoslovakia but also true for Czech Republic.

We still maintain to do a good management on margin in certain countries but margin is under pressure, therefore it declines with 3 basis points in this quarter. On the other hand we are able to increase our volumes in general on the loan book.

The margins have been -- sorry, the volumes have been increasing with 6% on the year. And I mean comparison year-to-year and with 1% comparison quarter-on-quarter.

This is different for one country for the other, but in general I think this can be seen as a good result. In terms of the inclusion of UBB let's express explicitly that UBB contributed €28 million to the net interest income for this quarter.

This is for the first time that we include UBB in the results. We will come back later on other lines of the P&L.

The €28 million is indeed the contribution in NII. If you would exclude that as well then, as I said, it will slightly increase the net interest income which clearly indicates the good performance combination of margin and volumes.

Now if you neglect all this and you just look at the bold numbers how it's accounting for, you have to go back to Page 7 where you can see that net interest income is still increasing on the quarter but clearly goes down compared to the year. But once again this is influenced by elements which are done on purpose and which have in essence nothing to do with it.

What we also see is that the prepayment fees are back to normal. We are currently having €6 million of prepayment fees in the group which is going back indeed to, let's say, the run rate for prepayments.

If you compare it with, for instance, a year ago, we're talking about €10 million less of prepayment fees. So in essence net interest income given circumstances was doing quite well.

What I forgot to mention on Page 8 was the net interest margin. If you exclude all the elements which I just talked about, then you can see that the net interest margin is actually flattish at group level.

So we currently stand at 196 basis point. If you compare it with previous quarters it's 1 basis point down.

If you compare it with 1 year ago it's slightly up. But again here this is after taking out or taking into account all the nuances which are worthwhile to consider.

Let me go the other line which is very important that is fee and commission business. We're on Page 9.

Fee and commission business is €408 million which is given the fact that we have with July, August and why not September a holiday month or a holiday period which is actually a good result. This €408 million compares to the €430 million, 5% down previous quarter but clearly goes up 11% compared with the year.

Now this includes also a €12 million UBB contribution. When you would exclude UBB there we will be going 8% down.

If we look at the building blocks of that fee and commission business, let's start with the less important building blocks this time. So securities were slightly down because of the seasonality of the activity.

And then on the banking fees we clearly see a fundamental increase of the payment services with €17 million on the quarter which is quite significant therefore good contribution. On the pure asset management side and fee business generated through the life insurance business, the life insurance business still remains under pressure.

I'll come back to that later on. So entry fees for unit-linked life was down and in terms of the mutual funds business we saw lower entry fee compared to previous quarter for good reasons, holiday season, remember.

And the second thing is that on the management fees we saw a slight increase which is good news. In terms of assets under management, we currently stand at 217 billion, which is a clear indication of the pricing effect on this assets under management.

The increase of 4% was merely explained by that positive price effect. But for good understanding also this quarter was characterized by a net positive sales.

So also from the pure sales perspective this quarter was characterized in a positive manner. Let me go now to the nonlife insurance business.

Once again a strong quarter from the insurance company nonlife. We have seen an increase of premium with 6% if you talk about earned premium, 7% if you talk about written premium.

The performance is not only good on the growth side and then clearly Central Europe is growing double digit numbers but also the performance is very good in terms of the combined ratio. 83% is a extremely good number.

After nine months, because these are combined numbers for the full year, after nine months 83% is historic, historically low. If we would exclude the one-off effect which we have because of the release of provisions these are [indiscernible] provisions which are due to the Belgium activity.

If we would exclude those and calculate back the new combined ratio it would be standing at 86% which is still a exceptionally low number. So quality wise excellent, growth wise excellent.

As a matter of fact we cannot say precisely the same on the life insurance business. Growth has been going down a little bit compared to previous quarter.

We're talking about €4 million which is not a big deal, but still. Also on the unit-linked side that's clear that it's hampered by two things the low interest rate environment and the high taxes which we have to pay in Belgium on these products, 2%.

But if you compare it with the year then it's clear that the third quarter is 10% down. So it's quite significant and it's a clear indication of the very difficult environment we are currently in for this type of product.

Also in the life business we had a release of provisions, the [indiscernible] reserve in Belgium because of accounting standards is going to be, is released and therefore it has a impact on the results of €33 million. In terms of the fair value gains, I'm on Page 12 now, the quarter-on-quarter numbers are down.

But once again this is influenced by the mark-to-market of ALM derivatives. We have seen a positive €11 million this quarter which is substantially down compared to the 73 million in the previous quarter.

What is far more important is the dealing room activity. Once again we had a good performance on the dealing room because of our trades which we undertake as I and my colleague, Hendrik Scheerlinck, have been explaining in the previous quarters as well.

So once again we do a substantial amount of activity in the trading between euro, dollar and Czech krona, and euro in full acknowledgment with the respective national banks. The dealing room activity was down compared to previous quarter, which was a record quarter, but it's still €127 million contributing to the fair value gains.

Last but not the least we had a little bit of corrections on the traditional fair value valuation CVAs, FVAs, MVAs which was had positive effect of €18 million compared to the quarter €30 million compared with the year. In term of AFS gains.

So on AFS assets, €51 million which is mainly due to the realization of €49 million via shares, so capital gains on shares. And then last but not least other income.

It should have been a normal quarter. The run rate as you know is more or less €50 million.

That would have been the case if we would not have taken the provision for the tracker mortgage review which is currently ongoing in Ireland and we -- as we have explained in the press release we have taken a position of booking in the range of €40 million -- €60 million. We booked actually for the €60 million.

And that has been expressed in a minus €54 million contribution to this line of the P&L and therefore the total stands at €4 million. But otherwise it would have been a normal quarter.

The €54 million is related to the tracker mortgage discounts still ongoing in Ireland and we'll see what it brings. A good element on the other hand is the operating expenses.

We are on the next page. I don't see immediately a number here, it will be Page 13.

The cost income ratio stands at 54% for the year. If you look only at the quarters it's even also extremely good, it was 55%, which also means that we are able to manage our cost in a very difficult environment.

Let's remember that in Belgium wages are indexed to the inflation and the inflation is close to 0 -- the 2%, it's not 0, 2%, and therefore it has a substantial impact on the cost side. Also we do see pressure on the wages in our Central European countries where, as you know, the unemployment rates are close to zero and therefore it has an upward pressure on the expenses.

But still if you look at the combined effect of all these elements, expenses of staff, IT cost, professional fees so on and so forth, then we do see that the expenses are flattish. But if you exclude UBB, which contributes €20 million to this number then the expenses are down 2% on the quarter and are flat compared on the year.

So that is actually good news because indeed we are already staffing up for our digital transformation which is currently ongoing and which is perfectly on track with the plan. In terms of banking taxes, €18 million for the quarter.

It remains a very substantial amount which has already been paid for, and it's 11% of our operating cost. If KBC -- let's just assume that doesn't have to pay banking taxes and all the contributions for all kinds of funds then our cost income ratio would have stand at 47% which would be given the markets and the activities are -- would be extremely well.

In term of the loan impairments, if you only look at the pure loan impairments we stand at €50 million, which is very good, to use an understatement. This is influenced by in essence through contributions.

Belgium contributed €27 million, that was due to one single file which we provided for €31 million and was released in Ireland of the €26 million, again a release in Ireland of loan loss provisions which is bringing the total, as we said, a bit more than €160 million. So all the other countries have had also very good performance.

When we talk Hungary it's zero contribution, Czech Republic one and Bulgaria and Slovakia both €7 million brings a total of €15 million which is indeed a good number. If you look at the credit cost ratio for the full year it currently stands at 5 basis points minus which is indeed an historic low and obviously is not representative for the way forward, but it is something which clearly expresses the quality of our lending book.

And these also explains the improvement of that quality in Ireland. In terms of the NPL ratios, we currently stands at 6.6%, of which 3.7% is for the 90 days past due.

This is mainly influenced by Ireland which is positively evolving and has been negatively influenced by the consolidation of UBB in the numbers as you can see in the graph. On the business units I suggest for the sake of time and to have enough room for questions that I just skip the business units.

In essence all businesses have been performing well. We can talk about net interest income and fee and commission business so on and so forth, but in essence all of them are more or less in line with what I just said.

This is true in general. Here and there you have [indiscernible] which is a little bit different.

In ROAC, that is on Page 41, you can see what it brings, for Belgium 27%, Czech Republic 44% and the international markets business units it's at 24%, also a stellar performance. Let me go immediately to the capital ratios and the liquidity ratios.

We are on Page 45. If you look at the evolution, and most of the time we only take into account the fully loaded Basel III ratio, if you look at the evolution risk-weighted assets we were able to manage that in a stable manner, €91 billion risk-weighted assets, capital improved and therefore our current ratio stands at 15.95%, which is a good result and which is clearly ahead of our targets or at least of the target of ECB standing at 10.40%.

You remember that we had a pillar two guidance of 100 basis points. Our own capital target stands at 14.60% and our reference target as you know is 16.60%.

So this is a good result. It is also explained and expressed in our leverage ratio, currently stands at 5.8% for the banks and 4.7%.

But you know that [indiscernible] to the group. In terms of the solvency ratio of the insurance company also very good performance, 221%, which is a clear indication of the soundness of this solvency -- of this insurance group and it's 4% better than the quarter.

Total capital ratio, Page 47, stands at 20% almost, 19.94%. The building blocks are explained on the page.

I suggest not to spend time on this. The only thing to mention there is indeed the good result.

Liquidity wise KBC has always been a strong performer and this is confirmed again this quarter. We stand with a 77% -- sorry, 67% customer-driven liquidity.

Obviously perfectly in line with our history. What you can see is indeed that we have been increasing little bit the certificate of deposits and also the short-term funding which is 100% related to the short-term trading opportunities I've been talking about earlier in this call.

In terms of ratios, yes, the liquidity ratios as we note them, NSFR and LCR stands at respectively NSFR 130%, LCR 150%, clearly above our target. And then also the short-term unsecured funding, this is covered almost five times in liquid assets.

So in that respect KBC has very strong liquidity position. Let me wrap up this call by saying that again the third quarter was a strong quarter.

90% return on equity is a very high number given circumstances, given the low interest rate environment and the competition, so on and so forth. It again underpins our earnings record and it also gives me the confidence to say that also for 2018 we expect that most business units, Czech Republic, Belgium, international markets will be very strong contributors to the net result because countries will be picking up.

Bulgaria will be then benefiting the full integration of UBB and therefore also the other countries which have been growing will be, continue to grow. I am talking Hungary and Slovakia.

In terms of guidance, we think that the impact which is given of the first-time application of IRS will be more or less in the range of 45 to 55 basis points including the reclassification of the banking book. We talked about the one-off impact of a review of the Belgium corporate tax regime and so -- the income corporate tax regime.

This has not changed. The only thing I have to mention is until today I've not seen yet a lot of legal and legislative action.

So we'll see. But normally it should have been -- it will be in place as of the first of 2018.

We again repeat our intention to call the coco and the guidance for Ireland for the release of the provisions €160 million to €200 million for the range in 2017. I would suggest to keep it here and give back the floor to Wim who will guide us through the questions.

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

Can we kindly ask to restrict the number of questions to two? By doing that we will have maximum number of people being able to ask questions?

Thank you.

The first question is regarding the Belgian NII which even if we remove the lower prepayment fees and dealing room income has step down this quarter. So I was wondering whether you could explain why and whether you expect this to continue into Q4 and next year.

And the second question is regarding the fee income this quarter which I found a little bit weak considering also the contribution from UBB this quarter. Although I know that Q3 tends to be seasonally weaker.

So whether you would explain here your view into the next quarters as well?

Thank you for your questions. Let me start with the first one, the Belgian business unit and the impact of the expenses on the net interest income.

Indeed if your -- if you look at the numbers straight forward then Belgium has an impact which is negative. And so the net interest income is coming down.

And that's clearly driven by the traditional elements which we see and we have seen in the previous quarters as well, that is the contribution of the dealing room effect, the reinvestment yields and then also the impact of the prepayments which is now fully taking in. So the prepayments more or less stopped.

We have only €6 million of contribution of prepayment fees this quarter which means we are back to normal territory. But obviously all the prepayments which have been happening in 2014, '15, '16 have been, as you know the first year is mostly time positive but then the impact of the hedging costs kicks in and this is now having cumulatively for the first time in 2017, that's what you see.

What we do see as well is pressure on margins and it is clear in the SME corporate business. We have been able to manage that margin in a positive manner.

But there is a very high competition ongoing in Belgium between all the market players on the mortgage business. And in the recent quarters we have been managing our margin.

But that came to the detriment of our volumes. We have been adjusting our position, that's what is translated now in our margin which has come down on mortgages which now stands slightly below 100 basis points, so 98 basis points.

That is on Page 20 of the pack. Now in terms of volumes we have been able to keep pace with the markets on the commercial line business because of our push in the second quarter for margins.

In mortgages this was really the case in mortgages, we restored our volumes because of the lowering of the margins and that's what you see in the results. So this is a clear pressure on Belgium driven by mainly competition, and that is translated indeed in the numbers.

The fee and commission business I think Hendrik will give you the answer.

Yes. Good morning.

And a warm welcome to everybody on this call. Indeed as in Q1 for the fee and commission income, as Johan already said, we have seasonal factors in the third quarter, two elements.

First of all lower entry fees. Lower entry fees is a result of lower new money coming in because of the vacation period, but there are also less switches during the vacation period as people do not go through their portfolios like they do in other quarters.

So this is about one third lower than what you would normally see in a normal quarter. Another element that played is also on the security services fee in the third quarter, there was almost no primary market activity.

We do expect that that returns to normal level. So basically if you look at the fourth quarter we do expect indeed an increase for the fourth quarter again we do expect an increase from present quarter.

And just one follow up quickly on the Belgian NII. I mean I've seen your comments regarding the margin pressure on the mortgages, and this is indeed shown in the slide pack as well.

I was just surprised because it seems to me that the loan growth you had in Belgium this quarter was more driven by the SMEs where it seems the margin has improved and much less on the mortgages. So that's why I was a little bit surprised on the NII performance this quarter.

Indeed your analysis is correct, but keep in mind that for production numbers you have a lagging effect. So mortgages most of the time you have a lagging effect for three months.

So what I was explaining, you will see the full benefit of that in the fourth quarter. But as the production which you have seen in the third quarter is actually an effect of the deeds in 2017 second quarter.

I have two questions on the same theme which is expenses. So you had a good performance this quarter.

Can you disclose how much investments there is this quarter and how much cost savings? And the second on expenses as well.

The banks which have announced digitization efforts have indicated potential savings which is not your case. What number do you have in mind in terms of cost savings you want to achieve, is it 200 million per year at the end of the process or in percentage terms of the 2016 cost base could it be 4%?

Thank you for your question, Jean-Pierre. The two questions are actually related to each other I think.

So if you allow me to answer them both combined. So first of all in terms of expenses where we are today is we announced a while ago that for 2017, we are still under the old regime.

And the €1.5 billion you see now in Dublin is only starting off 2018. But -- we're talking about €0.5 billion which actually means €250 million still to go for the year.

We are actually perfectly in line with what we announced at that time. So we are three quarters of the way through the year.

It also means that we are still three quarters away around the projected investment at the time. So in that respect we are fully on track.

In terms of what we expect going forward, so after the investments of the digital transformation, what we then bring on cost savings we always stick to our guidance which we have given. Our cost will increase over the next coming three years with on average 1.6%.

So CAGR of 1.6%. Our income which is generated as a combination of our model, and our model is a combination of, as you know, there's a multi channel model, combination of the call centers, the branches, the online applications and of course that is all impacted by that digital approach, we don't split that up.

But we assume that we have a evolution of 2.25% on our income side which is indeed also influenced by the digital part in what way -- I mean this would be nitty-gritty calculation. I do apologize for the word, but this would be what we really think about that.

In essence all the investments have an impact as explained in totaling a cost income ratio at 54% at the end of the guidance period which is 2020.

Just to come back on the NII, I was wondering if you could give us a smaller -- an outlook for 2018. I see basically still impact from low rates.

And if I look at the NII excluding UBB and excluding dealing room for the group that was kind of flattish in Q3. So how do you reconcile kind of low rates loan growth and commercial margin pressure for 2018?

It's quite clear that the NII will increase a lot year on year in 2018 because of the consolidation of UBB. But I try to look at it on a on a clean basis.

So that's the first question. Second question will be on the net new money in the AuM business.

Could you quantify a bit on what is coming from the mutual funds in the third quarter? And I think you guide for the fee -- the fee line to be up in Q4.

You mentioned the security services as a factor of the increase. Do you also see inflows in the fourth quarter in the business?

I will take the first one regarding the guidance going forward. So if I look at the year for the year end then we guide for the net interest income a flattish evolution excluding what you just said, dealing room activities.

In terms of reasoning why, I mean it is always the same, there's the impact of net interest income, impact of the margin pressure but compensated therefore by volume. So in that respect if we assess it -- if we assess it conservatively, let me use that word, we consider it to be flattish.

Now for 2018 because of the stance of the European Central Bank in the program which has been explained [indiscernible] it will be again longer period with low interest rates. So in terms of 2018 if I assess it conservatively and I exclude the dealing room activities then also we consider this to be flattish to the positive side.

But this is including UBB, is indeed a conservative assessment. What we take into account and therefore I said is conservatively with positive outlook that is the expected rate hikes in Czech Republic.

Obviously that has a positive impact but we assess that very conservatively in the guidance I just provided.

And on the new entries in the asset management business, year-to-date that is about €2.3 billion and that compares to about €600 million for the entire year 2016. And in third quarter it's about, new money about €540 million new entry.

And in the fourth quarter are you seeing also new entries?

Yes, we see in the fourth quarter a continuation of good money, new money flowing in.

It's Stefan from Citi. Just a couple of questions on my side.

Coming back to the Belgian mortgages. So I mean I think we all know that Belgian mortgages are quite profitable on a risk-adjusted basis, on an allocated capital basis, on actual equity basis, et cetera.

So are you -- are you basically going into sacrificing margins and gaining market share with the clear understanding that obviously this is long term shareholder value accretive or is there anything else that is going into your calculation for why you shouldn't be losing market share on Belgian mortgages. And secondly if you can update us on the Czech interest rate sensitivity.

And lastly, hopefully a quick one, just looking at the Bulgarian P&L would the UBB inclusion, there's a fair amount of, not necessarily one-offs but items that are not going to recur, could you give us what the underlying number for UBB would be for 4Q and potentially as a run rate for 2018 per quarter?

Thank you for your questions. Let me do the Belgium mortgage business answer, answering your question is, you said it's quite profitable, that's an understatement, it's very profitable.

And what we are not doing is I would not call it sacrificed market share, that's not how we work. As you know we always keep monitoring on both sides of the coin that is end market share and margin.

We work with a certain range. If our market share drops below that corridor or below that range then we adjust our margins.

And that's what we have been doing. Competition is very fierce and they all, I mean I guess they make the calculation themselves as well.

What we have been doing in the recent years is pushing up the margin. We have been able to do so market followed.

We tried to do it again, didn't work, and liquidity sample and therefore the margin dropped in general on the market. What we are doing is just balancing our policy because we found south of our range.

But what we make here as mortgages is indeed value accretive and that's the reason why we continue this.

And then on the Czech market, as you know the Central Bank in the Czech Republic has hiked interest rate twice this year. They did 20 basis points in August and then they increased another 25 basis points on the second of November.

And basically the impact of that on the fourth quarter is expected to be in the range of €5 million. And then on Bulgaria, so the underlying profit number, because in the third quarter they required some one-offs in both direction so we expected that to remain flattish.

I have two as well. The first is on the Belgium fees.

Could you just elaborate or at least confirm in direction that we have seen a 11% increase year-on-year in Belgium fees. Is it more or less the bottom end of the growth rate you expect going forward?

This is my first one. And the second one is on my capital return.

Because your scope for new acquisitions is relatively limited given I think at least Slovakia and Ireland. If you cannot find anything what can we expect for higher dividends or payout ratios or share buybacks?

Can you just elaborate that a more little bit?

Basically on the fees in Belgium, it's as the bulk of the fees on the group are actually just the fees from Belgium so we will see the comments that I made for the group also accounts for Belgium. We had lower entry fees, we had lower securities fees and we expect that to normalize in the fourth quarter.

And then coming back to your second question about potential acquisitions. Currently indeed we don't have much on the table.

To be very precise, nothing on the table. We are not looking into concrete files for acquisitions.

So what would happen if there are no acquisitions? I'm going to repeat what I said at our investor event in Dublin, so we have set our targets.

If our dividend policy remains in that respect the same. We will be paying out at least 50% of our profits including the 81.

We will be building up to 2% of buffers on top of the 14.6 capital ratio. And the up to is indeed an approach which makes it flexible.

But it's clear that if we reach our target that if we don't have acquisitions and we exceed our targets that the surplus will be paid out in dividends or let me reformulate it, it will be paid out to our shareholders.

Okay, thank you. And just to come back on the interest [indiscernible] on the Czech Republic.

The 5 million, is that per quarter on the NII for the Czech division?

Yes indeed. That is per quarter NII for the Czech division.

I have few follow-up questions. And maybe I start just on the one that you commented on, so it's M&A.

Can you clarify, since you have nothing on the table do you believe you currently need to maintain this 2 percentage point buffer? And can you possibly look at increasing dividend beyond 50% already for 2017?

Just if you can give us a clarity on that how to read your remarks. And then the follow up on M&A is also on your volumes.

You might comment in your presentation about positive growth outlook for economies in 2018, what level of volume growth you factor into your forecasts for flattish NIM because clearly this year they were helped by M&A? And maybe last one, and it's just a clarification, so you mentioned that NII continues to be distorted by the dealing room accounting activities.

And if we look at this Slide 7 and 8 that you referred at the beginning of your presentation, it actually looks that this distortion had increased a little bit quarter-on-quarter. And last time you -- I understood that you mentioned that over time it should narrow.

So can you give us a sense where we can see or if we could see the reversal of this trading income coming back to NII?

Thank you for your question, Pawel. Let me give you an answer on the M&A part.

The buffer was up to 2%. So currently it's not at all 2% yet.

It's a flexible one. We will be building it up comparing to where we are today.

That's what I said also in Dublin and that's what I said also previous quarter, it's flexible, which means we are going to pay out at least 50% and it is not because today we don't have a file on the table, tomorrow there will be not a file on the table. One hears also rumors about the bank in Hungary which could potentially come to the market.

Recently there were some rumors of some other banks. We'll see.

Currently I don't have anything concrete on the table but we will pay attention to what it is. But as I said on the previous question of one of your colleagues, if it's clear that if we don't have anything and we reach our target we will pay out surpluses to our shareholders.

In terms of can we make it already more than 50% this year on the back of the results of this year, we said at least 50%, and that is a judgment which needs to be made by our Board of Directors and ultimately by our AGM. In terms of the growth and the volumes which are related to that, the lending volumes which are related to that.

So we do indeed expect that in most countries that we expect 1.7% -- 1.6%, 1.7% GDP growth for next year. For our Central European countries and for Ireland we expect this number to be much higher.

And as a consequence we do assume that indeed in terms of the volumes that the base which we have seen this year, 3%, 4% growth is something which can be expected next year as well. We assess the guidance on them, as I said, conservatively, and that takes into account the conservative assessment of our loan growth indeed in the -- in the business -- in the net interest income as expected.

And then on the dealing room, Pawel, basically as we are attracting dollars and then swapping them to Euros. That is the bulk of the position.

And as the interest rates on the dollars went up, so we have to pay more for our dollars but the basis swap is and remains attractive and on that trade this quarter, the third quarter, we made about €10 million.

Just two follow-ups. One on insurance, I guess the given the solvency is pretty strong in that part of your business.

Have you got any further thoughts yet on where you think an appropriate solvency level might be which could imply some up streaming potential on the capital side? And if not yet when do you think you'll have sufficient clarity on -- for the volatility or regulations becoming clear in the local market, you can update us on that.

And then secondly just to make sure I fully understood on NII, your guidance on '18 given volume growths and margin pressure is it you think including UBB sort of flattish should be the outcome? So I guess given you've got an extra six months of UBB you're implying underlying slightly down year over year, just to check if I got that right.

In terms of insurance, solvency is indeed good, four points percent improvement compared to what it was, 221%. Now you see the evolution over the last couple of quarters then it has been jumping around a little bit and that is particularly due to the intrinsic elements of Solvency II.

Volatility is part of that game and we always had -- we have a target of 150% plus. We have in that respect a ratio which is much better.

But given the volatility we also said it takes us at least an observation period of more than a year to see where we before we take a position on what about the surpluses. So in this respect we are not there yet.

We continue to see what the volatility will bring us. By the way just to underpin what I just said, also the National Bank of Belgium which is the supervising entity on the insurance side also made changes in its -- in their position which they took six months ago and which they reviewed, let's say, three months ago.

So over there is still some volatility to expect. In terms of the guidance, a very short answer, 2018 as I said is conservatively assessed including UBB, excluding the dealing room activities flattish.

Well, you mentioned that you still don't have a final MREL target, but based on your indicative MREL target and keeping in mind you have large maturities and calls coming in 2018 and '19 so what are you looking in terms of issuance for 2018 both in sub-debt as well as holdco senior?

So indeed I mean also MREL is still under discussion, but with authorities it is not defined yet. We have talks with them, we got a number.

We have given to the market an indicative number of 26.25% of risk-weighted assets. What we get as a number is south of that little bit, but it is not final yet so I cannot disclose them unfortunately.

But what it means if you look at the position which we have today which is 23.7%, if I assume that the instruments which we consider to be eligible for MREL purposes which is an conservative approach then we still have to issue -- more or less 2.4 billion of holdco senior unsecured going forward. But as such this is what we assume in a conservative manner.

Talks are ongoing. I hope to give bit more clarity in the next coming quarters when the supervising authority is finally to put this down.

Just for an indication the 26.25% which we have today is north of what we understood that the supervising authority [indiscernible].

And what about sub-debts are you as comfortable with your current AT1, Tier 2 bucket or how does that look?

Yes, we are okay with that, yes.

Just one question for me. On the tracker mortgage review have you now finalized the discussions with the Central Bank of Ireland on the scope of the tracker mortgage review and finalize the customer numbers to be redressed and the appropriate comp for each customer.

If not, what is left of the process to go from here? And does the final number of customers include any staff that might have been impacted?

So what we have booked in our current, in our third quarter results mostly on the basis of our best knowledge at the time. So we still -- this discussion is still ongoing with the Central Bank as you probably know and could read in the press.

Also there is a little bit of a moving target. We are in talks with the Central Bank of Ireland and obviously as of the moment we have more clarity.

We can judge if what we have booked for in the third quarter is sufficient or that we have to adjust that. But these talks are indeed still ongoing.

And on your question of whether we included staff, the answer is yes. So we treat our staff in the same way.

I have two questions. First one is following from the earlier question on interest margins in Belgium.

I wanted to talk about interest margins in Czech Republic which have also declined. And is that also a result of dealing room activity or what explain that primarily especially considering that there has been rate hikes in Czech Republic.

And also what is the guidance going forward over here? The other question is on Slovakia.

So in Slovakia if I see that the deposits have trickled -- ticked down, so there is a 2% decline in customer deposits that you say comes from corporate books. What explains this?

And is there like some sort of trend or it's just like a seasonal effect?

Thank you for your question. If you go at the Czech Republic, the straight -- the straightforward answer to your question is indeed the big difference is explained by the dealing room activities.

If you would exclude that then -- and if you exclude it all over the place then the margin would be at 2.90 what it is now 2.85. So we do see a little bit of pressure there on the competitor side, 2 basis points not more than.

So all the rest is explained by the dealing room impact which is obviously taken in Czech Republic.

And then indeed on the deposits in Slovakia, so the decrease in deposits is fully due to bigger corporate deposits. And given the overall liquidity position we had in the group there is no need for us to pay the prices for deposits that we would have to pay to keep these volumes.

So we're okay with what happened so far this year in terms of deposits in Slovakia.

Johannes Thormann of HSBC. Two questions on NII left.

First of all if you look at the run rate of Bulgarian NII of 28 million, it seems that it has declined versus the previous quarters, what we've seen at UBB standalone or what you reflect for UBB NII, could you elaborate on the effects impacting NII in Bulgaria? And secondly looking at the your balance sheet and your NII, there has been markedly increase in cash and balances at Central Banks, another significant uplift by several billion this quarter.

And can you elaborate what's driving this, which Central Banks are behind this and what's the impact on NII?

Thank you for your question. Let me first answer the question on UBB.

So first of all this -- if you look purely at UBB it is clear that they contributed but it's clear that the integration exercise is fully ongoing. It is a little bit down compared to what was previous quarter, and that has main reason the integration exercise we're starting.

We're doing two things. We are already cleaning up the portfolios according to the KBC standards or you can call it the CBANK standard.

And some volume has been dropping out, volumes which we were not really looking for. So that has indeed had an impact on our position in UBB.

Now going forward what does it bring for the future, that's a very difficult question to answer because we actually do already integrate two services. So if you will ask me a straightforward position on UBB for '18, first of all we don't provide the guidance, but it will be very difficult to do because the integration exercise is starting up.

We are merging entities and we're bringing the books together. And as of 2018 first quarter we have also the legal merger in the places that we don't necessarily make a split any more between UBB and CBANK.

Yes. And then on the cash balances with the central banks, so basically a number of activities in the Czech Republic.

We have somewhat reduced reverse repo positions and that has been switched to deposits with the Central Bank in the Czech Republic. The bulk of the deposits are with the European Central Bank.

And then we also have positions, smaller positions at the Federal Reserve and new now also given the excess liquidity position of UBB also with National Bank of Bulgaria. And the impact on the NII actually sits in party in NII and partly in the fixed book.

This is Alex Koagne from Natixis. 1 quick question for me on the provision, very low level so far for 2017.

Can you please give us guidance for 2018 mainly on provision reversal? Do you think that you will have the same level of provision reversal or what can we expect for 2018?

And also on the impact of IFRS 9, do you know from now what could be the impact on the cost of risk and the profitability of your Bank?

In terms of the provisioning, so indeed what we have said during the call that the current 5 basis point minus is not an indication of what it will be for 2015, it's I think given our average run rate for the credit cost ratio is 30, 40 basis points. Now, we don't give an explicit guidance as you know, but the 30, 40 basis points is giving the current shape of our lending book is far too high.

So it will be south of that clearly.

Yes, and then on the IFRS 9, so we have said the first-time impact application will be between 45 and 55 basis points. As you know going forward it's going to be stage-driven and microeconomic model driven.

So if the microeconomic environment remains as benign as it is now we do not expect a big impact from the micro levels. And in terms of migration and formation of NPL we expect it to remain in line with the NPL formation that we have seen in 2017.

Two questions please. The first one on NII, just taking sort of longer perspective here, thanks for the guidance for 2018 which I guess is saying organic NII down.

And I'm guessing the biggest driver of that is the reinvestment yield risk. So my question really is just thinking out three to five years if I understand well how you do the investments of your bond portfolio that's going to be a consistent headwind for quite a long period of time and I'm just wondering if you have in mind a sort of level of the long bond yield that you'd need to see to sort of stabilize that problem what you've -- what configuration of the curve you need to see just to get to organic NII broadly stable.

Any thoughts along those lines? Second question on the fee line and particularly asset management fees, I think we're all struggling a little bit on the forecasting of that.

So if I go into your quarterly report Page 20 where you split out your fee and commission income nine months on nine months I think you're seeing 25% growth in AUM fees against 4% AUM growth. And I can't think of another European Bank saying that.

So I guess the question on that one is just if you could help us to think about if we had for a moment flat equity markets into next year if you could just help us to think about the evolution of that how big a contribution of that 25% growth is entry fees and if you have flat equity markets could you replicate this level of 930 million AUM fees for the nine months next year?

Let me give you an answer on the first one, the long-term yield for bond, for long-term bonds and the impact of that. As we don't give an explicit guidance on this matter also because the net interest income position is guided in general, so in total and not only specific building components.

But to give you a little bit of an indication where it goes is that our bond portfolio has an average duration of six years. It depends a little bit between the bank and insurance, little bit of difference.

In terms of disposition I mean five years of bank, seven years of insurance company. But obviously these -- there is not a cliff.

So these bonds are not invested one single day and then they fall off that cliff the other day after five -- after six years on average. So it's a cyclical investment.

If you do the whole cycle then we are talking about 10, 11 years.

And then on the fee and commission income, Nick, as we guide we have about 70% coming from asset management activities and 30% from banking products activities. And in that 70% about 80% is management fees and 20% through the cycle or entry fees.

When we look at the composition of the management fee, indeed they are elevated at this level. At this stage we know that we are skewed in a positive way given the evolution of the markets.

And given also the sensitivities of the CPPI we have been reducing debt book somewhat. Last year in the third quarter of 2016 CPPI volumes still stood at 21 billion, now that is down to 17 billion.

But just to compare last year, we had out of that 21 billion we had 27% in cash or money market, that is now down to 9% and equities moved from about 30% to mid-50%. So with the move going in the direction of easy invest we will stabilize somewhat the management fees in the sense that the ups and the downs will not be that dramatic.

We see that on average the product Easy Invest management fees should be in the range of under 20 basis points while on the CPPI that was still in the range of 150, 160. But then again the volatility of that will be lower.

Okay, thank you. So this sums it up for the call.

Many thanks for all attending. And we hope to see some of you tomorrow in London at 8:30.

Thank you very much and goodbye.