KBC Group NV (KBC) Earnings Call Transcript & Summary

Hello, and welcome to the KBC Group Earnings Release Quarter 4, 2024. My name is Caroline, and I'll be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] I will now hand over the call to your host, Kurt De Baenst, Head of Investor Relations to begin today's conference. Thank you.

Thank you, operator. A very good morning to all of you from the headquarters of KBC in Brussels, and welcome to the KBC conference call. Today is Thursday, 13th of February, 2025 and we are hosting the conference call of the fourth quarter and full year 2024 results of KBC. As usual, we have Johan Thijs, Group CEO with us; as well as Group CFO, Bartel Puelinckx, and they will both elaborate on the results and add some additional insight. As such, it's my pleasure to give the floor to our CEO, Johan Thijs, who will quickly run you through the presentation.

Thank you very much, Kurt. And also from my side, a warm welcome to the announcement of the quarter 4 results of 2024 and then, obviously, given the last quarter of the year, the full year results of the same year. Well, let me start the main message. The KBC engine has been firing on all its bank-insurance cylinders. We have posted a quite significant result in the fourth quarter with EUR 1.116 billion. And that is indeed a very nice number. It's influenced by a one off which is related to the exit in Ireland. That is a EUR 318 million tax benefit which is kicking into the results. But nevertheless, if you look at the underlying lines well indeed then the bank-insurance machine has been firing on all its cylinders. As a matter of fact, if I look at the split up between net interest income and non-net interest income, well, then we have in this quarter 4 a split 49:51, perfectly in line with what we have seen in previous quarters. And it also shows that the diversification of income in KBC Group is quite significant. Now in terms of where we are with the net interest income side. Well, the good news is, net interest income was up on the quarter and was actually then consequently resulting in a higher than guided full year result 2024 net interest income. This is due to, amongst others, the transformation result which was up, but also the fact that we have increased significantly our loan book and our customer deposits. Same can be said about the fee and commission business which was sharply up on the quarter and the insurance sales both on the non-life side as on the life insurance side were significantly up. So in that perspective, all those income lines have been contributing significantly to the result, partly offset by a lower net result from financial instrument at fair value and not net other income which is due to a one off. Anyway, in terms of impairments, well, they are lower. And also there, the credit cost ratio is significantly lower than the guidance, which we have given with 10 basis points or if you exclude the geographical and emerging risk buffer, it stands at 16%, significantly below the guidance. We do have a cost -- the cost evolution, which is perfectly under control and is also up, but well within the guidance, resulting in a cost-income ratio 47%, all included. But if you would exclude the bank taxes, we stand at a very good 43%. On the insurance side, costing the combined ratio was at 90%, also below the guidance of 91%. And the number is, as you know, heavily influenced by the Storm Boris mainly in Central Europe. When you look at the solvency position, very solid with a 15% common equity tier-1 ratio. And on the liquidity side, very solid with NSFR ratio of 139% and an LCR ratio of 158%. We will provide you also with an updated guidance. I will go through that in more detail later on. But on the dividend side, we are going to have a gross dividend over the full year of EUR 4.85 of which EUR 0.70 is already paid in May 2024, which was the payout of the surplus capital above the 15% threshold CET1. The genuine dividend is EUR 4.15 consequently, of which EUR 1 is already paid as an interim dividend in November and the remaining will be paid in May 2025 after approval by the AGM. Now, if you add up those numbers and you include the AT1 coupon, we will end up at a payout of 51% of the 2024 net profit. Further detail on where we are going to be with our dividend policy going forward, that will be provided in May with the announcement of the first quarter results. Let me then walk you through a couple of other things. Very briefly, this split up between banking and insurance activities is now roughly 13% on the insurance side and remainder 87% is on the banking side. What is very important for KBC is the result of our investments on the digital side, the AI implementations via Kate is further digging into our customer servicing. More and more customers are picking up Kate and 5.3 million of our customers are already using Kate in one or the other way. And the autonomy, which means that the solution, Kate is able to answer the questions of our customers independently from any other help from a KBC employee, now stands at 70%. Which means indeed that 7 out of 10 questions are provided with solutions via Kate. And on the next page, you can see a couple of things on the sustainability side. KBC was once again granted an A listing on the Carbon Disclosure Project, and we're very proud on this one. But coming back to more numbers of the year, then on Page 6, you can see the list of exceptional items. I referred already to the biggest one, that is the EUR 318 million tax benefit, which is generated through the liquidation of KBC Bank Ireland and -- or by its remaining shell, which is called Exicon. EUR 318 million. There is another one off that is EUR 28 million in Hungary, which is linked to a legal case, bringing the total to EUR 270 million exceptional items post-tax. Let me then go into the more important P&L lines starting, as usual, with net interest income. Well, again, we are able to increase our net interest income. This is due -- 3% up on the quarter and 5% up on the year. This is due to the further increase in commercial transformation result. In previous calls, we already made reference to this that this has to do with the way KBC has hedged its portfolio. And therefore, it's quite mitigating towards the rate cuts of the ECB and it is once again proven here in the fourth quarter NII results. On the other side -- on the other hand, we do have also a further increase in lending income, which was driven by strong growth of the loan volumes and thereby we are also beating our own guidance. The loan growth now stands at 5%, which is more than the guided for 4%. In terms of the net interest income, we do have a one off, which is linked to a special accounting treatment in Bulgaria on the mortgage brokerage fees, EUR 9 million, you'll be aware of that. But otherwise, all the other elements are contributing positively to the results of the net interest income. Amongst others, the short term cash management was up EUR 8 million. The minimum reserve requirements were -- reserves, sorry -- were a little bit better than the run rate. So in this perspective, the result is pretty significant up despite the fact, and that's the number which we already provided for in previous sessions -- despite the fact that the negative impact on net interest income due to the state note kicked in, in this quarter for EUR 22 million. What about margin? It stayed flattish at 208 basis points. What about the evolution of our loan book? 2% to 5% quarter and year results, which is split up on the mortgage side 1% to 4%. In terms of the evolution of our deposits, very significant increase of the current accounts and the saving accounts. And also you can clearly see here also a negative evolution in term deposits. All these numbers are, of course, influenced by the further roll off of the effects of the state note. But it's quite clear that the trend which we have seen, first and foremost, in Central Europe and Czech Republic, where we have seen due to the rate cuts of the policy rates by the Czech National Bank that customers are shifting back again from term deposits -- maturing term deposits to current accounts and savings accounts, we do see the same trend in the Eurozone as well, which is a repeat of the trends, indicating already in the second quarter and definitely in the third quarter of 2024 in Belgium as well. Total amount on the customer money, EUR 5.4 billion up on the quarter, bringing us to roughly EUR 20 billion more customer money in the full year 2024. Let me highlight already here 2 things. First of all, the strong evolution of term deposits, which is linked to the state note and that has in the fourth quarter definitely a positive effect on net interest income going forward in 2025. But also, the record results on the mutual fund business where we have a gross -- sorry, a net sale of more than EUR 5 billion. Which makes immediately the bridge to the fee and commission income EUR 700 million in one single quarter, is a record high. That's due to 2 things. First of all, strong performance on the asset management services fees, which is, obviously, linked to the further increase in monies, which we have assets under management, which we have available. We had in this quarter, despite the fact that we, as you know, had already record results in the first 9 months of this year, we still had a positive inflow in quarter 4 of EUR 382 million, resulting, as I said, the total net sales to EUR 5.30 billion of which EUR 1.6 billion is linked to the regular investment plans creating some stability going forward '25-'26. In terms of the gross sales, also fourth quarter was almost at the same level as the same period last year. In terms of -- perhaps to the next page, in terms of insurance sales, the other diversification factor, well, we have a growth of 8% on year-on-year. But if you exclude the FX effect, then the growth is 9%, beating again the guidance which we have given at the beginning of this year for the non-life insurance sales. So in this perspective, 2024 has been a rock solid year on the insurance side. Also on the side of the quality with a combined ratio of 89.7%, it stands solid definitely if you know that Boris storm which affected significantly Central Europe is fully absorbed in that number. If you would exclude Boris, see what is the underlying result of the book, well, then the combined ratio stands at 88%, which is indeed a very strong number. Life sales compared to previous quarter, which was a record third quarter as well, hold up pretty strongly. It's more or less the same. It's clearly down on the unit-linked product side, but it's clearly up on the interest guaranteed products and on the hybrid products with specific numbers plus 19% on the quarter for interest guaranteed products and 35% on the year. So also in this perspective, the life insurance sales for the full year '25 were up on the year 25%, which is indeed a very strong number. Financial instruments at fair value, this is a more volatile contributor to the P&L. Well, it was deteriorating with roughly EUR 32 million for the quarter, which is linked to, in essence, the ALM derivatives. Most of it is linked to the ineffectiveness of hedge accounting and on the increase of the Czech 10 year interest rates, which has kicked in negatively as well for EUR 7 million. The last part was the lower decrease of the 1 year interest rates on receiver swaps, which were linked to the state note. So in total, this is the full explanation of the difference between third quarter and the fourth quarter. The dealing room results was slightly up on the quarter, EUR 2 million, but not shifting the needle. Let me go to net other income. There is a big difference. Well, the difference is due to the fact that we had a legal case in Hungary for which we provisioned EUR 28 million. Normally, if this would not have happened, we would have ended up with EUR 55 million, which is particularly in line with the run rate for this net other income P&L line. Going to operating expenses. Well, operating expenses are seasonally up. This is linked to the seasonally higher marketing cost and professional fee expenses. Mostly also the invoices for the ICT costs come in. And you have, obviously, as well the implementation of the regulatory costs, which as you know are always going up. So given that seasonal effect, total income -- sorry, total cost side increased by 6% on the quarter, 3% on the year, but remained perfectly within the guided number. We have a cost increase if you exclude bank-insurance tax and commissions paid of 1.6%, perfectly in line with the guidance which we provided for. Cost/income ratio, therefore, also stands at a solid 43% if you exclude the bank-insurance taxes, which is similar to last year. And there are certainties in life. That certainty in life is that bank-insurance taxes are normally growing 623% -- 623,000,000% would be great, but EUR 623 million, which is down because of the single resolution fund contribution which dropped to 0, but unfortunately it was partly compensated by other elements in the bank taxes part. It now stands at 12% of our total expenses, which is quite significant. So you can see on Slide 13 all the split ups between the different countries. In essence, the bank taxes are very high in 2 countries Belgium and for sure also Hungary. Let me go to impairments. Well, impairments are at the level of EUR 78 million more or less in line with previous quarter. The buildup is in 2 parts. EUR 100 million loan loss impairments, which are linked -- directly linked to the lending book. And that is offset by a model-driven release of the geographic emerging risk buffer of EUR 50 million, totaling EUR 50 million net impairment. On top of that, we have EUR 28 million other impairments, which are, in essence, software impairments. If you exclude the EUR 4 million of modification losses, then you have the total number. In the emerging -- geographical and emerging risk buffer, we still hold EUR 117 million. And as I said, this is fully model driven also going forward. In terms of credit cost ratio, well, it now stands at a solid 10 basis points if you take into account the geographical and macroeconomic uncertainties. But if you would exclude them, it would end up at 16 basis points. Also there, once again, well below the through the cycle 25, 30 bps guidance, which we gave before. So also there, we achieved the guidance as it was indicated. Impairments, impaired loans ratio now stands at 2%, came down compared to previous quarter. And also in terms of the EBA definition, if you would use that, KBC stands significantly below the average of the European sector. Now if you wrap up all these numbers and you translate that into solvency numbers, then our fully loaded Basel III CET1 ratio stands at 15%. Let me remark 2 things. First of all, there is an increase of our risk-weighted assets by EUR 3 billion, which is driven, in essence, by volumes, EUR 2 billion extra because of the strong growth of our SME and corporate book and roughly EUR 800 million for the year-end -- traditional year-end review of the operational risk-weighted assets, which is also driven by the size of our balance sheet. So the increase of all these risk-weighted assets are 100% linked to the business performance of KBC. Let me remind you as well that there's a particular thing on the deferred tax assets of Ireland. The EUR 380 million, as you know, is taken in 2 different treatments. First of all, on capital, it is neutralized. But as we do accrue 50% of that dividend going forward, you will have a gap on your allocation of the capital in the ratio of CET1. So in essence, we do lack 13 basis points because of this effect, which is just an accounting effect and that accounting effect will be recuperated in the year '25 and vast majority in '25 and a little bit in 2026. So that 13 basis point negative impact will be recuperated going forward mainly in 2025. Brings us to the buffer slide, definitely when you compare it with the OCR and the MDA buffer. Well, the buffers remain very solid with 4.1%, 3.8% -- sorry, 3.5%, respectively, on the OCR side and the MDA side. I'm not going to dwell too long upon this. On the next page, you can see the leverage ratio, 5.5% for the full year compared with last year. Is there a difference? And this is mainly driven by the fact that we have higher cash and cash balances with Central Banks on our balance sheet negatively influencing -- positively -- negative -- sorry, negatively influencing that leverage ratio. Liquidity ratio is already mentioned, the solvency ratio of the insurance company stands at 200%, solidly above the required levels for the authorities. Which brings us to the guidance going forward. Well, for 2025, on the back of the -- amongst others, the evolutions which we do see taking into account the forwards of early February. We do also start from the position what we know what the decisions of governments have been until now. And we continue to apply, as always, a very conservative pass-through. Well, if you take all those elements into account, we will end up with a guidance, which will -- which says that we will have at least EUR 5.7 billion of net interest income, which is also built upon a growth of the loan book of roughly 4%. That net interest income of at least EUR 5.7 billion combined with an at least growth of the insurance side of 7% allows us to say that we will have a total income increase of at least 5.5%. We continue to apply as we have introduced last year, the floors and the ceiling approach. So this is for us definitely a floor. On the cost side. We consider the cost increases to be below 2.5% on a year basis. So here, we do have a ceiling. If you take both numbers into account, then we have a jaw which is at least 3% for the year 2025. On the insurance side, combined ratio and on the credit cost ratio, we stick to the guidance which we have also given last year that is well below 25, 30 bps for the credit cost ratio and below 91% for the combined ratio in non-life. If you translate those numbers in the period to come '24 -- sorry, '25, '26, '27, well, then it's more or less similar. Also, once again, we see a strong performance on the net interest income side, where we do predict that we will have CAGRs of at least 5%, so a floor. We do apply at least 7% for the insurance revenue, again, a floor, and that results in a total income floor of at least 6%. The operating expenses are sealed to or have a ceiling of max 3%. So they will remain 3% -- will remain below 3%, giving us a jaw of again at least 3%. The guidance on combined ratio for non-life and credit loss ratio for the lending book is the same as always. So in this perspective, it's a rock-solid guidance, which is actually building upon the realizations of 2024 definitely also on the different P&L lines, which are mentioned in this guidance. There is nothing new on the guidance for the Basel IV evolution. So that was already announced a while ago, so EUR 1 billion first-time application. And the remainder is the tail of the year, which is 2033, which is a long time to go. Let me go into the wrap-up. Well, KBC remains to be a very well-diversified group. And I also want to emphasize that in that perspective, we are diversified in 2 ways, first of all, geographically. One part of our book is linked to Western Europe, in essence Belgium. The other part is linked to Central Europe. There is a clear difference between, for instance, the GDP growth in these countries also going forward. In Western Europe, we expect a GDP growth of roughly -- depends on the year, roughly between 0.7% and 1.1%, whereas in Central Europe, the GDP growth is forecasted to be at least double. The other diversification factor is the split up between net interest income and the non-interest income contributions being the insurance activities and the asset management activities. This is resulting in a top line diversification of 50-50 split up net interest income, non-net interest income. And we do see this going forward as well in '24, '25, '26, '27. I think I can conclude with that. On the next slide, you have all the details, but I think it's far more useful to answer your questions. So please, Kurt.

I open the floor now for questions. Please restrict the number of questions to 2 to allow for a maximum number of people to raise questions.

[Operator Instructions] We will take the first question from line Benoit Petrarque from Kepler Cheuvreux.

Congratulation for the good set of results. So the first question is to come back on the net interest income move in the quarter. It's -- if I adjust for the term -- impact of the term deposits in September, we've seen -- we get to a EUR 50 million delta improvement quarter-on-quarter. So I appreciate that the transformation result sometimes is a bit of a strange timing in terms of reinvestment cycle. But it seems that Q4 has been extremely strong on that side. So maybe you could tell us a bit more about the moving parts on the quarter-over-quarter basis. And then if I kind of start with the NII Q4 at EUR 1.424 billion, which is excluding the EUR 9 million one-off multiplied by 4, I get already to the EUR 5.7 billion NII you expect for the full year. So I had in mind a bit of sequential improvement, especially in the second part of the year. Is that still something you expect? I just wanted to get a bit of granularity on the quarter-over-quarter improvement or movement in '25. And then the yes, the second question will be on the '27 NII CAGR, which looks extremely positive. There's a bit of a caveat on potential measures from government, and I wanted to check with you what you have in mind potentially from the new government. Is that a real risk or not?

Thank you for your questions, Benoit. We could not hear everything because the line was a bit difficult, but anyway. So let me come back to the first part, the evolution of our result net interest income quarter-on-quarter. But actually, it's true for actually the evolution over the last 4 quarters. Well, net interest income is mainly driven by the fact that our commercial transformation results, so the replicating portfolio is evolving in the way which we have indicated already before. That is -- that it is continuing to increase despite the rate cuts and has obviously to do with the way how we have hedged our book. So we always said that we were hedged for longer. And in that perspective, we are now benefiting the higher yields on that portfolio. This is clearly translated in quarters 3, 4 evolution, but also in quarter 1, 2 and 3 evolution. So this is nothing new. This is something which we indicated before, and this is also something which we are going to see in 2025 and '26 as well. So this is the reason why we also in our net interest income guidance for the longer term are pretty solid in terms of the delivery. Next to that, in quarter 4 of this year, we also had a very strong increase of our lending income. The volume growth was quite significant, as I indicated, 2% more and the margins were holding up pretty well. There is commercial pressure. There's no doubt about that. But still, in this perspective, this quarter, it was all in the same direction. So if I take into account these elements, and I would extrapolate that for 2025, but also further. Well, for 2025 on the lending side, so on the commercial transformation result, I already indicated a second ago what is going to happen. But on the lending side, the expectation is that for 2025, loan growth will be roughly 4%. Now if you compare it with what we have seen in 2024, GDP growth is linked -- directly linked to loan growth with KBC. GDP growth this year is roughly -- definitely in Belgium and then Central Europe is roughly 150 basis points higher. It's roughly 0.7%, up to 1% and then in Central Europe between 2% and roughly 3%. Well, the forecast for the GDP growth in Belgium and Central Europe for '25 is 10 to 20 basis points at least higher. So there's no reason why we cannot achieve the 4% loan growth going forward. So if you combine the 2, then you have the clear explanation between quarter 3, quarter 4, and you also have an indication of what it is going to be for 2025 as we have guided. And then your last question, what about -- so yes, indeed, we do have a new government in Belgium. Finally, I would say. What is the impact going to be for instance, on net interest income? Well, to be very open, it's a bit difficult now. If you read, they issued a report of 200 pages, which is the guideline for their upcoming government period. But the document is not necessarily crystal clear on the elements which are important for us and for answering your questions. For instance, on net interest income side, there are no elements in the document, which indicate that there would be a negative impact. There is a whole discussion going on the loyalty premium in Belgium, but that has no impact for us in 2025 for sure. And the decision is not taken yet. It needs to be discussed by the new Minister of Finance with, amongst others, the European authorities because, as you know, there is a discussion ongoing if this is acceptable for the European authorities or not. But let me cut the long story short. As we know, on net interest income in the document of the government, there are -- there's one element which might have an impact in the longer term on net interest income. But for 2025, the impact is 0. The other element, which is in the document, which is unclear, has to do with the calculation of the bank taxes. But that's something which is or stable or might be negative that is unclear on the basis of the document.

I would like to -- and Johan already referred to that earlier, but please bear in mind that indeed, in the NII and particularly in the lending income, we have this one-off in Bulgaria of EUR 8.5 million, which you should not extrapolate.

We will take the next question from Giulia Miotto from Morgan Stanley.

I'll ask 2 questions, please. The first one, in your NII guidance, what deposit mix shift do you assume exactly? Do you assume a comeback of current accounts or stable to current levels? And then secondly, I understand why you would expect 2025 cost of risk to be well below through the cycle again. But on 2027, why wouldn't you expect a normalization? What do you see that already makes you quite confident even on the longer term?

Thanks Giulia for your questions. It is indeed an important one. Where do we stand with the deposit mix? And how will it further continue to evolve going forward? Well, the -- what we have taken into account is a conservative approach, but we do have changed our position on the evolution of current accounts, saving accounts towards term deposits. As you know, in 2024, and that is also driven and negatively influenced by the state note in Belgium, there was a massive shift from current accounts, saving accounts towards term deposits. Well, that massive shift, you will not see in 2025, '26 and '27. We do continue to see shifts or we do take into account shifts from current accounts, saving accounts, to term deposits, but to a significantly lower extent than what we have seen in 2024. For a good understanding, we do already see in the numbers, and I highlighted it during my presentation, we do already see in the numbers of Q4, but also in Q2. And if you filter out the state note in the numbers of Q3 that when term deposits are coming to a maturity, in the current lower rate environment, rates which are now significantly lower than the peak of 4% a couple of quarters ago, then we do see that customers not necessarily prolong their term deposits, which are maturing. As a matter of fact, vast majority shift to current accounts and saving accounts. And this is something which we see, and we have taken a conservative approach in that perspective going forward.

Sorry, just to make sure I understand. So you still assume that term grows faster than current rather than a reversal of the mix shift that you have seen in '24?

No, no, no. We do not assume -- that was the case in 2024, term deposits were growing. So the growth of term deposits was significantly higher than saving accounts and current accounts. That was '24, and we don't see this happening in 2025. So we do see that there is still evolution -- positive evolution in term deposit, but it's significantly lower than what we see on current accounts and saving accounts. One of the elements is precisely what I said, when we do see today term deposits maturing that customers are -- and this is also true for the Slovak -- sorry, for the Czech market. Now it's also true for the European market when term deposits are maturing, given the fact that interest rates have come down, that customers are not prolonging those term deposits to the same extent. So the answer is no, it is not going to grow in the same way as current account saving accounts.

Giulia, as far as your question is concerned on the credit cost ratio and the guidance that we've given of well below 25, 30 basis points through the cycle. First of all, you should take into account that when you look at the additional provisions that we created over the quarter of EUR 100 million on the loan portfolio, a substantial part of that, actually EUR 80 million was related to the reducing of the NPL backstop. In addition, we also have created additional provisions on mainly large legacy files. When you look actually at the NPL ratio, then you see that it is actually dropping also quarter-on-quarter. And when we, obviously, carefully monitor the loan portfolio where we see that basically the PD shifts remain relatively limited, meaning that we see a slight increase in the PD shifts towards worse PDs, but not significant, certainly not a full trend or a structural trend in the quality of our -- in our asset quality. So that explains why going forward, we do not expect or we guide well below 25 to 30 basis points through the cycle.

We will take the next question from line Flora Bocahut from Barclays.

The first question I wanted to ask you is on the fees. You don't guide on fees, but I'm trying to reconcile what you think you can do on that line based on the guidance you gave on the other revenue line. So I think you have in mind something like a mid to high single-digit growth in fees every year to 2027. So just wanted to check if you would agree with that magnitude and what you think will be the drivers for such fee growth over the next 3 years? And then I wanted to ask you a question on the CET1. I know it's a Q1 update on the target. But maybe ahead of that decision, can you at least run us through what it is that you are considering when you're going to make that decision on the target CET1? What are the considerations around these, the factors that you will consider when you make your decision?

Well, I mean I will take first question on net fee and commission income guidance of 5% to 10%. First of all, we do not guide net fee and commission income. So we will -- so we're not giving any on that. But we think that basically what you're indicating is relatively on the high side.

And then Flora, for your second question, as you indeed pointed out, we are going to give you an update on the Q1 announcement. So that is in May, give you the full detail, first of all, what we expect it to be, how we are going to deal with targets amongst others and what we're going to do with the ceiling, the threshold for surplus capital and so on and so forth. Now I understand your question for any considerations which we will take into account. But then I'm actually excited to give you a kind of insight on what we are going to do going forward. It's a bit too early. But KBC is and will be also one of the better capitalized financial institutions in Europe. That is, for sure, one of the drivers which we're going to take into account. But I would ask you to have further more patience another, what is it, 3 months, and then we'll give you the full detail.

We will take the next question from line Kiri Vijayarajah from HSBC.

A couple of questions from my side. So firstly, on your less than 91% combined ratio target for 2027, just wondered how much conservatism have you baked in there because you did 90% in '24, but that was with some claims inflation catch-up and other special factors you've called out there. And I know if you look back over a longer period of time, you were very regularly below 90% on that combined ratio target. So just your thinking on how you arrived at 91% as a kind of medium-term target there? And then on the Czech Republic, more a high-level question. Everything seems to be going really well there, volume growth, margin expansion and that 40% ROE you show in the slide. So my question is really what could derail that? I know bank windfall taxes are off the table in the Czech Republic, but can that level of profitability really be sustained? Is there kind of a medium-term risk that it eventually gets competed away somehow? So just your kind of longer-term perspectives on the Czech Republic structural profitability, please?

Kiri, thank you for your questions. Let me answer the first one on the combined ratio. Well, indeed, your analysis is correct. So we have been able to keep that combined ratio significantly below the 91%, at least if you accept significantly to be in the range of 2% to 3% points. The reason why we are pretty okay going forward with that number is that, if you would exclude one-offs like natural catastrophes, the performance of KBC Group, and you need to understand that the underwriting rules of the non-life insurance companies in the entire group are the same. So it's done on the basis of the same tool that those underwriting rules have guarantees of the combined ratio, which is significantly below the 91%. If you would add then a natural catastrophe to the tune of roughly -- this year that was EUR 130 million, well, then you're still below the 91%. And this year, it boiled down to 90%. So we're pretty confident on the basis of the underlying quality, on the basis of the underwriting tool, which is group-wide the same. And we do take into account at least one bigger event in the number 91 to be absorbed. So that should be also doable going forward. Now just checking if Bart takes the second one? Okay.

Yes. So your second question is related to the Czech Republic. And indeed, everything seems to be going quite nicely, and that is correct. So we indeed see quite some nice growth both on the lending side and also on the deposit side. And also on the lending side, we see growth with -- that could still in -- both in volumes and quite nice margins that are being maintained. Now what could go wrong? I mean, it's difficult to predict. But when you look at the GDP forecast that we have published and basically, you see that we expect the GDP growth to go up from 1% this year to 2.1% next year and 2.3% the year after. On top of that, inflation is likely to -- or we expect to slightly drop in the Czech Republic. And what you should also take into account, of course, is that we had in '24 quite a weakening of the Czech koruna, which has a negative impact, of course, on your income side and there's a positive impact on your cost side. All in all, we are quite comfortable that notwithstanding the overperforming German economy, the Czech economy will continue to grow for 3 reasons. On the one hand, Czech economy still benefits from European subsidies. Secondly, of course, do not underestimate domestic consumption, which will increase, thanks to the huge inflation they used to have, including, of course, the wage drift over the past couple of years. And last but not least, there are also quite some foreign direct investments, including also investment into new nuclear plants, which will support the economy going forward. So that's the reason why today, we do not -- we are -- see no reason why we should be pessimistic on the further growth of the business in the Czech Republic.

We will take the next question from line Anke Reingen from RBC.

I just had one on RWA growth. If you can maybe just give us some guidance on your 4% loan growth, what do you expect in terms of RWA growth? And then I was wondering on your slide on the Basel IV impact. I mean it's based on first half 2024. Considering the volume growth, should these numbers -- is there a risk that these numbers are like somewhat higher when we actually come to that point?

Yes, indeed, as far as your question is concerned on risk-weighted asset growth, no, as Johan has been highlighting, the risk-weighted asset growth in the fourth quarter was EUR 3 billion or EUR 3.1 billion, which was mainly driven indeed by increase in the volumes -- or in the credit volumes, so good business going forward. And also by the one-off review of the -- once every year, of course, in the fourth quarter of the operational risk-weighted assets. Going forward, what you should have noticed as well is that, there was no growth or limited impact of growth due to the model changes or add-on requirements from the regulator. Going forward, of course, it's very difficult to estimate the further growth of the RWA apart from the fact that, of course, the loan growth that we guide is 4%. You should also take into account that somehow the risk-weighted asset density is increasing as a result of a number of measures that have been taken. But at the same time, we will, of course, also continue to manage properly the portfolio and the lending portfolio, potentially also looking at the SRTs. So that you should take into consideration.

So RWA also be well below the loan growth. That's a fair conclusion.

Well below is not what I would say, but indeed definitely below, yes.

So indeed, Anke, it should be below, because it's not 100% of the loans which you do. So therefore, intrinsically, it should be below. Coming back to your second question regarding the Basel IV impact. Well, the numbers, which you can see on Page 20, the first-time application impact of EUR 1 billion is taking into account a static balance sheet. So in principle, it should be this, of course, adjusted for the growth of the balance sheet. But intrinsically it should be stable.

We will take the next question from line Matthew Clark from Mediobanca.

So my question is on your NII outlook for 2025, which is just at the fourth quarter level annualized, I mean, even if you strip out the accounting one-offs, when you're guiding for solid loan growth and also seem confident in the* continued benefit from the replicating portfolio and deposit mix shifts. So it seems like that greater than sign is doing a lot of heavy lifting? Or is there actually some other lumpy item in the fourth quarter or reason for caution that means you're not having -- basing your forecast higher than just the fourth quarter annualized?

Matt, taking your question, well, the guidance of net interest income, '25 is obviously based on the evolution of our volumes, both on the lending side and on the deposit side. On the lending side, we were very explicit about that. So approximately 4%, which means that it is similar to the level which we have seen in 2024. On the other side of the balance sheet, the volume growth of our deposit side, which is then, obviously, influencing positively our guidance is also -- we don't give you an explicit number for that. But it's also foreseen that we do continue to see growth of current accounts, saving accounts and to a lesser extent, term deposits. That was a question of Giulia. Now in that perspective, what is crucial as well in the guidance that is that -- and we have taken a super conservative stance on this one. That is that the state note is going to mature partly in March and also the biggest chunk is going to mature in October of 2025. The assumptions which we have taken in is that it will be reinvested at the yield to 0. So in that perspective, there are a couple of things in the guidance, which are on the more conservative side. What I can say to that is, what we have seen recently in December when term deposits are maturing that it is reinvested only partially in term deposits and mainly in current accounts and saving accounts. And there, the margin definitely is not 0. So it is indeed a little bit conservative on certain aspects.

But just to be clear, the fourth quarter already includes the burden from the negative spread on the state notes reinvested in time deposits. So I don't see -- even if those mature and are reinvested at 0, I don't see why that would be a drag versus the fourth quarter level. Your fourth quarter was a lot better than the preceding quarters. And I'm just wondering why in your guidance, you don't seem to be annualizing that as your baseline. Whereas, from the outside, it looks like fourth quarter should be a fairly clean quarter and should be a baseline and therefore, growing in the year ahead.

Well, first of all, correct what you said. So we have a negative impact of the state note that is in the document, EUR 22 million. But there is also a one-off positive effect in the fourth quarter net interest income of EUR 9 million, which is linked to the fees in -- the accounting approach for the fees in Bulgaria. So be careful, if you extrapolate, you take the fourth quarter multiply it by 4, you need to be careful by not taking all those one-offs into account as well. What is also different and therefore, you need to make a couple of adjustments is the lower MRR cost, which is going not to be the case in 2025. So if you adjust that, then indeed, you are slightly above the EUR 5.7 billion, which means that we have indeed used the terminology at least EUR 5.7 billion. So it's a floor, which we consider to be conservative. So in that perspective, your analysis is correct. If you exclude the one-offs and you multiply, you will end up roughly EUR 5.73 billion depends what you exclude, what you don't exclude. But the guidance is a floor, and therefore, we assume it to be at least EUR 5.7 billion.

We will take the next question from line Amit Ranjan from JPMC.

I have 2, please. Can you please talk about the competitive dynamics in Belgium? You have talked about the shift away from term deposits. But on the new offers, et cetera, are we -- how are you seeing competition there? And also on the lending side, if you could talk us through that? And then the second one was if you could remind us of the sensitivity to Czech rates and euro rates, please and if possible, on the long and short end, please?

Thank you very much for your questions, Amit. First of all, on competition and you referred to competition in Belgium. Well, I would say what we have seen in -- yes, September 2023 and then in October -- September last year, sorry, '24, that was a severe competition beyond common sense, I would say. Well, that is no longer the case. We do have still strong competition. There is no doubt about that, but it is now more in line with what I would call common sense. So we are no longer having competition with negative margins on, for instance, saving products or term deposits. On the lending side, same story. It is strong, but it is reasonable in that perspective, we were able to generate more growth and decent margins. And we -- that is also the ambition going forward for 2025. The second part, Bartel is going to take.

Yes. Amit, so your question is all about the NII sensitivity. So what we guide in terms of NII sensitivity is EUR 50 million impact of a 25 basis point shift on an annual basis. Now what is important to highlight, you cannot compare that with the previous guidance that we have given on the -- which was EUR 70 million on a parallel shift, basically because this is mainly focusing on the short end of the curve, for the very simple reason that when this -- we have been lengthening the duration of the replication portfolio. And we are still today, obviously reinvesting the maturing bonds on a longer, at higher returns or higher yields. On the short term, you will have noticed, of course, that the curve is somewhat shifting more towards a normal curve. And there, we are somewhat shortening, and that's the reason why we mainly guide this on the short end of the curve.

And can I just follow up on the replication portfolio? Could you disclose the size of the replication portfolio, if possible?

No, we are not disclosing the size of the replication portfolio.

We will take the next question from line Farquhar Murray from Autonomous.

Just 2 questions from me. Firstly, just on the deposit side. I just wondered if you could run through perhaps the kind of pass-through assumptions that you're building into the '25, '27 guidance. I think previously, you framed around, say, 40% of pass-through or beta on savings accounts, about 80% on term. I just wondered if you got anything around that. It sounds a little bit different this time. And then secondly, on the asset side, mortgage margins in Belgium kind of ticked up a little bit for the first time in quite some time. I just wondered if you could outline what's happening there and whether it's actually been sustained into this year.

Giving your first question, the pass-through rates, well, we have -- as you know, the pass-through rates, obviously, are influenced by the evolution of the policy rates of the Central Banks, and therefore, the relative pass-through rate is constantly shifting. What we have assumed is the pass-through on the current accounts -- sorry, on the saving accounts in all countries is going to be at the starting level of where we are today. So in that perspective, the evolution of the policy rate is relatively speaking, increasing the pass-through, but not necessarily increasing the real pass-through. Let me explain that in more concrete terms. The more the interest policy rates are coming down, the higher the likelihood that we adapt as well our rates for our customers on our saving accounts, which, by the way, we did 2 weeks or 3 weeks ago in Belgium when we brought down the margin -- when we brought down the external rates on our saving accounts with between 10 and 30 basis points. So pass-through starting from the conservative levels, which we know today and relatively speaking, it is influenced by the interest rates -- policy rates of the ECB.

So as far as your second question is concerned, if I understand correctly, you are requiring for the development of the mortgage business in Belgium, in particular, and also looking at the rates. So the mortgage business in Belgium is picking up less than, of course, in the Central European countries. But it's still picking up. We have seen a quarter-on-quarter growth of 0.7% in Belgium and -- over the past quarter and roughly up to 3% on the -- over the year. But indeed, margins remain subdued. Basically, we are indeed running currently at margins which are below the margin on the back book. And this is something that we will manage going forward. We will, of course, maintain our market share as we indicated before.

One quick follow-up. Just on that deposit rate cut in Belgium, did you see any volume consequences following on from that?

The answer is negative. On the contrary, we continue to see volume increases. We had a very strong performance in quarter 4, which is, obviously, before the rate cut. But given the fact that the rate cut is in line with what the market has been doing, we do not see any negative impact on the volumes whatsoever.

We will take the next question from line Sharath Kumar from Deutsche Bank.

I have 2. Firstly, on operating costs. versus your previous midterm guidance, there is a bit of a step-up to 3% versus below 1.8%. How should we read into this guidance? Is it more to do with to support higher growth? Or do you think there is higher persistence in operating costs than what you thought? And within that, how should we think about banking taxes outlook for 2025? Previously, you had noted some mitigation measures, say, in Hungary. So any guidance on that would be helpful. And secondly, a clarification on your -- Czech Republic NII guidance. So what sort of guidance is embedded for 2025 within your at least EUR 5.7? So that would be helpful.

Thanks Sharath. On your first question regarding OpEx, the guidance, which was indeed driven upward is actually translated by, let's say, a like-for-like comparison '23-'24. So if you look into -- if you look at the evolution of the cost side in '24 full year, then the costs have come up slightly, but this is mainly influenced by the fact that in 2023, we will still having KBC Bank Ireland in our portfolio. That portfolio -- that asset, obviously, has been divested. The portfolio has been redefined. And in this perspective, if you exclude Ireland in both '23 and '24, then we do see a cost increase of 2.7%. For good understanding, we have also put that in a footnote on Page 18 in the guidance, where we indicate that if we would exclude Ireland, costs will be increasing with 2.7%. So as a matter of fact, if you look into the guidance for '25, but also even in the longer term in the guidance of -- so the long-term guidance is 27%. The 2.5% is actually an improvement compared to what the reality is of 2024, '23. And then the longer-term guidance is more or less in the same range as the cost evolution of 2024 versus 2023. The main drivers of that 2.7% increase in '24, you know these are mainly driven by the higher inflation. We do expect the inflation to be roughly around 2.5% going forward for the next coming years. So -- and therefore, also in that perspective, we keep our costs quite well under control.

As far as your question is concerned on the banking tax, and I understood mainly we're focusing on Belgium. There, the banking tax in Belgium came in at EUR 285 million, which is 10.2% of the OpEx, but is down compared to the previous year, and that is mainly because there was a significant -- I mean, the single resolution -- the European Single Resolution Fund contributions have stopped now. So that had a positive impact of more than EUR 100 million. The question is going to be, of course, what are we going -- what is going to happen in Belgium with respect to the deposit guarantee fund contribution? In principle, that is set at 1.8% of the covered deposits. Now we will have fully replenished that in Belgium by July of this year. The question now is what the government will do going forward? Whether we will have to apply that on the additional volumes that we will generate or not or whether they will maintain that equal is unclear yet. In the government agreement, it is indicated that banking taxes should remain more or less equal, but it's very difficult to interpret what that exactly would mean. We will anyway guide more on that with the first quarter results when we have a better view on the real impact of the government agreement.

We will take the next question from line Marta Sanchez Romero from Citi.

I've got 2 simple questions on capital. The first one is that with your current outlook for earnings, the organic and Basel IV RWA growth and the ordinary payout, do you think that you can build up capital from here before considering SRTs? And my second question also on capital. At what level of fully loaded core equity Tier 1 would you feel your capital constraints your growth?

Thank you, Marta for your questions. So coming back to your first question, well, we will indeed be able to build up capital. It all depends, of course, on the dividend policy, which we're going to announce on May of this year. But given the evolution of risk-weighted assets, given the evolution of the guidance which we gave for total income and on the cost side, you can indeed figure out that we are building up capital. Further, I would like to repeat what also Bartel said on an earlier -- as an answer on an earlier question. So we are also looking in SRTs to, in that perspective, generate some more oxygen on the capital side. So yes, on the basis of the guidance, yes, on the basis of the risk-weighted assets, we will be able to build up capital. And how we are going to deal with that capital is going to be explained in May of this year when we give the guidance of the capital deployment plan. And then the second part of the question was about -- because I missed that. So in principle, I mean, if I understood the question well, at what level of CET1 would be our growth jeopardized? Well, in this perspective, let's also be aware that SRTs are means to an end. So in principle, when we will be continuously using SRTs, it will allow us to further grow our book.

It was more like if you can -- I understand that you will update on capital in Q1. But it was more to think about the bottom level at which you want to be running or you wouldn't want to cross for running the business?

I understand your question, but this is what we're going to give you as an indication in May of this year.

It appears no further question at this time. I'll hand it back over to your host for closing remarks.

Thank you very much, operator. This sums it up for this call. So I would like to thank you for your attendance, and enjoy the rest of the day. Bye-bye.

Thank you for joining today's call. You may now disconnect.