KBC Group NV (OTCPK:KBCSF) Q3 2022 Results Conference Call November 9, 2022 3:30 AM ET
Company Participants
Kurt De Baenst – Head, Investor Relations
Johan Thijs – Group Chief Executive Officer
Luc Popelier – Group Chief Financial Officer
Conference Call Participants
Giulia Aurora Miotto – Morgan Stanley
Raul Sinha – JPMorgan
Flora Bocahut – Jefferies
Benoit Petrarque – Kepler Cheuvreux
Kirishanthan Vijayarajah – HSBC
Matthew Clark – Mediobanca
Farquhar Murray – Bernstein
Operator
Good day and welcome, everyone, to the KBC Group Earnings Release Third Quarter 2022 Conference Call, hosted by Mr. Kurt De Baenst, Head of Investor Relations. My name is Kobian, and I’m your event manager today. During the presentation, your lines will remain on listen-only. [Operator Instructions] I would like to advise all parties that this conference call is being recorded.
And now, I would like to hand over to Mr. Baenst. Please go ahead.
Kurt De Baenst
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 Wednesday, the 9th of November 2022, and we are hosting the conference call on the third quarter results of KBC.
As usual, we have: Johan Thijs, Group CEO, with us; as well as group CFO, Luc Popelier, and they will both elaborate on the results and add some additional insights.
As such, it’s my pleasure to give the floor to Johan, who will quickly run you through the presentation.
Johan Thijs
Thank you very much, Kurt, and also from my side, a warm welcome to the announcement of the third quarter results 2022. First of all, probably you already have noticed when you opened the slide deck of the presentation of the quarter results, this time it was different. We have a completely new design and look out of — outlook, sorry, of the presentation. I hope you like it because it’s more condensed. It’s actually, at least, the same information as previously, but it’s far more graphical. So I hope you like this, as I hope that you’ll ultimately like the results, because we posted an excellent €776 million net result in the third quarter.
And this is due to actually the bank-insurance model once again performing extremely well. It is once again a token of high diversification, and high diversification always pays off in difficult market circumstances, which we have been facing, indeed, in the third quarter, not only to mention the war in Ukraine, which has definitely triggered some consequences, both on the inflation side as on the GDP side.
Taking that into account, €776 million was a return on equity of bit more than 14%. It is also translated into a further strengthening of our capital position. We have excellent liquidity positions as always. And also, if you look at the underlying lines, I can easily say, the bank-insurance machine has been performing on all the [cylinders].
For the first time, we have the integration of Raiffeisenbank, Bulgaria, into the results. So it’s fully consolidated, and I will come back to that later on when I’m going to explain the detail of the lines.
But in essence, let me summarize it as follows. We have seen a clear increase of our operational business, customer loans, and customer deposits were on the rise, as was the net interest income. We have seen an extremely good performance on the insurance side non-life with excellent sales and excellent quality. We have seen excellent results on the impairment side, which allowed us to put away moneys, indeed, for the future potential impact on — of the war on our book. We have kept our costs under control.
And as a consequence of all of this, given the good quality of our capital ratio and performance, we are indeed, again, confirming that we are going to pay out an interim dividend of €1 per share as of — as on the 16th of November of this year.
Not to forget about all the initiatives which we have taken on the sustainability side. KBC issued an inaugural social bond in the third quarter, and we also published in September the new climate targets in our climate report. And what is so special about this is we got — this is a climate report with indeed, also a limited assurance.
Now let me go to the further detail, and let me begin, not with the traditional numbers, but with the success of the bank-insurance model.
17% of the insurance — of the total results were linked to the insurance business, which is more or less in line with the long-term average, but it clearly indicates that, because of the positive impact on the — of the interest rates on our banking activities, the insurance activities, mainly non-life, kept up the pace, and they are confirming, again, the bank-insurance model.
What is also good to see is that we have added in November last — in November 2020, an extra flavor. KBC has been investing, indeed, a lot of money on the innovation side that clearly pays off. The latest innovation in that perspective was the launch of Kate, and Kate has been taken up, in the meanwhile, in all countries into the business applications, and it is taking up massively by our customers, much more than we anticipated, and it’s really boosting our customer satisfaction, but also, it is increasing in that perspective.
Our efficiency. 2.5 million users in the meanwhile, in Kate, of which 1.5 million users are actively using Kate, and that is also translated for us in an important way in, what we call the Kate autonomy. This means that Kate will provide a solution to the answer of the customer without any human interference, front office, back office of KBC. And that autonomy now stands at 54% in Belgium and 63% in Czech Republic.
To give you a — kind of a framework what this means, the original target, which we put forward in 2020 November when we launched Kate, was 30% by 2023. So we are exceeding our target big time, and therefore, we have increased the target now to 75% by 2023. Which means that every four questions a customer ask, three of them can be answered by Kate autonomously, which has a big impact, of course, on our efficiency, on customer satisfaction.And because that is also a straight-through process, it has a positive impact on our cost side.
Talking about straight-through processing. We had a target of 60% by 2023, of our main activities’ transactions. Well, we have — now we are coming to the level that we have that target, and reached, because after nine months in 2022 — sorry, after six months in 2022, the nine months numbers are not publicly available yet. We are at 47% of our business being straight-through process, and that is quite a significant change, and that is indeed very important for customer satisfaction and our efficiency.
I already mentioned the climate report, which is mentioned on Page 3. It has a limited assurance by our external auditor. And on Page 4, you see all the detail. For those who have not read the report yet, I recommend one need to do so because it indeed triggers what we are going to do and how we are going to do it going forward.
And as you all know, ECB is also, in that perspective, clearly indicating what the position will be in the nearby future, much more attention from the regulatory side or the supervisory side to this topic, and much more [request] to be precise on target, exactly what is mentioned in this climate report. So in that perspective, indeed, we have taken an advice on the statements of our supervisor.
On Page 5, we have far more detail, but let me skip that and go to Page 6 to indicate that in terms of exceptional items, it was rather — limited is not the right word, but it is offsetting each other so that the ultimate impact of the exceptional items in our results in the fourth — in the third quarter is only €8 million after taxes.
Now, what does it then mean in detail for the first line, that is net interest income? Here, we do have the good news that the net interest income has increased with 4% on the quarter and 17% on the year. This is, of course, implemented positively by the integration of, and consolidation of Raiffeisenbank, Bulgaria, totaling €33 million net interest income, but obviously is also positively impacted by the increase of the interest rates, and that is translated in the fundamental increase on our transformation result.
Talking about the core business then. Good news. We have further increase of our lending business, now stands at 9% year-on-year, which was a 2% growth on the quarter. This is both on the commercial lines business and the mortgage business. So we have seen a strong growth. And that strong growth impact is partially mitigated by the fact that we see in certain of our markets that the margins are under pressure. For instance, in Belgium, the mortgage lending business was done at a lower margin. We saw a positive side on the SME, and corporate margin, on the other hand, in Belgium. In other countries, this is different. For instance, the margins are severely under pressure in Hungary because of the interventions of the government, and we do see also a bit further declining margins in Bulgaria.
The margin in total for the total book net interest margin now stands at 190 basis points, within 1 basis point lower than the previous quarter and 10 basis points higher than last year same quarter. This is negatively influenced, of course, by also KBC Bank, Ireland. First of all, the margin went down in Ireland. And secondly, — and that’s something which is obviously related to our decision to exit the Irish market. The impact of not further pursuing business growth on the lending side and mortgages in Ireland, nor to go for deposits, is having a negative impact on our net interest income, and that has translated, of course, negatively as well in the net interest income, and respectively, in the net interest margin.
Let me keep it there and let me go into the fee and commission business, also there good news. Fee and commission business was up 3% on the quarter and slightly down 1% on the year. The negative trend for the year is obviously translated by the impact of the war on our assets under management, which have come down over a year basis with roughly €25 billion, and that translates obviously a negative impact on your asset management fees.
Now let me come back to the quarter and make the comparison with previous quarter. What is the good news? The good news, first of all, is that we have seen, again, despite a very difficult circumstance, despite a very difficult financial market, we have seen again net inflows totaling about €510 million in the third quarter, which is excellent news. If you sum up the three quarters for this year, we have a €2.6 billion net inflow, which is more than — €1 billion more than what we have seen last year.
And you remember that we were indeed pretty satisfied with last year. But even given difficult circumstances, we have seen a strong increase. Now what is good about that is, of course, that we have, what we call regular investment plans, which are totaling €1.7 billion of net inflows in the first nine months of this year, and that’s clearly a translation of the successful shift from one-off investments to a more spread out saving type of investment products. So the asset management services actually stabilized on the quarter. What went down is the entry fee slightly with €2 million because of the decline of the gross sales, which is a translation of the very difficult market circumstances. What went up significantly is the fees generated to banking services, mainly through the payment services.
We saw a strong increase there at about €20 million in total, for the banking services, which was pushed also by the integration of Raiffeisenbank, Bulgaria, totaling €12.5 million in that particular bucket of the fees. What went down, or what is declining, that is the fees which we have to pay for distribution, and it’s always a bit painful because, the more successful we are on the insurance business, the higher the deduction of the fees in distribution because that’s one-to-one linked. So we had a minus 6% growth — sorry, minus €6 million growth of the fees which we have to pay for banking and mainly insurance business, and that is obviously negatively influencing. So that success is negatively influencing the fee and commission business total.
But let me summarize it. Actually, a good performance, strong inflows, and in that perspective, actually a positive surprise given the difficult market circumstances we are in. One last detail, 44% of our products sold in asset management are, what we call responsible investment products.
I already mentioned the insurance business. There, I can easily say that the non-life insurance business is doing extremely well. The growth was up 8% on the year, and this is driven by all countries. At least, they are at 5%, 6% growth, that is Belgium, and then the Central European countries are significantly above that, went — for instance, Slovakia and Czech are having a 20% growth year-on-year, which is quite strong growth.
What is also very good is the quality of that business is really well. We have an excellent combined ratio of 86% over nine months, which is extremely well. Also, when you compare it to the record year 2021 where we had 87% of combined ratio, mind you that also in 2022, the result was influenced negatively by a windstorm in what was in the first quarter, €90 million, and that is indeed having a negative impact. But despite of that, combined ratio is below — definitely below the target, and only at 86%. Good understanding, all countries have combined ratios, below the 90%, which is good news.
On the life sales, then we see clearly the impact of the war, and clearly the impact of turbulence on the financial market. Unit-linked was down significantly 15% on the year.
Other life sales were down 15% on the year, and the unit-linked business was down on the year, 31%. If you compare it on the quarter, it was down 16%, and that is a translation of the very difficult circumstances on the one hand. And the second hand is also a translation of the seasonality in the summer period, July, August, September, is clearly not the ideal period for investing on this perspective. What is good news is that we see a change because of the interest rate increases on the interest-guaranteed products business. It is up 3%, which is clearly an indication that clients are now back again on the interest guaranteed products, given the rise of the interest rates in the Eurozone.
Financial instruments fair value. We have a result of €56 million, which is a decline referring to the top results in the first half, €33 million compared to previous quarter. This, in essence, is driven by two things. First of all, a less positive change in the ALM derivatives, which is about €20 million difference compared to previous quarter. Let me summarize like this. That’s mainly to do with the ineffectiveness of hedges.
What is far more important is the decline in our dealing room, result for these kind of financial instruments, which is a decline of €53 million — €58 million, sorry. And that has to do with the position which has been taken in interest rate swap position, which has been taken on the Polish zloty. It’s an older position, which has turned against us. And for a good understanding, this is not a realized loss. It is an accounting loss, which is coming back in the next coming quarters.
So this is of a temporary kind which is booked in the third quarter. If we look at net other income, you see a similar decline at first glance, but in reality, it’s actually quite stable. If you look at the underlying results, so far good understanding, the business which is generating normally €45 million, €50 million is indeed happening in the third quarter again. There is a but. The but is that we sold a substantial part of low-yielding bonds in Czech Republic, which were then — the proceeds of that sale was then reinvested in high-yielding bonds for the future. So that means that we do have a shift of net interest income low to net interest income high for the future, which is then booked in this particular line, and other income for a total of minus €43 million.
If you would correct that, then the two becomes €45 million, and that’s precisely on the long-term average. If you look at the €90 million in the second quarter, mind you that there was included a one-off of €68 million linked to the sale of real estate in the insurance book. So also there, the comparison is, if you deduct, the number is perfectly in line.
Let me go to something which is far more important, and that is the operating expenses [Technical Difficulty] is that we were able to keep our costs very good under control. We all know that inflation is kicking in negatively in a massive way. And we have the particularity of the Belgium market where inflation is automatically indexed into the wages. And definitely in the financial sector, this is already a given.
It happens every two months that you put in the inflation into the wages of your staff. So 10% average inflation in Belgium can be indeed translated in a fundamental increase of the cost. But we were able to offset that increases by, for instance, also seasonally lower ICT expenses and marketing expense, but also by keeping a very tight look at our FTEs. And as a consequence, the cost increase is only limited to 6% if you take out all the one-offs, if you take out the bank taxes, and if you look at the underlying costs.
Why the one-offs are excluded? First of all, because of Bulgaria, Raiffeisenbank has been included totaling €26 million of costs. And secondly, of course, you have the impact of Ireland where we have taken a couple of one-offs, which are linked to the sales process and totaled €21 million. So the number is negatively influence,d which in total €47 million.
If you take that out and you start to look at the underlying cost, then the increase is only 6% year-on-year, and that’s really good. It has also translated in very good cost income ratios, 54% cost to income ratio when you spread out the bank taxes over the year equally because it’s mainly booked in the first quarter.
And if you would exclude the bank taxes, we would be only 48% of cost to income ratio, which is definitely much better than what it was in last year, but it was 51%. So let me translate that. We have been able to maintain those costs under control. We have been able to mitigate the impact of inflation. And if you look at the comparison with the increase of income, the jaw has widened. So we have got more positive impact from the increase of the interest rates and from the increase of inflation.
Let me say something about bank taxes. It makes a man becoming depressed. If you look at the number and you include the contributions for — amongst others, on guarantee scheme, local or European, then we are estimating now a €657 million of total bank taxes by the end of this year, and that is 14% of our total OpEx, and that’s indeed a lot of money.
On Page 12, you can see the detail per country or per business unit, and that’s clearly indicating what we speak about, a lot of money. We also know that certain governments are inspired by those bank taxes. If we further increase them or completely change them going forward — we have already seen initiatives in Hungary, which are already part of the result.
We have seen initiatives in Belgium, where they did not increase bank taxes, but they reduced the deductibility of the bank taxes from the corporate tax. So mind you, it has not an impact on the number before the taxes, it has only an impact on the number after taxes. And then, we have seen a bill passed by the Czech parliament last Friday, and that has also a review of the bank taxes going forward.
So, in total, I would say, the impact on KBC Group is limited to a couple of tens of millions per country. And in that perspective, it is only slightly increasing the number which we have here in this presentation of €657 million for the year ’23-’24
In terms of the loan impairments, also there are good news. As a matter of fact, we have no impairments. On the contrary, we had €24 million of releases, of provisions on our lending book, which is once again a sign that the underwriting of KBC in all jurisdictions is of good quality, and that is also translating [itself] in difficult circumstances, which we’re in, in maintenance of our provision level and the country that we are able — even able to release part of that provision, because we don’t have any impairments.
We do anticipate now on the scenarios which we have put in the market, in the second quarter — after the second quarter results of this year, that, there might be a change — shift in that perspective. And in the traditional cautious stance of KBC, we are putting away provisions for, what we call geographical and emerging risks.
Well, we have increased that buffer with €103 million, which is now totaling €387 million of provisions. Now let me translate that differently. That’s more or less 19%, 19.5% — not percent, 19.5 basis points of our lending book, which is slightly below the — through-the-cycle average of 25 basis points, 30 basis points for the full year. So what we are doing is, we are setting away after nine months, almost a full year through-the-cycle provision level, for eventual claims going forward.
The good news on the other hand is also that we do see, as we speak and we remain cautious, that the scenario which we put forward, mild recession or deep recession scenario, respectively, with the probability of 55-45 and around the number, that we are starting to see the first sign that Europe will be able to deal with the energy deficit, which is created by the fact that the Russians have cut the [gas] inflow into Europe, that we are seeing more and more positive signs in that respect.
So we become a little bit more positively biased towards the fact that Europe will be able to deal with the energy deficit, which has a positive impact on a potential outcome for the nearby future being a mild recession scenario.
Now let me translate the [critical] situation differently. The books itself — the lending book itself has a credit cost ratio of minus 0.03%, so 3 basis points minus, and the minus here is a good sign. If you take into account the buffer which we are creating, we have a 5 basis point scenario. Compare this with through-the- cycle 25 bps to 30 bps, then, indeed, the guidance which we gave between 10 bps and 25 bps for the full year 2022, we will be more tailored towards the — let’s say, the lower end of that guidance rather than the higher end.
The impaired loan loss ratio stands now at 2%. If you would translate that strictly to the EBA definition, it even will go to 1.4%.
On the pages following 14, 15 and so on, you can see that — the split up of the €387 million. Just important to say that in the €387 million, we also included the €16 million of Raiffeisenbank, Bulgaria. And on Page 15, you see — and that’s a very important one. You see the evolution of the gas, first of all, consumption. It’s first class, the stock levels and how they have been filled up in the meanwhile in the different jurisdictions where we are present, including seven countries as a reference, trends in Germany. And you can clearly see that Europe is saving more gas than — or saving gas, and that is something which was expected by European Commission anyway, that they are filling up their stock levels, and that the national gas covering in that perspective is sufficiently to deal with the next coming quarters, i.e., with the next coming winter.So probably we will make it for the winter of 2023, and then we’ll see what happens in the winter of 2024.
On Page 16, you have the detail per country. The only thing which I would remind you is that the loans are negatively impacted by the fact that we have a 5% decline in Ireland, and we have a negative impact of 25% on the deposits because of Ireland and because of everything which is linked to the sale agreement, which we have at Bank of Ireland and [us] stopping business. Second thing is on the deposits in Belgium. You see a negative number there, that is purely done with balance sheet management where we have change in short-term cash management. These are our foreign branches, and we have pushed them back into our limits for reasons of balance sheet and, of course, also a limit for reasons of other financial instruments, which we have to issue.
Talking about financial instruments, let me go immediately to Page 17 where you have the capital position, and that capital position is now 15% after full inclusion and absorption of Raiffeisenbank, Bulgaria, which totaled roughly 1% of capital. So in principle, the number would have been 16% if we would not have done the acquisition in Bulgaria. So that is translated on this graph. You can see the goodwill. You can see the impact of the risk-weighted assets. Risk-weighted assets now totaled €110 billion, which is — the increase is driven straight forward by volume growth, acquisition of Raiffeisenbank, and we have seen an improvement of the asset quality because of a better collateral position rather than a change of model. So that’s the good news.
In terms of where we are on buffers, that’s always super complicated because there are different measures to take that. We have taken the most strict interpretation now. And that means that we do have a buffer of 4.4% on the CET1 side with 15% compared to the 10.6% imposed upon us by the supervisors. The detail you can find on the right-hand side of this slide.
But if you then look at the other measures, which are defining an MDA buffer, then you see on the Tier 1 capital, 3.9% and a total 3% of the total on capital, which also means that we can increase that buffer if we want to, by issuing more AT1 and Tier 2. You know that KBC, on purpose, is having a shortfall in that perspective. We are going to review that position going forward. And in that perspective, we do have sufficient buffer compared to our risk — to our MDA levels and we are, for sure, more than 4% buffer compared to our absolute minimum by our supervisors.
In terms of leverage ratio, because of the decisions which we took on the foreign branches, 5.2% as well is very solid. We have 227% Solvency 2 ratio on the insurance company, which is coming down from what it was, from 242%, and that is fully influenced by the evolution of the interest rates, and that is also having a negative influence by the decline of the equity markets, respectively, 11 — and the remainder for the equity — 11% — remainder for the equity markets. LCR and NSFR are superior to our absolute minimum in that perspective. They are very comforting.
And that brings me to the forward-looking statements. First of all, we confirm our group guidance for 2022. You can see clearly on Page — what is that, 20, what we are going — what we have confirmed today, €8.4 billion ballpark figure, €5.05 billion ballpark figure for the NII.
We have our OpEx guidance confirmed on €4.15 billion. And we — in the footnote, you can clearly see what the assumptions were taken. We have absorbed in that assumption a new position of the ECB regarding the TLTRO. We have corrected the volume growth, which was originally guided for 7%, but we have surpassed that 7% already year-to-date. So we have now estimated the growth for year-end at 8%.
What we did not change is the forecast on the policy rates of the ECB and the longer-term rates of the ECB. So we kept it constant than what it was 150 and — 250 basis points in 2023. So in that perspective, this is a very conservative stance. And in that perspective, I could say that the guidance which we have given for 2023, we will be at the higher end of those numbers.
The long-term financial guidance, we did not change because the interest rates aren’t changing every day. We are in the middle of a budgeting exercise. And in that perspective, we did not change that at all. What I would like to remind you here is that, it is conservative because the interest rates which are included here, are on the low side, 2.50% for the longer term, whereas the market currently is expecting roughly 3% going forward.
So in that perspective, this is conservative. And I would like to remind you that we are guiding explicitly 4% jaws. We do indeed consider this to be perfectly realistic, And on the other hand, given the interest rate increases, which we have seen and which are not absorbed yet in this forecast, we think it will be indeed at least 4% jaws. And this is something which is not taken up in the consensus yet, I assume. So therefore, I would like to specifically mention that.
We did not change that in the detail. We did not change it in the guidance for the sensitivity because the interest rates positions are completely changing, and we will do that on the back of our fourth quarter results in the beginning of next year. We will give you the full detail on this slide, so the long-term financial guidance and the sensitivities, but also 2023 going forward.
I would like to keep it here and I hand over back the floor to Kurt, who will guide you through our questions.
Kurt De Baenst
Thank you, Johan. I will open the floor now for questions. Please restrict to two to allow for a maximum number of people to raise questions. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions] And the first question is coming from the line of Giulia Aurora Miotto, Morgan Stanley.
Giulia Aurora Miotto
Two questions from me. The first one is on asset quality. So I look at the numbers and then I think about the macro picture of [CEE]. And I almost count the numbers. I mean, of course, they are real, but how is it possible, and which area of concern do you see going forward, or truly you think this [indiscernible] environment can continue? So that would be my first question.
Then cost. You mentioned acquisition, you mentioned wage increases in Belgium, of course, but also bank taxes. Are we now down with bank taxes? Or is there anything else that you would expect on the horizon, which could change next year?
Luc Popelier
I will take the first question on asset quality. The areas of concern, well, will not be surprising. First of all, of course, all the areas in which our [indiscernible] to the gas prices. This is, for example, the chemicals industry, like the techniques, to some extent, the metals industry, machinery, heavy equipment, these types of sectors.
On the other hand, when we look at market session, we’re also looking at the service sector, particularly the entertainment and leisure sector, and the aviation industry as well because, aviation — of course, when there is a recession, there will be less flights, and that combined with high fuel prices, will also get hit. So these are more or less the sectors that we’re looking at. I’m not going to go in all of the sectors, but this gives you a sense, on one hand.
And then secondly, we look obviously at the retail side at clients which are very vulnerable to higher energy bills in the one hand, and for some which have variable rates or where the fixed rate comes to an end between now and next 12 months, the impact of higher interest rates as well. And there, we purely look at the cash flows that we see from clients, and we stress those to see which clients are more vulnerable. I hope that answers your question.
Johan Thijs
I will take the second question, Giulia. So on the cost side — indeed, we have two sides of the story. First of all, we will give you a full guidance on where we will be with costs going forward in 2023, as I said, at the beginning of next year. But to give you a little bit of flavor, so, first of all, we were able, in 2022, to manage the impact of inflation in two ways.
First of all, in Belgium we can’t because it’s automatically indexed, as you know, and as you pointed out in your question, but what is — the alternative there is, we were able to manage other parts which we have control of. That is FTEs, and of course, other investments which we are doing. So in that perspective, we will continue to do the same in the year going forward.
The only thing which I would like to highlight is that, we see — and that’s something which is not new with all the financial — it is also true with all the financial institutions. What we do see is, of course, that there’s a constant increase of the cost on the regulatory side. Compliance, I already mentioned sustainability, and begin taking more and more FTEs and so on and so forth.
But despite the fact of that increase, because we already saw that massively in 2022, we were able to mitigate the impact. Central Europe, in that perspective even different. The FTE is more or less in line with what I just said for Belgium, but the impact of the inflation is clearly not automatically into the salaries.
And we are able to lower the increase of the salaries, the wage cost, substantially below the average inflation, which is true in Central Europe. And as you know, it’s more than, yes, 13%, 14%. So we are able to manage that downward significantly. That’s one thing.
What about the bank taxes. First of all, what I said bank tax — I repeat what I said. It is only for 2023 starting, and — except one country that is Hungary, is not necessarily bank tax, but the impact on our P&L decision taken by the government is already kicking in, in 2022. But all the other countries, we are talking about 2023-2024 period, that’s Belgium or 2023, 2024 and following for some other countries.
So Belgium, as I said, it’s not about tax increase, it’s about a decrease of the tax deductibility. 80% is no longer tax deductible. That has an impact on the income taxes, has no impact on the pre-tax results. We’re talking about a couple of tens of millions of euro for 2023. For Czech Republic, the bill, as I said, has been passed. There we talk about bank taxes.
And as you know, it is related to the results, and the impact is also in that perspective, limited for KBC. It is only applying as of 2023 and following years. Slovakia, the talks have been started up. There is no concrete bill passed in parliament. There is no concrete number yet out, but the estimated impact is also limited in terms of — limited, I speak about, a couple of tens of millions of euro. We don’t see any further increases in that perspective [as shown] .
Operator
And the next question is coming from the line of Raul Sinha, JPMorgan.
Raul Sinha
The first one is on NII. Firstly, to recognize that your NII guidance has been quite accurate, usually much more accurate than your peers. Obviously, in the last call, there was a lot of question around this, too. So just to say [[indiscernible] in terms of NII guidance, can I ask a question about Slide 55 and your new NII sensitivity, which is obviously lower as interest rates have moved up. You talk about even more conservative pass-through on that slide. So I was just wondering if you could give us a little bit more color in terms of what you mean within the changes to your assumptions?
And then secondly, I was wondering if — in terms of the capital moving parts, if you might have any more color for us in terms of where Ireland would close? Just that — there’s obviously quite a material benefit to your capital ratios, whenever that deal comes through. And so, I was wondering whether or not we should expect any distribution linked to Ireland to still be as per your normal full year results for decision? Or do you think that related to Ireland, it could also be maybe a mid-year event, just given how big the capital benefit might be?
Johan Thijs
I will take the first one. Coming back to, first of all, the first part of your statement. Thank you very much for the compliment. I remember what happened after the second quarter results, and I’m pretty pleased that my chief economist was right, and that, indeed, our guidance was quite accurate as you stated. What is a bit unfortunate is Page 55 — because that should not have been in the pack because it’s an old slide, and — so this is not the valid one.
What we actually are stating is, we confirm we have not changed the guidance whatsoever for — the long-term guidance and not — we have not changed the guidance for Page 55. So what was in the pack was an old slide with very different assumptions on interest rates and on [indiscernible]. So in that perspective, we did not change at all. We did not take a position on the guidance for the longer term, nor for Page 55. We will do that at the end of the fourth quarter results publication early next year where we give you the full detail on — and the longer-term guidance and the sensitivities, and also the net interest income and cost side of 2023.
Luc Popelier
And I will take a question on Ireland. So we — yes, we expect indeed a very strong capital release as a result of the completion of the sale of most of our assets and liabilities to Bank of Ireland. We expect the completion to happen in the third — in the first quarter of next year. We will only decide on how we’ll deal with the capital release at that time. We do not want to make any — already projections before we make sure that the completion has happened. And we will probably give a bit more guidance when we are releasing our fourth quarter numbers as we usually give then also our view on capital deployment, and that will then be part of that.
Operator
And the next question is coming from the line of Flora Bocahut from Jefferies.
Flora Bocahut
And the first question I have is going back to the revenue guidance for 2024. I think you have slightly changed some of the assumptions you made on the NII. I’m not talking about the rate sensitivity slide here. I’m talking about the ECB rate, which you now expect to be at 2.25% already by the end of this year. This is 1.50% before.
Obviously, the loan growth is also surprising positively this quarter. As you mentioned, Johan, on the introductory remarks, you consider [indiscernible] ECB rate at 2.50%, while the market is closer to 3%. So the question is, given you’ve left the 2024 revenue target unchanged despite all this, can we say that the risk to that guidance is to the upside? Or are there headwinds somewhere else that have appeared, that we need to be aware of, that will explain why the 2024 guidance is left unchanged at this stage?
The second question is a very simple one. It’s looking at the Czech NII. Should we consider that you are at the peak NII in the Czech Republic?
Johan Thijs
I’m answering the first question. Your analysis is correct. So the guidance for 2022 was updated, and it is indeed 2025 taken into account, I said 2.50%, why I was talking about the 2023 number when I said it during the presentation of the slides. And indeed, the guidance was given and updated for the volume growth, and it was increased from 7% to 8%, because we already passed the 7% as we speak. And then going forward, we did not change the position, nor on the sensitivity. We just kept the size as they were, including the long-term guidance for 2024, and your analysis is indeed correct.
So the market is higher as we speak. It depends a bit of the source, roughly 3% for 2023, 3.20% for the more bullish ones. And the longer term is for 2023, let’s say, around the — 2023, 2024 around the 3%. Our position in the guidance for 2023 is indeed only 2.50%, and therefore, this is conservative.
In terms of the specific lines of income and costs, which is a consequences of our calculation of the jaw, we will give you the update of the detail on the split line, central income and costs on the back of our budget exercise, which is currently running, and which is taking into account indeed higher numbers of interest rates, and also changed numbers on inflation, not only for the position of 2022 because that’s the starting position, but also for the position of ’23, ’24 and following.
And for that reason, we did not change the slides on 20 and on the sensitivity. But to answer your question, very short. When you refer to the jaw, we take into account the numbers which we have used as in the economic scenario. The question was, is there an upside? Or would we see any headwinds? The upside is indeed the thing which we are facing.
Luc Popelier
I’ll take a question on the Czech NII. So indeed, if the interest rates which we expect the — so [indiscernible] [depo] rates not to change anymore, it’s now at 7%. But indeed, I think we’ve reached the peak. Of course, there is always a probability, which we see as less than 50%, that there will be a further increase. But our view is that it will remain at 7% for the next few quarters. That is — there’s also a risk that the Czech interest rates will come down, and that’s why we’ve already started to increase the duration of the replication book, as a result of which also the peak has been reached as well. I hope that would answer your question.
Operator
And the next question is coming from the line of Benoit Petrarque, Kepler Cheuvreux.
Benoit Petrarque
So just to come back on the 7% CAGR, because it was not only 2.5% on Eurozone rate. That was also Czech rates going down to 5.25%, 2023 and 3.5%, 2024. Based on what — recent comments from the Czech Central Bank, do you see upside to that figure? And just to come back on the question on the Czech NII, I mean, there are some, well, cautious guidance on Czech NII from some of the peers talking about much weaker loan growth, and also the pass-through rates starting to pick up. So when you say it’s kind of we are — we’ve reached the peak, do you think it’s going to remain relatively stable on the back of what you’ve done on the replicating portfolio? Or could we trend down in the coming quarters? So that’s the first type of question.
And then just on the pass-through in Belgium, it seems to be extremely low, no banks really reacting. What is your view on the pass-through versus maybe the broader picture in Europe? Is that fair to assume that the pass-through will remain very much more likely under control in Belgium? Thanks to the — basically the market concentration and the behavior of banks.
And then if I may, just on the asset margin, I think you see — you’ve seen asset margin pressure in most of the markets. Is that a timing issue? Or do you think something more fundamental going on, on the asset side?
Luc Popelier
I will continue on the Czech NII then. Yes, when we say at peak, it doesn’t mean that it will come down necessarily. That will depend on many variables. And one of them, as we mentioned, is the pass-through rates. So we indeed saw also a pickup in the pass-through rates. On the other hand, we also see still good deposit inflows, albeit mostly on term deposits, but also on term deposits we get a good margin. So it is difficult to say in the balance of what the total effect will be. I think the biggest impact will be from lengthening the duration where we are giving up a little bit of the short-term interest rate benefit moving into long-term bond yields.
But obviously, we, therefore, lock in a strong interest rate for a much longer period. So that is, I think, also an important driver to take into account.
So have we reached the peak? Yes. It’s going to come down next quarter already, that is very difficult to say at the moment. And longer term, we prefer not to give guidance because we also then need to look at the loan growth. Loan growth there is — well, it has been very strong in Czech Republic. It will, of course, decelerate given the mild recession or the base scenario that we foresee.
But nevertheless, we still foresee good growth next year, and at margins, which — and that’s maybe already an answer to your second question — which should recover given that part of the — large part of the margin pressures had — was a result of the very strong increase in interest rates. That will not happen anymore next year. So we should see a recovery there. And that, together with loan growth should also support NII. So all these moving parts is very difficult to give a guidance on. That’s why we’re now doing the full exercise, and we’ll come back with more guidance in the first quarter — sorry, for the final, the fourth quarter results in February.
Johan Thijs
And topping up — let’s answer with the pass-through in Belgium. Yes, indeed, you’re right. We don’t see any pass-through yet on the banking — on the larger bank side. And as you know, we — with the four big banks in Belgium, we cover roughly 75%, 80% of the market in that perspective. What is going to be the situation going forward? It all depends on the evolution of the interest rates.
We have taken a very strong position in August, which is confirmed today on the rates increases, and we’ll see. It’s very difficult to talk about the future because that is not out guidance-wise. I can talk about the impact on net interest income, but I cannot talk about what we’re going to do commercially because that’s not allowed by law. But in terms of net interest income and so on and so forth, we have given you an idea where it will be for 2022. And as Luc has said, we will give you the full detail within literally three quarter — within the three months. so at the end of the fourth quarter results.
Benoit Petrarque
And maybe on asset margin in Belgium, any specifics [there] ?
Johan Thijs
So we — sorry, I forgot about that. So we — as I said during the call, if you look at the margins, which, by the way, we also published today, the pressure is definitely on the margin in mortgages, which is — has come down in the third quarter. But the good news is that we see on all the other products in the Belgian market. The margin going up. We saw the margin increasing on the corporate business.
We saw the margins increasing on the SME business, and we saw the margin increasing on the smaller portfolio, which we have is consumer finance. So in that perspective, there is an upside, and the upside is not uniform because the mortgages was going down. And — but also would remind you the explanation Luc has given also, on the situation going forward, that will apply to a certain extent also to Belgium, definitely on the evolution of volumes and the link between volumes and margin.
Operator
And the next question is coming from the line of Kirishanthan Vijayarajah, HSBC.
Kirishanthan Vijayarajah
A couple of questions from my side. So firstly, just a broad question on capital return, because we’re hearing that some other banks are perhaps facing some challenges, or at least question marks from ECB when they’re planning aggressive forward-looking kind of capital return aspirations. Is that a change in tone from the ECB that you’re also coming across maybe? Or do you feel, at least from your side, the tone hasn’t really changed from the early summer of this year?
And then secondly, on — going back to Ireland, can we just have your latest update on the speed at which the cost base also falls away? I know the RWAs you’re talking about, first quarter next year. Just wondering how much OpEx we should factor in for 1Q, 2Q next year? And positively speaking, are you finding it consistent with your kind of original expectations in terms of exiting the cost base in Ireland? Because there does seem to be some quite lumpy costs along the way as you’re sort of exiting that business. So just some clarity for what to [pent in] on the cost part in Ireland for first half of next year?
Johan Thijs
Coming back to the first one, the capital return and then the position of the ECB. Well, I’ve read — like you, all the articles in the newspapers and on the websites of the different newspapers that, indeed ECB is giving a couple of banks harder time on their, you called it, aggressive capital return. So it’s clear, and that is, I think, from a supervisory perspective, quite logical that ECB has taken a cautious stance in current situation of high inflation, low growth, potential recession and deep recession, that they take a very cautious stance towards capital returns.
And I’m not going to use your word, but I’m just going to call you, if you then use the word aggressive capital return, then definitely the ECB is going to be cautious. So in that perspective, I’m not surprised by a couple of statements, which I read in the newspapers that ECB is asking, at least, a lot of questions about potential capital returns and so on and so forth. In that perspective, KBC sticks to its position.
So first of all, we are well capitalized. We are profit generative, at least 250 bps of capital a year. So that gives us a kind of comfort position. We — as I said, we almost put away full through the cycle buffer for potential impact of that — the deteriorating economic situation in our lending book.
And we stick to our capital returns which we have put forward, that is, at least 50% of our profit will be returned to our shareholders. We will define [service capital] as of 15%. And if we cannot make it work, like we did, by the way, with the acquisition of Raiffeisenbank, Bulgaria, then we will also consider that for return to our customers — to our — not customers [for heavens’ sake] to our shareholders. And the way we do it is that we have all the instruments available that is in cash, or we have had an approval of a share buyback by our AGM last May. So that is also one of the possibilities. And we will discuss all matters with ECB in — when the time — that is needed. But as I said, I’m not surprised by their stance.
Luc Popelier
On Ireland, the costs at the moment are relatively high. And business as usual, you see the total costs for the third quarter was €52 million, but that includes indeed some one-offs underlying at close to €40 million at the moment. That will ramp down once we can achieve completion. Now the ramp down will not happen from one day into the other because we have to let people go over time that is — and we have to ramp down the operations, turn back licenses and so on. So that will take some time. And then we’ll come to a more steady state at — in a few quarters.
To give you a concrete results, we will be averaging down to about 15% to 20% — sorry, €15 million to €20 million per quarter in a steady state after the completion. And obviously, taking into account that it will not happen in the second quarter immediately, you have a ramp down period necessary for that.
Operator
The following question is coming from [Sam Maurepas], Barclays.
Unidentified Analyst
I have two questions, please. Firstly, on NII. [indiscernible] — So just on NII in FY ’22, specifically in reference to the guidance of a €73 million benefit expected from TLTRO in 2H. Notably, that’s unchanged from the guidance given in Q2. And just in the context of your Benelux peers guiding towards some negative impacts in Q4 from hedge on [one]. Just wondered if you could provide some color on whether that €73 million is kind of net of any potential expenses? Or is it just solely capturing the charge-up until the [23rd] of November?
And then secondly, on costs. Should we expect a roughly equal 3% CAGR out to FY ’24 each year? Or do you expect some kind of disconnect between the inflation levels expected in FY ’23, and then the timing of any kind of cost-cutting measures?
Johan Thijs
Coming back to the first one on the TLTRO 3. Yes, indeed, we have adapted our guidance as was in the — I don’t know which page that is, I think it’s Page 20. In the footnote, it’s mentioned there — yes, indeed it’s Page 20. So it’s €73 million now, whereas in — the previous guidance — for the remainder of the year, the previous guidance was €74 million. And that takes indeed into account what you indicated in your question, the new policy regarding TLTRO from the ECB. Now the reason why the updated number is so close to what the original number was — the original number was €74 million — is that the TLTRO changes only kick in now.
And that, of course, what we have been seeing is because of the interest rate increases, which are much sharper than what we originally assumed in our scenario. We have actually gained more profit in the first part of the second half of this year, and that we now have a negative impact as of the 23rd of November, and that’s setting each other off. And for that reason, it’s €73 million. So of course, the impact going forward on TLTRO in ’24 will be then completely different as a logical consequence of the position taken by the ECB.
Luc Popelier
On the cost side, well, we don’t expect a nicely spread increasing costs over the years in line with the 3% CAGR. But it will be more front-loaded, obviously, because the inflation was very strong initially. We think it will then reduce over the next two years — well, ’23 and ’24, much lower than in ’22. So the biggest effect will be in ’23. And then we will also see not only lower inflation rate and therefore, lower pressure on costs, still at a higher level than usual, of course. But secondly, we will also see more and more the effects of the productivity gains that we already see coming through, and that will be even more visible in the year in year ’24 compared to ’23.
Operator
The next question is coming from the line of Matthew Clark, Mediobanca.
Matthew Clark
Could you just talk a bit about the outlook for Hungary next year, given the higher gas reliance, maybe the perhaps more vulnerable to the economic downturn? So how do you think about that? And how is that reflected in your group guidance.
Johan Thijs
Hungary is indeed in a very particular situation, and we have seen several interventions from the government, both into our P&L directly, but also economically. And therefore, indeed, we have a close look on what is happening in Hungary, and we have taken that into account fully in our guidance. So this is — indeed is solved.
Operator
And we do have one more question, which is coming from the line of Farquhar Murray.
Farquhar Murray
Just one question from me. Again, coming back to the customer spread in Belgium. And the lack of pass-through on deposits is obviously improving the liability margin, but the counterpart seems to be the lack of movement on mortgage rates pressure on the asset side. Is there any reason why the system is responding in that way and the competitive dynamic around it? I kind of understand the lack of competition on deposits, but I’m just wondering what’s driving the inertia on the mortgage rates and when actually maybe the capping rules were part of that?
Johan Thijs
I’m a little bit surprised about your conclusion on — or perhaps I misunderstood it on the inertia of the mortgage share rates because there’s a super strong competition on the mortgage rates in Belgium. For that reason, it’s the only topic, which is — indeed the only topic — I mean, the only product line in lending in Belgium where the margin has declined. All the other margins are going up. And that is because of the severe competition, which is ongoing. So if I misunderstood your question, please rephrase it. But the detail in that perspective, you can see on Page 25 of the slide deck where we disclosed the competition, as you could call it, in Belgium on the mortgage and on the corporate and SME loans business. So if I misunderstood your question, please, could you then rephrase it?
Farquhar Murray
I think [not] necessarily we may be talking at cross purposes. What — I meant inertia — I mean the lack of movement in the mortgage rate, which is then driving the margin down, as you say, which obviously looks like it’s super competition. But the other side is if everything was so competitive, why wouldn’t we be seeing a bit more competition around deposits on that side? And is it just the markets are very distant, divorced from each other at present?
Johan Thijs
Yes indeed. I mean, first of all, of course, every bank has its own strategy. And that means also every bank has its own strategy on both sides of the balance sheet. Also on both side of the balance sheets that has an influence on how you position your products. Now I said earlier on the question was — [indiscernible] we need to be careful what I say because I could give commercial guidance, and that is forbidden, as you know. But the end conclusion is that until further notice, we do not see any strong competition amongst the major banks in the deposit book. We’ll see how that evolves going forward when interest rates increase further, because you can imagine that on a regular basis, we do have articles in the newspapers in Belgium indicating that the deposit rates should increase for customers.
And then the second thing, the commercial pressure on the mortgage business has been severely strong. And you can see that on Page 25 for two, four, six, eight quarters in a row, and that obviously also comes to an end a certain moment and then you should have a change of position there. So it’s kind of linked. But as far as we are seeing it now, it is still behaving independently from mortgages and customer and corporate loans, and it’s clearly also independently behaving between mortgages and deposit rates.
Farquhar Murray
It’s funny how you don’t see articles saying that mortgage rates should go up.
Operator
We have no further questions waiting in the queue at this point. [Operator Instructions] No further questions waiting in the queue.
Kurt De Baenst
All right. Then, this sums it up for this call. Thank you for your attendance, and hope you remain healthy. Take care and enjoy the rest of the day. Cheers.
Operator
Thank you. Everyone. That concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.
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