U.S. Markets closed

Edited Transcript of KBC.BR earnings conference call or presentation 14-Nov-19 8:30am GMT

Q3 2019 KBC Groep NV Earnings Call

Brussels Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of KBC Groep NV earnings conference call or presentation Thursday, November 14, 2019 at 8:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Hendrik Scheerlinck

KBC Group NV - CFO & Executive Director

* Johan Thijs

KBC Group NV - Group CEO, MD & Executive Director

* Kurt De Baenst

KBC Group NV - General Manager, IR

================================================================================

Conference Call Participants

================================================================================

* Benoit Petrarque

Kepler Cheuvreux, Research Division - Head of Benelux Equity Research

* Jean-Pierre Lambert

Keefe, Bruyette & Woods Limited, Research Division - SVP and United Kingdom Analyst

* Josema Coll

Grupo Santander, Research Division - Equity Analyst

* Kirishanthan Vijayarajah

HSBC, Research Division - Analyst

* Omar Fall

Barclays Bank PLC, Research Division - Analyst

* Pawel Dziedzic

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Stefan Rosenov Nedialkov

Citigroup Inc, Research Division - Director

* Tarik EI Mejjad

BofA Merrill Lynch, Research Division - Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the KBC Group Earnings Release 3Q 2019 Conference. (Operator Instructions). I'd like to advise all parties, this conference is being recorded. And I'd now like to hand over to Kurt De Baenst. Please go ahead.

--------------------------------------------------------------------------------

Kurt De Baenst, KBC Group NV - General Manager, IR [2]

--------------------------------------------------------------------------------

Hello, good morning. A very warm welcome this morning. Today is November 14, 2019, and we are happy to host the conference call of KBC's third quarter results.

As usual, I have Johan Thijs, our group CEO with us, as well as Rik Scheerlinck, our group CFO. As a result, it's my pleasure to give Johan the floor to elaborate on the results.

--------------------------------------------------------------------------------

Johan Thijs, KBC Group NV - Group CEO, MD & Executive Director [3]

--------------------------------------------------------------------------------

Dear colleagues, also from my side, a warm welcome on the announcement of the third quarter results. And as usual, I will talk you through a couple of slides. And we start also, as usual, with the key takeaways of this third quarter.

In brief, the result of the third quarter stood at EUR 612 million, which is a good result, definitely given and taking into account the circumstances in the markets where we are active in. In essence, I could say that the pure core of our business has been performing extremely well. It means that all bank-insurance franchises have been producing more than according our plan and that is translated in higher volumes on the loan and deposit side and higher margins on the production of those products.

We have higher fee and commission income. We have higher insurance sales. We have good and actually, it's an excellent combined ratio, so quality wise is okay as well. And the costs were down, which is good news. And also, the impairments were down. So all the important lines, which I consider of being our core business are doing extremely well, have been doing extremely well in this quarter. The only thing which was a bit of a disappointment in our respect was the performance of our dealing rooms where we have taken positions on interest rate increases and that has turned out negatively, as you all know.

So in terms of the P&L, it was a strong quarter that has been translated in a return on equity of 15%. That has also translated in a confirmation of our strong capital position, which now stands at 15.9%. If we apply the new rules of the ECB, where we do not recognize the profit made in the quarters in that capital ratio, it stands at 15.4%. But let's face it, the reality is it's actually 15.9%.

Leverage ratio stands at 6%. As I said, liquidity positions are also quite good. So it also concludes us to announce further confirmation that an interim dividend of EUR 1 per share will be paid out as an advance on the total dividend of 2019, and that payment will be concluded as of tomorrow.

In terms of further detail, you can see the building blocks on Page 4. I'm not going to elaborate on them to save some time for questions afterwards. And the same is true on the exceptional items on the next page, where we see that this quarter is actually a quite normal quarter in terms of the exceptional items.

The only thing which is in there is the EUR 18 million, which we have booked in net other income in Ireland that is mainly related to a provision which we have taken for the potential fine which we are going to get on the tracker mortgage issue that -- I will come back to that later on.

The other thing is, obviously, if you make -- start to make comparisons to the previous quarter, be aware that previous quarter was heavily positively distorted by the consolidation of CMSS. That was a contribution of a positive EUR 82 million in that quarter, whereas also in that quarter, we had a positive DTA impact of EUR 34 million. So making the comparison with the previous quarter, be a bit careful.

In terms of the performance of the group, the bank-insurance split, as we always do, is the one which you have seen before. It's more or less in line with the 85%/15% average. It now stands at 84%/16%, so quite normal. Let's not waste time here and let's go immediately into the important contributors of our P&L and start with the net interest income.

On the net interest income side, once again, I can give you good information or good outcome. The output in this quarter was EUR 42 million higher than previous quarter. It was also substantially higher than the same quarter last year, 3%. And that is mainly due to the banking performance. (technical difficulty) If you would exclude the insurance business, where the impact of the low interest rate environment is quite significant. So if you would only look at the banking business, then you can clearly see that the performance of the bank was really good year-on-year, it increased -- the net interest income increase with a strong 6%.

Now what are the main drivers? Let me start with the same banking side. It is clear that the interest rate environment is having an impact on our transformation result. That is the reinvestment yield, which is continuously under pressure. And as we all know, after the recent decision of the ECB, that will stay further for longer.

The positive side, on the other hand, is that we had an extremely strong quarter in terms of our lending net interest income, which means that both volumes were up, 4% on the year, 1% on the quarter, and this is true for -- this is an average, obviously, but this is true for all of our core countries. And far more important is that also the margin, the net interest margin on that new production is up as well, and sometimes is significantly up. I'm talking about 30 basis points in Belgium. I'm talking about more than 10 basis points in Czech Republic on the new production of mortgages. That is quite significant.

In terms of the product of the 2 means that the lending business is significantly up on the quarter. I'm talking about EUR 19 million extra just because of that, which is quite significant. In terms of the other elements which are in there, you can read it yourself. For instance, we have a full consolidation of CMSS [all] which makes a difference of EUR 14 million quarter-on-quarter. It's about EUR 7 million per month that you can calculate the CMSS. We have some additional impact on the short-term interest rates in Czech Republic, EUR 3 million and so on and so forth, not going to go into that detail. And there's also a technical element on the insurance side because the coupon on the inflation-linked book -- sorry, the inflation-linked bonds are booked in the third quarter, and that's obviously a little bit of distortion there.

But nevertheless, the sum of all parts is mainly driven by good commercial performance in all of our core countries. In terms of the net interest margin, because of the increasing margins on the new production it stabilizes now, and that has to do -- mind you also, with the consolidation of CMSS, you can clearly see that in the results of Czech Republic NIM.

But what we also see is that, for instance, now in certain countries, that new production margins are higher than the margins on the back book, and that obviously has a positive impact on that very same net interest margin.

So good news on the net interest income side, and this is also repeated on the fee and commission business. Here, we again have a strong performance. This is now for the fourth quarter in a row. We have an increase of 2% on the quarter and we have a 5% increase on the year, which is really, really strong.

In terms of the split up, as you know, this fee and commission business can be split up in 3 buckets. The 2 most important one are the fees generated through the asset management business, but as the other part is generated through the banking services.

Let me perhaps start with the latter. Banking services have a 3% increase on the quarter, and that is mainly driven by the payment services in Central Europe, which is really an excellent result, also taking into account the fact that the markets are not really easy at this instance. We have also some regulation, which has adopted, for instance, the difference between fees which can be generated on the bank's transactions are under pressure. But nevertheless, we saw an increase in this respect of 3% on the quarter, which is good news.

The main bulk of that fee income is generated on the other hand by the asset management activities. And here we do see, indeed, again a strong performance, and that's on both sides. For instance, we had a better -- substantially better than budgeted sales order. So the gross sales were up more than EUR 3 million, which is significantly higher than we anticipated for. That translates in higher entry fees, and those entry fees were up at EUR 35 million -- sorry, they were EUR 2 million. If it would have been up at EUR 35 million, we'll be really excited. So that's good news because it's not only on the volume part, but also the entry fee margin was up with 4 basis points on the quarter.

The entry fees are only a part of that. As you know, the split up between entry fees and management fees is 15%/85%. And if you want to have the full split up between the EUR 444 million banking services and asset management, the split is more or less 35%/65%. So you can calculate yourself what the impact is of the entry fees, about 8% of the total.

The management fees, which is the more important part. Good news there as well, up EUR 5 million, which is due to the fact that the assets under management increased, but also the margin as such. So the asset management margin was up as well. And that is given all the circumstances which we have been facing, amongst others the introduction of MiFID II and so on and so forth, excellent results.

In terms of the assets under margin -- sorry, assets under management, we now stand at EUR 212 million, which is a 1% increase on the quarter, which means also that we are back on the same level as where we were end of 2018 (sic) [2008] after the, let's call it, the crash in the financial markets. Now the gross sales were good, what we still see is net outflows and those net outflows are more or less EUR 300 million.

What we do see here is actually something which is perfectly in line with what we saw previous quarter -- previous year, sorry. First quarter was very good, and then a small decline in the second and third quarter. In terms of the insurance results, I can continue with the good news. Also there, we saw a strong performance. The premiums are up 9% on the year, which is actually quite strong, and it's 4% in Belgium. Let me give you a little bit of a reference point there. 4% up in Belgium means that it's at least 50% better than the market average. So that's once again a strong performance.

In terms of the Central European countries, we have digital -- double-digit numbers in each and every country. And that is again because last quarter -- last year, it was exactly same thing. So Central Europe is really kicking [off] the bank-insurance model, really kicks in, in those markets.

In terms of the output quality, I mean, what's the quality of the underwriting, it remains solid. 92% is an excellent result. It's better than our long-term target and it's indeed a number which is a little bit higher than last year. But mind you, these are year-to-date numbers and the year-to-date number was distorted by the first quarter windstorms, flooding and stuff and a couple of bigger claims, whereas also, we made an adjustment to our provisions in the Belgium business unit. And as you know, those revisions of parameters always done the typical KBC way, means very conservative.

In terms of the life sales, that's been a more difficult and complicated picture. Be careful when comparing the quarters on the quarter because we have seasonality in here, and that seasonality creates a negative impact on third quarter. That's always the case.

But if you compare it with last year, then the growth is about 5%, split up between unit-linked products and interest guarantee products. It actually doesn't make a difference, both were up 5% on the year. This is given circumstances, okay, I would have preferred this to see a bit stronger. But here also, the bank-insurance model plays. We have a perfect alternative, for instance, the high taxes which are raised on the unit-linked products in Belgium. That alternative is called asset management, and that obviously translates into net gross -- in the gross sales, which are significantly up also in Belgium.

In terms of the negative side of the P&L this time, we go to Page 13. That's the appropriate page for this result. The -- it is down significantly, and that is EUR 48 million on the quarter. And that is mainly due to the impact of the interest rate environment. Let's emphasize that where it is, and the dealing room results were down EUR 25 million because we have taken position on an interest rate increase, ["normal"], and as a consequence, we have taken the hit. That hit, if you compare it with last year, it was even more substantial. You can calculate yourself the impact, it's at EUR 770 million. And also on the Czech environment, we had not anticipated on the inversion of the rate curve, and that has kicked in negatively as well.

In terms of the value adjustments. So the funding counterparty value, adjusted market value adjustments, we have seen the impact of that very same interest rate environment as well. But also, we saw the increase in counterparty credit spreads and the KBC funding spread increased as well. And that has, obviously, a negative impact on those elements now. The better KBC does, the better it becomes. So in this respect, it is something which is cyclical, and therefore it potentially comes back over time.

In terms of the equity realizations surplus, which we realized we did not use them in this quarter. It is EUR 2 million less compared to previous quarters and it's also less than the previous years. So in this respect, we did not push for further realization of our equity position, which is mainly at the insurance company.

In terms of the net other income, I would say it's a normal quarter because it now stands at EUR 43 million. If you would take out the one-off, which is booked here that I'm talking about the provision, which was done for the tracker mortgage potential filing, which we will get, that's EUR 40 million, then it stands at EUR 57 million, and then we are perfectly in line with the run rate of EUR 50 million. Mind you as well that the EUR 133 million in previous quarter was heavily distorted by the EUR 82 million one-off on the consolidation of CMSS.

Let me give you a bit more flavor on the potential sanction. So the Central Bank of Ireland is conducting an exercise which is called the tracker mortgage investigation, and that will emphasize on other mistakes made and will result, potentially, in a fine. Now the external auditors of KBC asked a provision for that. The question is how much? This is a big question mark, nobody knows. But what we have been doing is we have been taking into account the only one which is already public. The only fine which is already public in Ireland. And we use the parameters which were used by the Central Bank of Ireland to calculate our potential fine, and that would result in a fine of more or less EUR 14 million, and that's what we have provisioned for.

In terms of cost management, we all -- we are on Page 14. So more good news. So once again, we have managed our costs in a strict manner. This has also resulted in actually a decrease of our cost is 1% on the quarter, and that has even resulted in a decrease of our costs over the year, 1% each.

And let me perhaps emphasize what it means. It means that all the increases which are linked to the wages, or the inflation in that wages in Belgium are linked to the index. And also the wage inflation in the Central European markets has been fully compensated by FTE reductions. Also, the increase of our investments, be it that it is seasonal and that third quarter is mostly a little dip in that respect are fully compensated for that next to the consolidation of CMSS, which is EUR 11 million in this quarter is fully compensated.

So in essence, we stick to our guidance in this respect. We continue to manage our costs in a very strict manner, and that means that our cost increase also going forward will be kept under control.

In terms of the cost-to-income ratio, the unfortunate thing is that, obviously, we do see a big pressure on our income side and the cost-to-income ratio now stands at 59% year-to-date. If you would exclude entirely the bank taxes, for good understanding, we expect almost EUR 0.5 billion, EUR 0.5 billion of bank taxes in 2019 full year. That's a whopping amount. And if you would exclude those, the cost-to-income ratio would stand at 52%, which I think is quite a nice result.

In terms of the split of the bank taxes impact on the operational expenses, you can see it on Page 15, let's not use too much of time for explaining that. Let's go immediately to the impairments. And also there, we have some good news. Impairments are down again, EUR 26 million, which brings the credit cost ratio to 10 basis points, which is indeed a good result definitely, taking into account the long-term average of 30, 40 basis points.

The split up of that EUR 25 million -- of the EUR 26 million to EUR 25 million on the lending activities, EUR 1 million is another impairment. But the EUR 25 million can be easily split up about the countries. Let me summarize it in brief. All countries are doing exactly what they were expected to do. So it's more or less in line with the budget and we have write-backs still in Czech Republic -- sorry, in Ireland, EUR 7 million. And we have a write-back in group center for Diamond Bank as well. In that respect, we do see also, in all those countries, credit cost ratios which are substantially below the long-term average.

In terms of the impaired loans, the impaired loans 90 days past due stands at only 2%, which is a fundamental improvement compared to a couple of years ago and which clearly reflects the good quality of our book.

The business profile on Page 18, I'm not going to spend time upon. And also, the same is true for the business units. I mean, in essence, what I said for the group is true for each and every country. So better net interest income, better net fee income, better insurance business, lower impairments and so on, costs are under control. The detail is obviously giving here and there a little bit of differences. But in essence, it's for each and every country the same.

On Page 38, you have the organic growth volume. Mind you also, Ireland is having a positive impact and has now positive numbers despite the fact that the legacy portfolio is still there and it has been reduced significantly in order to make this happen now that the overall numbers are positive.

And let me translate all of those results into capital ratios. We now stand at 15.4%. If we would fully include the net result, taking into account the dividend payout of 59%, which is the same as last year, then the capital position stands at 15.9%.

The reason why we are there is obviously that the good results, but also the volume have been driving the risk-weighted assets upwards. Volumes are the main -- I mean, are the almost sole -- so the sole explication and explanation for the increase of risk-weighted assets. It's a bit more than EUR 1 billion up because of the volumes which we have generated. I mean, I could dwell upon the details there that are a little bit of translation differences and so on so forth, but that is not really explaining it. But the main driver is volume increases, so risk-weighted assets up EUR 1 billion.

In terms of the total capital ratio, 89% is fully explained by what I just said about the common equity tier ratio, so let's not dwell upon that detail too much. The 6% leverage is solid and the 187% of Solvency II ratio in the insurance company is indeed lower than previous quarter, but it's still perfectly in line with our expectations and our standards.

Now where does it come from, that decline? It's actually simply explained by the impact of the longer-term low interest rates. Those interest rates have, as you know, an impact on both sides of the balance sheet, and it's a higher impact on the liability side than on our asset side, and that almost entirely explains the difference.

We have some credit spreads going up, which means that the valuation of loans are going down, and that has also a negative impact of 1 basis point. We have a 1 basis point impact of our equity portfolio because equities have been performing better, and that generates more capital requests. And we have been buying a little bit more of equity, and that also translate a little bit more equity. But it's, in total, only 1 basis point.

So it means also that the expectation going forward for [predense] in the fourth quarter is that EUR 187 million is the bottom and that it now goes up again as of the next quarter. So we will be hovering around, let's say, 195%.

Also, keep in mind that in the insurance company, we fully upstream all the dividends towards the group. So this is a clean result of the insurance company, taking into account a 100% dividend payout.

In terms of the funding side, actually not much to mention. That's quite stable. 71% of our funding comes from our customers. And on top, the liquidity ratios are super stable, which means that I can conclude by saying that despite the difficult circumstances, we have delivered on all the important lines and those important lines are all the lines which we can influence. So both on the quality in terms of underwriting, in terms of producing, in terms of managing the cost side, all of them have been doing quite well in this quarter, and that is something which we expect going forward as well on both sides. It means Dublin's on the economic situation, but KBC performing well on those things which we really have [impact on].

I will now [prefer] to give the floor back to Kurt, who will guide us through your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Kurt De Baenst, KBC Group NV - General Manager, IR [1]

--------------------------------------------------------------------------------

Thank you, Johan. The floor is now open for questions. May I kindly ask you to restrict the number of questions to 2 without, and I stress it, without 15 sub questions so everybody can ask his or her 2 burning questions during the call.

--------------------------------------------------------------------------------

Operator [2]

--------------------------------------------------------------------------------

(Operator Instructions) And we have the first question, and it comes from Stefan from Citigroup.

--------------------------------------------------------------------------------

Stefan Rosenov Nedialkov, Citigroup Inc, Research Division - Director [3]

--------------------------------------------------------------------------------

It's Stefan from Citi. My 2 very burning questions are as follows. Number one, are you ready to tell us about your NIM expectations for 2020? And I would appreciate at least some color rather than, "We'll tell you in 4Q," in terms of moving parts on the rate side of things in Belgium versus non-euro countries.

And my second question is I noticed you've changed the hedging from the parent book value to your capital ratios. Can you walk us through what are the reasons for that? What are the pluses and minuses? And I'm also thinking if you're not hedging the parent book value for FX risks outside of the Eurozone, should we be expecting a bit of a negative drift going forward through other comprehensive income like we're seeing with other banks that are operational in non-Eurozone countries?

--------------------------------------------------------------------------------

Johan Thijs, KBC Group NV - Group CEO, MD & Executive Director [4]

--------------------------------------------------------------------------------

Thanks, Stefan, for your 2 burning questions. I will take the first one that is guided. And I saw your preliminary remarks yesterday, where you already give some guidance on the net interest income going forward. But you know -- and I know that it was part of your question -- you know that we have said already earlier that we will give guidance in -- after the fourth quarter, and that has actually 2 main reasons.

So KBC has a tradition. If we give guidance, and definitely on the important lines, we want to give you guidance which is sticky. We started this year, beginning of this year, giving the guidance. It will be EUR 4.6 billion ballpark, EUR 4.6 billion on the net interest income. Today, we confirmed that EUR 4.6 billion. We have not changed our guidance. And I confirm today, it will be EUR 4.6 billion more or less. But as previous quarter said, ballpark, you can interpret lower end of the range or higher end of the range. So previous quarter, we said it will be closer to the lower end. This quarter, we said it will be on the upper side of the EUR 4.6 billion.

So in that respect, I mean, I can give you some color on Belgium, I will do in a second. But in this respect, also, we continue to give guidance in the fourth quarter, EUR 4.6 billion confirmed. There are some technical elements in the results. If you correct for those, then it will be more or less in line with what you have seen in the third quarter give and take perhaps EUR 5 million difference, up or down. Now in terms of next year's guidance on the net interest income, I would say this, give us the time until fourth quarter and we'll give you a guidance that you can use throughout the year.

In terms of NIM, let me give you a little bit of flavor there. I will give you the flavor for the fourth quarter. What we see is that volumes are still doing quite well. And despite the -- and definitely in Belgium because your request is to split up between Belgium and Central Europe. Definitely, in the fourth quarter, we have seen, right -- let me give you a bit more flavor on the first month of the third -- of the fourth quarter. We have seen a big uptick in our production because of what is called the Belgian bond bonuses. It's a fiscal tax benefit for mortgages that has been stopped by the government and they will (technical difficulty) now, so we have still a couple of months to make production, and we make use of them. So we will see a big uptick in our production. But despite of that, our margins are still going up. So what you have seen published today is not the end yet, and that's the guidance which I gave on Central Europe, you know our policy, we try to have a sound margin and that sound margin means that it has to go upward. We have seen that in the third quarter, and we will strive for doing exactly the same thing in the fourth quarter.

So in terms of NIM, I mean, this gives the most explicit guidance which you can get on the fourth -- sorry, on the 2020 year. Have a little bit more patience and we will give you a guidance which you can use for the full year of 2020.

--------------------------------------------------------------------------------

Hendrik Scheerlinck, KBC Group NV - CFO & Executive Director [5]

--------------------------------------------------------------------------------

Good morning to everyone from my side as well, and to come back on your second question, Stefan, indeed, the way that we have changed the hedging from our FX participations, which is mainly a participation in CSOB and in K&H Bank.

Before we were -- it was important for us to stabilize parent shareholders' equity. That was the big focus. But as the focus has been changing to CET1 ratio, we have changed that strategy. And indeed, now we make sure that we actually stabilize the CET1 and that is indeed a change in direction we took there.

--------------------------------------------------------------------------------

Stefan Rosenov Nedialkov, Citigroup Inc, Research Division - Director [6]

--------------------------------------------------------------------------------

Okay. Just to follow up quickly on the hedging, Rik. So our -- should our takeaway be less volatility on the CET1, but potentially more volatility on the book value on a quarterly and year-on-year basis?

--------------------------------------------------------------------------------

Hendrik Scheerlinck, KBC Group NV - CFO & Executive Director [7]

--------------------------------------------------------------------------------

Yes, Stefan, that is indeed correct. But mind it, if you look at the long-term expectation of where the Czech koruna is, and you just look at the website of the Central Bank of the Czech Republic. So there's a general expectation that we will see a strengthening of the Czech koruna.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

And we do have the next question, and that one comes from Jean-Pierre from KBW.

--------------------------------------------------------------------------------

Jean-Pierre Lambert, Keefe, Bruyette & Woods Limited, Research Division - SVP and United Kingdom Analyst [9]

--------------------------------------------------------------------------------

The results were quite good, and so I will focus on 2 general questions. The first one is the trend in international, other international, the contribution. If you look at Slide 31, we see a change in, I mean, a decline compared to last year. I mean some of it is due to Ireland. We know why. But there seems to be a trend in terms of NIM pressure, cost rate and higher impairments. So the contribution of this segment is now 14% of the total.

Last year, third quarter, it was 23%. How do you see the evolution of this block outside of the Czech and the Belgian division business? The second question is also, generally, it's about digitalization of your asset management product. How is the state of play? Because if it's quite, how can I say, paper-based or meeting-based, it is at risk of competitive pressure. So I'm wondering what's the status, what's the direction there in terms of digitalization for the clients.

--------------------------------------------------------------------------------

Johan Thijs, KBC Group NV - Group CEO, MD & Executive Director [10]

--------------------------------------------------------------------------------

Thank you, Jean-Pierre, for your questions. Indeed, if you look at the trend of international markets, as you rightfully said yourself, it is a lower takeback of provisions in Ireland in 2019 versus 2018. And then if you look at the interest front and the interest margin, actually the biggest delta sits in Hungary. And you may remember there were a number of measures that actually the Hungarian Central Bank had taken in 2018, which were supportive of NII. And those measures, so there was actually off-market, long-term swaps. So those measures have been discontinued at the end of the year. That's number one.

Number two, the banks also were investing in retail government bonds. And those retail government bonds, which were actually issued at a certain premium, if you look at the interest carry, they have also been repaid by the Hungarian government at the end of the year, and that is the main reason why you see the NIM coming down in international markets.

The second question, Jean-Pierre, on the digitalization. So what is true for the whole group is also true for individual subsidiaries like asset management. That is, we are striving for a full digitalization of our services and digitalization is, for good understanding, 2 sides. First of all, because you will have a redesign of your processes, your products, your procedures so it's not a digitalization of the old stuff. And then the second thing is the inclusion of artificial intelligence into that.

Let me narrow it down now to asset management. As you know, asset management of KBC Group has a cost ratio, which is substantially lower than the average of the market. We talk about 10% on average, that's quite strong. But nevertheless, also in asset management, we have been running a complete redesign of the processes, and we are implementing platform AI solutions. We will launch fairly soon some results of that, and they are full AI-driven solutions, which means that we will launch it. We have been running this for more than a year internally already, and we will launch it now to the outside world, also potentially to customers in different ways, but it is a bit too early to disclose upon that. But be aware that, indeed, the answer to your question is very positive and it is driven on 2 sides, redesign and implementation of artificial intelligent solutions.

--------------------------------------------------------------------------------

Jean-Pierre Lambert, Keefe, Bruyette & Woods Limited, Research Division - SVP and United Kingdom Analyst [11]

--------------------------------------------------------------------------------

Great. To come back on the first question, how do you see the outlook for Ireland? Because the contribution is really declining following the sale of NPL and this reversal and so on. I mean, are you happy with your position in Ireland?

--------------------------------------------------------------------------------

Johan Thijs, KBC Group NV - Group CEO, MD & Executive Director [12]

--------------------------------------------------------------------------------

So let me be straightforward about that. So Ireland is doing quite well. If I look at the bold numbers of Ireland, then -- I mean, the underlying business numbers. So once again, we had 22,000 new customers in the third quarter, which brings the total for the full year already to more than 60,000 new customers. We have a market share in the mortgage business, which you know is quite important for us, of more than 12% the -- we outperformed the market in that respect. We have a market share on average, which is growing to 11% on the whole book. The mobile app activity was -- carefully, listen carefully -- 50% up year-on-year, which means it is really the driver. And in that respect, business wise is doing okay.

We have been cleaning up the legacy book, as you know. We sold part of our NPL. We sold our corporate exposures so management can now purely focus on doing business in the way I just described.

What is still an annoying thing is the whole tracker mortgage stuff. Honestly, I would recommend to Central Bank of Ireland, "Come on guys, turn the page, let's focus on doing business. We are a little burned out." I'd ask them, "Let me know what to do. Let's now stop doing all nitty-gritty stuff, which is an administrative hampering of the development of the financial institution and the financial market as a whole in Ireland. Let's turn that page and now really grow into business." What is the long-term expectation? Ireland is going to be the challenge in the Irish markets. It will turn to a normal bank, which means, forget about the writing offs of -- the writing backs of the nonperforming loans and the matter we have seen a year ago, it will be now returning to normal. So we are talking about not hundreds of millions anymore, but tens of millions next.

And then the second thing is we are going to bring the KBC Bank Ireland to the level of integration which we want it to be, which means it's a full-fledged digital-first bank with a cost/income ratio which is the current cost ratio divided by 2, more or less.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

The next question comes from Pawel of Goldman Sachs.

--------------------------------------------------------------------------------

Pawel Dziedzic, Goldman Sachs Group Inc., Research Division - Equity Analyst [14]

--------------------------------------------------------------------------------

And 2 questions from me. The first one is maybe a little bit more technical, and it's just on your dealing room income. We've seen it -- the performance was weak already last quarter, and now it turned loss-making. So perhaps you can give us a little bit better sense what exactly happened there? Do you expect an improvement in the coming quarters? And to what extent you would feel comfortable with the profitability reverting to, I think, EUR 40 million, EUR 60 million run rate that you showed in the previous quarters? So that's number one.

Number two is on buybacks and your capital distribution. I know it's early, I know it's not fourth quarter as well. But SSM for the first time signed off on a major buyback for one of your [Euro] peers. And of course, if you look at other regions, the buybacks are much more common. So could you, just going into fourth quarter and no more, maybe detailed discussions about your capital distribution, can you help us understand if this is something that you would be willing to consider? You did a small buyback last year, but of course, would you be willing to use it on a more regular basis?

--------------------------------------------------------------------------------

Hendrik Scheerlinck, KBC Group NV - CFO & Executive Director [15]

--------------------------------------------------------------------------------

Thank you for your questions, Pawel. If I may come back on your first question, the results of the dealing room, the main difference between the previous quarters was actually in what we call our single-rate desk and our cross-rate desk, and that has to do with the shape of the curves and the, as we would say in the Czech Republic, the asynchronic move of the curve.

So we are positioned. So where we take spread positions, typically, you do either 3-month 6-month or 3-year 5-year, and you've seen the wide gyration in the interest rate curve in the Czech Republic as a result of that. At the end of the quarter, when we had to do the devaluation of those positions, they turned out quite negative.

In the meantime, the curves have moved quite substantially. I mean, the interest rates in the Czech Republic went up. If you just look at the 3-year and the 5-year, the increase has been more than 25, 26 basis points just in 6 to 8 weeks. And that will indeed have an impact on the valuation of the positions that we have in the dealing room.

And then, as Johan also said, so on the euro, same thing, the long end of the euro curve dropped much deeper than we had expected. We were kind of positioning ourselves for a very timid normalization of the interest rates on the euro. That has not happened. But then again, we had wide gyrations at the end of the third quarter. Also, those curves came back a little bit. So if those trends continue, the fourth quarter in the dealing rooms should be much better than what we have seen in the third quarter.

--------------------------------------------------------------------------------

Johan Thijs, KBC Group NV - Group CEO, MD & Executive Director [16]

--------------------------------------------------------------------------------

And regarding your second question, Pawel. So as you already indicated, indeed, the capital deployment plan will be -- I mean, the capital deployment going forward will be explained on the Investor Day, which we have, I think, launched today or yesterday the invitation for. That will be -- is it today? Okay. So we launched the invitation, and obviously, that will entail important messages around the capital deployment of KBC Group going forward.

Now coming back on the detail of the question, what is it then going to be for 2019? Well, we stick to what we said on previous occasions. That means the dividend payout is at least 50% and so we consider everything above 15.7% to be surplus capital. What is going to happen to the capital will be at the discretion, obviously, of our Board and then ultimately, AGM. But it is true that the way we are going to distribute surplus capital can have different forms, including share buybacks.

As you perfectly indicated, we were the first one in, I think, Europe, who has got a permission for a share buyback, be it a small one. But that permission was granted on the back of our good solid capital position, our good results and also the forward-looking position, which was exactly the same both on capital, both on profitability. And I think the [Offschen] group, which recently got the dividend buyback approval also used that same explication and referred to KBC. I know it from the CEO himself, and they were granted for that.

So yes, it's a possibility. Yes, we will explain what we're going to do in detail for the years going forward on the investor event for the year 2019 adjusted.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

The next question comes from Benoit of Kepler.

--------------------------------------------------------------------------------

Benoit Petrarque, Kepler Cheuvreux, Research Division - Head of Benelux Equity Research [18]

--------------------------------------------------------------------------------

Benoit Petrarque from Kepler Cheuvreux. Yes, 2 questions on my side. First one was on Czech Republic. I was wondering if you could update us on the expected pass-through of client rates on the deposit side. Do you see a move there? I think some competitors mentioned a few comments on that. So that's number one.

And number two is actually on the capital of the bank. So you said that you will distribute 100% of the earnings from the insurance to the group. So as your CET1 at bank level at 13.9%, excluding the profit and dividend accrual, I was wondering how much you plan to upstream to the group from the bank in 2019.

--------------------------------------------------------------------------------

Hendrik Scheerlinck, KBC Group NV - CFO & Executive Director [19]

--------------------------------------------------------------------------------

Thank you for your question, Benoit. On the first question, the pass-through of the repo rates. So as you know, we are very carefully watching the evolution of client money, mostly retail client money and we have indeed seen that some of the other banks became a little bit more aggressive on their pass-through pricing.

When we look quarter-over-quarter to our savings accounts and current accounts on total, we're down about EUR 10 million. So it's not all that dramatic. But -- and where is this money going? So partly, as we have said in the past, we have actually launched a very attractive asset management product, which is a short-term bond fund, and that has been very successful in the inflows in that fund, which is actually a way of investors to get a higher yield on their savings, is going very well. So that is at high levels.

What we have seen that, indeed, those clients of ours who also have investment accounts, that there was a necessity to do a certain pass-through there. So that is happening, but the impact on NII is not going to be all that substantial.

--------------------------------------------------------------------------------

Johan Thijs, KBC Group NV - Group CEO, MD & Executive Director [20]

--------------------------------------------------------------------------------

And regarding your second question, Benoit, so it's indeed correct that we upstream 100% of the insurance company to the group, and that upstream is continuously, so that happens every quarter. In terms of what is upstream from the bank, it is the remaining part which is necessary for the group, which means that it is not 100% for the bank. But -- and is only the part which is needed at group level. So we upstream and strengthen the capital ratio of the bank at the same time.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

The next question is from Kiri, HSBC.

--------------------------------------------------------------------------------

Kirishanthan Vijayarajah, HSBC, Research Division - Analyst [22]

--------------------------------------------------------------------------------

Kiri Vijayarajah, HSBC. A couple of questions. Firstly, on the strong banking fees that you were seeing, particularly in CE. Just a bit more color there. Is there any repricing going on there versus kind of volume effects? And looking further out, should we be thinking about potentially pricing pressure as more of those kind of payments and FX transactions move onto digital platforms? And then on costs, and the delayering of the middle management you executed on over the summer. Are we seeing the full effect of that in the third quarter, I guess presumably in the Belgium division? Or is there more of that to come through in the fourth quarter as well?

--------------------------------------------------------------------------------

Hendrik Scheerlinck, KBC Group NV - CFO & Executive Director [23]

--------------------------------------------------------------------------------

On the banking fees, and thank you for your question on the banking fees. Indeed, the third quarter is typically a good quarter, and it's very visible in international markets and in the Czech Republic. And that basically has to do with the tourist streams. So people are traveling, are using their credit cards to pay and there is a nice fee to be had on that one. So that is, again, something you see every year in the third quarter. So that is a positive one.

If you look at the potential headwinds or definitive headwinds on the banking fees for international markets, it is actually a change in the SEPA regulations. We commented on that already last quarter when there was a specific question about the Czech Republic. We see now that the impact of this new SEPA regulations on international payments will be about EUR 18 million for next year for the entire year.

--------------------------------------------------------------------------------

Johan Thijs, KBC Group NV - Group CEO, MD & Executive Director [24]

--------------------------------------------------------------------------------

Thanks for your question, Kiri. Regarding the costs, the -- indeed, we have announced in the second quarter the delayering of the organization, but that was for the management. In the third quarter, we were further pushing that down in the organization as indicated in a separate press release. You can find the details about that in that press release.

Let me just wrap it up in a couple of things. So in the second quarter, for the delayering of the management layer, we took into account EUR 10 million costs. And obviously, and you're right with your analysis, the benefits are contributing in each, as of the third quarter in our results. So going forward, that will be indeed the case for all quarters coming up.

Now it is -- we didn't disclose that detail, but to give you a bit of flavor. So the total benefit which we have by doing what we did is, I mean, 3, 4x the total cost amount, which we mentioned with the benefits, EUR 30 million, EUR 40 million, somewhere in between. And it is coming in gradually over time, but at the rate of, let's say, EUR 5 million, at least EUR 5 million per year.

What is far more important is the fact that we have pushed down the delayering in the whole organization, which means that it's not only true for management, it is also true for every leadership in the group, which means that we currently are conducting exercises to implement that and for reasons -- for that reason, amongst others, in this third quarter, we have booked a provision for EUR 5 million in Czech Republic. The impact of that is going to come into the results going forward.

So in fourth quarter, first quarter next year and so on, you will see the impact of that exercise, the exercise is called H25. H stands for, in principle, headquarters of all the organizations and the impact is significant. We will get -- we are on track to realize the numbers which were budgeted for 2019 so the FTE reductions are perfectly in line. All the details of that will be given to you at the Investor Day in Prague next year.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

The next one comes from José from Santander.

--------------------------------------------------------------------------------

Josema Coll, Grupo Santander, Research Division - Equity Analyst [26]

--------------------------------------------------------------------------------

Yes. The first one would be on NII. I was wondering if you could comment on the drivers of the apparent decoupling of interest rates from lending rates in Belgium and how the competitive landscape is looking there. And the second question also in NII. If I understand correctly, the deposit gearing has no impact for you. So I was wondering how much liquidity you have and where you are investing or depositing it.

--------------------------------------------------------------------------------

Johan Thijs, KBC Group NV - Group CEO, MD & Executive Director [27]

--------------------------------------------------------------------------------

Thanks, Jose, for your questions. I mean, did I understand well your first question, that it's about the competition and the impact on that on the NIM and the volumes going forward? Was that -- is that [relevant] or...

--------------------------------------------------------------------------------

Josema Coll, Grupo Santander, Research Division - Equity Analyst [28]

--------------------------------------------------------------------------------

Yes. I'm actually -- yes, I'm struggling to understand how come that your NIM is going up in an interest rate -- in this interest rate scenario.

--------------------------------------------------------------------------------

Johan Thijs, KBC Group NV - Group CEO, MD & Executive Director [29]

--------------------------------------------------------------------------------

Yes, yes. So actually, this is the consequence of major changes in the Belgian market, and that has to do with the underwriting quality of the Belgian banking sector as a whole. So as you know, KBC was already, for 2 years, even a bit more than 2 years, applying our own LTV limits, DSTI limit. And we were part of the -- one of the exceptions in the Belgian market. At a certain moment in time, when the interest margins started to come down significantly, when we started to lose market share significantly, I was very blunt about that in the Belgian press and also stated that the quality of underwriting is becoming a threat for the Belgian mortgage market as a whole.

Message was picked up, amongst others, by National Bank, which started to do an investigation. And they came to the same conclusion, that the underwriting of the Belgian market was heavily concentrated in those areas where you don't want to be, which means high LTV and high DSTI. And they interfered, and they interfered publicly by making statements about the underwriting quality that was afterwards confirmed by one of the other European supervisory authority.

I don't -- it's a bit difficult to quote now the ECB or the SSM, I don't remember precisely, but one of those senior institutions. They expressed their concern. And as a consequence, the National Bank has now also established LTV and DSTI limits on the Belgium sector, which have 0 impact for KBC, but had a significant impact on the Belgian market.

As a consequence, margins start rising. So this is a general trend in Belgium, has nothing to do with KBC as such. I don't know the detailed numbers of each and every institution. But at least I'm pleased at the evolution of the margins which we are seeing in KBC, and that's something which is going to last also the next coming quarters.

--------------------------------------------------------------------------------

Hendrik Scheerlinck, KBC Group NV - CFO & Executive Director [30]

--------------------------------------------------------------------------------

And then, José, on your second question on deposit tiering. It will have a positive impact on KBC. So we estimate, if we indeed keep the same tiering at 6x reserve deposits, that the positive NII impact for next year will be a little bit more than EUR 40 million. And for the fourth quarter of this year, so it is EUR 7 million positive impact.

--------------------------------------------------------------------------------

Josema Coll, Grupo Santander, Research Division - Equity Analyst [31]

--------------------------------------------------------------------------------

Yes. Could you please comment how much liquidity you do have and where you are depositing that liquidity?

--------------------------------------------------------------------------------

Hendrik Scheerlinck, KBC Group NV - CFO & Executive Director [32]

--------------------------------------------------------------------------------

Yes. But at the end of the day, that is not so relevant because, again, that is -- you can play with that. You can shift that. And indeed, you put the extra liquidity where the yield is the highest. If the underlying question is, how much did you have in liquidity with the ECB? At the end of the third quarter, that was EUR 2.7 million. But again, in treasury, no, we put the liquidity at the place where the yield is the highest.

--------------------------------------------------------------------------------

Josema Coll, Grupo Santander, Research Division - Equity Analyst [33]

--------------------------------------------------------------------------------

Yes. I am sorry to insist on this, but I'm just looking for a clearer answer. So I'm thinking how much of all that liquidity that you have, if you could give an amount, is being deposited at the Czech Central Bank and how much of an FX risk you're running there?

--------------------------------------------------------------------------------

Hendrik Scheerlinck, KBC Group NV - CFO & Executive Director [34]

--------------------------------------------------------------------------------

On the total deposits that we have with the Czech Central Bank, and that is in 2 ways. That is cash balances and these are reverse repos and the cash balances are quite limited, but the reverse repos are a little bit higher. That total is EUR 27 billion. That is in line with the number that we have given you in the previous quarter. So actually, it has not changed. And there are different composition of that, as we have said in the past, a little bit more than 1/3 of what deposits there are [actually] cash management balances from the Czech operation. So meaning, the fact that we have more deposits than we have loans in the Czech Republic and the balance, which is almost 2/3 of that, is the effect or is the impact of treasury activities, some x liquidity we have at group that is placed with CSOB. And then market activities that are done by the dealing room in the Czech Republic were basically the Czech koruna that are floating worldwide and mostly in banks in London are being recycled 2 tiers away and then placed in reverse repos with the Central Bank.

So overall, again, that volume has not changed since the first quarter of this year. It remained around EUR 27 billion.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

We have got the next question from [Adam] of Deutsche Bank.

--------------------------------------------------------------------------------

Unidentified Analyst, [36]

--------------------------------------------------------------------------------

Just on the Solvency II ratio in the insurance company. Is there a minimum target or it's operating target range? And also, what kind of actions would you take if it goes below that threshold? And finally, is there any intention of any kind of external funding out of the insurance company?

--------------------------------------------------------------------------------

Johan Thijs, KBC Group NV - Group CEO, MD & Executive Director [37]

--------------------------------------------------------------------------------

So thank you for your questions. So first of all, we have, indeed, a target, but the target is not disclosed to the market. So unfortunately, I'm not going to mention that today. But I can assure you that with the 187%, we are pretty much pleased compared to our target. That's the first thing.

Second thing is there's something which we constantly observe and constantly watch. It is influenced by 2 things. That's the underwriting quality of the book, which is quite good, as you know. And then the second thing is that we can take final or temporary measures in order to boost or to conserve our position. Until now, we don't need to do that. But I can give you one example when [elements], and that's definitely longer-term business, are putting [that ratio of] pressure and when that is influenced by the way that we do business, then we cut certain of those activities back or even cut it back to 0. I'll give you one example.

We were not making any more margins on the life insurance interest guaranteed products lump sum business in Belgium. The margins were at least not sufficient enough to justify both the offer to the customers and the offer -- return to the shareholders, and we stopped that business already in August. That has a positive impact on Solvency II ratio as well.

In terms of external funding, as you know, KBC Insurance is capitalized almost entirely by equities and the external funding is zilch, 0. Hybrid capital in the group is -- in the insurance group is only $0.5 billion.

--------------------------------------------------------------------------------

Unidentified Analyst, [38]

--------------------------------------------------------------------------------

And it's your intention to keep it that way in terms of external funding?

--------------------------------------------------------------------------------

Johan Thijs, KBC Group NV - Group CEO, MD & Executive Director [39]

--------------------------------------------------------------------------------

So it's indeed correct to anticipate that we are not going to change that position.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

The next question comes from Tarik of Bank of America.

--------------------------------------------------------------------------------

Tarik EI Mejjad, BofA Merrill Lynch, Research Division - Equity Analyst [41]

--------------------------------------------------------------------------------

This is Tarik EI Mejjad from Bank of America. Just 2 quick questions. I'll come back on NII. The -- is it fair to think that the main swing factor in terms of your guidance and uncertainty is coming from the volume growth rather than the margins, because of the rates I think you already baked in quite a negative scenario?

And in the past, you linked your fate to Brexit, trade war and so on. How you think Q4 will give you more visibility on these topics? Because we all know that this is not a finished story in terms of Brexit [ratify] until February. And second question, maybe just more on the Investor Day in Prague, why Czech Republic? So is it because you want to give us more comfort that everything is going strong there? Or is it like a focus for you, a bit like in Ireland in 2017, that was like this digital team. So why is Czech Republic in terms of Investor Day? Is there any message there to take?

--------------------------------------------------------------------------------

Hendrik Scheerlinck, KBC Group NV - CFO & Executive Director [42]

--------------------------------------------------------------------------------

Yes, thank you for your questions, Tarik, on the NII. Indeed, the volume growth plays an important element in that. As you know, NII has 2 parts, the liability side, the asset side. We have commented already since a number of quarters that on the liability side, basically the transformation results, especially in the Eurozone, is under pressure. We have taken different measures in the past by extending duration and also increasing the volume of replication. There is not so much that can be done now at the levels where the interest rates are. There's still positive evolution in the Czech Republic. And we're -- last quarter, we were still expecting that the CNB may decrease the interest rate by 25 basis points next year. That is now no longer in our assumption.

The main reason for that is that the inflation expectations in the Czech Republic are, if you look at the website of the CNB, they're further increasing right now and the third quarter inflation was at 2.7%. We expect -- or the Central Bank expects this to go up to 2.9%. But also, to the end of next year, inflation is going to remain around 2.5%, and that is actually the main driver for the interest policy of the CNB. So again, we expect it to remain at 2%.

As I commented before, also, the curves have changed quite dramatically. If you now look at the 3- and the 5-year, they're both above 5%. So that allows us then also to again extend the duration of the replication in Czech koruna, which is going to be a positive element.

To come back on the asset side, we see good volume growth. And as Johan already commented on some of the questions in his initial statement as well, we see that the margins in each of our countries are increasing mostly on the mortgage side, but not only on the mortgage side. We also see better pricing on corporate and SME. And in 4 out of 6 countries, we are actually producing loans at slightly above [our for] mortgages. Yes. Again good, well above the back book.

--------------------------------------------------------------------------------

Johan Thijs, KBC Group NV - Group CEO, MD & Executive Director [43]

--------------------------------------------------------------------------------

Hi, Tarik. Going back to your second question. It was an interesting one. So is there anything which we have in our mind to send all of you guys to Prague, to Czech Republic for the Investor Day? Well, in principle, not. So it is nothing you have to worry about. The reason why we do this, when we went to Dublin it was just after the announcement that it was a cool country, and we thought why not in Dublin. And then this time, let's face it, Czech Republic is by far -- our subsidiary in Czech Republic is by far the best-performing one in our unit, in our institution. So just to pay them a little bit of respect, we thought why not Czech Republic?

Now the investor event will be, honestly, not about Czech Republic. It will be about the whole group, how those different elements work in the whole group, how it combines all things and what the result will be on the cap on the capital deployment. So in principle, it has nothing to do with Czech Republic. So at the end of the day, it just -- I mean, it's Prague. It's the best-performing entity in our group. It's a beautiful city, and let's face it, they have great beer.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

The next question comes from Omar of Barclays.

--------------------------------------------------------------------------------

Omar Fall, Barclays Bank PLC, Research Division - Analyst [45]

--------------------------------------------------------------------------------

Just one question, please. Just on the point of more reasonable competition in the mortgage market in Belgium. When do you think that pricing will be seen in terms of the aggregate numbers by -- that we can all see at the Central Bank? It's just if I look at fixed-rate mortgages over 10 years, [fees] are still going down as of September at about the same pace. So do you think it's more of a function of the pricing that you're seeing at KBC level and that should take a bit more time to get reflected into Q4 at the aggregate level because of the changes, the competition has made only more recently? Is that kind of the dynamic?

--------------------------------------------------------------------------------

Johan Thijs, KBC Group NV - Group CEO, MD & Executive Director [46]

--------------------------------------------------------------------------------

Indeed, Omar, I think that your analysis is quite correct. So the Belgian market came to the conclusion, guided by, amongst others, the National Bank, that it had to change its position, not only in terms of underwriting, but also on the margin level. Let's face it, the majority of banks in Belgium have not, for instance, the diversification which KBC Group has.

So we have the diversification not only geographic, but also to the bank-insurance side. A lot of banks do not have either one of them. So they are confronted with a low interest in their environment. Definitely, the smaller banks are confronted with the fact that they are focused on mortgages, consumer finance products, and that's it. So they are really under pressure in this respect. And when they were underwriting half of their production in the, let's call it, the wrong corner, I mean, it's an obvious one that they will be -- that they have corrected and are adjusting their current underwriting policy.

So what we see today, let's face it, is still at external rates for customers at historic lows. It's not because the margin increases that the rates towards the customers are having the same impact. So the only thing which has stopped is the downward trend in the interest rates which are offered to the customers. We, by the way, just had, a couple of weeks ago, comparison where they compared the interest rates of 20 years, and they were 1 -- below 1%.

So competition is there. Competition is indeed having the common sense, let's call it like this. This is driven by circumstances. They all know that the interest -- the longer-term interest rates are still very low for a long period now and that they have to have some margins to survive in the long run.

--------------------------------------------------------------------------------

Omar Fall, Barclays Bank PLC, Research Division - Analyst [47]

--------------------------------------------------------------------------------

Got it. And just as a quick follow-up, I guess the obvious corollary to that is, which you've guided to, is that we'll see a progressive decline in the overall pace of loan growth in Belgium, and that's starting to come through somewhat. Where do you think that bottoms out, if you look at that dynamic of more sensible pricing, coupled with the pressures elsewhere?

--------------------------------------------------------------------------------

Johan Thijs, KBC Group NV - Group CEO, MD & Executive Director [48]

--------------------------------------------------------------------------------

So, I mean, the evolution of the volumes, and that's something which we -- and that's precisely why we wanted to give the guidance explicitly, more explicitly in the beginning of next year. But what I said during the main call, indeed, what we have seen in Belgium is because of the changes on the regulatory side, where they have the government, or the temporary government, has stopped the fiscal benefits for the mortgages,, that it has triggered a run, let's call it, a run on the banks, for having more mortgages.

So the -- our population obviously wants to still benefit from that tax advantage, and that has generated strong growth in what we have seen in this fourth quarter. I only mentioned to you the main call this first month and that's -- you remember well, I said it had a very significant uptick in the volumes.

Is this something which is sustainable going forward? I don't think so. I mean, if you look at what we have produced on average throughout the year until now, I think that's more -- and that's more than an adequate guidance for 2020. Don't expect the -- what I said on the fourth quarter to be the reference for next year. In terms of margins, I stick to what I just said.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

No further questions.

--------------------------------------------------------------------------------

Kurt De Baenst, KBC Group NV - General Manager, IR [50]

--------------------------------------------------------------------------------

All right. This sums it up for this call. Many thanks for your attendance, and hope to see many of you at sell-side equity analyst meeting tomorrow morning in London. Have a nice day. Cheers.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

Thank you very much. Okay, everyone. That concludes your conference for today. You may all now disconnect. Thanks for joining. Enjoy the rest of your day.