Credit Agricole Sa

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Credit Agricole 2020 second quarter and first half results conference. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you'll need to press star and one on your telephone and wait for your name to be announced. I would like now to hand the conference over to your speaker today, Mr. Jérôme Grivet. Please go ahead.

Good afternoon, everyone. To start with, I just wanted to thank you for attending this conference and to say that I've received a few messages asking me to do a short and quick presentation, so I'll try to walk you very rapidly through the document, and then we'll go to the Q&A session. I'm going to start with page four, on which you have the main figures regarding our performances this quarter and this semester. Just let me highlight a few figures. The net income group share for the group globally, which stands at 1.5 billion euros, and on an underlying basis, at €1.8 billion, and for CASA, €950 million as a stated figure and €1.1 billion as an underlying figure. This quarter, the elements explaining the difference between stated and underlying figures are besides the traditional DVA loan hedges and home purchase saving plan elements. uh two main things uh regarding the group globally and kaza specifically the first one is the cost of a liability management operation that we did in june for which we bought back around three billion euro of debt uh that we are going or that we replaced by cheaper death the cost of this operation which is booked in the quarter is about 40 million euro of uh cost booked in the revenues, negative revenues. And the second element, which is even more significant, is the cost of the indemnification that we voluntarily paid to the self-employed professionals that are our customers for their insurance policies. You know that Their insurance policies cover business interruption, but not in the case of a pandemic. And we have decided nevertheless to indemnify them. This represented a cost of around 140 million euros at CASA level and even 240 million euros at group level. It's also a negative revenue. And then the last point, which regards only CASA and which is neutral at group level is the triggering this semester of the switch mechanism for a very modest amount, 65 million euro, which is a profit for CASA at the level of the cost of risk. It's symmetrically a cost for the regional banks and it's neutral at group level. The second and last element I wanted to mention on this page is the high level of solvency that we have reached this quarter, both at group level and at CASA level. At group, the CET1 stands at 16.1% and at CASA level at 12%. If I go now to the following page, I think that the only elements we can mention here because the rest is going to be covered by the following pages is that we have had a very specific quarter in terms of profile with a level of activity that declined significantly in April and also in May, and a very sharp rebound in June, which continues to be the case across July. Let me go now on the next page. Just a few elements to remind you that we've been very active in helping our customers across the board to come over this very specific period of the lockdown. And actually, in France, We've dealt with 28.7 billion euro of state guaranteed loan requests. And we've also provided to our customers more than 4 billion euro equivalent of deferred maturity of payment holidays for the different credits. In addition to that, we also mentioned this indemnification that was granted to the customers of our insurance activities, voluntarily again. And then the last point is that in Italy also, we've been active in granting state-guaranteed loans and credit moratoriums. Next page, just a few elements on this. We've continued actually to work on the three pillars of the group medium-term plan through the second quarter, despite the lockdown period. And I think that this proved to be very relevant considering the type of crisis in which we were and considering the achievement that we've managed to make in those three pillars. On the following page, just a few elements to explain how we see the economic situation in France and more generally in Europe. We said that we were forecasting a V-shaped crisis, and definitely what we see now is converging with this scenario. There is a very sharp rebound in household confidence and business climate. And we also find that all hot indicators that we try to follow, especially indicators that we can follow with our own activities, confirm this very sharp rebound in the level of activity in France. On the next page, And this is going exactly in the same direction. We have seen in our own activities, in our own commercial activities, a very sharp rebound of the volumes of operations in the second part of the second quarter of this year. As you can see, this has been the case for the number of new customers that we've managed to attract in our different retail networks. with a low level of 46,000 new customers in April, but a very high level of around 150,000 new customers in June. And this is leading to a sharp rebound in the different areas of activity, be it home loans, consumer finance agreements, be it also savings accounts, on and off balance sheet savings accounts, and be it also the sale of new PNC insurance policies in the different networks. Let me go now to the financial figures, and on page 11, you have the evolution of the revenues of Credit Agricole SA on an underlying basis. between Q2 2019 and Q2 2020, the level of revenues was more or less stable, which is a very good performance, again, considering the fact that in the biggest part of our activities, we are dealing with individual customers, and for the biggest part of the quarter, actually, the retail activities were more or less stable. stopped and all our networks were dedicated to deal with state-guaranteed loans and other specific elements linked to the management of the COVID crisis. So this is leading to a level of revenues which are up 2.5% on the first half of the year, which is a very good evolution of our revenues. On page 12, The evolution of the cost base, it's very well kept under control. On the Q2 only, the cost base is down close to 2%. And on the full first half of the year, it's up only 0.5%. So very well controlled cost base, which is proving again that our strategy to manage the cost base of the different businesses close to the operational level is the best way to make sure that all efforts can be really efficient to monitor the cost base. This is leading to a cost-to-income ratio on Q220 for credit agricultural SA, which stands at 57.4%. down 1.2 percentage points. It's a very competitive and robust level, and it's already below the level of 60% that we were targeting for 2022. Again, the Joe effect is positive both on the quarter and on the first half of the year. Just on this page, the last element that you may want to keep in mind, we have had to book an additional contribution this quarter to the single resolution fund, which is a significant amount. It's 80 million euros at CASA level, around 80 million euros, and even 110 million euros at group level. On the following page, a few elements on the risk situation, starting with a presentation of the quality of our loan books. The level of NPL didn't significantly evolve across the quarter. It stands at 3.2%. The NPL ratio stands at 3.2% for Crédit Agricole Essai and 2.4% for the Groupe Globally. It's more or less stable as compared to end of March. Considering the significant level of additional provision that we have booked this quarter, and I will come back on this question just on the following page. We are reaching very high levels of coverage ratio, 73.4% at CASA and even close to 85% at group level globally. We now have in excess of 10 billion euros of loan loss provision within Casa's balance sheet and $20 billion, above $20 billion, globally for the group, despite the very good quality of our asset books. On the following page, the flows of loan loss provisions that we've booked this quarter. You see that we continue to have a level of provisioning which is significantly higher than the one we've booked on the same quarter of last year. two and a half times the same level, the level of Q2 2019 for Gaza and two times for the group globally. But you can see also that a significant part of this increase is linked actually to an additional effort of provisioning in stage one and stage two loans. 236 million euros of stage 1 and 2 provisioning this quarter for CASA and more than 400 million euros for the group globally. This additional provisioning of stage 1 and stage 2 loans is mainly the result of the an updating of our economic scenarios within our model. And you have details on the scenario in the appendix of the documents. This is leading, and you can see it on page 15. You can find on page 15 that the situation is more or less the same for every single specific business line. It's obviously massively the case for the regional banks where the level of additional stage 1 and stage 2 provision is very high, but it's also the case for LCL, for CA Italia, and for the financing activities of CASIB, a little bit less the case at CACF because the type of credit risk that we have is less relevant regarding the forward-looking provisioning. In terms of net income, you can see the figures I already mentioned. A net profit underlying of €1.1 billion for the quarter and close to €1.8 billion for the first half of the year. It's a very good resilience and even if we exclude the significant increase that we had to book in our contribution to the Single Resolution Fund, the evolution of the net profit would be only minus 5% on the quarter and minus 8.5% on the semester. This very good resilience of the net profit is mainly due to a very good operational efficiency with a gross operating income which is progressing on the semester and stable on the quarter, thanks to the very good diversification of our business models. The return on tangible equity stands at 8.5% for the first half of the year, and if we spread the IFRIC 21 taxes across the full year, it would be close to 10%. If we zoom now a little bit on the different businesses, starting with the asset gathering and insurance activities, on page 18. What you can see is that actually we have had net inflows which were more or less nil on the quarter. Very positive market effect, plus 75 billion euros of additional assets due to the evolution of the markets, but it's nevertheless less than the negative market effects that we had to support in the first quarter, which was minus 125 billion euros. Despite that, the contribution of this business division to the net profit of Gaza is significantly up on the second quarter and close to stable on the first half of the year. Zooming a little bit on the insurance activities, definitely in terms of commercial activity, the insurance business division suffered significantly during the lockdown period. But what is very encouraging is that The turnover that we had in June only was globally 74% above the one that we had in May, which was itself above the level of April. So the pickup is really here. Maybe one or two other elements I can mention. The revenues increase. within the life insurance activities were up this quarter thanks to a reversal of some depreciation that we had to book on certain assets in the first quarter. But the reversal is only partial at this stage. The other revenues were quite positively oriented and the cost base is very well controlled. On asset management and Amundi activities, what we can say is that the net inflows this quarter were close to zero with actually a positive movement of inflows on long-term assets and still negative flows, net outflows on money market funds. A very strong resilience of the P&L with a decrease in the revenues linked to the fact that market indexes were in average lower in Q2 than in Q1, but at the same time, a significant decrease in the cost base. And the last point I can mention is that we have closed this quarter the acquisition of Sabadell Asset Management, and we have announced recently the renewal of the partnership with Societe Generale. If I go now to the retail banking activities, starting with LCL, again, we will have the same shape of the quarter with a level of activity which was very low in April and again in May and a very sharp rebound in June. And all in all, actually, loan outstandings outside of the state-guaranteed loans are up significantly, 7% between June 20 and June 19. Revenues are a little bit down. The net interest margin is actually down mainly because of some valuation effects, i.e. the fact that in Q2 2019 we have had some dividends coming from visa shares or some revaluation coming from the visa shares that were at that time within LCL balance sheet. And the decrease in fees and commission is mainly explained by the commissions on payments because of the decrease in the volume of payments in the first part of the quarter and also a decrease account-related commission because LCL decided to be very moderate in that type of commission during the lockdown period. Operational costs continue to be down. It's now the fourth year in a row where we see a decrease in the cost base at LCL, and so the net contribution continues to be very positive despite the sharp increase in the cost of risk. In Italy, we see more or less the same trends, a little bit more pronounced, actually. The decrease in the level of activity was sharper in the beginning of the quarter, and actually this is leading to a sharper decline in the revenues. The cost base is also down in Italy. Cost of risk is significantly up, and actually you may see that we have significantly increased the coverage ratio of our NPLs this quarter. And so we have, I would say, voluntarily pushed up a little bit the provisioning of our NPLs, despite the fact that the level of NPLs did not significantly increase, in order to be ready to take opportunities of potential sales of NPL portfolios. For the rest of the international retail activities, we have more or less the same trend in all countries where we are present. We have a negative jaw between pressure on the net interest margin because of the decrease in interest rates in connection with the reaction of the monetary authorities in those different countries to the COVID crisis. and an increase in the cost of risk, mainly driven actually by a further increase in the performing loans provisioning, so bucket one and bucket two. In the specialized financial services division, starting with the consumer credit business, it's a business where the duration of the loan in average is only 30 months, so it means that if you lose two or three months of production of new loans, this is clearly leading to a decrease in the level of outstanding. So it's been the case at the CACF. The consolidated outstanding are down 1% across the quarter, so as compared to end of March. And this explains the decrease in the level of revenues in connection also with the fact that part of the revenues are recognized at inception of new loans. What I can mention in addition to that is that the rebound in June is quite sharp, and actually to illustrate that, the production of new loans was only $1.3 billion in April, $2.1 in May, and $3.6 in June, so a very sharp decline. increase between June and April and in June 20 we are only minus 13% as compared to what we had in June 19. The cost control continues to be very good and so we've managed to keep the cost to income ratio below 50% on this division. Cost of risk is of course explained by the situation. On the leasing and factoring activities, we have had also a complete stop of the production of new leasing loans up to mid-June. We've managed to increase the commercial production of new contracts in factoring, but actually the turnover, which is effectively factored, is significantly down, so this explains why why, again, the level of revenues was down this quarter. Large customers division. Globally, this division is generating an increase in the top line by close to 21%, with a very good dynamic across the board with both corporate and institutional companies. for the custody activities. Of course, we continue to benefit this quarter from the scope effect and the integration of Santander Security Services and Casbank. But despite that, we have also a very good commercial efficiency with the signature of a significant number of new contracts and also a good profitability of the management of the liquidity generated by this business, which is sharply up. On page 26 for the CIB activities, what we have seen this quarter is an acceleration of the financing activities in connection, of course, with the credit demand coming from our customers and also a very good level of activity in our different capital market businesses with especially in the fixed income currency division revenues up 44%. We continue to have a very low level of market risk, and the VAR stands at 14 million euros end of June. The cost basis is actually very well controlled. It's apparently 3.4% up on the quarter, but actually we had booked in Q2 2019 a significant increase a write-off of a provision for HR-related costs of around 20 million euros. So actually, if we restate the figure from this provision that we could write off last year, the cost base at CACIB on this quarter is more or less stable. We have an increase, a very significant increase in the cost of risk this quarter compared to a level which was still very low in Q2 2019. And despite this sharp increase in the cost of risk, the net income group share at CACIB is more or less stable on the quarter at a very high level. And the cost-to-income ratio at 43% is very low. On the corporate center, to put it in a nutshell, the structural part of the corporate center continues to improve quite significantly as compared to the second quarter of 2019. The volatile part is deteriorating a little bit. It's the reversal of the situation that we had in the first quarter. You know that the most significant part of this volatile part of the corporate center is due to some intra-group changes transactions, and to put it in a nutshell, when the credit spread of Credit Agricole SA narrows, these intra-group elements are negative, and the contrary when the spread is widening, which was the case in Q1. Going now on page 29, the regional banks of Crédit Agricole, you will see in terms of activity more or less the same trend as we have seen for LCL with commercial activities at a very low level in April and May, until mid-May at least, and then a very sharp rebound. So this is also leading, like at LCL, to an increase in loans outstandings between June 19 and June 20 outside the state-guaranteed loans. this increase is about 5%. In addition to that, the COVID-related activities has been very, very important with around 400,000 payment holidays granted plus close to 18 billion euros of state-guaranteed loans. So a very sharp increase. This quarter, the contribution of the regional banks to the net profit of Credit Agricole Group is up 18%, and the cost-income ratio improves significantly. Going now to page 31, Solvency, and starting with CASA Solvency, the CT1 ratio stands at 12%. It's up 60 bps as compared to end of March. It's the combination of several elements, But what you can see is that one of these elements is the very monitored evolution of the level of RWAs, because actually the level of RWAs is more or less stable, and it includes close to $2.5 billion of temporary penalization in connection with the state-guaranteed loans. you know that the state guarantee starts to kick in only two months after the inception of the loan. So it means that for all loans granted in May and June, we have a penalization in terms of RWA end of June, which is going to disappear in the course of the third quarter. So outside this element, actually, the level of RWAs would have been slightly down of around 1%. The other elements explaining the evolution of the CT1 ratio are of course the results that we've published. Again, I mentioned that this result is net of a dividend accrual that we have booked in the second quarter exactly like we did in the first quarter on our 2020 profit. OCI results which were significantly negative in terms of evolution in Q1 are recouping progressively. So it's a positive contribution to the Solvency this quarter. There's also a positive contribution from the effect of the quick fix and a negative contribution for some other elements like the acquisition of Sabadell asset management, which represents the cost of around 10 bps of ratio. All in all, we have a ratio which stands at 12% And fully loaded of the IFRS 9 transitional effect, it would be 11.7%. So 12%, it's a distance to the PILAR 2 requirement of 4.1 percentage points. Going now to the solvency of the group globally, you will see that, again, the evolution of RWAs is very moderate. Actually, it's only up 1 billion between March and June. And we have the same state-guaranteed loan effect, which is more important at group level, considering the market share of the regional banks in the distribution of state-guaranteed loans. So this effect represents 7.5 billion euros of RWAs, which are going to disappear across Q3. The evolution of the CT1 ratio is explained again by the high level of profit, which is kept, which is retained, the evolution of the OCI reserves, the evolution of the RWAs, And then the benefits that we draw from the quick fix and other regulatory and methodological effects, which is leading to this 16.1% CET1 ratio end of June. So it's 7.2 percentage points above the Pillar 2 requirement. And of course, the other capital ratio, TLAC, MREL, and leverage ratios are at or above our different targets. In terms of liquidity, I think there's nothing much to mention. We have a liquidity position which is very, very comfortable with liquidity reserves above 400 billion euros. It's an increase of close to 70 billion as compared to the end of March. We've been, of course, using significantly the TLTRO mechanism that was put in place by the ECB, and we've drawn actually 90 billion euros end of June at this window. And the LCR ratio is around 155% both for the group and 151% for Clio Ecole Essay. So very high liquidity situation. The medium and long-term market funding program is completed, actually, end of July. We've managed to continue to issue in the first phases of the lockdown period. And actually, we've completed now, fully completed the funding program of Crédit Agricole SA. So, This is it. As a conclusion, I just want again to insist on the high level of profitability that we are able to deliver in the very specific period of time that we are going through. I want also to reiterate the very low level of cost-to-income ratio, so the very good operational efficiency that we managed to to provide the high level of return on equity, especially if we spread the IFRIC 21 taxes across the full year. And of course, the very high robustness of the group, both in terms of solvency and in terms of liquidity. Thank you very much. And I am now ready to try to answer to your question.

Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, it's star and one on your telephone. And the first question comes from John Peace from Credit Suisse. Please go ahead.