Credit Agricole Sa

Ladies and gentlemen, thank you for standing by, and welcome to the Credit Agricole first quarter and full year 2020 results conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone keypad. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today. Mr. Jérôme Grivet, please go ahead.

Good afternoon, everyone. Indeed, 2020 has been a very peculiar year, and I'm happy to hand the floor over to Philippe Brassac with us today to introduce this results presentation. Well, thank you, Jérôme, and good afternoon, everyone. Philippe Brassac speaking, and of course, I'm so sorry not to be able to meet with you as we were used to do this in London. But naturally, I do hope this will be possible once again next year. Anyway, I'm really very, very pleased to present and to comment with Jerome our main figures, our main performance for 2020. And I would like to tell you that I'm especially pleased to report that We can both hugely commit to the economy, to our customers, to help them to pass over the crisis because this is our main mission, and in the same time to reach a high and regular high level of profitability since you probably saw that our return on tangible equity was at 9.3%. I guess we must be in the best benchmark in terms of return on tangible equity, at least probably within the French bank group. This is why the board decided this special mechanism in terms of dividends to prove our loyalty towards all our shareholders. because this is, of course, our first target in terms of relationship to our shareholders. And I think that we succeeded to conjugate optimization of the dividend and simplification of our financial organization, since you saw that we decided to completely unwind our switch mechanism The last decision was to unwind for 50 persons at the end of the current plan. And thanks to the level of our solvency, we decided to unwind towards 100 persons. And it's a pleasure for me to report that I'm sure that we are very useful to our economy, to our customers. then we can reach a high level of profitability, and then we can go back to our shareholders to thank them. And with this mechanism, being able to give you the highest level of dividends we could decide, and in the same time, simplifying the financial organization of the group. This is my main message for the introduction, and I immediately give the floor back to Jérôme. Thank you, Philippe. I will go back on page four to comment the main figures of the results of the group and of Credit Agricole SA for the last quarter and for the full year of 2020. Let me start with CASA on page four. Of course, you have in mind that in December, we had announced that we were going to impair partially and quite significantly, actually, the value of our stake in the capital of Crédit Agricole Italia. This is, of course, impacting the stated figure of our net profit for the quarter, but you know that it has no impact neither on our cash position nor on our solvency, so I will skip this element. So it means that in stated net income group share before this goodwill impairment, the net profit of CASA is above 900 million euros. And for the full year, it's close to 3.5 billion euros. If I restate those figures from the exceptional items that are described a little bit later on in this document in the appendix, we end up with an underlying net profit of close to €1 billion for the last quarter, and close to €3,850,000,000 for the full year. It's down only, quote-unquote, 16% as compared to the full year 2019. This is the result of a very solid combination of a top line that is growing above 2%, both on the quarter and on the full year, a cost line that is slightly down, showing again our agility, which is leading to a cost-to-income ratio which is now below 60%. I remind you that it was the target that we were aiming at for 2022, so it's been reached two years in advance. And this very solid set of operational figures leading to a gross operating income up close to 5% for the full year and even close to 8% for the single quarter absorbs quite nicely a strong increase in the cost of risk, which of course is in part and in significant part due to the provisioning of performing loans. In addition to those elements, I want to mention the solvency at CASA, which end of 2020 ends up at 13.1%, including our distribution policy that I will comment a little bit later on. And as Philippe said, we are posting a return on tangible equity, which is at 9.3%. It's, of course, down as compared to the close to 11% figures that we had posted last year, but part of this decrease is due, of course, to the decrease in the net profit, but part of this decrease is also due to the very strong capital base that we have this year, again, with this 13.1% solvency ratio that we are posting. You'll find on page five the corresponding figures for the group globally. Let me go directly to the underlying net income group share, €1.4 billion for the group in the last quarter of the year, and above €6.1 billion globally for the full year. And again, a nice combination of the top line that is growing, the cost line that is going down, so solid performance in terms of gross operating income, absorbing the cost of risk, That is multiplied by more than two over the full year, including a very strong provisioning of the performing loans. Solvency ends up at group level at 17.2%. It's a record level, an all-time record for Credit Agricole Group and probably one of the strongest figures among the space of European SIFI banks. I think we can skip page six because I think that Philippe mentioned most of the elements that are on this page, and we can go directly on page eight where we have some indication on the way we've been actually producing these financial performances. On the left-hand side of the page, upper part, you will see an indication of how the French economy evolved in the full year, month after month. What you can see on this chart is that actually, first, the second lockdown was less impacting than the first one. And second element, every time a lockdown ends, you see a very strong rebound in the level of activity. This is leading for us to globally across all our business lines to a very strong level of activity in the fourth quarter of the year. It's been the case for the insurance activities with a very strong rebound in the sale of new policies in P&C and protection. It's been the case also in asset management activities where we had a very strong level of net inflows. It's been the case also in retail banking activities, in consumer credit businesses, and also in the CIB. For the full year, and I think it's interesting to keep that in mind, we see in retail banking an evolution of the loan outstandings, which is very positive, plus 5%, excluding the state-guaranteed loans. we often have in mind the image that the networks have been spending most of their time in 2020 producing state guaranteed loans. It's not the case. They have been working also on home loans, consumer credit loans, or equipment loans for their professional and SME customers. In addition to that, I want to mention that globally, Three retail banks of the group in France and Italy attracted 1.5 million new customers for the full year of 2020. So it means that we've continued to focus on customer capture, which is, of course, a key for the future development of the group. Last point on the left-hand side, bottom part of the page. All in all, after this bumpy year, we've managed to post a level of production in the main activities of the group, which are very close to the high level that we had reached in 2019. For example, in home loans, the production of new home loans in France. we've managed to generate 96% of the production of the home loans that we had produced in 2019, so it's a very good performance overall. And it's the same, for example, in the sale of P&C insurance policies are close to the same for the production of new consumer loans. On page nine, some indications of some analysis of the evolution of our revenues in the last quarter and in the full year of 2020. Just maybe to put it in a nutshell, first, we benefit as a CASA from the diversification of our businesses. It means that when on a specific quarter some businesses are more impacted by the context, we know that maybe some other businesses are going to overperform, and it's been the case both in the quarter and in the full year. Second element that is important, three quarters of our revenues stem from a or policies or items that already sit in our balance sheet. So it means that we are not so much dependent on the new transactions of the year to generate revenues. And the third point, which is important, is that only 37% of our revenues directly come from net interest margin. which is quite important in the circumstances that we have crossed in 2020 where we've seen new lows in terms of interest rates. As far as expenses are concerned on page 10, what you can see is that we've been, again, quite agile and quite disciplined in the management of our cost base, which is down minus 1.1% on the quarter and minus 0.3% on the full year, thus leading to a very low level of cost-to-income ratio, 59.6%. It's already at the level of the medium plan target two years in advance. On page 11, some indication about the quality of our loan book. And what you can see is that globally for the group and for CASA, we have levels of NPS that continue to be low, 3.2% at CASA and even 2.4% at the group level. And in both cases, it's down 0.2% as compared to end of September. So it means that we are not in the situation that some people like to describe where all the – The bank customers are getting worse and worse. And in addition to that, we've improved over the quarter the coverage ratio of these NPLs with our loan loss provisions. We have at CASA level coverage ratio, which is now at 71.5%, and at group level at 84%. It's 20 percentage points ahead of the average of European banks, as we have seen on the EBA semi-annual transparency exercise. The global amount of loan loss reserves that we have end of this year stands at 19.6% at group level and 9.6 billion Euro at CASA level. It's a little bit above what we had at the beginning of this year. So we've improved this year globally our capacity to absorb future losses. In terms of cost of risk itself on page 12, what you can see is that first, the level of additional provisioning in Q4 has decreased a little bit as compared to Q2 or Q3, both at CASA level and at group level. And the second key point, which is important to have in mind, is that over the full year, at CASA, almost three-quarters of the increase in the level of provisioning is due to performing loans. And at group level, it's even more. It's close to 100% of all the additional provisioning that is related to performing loans. So it means that clearly this year has been earmarked by significant efforts to completely coherent with the IFRS 9 regulation to cover future and potential losses and not occurred proven risks. If I go now to the analysis of the net income on page 13, what you can see is that the net The gross operating income, so the operational income, has increased by close to 500 million euros over 19, if I take out from this calculation, the supervisory costs, and the decrease in the net income between 2019 and 2020 is more than explained by the increase in supervisory costs, by the increase in the cost of risk, stage one and stage two, meaning the cost of the provisioning of performing laws. Page 14, the dividend. Philippe said it. the board of Credia Equal S.A. have decided to propose the General Assembly meeting that is going to take place in May to propose a dividend of 80 cents to our shareholders, 80 cents per share, with a script dividend option. And our majority shareholder, SIS Labo S.E., has announced its intention to take this script dividend option. This has enabled us to propose this level of dividend, which represents for all our shareholders a dividend yield of around 8% as compared to the current price of the share. This script dividend option that is going to be taken by our majority shareholder is clearly going to initially create a significant number of new shares, thus a certain level of dilution that is going to depend on the number of new shares that we are going to issue, so the actual reference price of these issuance next May. And this is to offset this potential initial dilution that we complement this dividend proposal with two additional mechanisms. The first one, Philippe mentioned it also, which is to enhance and modify our commitment of unwinding the switch mechanism. The initial commitment that we had made was to unwind 50% of the switch by end 2022. And we are now modifying this commitment in order to get to 100% of unwinding by end 2022. And the second element is that we also are going to launch an exceptional share buyback mechanism in order to fully offset this initial dilution. I'm sure that you will have some questions on these different elements of the dividend policy, so I propose to stay at this level of explanation now and we will probably go back on this during the Q&A session. Let me go now to some other and key elements of reporting about what we've been doing in 2020 because besides the financial figures, As Philippe mentioned, we've continued to deploy our group project, and we've continued to behave towards our customers in accordance to our DNA and also in accordance to our own best interests. This is why we've been very active in supporting our customers by granting state-guaranteed loans. And actually, indeed, we've provided to the French customers 27% of all the state-guaranteed loans attributed in France. We've been also very active in granting payment holidays on pre-existing loans. And at the peak of 2020, it was more than 550,000 payment holidays that had been granted in France for 4.2 billion euro of deferred maturities. around 80% of all these payment holidays have now ended, and in 98% of the cases, the payments have resumed completely normally. In addition to that, we've also been very active in granting direct support to our customers. It's been the case with Credit Agricole Assurance that it has provided support a very strong and extra-contractual support to its small business and self-employed professional policyholders in the second quarter. It's been also the case with different entities of the groups that altogether provided in excess of 70 million euros of solidarity donations and different kinds of support in 2020. We've continued to develop our global relationship model in 2020, and we've been, at the same time, improving our digital features, but also with continue to improve the quality, the efficiency, and the empowerment of all our staff that is facing customers in order to be compliant with our commitment to provide the best of digital and the best of human relation to all of our customers. We've continued to work alongside our commitments to support societal transitions, both in the direction of being an ESG leader, and it's been the case in the investment field of the group, Amundi and Crédit École Assurance, but also in the banking areas with CIB, with LCL, and with the network of the regional banks. And we've also been very active in our inclusivity commitment because we believe very much in our social role in terms of inclusivity. And we've been, for example, a very important employer when it comes to hiring young people or when it comes to proposing initiatives traineeships to students. We've continued to deploy our global strategy, and you know that the strategy of CASA is at the same time to permanently strengthen the intensity of its relationship with its customers, but also to offer the capacity to its specialized business line to deploy their activities on additional customer basis through different kinds of partnerships. And indeed, we've been very active, despite the difficulties of the year, in concluding new partnerships in Europe and in Asia in the different specialized business lines that we have in insurance, in asset management, in consumer credit, or in wealth management. Lastly, we've continued to dispose of non-core assets in order to keep permanently focused on our main strategic lines. Let me go now starting with page 22 on some additional comments on the performances of the different business divisions of the group, starting with the asset gathering and insurance activities on page 22. I think that what we have seen – across this year in the assets gathering and insurance business division is a very difficult start of the year with markets that were in perfect turmoil and a progressive recovery. And in Q3 as well as in Q4, we have had at the same time a recovery of the market valuation of our assets plus strong inflows And it's been, again, the case in Q4, both in the asset management and in the life insurance activities. So, overall, a good quarter, and overall, a quarter that is ending with a total contribution of the business division that is, of course, impacted by the very hard beginning of the year, but which is, all in all, very positive for the full year. If I drill down on the insurance activities, what we have seen in the last quarter of the year was a very strong rebound of the activity with, all in all, the net premium income, which is up 3% as compared to Q4-19, and up close to 20% between Q3 and Q4-20. And it's been especially the case in non-life activities, so P&C activities, and protection businesses, which actually continue to post year after year a significant increase and continue to represent a very sharp gain in market share in France and in the other countries where we are active. In terms of financial figures, This quarter was very solid with a top line of 3.5% and a cost line which helped by taxes is significantly down. You may see that the level of taxes is very significantly up. It's due to the fact that we've been booking some provisions on some assets that were not tax deductible. And the last point, but you have that in mind since Q3, is that we now book the cost of the 81 debt of credit equal assurance directly in the P&L and not against equity. So this is why you have now a minority interest or non-controlling interest line, which is negative by 34 million this quarter and 80 million for the full year. But actually, it has no impact in terms of earning per share. It's only a different type of accounting. And so, restated quote unquote from these elements, the net profit of the business division would have been close in 2020 to what it was in 2019. Amundi and asset management, I think we can summarize the quarter with this idea that it posted two records in Q4 2020. a record level in terms of assets under management above €1.7 trillion, and a record level in terms of net profit on a single quarter. So it's definitely been a very dynamic and positive quarter for Amundi, concluding a very good year. LCL on page 25, a very solid quarter and a very solid year indeed. This quarter, the activity was certainly impacted by the second lockdown, but much less than in Q2. And this explains how we've been able to post a significant increase in the level of loans, outstandings, our customer assets. From a financial viewpoint, again, this quarter and for the full year, a very positive job effect leading to an increase in the gross operating income, of course, an increase in the cost of risk led by the provisioning of performing loans, of course, like in all other business divisions, and all in all, a very positive and resilient year for LCL in the context. In Italy, the beginning of the year was probably harder impacted by the lockdown than in France. And this explains why the activity was subdued in Q1 and Q2. It started to rebound in Q3, and the rebound continued actually in Q4. And in Q4, for the first quarter of the year, we've managed to post an increase in the top line in Crédit Agricole Italia. In addition to that, we've been booking some additional provisions of course but thanks to a very significant sale of a an npl portfolio we've continued to improve the level of npl which is down and the coverage ratio which is up this quarter so very resilient a quarter for critical italia all in all in italy You have the different figures that we usually post about all our Italian activities on page 27. What I can note is that globally in Italy for the full year, we've managed to keep a level of profitability which is very high, 571 million Euro of underlying net income group share for the full year, which is only down 11% as compared to the same figure in 2019. Maybe in addition to that, a few elements on the Creval operation, which is going its way perfectly online with the initial schedule. We've announced the offer on November the 23rd. We've finalized all the filings mid-December. We have received the final approval of the European Union in terms of antitrust authorities beginning of February. We have also received the approval of the Italian authorities, so we now have to wait for the ECB approval, and then we can file the offer file with the CONSOB in order to launch effectively the offer, so we are perfectly in our scheduled timetable. The rest of the international banking activities on page 28, clearly it's been a difficult year because in most countries where we are active, we have had two adverse elements. The first one was a significant decrease in interest rates as an answer of the monetary authorities to the crisis. And this has put a very significant pressure on the revenues. And in addition to that, we have had to book a significant additional provision. But we are now progressively recovering. The coverage ratio of our non-performing loans in all these business divisions is above 100%. And in addition to that, we have announced beginning of January that we have signed the disposal of our banking activity in Romania, which was for sale since quite a long time. In the specialized financial services division, so consumer credit, car financing, leasing, and factoring activities, Again, the last quarter of the year was earmarked with a strong rebound in the level of activity. And as an illustration to that, we can say that at CACF, the best month of the year was December, which is not usually the case. So this helped. to contain the decrease in the global loans outstanding to around minus 1.3%. Of course, this was not completely enough to preserve the top line. But I think that what is remarkable is the capacity of this business division to really adjust the cost base in order to try and preserve as much as possible the profitability. So on the last quarter of the year alone, the cost-to-income ratio is below 49%. So it's a very reactive approach. The cost of risk on the quarter is up as compared to Q4 2019, but slightly down as compared to Q3 2020. So clearly, we are not, again, in this business division in the situation of a massive deterioration in the credit quality. Going now to the large customer division, what we can note is that the last quarter was a little bit less buoyant than Q2 and Q3, but nevertheless, it's been a very good level of activity as compared to Q4-19 because we are up globally in terms of revenues a little bit more than 1%. In the asset servicing activities, we are now in a situation where we progressively benefit from the integration of Santander security services in the perimeter of CASEIS. And so we are going to progressively compensate the minority interest that we recognized for our minority shareholder Santander. If I drill down on CASEIS now on page 31, we have had this quarter a stability of the top line, which is actually due to a forex effect because we stated from this forex effect the revenues would have been slightly up. But what is interesting to note is that for the full year, we are posting revenues up close to 9%. And thanks to very good cost control, the gross operating income in this business is up close to 15%. So despite a very sharp increase in the cost of risk, it's a multiplication by five for the full year. But keep in mind that in H1-19, we were still in a situation of loan loss provision reversal. So we've been able to absorb very significantly this increase in the cost of risk with keeping a very high level of profitability for the CIB division, close to 1.2 billion euros for the full year. And again, I want to note the very attractive cost-to-income ratio at CACIB. Corporate centers. We continue to improve structurally the corporate center. Seems that in Q420 we were a little bit down as compared to Q3, but actually it's mainly due to a tax effect. If I zoom on the revenue line or on the cost line, the improvement continues to be here quite significantly this quarter again. Regional banks of Credit Agricole, of course, we will find more or less the same trends as the one we have seen at LCL, a very dynamic level of activity in Q4. Very good cost control. Of course, there's an increase in the cost of risk, but if you see the performance for the full year, you will note that again for this perimeter, the whole of the regional banks of Crédit Agricole, The contribution to the net profit of the group is down only 14% despite a multiplication by more than two in the cost of risk. So again, this very strong robustness of the upper part of the P&L has been able to absorb most of the increase in the cost of risk. And again, this increase in the cost of risk was mainly made of provisioning of performing loads. For the full year, the regional banks of Credit Agricole managed to attract more than 1.1 million new customers, so very significant customer attractivity. If I go now on page 36, it's the financial strength and the solvency at CASA level. You will see that in terms of RWA evolution, we've been very prudent this quarter, and indeed the overall RWA evolution is slightly down, let's say stable between end of September and end of December. It's the combination of a reduction in the business line's contribution, a slight increase in the insurance contribution because of the net profit that is not paid under the form of a dividend to CASA yet, and then some methodological and regulatory effects, which represent all in all an increase of a little bit more than 5 billion RWAs. This is leading to a solvency ratio that increases significantly between end of September and end of December. It's the result, of course, of the good level of profitability, plus the fact that our dividend policy is going to represent a smaller impact on the solvency than the one we had provisioned and accrued end of September. So there is a positive effect of the distribution this quarter, which is a little bit counterintuitive. The RWA evolution, considering what I've said, is positive, too. And then you have some technical, methodological, and regulatory effects that bite a little bit the solvency ratio. But we end up the year at 13.1%. If I already deduct from this level the impact of the decision that has been announced that 15% of the switch mechanism will be unwound end of March, it will nevertheless leave us with a solvency of 12.9%, so well above any regulatory requirement. At group level, also a very high level of solvency with more or less the same elements, a very flattish evolution of the RWA basis, plus $2 billion across the quarter, very good level of results that is integrated in the solvency, and all the other technical elements that do not play a significant role. So, all in all, 17.2% CET1 ratio, which, of course, triggers also a very high level of TLAC and MREL ratio, as well as a high level of leverage ratio. Liquidity is definitely not an issue. Our reserves, our LCR ratio, All our indicators are at their highest levels ever. It's just interesting to note on this page that in terms of TLTA growth growing, we end up the year with a total outstanding of 133 billion euros of growing for the group globally. on page 39, definitely the 2020 program has been completed under very good conditions, and we have announced a program for 2021 that is going to be reduced, considering the ample liquidity that we have, and that is going to be concentrated on TLAC-eligible debt and not on senior I think we can now stop the presentation, and I'm more than happy to answer to your questions, of course, with the help of Philippe, if you want to address directly some questions to him.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star 1 on your telephone keyboard and wait for your name to be announced. Please stand by while we compile the Q&A query. This will only take a few moments. If you wish to cancel your request, please press the ask key. Once again, it's star 1 if you wish to ask a question. Thank you. And our first question comes from the line of Giulia Miotto from Morgan Stanley. Please ask your question. Your line is open.