Banque Cantonale Vaudoise (BCVN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the BCV Full Year 2020 Results Conference Call and Live Webcast. I am Paolo, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. For the call today, the speakers will refer to the slides, which are available for reviewing on the IR section of the BCV website since this morning. At this time, it's my pleasure to hand over to Mr. Pascal Kiener, CEO of BCV. Please go ahead, sir.

Thank you very much. Good afternoon, everybody. Let me go directly on Page 4. I would like to highlight on these 3 main points that are going to be detailed later on by Thomas. But the first point is the decrease in revenues is mostly only due to the COVID-19 crisis. Probably, you will see that other cantonal bank will not have this kind of decrease. It's quite clear because a big part of the decrease is due to trade finance. And many other cantonal banks do not have any trade finance business. Thomas will come back on that. The second point is the decrease in profit. I would like to stress here that despite the decrease with an ROE of 9.3%, we still are, I think, in terms of ranking, the first cantonal bank in terms of profitability based on ROE. I think that's important. And last but not least, we carry out with our dividend policy this year. Let me go directly maybe to Page 6. So in terms of business trends, so mortgage loan in line with the market with an increase of 4%. I will come back later on, on that. Deposits, I mean, you have 2 other sight deposits and other client deposits because we had a change in accounting assessment. And if you add the 2, you see a significant increase here due to customer liquidity. Thomas will also give more -- some more details. Otherwise, loans to corporates rather stable, but I will come back to that because you have different effects here. I'm going to comment Page 7 and 8. I think you saw that. And 9 is the same. We had some announcement about that. So I don't think I need to comment that. So let me go directly on Page 10. retail banking. So basically, in terms of mortgage loan, a very good year, steady increase. Nevertheless, we are very cautious on buy-to-let mortgages. We are also cautious in certain area in Canton of Vaud because we have a vacancy rate of 0.5%, and we have other regions with a vacancy rate of about 2% to 3%. So this is clear, we grow faster in those areas where the vacancy rate is low. In term of customer deposit, several effects. I think some customers think BCV is the same bank. Some customers think BCV probably is nice with them as far as negative interest rate are concerned. And this is also the effect of the lockdown in Switzerland of semi-lockdown and the restriction in traveling. People spent less. People traveled less. We had a clear decrease in customer transaction for payment transaction being a credit card, debit card, ATMs, cash. So this has an effect on the revenues. That has been part of the reduction, and it has also an effect on deposit and savings since people spent less, maybe they saved money during 2020. I think that's going to be not the case if the vaccines work, and everything is back to normal in the second half of 2020. One, probably, we see here -- we will see here a boost in spending. I hope so, anyway. Then revenue on profit, directly what I said, so the consequences of what I said. Otherwise, I would say a good year for retail banking. So corporate banking, 3 business, as you know, 3 businesses, and really here, different dynamics. For SMEs, let's say, the credit line as well as the utilization of credit line, without taking into account the COVID loans, are very stable. So this is a good news. It shows that the SMEs at least in Switzerland or in Canton of Vaud are very resilient to the pandemic. Now in terms of increase, the increase is mostly basically those COVID loans, 6,000 SMEs were granted a credit -- COVID loans for roughly CHF 700 million. So you see that those loans are quite small. We talk here about very small SMEs. The customer deposits up because, exactly, when you get a loan, you get the credit on your cash account. I would also say that looking at the number of SMEs having troubles, this is exactly similar as 2019. So I'm talking SMEs which have credit with BCV and roughly 60% of SMEs do not have credit, either with BCV or with other banks. So I'm not saying in this call that all SMEs are in perfect shape. I'm saying the SME we have seen in our credit book, they are very resilient, and we don't have more issues than 2019 or 2017. In a way, this is normal. When you look at all measures taken by the government, basically, they were helped in this phase. There are certain sector where it's more difficult, travel, hotel, restaurants, but we don't have a good -- a very big exposure in those sectors. So basically, my point is that here, the credit book is still very good. Large corporates, I mean, seasonal volatility as usual. So nothing really to comment here. I see 2 to 3 difficulties in large corporates. In Switzerland, firms active in travel, in air transport, in freight, in cruise, those kind of things, this is probably more difficult. But I'm quite confident that if we can go back to normal, let's say, at the end of June, in summer, I think those corporates will be in good shape. If there would be another lockdown, that will be more difficult. I'm not talking about, let's say, specific BCV large corporates. I'm talking about Swiss corporates where banks like BCV might have -- might be part of a syndicated loan. Trade Finance, that was, in a way, the big issue in 2020. In March, when we realized what was going on in China -- I mean, in February, actually, we decided to be very cautious and to decrease our exposure, voluntary, in order not to have some problems, some risks. Unfortunately, we nevertheless had some risk. We discussed that last time in August during this call. And basically, we are very cautious for the second part of the year, which is, in a way, positive. You see the -- you saw the numbers this morning. So it's resulted, basically, in a reduction of volume of around 20% and has had direct effect on revenue. So Trade Finance, first point, it has reduced revenues; and second point, we took some provision. And as you know, some part of the provision are in the revenue lines. So that explain this Trade Finance issue as well as, let's say, the fewer transaction in -- from retail customer and private banking customer as far as ForEx, et cetera, are concerned. This explain a big part of the reduction of revenue. I think this is rather a temporary program. Credit risk, as I said, some new provisioning needs, not only trade finance but a big part is trade finance. But nothing during -- nothing new during the second half. Almost everything was taken in the first half. And the rest of the portfolio, I believe, is really good, is really resilient. And I don't expect today many issues going forward. Private banking and asset under management, a large increase in assets under management, the performance of the market and also people bringing money to us from almost all segments. Mortgage loan, it's less than the market, 3%. And okay, the rest -- I mean, we put some effort on bringing to the market investments in responsible product. We established a partnership with Ethos, who is a leader in the industry in Switzerland. And Trading, that's, in a way, the good news. Bad news, the market will be difficult. The good news, there was an increase in volatility, and we could, as usual, take advantage of this kind of situation with our revenue up roughly 10%. So I hand over to Thomas for the financial part.

Okay. Thank you, Pascal. Hello, everybody. I'm on Page 15, which, once again, summarizes the income statement with the key numbers and evolutions which you know. I think it's more interesting to deep-dive into the different elements, to start off with the revenues on Page 16. So here, we see that the main issue, if I can say it like that, comes from net interest income, which decreases by CHF 48 million with regard to the total decrease of CHF 57 million. So what you see is on the bottom of the chart, you see that with regards to net interest income before loan impairment charges, minus CHF 23 million. Here, of course, half of it -- almost half of it, is the voluntary reduction in Trade Finance. And then the remainder of this is the negative interest environment. But also, for example, they reduced net interest income on the dollar with regards to the decrease of the interest rate curve in dollars as the pressure on margin has resulted on the liability side. Now, obviously, the comparison is not in our favor with regard to 2019, which was a year of impairment reversals. So year-on-year, there's a plus CHF 25 million in difference, which explains -- speaks that net interest income decrease of CHF 48 million. Now it's clear that the main part of this loan impairment charge comes from Trade Finance, as you already understood. Now with regard to commissions, again, which decreased by CHF 13 million. Again here, the voluntary reduction of Trade Finance comes in with almost the same amount as with interest income. So overall, we talk about more than CHF 20 million in decrease of interest income with regard to that decision. The behavior of private clients, as mentioned, we reached commissions in the Bancomat ATMs, FX and credit cards. However, there was a positive trend in commissions from the wealth management business, be it private banking or asset management, in particular, on the transactional side. The trade income is up. Now this is, of course, to on one side, the trading desk, net inflow with activities, which is based on the flow of commercial clients and private clients. But in this number, you also have a part of the treasury income, which uses FX swaps to take advantage of the exemption at the Swiss National Bank. So it's important that from an economic perspective, actually, the net interest income or the interest income decrease is less than that because part of this is actually from accounting -- by accounting rules taken into trading income. If you come -- maybe have questions on this, I'm happy to answer to that. Now again, also, I want to insist on the point that after the record year of 2019, had exceptional items. Also, under other income, we see one exceptional dividend from 6, which obviously did not came in this year. So that is why others are down by CHF 8 million. So the Page 17 gives us more details on the evolution of operational charges. And you know that this is our ongoing concern to keep a firm control on operating expenses. And you see that other operating expenses are down by CHF 9 million peered on our efforts of managed IT costs. I remember, maybe I mentioned that we had initiatives underway to reduce this. Now this is happening. And on the other hand, obviously, the COVID resulted in less events, less marketing. And I must also say that as a regional important actor, we have been nice with all kinds of suppliers, event organizers. When we cut -- when we ended the contract because an event could not take place, we also had kind of social responsibility to leave some amount to the suppliers. So still the amount of money are -- still, we saved money. Now, okay, headcount is quite down, but it's in the same order of size, on Page 18. With regard to assets, now here, this is important. You see, of course, on the client side, by the development of mortgages and loans, advances to customers, which I think Pascal Kiener explained already. But you should see also the effect of the increase in cash and equivalents. Now this is directly linked to the policy -- monetary policy of Swiss National Bank, which actually increased quite significantly the exemption limit up to which Swiss banks can put money at 0 interest rate at Swiss National Bank. It's actually this multiplier of the liquidity -- legal liquidity reserve, which was -- this exemption was introduced in January 2015 but then was increased twice last time in April 2021 to the factor of up to 30, whereas it was initially 20 when introduced in January 2015. Now it's obviously now our aim to always make sure that this is fully filled up because, in this environment, to have 0 interest in Swiss Natural Bank, obviously, is a kind of support that the Swiss National Bank provides to the Swiss banking system. And also, the idea behind that, that universal banks like ours, our retail banks cannot charge negative interest to small depositors. So here, actually, the Swiss National Bank provides some support. We can call it like that. So we use this professionally, and we fill it up, as you can see, on the next chart on liability and equities. On one hand side, it was increased due to banks and on the other hand side, maybe in not such optimal way from an economic perspective, with customer deposits, which increased, as Pascal mentioned, by more savings, also to some extent, to the credits which we have provided and the money went direct into deposits, the COVID credits. And with maybe some tendency to bring money to the BCV and where we will be change -- we will change ourselves as we go further with regards to negative interest rate conditions. So far, less than 1% -- significantly less than 1% of our clients have negative interest provisions and over a total amount of about 1/4 of the deposits. While shareholder equity is slightly down, this new way of provisioning expected loss for healthy credits and which we -- actually, we created out of reserves in the equity. And this takes me directly to Page 21. How did we do? How did we create provision for nonimpaired loans? Actually, we took CHF 35 million out of the reserve for general banking risk and shareholders' equity. And actually, this goes a different [indiscernible] and different items of the balance sheet. For the balance sheet exposure, it's directly reduced from the balance sheet exposure, be it cash, be it interbank exposure, other loans and mortgages. And for the off-balance sheet exposure because there is credit risk in off-balance sheet exposure, as we mentioned quite easily, it's on the right-hand side, it's a provision item. So you can see that this CHF 23 million plus CHF 12 million are the CHF 35 million which we created. This is now an endogenous number reflected -- reflecting risk rates, expected losses and will evolve but marginally, marginally year-by-year. As you can understand, we mentioned we simulated this, and we see that the amplitude of fluctuations year-by-year versus expected loss provision is at most plus/minus CHF 4 million year-on-year. Well, at most with a certain confidence -- interval of confidence, obviously. Now as we get to assets under management, while, basically, you have more information here, also, CHF 4.5 billion of net new money. You see again, it's typically seasonality, which I always insist on when we are on the third-party when we talk about first half results. The net new money has been overall businesses, be it asset management, be it private banking, but also more a balance sheet business like personnel or SME clients. The thing has been already largely commented. With regard to our capital ratio on Page 23, now it's high and even higher because by reducing activity, which has quite high-risk rates, it's obvious that our CET1 ratio is up to 17.7%, but also because we just already mentioned in August last year, because FINMA reduced some of the multipliers because I think we are conservative in our internal models. On Page 24, where you see this other effect of the time in which we live with excess liquidity, to some extent, our LCR is far beyond the regulatory limits. HQLA is composed to 3/4 of our cash deposited with Swiss National Bank and 1/4 out of our HQLAs, which are really top AA, AAA bots. Now coming to the key element, which is also I'm proud, obviously, we had this chart and which is a clear confirmation that we walked the past -- now in our third horizon. We are in the third horizon now of 2018 of CHF 3.40 to CHF 3.80. And given the current environment, we maintained CHF 3.60 per share as proposed to the AGM, which we'll provide CHF 310 million in distribution, meaning 94% of payout. So this is all for my part. Pascal?

Thank you. Okay. Going forward, I think I'm not going to be very long in my explanation. I mean we have a relatively low visibility on the pandemic. My personal feeling is that, not feeling, but see the vaccines are working. Maybe everybody would like that we could vaccine people faster. But nevertheless, I see till summer I'm convinced that most of the elderly people as well as the vulnerable people will have get -- will have got the vaccine. So that means that we're optimistic that we can see the light at the end of the tunnel for H2. So I suppose that 2021 will be better than 2020. You see on this chart, the estimate of the GDP. Now whether it's going to increase by 2% or 3% or [indiscernible], as I'm convinced it will be positive and there will be a rebound because of COVID that people need to spend now, need to consume after those several months of difficult times. In term of -- interesting to see that the real estate market, the mortgage market, has not been at all affected by this pandemic. And this is not only in Canton of Vaud but in whole Switzerland. And I expect the market will carry on like that. You see in the last 3 years, I always told you that we want to be careful. We want to carry on the cash flow, but there is a small change in 2020. You see, in the last 3 to 4 years, houses were built at the rate which slowly was higher than the growth in population, and we could see this vacancy rate increasing. And now people are carry on building houses. It's clear that the growth in population increased in 2020. We had in the good year 1.2%, 1.3%, then it slowed down to 0.7%, 0.6%, 0.8%. And now we are back at something like 1.1%. So I don't know whether 2020 is an exception or whether this will carry on in 2021. But in a way, this is a new element that supports, let's say, an increase in demand. And this is good in a way for the real estate market as well as for the mortgage market. So we will see. And this increase of population is, of course, driven by immigration, not by Swiss people or people around Zurich or Geneva having more babies during the lockdown. That might also happen. Okay. I'm done with my presentation, and we are ready for your questions.

[Operator Instructions] The first question comes from Stalmann Stefan (sic) [ Stefan Stalmann ] from Autonomous Research.

I have 2 questions, please. The first one relates largely to net interest income and net interest margins, which were actually quite weak in the second half compared to the first half. And I'm curious to understand whether we can actually look at the second half net interest income as something like a normal run rate going forward or whether the second half of the year has actually seen a constant deterioration of net interest income so that in December, the run rate of net interest income was even lower than what the average for the second half would suggest. And also, I'm curious to learn more going forward about what the pressure points are here for net interest income. So for instance, is there still pressure from the runoff of swaps? How does the situation look like in terms of front-book, back-book margins, mortgages and other loans? And maybe in this context, could you remind us what your SNB's threshold actually is in absolute terms? I seem to remember something like CHF 8 billion, but I'm not quite sure.

Thomas?

Okay, Stefan. Very good question. Now first of all, in the second half of last year, on the treasury side, we did more FX swaps to take opportunity to take in U.S. dollars [indiscernible], for example, and to swap them into Swiss franc to fill up our exception -- exemption limit at the Swiss National Bank. And when we do that, precisely in that moment, we put pressure on the net interest income, and the gain is in trading income. Precisely, the point I mentioned, which, of course, I apologize, makes it very difficult for you guys to follow what is really from an economic perspective going on with regard to our dimension. That is an element which you must be aware of. Now, but more fundamentally speaking, what offers you mentioned, right? We have seen a little bit of pressure on the asset side with regard to the repricing of the mortgages. This is an ongoing issue, right, of the existing mortgage book repricing. This is long, long, long decrease of interest rates in -- I want to say, in absolute terms, if you can say that. And in front of this, of course, it's only partially compensated by, of course, yes, the reduction of the cost of our bonds, particularly over the fundraising part of the covered bonds and with regards to the long leg of our swap book, right? It's only partially compensated. So this provides some pressure, which is then partially offset by volume growth. So if I take the building blocks together of repricing of the asset -- on the asset side, right, in front of this, I put the repricing of the bond side of the long leg of the swap book and volume growth, I almost set off the pressure. But it's a slight increase still, but it's almost set off, okay? I think these are the key elements which you have in mind. But -- and then -- I mean, and then keep in mind, keep in mind, please, 2 other elements. Now the net interest income in 2020 had a nonmarket element. I mean the voluntary reduction in trade finance, right, is a contextual decision, right? And for the moment, I dare to say that once we are out of this COVID crisis, we get back to more or less 2019 levels in that activity, right? But this obviously is a decrease in net interest income, which, in proportional terms, is stronger in the second half than the first half because, as Pascal mentioned, this reduction happened in February, was fully, let's say, March. So this is another impact on the second half of the year where it was fully loaded, if I could say that. So I think these are the key elements which we should put together. To make a long story short is that from an economic perspective, we are quite able to stabilize our interest income, if I take the part which is in the trading book,and put it together with net interest income, which you can't see, I apologize. Obviously, this is a challenge for universal bank like ours, because, I mean, it's a lot of activity. It's still rising volumes in mortgages and loans to defend net interest income. It's a -- which is the whole argument for efficiency, for cost control, right? But the good news is, from an economy perspective, we maintain it. Particularly of the current element, obviously, is this whole dependency on monetary policies, I don't want to get into this right now. And the second key measures I give is that we have a contextual particularity with the income effect from trade finance, which we stay in the market. We, obviously, that we learn, but there is definitely -- there's no strategic change, structural change from our ambitions with regard to trade finance.

Did this help?

Right. Yes, very helpful. I was wondering regarding the SNB threshold. Is that something that you could guide towards?

Yes. Well, I mean -- well, let's put it that way, right? It's always quite close to the numbers, which we publish. So it is quite higher than the number you pronounced.

Right. Because it seems like there were 2 different ways to read your SNB deposits from the material that you publish. I guess if I look at your balance sheet, I would guess it's a bit north of CHF 11 billion. But if I look at your HQLA assets, I would get to maybe CHF 8.5 billion because you say it's 75% of HQLA is SNB deposits. So it was a bit, I guess, confused about how...

Okay, let me be clear on that one. No, okay, let me be clear on that one because some people call HQLA as see it. It's kind of balance sheet of looking at things, is that my total liquidity at SNB and the total amount of my [indiscernible], my bond book, some of that is some of my HQLAs, right, which means I have gross, at least speaking because then is how much I can do -- actually, I know I see what I mean. Then I said a question to what rate I can take them into the account. But grossly speaking, right, from the account -- balance sheet, point of view, I have the CHF 11 billion plus CHF 4 billion of HQLAs. Then I see to a point on Page 24, that the way to which I can take into account is a little bit less. So from balance sheet perspective ...

Sorry, they're category what?