Banque Cantonale Vaudoise (BCVN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the BCV 2021 Half Year Results Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] For the call today, the speakers will refer to the slides, which are available for viewing on the IR section of the BCV website since this morning. At this time, it's my pleasure to hand over to Pascal Kiener, CEO. Please go ahead, sir.

Thank you very much. Good afternoon, everybody, and maybe good morning for some of you calling from the U.S. Let me go direct on Page 4. I think we have a good result, a very good result in this first half given the context. They are not as good as 2018 or 2019, but those 2 years were record years, but nevertheless very close to them with a net profit of CHF 173 million. I think, CHF 10 million short of the best results in the last 2 years, I think. Now I will concentrate on some business evolution in our different business lines, and Thomas then will concentrate on the more financial element of this presentation, P&L, balance sheet, et cetera. So I go directly on Page 6. One of our main business, the mortgage business, we have a growth of 2%, which is totally in line with the growth of Canton of Vaud. We don't have the latest statistic of the Swiss National Bank, but according to the statistics we have in the last 6 months, the business in Switzerland grew by roughly 3.5% and 4% in ROE, so we are totally in line with the market growth. And other loans, I will come back to that, mostly an increase -- a slight increase in trade finance. And deposit, as usual in the last couple of semester, this is still increasing probably a bit too much. We have to be careful on that. We come back to that. And AUM, of course, net new money with the performance of the market significantly. Now other highlights, I will not mention that on Page 7. I think it is self-explanatory. Let me go into the different business lines. So Page 8, retail banking, an increase of 3% in the mortgage or slightly probably above market. And we are focusing, as you know, on several areas in the market and not on all region of Canton of Vaud since the vacancy rates are quite different from region to region. We're focusing on those regions mostly around the Lake where the vacancy rates are still low. We have a very good traction in asset allocation funds. So those products are doing very well. We are also able to transform some savings account into those off-balance sheet accounts. This is, of course, very interesting in this period, but not easy, but this is improving quite fast. And as I said, an increase of inflows from customer. Basically, if we look at the market dynamic, PostFinance as well as UBS have changed their condition orders as well, so we are following here. So we always said we don't want to be here a leader. We follow the market, and we try to reduce as much as possible the inflow coming from all the banks. But it is not easy when you have a customer that brings you 6x CHF 10,000 or 12x in 1 year. It's difficult to track really very well, and it's difficult to prove that this is a kind of arbitrage. So it's difficult to do that. Nevertheless, we're going in the next weeks to adapt some of our pricing condition to make sure that we are not the ones, which receive all those flows going out from certain banks. Otherwise, you see that revenue and operating profit are quite up, nothing really to mention. I mean, 2020 was not a very good year. So in a way, there is a kind of a base effect here. Corporate banking, quite stable in terms of overall volume, an increase in revenue and profit. But I think it is more important to discuss the different business activities within this division. So first of all, the SME, mostly Canton of Vaud, SME, as you know, this is very stable in terms of credit limit, in terms of draw downs or utilization of those limits, I think, is very stable. Those COVID-19 bridge loan issued last year from the bank backed up by the Swiss consideration, we have roughly 12% paid back already. You see that those SME are quite liquid, with the deposit up 6%. And I mean, they are very stable, and this is a sign that the Vaud economy is very resilient, very, very sturdy. We don't have an increased number of SMEs or companies showing having problems. This is very stable. I mean, it's clear that for some sectors like tourism, gastronomy, entertainment, et cetera, those sectors have really suffered quite a lot during this pandemic. This is not over. They've been helped from the states. This is clear. But we don't have a significant exposure. It's rather small. And most of those very small SME activity in gastronomy or entertainment, they don't have credit basically. They might now have some COVID-19 credit as possible, but -- so historically, we cannot really see what's going on in this market because they don't have any credit. So only 1/3 or 40% of SMEs have credit in Canton of Vaud. Large corporate, this is a volatility based basically on pricing here, so we are very strict in terms of negative interest rate condition, and some deposits went down going to other banks. And trade finance, for those of you who follow us, we decided in 2020 to reduce our exposure in March last year because we didn't know exactly what was going on with this pandemic, this crisis, so we reduced its position. And we did that for the whole year 2020. And only beginning 2021, when we saw that the market is recovering, that the economies around the world are doing much better, that the supply chain are working, we decided again to increase progressively our exposure. We are not back at the level we had in 2019 or 2018, but we are going to go in this direction during this year, probably the beginning of next year. So you see an increase, but it doesn't reflect directly yet in the revenues because we are not yet there. And in terms of credit risk, as I said, the book -- I mean, the SMEs are resilient. Book is sound, being trade finance, large corporate or SMEs, not at all affected by the COVID problematic. And we have some provision this year, for this semester, less than in the first half of 2020, nevertheless, I think, CHF 8 million or CHF 9 million. This is due to only one case, I insist on that, one case, a local company, and that has nothing to do with COVID-19. So this is in a way bad luck. I mean, this is a credit business, so this is not a sign that the portfolio he's having a problem or something like that. This is just a very special case, probably a fraud, but I cannot mention much more about that. But the main message has nothing to do with the COVID-19 crisis. Wealth management, basically private banking as well as institutional asset management as well as our subsidiaries, Piguet Galland. You see the numbers are good. This is quite normal given the financial market. And we see here the effect of performance and increase in valorization effect directly on revenues, on commission, quite also a strong transaction activities. I think you see that in most private banks or private bank-related businesses, nothing really special to mention here. Trading, quite stable. Basically 2 effects. First one is the reduced revenues in the ForEx business. I repeat here, we don't do any prop trading. This is customer-driven activities. And in ForEx, basically, in the first half 2021, there was less volatility in the market than in the first half 2020. So we profit from volatility usually, so basically less revenues. That was compensated by a very, very robust activity in structured products. So we have 2 new person there. We have made some changes. And this is picking up quite well and with an increase of more than 50% in revenues. This is also due to the market condition. Let's be clear on that. Okay. I'm done and I hand it over to Thomas for the financial part. Thank you.

Okay. Hello, everybody. So I'll give you some comments on the more financial parts. So on Page 13, if revenue is up 13 -- 3%, we developed this in [ multi-stage ] just after. The key element here to highlight is probably that the other provisions were at CHF 8 million -- or minus CHF 8 million last year. You remember last year, we had total risk cost of above CHF 20 million. The balance sheet part of it is in the net interest income. And for the impairment costs on off-balance exposure, we had to put it under other provisions. Now this year, this is at least first line completely different. We had only some releases on other provisions. So with the well-managed charter costs, we also developed this in more detail after. We have operating profit up 13%. With taxes of CHF 30 million, we get net profit of CHF 173 million. Now looking at the different lines on Chart 14, obviously, the key element to have in mind is that the commissions and fees income was outstanding, at least with regard to the up -- increase of CHF 17 million, up 11%. Well, just mentioned, this is mainly linked to the valuations and the transaction levels. Also in this line here, with regard to commissions, we have trade finance and on the commission level already picking up more than interest income over H1 '21. The trading income has just been explained. In net interest income, so I take the lower chart on Page 14, while it's always interesting to understand why, what's going on, on the loan -- on the NII before impairment charges, well, it's under pressure of minus 2%. Obviously, here, we have one inside the world dynamics, which are linked to the ongoing negative interest rate environment. They are -- the total events are more or less stable, meaning that the -- there is income pressure coming from the repricing of the mortgages, which is only partially offset by the mortgage growth. On the liability side, we have some repricing, of course, on the -- of our own bonds as well on the hedge book, whereas we are stuck on the deposits, as here mentioned. And as Pascal already highlighted, there is ongoing steps of bringing more negative interest rates to the clients. But however, at the moment, it's less than 1% of the clients or about 15% of deposits volume will have negative rates. However, the -- it's important to say that probably the minus 5% is linked to the fact that trade finance is still above -- below normal. And as Pascal highlighted, we expect, with the normalization of the environment, that also trade finance will continue to step up. Now in our risk charges here on the balance sheet part of credit exposure, as Pascal mentioned, we had one isolated case, which gives the main numbers. Obviously, there's always a continuous flow of some SME defaults, as you know, but they wouldn't show any significant number. Here is one isolated case, which is neither COVID nor trade sided, which gives us the net interest income of minus 1%. On Page 15, let's discuss the operating charges, where the product costs are up, I would say, for a good reason. We in-sourced another step of IT specialists, and you know that this is always interesting for BCV because we reduced the margin paid to IBM and the VAT. And at the same time, we apply our own discipline and management and efficiency, so this will then drive through to some cost reductions. On other operating expenses, we see already lower IT costs and the minus 2%, therefore. Depreciation is stable. Headcount, well, headcount, you'll basically find the increase linked to the IT guys, which I just mentioned. Total assets, well, of course, the balance sheet is marked by the high level of liquidity, [indiscernible] and cash and equivalents of -- with other banks. Obviously, there's also some part of treasury optimization and particularly to the increased -- also in the increase, what we have put at reverse repo agreements. Well, the business side, and Pascal explained already very well, what's going on, on loans and mortgage loans. So I turn to Page 18 with regard to the liabilities and equity. Here, of course, you see the inflow of customer deposits, which is partially higher on H1 '21, and that's why we will be -- that will tighten our conditions. Ongoing increase of bonds, even though we are very liquid, but obviously, this is linked to have a structural solid and same finance structure. Well, paying more dividends and the income of benefit of first -- of H1 means that shareholder equity is down on June compared to end of year. On Chart 19, some numbers on assets under management, which have already -- with regard to net new money and performance fee mentioned by Pascal, and what our key message here is that we -- this is pretty nice, pretty good situation, in particular in asset management and private banking, and also institutional clients. But in these numbers, there also are some inflows of deposits on the bench, which are too high. On Page 20, our CET1 ratio is slightly down for 2 reasons. One is the trade line is coming back. And secondly, on the -- our [indiscernible] our Institute, which is financing central banks by covered bonds has decided that this large general assembly on capital increase, and every participant Canton of Vaud [ participate ] in pro rata in this increase, and it is already committed. That's why it's already with impact on the CET1 ratio. So well, leverage ratio is obviously down due to the balance sheet, which is increasing in liquidity. LCR ratio is very high because of the optimization to do in treasury management, hence as a result of very high LCR numbers to make it simple. Okay. These are all my comments, and I hand over again to Pascal. Okay?

Thank you. Okay. I'm going to finish with just the outlook. So in terms of economic situation in our region, as you can see, the GDP development for 2020 was not as bad as foreseen. This is always the same when there's a crisis. There always account certain exaggerations. So instead of the minus 5% to minus 6%, we will land by minus 2%, minus 3%. And the estimate for 2021, we estimate a growth in Switzerland or in Canton of Vaud of around 3%, let's say, between 2.5% and 3.2%. So basically, we are more or less back at where we were in 2019. So we recovered. I think this is similar in certain parts of the world as well. So going forward, we -- I believe the number 2021 are probably rather right between 2.5% to 3.2% I would say 2022 could be a bit lower, but certainly lower -- not lower than 2%, 2.5%, so rather optimistic about the future here. In terms of real estate prices, you see the trend continues. Again, we saw an increase in the last 6 months of prices being on flat, apartment or single-family homes. This is clearly due to a strong demand, but as well as the environment of very low interest rates on mortgages. Now the good news here is that for the first time, since 2010, the vacancy rate is going down. I mean, this is 1.4% to 1.3%, so this is not a lot. But nevertheless, it seems that this trend has stopped. Two reasons. There is again a population growth above 1%. We had achieved 2016, '17 roughly 1.2% to 1.3% population growth. Then it went down to 0.7%, 0.8% for 3 years, I think, and now we are back at a bit more than 1.2%. And in the same time, I think a bit less new objects on the market or new buildings. So probably, that explains this slight decrease in the vacancy rate. Now whether it stays like that, difficult to say. This is why we're not going to change, let's say, our mortgage policy focusing on quality, focusing on the areas where the vacancy rate is low. I mean, 1.3%, 1.4%, this is the average for Canton of Vaud. But basically, it goes from 2.5% in certain regions down to 0.3% around Lausanne, the main city and around the lake. So this is, of course, where we focus our effort. But I don't see that there will be a burst of a bubble in the next couple of months. I mean, the population grows -- is growing, and the price of mortgage are still low due to negative interest rates. So probably, this will carry on, but we have to be clear. I mean, prices cannot go up to the roof. I mean, at one time -- one point in time, that should level off, and I don't know exactly when. Okay. More specifically for the bank, unless there is another huge problem either in credit, which I don't foresee, or in the environment or a new variant of this virus, I'm rather optimistic for the second half, which would be similar as the first half, so probably a result around CHF 340 million, CHF 350 million. So enough to pay our dividend, which is basically our base commitment to our shareholders is to have a stable dividend. No surprise. That's the value proposition of BCV. And if we can increase the dividend, we'll see. But for the time being, I don't think this is -- even the uncertainty, it will be the right move. Okay. Thank you, all. We take our questions, if there are any.

[Operator Instructions] The first question comes from the line of Stefan Stalmann with Autonomous Research.

I have 2 questions, please. The first is on what you said about negative interest rates and the potential to do a bit more there on pricing. Can you maybe give us a rough idea of how much potential there is? I think for last year, you disclosed interest income from negative rates of about CHF 46 million. If you could maybe put the additional potential from here into perspective relative to the number. And the second question, I guess, is somewhat related to this. You now have this very, very generous LCR ratio, 150% even in the second quarter, and you did mention some optimization in the treasury. So this is not all coming from deposit inflows. This is also coming from something that you have done in your HQLA portfolio, I guess. Does that now give you additional degrees of freedom to either make more money in the treasury or maybe even push client deposits out of the bank, if they're not willing to accept repricing?

Okay. I'm going to take the first one. I mean, I cannot give you specific figures. But you see, I mean, there are 2 ways. We're going -- I mean, more and more, every, let's say, 3, 4 months, we increase the number of clients, customer who are affected by negative interest rate. So we charge them minus 0.75. So we don't really change the pricing. We increase, let's say, the circle or the scope of clients going down slowly, and it's also kind of a competitive game. It depends what the others are doing. There also -- there is another way. I mean, this is increasing in transaction cost, increasing costs for an account, increasing fees. And we will, in the next couple of weeks, months, introduce some new pricing schemes for certain type of accounts, et cetera. So that might not increase the revenue of interest. That will increase commission because, I mean, those fees on commission are not in interest rate. The interest rate depends basically on the growth of the mortgage, and I think with 3% -- 2.5%, 3%, we are in line with the market. So we don't want to go much faster than the market. 0.5% more, why not? But not much more than that. And the rest is just trying to carry on, continue, let's say, increasing the scope of the negative interest rate. We will carry on doing that. I cannot give you a specific number. That will be a wrong guidance, so sorry for that. But we have -- I mean, we don't -- you see, it depends really what the others are doing, and we have to follow that to make sure that we don't get too much inflow. Our goal is not really to -- I mean, to get people out of the bank. I mean, you have to think long term here. I mean, today, we don't need all those funds. But maybe in 5 to 10 years from now, we might. We don't know. We try to not to attract new customers here who doesn't want -- who don't want to invest in central market, so just having a saving account. We try not to accept those customers. We try to detect to see the situation where we have the impression or the proof that the client is arbitrating us. And then we apply, we get the interest rates or the guy has to leave the bank. So it's not an easy task to do, so I cannot really commit to any numbers here. We will do, let's say, the maximum we can given the situation of the competition. Now in this first semester, I think the increase in inflow is a bit too high. I want to make sure that I can slow it down in the next couple of months. Now you cannot change just like that. You have to send a letter to customer, et cetera. So you have to be careful with those conditions. You cannot just change overnight. So -- but we are ready. I cannot also give you information here, but we have another situation, and we will increase our condition in the next few weeks, but that might translate more in increasing commission, but the negative interest -- in interest rate revenues. I hope that gives you kind of a guidance, and I give now the word to Thomas for the second question.

Okay. Stefan, with regard to your LCR question, well, I mean, the first point here is that the LCR currently, I mean, it's no -- it's not directed, right, because from a strategic point of view -- financial strategic point of view, we would put them at 110 or 120. But it's now rather as a result of optimization, getting actually the most out of the opportunity, which the Swiss National Bank gives us with this exemption level. So it's the result. Now here, you must understand that -- and I think we -- I can't put it bluntly on the table because if you combine numbers, you can see it on your own, that this exemption level continues to increase as a matter of fact for BCV. Because as a matter of fact, which you can read, our legal liquidity reserve has been increased for some accounting reasons 2 years ago, and the exemption level is a result of the 3 years moving average. So basically, this increase of liquidity reserves has a positive result of increasing the exemption over months after months, the new 3 years moving average going up. So that's a key element, right? That's the key element. We have this basically HQLA, if you want to say quite that way, which is increasing because we want to fill up -- at least fill up the exemption of the Swiss National Bank, and everything else follows, right? So if you fund it with something, which is longer than 35 days, then obviously, this will be very positive on LCR, okay? So that's the main driver, and I think this should have answered to your question.

The next question comes from the line of Andreas Venditti with Vontobel.

I would have some related to trade finance. Maybe you could discuss a bit how you see the market evolving, maybe also in terms of margins given the withdrawal, at least the stated withdrawal of some competitors in this market. So this would be helpful. And then in terms of volumes and the gradual recovery you mentioned, where do we stand here? You mentioned that this will continue in the second half and probably also at the beginning of next year in order to recoup somehow the volume you decided to withdraw last year. And then also in terms of revenues, I think if I understood you right, on the net interest income, it's more lagging. I guess, that's obviously the averaging effect. While if I got it right on the fee and commission side, this has already been in -- partially, obviously, in the numbers in the first half. Did I get this right?

So I'm not sure I understand the last part of your question, but let's try to take the first line, which is more strategic, I understand. You're right, some big players withdrew from this business, so we could -- we didn't want to take opportunity to increase our lines -- credit lines within our customer at the same time because we were in a strategy of being very cautious. They did that very professionally, so that means at one point in time, we thought that there might be some liquidity problems in the trade finance business, not for us, but also for other clients and for also other banks. This did not happen because those banks that withdrew did it very professionally and over time. So for us, in a way, it's an opportunity. On the other hand, we want to be very. very careful. We don't want -- on the same. Those were large credit lines, and what we see is that some American banks as well as Asian banks are entering the market. Those -- most 2 banks, European banks that withdrew now are being replaced slowly by some American banks and Asian banks. So that will not have a significant effect on us. What is changing though is we try to increase price because you see there were , let's say, some fraud cases. And I think most banks have realized that they went too far in the last 5 years with, let's say, low pricing and very loose, in a way, credit arrangement, credit conditions. So basically, those -- let's say, those significant fraud cases in Asia, Singapore, not to name it, as well as the withdrawal of some banks have created in a way a reaction within the trade finance banking community where I think the business is going to be a bit more, let's say, healthy in the next couple of years, with a slight increase in overall price and especially a better risk management. I think banks will no longer accept several conditions, and the clients will have to adapt and not the banks. So given the situation, we're going to increase slowly. I cannot give you an exact timing when I expect to be back at, let's say, 2018, 2019 level. But if things carries on like that, probably mid of 2020, we should be back at -- sorry?

Mid of 2022.