Banque Cantonale Vaudoise (BCVN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the BCV 2022 Half Year Results Conference Call and Live Webcast. I'm Moira, 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 Mr. Pascal Kiener, CEO of BCV. Please go ahead, sir.

Thank you. Good afternoon, everybody. Good morning for the ones coming from the U.S., -- in the U.S. Let me jump directly to Page 5. So as you've seen, we have quite very good results in this first half 2022. All figures are up more or less except assets under management basically the main issue here is the investment performance. So you know, the financial market, as well as, myself and the performance was negative so AUM are slightly down. Now, if we jump on Page 6, if I take the main business area, out of the main business volume, so mortgage, again 2%, this is totally in line with the previous year, where we had a growth between 3.5% and 5% on average. So here we are on the 4% trend. The market -- the mortgage market is still dynamic. I accept though a slowdown in this market due to the increase in interest rates, probably we will see that in the next 6 to 12 months. But for the first half, the market was still very dynamic. So we're growing more or less like the market here. Other loans, here you have different businesses, in the corporate business, I will come on that later in the presentation, slightly up. Deposits are stable, but I mean there are a couple of effects here. As you will see, they are up for SMEs and retail and private banking down in the corporate business, mostly due -- just a couple of clients reacting to interest rates et cetera. So we decided to withdraw some funds, which is not a bad thing in this period of negative interest. And then AUM, net new money Thomas will go into detail into that. Maybe I just like to [go] in some points. So we are losing a Member of the Board. Mr. Ochsner decided to step down in -- at the end of June 2023 after 7 years, we regret that, but he wants to take advantage of life in the next couple of years he is almost 70. So he decided to step down. He was also the Chair of the Audit Risk Committee. So, we are getting to [hire] -- to look for somebody of a similar caliber for this role, which is quite important. As you know, because it has been communicated recently the Head of Private Banking is leaving the Executive Board and Mr. Christian Steinmann is going to replace him. Christian Steinmann is the current Head of Private Banking Credit Suisse, Suisse Romande, as well as, the Regional Head of Credit Suisse, Suisse Romande which is the French part of Switzerland for [foreigners in the call]. And then a couple of information, maybe as that I started 7 years ago a huge initiative based on client service. I think this is key for our business. So quality of client service, client experience and you see that for the first time we are seen as the most recommended bank in the Canton Vaud. Maybe 2 points on Page 8, I think for the financial ratings. I mean, it's quite clear to everybody. We've had those very good excellent rating I must say in the last couple of years. They were just confirmed this year. I wanted to take just some time to talk about those ESG rating. So MSCI decided to upgrade us from BBB to AA, you know, that is the second highest rating. I think the truth, it doesn't show a significant difference in our ESG approach. I think MSCI had a kind of a methodology problem. We saw Cantonal Bank especially with BCV. And we integrated -- we discuss with them, they decided to review the other method and they acknowledged that they had a problem. So this is why we have this -- we have this huge jump from BBB to AA, BBB was clearly wrong, and AA will be closer to reality, [Atos] which is a MSCI in Switzerland, let's put it like that similar kind of agency. And we have the second highest rating in their rating. So quite good. So from this side, I think as well from a financial point of view, our ratings are excellent. And also our ESG rating. Let's talk a bit about business. So retail banking doing quite well. 2% in loans, customer deposits increasing which is not something that we look for in those negative interest time. On the other hand, we haven't given negative interest rate on customer deposits or to the kind of customer saying that those guys are quiet -- they have an inertia. So they will be there, when the rates are going up. And we believe this is nevertheless the cheapest source of refinancing for a Cantonal Bank or for any bank almost. And we believe that since we were able to attract some of those funds to attract some new customer area that they will remain once the interest rates are going up, they will stay with BCV. So from that point of view, it was a bit -- probably a bit difficult in the last few years to manage those funds, but actually I think we did it quite well with our asset management team. But now we believe this is an asset going forward. Once the interest rates are in positive territory. You see revenues operating profit are up, basically the increase in revenue is very simple to explain. This is driven by all payment transactions in credit cards, ATM, foreign exchange et cetera. So 2020 and '21, we had a bad year because of COVID less consumption, lock down, people could not really travel occasion et cetera. So this is why 2022 was normal year, and we are back here on the normal track on those sources of revenues. So retail banking is doing quite well. Corporate is saying we have to differentiate between different business lines. But you'll see that the numbers are quite good as well especially in terms of revenues. So SME quite stable, deposits slightly down, low slightly up and maybe you want those COVID-19 bridge loan this is a program issued by the Swiss Federal Government to give liquidity to SMEs and company in Switzerland during the COVID period. We have here put another 40% of those loans, and we issued I think CHF 700 million for 6,000 customer so as of today already 40% in terms of volume paid back, and in terms of number of loans is 25%. So that means that's going quite well. And this is also an indication that the economy in the canton is doing quite well, with another number in 2022, that is the first year that bank started the amortization program. So those customers have to amortize over a 7 or 8 years period, I don’t remember exactly, this year was the first year, and 98% have no problem to pay the first amortization payment. So that shows, for us in terms of risk is the issue, because the risk is beard by the System Federation, but this is just an indicator that the economy is doing quite well. Real estate firm, you see the numbers, we talk about maybe later on the recent market, still doing quite well. I do expect a slowdown due to raising interest rates, but in those numbers I don’t see that yet. Large Corporates and this is where we have the decrease in deposits. This is quite normal. Those guys are professional, and they go where they get the better return for the money. So this is not a problem for us. Those kind of swings. Trade finance, let's spend a little bit of time on trade finance. For BCV you know, this is a business volume exposure between CHF 2 billion to CHF 3 billion. So this is not very big compared to our loan books, maximum of 10%, maybe not even that also trade finance banks and traders basically around the Lake of Geneva there are many traders and those guys are quite exposed to Ukraine and Russia. Ukraine is exporting lot of steel and agro products, wheat, corn et cetera. So already in November/December we had a feeling that the things could go very badly over there. So we decided to reduce significantly our exposure. Many people said yes, Mr. Putin is a bit arguing, but he will never attack or invade Ukraine. We were quite doubtful. So we decided to reduce dramatically our exposure, not only to Ukraine, but also to Russia, or to let's say Russian old traders or assets. And basically it was a very good decision, because when the problem occurred that -- if I remember well on the 24th of February, we had -- we had exposure but it was significantly reduced compared to November. And actually I can tell you today that we stopped everything related to Ukraine or Russia in terms of trade finance activities, and that we're going to have minor losses, minor risk of provision all those -- the 2 or 3 cases where we still have some issues they are fully provisioned, fully in the half -- H1 2022 numbers. So no more risk regarding Trade Finance and in Ukraine or Russia, which is a very good news because it was not easy from the start. Now, you can imagine that we are no longer taking any transaction in those 2 countries or related countries, it's not only Russia and Ukraine, all the countries in the region like Belarus, for example. So we have significantly reduced the number of transactions and the number of customer we have in those areas. I mean, the customers are here in Switzerland that the transactions take place in those areas. But at the same time there was this increase of raw material prices. So basically in terms of volume, volume are quite stable, the number of transaction are down in terms of volume, and in terms of revenues. This is very stable compared to last year. And finally, as you can see the number our corporate business is quite resilient, very limited provision needs. But I think that's it for the start. Wealth management again here this is a collection of businesses. This is Private Banking for private people. This is asset management for investors, for pension funds, et cetera. And this is also our subsidiaries Piguet Galland, which is a traditional small Private Banking operation here in Contango as well as in Geneva. So you see the impact of the market on the performance on the AUM. But again, here, the mortgage business, which is quite important for us. If you look at the revenues, if I take private clients, this is more like 50-50. Also it's a private banking business, but it's also a mortgage business for [indiscernible]. So this is quite stable overall, but the AUM are significantly down. That's mostly the financial -- that's the financial market. And trading, and again, for maybe some of new ones in the call. We don't see about customer-driven trading. We no longer seen -- for the last 14 years, we don't do any prop trading. This is only trading for customers and high volatility in the first half. So the ForEx market was quite attractive and the ForEx transaction were up and we could increase our revenues. Despite a slight decrease in structured products, which is another business in the trading division. So this business was very, very good in the first half of 2021, a bit less in 2022, but nevertheless, good activities. So that went down, but the ForEx revenue overall, everything went up. So basically, a very good year, first half in terms of revenues and almost all businesses and business lines contributed to this very good results. Now, I'm going to hand over to Thomas for the detail and more financial aspects of this presentation.

Thank you, Pascal. Hello, everybody. So I'm on Chart 14, on the income statement. Well, it's pleasure to show you this -- a total income up 6% to CHF 524 million. We will dig into more details on the following pages with regard to the operational charges. Just one point which is important here is that operating profit is up CHF 24 million, net profit CHF 197 million, and taxes are stable. This is because there was an extraordinary tax charge previous year -- previous H1. That is why this is stable and is basically more reflecting the tax rate in 2022, which we have in this region. Now, if we go to total income composition on Page 15. Well, overall, the first statement is, of course, that all contributors, all sources of income were up. I will go more into net interest earning a little bit later, which is up 4%. Where, as mentioned before, commission and fees is up 3%, where obviously, this is taking advantage of the average high capital assets under management, which we are pretty aware were decreasing over the first half. Trading income is up 16%, which is obviously very strong, driven by the [loyalty] in the ForEx market, this was ForEx, which was very high. Structured products are well -- are at a high level, but lower than the exceptional structured product first half 2021. And then as mentioned, we had a real estate disposal, which is kind of something exceptional, which drove up the other ordinary income. Now, with regard to interest income, it is interesting to see that the net interest income before loan impairment charges is stable, which -- the different dynamics, we can go into more questions with this later. It is the almost in-existing net loan impairment charges, which drove up the net interest income in comparison to the previous half by CHF 8 million. Now, with regards to operational charges on Page 16. Personnel costs are stable, and it's operating -- other operating expenses which are up. Well, of course, one insight because life is waking up again cultural and sporting events take place, and we obviously we are sponsoring them here. That is one of the key drivers. But the other one is also the IT side with increasing charges driven by digital channels use and needing digital capacity on the IT side to respond to that. Depreciation and amortization is stable. Well, on Page 17, as you can see, overall head count is pretty stable. As you can see, there are always this kind of local variations by in and out, nothing significant. On Page 18, total assets, while it's a very [low] balance sheet with CHF 59 billion, given the current situation of very high liquidity, cash and equivalents at Swiss National Bank almost only slightly up 3%. On the client side, more interestingly, we see this, Pascal Kiener already mentioned is this, still dynamic mortgage market. Mortgage loans are up 2% over the half year. So that is something which we look carefully to stay with the quality we want. Then slight movements in loans and advance to customers, which are rather marginal. On Page 19, on the liability side, where you see the treasury activity, also given the fact that we [try] always to fill up the exemption level at Swiss National Bank, which has been rising continuously over that period still, even if it's not producing less money, but we'll go back to that later. Well, customer deposits has been discussed or were stable. And shareholder equity is obviously down, because we don't take into account, but we had higher distribution than of course, we are earning over 6 months, as you are well aware of. Assets under management on Page 20. No, it has been very well discussed, what was the market performance, there was some new money. The split of net new money is basically coming from the different businesses of BCV from Personal Banking, SMEs, Institutional and Large Corporates. So this is a quite normal development of the business. On Page 21, the risk-weighted assets and the capital ratios. Well, first measure, of course, is rather stable. And then those for you who follow the kind of technical information of regulation in Switzerland, you have probably heard that FINMA is coming back with it is countercyclical buffer, which will be increased in September 2020, which will be back in September [2022]. Given the split of risk-weighted assets of BCV that basically means that requirement increases by 1% to 14%. Well, it doesn't -- has no impact for us is the way of how we do our business. Well, this still increasing environment of higher liquidity, increasing liquidity of higher larger balance sheet, the leverage ratio is slightly down, which is also insignificant. LCR, I think also in the same sense is pretty high, driven by -- is exclusively high, driven up by our priority to earn money with additional bank as we see exemption level we have there. Well, structurally, we have a very solid funding, as you can see on Page 23, and this is basically all.

Okay. So going forward, let's look slightly on Page 25. So you see some estimate for GDP growth for Switzerland and for Vaud. I believe those estimations from some institute around [Vaud] and also BCV estimation. They might be quite a bit high. I expect a slowdown due to the current situation. Nevertheless, 2022, I believe that the growth will be above 2%, clearly above 2.5%, something like that. And for next year, I do believe that the growth will be around 2%, maybe 1.8%, maybe 2.2%, 2.3%, who knows? But clearly, I don't see any sign of recession in this part of the world, Switzerland is doing well and Vaud is doing even better. And we see that immigration is increasing. Again, after a couple of years where it was flat. That means a resident of European countries, mostly Spain, France and Portugal are coming back to work in Switzerland, we have an employment rate of 2%. So it's quite tense in the labor market for the time being. So that means rather positive, I don't expect any recession in the next 18 months. In terms of real estate, this is quite an important market for us. You see the number here that in H1, prices of apartment or flat or single-family homes were again up, I was a bit surprised. I would have thought that price would slightly level. No, probably that's going to happen now with the increase in the interest rates. I do believe that pricing should -- so the growth of price should slow down even maybe slightly negative, but marginally and probably in terms of volume, also I expect a decrease of growth instead of 4%, maybe 3%. That's normal given the interest rate situation. Now on the other hand, we see that immigration is again going up. So the growth of population is slightly growing. We see also that real estate promoter are quite careful in the last 2 years, given also -- let me in 3, 4 years, given the increased in faculty rate, but you see in the last -- number of the vacancy rate is going again down. So this is why I believe that the market will remain sound even if I consider the price being very high. But I said for the last 10 years that the price were too high, so I was always wrong. So should be careful with estimation. No, but basically, there is a need, there is a very low employment rate, as I said, there is an increase in immigration. So more or less, the number of flats or single-family homes, new homes being brought on the market, composing just for the increase of population growth. So probably this vacancy rate will remain between, I don't know, 0.8% and 1.5% in this bracket, I don't see that price will crush possibly in the next 12 to 18 months. So we will carry on our strategy, targeting a growth roughly like the market, so probably a bit less than 4% for next year. And we focus clearly on those areas where the vacancy rate is lower, and we carry on looking at quality objects. We could have a larger growth or bigger growth than the 4%, but we don't want to do that, because that would probably mean taking lower-quality mortgage. In terms of outlook, you see H1 was exceptionally good. This is the best H1 in the last 15 years. And H2, 2021 was the best H2 in the last 15 years. So I don't think H2 will be as good as H1. A couple of reasons for that, first of all there was an exceptional item in H1. Then the trading was exceptionally good. So I'm not sure we will -- we will have a good performance, but I don't think we have the same level of performance. Then the financial markets are slightly down, a bit up now, but basically since a couple of revenues, fee and commission are linked to the volume of AUM, we will -- we should see roughly a decrease -- slight decrease, but if you add all those elements and then also the dynamic in the interest revenue due to small increase of interest rates or the ramp up -- I mean, if interest rates are again one day totally normal, it will be the jackpot very good for us. We always said that the 6 to 12 months, 18-month period when the interest are going up, that will be a bit more difficult for us for different reason, maybe Thomas can explain that a bit better later if there is a question about that. Now, it depends also what the SNB will do in September. If they remain like that, okay, fine, if they go to zero, this is the worst case in a way for us. And if they go with the rate to 0.25 or 0.5 where we again get some money on the CHF 15 billion of, let's say, SMEs and private [personnel] deposits. So this is why it's quite difficult to estimate. But when -- if I make it the best possible guess, the revenue will be down in H2, and the net profit will be in line with previous years, but we will not make again a net profit like the record we had in 2021. Okay. I'm done, and we are ready to answer your questions.

[Operator Instructions] The first question is from Stefan Stalmann from Autonomous Research.

I wanted to talk about 3 topics, please. The first is on costs. Your cost base has been very well behaved. But clearly, there's all kinds of pressures in the environment, maybe less in Switzerland and elsewhere. But do you expect to see anything, let's say, in the next 6 to 12 months pressure, let's say, from rising rates, rising energy costs or maybe cost inflation on other inputs? Second, topic would be energy security. I was wondering if you have any view on how you look at the energy supply risk in Switzerland over the next, let's say, 6 to 12 months? And even more specifically, have you actually run a scenario to determine what your expected credit losses might be in a scenario where there would be, let's say, a total stop of Russian energy deliveries to Western Europe? And the last question relates to deposits. You break out, I think, for the first time maybe that the deposits in real estate firms or the deposits by real estate customers are down, while their borrowing actually grows. Now, is it just a random noise, what we're seeing there? Or is that maybe a first indication of tighter liquidity in this client group maybe because they're facing rising cost of construction?

First question about cost. I would say it is quite difficult to answer this question. I mean, certainly, we will suffer like everybody from inflation. I mean, let's declare on the personnel cost side. I mean, we were quite lucky in the last couple of years where the increase in personnel cost therefore is limited. Now as you see in Switzerland, I mean, some union asking for 4%, 5%. Definitely, we will not give that, but that will be more than last year. Last year, I think we had an increase of 0.7%, probably this year we're going to be closer to 1.5%. We haven't decided that yet. But definitely, on the energy cost also, I don't know if you have looked at the price of electricity, and we have long-term contracts, but now we have to renew those contracts. So there will be a slight increase here. Then it's difficult, I mean, in the other items, I don't think this is quite important. We have long-term contracts also on the IT side, but probably the cost next year will increase more than this year. Except this increase we had this year based on those sponsoring events, et cetera. This is going to be flat. So that means we will not see again a kind of a CHF 5 million to CHF 6 million increase, that's going to be flat, so -- but I could imagine that the cost would increase by maybe I don't know, maybe 2%. It's difficult to give you a precise number. But definitely, we're not going to see zero. I mean, I don't believe that. And we don't have plan in a way to cut cost dramatically. I think, as you said, we managed them quite well in the last 10 to 15 years. So we're going to carry on that -- but against [implementation] we cannot really fight alone. I hope that answered the first question. The second question is a bit -- is a very wide question. So I'm not sure if you talk about BCV, overall Switzerland. So I do expect some problems in Switzerland. And actually, in fact, a bit cynical, the sooner those problems, the sooner the government will react and take immediate decision to solve that problem on short term, midterm and long term basis. So you know how the politician work, but probably we need a kind of a crisis to make sure that we take now the right decision. This is suddenly in the press, in the political or the problem. But if you talk to specialists, I mean, this was clear for the last 5 years that we will come to that point, almost 10 years maybe. And anyway, so I do expect some issues. Now, for -- let's say -- let's try to structure the discussion. For us, BCV, we are ready for that. I mean we have systems. If there is, I don't know, a cut in power -- the power of electricity grid for a couple of hours, it's not an issue for us even a couple of days. I mean, certainly not a couple of weeks, but we have system to be able to survive a couple of days. Now you -- now if the grid is -- I mean, if there is a huge shortage, and there is a cut blackout. Now this is a system blackout in Switzerland. Obviously, we cannot do anything against that. I mean, if the financial system or the payment system doesn't roll, because there is electricity, that's a lot of discussion. Now in terms of credit risk, I mean, we haven't done a thorough in-depth analysis, but I'm not sure this is really necessary. I mean we don't have in-- I mean there are 2 issues here. There is one issue of the price. And if you look in our portfolio, in our region, we don't have those kind of energy intensive industry or customer. So I believe price is not an issue. There might be 1 or 2 companies having problems. But we don't -- we are not exposed on energy intense activities or companies. So price -- increase in price will not be a problem. Now, in terms of supply -- in terms of blackout. So I expect the blackout electricity in terms of energy, I don't think so. Now, it's very difficult to imagine. But I mean it's clear that if the country is blocked for 2 weeks, there will be some problems. So, I mean, the problem will be for everybody. But if you talk about our loan book specifically in terms of credit risk, I'm quite confident. I don't think that it might be different in other parts of the world. But again, I say that we have a service-oriented industry, 85% in service and maybe 10% in industry, and the rest in the agricultural business. So I'm not too worried about that. And we have looked at a couple of customers specifically and the situation seems to be okay for the time being. That's the second question. The third one was about real estate, I think that's random noise. This is not something -- this is not a sign of everything. This is just random noise, don't worry about that.

The next question is from Andreas Brun from Vontobel.

Maybe one to start for Thomas. On the one-off, how big was the gain from the sale of real estate. Then a second one on NII. How big is the negative impact from the higher interest rates like in million Swiss francs in H2? Or put differently, how big is the lost revenue given that you cannot judge negative interest rates anymore for 75 bps. And then...one on trade finance. In trade finance, you said the book is normally between CHF 2 billion and CHF 3 billion. Could you tell us the current size and maybe compare it to the book by mid-2021. And then maybe the last one for Pascal. On the guidance, is the net profit in H2 2020 or H1 2021 of, which was CHF 173 million kind of a good indication overall in the ballpark for the second half year?

Let me maybe jump to the last one. And I mean you see -- I mean the different way of answering your question. If you take maybe the 3 or 5 years average on profit you should get sort of some to a number which is correct, plus/minus CHF 10 million, maybe something like that. We will pay the dividend, don't worry. Okay. That's the third point.