Banque Cantonale Vaudoise (BCVN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the BCV 2022 Full Year Results Conference Call and Live Webcast. I'm Alice, Chorus Call operator. [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 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, and good morning for some of you calling from the U.S. Let me jump directly on Page 4 with the key messages. I think you certainly read already our communicates. So revenues are up 3%. That was not exactly expected. If you remember what we communicated in August, we were thinking that we would land a bit slightly below 2021. Actually, we are slightly above the record profit of 2021. So a very good year. We are quite pleased. Therefore, we are in a position to increase the dividend for this year. And since we are quite also confident in the future of the bank, we are -- we have decided to carry on our distribution policy and with a higher distribution range going forward for the next 5 years. Page 5, I'm going to comment those numbers. Page 6, very quickly. So mortgage business up 4%, corresponds more or less to the market, which is growing between 3.8%, 4.2%. We don't know exactly because we don't have the market figure yet. But I guess we are in line here with the market. Other loans are stable, but I will come back on that later on. There are different effects here on the other loans, basically commercial loans. And deposits slightly up. You have to combine the 2 parts of this sight deposit and other client deposits. I will also make a couple of comments on that. And net new money is positive, and AUM are going down due to market performance. Okay. Some new people. A new person in the Board of Director for the Audit and Risk Committee a new Chair. He will join us on July 1, 2023. And as already communicated [indiscernible] the Head of Private Banking left bank at the end of 2022 and was replaced by Christian Steinmann coming from Credit Suisse, in charge -- in the bank as of 1st of November, but in charge of the division as of 1st of December 2022. Some highlights, as you know, we entered some index. We obtained a certification for our asset management business. And for those of you who follow BCV for a couple of years, you know that we put a lot of emphasis -- strategic emphasis on customer service, customer satisfaction, and in 4 years in a row with an independent survey, we are the most recommended bank in Vaud. We have very solid financial ratings. Those are stable, no change. And also very solid -- very good note grades, about extra finance -- for ESG ratings. You see MSCI ethos, which is a Swiss organization and the [indiscernible] project. I think we’re always a very good rate, very often the second grade out of the range of 6 or 8. Now coming on business. Retail Banking, which is a stable business, slightly growing with the GDP here in Switzerland or in this part of Switzerland. Customer deposits still growing, but a bit lower growth than last year. This is basically due to the post-COVID period. People started again in 2022 to travel, to consume, et cetera. So a bit less deposits. And the mortgage, as I said, 4%, we are in the market. And you see that also an increase in revenues and operating profit. So a very good year for our retail banking activities. Corporate Banking, this is what I said. We have to look at the different business lines in this division. SMEs, a very good year again. So 2% increase in credit volume. This is more or less the GDP. And the COVID-19 bridge loan has been repaid, up to 50% right now. So this is a reduction of CHF 150 million. But those loans were issued during the COVID period. And this is good that customers are able to amortize or to repay part of this loan and deposits are also up, showing that SMEs in this part of Switzerland are in good shape. Real estate mortgage up 10%. I mean, the real estate market is still dynamic. So this is not a big surprise. And deposits slightly down. I mean, this is kind of a volatility, nothing really to mention here. The same for large corporates. As you know, we focus really on profitability, risk-adjusted profitability, and we don't care really about volume. So there is an inherent volatility in this business depending on the condition we are -- we are suggesting to our clients and/or what the competition is doing. Trade finance, maybe more interesting comment. So basically, the average business volume is down 16%. 2 main reasons for that. The first one is the reduction we initiated already in November 2021. So before the start of the war between Ukraine and Russia, we were quite worried when we saw what was happening there. So we decided already in November to reduce our exposure. And of course, as of February 24th, we decided to stop every single new transaction. But as you know, in this business, those transactions are of 3 months or 6 months duration. So it took some time during 2022 to bring that business to 0. We have 0 risk. So I think that should be also mentioned. So we are completely out of that for the time being. We hope that one day this war will stop and we can with our clients, again, have transaction in those 2 important countries for the trade finance activity. And the second reason is the reduction in commodity prices in the second half of the year. So those 2 elements explain this reduction of 16% of average volume. And if I talk about credit risk, I mean, there is very limiting new provisioning needs, the SME, our client portfolio is in very good shape, although the economy is slowing down slightly, we don't see for the time being any sign of problem as far as credit risk is concerned. So the wealth management business, basically, here, you have also different, let's say, business lines. You have the onshore wealth management activities for private clients. We have our subsidiary, Banque, focusing also on private clients, and we have the institutional business focusing on pension funds and other kind of institutional clients. And here, this is clear due to the negative performance of the market, you see a decrease in AUM in revenues and operating profit, clients are quite cautious for time being, so there is less a transaction. And if you add that to the performance, which was not that good for all banks, all asset manager, I think you know that probably better than myself. Of course, the commissions or the revenues which are mostly proportional to the level of AUM, they suffered quite a lot here. So a decrease in revenues as well as operating profit. Trading, and I think this is very important to understand here because I saw some reaction where I believe people do not understand exactly what we are talking about. So trading -- the trading activities as it is reported here, this is really trading activities. This is mostly ForEx and some trading on structured products, and this is essentially client-driven activities. When I took over this bank as CEO in 2008, I stopped over 1 year because it took some time. I stopped all [ prop ] trading activities. We don't have the right people to do that. We don't have the [indiscernible] et cetera. This is not an activity for a bank like BCV. It's already difficult for a larger bank in Switzerland. So we are not London-based. So basically, this is not so for trading, is not for us. So here we're talking about client-driven activities, so mostly ForEx. This is not equal to the accounting line in the P&L, which is also called -- or trading and Thomas will explain that in detail. You see a sharp increase here in this accounting line, but this is essentially due to treasury, balance sheet management, liquidity management activities. It has nothing to do with a trading -- prop trading. So don't mistake. In terms of trading, the numbers are quite stable. They are slightly up due to an increase in volatility on the ForEx pocket, but it has nothing to do with prop trading or investment banking, whatever. The strategy of BCV has not changed and will not change as far as trading is concerned. Okay. I hand over to Thomas for more details.

Thank you, Pascal, and hello, everybody. So I'm on Page 15. As mentioned, total income is up 3%, and I will go deeper into that on the following pages. Also, I will tell in more detail the operating expenses and depreciation, which together increased by CHF 9 million. The other provision and losses. Well, in average, we are at CHF 2 million to CHF 3 million, so we had releases of CHF 1 million last year, cost of minus CHF 5 million this year, so we are in the average, taking us to an operating profit of plus 4%. Last year, we had real estate owned by the bank, which was sold with a balance sheet gain. This year, there's nothing extraordinary or almost nothing to signal. Now net profit is up CHF 388 million, higher than last year. You see that the taxes are slightly down. Remember that in 2021, we had additional taxes due to the fact that penalty payments on the settlement, obviously, with regard to the DOJ, where at that time not fully recognized as tax deductible and that was corrected by that date. Now we're again in this normal corporate normal taxes, and that's why they are down compared one year to another. Now here we are with regards to the different sources of income on Page 16. Well, first of all, the net interest income overall is stable, and this is the accounting perspective. Well, you see that from an accounting perspective the net interest income is stable because net interest income before loan impairment is slightly down. We had on the [indiscernible] impairment we had released as we brought in so this year, whereas we had some charges last year. This difference brings us to stable net interest income. Now the important point is here, the trading income is up CHF 46 million on the accounting line trading income. And then as Pascal mentioned, it is important that the main reason for the increase is linked to treasury operations, but which are from an economic perspective, rather -- should rather be interest income, but we account and put them with regard to our accounting produces in that line. What I'm talking about? I think you should remember that we do travel operations where we try to take advantage of the limit, which we have as a Swiss National Bank. In the past, it was a limit up to which we of several billions where we were earning 0 when there was a negative interest rates. And it's now a limit where we earn 100 basis points as the Swiss National Bank, slightly above. Now we are very interested to attract deposits. And it's quite interesting to attract deposits in FX. Now it's very -- the interest charges for the FX deposits, they are booked in the net interest income line and they, obviously, with higher interest rates on FX on U.S. dollar and euro provide actually for higher charges on interest income, which is obvious. Now the FX swap, which brings us into Swiss francs and basically which captures the yield on this is accounted for in the trading line. So now as we have this huge difference in interest rates, the consequence is just obvious. The charges for these trade operations have increased and the trading result has dramatically increased with a positive sign. Well, I will be more than happy if you have questions on this and I'll come back to this point. But the key message is that for our shareholders we take advantage to the full extent of what the Swiss National Bank provides us as it an interesting limit for placement. And we are -- except for that, that from the first lecture, the accounting P&L is a little bit more difficult to understand. Now with regard to development of commissions, what has been said -- and you know very much that situation is in the financial markets and we said to trade finance. On Page 15, on operating expenses. Well, I think the key element here is the other operating expenses are slightly up because the full activities around sponsoring events, casual events, has, of course, started again after the COVID. And so we have a year of increase of 5%. We keep on working on controlled development of personnel costs. Depreciation is slightly down. We have now -- basically there's no more depreciation of goodwill with regard to our subsidiaries. With regard to headcount, while it fluctuates more or less around the same numbers, nothing special to say here. With regard to total assets on Page 19, while you see this important levels of cash and equivalents, which are part of the game I described before. And you see the mortgage loan development and other loans which Pascal Kiener commented on. Financial investments increased, which is part of our financial strategy to have -- these are our financial investments which are basically HQLA, which means a liquidity reserve. On liabilities, the key element is that cash deposits develop now more timely. We had a little bit high inflow during the negative interest period because we were not very aggressive with the cap negative rates for clients. Assets under management. Well, it's important to see that the negative performance of minus 6% is, of course, to realize that this asset under management which we consider here are as balance sheet as [indiscernible] positions. That is why you don't see the typical balanced portfolio performance, which would be rather minus 10% to minus 15%. The net new money is very satisfactory, very much in line of previous years. Remember that 2021 was a little bit high to be precise for the reason I just mentioned before that we had a little bit high inflow of liabilities given our little aggressive conditions. Capital ratio. Well, a CET1 of 70.6%. [ FINMA ] decided to reactivate its counter cyclic buffer with regard to residential mortgages, well, something which is very discussable, but which is not really important for us. The leverage rate is, of course, way above the requirements. The equity ratio also slightly down, but well above requirements and our internal target line. And the net stable funding ratio for a bank of like ours, of course, is not really a major issue. Now given this positive development, on Page 25, we decided to propose to the 2023 AGM a dividend of CHF 3.80, and which, by the way, would be the -- is the upper limit of the structuring of our dividend policy, which now comes to an end. It's the first time that we enter in horizon, we see upper limit. If you see on Page 26, this is now a long story. The rise if approved by the -- will be approved by the AGM, means that we have paid out CHF 1.5 billion over the total period. It's more than CHF 4 billion, and we want to go on because basically from our key convictions there's no change. It's in a commitment for distribution in Swiss francs for 5 time horizon. And we basically want to go stable or higher, conditions that there are not any structural changes. Well, that's all from my side. Pascal?

Okay. Looking forward, going forward. Just one chart on our expectation as far as GDP growth is concerned in our region. We expect GDP to decrease significantly in 2023, around probably 1%, between 0.8%, 1%, I would say. I do not expect any recession, both in VO as well as in Switzerland. Low growth numbers around 1% or could be slightly less, but I don't expect any recession in this part of the world. And 2024 should be probably better, but that's a bit far away to be very precise. But the main message here is that growth will be low, but no recession expected. In terms of real estate, it's amazing, but this dynamic continues. We had again in 2022 an increase in prices of flats or single-family homes. We see, however, that the growth is slowing down. The prices are still going up, but at a smaller rate. So I could imagine that slowly this trend will level up in 2023. So I could expect a very slow growth in prices in 2023. A reduction in prices, I don't think. If there would be one, that would be a very small one. So I don't expect a kind of a bubble exploding because basically the demand is still here. I mean, the population is growing by roughly 1.1%, which is roughly 9,000 person, and builds something like 3,000 flat or houses. So you see, if you make the math, you see that this is quite a good equilibrium. And you see that clearly now is a vacant housing rate that went up in the last 10 years and slightly back going down in the last 2 years. So I expect this occupancy rate to stabilize around 1%. And given that demand, I don't see why -- how prices could really collapse. Clearly, the increase in interest rates will slow down the market. I think has already slowed down the market, but the effect on prices is not really seen yet, but I expect it in the next couple of months. I would not be surprised if the increase on prices would be around 0% or 2% at most during 2023. For us, as far as revenues are concerned, this pressure we had due to negative interest rate on the mortgage book, this pressure is over. There will still be a commercial pressure, competitive pressure, it is very clear. But the mortgage -- the mortgage books were repriced itself at a higher rate than before. So that's a good sign. On the other hand, the financial market are still in a difficult situation. We don't know exactly how the geopolitical program will turn. So we are quite cautious as far as, let's say, commission fees, et cetera, are concerned. And this is clear that the trade finance activity will be reduced for a couple of months. I mean, we're not going to find or to try to have other type of transaction in other type of countries that are our client or we do not master to compensate for the loss in Ukraine and Russia. So this is a pressure on the revenue since the volume will be slightly lower at least still we see exactly what will be the future of those territories, especially what's going to happen with the war. So basically, our guidance is that we will evolve in the -- in line with previous years. And as usual, we will be very careful with our costs and that's it. I think you have seen our message regarding the dividend policy. So I think that should give you also a clue on how we see the business going forward. Thank you very much. And we are, of course, ready to take your questions if you have any.

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

I have a couple of questions, please. The first one on very broadly net interest income in 2023, given what Swiss interest rates have done. Can you give us a rough sense what you expect on NII given these benefits? Related to that, on the trading income from treasury operations that you explained, could you maybe add a little bit more color on the size of these deposit flows and whether or not you think that -- that kind of income contribution that we have seen in the second half is sustainable going forward and what the swing factors are that influence the size of this revenue line? A and the last question is the -- relates to the LCR ratio, which went down quite a bit during the year. And if you look at the balance sheet, it's not immediately obviously -- obvious why. Could you maybe add a bit of color of why you've lost almost 30 percentage points of LCR during a year when the balance sheet hardly changed? Thank you.

Okay, Stefan. Pleasure to answer your questions. It's actually important to understand is communicating baskets of that interest income and trading income. [indiscernible]. From a business perspective, before going into accounting lines, the important dynamic now is that the perspective is very positive, but we have to be cautious given that we are baked into positive interest rates and we start to earn our salary, our -- and again, on the liability side of the balance sheet, right? We make our way back to commercial margins on the liability side, whereas before we revise, if we subsidizing the deposits, right? That's obviously the key element which drives the revenues and gives a positive dynamic to revenues over the next 1 to 2 years, at least. That is a big picture we have to have in mind. We have also have in mind that there is probably some increasing commercial margin pressure on the asset side. But I mean, at the same time, this has continued to grow, it is secondary. Thirdly, we've come from a quite particular situation with the strange economy we were living in, in the negative -- during the negative interest period. Now, because you remember and then I go back into the accounting lines. You remember that in that period, we were on one hand side earning quite substantially from this exemption level at Swiss National Bank. And that's a key point substantially, right? Because from minus 75 basis points to 0, its quite a lot. And I think we never gave a precise number, but it was more than CHF 10 billion or it's more than CHF 10 billion of exemption level -- or level limit at the Swiss National Bank. So that was big money. Obviously, there is now much less interesting, and I'll come back to that. Also, we have to keep in mind that from the dynamics of interest income, we had still and it was written in the annual report, a significant level of negative interest rates charged, right? Which obviously gave a part of the solution, but the assessment was a negative time because the bulk of deposits were losing money, right? Now it takes us into the accounting lines, right? The accounting line interest income, right, has no more the negative interest rates which were charged, which basically was reducing the charge of interest income, okay? The accounting line interest income is always the one which pays, of course, the deposits in FX. And these deposits are basically key elements to earn -- key driver to earn with the Swiss National Bank. And these charges now they increased significantly given to the high interest rates of FX of euro. Whereas, on the other hand, the gain, the net gain, obviously, has decreased. The net gain was very high when there was a 75 basis points difference on the account of Swiss National Bank. Now it's much smaller. So the contribution of the expansion level, which is some net gain, which is the issuing is less. But from a growth perspective, there is still a significant trading income linked to these arbitrage operations because it has first to compensate, obviously, we own the charge, which we pay on the FX deposits, plus little spread, which then come -- some of this comes in over the trading income. Going forward, this arbitrage game is most likely to continue, but to a degree slightly. It is possible that the Swiss National Bank will progressively decrease this exemption level as we go back to a kind of more normalized interest rates. And basically when the exemption level -- or the special limit at the Swiss National Bank disappears, there will be no more -- almost normal this arbitrage game and we will have a quite significant shift of trading income -- decrease in trading income and significant increase in interest income because we would have -- we would take -- we have definitely less FX deposits which we take in, less interest charge. I agree it's difficult to explain on a telephone line, but I hope you understand what I'm telling.

Yes. I think I get the message roughly. One of your competitors on the wealth management side is doing very similar things, I think.

Okay. I don't know. I don't know. I mean, what now makes the comparison between banks a little bit more difficult is that I know without naming them that some banks, Canton banks, they published this type of swap result in the interest income line, right? Which probably could also do, which would be a change in accounting principles. But now that we've won this -- or this year with this dynamic and we try to understand and I explained it, we don't seem to change our accounting principles now. So we keep on accounting that this way. But the thing is still good for the comparison of accounting lines. Okay, that was between those 2 accounting lines. Now LCR. LCR, to make it very simple, it was particularly high due to excessive deposits over the last years, right? And it's rather now coming back to the target level, which we were shooting for as I said in the statement.