Banque Cantonale Vaudoise (BCVN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the 2023 Half Year Results Conference Call and Live Webcast. I am 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 Pascal Kiener, CEO.

Thank you very much. Good morning. Good afternoon, everybody. Let me jump directly on Page 4. I think the main point I want to make, I think you have already seen the figures. It's basically a sharp increase in revenues due to the increase in interest rates. And consequently, since we are managing costs quite tightly, a sharp increase in net profit and operating profit. Net profit being CHF 240 million, up 22%, which is basically the best result since 2007. Why 2007? Because in 2007, 2006, I think we had some extraordinary items following the recapitalization of BCV 2002-2003. So basically, which is CHF 240 million is the highest half year profit from the creation of BCV, which was 1845. Okay. Directly on Page 6, you see the volume development on the main business lines. Probably, I will rather comment that when I comment the different business division. I think it's more -- it's clear. So just on Page 7, just to remind you that the 2 main rating agency confirmed their AA for BCV. This is the highest mark we can get since we don't get an official explicit guarantee from the state. We don't have any guarantee. And I just wanted to mention the ESG rating, which I think are getting an importance for you guys, but also for us. And you can see for those 3, let's say, main players in this business. We have always the second highest rating in their rating methodology, so which is I think quite good. Now let's go to the business. So retail banking is going very good, very well. The mortgage loan is increasing, also the mortgage book is increasing a bit slower than last year. We have something like 2%. Here, we are 1%. And this is due to basically the market in our region, let's say, going less fast following the increase in interest rates, which is quite normal. That was to be expected. So here, I expect to have a kind of 2% to 5% growth this year. Deposits, basically, this is a bit more than GDP. There are also some funds coming from Credit Suisse, as you can imagine. And the revenue is basically driven by increase in interest rates. That's quite easy to understand and you see the impact on operating profit. So nothing tremendous here, except the interest rate increase. On the corporate side here, you have to remember, here we have 3 business. Now we have decided to be more transparent to show the 4 business lines. So the SME in Contango, the real estate firms and the large corporates and the trade finance business. Basically, SME is quite stable. We have those COVID-19 bridge loans. They are almost 60% repaid. So that shows that the Swiss economy and economy is Contango is doing quite well. So the increase in real estate firms, this is basically a mortgage fund based on Switzerland that we are financing. And then large corporates is always a volatility. And maybe the main point I would like to make is trade finance. So we decided to, let's say, reduce our exposure following the problems in Ukraine, Russia and also the letter of credit business we have, which is really geared to China. As you know, probably in China, there might be some issues, we don't know, but the news are not very, very good. So we are relating to concentrate on several banks where we believe they are quite strong and they will be supported by the government whatever happens. So that's our credit business has been concentrated on fewer banks than before just to make sure that we don't get into these problems. In this corporate banking business, the credit risk is very low. That means, first of all, the economy is doing quite well. And this business basically is quite resilient and we have very limited provisioning needs. Thomas will talk about it later. In the wealth management, we have to think that this is institutional asset management, so basically pension fund. This is also private banking, onshore, automotive company. This is also the offshore private banking which is very small now and the business of our subsidiary, Piguet. So those numbers are really aggregate. So it's difficult to be very specific and say what's going on in each business line. But more or less, this is the same trend everywhere with even increasing. And basically also you have -- you can imagine that we have also some interest rate-driven business here being mortgage or being also basically saving accounts. And the effect of the increase of interest rates is also significant in this business. Trading, slightly down, but this is very small. This is basically our ForEx trading. The volatility has diminished as of March, April in the ForEx market. And basically since we take advantage of volatility really down, I think also revenue is slightly down. As you can see, this is quite stable business. I'll repeat, this is just client-driven activities. There is no speculation or, let's say, restating from bond except in intraday, we have to pull some volumes, but there is no position taken by this unit. Okay. I'll give the word to Thomas for the more financial part of the results.

Okay, and hello, everybody. On Page 13 on the P&L statement, which you know, I actually have no precise comment to add and I would like to directly go to Page 14. Now this time, we are more explicit on what's going on with the balance sheet management. Basically, what you can see is on the upper part of the chart, whether our total banking operations income of CHF 582 million. And you see the NII of CHF 293 million, which is CHF 55 million from an interest income from an accounting perspective. Now let me take to the lower part of the chart, where basically, I'll come back to the CHF 290 million where it's split, which is net interest income before any balance sheet management. And then there are CHF 44 million of charges induced by balance sheet management or you can also call it the arbitrage. Basically, these are dollars or euros which we take in and where we pay the charges and obviously these charges has increased with the higher rates. Then below that, I can come back to the CHF 105 million of trading income, but I split them to show you what is really the trading of what Pascal just talked about. And what is on the other hand side, the income from the arbitrage by placing the money which we received by swapping them in Swiss francs and placing them at Swiss national banks. So basically these are FX swaps, which then produced CHF 53 million of income against the CHF 34 million of charges, which means that they produce a net income of balance sheet management or arbitrage of CHF 19 million. So you understand that from what we call internally as an interest income from an economic perspective is the sum of the NII before balance sheet management plus the net income from balance sheet management, which actually adds up, which is not written here, to CHF 324 million plus CHF 19 million, CHF 343 million. And that number is up CHF 80 million. That number is up CHF 80 million actually increased here is an absolute numbers more important. And it's for accounting reasons of BCV that we are -- you can say, still has these FX swaps and these elements in trading income. I must admit some of other Swiss players have changed and have put them into all of that stuff that I just described into interest income. But I think the important point is that now you have the transparency and so you'll get a better understanding. So now you can see more precisely that from an accounting perspective, the trading income which you see in the P&L is not driven by kind of amazing crazy trading income ideas, but just the mirror of what I just described. And you can also see that absolute numbers really jumped up in net interest income from an accounting perspective is even higher. Let me go to commissions and fees, I think it's pretty straightforward. I mean, there are 3 elements in here. As mentioned by Pascal, we have reduced in the current geopolitical environment our trade finance exposures. We have the wealth management given the market turbulences, particularly in March, people were more refraining from investment, there's been less activity. And finally, there has been a little bit more, of course, with regard to the payments of shopping and the traveling, but still commissions is down by 6%. And then last but not least, I mean, the other income was higher in H1 '22 because there was a real estate disposal. Okay. So obviously, we will take timed questions if this has not been perfectly clear. On Page 15 then there is more focus still on NII, but more focused on impairment charges. And it's very simple to see that they're really minor [Indiscernible] our releases. They've all been minor the half year before. So this doesn't any change with regards to the year-to-year comparison. With regard to operational expenses that Pascal mentioned, our controlled way of managing costs. Some nominal increase in personnel costs and it's just a nominal increase. In the current inflationary environment, there's been some percent points of increase in salaries. And then more important in relative terms, the other operating expenses. Here, you see the classic higher energy costs, IT costs up. Even though we work in efficiencies, the volumes are increasing and financial data is always getting more expensive. The total headcount on Page 17 is what I mentioned before, they are fluctuating around more or less the same numbers. On Page 18, total assets. Well, with regard to business development, where if you understood that the mortgage has still progressed 2% in this high real estate market and in the loans and advances to customers that we have different forces at work which reduced volumes in trade finance, the bridge loans are getting more and more reimbursed. But the underlying business sector of SMEs and other companies have increasing loans. With regards to financial investments basically which are in HQLA reserve, there has been an opportunity to invest into short-term SMB bills, which we took -- which we ended in over the half year. That's why you see the decrease. With regard to liabilities and equity, well, nothing particular to signal. The customer deposits are down by the volatility of some large factors, whereas in the core business, we have a continued increase. Nothing dramatical, but continued increase. While of course my shareholder equity is down for several reasons as we paid our dividend. With regards to asset under management on Page 20, I think the interesting point, which is what I like to insist on is that, on the lower part of the chart, on the right-hand side, that the business with personal banking customers with SME institutions shows a net inflow of CHF 2.5 billion. It's just is very small, large corporates, let's call them, who have the typical size for them of treasury movements, which should make that -- the net inflow onshore is CHF 0.8 billion. There is ongoing or what most time net outflow, slight outflow in offshore of CHF 0.1 billion. In regard to capital ratios, finally, we say all the time with the same capital ratio you might say, which is a very solid capital ratio of 70.5%. The leverage ratio is also stable. With regard to the LCR, we are more on a stable on 132%, nothing special to add here. And for a bank like ours, the net stable funding ratio, of course, is stable and on a high level. That's all. Thank you very much. Pascal?

Okay. So going forward, I mean, in terms of economic situation, we believe that Switzerland will not -- there is absolutely no sign of any possible recession. I think if you look at the strategy of the Swiss National Bank is indeed quite well. Inflation is around 2%, less than 2%, I believe those are very good figures. So that means they should not go much further with increasing interest rates. It will depend of course of the European central bank decision. But the consensus today [Indiscernible] we would -- I mean, for the Swiss National Bank we would maintain that current level of interest rates, which I think should not damage the economy too much. The growth is not expected. I think 1% for me -- 1.2% would be the maximum that we will get, probably rather 0.8%, 0.9%. So small growth, but definitely no recession. I think that's the main point. And when I talk to SMEs, when I look the credit risk provision, I mean, this is okay, there is no problem as far as economic growth is concerned, although our trading partners maybe have more -- some more difficulty. And this is exactly the same for Contango probably even better than Switzerland here. We have really a network of small SMEs, very flexible and working or using a product with high margins. So that should be okay. That will definitely help us or not damage us. If I take one of our main business, which is the mortgage business, prices are slowly -- I mean, increasing prices is clearly slowing down. There is also some reduction in prices. But the fundamentals are still good because we have an increase in population and the building rate or the, let's say, the rate -- the pace of building new houses cannot really keep with the increase of the population. So basically, you see in the last 2 years and again this year, the vacancy rate is going down at around 1%. So this is why I don't expect this market to collapse or whatever. But we see -- with increase of level of interest rate, we see that the prices are leveling off, and I think this is a very good thing. For us, the policy will not change. I think we will try to grow more than like the market, which I think is rather a 2.8% to 3% growth rather than 4% we had in the last years. But we will not try to grow at 4% if the market doesn't grow at 3% and take risk just for getting some more volume. And we -- I mean, as you know, the vacancy rate is quite differentiated between areas in total growth. So we are also careful in targeting those areas where we consider is very low. So in terms of outlook, I mean, what can I tell you, I think this is the continuity. I don't expect any surprise as far as BCV is concerned. Now I cannot talk for the entire financial market or for the world. But I mean, you know the economic situation as well as myself. In terms of BCV specific item, I don't see any surprise or any challenges. So this is why we believe we are in the continuity of the last semesters. Be careful guys, don't assume 240 times 2, because if you look at these [Indiscernible] first semester is better than the second one for some reason. And basically, I hope that we will have a very good year. So I'm convinced we will have a very good year. Certainly, if you look at the numbers, probably above last year. I think that's not very difficult to guess. Okay. And I'm done and we are ready to take your questions.

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

I have 3 questions, please. So the first one is going back to your observation, Pascal, we have obviously a very good profit growth, maybe to the tune of 20% and maybe that is also true for the full year. Now if I look back over the last 10 to 15 years, your profit has grown at around 2% on average and your dividends have almost perfectly matched the growth and your dividend plan for the next 5 years also calls for that kind of 2% growth. But you now have probably 20% more profits that you may or may not have expected at the time you set the target range for the dividends. So is there any possibility that the dividend range also have to reflect the fact that now your profit level is at a different level or are there reasons to assume that maybe this jump in profits will not have an impact on your dividend target range?

Okay. Let me maybe first answer that question. It's a good observation. Look, when we define our dividend, I mean, there is an uncertainty. I mean, we all know that interest rates are going to go up. The big question mark was what would be the pricing of deposits? And if you look at the different Swiss banks, they've been able -- without talking to each other, of course, they have been able to get, let's say, attractive rates not to lose clients and to reconstruct in a way the margins we lost during the negative interest rate period. So now we have reconsidered. So this plus 20%, I mean, really not do plus 20% every year, it doesn't make sense. I mean, we have this change of going to a negative margin on deposits and very low pricing on mortgage. And now we are again in margin on deposit and we have, let's say, higher rates on mortgage and credit overall. So this jump will not repeat. I mean, we are drifting in new normality, but don't expect plus 20% every year. But this is clear. There is -- it jumped because unless interest rates become again negative, which I don't believe, but let's assume, interest rates would more or less stay the same for the next 2 to 3 years, so we had a jump, so we will not repeat the jump. But it's clear now, we should see maybe 2% to 3% growth, which is -- I mean, this is our volume growth more or less, we should see that in the profit more or less, but this is at a higher level. Now it's very difficult to be very specific about this level because it depends really on the margin we will get on deposits. And I assume that the competition will become a bit tougher on deposit with the time going on, okay, with time passing. Now to answer your question more precisely, we will think about it. It's clear that when we define our, let's say, our dividend and our dividend policy. So the range, basically CHF 3.80 to CHF 4.20 million, we have not really -- I mean, we could not be sure that the pricing on deposits would be so positive. I think this is a surprise for everybody. We knew that it would be higher -- I mean, that the profit will be higher. This is why also we said we are increasing our target for the dividend. But it was a surprise for everybody that the banks could manage to reconstruct their margin. The question now is, is it fully sustainable? I don't think so. Is it not at all sustainable? I don't think so as well. We really have a margin on deposit product. We have no margin, but even a negative margin. So let me see. The assessment that we need to do to see whether we can, let's say, review, let's say, our guidance for the dividend. So how sustainable are those increased margins? And as I told you, this is between 0% and 100%, because I don't know, but certainly, a part is sustainable. And we will assess that. What we don't want to do probably is just to increase the dividend and going back in 12 months or 16 months. This is not our strategy. We always say we commit to a dividend. We have delivered that for the last 15 years and we will continue to do so. But looking at the numbers, I mean, we have to ask ourselves the question. And this is a discussion we're going to have in the Executive Board. And certainly, we have to have this discussion with the Board because they decide the dividend, we don't, we make a proposal. And we will do that before the end of -- I mean, before the January, February next year when we announce the result and also the proposal for the general meeting dividend where the shareholder has to decide. I hope I could answer your question more.

No, that was very helpful. Very clear. And I'm always concerned that my next question has become a little bit pointless, but I'll try it anyhow. So that is more about the net interest income and net interest margin prospects. I guess, from what you said now is, I should conclude that maybe net interest margins and net interest income are broadly in a good place and they could go down, maybe even go up a bit, but maybe the risk is more to the downside. But maybe the question I wanted to ask specifically is, your net interest margin on loans if I adjust for balance sheet management in the first half was around 170 basis points, give or take. And in 2006 and 2007, when interest rates were at the current level for the last time, the margin was around 50 basis points higher, let's call it, 220. Now if interest rates do not change from where they currently are, do you think that there's any chance that net interest margins could go back to this level 15 years ago or has there been enough competition and maybe changes in product mix that makes it basically impossible?

No, I think that's impossible. I mean, the competition on mortgage has completely changed. Now this is a commodity. We have competition from -- I mean, all of the banks of course, from insurance, from brokers. So no, I don't expect interest margin to come back to 2007 or 2010 level. No, I don't expect that. But you see the point, once we have reached this normality -- and we don't exactly know where the normal is. The commercial margin on mortgage product, they're quite stable and I expect them to remain stable. The point is, what's going to happen on deposit exactly once we have seen -- we have reached this new normality? I mean, think about it. I mean, if we have on average a growth of 2% to 3% on mortgage and deposits, which is the ongoing normal, let's say, growth rate for those 2 businesses, we will see that anyway in our revenues. During the negative interest period, we have to fight against that. Every year, we would reprice mortgage at a lower rates than they were issued. And now this is exactly the other way around. I mean, we still have in the book. Maybe this year, we will reprice, let's say, 20%, 25% of the mortgage more or less. So no negative exactly. Next year, this is another 20%, 25% that's going to be repriced. Are they going to be repriced at a higher rate? I mean, unless the interest rates go down, which we don't really expect totally given the current situation. So there is an interim growth. Now we have to mix that with arbitrage, et cetera. This is why this is a bit complex. But I'm quite confident that we will add of this certain normality, which I don't know exactly where it is. We will see a sustainable growth in our interest margin business. What is for us not clear is also that the SNB. We carry on this policy of adding this amount that is paid. And before SNB, I mean before the interest rate situation, SNB would not pay on the bank -- on the money deposited with them. Now it has changed. They pay up to a certain amount. I don't know their strategy. That's also something that we should assess.

Yes. Could I maybe add one last question on the similar topic. You now, I guess, in your Canton, which is quite affluent, have a lot of borrowers of mortgages who also have quite a lot of financial wealth and maybe deposits. And I guess, there's always a temptation for these borrowers to collapse their balance sheets, in particular, if they think that they are not getting much on the deposits, I imagine that could become an issue. Do you see any of that at all that customers are thinking about using their excess deposits to reduce their loan balances?

No, I think it has happened during the negative interest rate period, we would pay 0. So I think it has happened. So I don't expect any significant move on this side. You see -- I mean, you have to think that for savings -- I mean, a lot of savings. I don't know exactly which -- how many percent of the volume. But those are people they have something like CHF 50,000, CHF 20,000 or CHF 80,000 and that's it, they have no mortgage. So they just sit on their savings. And this is the majority of our customers. In terms of volume, this is not maybe the highest revenue, but this is certainly something, I don't know, 20%, 25%. And I don't expect any move here. I think now they are quite happy to get maybe 0.5, 0.75 for the first CHF 20,000. We don't have that much pressure. I think the pressure comes from the latest that try to trigger the discussion. But from customers, we haven't seen any, let's say, departure or any outflows due to the interest rate. If you look at the other bank, they pay something similar, sometimes a bit different because you have also some fees on the accounts, et cetera. So difficult to compare. But as far as we are concerned, this is very stable and I don't expect any significant move here.

[Operator Instructions] The next question is from Michael Klien from ZKB.

A similar question on the mortgages. Firstly, maybe just could you provide us some indication in terms of the new mortgages and those that are renewing whether they are mostly certain type mortgages or whether you're now seeing also some customers switching to fixed mortgages? And you mentioned in your presentation also the environment for real estate that your policy remains unchanged. You focus on loan quality, target areas and so on. Have you done any changes to your standards? Have you maybe tightened them as well in view of maybe the economy being somewhat more difficult going forward? The second question would be on trade finance. So business has been going down for quite a few periods now, you mentioned for the latest period down 37% in terms of volumes. You still see uncertainties in terms of the geopolitics, China, you mentioned. So my question here is, when should we expect that trade finance has kind of reached a bottom? And what are you looking for trade finance to pick-up again? And then the third question would be on your balance sheet measures that you mentioned, I guess, some of it is strategic, some of it is technical. Could you provide us sort of what amount in the numbers was from a strategic perspective and what amount might be considered maybe technical?

Okay. I will take the trade finance one and the 2 others will be answered by Thomas. Let me take the trade finance first. I think we are, I'd say, close to the bottom as far as, let's say, tactical consideration given the current environment, i.e., China, i.e., Ukraine and Russia. Now what I cannot guess is, certainly, there is another problems in other country, I don't know, or the price of raw materials would go very low, I don't know. But given the, let's say, -- I mean, the main driver probably now is the price of raw materials because in terms of, let's say, -- I don't want to use the word structural, because I mean, I hope one day that Russia and Ukraine that we can solve the problem and that we can go back to our normal business over there. But I don't know exactly when and probably you don't know when as well. So in terms of those, let's say, small decision that we have taken to make sure that we don't take risk, I think this is mostly over. But what I don't know is the development of raw material prices. If they would increase by 10% overall, probably we would have 10% volume. If they decrease by 20%, probably we have 20% less volumes. But from our part in terms of active management, I think we are done.

Okay. I'll take the question on the mix of mortgages. I mean -- well, we've seen a movement more into short-term, into several mortgages 12 months ago when interest rates were very low on the short side. We now see rather again it's more typical situation where people have had a mix of 20% a little bit more [Indiscernible] and people take a long other leg. It's not always completely rational. They choose 5, 6, 7, 8 or 9 or 10 years. Sometimes they seem to be very driven just by a base point considerations, it's still quite amazing. But to make a long story short, there's no dramatic move. The overall for the fixed loans, mortgages, we have an average maturity of 4, 5 years. There's no major movement. With regard to our standards of approval, there has been no change. We have solid standards. And the -- I mean, the economy in our area is doing well, as you've seen in the presentation Pascal just made. And we have a healthy economy with so far, what we can see a healthy loan portfolio, healthy customers and we stick to our policies. There's no change here. With regard to the balance sheet management, I'm not used to talk about strategic or technical. I mean, we explained that to you. It's just all the same. It's taking opportunity of the 2-tier pricing at the Swiss National Bank by attracting money as cheap as possible. And on the liability side, very often in euro and U.S. dollars and swapping them into Swiss francs to place them with BSM. And these operations are typically of some 1 to 2 months. So it's a tactical behavior to take full opportunity of the 2-tier pricing at Swiss Nature Bank at the maximum limit, which we try to fill up. I mean, we will not do it just for 2 or 3 basis points. We try to capture 5 basis points or more. But then the issue here is that we see some higher rates. We remove a lot of liabilities to capture this gain. But we have a shareholder value focus. So we do that because we think it's an opportunity which Swiss National Bank wants us to take because that is the way they absorb excess liquidity to make sure that there are monetary policy functions that the reference rate that they target for is really paid where people exchange. I hope that answers your question.

That's very helpful. Maybe just one follow-up on the outlook. So you highlighted obviously that it's going to be along the same lines as in previous periods. I don't assume it's going to be 240 times 2 because H2 is somewhat seasonally weaker. But from a growth perspective, should we assume a similar year-over-year growth H1 '23 versus '22 in H2 or should it be maybe lower because of the expectation and interest rates might not rise as much anymore?

Well, I don't know. I mean, I would not assume 22%. I think that's a bit too much. But you see it's very difficult to be precise because it depends on the development of deposits -- of pricing on deposit. For the time being, we can maintain our rate. Some people found this is too low, of course, some others say, okay, fine. So it's very difficult. But if you see, last year, we had about CHF 388 million and I think total and we have already CHF 240 in the equity now. So definitely, it will be higher because a semester with CHF 148 million would be a full semester. But I would not assume 22%. Not that the growth will be smaller. But you see, I mean, then there is always the possibility of a credit risk issue. And suddenly, this is CHF 10 million because we have to provision CHF 10 million for a company, whatever. So it's difficult. I mean, what I can say is that it should be much better than last year, but I don't want to mention a number. I mean, see, we have to save us of those rules, the 6 rules, et cetera. As soon as we give too specific numbers, then you put yourself into trouble when you -- where you are not really reaching exactly that number, positive or negative. So this is why I don't see any upside for us to be too specific in the guidance as we knew only downside. I think it's also your job to understand exactly how the economies of the banks develop. I think you know the interest rates as well as we do. So if you study carefully the development of economics, you should be able to have a well educated guess.

[Operator Instructions] There are no more questions at this time.

Good. Thanks very much, everybody, and we'll talk to each other maybe sooner if we have a road show, otherwise we will talk to you next year in February probably. Bye, bye. Have a nice day.

Thank you. Bye.

Ladies and gentlemen, the conference is now over. Thank you for choosing chorus call, and thank you for participating in the conference. You may now disconnect your lines. Good bye.