Banque Cantonale Vaudoise (BCVN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the BCV 2023 Full-Year Results Conference Call and Live Webcast. I'm Andre, your chorus call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] For the call today, the speakers will refer to the Slides which are available for viewing on the IR section on 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 very much. Good afternoon, everybody. Good morning for those of you calling from the U.S. Let me jump directly on Page 4. So you see the 4 key messages we are trying to communicate this morning to the press, as well as to you, the financial community. So basically, good business activity at BCV in a very resilient economy. Our revenues are up 12%, mostly driven by the normalization of interest rate, if I can speak so. And you see a record financial result being at operating profit level or the net profit of CHF 469 million, 20% up. And according to those or based on those result, I should say also based on the fact that we are quite confident in the future. We have decided first to increase the dividend 2023 to CHF 4.30 and to increase the interval target for the next year. Thomas Paulsen will go into more details on this topic. I will go directly on Page 7, because I think all those numbers you can read them for yourselves. So you see that we carry on having good financial rating, as well as ESG ratings. I'm not going to comment all of those, but I think this is also so, first of all, the quality of BCV in term of level of equity, in term of quality of balance sheet, as well as our efforts in the last 5 years in term of sustainable economy, a sustainable bank trying also to help our clients to become more sustainable. Retail Banking, I mean Retail Banking basically most influenced by interest rate, of course and you see that, we see that in the number in the revenues and operating profit, in term of volume growth, mortgage book is continuing growing by 3% to 5%, this year is 3%. I think there was a slow decline or let's say in the first half of 2023 in the Swiss market in terms of speed of growth and basically we are now back probably for the end of 2023, as well as 2024 on an average growth of 4% for the market, as well as for BCV. But here the impact of the first half of 2023 make the number a bit lower than the 4% that is 3%, otherwise, quite stable. Customer deposit is slightly up. Corporate Banking, again here, the number on the left. I mean they are important to look at, but this is a composite of many different businesses. So let me start with SME. Basically, you see here that the slight increase in loans. If we don't consider the COVID-19 bridge loans. So this facility that was issued by several banks in Switzerland, as well as the Federal Government of Switzerland. Basically, you see that there is a payback, continuous payback of those loans by the customer. So basically 70% have been bought back or re-imposed. That means, basically, this mean that the customer, sorry, the loans -- the increase in loan without those 23%, otherwise there is a slight decrease and deposit is like basically retail slightly up. Real estate, everything is up, which is not surprising given the mortgage market doing well and also the real estate market where that is driven by the strong immigration in Switzerland. In term of large corporate, there is an effect of single customer, a treasury withdrawal exactly at the end of December, making the number appear negative, but except as customer, there is a slight increase, I mean 15%, it's not slight, but basically this is very volatile. So those numbers change every month. So as you know, we are not looking at volume effect in large corporate, but rather on profitability, so the volume number change according to our pricing policy and what the customer can find in the market. Trade finance, again, we are down here, but this is a voluntary strategy. We want to be careful given the geopolitical situation. We have reduced our stake, as you know to 0 in Ukraine and Russia, which is quite normal. And in addition to that, we are careful in other part of the world where there are -- there might be some geopolitical issue that could affect really the trade of goods and really increase risk in some market. So here we are quite careful. Overall, if you take the loan book, I mean this is very, very solid. The main part of the book, basically the Canton of Vaud is in good shape and we have a very limited need for new provision. So this has been the case for the last ten years now and there is no significant change to be anticipated. In term of Wealth Management, here in the numbers, you have several thing of Piguet Galland, which is our subsidiary, focusing on private banking. You have the private banking at the motor company and you have also the institutional asset management automotive company targeting pension fund and large institutional basically doing quite well. Again, given the mix of the businesses here, the main increase in revenue and but in profit is also due to interest rate, not only but it is influenced by the increase in interest rate because those customer, especially in private banking, they have also simple deposit or let's say, savings account. And the Trading is basically stable, plus minus CHF 1 million or CHF 2 million. Basically, again, I repeat, this is a Forex driven trading and this is a customer-driven trading. They are very limited own position. There is no own trading or prop trading as we call it. Now I'm going to hand over to Thomas for the more financial part of our presentation and I come back slightly at the end to look forward.

Okay. Thank you, Pascal. Hello, everybody, I'm on Page 13. Well, this is our P&L statement. We will go more into details just to mention that there is besides the key numbers, nothing special to mention, be it on provisions or extra income. So let's dig into the numbers. Well, on Page 14, it's quite interesting to see that, well, of course, we have the strong increase of net income, which is driven by the evolution in interest rates, which is -- but we call the normalization. Interest rates have been become positive and they have become quite quickly positive. So as already mentioned, on half 1 results, we basically went to the best scenarios also with regard to liability pricing within the market. It's interesting to see that we are [ baked ] to kind of proportions which we had before the negative interest context, meaning 2014. Interest income is, again, more than 50% of total income, which is the typical size, keeping in mind that we are very diversified as a much diversified bank with regard to the kinds of income we have. Now for you it's always interesting to understand what's really going on behind the interest income development. What is really coming from interest rates and from business and what is coming part of our treasury, our balance sheet management with regard to the opportunities also given by the Swiss National Bank. Now you can see it here in more detail on the bottom of Page 14 on the left-hand side. So, pure interest income with client activity is basically up CHF 152 million from CHF 502 million to CHF 645 (sic) [ 654 ] million. Now bottom right, there was a chart induced by balance sheet management, which then had this income for balance sheet management in the trading, [ Rubrik ], with regard to accounting. And so which then generated net income for balance sheet management of CHF 31 million and that is actually down and that is quite interesting, right? And that's also because maybe some of you had a tendency to overestimate the second half of 2023, right? Because the market conditions are such that this what we call in French arbitrage is balance sheet management provide less opportunities, right? The interbank market itself quite close to the interest rates paid by Swiss National Bank. So there was less opportunity, less volumes to be made with the spread between interbank rates and what the Swiss National Bank paid. So that is a key element to understand for the revenue dynamics, which we've seen and which we might see going forward. Now with regard to the other kinds of interest -- of income, sorry, commission fees are stable, right? We have definite elements, obviously, as a universal bank, where we have transaction commissions from in particular, individual clients, which are quite good, which are up. And we have on the other hand, the as mentioned, the trade science, which is in balance sheet and off-balance sheet activity, so the off-balance sheet part is in commissions and as the volumes are down, the commissions here are down. Well, of course, the total trading income, you understand it now of CHF 190 million is, of course, really trading as the client induced trading, FX and structured products is CHF 101 million and it's slightly down. And then on the other hand side, the gross income from here is -- provide us with a stable total accounting number of trading income. Now on Page 15, it's just basically the same upper part and with other lower part on the chart, just giving you the evidence that our impairment charges are very low. No new net provision needs with a very healthy loan portfolio. On Page 16, total operating expenses. Well, in the current environment, you can imagine that personnel costs are going a little bit up. Operating expense are obviously drawn by financial information provided, I guess you live the same thing, IT cost and other elements which had a repricing in this international environment. Depreciation and amortization cost slightly up linked to our different development initiatives. The headcount is detailed here for you. What -- it has some fluctuations, some on the parent company, while we have some continued in-sourcing of IT competencies. We have also the increase linked to more compliance resources, more cyber IT resources, which are [indiscernible] in their banking industry hot points and where we really want to be referenced with regard to our quality. The subsidiaries increased slightly, are also linked to the nice business development which we see in our Cie, Piguet Galland in private banking in the Western part of Switzerland. Total assets were almost stable, close to CHF 59 billion, mortgage loan development and customer have been commented on. For you guys, you might be at the first sight surprised financial investments go down. Remember that we took opportunity in 2020 in the short-term SNB bills, which were redempted. On Page 19, on the liability side. Well, I would point out that there is, of course, linked to the mortgage development, the ongoing mortgage-backed bonds with our Pfandbriefzentrale. You know this is a very solid set-up for refinancing of Kantonalbank. And the customer deposit, of course, here is linked to what Pascal mentioned is treasury money, which moved in and out and which is hiding the underlying positive trend. Total -- just jump back to the bottom of the chart on Page 19, ongoing shareholders equity increase because actually as you know we do not -- we still keep some money, even we have nice dividends. Well, back on the topics of asset under management, where we see the performance of 3.2% and where we have this key element of net new money, where we have both of them the off-balance institutional, where there was some non-managed money, only custody money which went out with almost very, very little impact on revenue. And again, our treasury [ actual ] large player who moved at that time. All business lines are positive in the new income and we decided those numbers, right, you don't see it, I apologize. Capital ratio is still up. Well, let's be clear. It's also linked to some extent to the little activities and trade filing, which trade finance, which has quite high risk weights. LCR -- LCR, actually, with regard to LCR, okay, the LCR is almost the same. But what is interesting for you is what -- is linked to what I said before, right, with regards to balance sheet management and all this. This is we get -- you see that the HQLAs and net cash outflows, right, that there is a base effect, right? We -- they have been increasing -- is increased with balance sheet management and now the volumes are going slightly down. Net funding ratio, you know like for Kantonalbank, Universal Bank like ours is not a critical topic. Well, now given that we went through this duty for record year, but also conscious that this is a record year. We adapted our target ratios, right? You have seen that our cost income on 2023 is 53%. However, going forward, we think we should be at 55%, 57%, which is an improvement with regard to previous targets. On the bottom of the page, right? You've seen that in '23, we did 12.5% in ROE. Our target range was below 10% so far. We think going forward, we will be between 10% and 12%, so there's a lot of message on this part pages you can see. And in the middle of the page is more kind of a little game, right? Because those of you who follow us for a while know that we're always proud to say that this bank would be perfectly capitalized from operational point of view with 13%. And then if we formulate ROE target on the 13%, just the same numbers basically with an denominator. The new target of 10% to 12% would be 14.7%-13.7% (sic) [ 17.7%]. That's the way how we formulated than before. But to simplify your life, we formulated in a simple way now, like everyone is with regard to accounting numbers with regard to shareholder equity, 10% to 12% going forward. Well, Page 25, as mentioned, we increased by CHF 0.50 our dividend, total payout of 79% of CHF 370 million, which represents a 4% dividend yield based on end of 2023 numbers. Of course, this has been approved by the AGM on end of April. Well, you remember, guys, that 12 months ago, we have been very prudent and some of us -- you criticized us immediately, I apologize. You see the footnote on Page 26 that what we communicated 12 months ago. Now we have been surprised by this very beautiful way, how interest rates developed and how pricing in the market happened. We've seen this record here. And -- but we're also confident in the future. And also, again, right, we mean that, well, Pascal had said that we should think that 2024 is probably slightly below '23. But we believe that strong is to come, we think the right dividend in, well, for years to come is CHF 4.30 to CHF 4.70, of course, always bearing significant changes in the economic or regulatory environment or bank situation. Thank you very much.

Okay. I'm back on Page 28. So basically, purpose of this page is to show you that we are quite confident in the economy of our region. I expect -- I do not expect a recession in Switzerland, it's totally not possible for me. Although I expect a low growth around 1%, I don't see that return will be able to be much higher than that. You see here the number for Canton of Vaud 1.4 probably that's the latest estimation we had, but I think it's a bit too high for me. Let's say, roughly 1% should be the GDP growth in our region, which is, nevertheless, a small growth and no recession. So quite positive from that side. In term of real estate, the prices are, again, going slightly up. There was a lifting off of the prices and now given the vacancy rate going down, given the strong increase in immigration, we are expecting 1.8% population growth this year in Canton of Vaud, which is something like 13,000, 14,000 new inhabitants. That means that the vacancy rate will further decrease because the buildings. So we are not building enough buildings to accommodate all those guys. So basically, that means that the real estate market will carry on growing, the mortgage market will carry on growing and probably the prices slightly as well. So basically, we're not going to change our mortgage policy, basically focusing also on low quality, focusing also on area with low vacancy rate because there are some discrepancies between the region in Canton of Vaud. Some of them are more than 1% order around Lausanne, the Lake of Geneva, I mean or the [indiscernible] we have vacancy rate of below 0.3%. So basically, that's a continuous strategy in this key market or key business for us. Now outlook. Here, I would like to be very well understood. I mean, roughly, if I take volume growth business lines, et cetera, I think we will be in the line of the previous year. There is no discontinuity expected in terms of volume growth, the kind of business mix, et cetera. Now in terms of financial results, I believe, as far as I know today, that 2023 will be a record and that 2024 will be slightly below, I mean let me explain. 2023 was really exceptional in terms of margin on the deposit side on the left side of -- on the right side, sorry, of the balance sheet. Imagine that SNB will decrease the interest rate, which might happen in March or in June slightly. I'm not sure that all the banks will decrease the rate they're paying to customer on the deposit side. So I expect that the margin in the deposit business will be slightly lower. Let's be realistic, we had really a very -- quite lucky all the banks in 2023. I expect this trend to be the same for all of them. Now having said that, you see that we have decided to increase the interval for the dividend, which is normal because if you look at the number before 2022, we had a result between, I don't know, CHF 350 million and CHF 380 million -- CHF 390 million, I think. And now we come back to -- we have come back into a positive environment for the interest rate. So I do expect that the number will be higher. So we are talking CHF 400 million plus, but probably not CHF 469 million 2024. That might happen with further growth in the mortgage business or in the credit business, of course. But the next 2 to 3 years, everything being equal, I believe that they will be slightly below 2023. So just to make sure that we are correctly understood, I don't expect a bad 2024, I expect a very good 2024. This is why we are quite confident and quite clear on our dividend policy or distribution policy. But I do not expect as far as I can see that today, record 2024 being better than 2023. I hope this is clear, but we are ready to answer all your question, guys. Thank you very much.

[Operator Instructions] The first question comes from the line of Andreas Venditti with Vontobel.

Maybe on the cost side and you have obviously a very good track record over many years in managing the cost. We had some uptick in costs, which you explained, which are all very clear for the reasons. For me, it's more looking forward, what you would expect in terms of, has this been now just a step-up in terms of costs and you're going to manage, let's say, the costs again like in the historic range or should we expect a bit more of investments and so on, so a bit higher cost growth going forward compared to historically. Then also on the depreciation, we've seen a tick up there. Maybe you could add some color here as well, what we should expect going forward on this one. Further on, on trade finance, you explained -- showed the volumes that came down again quite a bit. Would you say that we are close to the bottom, assuming that the geopolitical situation and also the currency situation remain stable? So have we seen the bottom there? Or yes, not yet.

Okay. So let me start maybe with question #3, yes, I think we've seen at the bottom. [indiscernible], the geopolitical situation doesn't change, I mean stay similar as of today, which means not very good. But let's say, the situation doesn't worsen, I think we have reached the bottom. That's the third question. Concerning the cost, I think we are in between. You see -- I mean, you know that the unemployment rate is less than 2% in Switzerland. So basically, we have to give some salary increase to make sure we can keep the best people. So if you look at the number in terms of increase of personnel cost in the last, let's say, 10 years, we were quite strict. I'm not sure we can carry on like that. So I expect a bit more on the personnel side in terms of salary increase, but not as high as we had last year. Let's be clear, last year is a bit special. But I don't expect to come back exactly at what we had in the last may be 10 years. In terms of other cost, we invested a bit last year in cybersecurity element. So this is why we had an increase. We had also an increase of energy cost. And I can tell you the energy cost will go down. This is -- they will be slightly down, already this year on more next year. So basically also here, I do not expect the same kind of uptick you could see going forward and the precision maybe, Thomas, you...

Yes, maybe I comment the depreciation. Well, depreciation is interesting because we are, again, an interesting move with regard to our IT set-up. We are further in-sourcing IT, which will increase our ability to control our -- the way we go and also our efficiency. So this actually enhanced depreciation for the moment, but will other things being equal includes our productivity going forward. So this is a move which has been communicated by [ Kyndryl ] and BCV. And it's a very nice strategic move, which we appreciate and which will bring us to higher IT productivity in the years to come. Did I answer your question?

[Operator Instructions] There are no more questions.

Okay. In that case, thank you very much guys. Have a good afternoon. Bye-bye.

Thank you very much. Bye-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. Goodbye.