Banque Cantonale Vaudoise (BCVN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the BCV Full Year 2024 Results Conference Call and Live Webcast. I am Valentina, the chorus call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Pascal Kiener, CEO. Please go ahead.

Thank you very much. Good afternoon, everybody. Let me jump on Page 4. Sorry, I have some problem with my throat, but I will try to keep my voice during this call. I think those are the key messages on our results. First of all, we are in an economy which is still resilient. The Swiss and Vaud economies are doing quite well, about something like 1%, 1.5% growth. As you can see, we have in 2024, a strong growth in the mortgage business. First of all, the market is quite dynamic in this part of Switzerland. Second, as you know, due to the merger of UBS and Credit Suisse. We could take some market share. Third point for me is quite an important one. Our revenues are quite stable. And here, you can see the effect of, let's say, the diversification of BCV. BCV is the most diversified Cantonale bank. We had a bad year, I would say, in the revenue interest aspect given to the interest rate environment following the decrease in rate by the Swiss National Bank, and that was almost compensated by the commission business and trading income. And our results are down 6% for the net result, minus 6%, which is a bit less than anticipated and better than we had in the first half. However, I consider those numbers being very good. The second best full year results given the fact that 2023 was quite a record year in Switzerland for banks, not only for BCV, but also for others. And since we have good results, and we are quite confident going forward based on our strategy, based on financial strength and based on the development of the economy around [indiscernible], we decided to increase the dividend by CHF 0.1, which is CHF 4.5 per share. Page 5, I'm going to comment -- some comments on Page 6. So the 8% increase in the mortgage business. If we consider the other loans, so mostly SMEs, minus 3% means basically stable -- a bit more than stable for SMEs and the reduction is due to the ongoing decrease and paying back of COVID loans. In terms of deposits, you see if we add up the 2 components, you see a slight increase and the same for AUM due to net new money coming from different segments as well as performance of our investment portfolio. Women joining BCV, one in the Board of Directors, succeeding Ingrid Deltenre will retire. And the first woman in the Executive Board of the whole story of BCV, Anne Maillard is going to join us as the Head of Retail Banking, replacing Jose Sierdo. And you see that our financial ratings are still very good. There are no change here. And in terms of ESG rating, you see that we have good rates, and we had an upgrade from ISS recently. Now we are in the prime category. I think this is also quite good. And if you took all those ratings, I mean, there are 1 or 2 more, which are not mentioned here, you can see that BCV is one of the best Cantonale bank in terms of ESG rating. Retail banking, basically, this is ongoing business, slow development. This is like diesel motor. With an exception last year, mortgage business grew at 7%, which is quite a lot. But again, this is mostly due to a dynamic market, but also to the UBS/Credit Suisse merger, where we could take some market share. Now if you look at revenues and operating profit, this is up. I mean, I don't know how familiar you are with division accounting in universal bank, but you know that the transfer price between the Corporate Center and the different business units play a big role. And here, basically, you have a reflect of higher internal transfer price from the Corporate Center to the retail banking unit. This reflects the interest rate environment. This is clear that the value of the savings of the deposits in retail banking are higher today than some months ago. So this is why the Corporate Center pay this unit a better transfer price. So I always mention to analyst to be very careful with divisional numbers because it depends really on the model that every bank is using to transfer money from the Corporate Center or, let's say, transfer [ bulky ] money in this, because this is right pocket or left pocket. So this is why I think those numbers are important, but they are less important than the overall number of the bank. Now corporate banking, different situation. SME is doing quite well. You can also see that the deposits are up which means that the SME in Contango around those [ are not quite liquid ]. So this is a good sign of a healthy economy. Real estate firm, up 14%. This is again due mostly to the merger of UBS and Credit Suisse. Large corporates, some -- the loans are slightly up. And then deposit, this is really very volatile depending on whether we need money or not on liquidity, we pay less or more. Trade finance, again, the same story as last year due to the geopolitical environment, we are very careful in this business. And you see that the volume on average is down 10%, and also a good sign of the economy is that there is very limiting new provisioning needs for SME. So the SME overall in -- around those are now doing quite well. Wealth Management, you see the effect of the market, a good performance, some net new money also coming from new customer or we could get a higher share -- market share within -- for each customer and also growth in the mortgage business of private banking. And again, revenue and operating profit are up, so quite good. And trading, everything is up. So this is why I mentioned, be careful with those accounting numbers. They are correct, but you see there are models behind all those numbers or divisional numbers. And it's clear the bank is doing not as good as last year, and the business units are doing a way better. So the one is doing worse is basically the Corporate Center, and this is the effect of mostly interest rates. Now I'm going to turn to Thomas for the more financial part of the presentation.

Okay. Hello, everybody. I'm on Chart 14. Just to summarize, where we see the stable total income, which we have developed in more detail. We see higher operational costs, which I will come back to, which resulted in the operating profit, which is down 5%. Taxes are higher even though the operational profit is lower given that we have now the implementation of the minimal tax rate due to the new OECD approach, which then results in net profit of CHF 441 million. Well, it's important to underline on Page 15 that even though this result is respectively, 6% below 2023 numbers, it's still very high result, the second highest result in the history of BCV. And it's well above. I mean, it's 15%, respectively, 13% above 2022 numbers and above the average numbers before. We are really at a higher level of net result operating profit by now. So that's why we think it's solid and good result. On Page 16, let's see the different sources of income. While net interest income is obviously half of the result. And it is reduced. As you see at the bottom of the page, it is the interest environment, which makes realized in lower NIIs, whereas the impairment charges are still marginal. So it's not a change here. Obviously, you knew that. Now coming back to the source of revenue, there is obvious we take benefit of the diversified business lines of BCV, where driven by markets and client transactions, commission fees are up by 9%. Then going further into interest income on Page 17. I want -- and some of you know this game. I want you to be aware that from an economic perspective, we have to look at what we call the economic net interest income. And it stayed on this page is actually the result of what we call NII before BSM, CHF 627 million and the result of the arbitrage -- treasury arbitrage, which is called net income from BSM. And treasury arbitrage, as I remind you, is taking in typically short-term money in ForEx on the liability side and to swap it in Swiss franc to put that money at the BSM -- Swiss National Bank. The charge paid on those money on liability side goes directly into the interest accounting result. This is minus CHF 74 million. The income from that, the swap is in trading CHF 96 million, which CHF 96 million, minus CHF 74 million explains CHF 22 million in net income from business sheet management. We draw attention to this point because from a really pure economic perspective, it is this sum of NII before BSM and net income from BSM, which adds up to CHF 649 million, which is the real economic revenue, whereas in the year before, it was CHF 654 plus CHF 31, CHF 685 million. So obviously, I'm happy to hear your question on that. It is for the accounting reason that does not really show up in the accounting numbers. That's why we do this effort for you that you have transparency on this point. On Page 18, let's get into operational charges. It's quite interesting what's going on there. Well, first of all, okay, personnel costs are up 6%, but here are some key drivers to understand. Well, there are some inflation driven salary increases. But I think structurally speaking, half of the -- almost half of the resource increase FTE increase is due to the strategy of [ VCV ] of in-sourcing the IT hosting services. Before the services was paid to a supplier before which was Kindred. And as the last act of our strategy to become an owner of our IT, this is step 3 basically of the strategy, we now in-source also the last part of it. So this is step on personnel costs. The other increase in personnel costs are obviously due to higher cybersecurity personnel and business development asset management. Now if we look at other operating expenses, they are down. And I mean, from the point of view that we now don't pay any more company for hosting services, there was a strong decrease of this size. However, there is a kind of financial information, other suppliers, which became more expensive so that the other operating expenses only decreased by 4%. Last but not least, and I think that's something you're interested in, I guess, is that depreciation and amortization is up. But we actually accelerated the depreciation of some of those pieces, which we in-sourced now on hosting services. And so you can understand the CHF 82 million of 2024 as a spike as a peak, we expect it to be lower in the next years. With regard to headcount, basically you find the same story, which I just mentioned in terms of personnel numbers. Adding to this in our subsidiaries, in particular but also the others, we have positive business development, which we see later with additional resources. On Page 20, total assets are up, mainly driven by the mortgage loan increase, which has only been commented, but also the continued building up financial measures as a liquidity reserve. On Page 21, as the liability side, while the increase was basically financed by an increase in customer deposits and increase in both mortgage-backed loans, as you can see. On Page 22, now we come back to assets under management, which are up almost 6%, half of it driven by market performance, the other CHF 3.2 billion are net new money. And they are, as you can see from all major business lines, individual SMEs, institutional and large corporates. So we are with CHF 3.2 billion in a kind of normal level. We don't have the funky jumps as we had in '23. We didn't have those in '24. Now with regard to some capital ratios, I mean, the capital ratio is very interesting. Obviously, I mean, doing so much more mortgage loans had an impact on our CET1 ratio because risk-weighted assets were up, even though equity increased slightly. Now as you already know, but I want to reinforce this, I mean, Basel III final has a positive impact on BCV. It is now in force since January 1, and it will basically compensate the decrease we saw over '24. The LCR ratio is on a solid level and is well managed. The relation of HQLA to net cash outflows is in good orders. It has -- for technical reasons is lower because I don't want to get into too much details. You can ask more questions if you want. And the net stable funding ratio, is on a solid level with 118.3%, slightly decreasing. I can get also more technical topic here, if you like while discussing function of your question. Now the key element, of course, is that following the solid and good results, we decided we will propose to the AGM to increase dividend by CHF 0.10 to CHF 4.40. Now it's a really important point to see that this is the key element to say we are confident in the earning capacity of our bank. We step up even though the net result is lower than 2023. it's really important to understand because you remember this beautiful dividend policy, which is ours now for 16 years, is characterized by commitment and interest on Swiss francs, not payout. And it has an implicit rule that we don't like to step back. We never step back. Remember, we had financial crisis 2008, we had oil crisis 2012, '13. We had negative interest in 2015, we had COVID 2020. Those things were never budgeted, but we managed quite well to them and stayed in line with our dividend policy. Okay. That was my part. Thank you very much, Pascal.

Okay. Just maybe 2 slides to show going forward, that we are quite confident. So in terms of GDP growth or the economic situation in this part of Switzerland, I think we will see, let's say, positive numbers of around 1%. I always say that those numbers from those -- from SECO or Commission Conjoncture vaudoise, I think they are always too positive. But I would expect a growth between 0.8% and 1.2%, both for Switzerland and for Canton of Vaud, which means no recession, that's the main point. And in terms of real estate, we expect that prices will slightly going up, transaction number as well. So the market will remain quite dynamic due basically to the low level of interest rates and the ongoing immigration in Canton of Vaud. We will not going to change our approach or strategy in the mortgage business, which we know is a key business for us. I don't expect to have again 7% or 8% growth because I think the UBS/Credit Suisse effect is done. So I expect probably to grow more or less in line with the market, which means something like around 4% growth. Except that, I think it's going to be more or less business as usual. Okay. I'm done. So we are ready to answer your questions.

[Operator Instructions] The next question comes from [ Alzano Criivelli ] from [indiscernible].

So a quick question on the decrease on the income side of the interest rate business in the second half of the year. Could you give us some details on the drivers of this decrease other than the lower interest rates on liquidity and the missing interest on the minimum reserves for the latter part of the year?

Well, I mean, the key point is that, I mean, everyone knows -- maybe everyone should remind that we have massive decrease in the Swiss National Bank rates and still over the second half where we went basically from 150 to 50 basis points. And this impacted 2 elements which we should not forget. Obviously, it's the liquidity, which is with the Swiss National Bank. But secondly, it's also the income on the short leg of the swaps which is also quite significant. So these 2 elements together, I mean, more than explaining the decrease which you observed.

[Operator Instructions] The next question comes from Andreas Venditti from Vontobel.

Maybe you explained the competitive situation that had some impact on the high mortgage growth we've seen last year and this -- you said should normalize this year. Maybe you could elaborate a bit on the impact on commercial margins in the business? And also if you could -- yes, maybe talk a bit about refinancing, how you see this going forward? And maybe if you could add a bit more of color in terms of outlook, what you would expect this year?

Outlook for the bank or for the mortgage business?

For both.

Okay. Let's start with the mortgage business. You see, I mean, I think this is a situation that all Swiss banks are facing. So the refinancing is a bit more expensive. You can see that in the fund [indiscernible] cash. You see that for all the banks. You can also see the different loans that have been taken by banks. So you see that the cost of refinancing is a bit higher. Interestingly enough, banks are not totally able to transfer that to the market. There is a strong competition on the mortgage market. And basically, the commercial margin are, therefore, under pressure, and they're going slightly down. Probably with time, we might see an increase in the commercial margin due to 2 reasons. First of all, it takes time so that banks react the customer blah, blah, blah. And second, you see the prices now for mortgages are so low that maybe for a customer, [ 1.6, 1.7 ] doesn't make a big difference. But the situation has been like that for the last, let's say, what, 7, 8 months. And I don't see for the time being that the situation will completely change. It will depend on the next, let's say, loans we're going to make or we're going to see in the market. So we don't know exactly why it's like that. I mean there are several, say, sensitive explanation. One is UBS had to reimburse quite a lot of money to the SMB, so absorbing liquidity from the market. In addition, as you know, on 1st of September, all banks had to increase their liquidity reserve from SMB. So it means for BCV [ CHF 700 ] million. So there was not a liquidity squeeze, but basically, many banks had to -- in a way to slow down the growth in credit. I'm not saying stop to slow down. And most banks, including ZKB or any bank, I think they're doing their 2025 budget under kind of a refinancing constraint. So probably they could grow more in the credit business if probably the refinancing side was easier. I'm not saying there's a liquidity crisis, don't misunderstand me. I'm just saying that this is not as easy as it used to be, and it's a bit more expensive. And we have, in a way, all banks to transfer this increase in refinancing costs to cost of credit business. This is quite easy in the SME business. It's a bit more complex or difficult in the mortgage business, which, as you know, is very competitive. So how long that will last, I don't know. I think the main effect is done in a way because I don't expect now the refinancing costs going up further. They should decrease over time. I'm quite convinced. Now how long does it take? I don't know. For the second question going forward, if you tell me where going to be the interest rate in 6 months, I will tell you my guidance. Now I mean, joke about you see it's quite difficult. I mean good analysts should know our BCV. I don't expect to have a kind of CHF 350 million net profit next year. That will be too low. And I don't expect as well to have a CHF 469 million like in 2023 with the current interest rate situation. But since we have decided to increase the dividend to CHF 4.40, you can expect that we will be able to do that without too much problem. So I don't want to give a number because you see that number could be plus/minus CHF 25 million, CHF 30 million, depending on the level of interest rate. Are we going to have negative interest rates in September? I don't know. Nobody knows. The trend is towards decreasing rates. Now whether it's going to be negative or not at the SMB, I don't know. And then even if it becomes negative, what's going to be the situation of SMB? Are they doing the same with the banks as they did in the last time when they had a negative interest rate? We don't know. So this is why it's quite difficult to make a guidance plus/minus CHF 30 million. And I don't want to be due to 6 rule, I don't want to be forced to have a kind of profit in one direction or the other direction in 10 months from now. But you can assume that you know the business model of BCV, you can see the fluctuation. And since we have decided to increase the dividend, we are quite confident that we will have good results, results that will enable us to pay the dividend. Now whether it's CHF 4.25 or CHF 4.35, I don't know, and nobody knows.

Ladies and gentlemen, there are no more questions at this time. I would now like to turn the conference back over to Pascal Kiener for any closing remarks.

Okay. Thank you very much. This is the only closing remark I have. Thank you, guys. Bye-bye. See you next time or talk to you next time. Bye-bye.

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