Crédit Agricole S.A. (ACA) Earnings Call Transcript & Summary

Good morning. I'm delighted to be joined today by Jérôme Grivet, Deputy General Manager and the Chief Financial Officer of Crédit Agricole via a conference call from Paris. Jérôme, good morning.

Good morning.

So before we go into our fireside chat, I will leave the floor to Jérôme for some introductory remarks.

Yes, thank you. Thank you very much, Giulia, and thanks to everyone that had made it possible to join this conference in a quite specific situation. We are indeed facing an unprecedented crisis. And there are obviously still a lot of uncertainties, and it's, of course, impossible as of now fully assess all the impacts of this crisis, be it in term of public health, of economic costs, and of impact on the financials of the different institutions, which are in the heart of this very difficult moment. But there are still some points of stability or relative certainties, and this is what I wanted to share with you today. The first one is that contrary to the 2008 or 2011 crisis, we are facing a crisis in which the problem does not come from the financial or the banking sector. It's purely a sanitary crisis, and all the necessary measures that have been taken by the different states in order to monitor, control, alleviate and finally, get rid of this sanitary crisis are indeed stopping the economies. And banks, therefore, are part of the solution, not part of the problem, which is a very important point to keep in mind. Second element of certainty. We, Crédit Agricole, but we -- all the banking sector in France and in all European countries, we are up and running. Thanks to the commitment and the dedication of our teams, we are operating all the necessary basic financial services and, even more important, we have started to work with our customers in order to find solutions to their liquidity issues, which are obviously triggered by this due to the stop of all the economics. Third point, which is also very important, we are acting in an environment where the necessary measures are indeed taken by all the public authorities in charge, be it the different governments, the European Union, all the monetary authorities, in a coordinated manner. And this is what we explain on Page 4 and 5 of the short presentation we have prepared. In France, many, many measures have been already taken on top of all the existing social questions that help usually to mitigate the economic shocks. It's the case for individuals and for companies. I will not describe all the elements that are here and which may be even further completed or improved going forward. It's also the case of the monetary policy front where the ECB is providing a lot of support to the banking system, and it has indeed been significantly upgraded by the recent decisions taken yesterday night by the governing council of the ECB. The ECB is also working and has also worked on some prudential measures that are going to provide relief to the banks. And definitely, we feel that we are now in a coordinated set of actions globally worldwide. The fourth element of stability, of relative certainty I wanted to share with you is the fact, and it's described starting on Page 6, that we, Crédit Agricole Group and Crédit Agricole S.A., but also all the banks, are entering into this difficulty -- difficult moment with a very solid, very strong capital position. It's the case for our group. And you can see here that end of 2019, as you know, Crédit Agricole S.A. had a CET1 ratio, which was in excess of 12%, and the group globally started also with a cost -- with a CET1 ratio, excuse me, which was close to 16%. And even if we talk about tier 1 ratio, we are at levels which are much, much higher than the levels we had back in 2008 or even in 2011. And this capital position is going to be further strengthened possibly by the effective usage of all the easing decisions that have been announced by the ECB or by the national authorities, for example, the entry into force -- the early entry into force of Article 104A of CRD V or the dismantling of all the countercyclical buffers that are progressively announced by the different national authorities. So this is putting Crédit Agricole Group and Crédit Agricole S.A. with very, very high buffers above the actual requirements -- capital requirements, and this is what we described on Page 7 and 8 of this document. I think it's not useful to read all the figures that you can see here. But to put it in a nutshell, at group level, the buffer that we have before -- even before taking into account the easing I was just mentioning, above EUR 30 billion of distance to any restriction to distribution. And at CASA level, this distance is above EUR 11 billion. Fifth key point to keep in mind when assessing this situation. We also start with a liquidity position, which is very ample. In 2008 and 2011, all banks, it was part of their model, where, in a transformation position from a liquidity viewpoint, we are now massively in a healthy transformation position with stable resources, which are far above our stable assets, which -- with a short-term debt which is covered many times by all our liquidity reserves and HQLA securities, and with a liquidity coverage ratio, which is around 130%, both at a group level and at CASA level, so far above the 100% threshold and even our management target of 110%. Sixth point. We also start this year, 2020, with a funding program which is very well advanced because at the end of March or I would say, even at the end of last week, I would say, our medium- and long-term funding program was completed at 38%. And we -- so -- are in a very solid situation from this medium- and long-term funding standpoint. Following point, which is also very important, Crédit Agricole Group has a strong risk culture and continues to monitor closely its risks. We've put on Page 11 of these documents an illustration of this risk culture. And you can see that on the different sectors, industrial sectors which are definitely -- definitively under a real stress in the present situation, we've gone through significant crisis before this one with a very low level of the cost of our final losses. In addition to that, I could also add that a very important proportion of our loan portfolios is made of home loan in which, again, historically, the cost of final losses has always been very low. Lastly, we have a very conservative capital market risk profile with a VaR, which was, before the burst of the crisis, far below EUR 10 million. It's a little bit above, clearly, since the breakout of the crisis. But still, it remains at a very low level, and our capital market positions up to now have been monitored very efficiently. One last point I wanted to share with you before trying to answer your questions is the fact that our business model, which you know perfectly, which is made of a very diversified set of activities working closely together, which is made of a focus on our customers to which we are in a position to sell many different services and products, which is made of very good cost efficiency and which was leading up to last year to a high level of profitability at Crédit Agricole S.A. This business model is, we think, well positioned to have a steep recovery curve once the crisis is going to be over. So in conclusion, I think, again, we have to recognize fully that we are across an unprecedented crisis. And so lots, again, of its impact are difficult to assess. But in this crisis, we are clearly -- the banks globally and Crédit Agricole specifically, we are in a position to overcome the crisis. If all the political measures that have been taken indeed generate what we believe will be the case, a V-shaped recovery curve, we think that considering what we are, considering what we do now to cross the crisis, we have the business model, and we have the, I would say, the DNA in order to -- along with the global economic situation, to recover quickly after this crisis. So this was just the few comments I wanted to share with you on the present situation. I think that in those specific period of times, it's maybe more useful to try to answer your question rather than developing a long presentation. So if it suits you, I think that we can now spend the next 25 or 30 minutes to try to take all your questions and answer them.

Thank you, Jérôme. So let's start with, of course, coronavirus and the potential impact on Crédit Agricole, I would say, on the asset quality side. So it's early days, but what are you seeing on the ground? For example, are you seeing corporates drawing up their liquidity lines, their credit commitments? Any developments on the consumer finance side? Or given that Italy seems to be further down the line than other countries, what are you seeing there?

Okay. Indeed, corporates are drawing more than usually on their facility lines. It's -- I would say it's a global behavior. Everybody is trying to get as liquid and as cash-rich as possible. So we see it everywhere in the system. All entities that can access to cash, even without needing it, is trying to secure its cash position. So indeed, we've seen some and many corporate starting to draw on their facilities and their credit lines, which is obviously, again, absolutely normal. What is usually happening is that in most cases, all these corporates that draw on their line are putting back the money with us because they don't need it for many, many of those corporate. They don't need it right now. So it's just a matter of drawing on the line and then putting back the money at the bank. So globally, our cash position has not changed, but there has been an increase in our balance sheet with an increase of the drawn lines and an increase of the cash position. In the consumer finance business, the first effect that we have seen up to now is a very sharp decrease in the production of new loans. We are active, as you know, in car financing in China. And what we have seen in China is interesting because China is clearly ahead of Europe in this crisis. Between Jan and Feb, the production of new loans was probably divided by 4%, 5%, so it was a very sharp decrease. But again, in March, it started to pick up back, so a very deep decrease in the production of new loans and a slight pickup afterwards. In terms of asset quality in the consumer credit business or in the car financing business, up to now, we haven't seen any massive sign of deterioration, and this is something we are going to assess, especially in the context of IFRS 9 for the Q1 figures. But when it comes to really customer behavior, when it comes to real payment incidents, as of now, it has not been very, very massive and significant. Lastly, in Italy. In Italy, it's more or less the same situation I was describing globally. You see customers having liquidity facilities trying to capture some cash and some liquidity, and you see a very sharp decrease in the projection of the new loans linked to the normal course of business. And up to now, not a significant and not even at all a cash -- a deterioration of our cash position, and no significant payment incident up to now. But obviously, this is going to start in the coming weeks, and we have to assess in our Q1 figures, what should be the impact under IFRS 9.

And then -- so I will ask a question precisely where you finished. So you mentioned IFRS 9. There are a couple of elements that investors are struggling with. One is the cyclicality once you change macro assumptions. So any guidance that you could give us there would be very helpful. If your economies don't grade GDP by 1%, 2%, what impact does that have on current cost of risk? That's one. And then two, do you already have any clarity on how you account for payment holidays, payment moratorium or some of the measures that the government has introduced recently?

Well, there's different questions in this issue. First, IFRS 9 is clearly a procyclical accounting regulations. So we will have to take into account and we will have to assess the macro prospect. We will have to make assumptions on the macroeconomic outlook. And clearly, we are significantly reducing, for 2020, our expectations. We have still some few days or even a few weeks before we finalize big things for Q1 figures, so it's way too early for me to give you a precise idea. But it's clear that 1 month ago, we were talking about a hit -- we -- I mean all the economists, we are talking about a hit of a few tens of bps on the GDP growth. We are now talking about possibly of recession in Europe. We have, of course, to take that into account. But when we are talking about macro assumptions, we must not stick only to the GDP growth of 2020. We must also have in mind what type of recovery we will be facing. Because clearly, one thing is a recession in 2020 followed by very slow and difficult recovery. Another thing would be, and again, we are in this period of time as of now, would be, as I call it, a V-shape recovery curve in which we have a very harsh shot in Q2 this year from a GDP viewpoint. And then possibly, if all the measures that are indeed taken by the different governments work, and we are going to do whatever we can to help them to work, we can expect a rather steep recovery curve. And of course, the shape of the recovery is going also to play a role on our global assumptions. And there is your question about moratorium, the moratorium. It's clear that in the present -- in the type of crisis that we are presently going through, what is going to happen, what is going to make our customers suffer is the fact that for a certain period of time, they will have almost no income, no turnover. And so they will have difficulties to support their fixed charges. So to work this out, one of the first things that we can put on the table is precisely what we announced already 10 days ago, which is that we are ready to provide a moratorium of at least 6 months of all the credit installments of our customers. So clearly, the discussion that we are having with all the accountants, but also with the prudential authorities and supervisory authorities, is the impact of such a moratorium on the status of our exposure. In our understanding, such a moratorium is here to precisely help our customers overcome the crisis. And so this should not be seen as a signal of restructuration of the loan or a signal of kind of unlikeliness of payment. But these discussions are still taking place, and we'll see what the outcome will be. But clearly, in our viewpoint, such a moratorium, which is granted to counterpart that before the crisis, we're in a solvent situation, we're functioning normally, shouldn't be considered as a default or any kind of payment incident.

Understood. And any comments on the government measures? I guess those who also had the accounting of the credit quality of your book?

The government measures. So the main measure decided by the French government is to provide all banks dealing with French customers a guarantee for all the liquidity lines that we could grant to our customers in order to help them overcome this situation. So the idea is that our customers are going to lose 1, 2, maybe 3 months of turnover. And in order to help them to continue to operate, to cover their fixed charges and to be able to go back to business as soon as the crisis is over, banks are here to provide a liquidity support with the guarantee of the state. The amount is massive because we are talking about EUR 300 billion which represents about 1/3 of all the banks, it composed of all the SMEs and corporates in France. So it's absolutely massive, and it's going to be provided with a guarantee of the state. So definitely, such loan wouldn't and shouldn't generate any solvency penalty for us because we will have a guarantee of the state, which is going to cover all the risks linked to this new liquidity and treasury facilities. So in -- from this viewpoint, what I expect and what we are preparing is to be able to cash out some significant amounts because we need, of course, to fund these liquidity facilities, but this is not going to generate a significant RWA increase.

Very clear. If I can now move on to the market volatility. So of course, we have seen extreme market moves, which have led many to think about 2008 and many previous crises. So how does this impact Crédit Ag? And I think probably we can talk about a few businesses, CIB, but also, most importantly, asset management and the rating derivatives and insurance. If you can give us any sensitivity there, it would be very helpful.

Sure, sure. Well, sensitivity is difficult because all the sensitivity analysis that we have made in the past and that we have provided regularly are made on the basis of a shock of, let's say, 10% of decrease in stock indexes. And you have seen that some days -- on a single day, the shock was harsher than 10%. So of course, all the sensitivity analysis are a little bit out of scope considering the magnitude of the shock. But let's try to answer to your question addressing the different businesses in which we are involved. First, on the capital market activities, as I said, we are -- we have a very small exposure to capital market parameters. And so of course, those trading days were difficult to handle, but I think that up to now, we've gone through them quite nicely without any massive shock with a slight increase in the level of our VaR. So this is going definitely to trigger an increase in the capital consumed by our capital market activities. But in terms of P&L, no massive, no significant and even no negative impact up to now. So clearly, we've been able to take advantage of our philosophy, which is that on capital market activities, we do not want to take direct capital market risks. Definitely in the asset management business, the shock is quite massive. But keep in mind that Amundi has only 17% of its asset under management made of equities. So the biggest part of its assets under management are either fixed income product or liquid monetary products or real assets. So only 17% is directly impacted by the shock on the stocks market. Of course, the rest of the books are impacted by the moves in the rates and the spread, but it's not exactly the same. And clearly -- so Amundi will see its revenue decrease in line with the decrease in the level of its assets under management but probably not as massively as asset managers directly exposed to or more massively exposed to the capital market -- the equities market. As far as the insurance activities are concerned, 2 issues: solvency and profitability. From a solvency viewpoint, you may recall that end of 2019, thanks to the very efficient management of our risks and thanks to the recent regulatory measures taken in France, we ended up with a very, very high level of solvency at Crédit Agricole Assurance. And so we are very comfortable that we are going to keep a high level of solvency end of this quarter. From a P&L viewpoint, it's clear that we have triggered, on some investments of Crédit Agricole Assurance, we may have triggered some level in terms of valuation that we need additional provisions. So clearly, the P&L may be impacted by some provisions linked to some assets at Crédit Agricole Assurance owns. But again, I don't expect that to be a game changer for the insurance business. And if our assumption is right, and if there is a normalization of the situation in the second half of the year, we expect Crédit Agricole Assurance to continue to perform quite nicely for the full year. So clearly, I'm not saying we will not have any impact, but up to now, very manageable impact, I would say.

And perhaps on this topic, the last bit is the cross-selling of investment products into your retail network. I guess also it will be affected.

Well, it's true that in the coming weeks, we don't expect the retail networks to do anything than operating the basic function of a bank, i.e., payments, card distributions, ATM functioning and so on and so forth. So I think that clearly, the sale of new products and new services to their customers is not going to be the top priority. The top priority will be clearly to also help our customers to overcome the situation. So we can expect that clearly, from a distribution viewpoint, there is going to be a weaker momentum in the coming months. But we haven't seen -- to go back to your -- the beginning of your question, we haven't seen in our retail network moves of panics or fire sales of investment products that our customers had purchased in the last months or years. So I think that the customers themselves completely understood the very specific characteristics of the present crisis.

So this brings us nicely to Crédit Ag ambition of revenue growth, 2.5% as of June last year. Of course, the world is in a completely different place now, and -- but I was wondering how do you defend, if not even grow, your revenue in the context of low interest rates, potentially even lower going forward. I mean the ECB hasn't moved yet, but they could lower fees and lower market levels, lower loan growth. So how are you thinking about the top line of your bank at the moment?

Well, it's way too early to assess the new normality, I would say. So we will do that when all the dust is settled. But clearly, as I said, we think that our business model will be adapted to the new normality after this crisis. It was very well adapted to the previous situation. And we clearly think that going forward, being a bank aiming at serving well its customers, aiming at presenting a global offer of all the financial products and services, aiming at cross-selling as much as possible, aiming at continuing to look at the cost-to-income and the cost efficiency is going to be a key edge in the new world. And we think we may, of course, be proven wrong, but we clearly think -- we really think that this crisis is putting us -- take many, many things, but it's not challenging our business model and the way we do banking. Then, of course, we will have to reassess probably some parameters going forward. In terms of rates, I'm not sure that the situation after the crisis is going to be significantly deteriorated as compared to what it was before the crisis because actually, rates were definitely already low and, to a certain extent, negative, and the yield curve was very flat. So I don't expect this to deepen further. In terms of loan volumes, it's clear that for the time being, we are going to see, and we expect to see a complete drop on the development of new home loans or new equipment loans for our SME and corporate customers. But again, the shape of the recovery is going to be key. And what we understand and what we share as a priority is the stance taken by the government to make everything possible in order to have a recovery, which would be as steep and as quick as possible. So it's difficult from now on to give you new assumptions on the development of loan growth or on the sales of insurance policies in our retail networks. But clearly, I think that whatever the shape of the recovery, we are well positioned.

And I want now to go back to your remarks on capital. So it is, of course, well understood that Crédit Ag S.A. and Group are well capitalized. And so they start from a good point. But I would be interested in your thoughts on the back of the ECB announcement that banks can run with a significantly lower amount of capital. So that's one. What does this mean for the way Crédit Ag will manage the business? Do you expect banks in general and Crédit Ag to use this increased flexibility to cover up for movements in their credit book? And then very important for Crédit Ag, has there been any changes on the way you're thinking about the repayment of switch?

Well, let's start with the second part of your questions -- of your question. The repayment of the switch mechanism has already started because on March 1, the first layer or the first tranche of switch dismounting has indeed been put in place. So Crédit Ag, Crédit Agricole S.A. is now operating with only 65% of the switch under which it was operating back end of 2019. This operation has taken place. And the -- it's now here to -- the situation is now this. So going forward, we are still committed to go from 35% to at least 50%. We'll see when we will do that. It's very -- it's way too early to make assumptions on a timetable. But clearly, this present situation does not seem to lead us to change this commitment. And again, 35% has already been made and is indeed implemented. Above that, it's clear that our capital position is putting us in a very positive situation. It's clear that the group has very significant buffers of -- above all the present regulatory requirements. And it's clear that as the regulatory requirements are going to decrease and to shrink a little bit, we are going to be even more comfortable. So probably, we will see our solvency decrease in the first period of the crisis because clearly, there will be a combination of less result and more RWAs. But we don't expect this solvency to be an issue neither for CASA nor for the group going forward.

Fantastic. And one last question on [ cost ], if I may. So all that we discussed points to lower profitability, at least for Q2 and in the short term. And are there any additional measures in terms of perhaps delay in investments or any digital efficiency that you can think of that can help you defend the bottom line via lower cost basis?

For the time being, we are not looking too much at the cost base, as you can imagine. Nevertheless, we have put on hold almost all projects that were not absolutely necessary to continue to operate on our basic services. So we are, for the time being, postponing, delaying some projects which were useful to our business but which are not absolute priorities. So this is going somehow, on the first hands, to generate possibly some cost cuts going forward. But I think that we will have to reassess our priorities and our projects, especially from a digital viewpoint at the light of what is happening here, which is absolutely massive. Because beginning of this week, 38,000 people within Crédit Agricole Group could operate remotely from their home in France only. And by the beginning of next week, this figure will be doubled. So it means that beginning of next week, we will be in a situation where up to 77,000 people within our group in France will be able to work remotely. And what I can tell you is that I've been working from home since Tuesday this week. I have had no issue at all, no operational issue at all. All the capacity to access to any resources in-house. And so this is clearly going to -- this will need to be analyzed in-depth in order to assess possibly new ways of working going forward.

Fantastic. Jérôme, thank you very much. And thank you, everyone for joining.

Thank you.