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

Okay. Then let's start. Good morning, and good afternoon, and thank you, everyone from Asia still hanging on to this call. My name is Benjamin Goy. It is my pleasure to host Philippe Brassac, Chief Executive Officer of Crédit Agricole, at our conference today. Just a couple of housekeeping [ questions ] first before Philippe will start his presentation. If you have any questions, please post them to the webcast, and I will pass them on. And Philippe will mention 3 slides. You can move in the slide deck. So please follow his words. And now, Philippe, the stage is yours.

Thank you so much, Benjamin. Good morning, everyone, perhaps good afternoon because I'm speaking from Paris, and this is the afternoon for me. And thank you for having me. It's really a great pleasure for me to be with you today even if it is only by the special channel that is the audio channel. This is a very special and particular situation because, of course, we should be speaking about our results and strategy. But probably results of the first quarter could seem a little bit irrelevant, simply because the first quarter was, for the most part, before the lockdown. And the world seems to have changed since then. But I think that this kind of rationale could be a kind of mistake. I think, on the contrary, that the results and the strategy of the group are very relevant to be commented today. They are not out of place, notably because this time, I do highlight the fact that this is this time, banks are not part of the problem. Banks are part of the solution and on the behavior will depend the exit from the crisis. And our results and our financial strength will determine our capacity to act. I'm convinced that the exit scenario is, to a large extent, in our hands. And if I had only one key message, it will be this one. I do feel since the very starting point that a positive scenario is absolutely doable. And it's kind of pity to have to explain that. But of course, I shall try to explain this point. Three main messages. The first one, and you can follow my words on Slide #4. The first message is that the group, Crédit Agricole and Crédit Agricole S.A., started at the very beginning of this crisis from a position of strength. This is very important because, of course, the starting point is something so important to be able to cope with this kind of crisis. The first quarter results have only confirmed probably, as you read that, the robustness of Crédit Agricole and the group and the continuation of 2019 results. In fact, the first quarter was very positive until mid-March, like 2019, with, in all business lines, healthy activity levels, customer acquisitions and high profitability. You can see on the Slide #4 that for our solvency, our core equity Tier 1 was 11.4%, 3.5% above the SREP minimal requirement. And 11.4% despite, you know that probably the partial unwinding of Switch #2. Of course, I can explain that if you have questions. And I do remind you that Crédit Agricole S.A. is part of a larger group, that is Crédit Agricole Group. And the solvency of Crédit Agricole Group is between 15% and 16%, to be more precise, 15.5%. And this is why for many years, we decided that we could target only this relative low level of solvency with this target of 11%. Liquidity reserves are very high, EUR 338 billion. You can see that the LCR of the Crédit Agricole Group is at 130%. Same thing for Crédit Agricole S.A., 133%, to be more precise. And cornerstone of this first quarter was probably that for CASA, the gross operating income was up plus 8%, close to EUR 1.6 billion for the first quarter. These are the most important figures of this quarter. And this made it possible to absorb a tripling of the cost of risk and notably, because we -- the cost of risk was mustered at the very low level for many years, thanks to our different policies. And to give you another indication, I can tell you that this performance represents an annualized return on tangible equity of roughly 9%, restating for the special impact of IFRIC 21. Of course, I think this is a high level, 9%, and the question is how can we get this high level simply because our starting point was 12%, one of the best, at least of the French banks and probably one of the best of the [ European ] banks in 2019. And once again, of course, when you have to face a crisis, the level of your starting point is very, very important. I would like to add at this rationale that if we could reach this kind of performance, this is due to our diversified business mix. You know and we often repeat that our model is the universal model. That means for our customer to be able to provide the whole range of different needs of the customer and this is, of course, a source of resilience for our revenue of diversification. But more than this, this is a natural way to nurture synergies between the different business lines of Crédit Agricole Bank. And this is why we do think for many, many years that a diversified business mix linked to the different needs of our customer is something very strong in terms of ability for growth, but very strong to face some times where weather is worse, of course. But we succeeded to get this performance, both thanks to our diversified business mix, but both thanks to our prudent risk management for a long time. I'm very pleased to report to you that we have a very sound loan portfolio with a high coverage ratios for many years. You can see for the first quarter, for example, that our nonperforming loan ratio was only at 3.1% and it decreased compared to the same period in 2019. And the coverage ratio is at 72.4%, an increase compared to the precedent period. As a conclusion of this first message, I -- my proposal is that you can remind, first, an underlying profitability, able to absorb a higher level of cost of risk. And then high solvency level and a high liquidity level. And once again, sorry to repeat that, in a crisis, the starting point is key, and we are very well equipped for this point. My second chapter, my second message is about something I can comment about Slide #25. And this message is that even all the guidance you are expecting are difficult to express, to state, the guidance is uncertain. But one thing is very clear, and this is really important for us, CASA and Crédit Agricole Group will withstand the crisis. I would like to add, because I do feel that, quite easily. And this is due, probably in terms of external support, thanks to all these positive impacts of strong support measures from central banks and governments. And I would like to share with you that we had to cope with the crisis in 2008, we had to cope with the crisis in 2011 for this sovereign debt crisis. But we were not in this kind of paradigm with this kind of whatever-it-takes immediately present to save our activity. And so these positive impacts of strong support measures are there. They are massive and they have made available from the very onset of the crisis. Of course, I could give you many examples about notably, the annuity, the liquidity from central banks, but you know -- you all know that, notably with the Pandemic Emergency Purchase Programme, the TLTRO III and so on. I have to add, of course, the state-guaranteed loans that we can distribute, and for France, for a maximum amount of EUR 300 billion, up to 90% of guarantee. And the last but not least, the employee temporarily furloughing paid by government that made the situation of enterprise, of course, easier for being able to face this temporary crisis. Of course, I would like to tell you that with that in mind, it's really difficult to predict exactly the evolution of NPLs. But something for me is easy to be predicted at this point is that they will be mastered. Obviously, they will be mastered. If I take, first of all, the Bucket #3, for IFRS 9, that means the real risk Bucket 3, you can see that the level of NPL may remain low for some time, simply thanks to support measures, of course. So probably, you won't see something very important within Bucket 3, at least during the current year, and I do repeat that, thanks to all the measures that have been taken by policymakers. And the important point is about Bucket 1 and 2. That means for prudential provisions we have or we have not made and that depends from our forward looking. And of course, it depends on our forward looking, that means from the different scenarios and their weighting, we are speaking some of scenario U, sometimes in V, sometimes in W, sometimes in L, of course. But what I can tell you is that I feel -- I'm sure that our economic scenario is as good as anyone's. And at least, it is slightly more conservative than the scenario that has been provided by IMF. And in terms of proof of that, we could check that for Bucket 1 and 2, during the first quarter, our levels were close to our peers in France and best player in Italy. But most important point, the first point is, obviously I repeat that, that I'm sure that risk will go on, of course, will increase but we are absolutely able to master this level. But the second point is that this -- our model really protects us. I have already highlighted the level of our coverage ratio, it is high at 72.4%. I would like to remind you or to inform you that on the 1st January of 2018, for the changeover of IFRS 9, we created an additional provision for EUR 1.2 billion. Once again, it's important to reflect with the [ potential ] level of the outstandings of provision, but not so only with the cost of risk that are only the new flows. And my simple conviction that I want to -- on which I would like to commit for you is that this good capacity of Crédit Agricole S.A. to absorb, if it was a case, the same level of quarterly cost of risk as in the first quarter of 2020. You can see on this slide, another point that is very important probably for you is that our solvency target is unchanged, 11%, for many years since the operation that we called Eureka, 11% for Crédit Agricole S.A. We don't change our dividend policy, a 50% payout, and it was accrued in the first quarter for next year. And of course, I do reexpress for you or restate for you that all dividend options would be reassessed in the fourth quarter after you know that the fact that the 2019 dividend cancellation has been required by SSM. So the conclusion of this second part is that we can, and we do remain very confident simply because the positive scenario is doable and simply because it is doable because it depends on the banks and on their behaviors. And this is special and notably for Crédit Agricole Group that is -- that represents 25% to 30% of the market share, and so of the remediation tools of this situation. And I would like to share at this point, we do note, as an optimistic guy, that simply, as I try to do my job, I mean, as a scientific economist, I do look at the scenario. I do look at the crisis and our conviction is that, I shall come back on this point, this crisis is very special because we never knew something as deep as this crisis, but it is not comparable to any other crisis because this one is a driven crisis, it is a market crisis with a crisis that is being triggered, and the end of the lockdown for, for example, is mastered as was mastered, the very beginning of the lockdown, so the point especially at the point of the bridge between the before crisis and the after crisis. Last point, and I hope not to be too long, my third message, and the third slide, you can see on Slide 27, it is about our strategy. What about our group project in this kind of turmoil? What I want to tell you and to share with you that we are fully, fully busy with achieving our group project because it's absolutely and fully relevant. It is, all the same, vindicated by the crisis. And this is very important. And we'd like to share this point with you. Let me -- very simple. You can see on this slide that our group project has been organized with 3 main projects: the customer project, the human project and the societal project. That has been written, this has been decided on June 2019, not during the crisis. And our conviction was, first of all, the customer project that the current model can be nothing but the combination of digital and human responsibility, digital and human responsibility. What we can see during this crisis is that I tell you, as I think that, nobody will ever argue that digital-only banks could have met the needs of their customers in times like this. The correct answer is an answer of a full-fledged model, that means -- full-fledged means digital solutions, digital abilities for customers and human responsibility available and notably in proximity. This is the first point. And the second point of the customer project was to be agile with our technology, and we did made the proof of our agility when we saw how our technology tools and digital tools were able to prove their robustness, first of all, and then their ability to adapt to this remote banking we had to work with during this crisis. And I think it won't come back, it will be a new step of this new paradigm of digital using for the banks and human responsibility for the relationship. This is why the second project, main project of the -- of our medium-term plan is the human project. Why? Because, of course, when we speak about human responsibility, that means that you have to provide really teams of men and women, able, from a personal point of view, to take this, to make decisions for the customer, personal decisions, with the right level of judgment and discernment. And this is really something very difficult, but it is the core project for our human project. And then you see the societal project that is, more than ever, very relevant in times we are living with 2 main topics. The first one is, of course, always in front of us. The climate-change fight. And the second point was the customer inclusion. It was a special point on which we had a few questions when we launched our medium-term plan. But I think that today, everybody can feel that, within this crisis or during this crisis, the most important risk is the fact that we can look at the kind of growth, huge growth of inequality and then a kind of social crisis. This is why in our interest, in the interest of the society and so in the interest of our business, we need to really be very, very busy, very engaged on the customer inclusion for all our customers and the different territories of our customers. My conclusion and my global conclusion, and then I'll leave you the floor is that, of course, we are living in an unprecedented situation. But I know that it's very strange when I say that, but this is not so complex situation. For the first time of my life, this is a crisis that we have decided to launch, I speak, of course, in the mouth of policymakers with driven scenario, not precisely, but driven scenario. And so this quite is as deep as it is able to be driven, this is very important. And so I'm sure that we can face the situation because the consequence is the kind of economic crisis, but the factor at the very beginning it's not an economic crisis, it's not a financial crisis, it's not a banking crisis. The considerable point is that we face this situation with a solid health to start with, thanks to everything -- all the things I've always listed: Diversified business mix, profitability, solvency, liquidity, was the fact that we were very prudent; and that we gave priority to organic growth, to mastering risk during the different -- last years. The third point is that we are fully operational since the very first day of the crisis, and this is, of course, very important, and that we are in this position to enforce all the decisions made by all public authorities. And this is absolutely in accordance with our raison d'être that we have stated during our group project 1 year ago. Well, the last point in conclusion of that is that I can feel today, difficult to prove, but I'm sure that, that during this crisis, I think I'm sure that the global reputation of our group is up. I mean both in terms of political view, but in terms of usefulness, in terms of attractiveness for different customers. I'm sure that this crisis, of course, is a bad situation, but it's a positive occasion for us to prove our difference and to fuel our strategic attractiveness on the very long term. So that's all for me at this level. I leave you with that, I'll leave you the floor. And of course, I shall try to answer your questions. Thank you.

Thank you very much, Philippe. While we are gathering questions from the audience, I might start with some questions. Philippe, you mentioned your strong starting point on asset quality going into this crisis. But you also have some exposure to higher-risk sectors or industries, I think about oil and gas, but also aerospace and so on. So maybe you can differentiate a bit on this type of portfolio what is really the higher-risk part? And what would you see as rather low-risk and some considerations around your cost of risk view here?

Yes. Thank you for this question. I shall try to answer the more precisely I can. Of course, what I said was very global, that doesn't mean that was wrong. It was global, and we have to be more precise on certain sectors. And obviously, certain sectors are more vulnerable sectors. That's right. And I can give you some color about that. And we have many questions, of course. And we have a question from ourselves about our aerospace, shipping, tourism, hotels, oil and gas and so on. What I can tell you is first, that on the global outstandings of our loans, 33% of our corporate exposures are still today investment grade, 73%. What did I say? 73% of our corporate exposure are investment grade. This is a very first point. Second point about oil and gas because this was your precise question. The exposure today is EUR 23.7 billion, and this is 5.5% of our global corporate exposure. But only -- so this is a relative exposure, and only 18% from them -- of them are on segments which are sensitive to oil prices. So I repeat, EUR 23.7 billion on oil and gas. That means 5.5% of all our exposure and only 18% sensitive to oil prices. And I would like that you could note that I do remind what we lived in 2015, 2016 and in many other circumstances. But between 2015 and 2019, we already had to cope with prices of oil at $25. And the annual losses were only 7 basis points a year. So that's a kind of very usefulness -- useful reference of the real kind of exposure for the future. A special exposure can be commented to is about aircraft. Exposure on aircraft is EUR 14.8 billion, 3.5% of our corporate exposure. And as you probably know, that our portfolio is very good quality because it is really asset-based financing. And we are, of course, concerned about the scenario about aircraft activities today. But this is absolutely relative within our outstandings simply because how we decided for a decade to be universal bank, each of these kind of exposures, some of them are really vulnerable sectors, they can't hugely or roughly impact the global Crédit Agricole Group. And my main message, once again, is that when I integrate all this rationale, I'm sure that we can master cost of risk. The first point is that because provisions were very high at the starting point, but we are absolutely able, since we are starting from a high level of profitability and a low level of cost/ income ratio to face, for example, if we had to cope with the same level of risk each quarter. I don't know which will be the right level of risk for the next quarter. But if it goes the same level than for the first quarter, it won't be -- it wouldn't be a concern for the profitability and the solvency of Crédit Agricole.

Very clear. Thank you. And then maybe following up on one of your last points, meaning the attractiveness for clients. Could you speak a bit about how you expect the competitive situation to develop in Europe, maybe across corporate or retail, wherever you see major changes happening maybe and what the opportunities specifically are for Crédit Agricole?

Yes. This is -- for me, this is probably the most important question I've always in my mind because I always repeat it for many years that the first guideline for a CEO is to work on the attractiveness of his bank, his company, commercial attractiveness. Because the main trend is as your ability to get customers better than others. And this is why we decided, at least since 2015, to always give priority to organic growth. And external growth were -- could be, simply put, inevitability if we could bolster the organic growth. And now I think that when you work on the quality project, I mean, your ability to be attractive. To be attractive, you need to be a universal answer. And when you are the universal answer, you must have universal ability to channels and so on. You are really working for the future. And so what I see today in terms of consolidation is the next point. The first point is that first, I repeat, this is clearly not our priority for Crédit Agricole Group. Consolidation between banks is a matter that is something a little bit external to our core strategy. But I don't think that even if things are more and more difficult for certain banks -- I mean that there is no room today for cross-border consolidation for many reasons. Pay off, I'm not sure of that. It's just a rationale, perhaps there is a room for domestic consolidation, notably in Italy, Germany or Spain. But I do think -- we do think that the best way today, and notably, when there is a crisis, to face the situation is to cooperate within business -- or through business lines. Because the best way today -- it was right for many years, but it is more and more relevant, the best way to immediately lower your cost/income ratio and be sure to enlarge your range of projects is to cooperate on bigger and bigger platform for business lines because these are win-win operations, you have immediate gains, and you are protecting your brands. Just let me give you some examples. You know that we are the provider in terms of asset management of Societe Generale. But Societe Generale is always Societe Generale. We are the provider of consumer finance for Banca Popolare di Milano, but Banca Popolare di Milano is always Banca Popolare di Milano. We are the providers with a joint venture of trusted joint solution with Santander. Santander is always Santander. I mean that this is the proof that when you need, and every bank will need to reach a lower level of cost/income ratio, protecting the comprehensive quality of the range solutions and protecting the brand, the only correct solution today is to consolidate through business lines. And I would like to highlight the fact that, I do repeat that for many years, that Crédit Agricole is in an excellent position. First, because we decided to keep the universal bank, we master all the different business lines useful for our customers, and we are probably one of the rare banks in Europe to be able to do that. Second point, we have the size. Third point, we are organized for all these business lines in legal entities. And fourth point, as we are a group, we are used -- we are a seasoned person for providing solution for many banks, notably for our internal bank. So my view is that probably some consolidation could happen on domestic market, but the right solution, the best solution for many, many competitors will be to accelerate in terms of cooperation to business lines, and our position is really great.

Thank you. Maybe in the interest of time, one last question. And that is on capital. You mentioned 11.4%. You had some adverse impacts in the first quarter. So I was just wondering what is the glide path here for the rest of the year. When I look at some negative impacts call it, risk-weight inflation but also plans of the European Commission proposals, some of the OCI might return. So maybe some thoughts around the capital development going forward. Thank you.

Thank you. The best thing I can provide to investors for many results, is that for Crédit Agricole, capital concern doesn't exist for -- since 2016, since Eureka. You have, with Crédit Agricole, very stable vision. Our target is 11%. We don't change. And we don't decide to change simply because for many years, this is a correct target. And simply, for this crisis, because many questions are about could you lower this level of 11% since, for example, you can have the benefits of regulatory requirements that have been decided to be decreased. I would like to answer first that the stability of Crédit Agricole Group is due to the 17% of the group, Crédit Agricole Group. 15.5% of 17%. So we are very comfortable with our target within Crédit Agricole Group of 11%. And I do remind you that Crédit Agricole S.A., since it is included in Crédit Agricole Group, is a nonsystemic bank compared to other players. What do we see for the foreseeable future? We can see first regulated decisions that have been made in terms of decreasing requirement. And for Crédit Agricole, it was a decrease from 9.7 -- 8.7% to 7.9%, first point, so this is very positive. But we have, on a concrete point of view, many moving pieces going forward. Just to share the rationale with you, when I'm just looking to RWA, of course, they should increase next quarter. First, because of downgrading of counterparts. We shall have, unfortunately, as many, many banks, a new one-off effect of the second quarter since -- the fact that we shall add in our balance sheet, the state-guaranteed loan for the first 2 months. That are not granted, so this is a one-off effect. We could have a possible increase in the equity, the accounted value of insurance contribution if credit spreads could improve. But on the other way, that could have a positive impact on the core equity Tier 1 via OCI reserves. And EU is just looking at new decisions to make us more comfortable. And I saw today that ECB has stated a favorable opinion about a new kind of quick fix about the fact that they could lower, once again, the requirements about CRR 2 and notably, about the future leverage ratio. So all in all, this is not stable, but you can simply remind that for us, capital is not a constraint for Crédit Agricole S.A. So we are comfortable with that, and we shall be able to maintain this target or to fix the most relevant target that we could decide to fix in the future when the future will be more easier to be predicted, of course.

Very clear. Thank you very much, Philippe, for joining us today, and I hope we can welcome you in person next year. Thank you.

Thank you so much. Bye-bye.