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

Well, it's, of course, a very important and key question. And of course, we are still surrounded by many uncertainties. But just let me start by reminding everyone the type of situation in which we are. It has been decided for perfectly understandable and relevant reasons to, I would say, shut down the economy for a while and then to try to reopen it after the end of the lockdown period. And so what was absolutely key in order to preserve the capacity of all the economy to start again as soon as the lockdown was lifted was to provide liquidity enough to all private sector agents in order to, I would say, "survive" the lockdown period and to be ready to reoperate, reconsume, reinvest, reproduce just after the end of the lockdown period. So what was key, to put it in a nutshell, was to make sure that all private agents access to the level of liquidity that they needed. And in France, as in many other countries and especially many other European countries, for businesses, this liquidity line took the form of state-guaranteed loans, state-guaranteed lines of credit granted by banks but guaranteed by the state, guaranteed by the public authorities, guaranteed -- led by the taxpayer. Just to put the figures on the table in rough figures, rounded figures. When the state-guaranteed loan program was put in place, the state has put a headline figure for this program, which was EUR 300 billion. And actually, the credit demand in this program has now reached a little bit less than EUR 120 billion. So this proves that the program was correctly dimensioned because it's far from being saturated by the demand. It continues to run up to the end of this year, so it means that we may see some additional demand coming in the coming months or weeks, especially in the case of businesses that didn't draw their full allocation at once. And so we may see some of those businesses going back to us asking for another slice of state-guaranteed loans. But up to now, it's a little bit less than EUR 120 billion that were drawn at this facility all in all in the French economy. At the same time, what is the amount of losses that the businesses had to withstand because of the lockdown? Again, if I put some rough figures on the table, the French GDP is going to decline by around 10% this year. So it represents around EUR 250 billion of loss of wealth for the French economy this year as compared to last year. Out of this EUR 250 billion of loss of wealth for this full year, the public entities are going to cover at least EUR 150 billion, both because the public revenues are going to decrease, the level of taxes is going to decrease and so on and so forth, and also because the public spendings are going to increase quite significantly. So let's say, EUR 150 billion taken by the public authorities, it leaves EUR 100 billion for the private agents, out of which, the biggest part is certainly going to be taken by the businesses, be it the SMEs, self-employed professionals or bigger corporates. And only a very modest part is going to be withstand by the households and individuals because of the different unemployment indemnification schemes that were put in place in France. So it means that probably the losses incurred by the businesses in France are going to be somewhere a little bit below EUR 100 billion when they were provided, somewhere above EUR 100 million of liquidity. So it means that in terms of liquidity, they are completely covered by this program. So the key question is now the capacity with their earnings progressively to repay those loans. But keep in mind that they will have once window to repay at once -- one-shot beginning of next year. And if they choose to amortize, they will have up to 5 years to amortize these -- the repayment of these loans. So the French economy, globally, is going to be given up to 5 years in order to repay this state-guaranteed loan, state-guaranteed lines of credit. So this is why we are quite -- optimistic is not the real word. But we are quite convinced that this scheme is well-designed and that the businesses are going to have time able to repay their loans. Maybe 1 or 2 other elements to try to answer fully your question. Second element, as far as Crédit Agricole Group is concerned, we entered into this crisis with a very low level of NPLs and a very high level of coverage of those NPLs by provisions, by reserves. And to give figures, for the group globally, we entered into this crisis, so beginning of this year, with a level of NPL which was at 2.4%. And it was covered by loan loss provisions at the level of around 85%. So it's a very low level of NPL and a very high level of coverage. So I'm not pretending that the situation is not going to deteriorate somehow, and actually, indeed, it has started to deteriorate a little bit beginning of this year in H1. But what I'm saying is that, at the same time, we have a situation where the public tools that were put in place in order to cover the cost of the crisis and to handle this very specific type of crisis are well designed. And in addition to that, Crédit Agricole Group is entering this crisis with a very sound loan book. In addition to that, the French government is now working on several additional programs in order to foster the pickup and in order to make sure that after the first and mechanical rebound of the level of activity, we continue to have a steady pace of growth. And namely, the French government has presented a few days ago a EUR 100 billion recovery plan, and it's going to represent a very significant help to boost the GDP growth. And in order to help the businesses to continue to weather the circumstances -- the prevailing circumstances, it is thinking about additional tools in order to help the businesses to improve their structure of balance sheet. And namely, we are discussing presently with banks, with the French Ministry of Finance about a program of what we call prêt participatif, so participating loans, which is somehow, I would say -- makes an impact of loans, which is long-term lending to the SMEs with again a partial guarantee of the French state. So all in all -- and I could give many more additional information, but all in all, what we see is that we are in a situation where, of course, we know that certain businesses are going to be jeopardized by the crisis, and indeed, we have seen already certain defaults. But it was very much the case of businesses that were already fragile before the breakout of the crisis. But all in all, we think that what has been put in place up to now in order to help our customers to weather the crisis was relevant. I don't know if you need some more information. And again, as I said when I started to answer, of course, we are seeing still a lot of uncertainties both on field of the pandemic itself and on the field of the economy also.

No. That's very, very comprehensive. Maybe switching perhaps a bit to capital. You were obviously very detailed in giving guidance for uses of capital at your last Investor Day, but that was some time ago, particularly with regulatory headwinds such as Basel IV and the repayment of the Switch, which is particular to you. A lot has happened since then that your CET1 ratio is 400 basis points above the regulatory minimum, which is a good buffer. There's plenty of uncertainty at the moment, of course. But what would be very helpful would be getting your view on the priority of use of that excess over time, and dependent on the ECB, of course, between capital return and repayment of the Switch, high-end growth, of course.

Well, you know that because of the very specific structure of the group, we have 2 levels at which there is an assessment of our solidity. And we have different ways of monitoring these 2 levels of solvency. At group level where we have already a solvency which is above 16%, I'm talking about CET1 ratio, so which is already above 16%, which was the target that we had initially set for the medium-term plan for 2022, we are perfectly comfortable with the idea of continuing to build up this level of capital. And indeed, at group level, we have only a very small proportion of our earnings that are paid outside under the form of dividend or under the form of a remuneration for the mutual shares. And so indeed, we are going to continue to build up this group solvency going forward. At the level of CASA, the situation is different. CASA is part of the group. CASA benefits from the solvency of the group because of all the financial solidarity mechanisms that exist within the group. And so CASA is monitored and is going to be monitored going forward with a much lower level of capital. And actually, we have, for the time being, the target of 11% in terms of CET1. And we think that this is one of the key features of the group, to be able to offer our minority shareholders the capacity of accessing a listed vehicle which is monitored at a lower level of capital, a lower level of solvency whilst benefiting from the solvency of the group and with the capacity, thus, first, to show a very good and very competitive level of profitability. And keep in mind that, for example, last year, CASA generated a return on tangible equity which was close to 12%, which is clearly one of the best performances in the space of European banks. And the combination of a significantly -- a high level of profitability, on the one hand, and no need of fostering further the level of solvency, on the other hand, is generating the capacity for CASA to remunerate its shareholders. So this is leading to the question of the dividend. You know that in 2020, we had initially the intention of paying EUR 0.70 per share dividend to our shareholders on the ground of the results that we've made last year in 2019. And we are now faced with this dividend ban that has been put in place by the supervisor. We deem that, in our case, this dividend ban was not necessary considering the situation in which we are because we have a level of solvency at 12%, including the 60 bps cost of the dividends that we intended initially to pay. So we had to reintegrate the 60 bps of solvency in our solvency ratio. But it means that even if we had paid our dividend, we would be at 11.4%, so still very significantly above our target. So we don't know exactly what's going to happen. We just say that we could have paid the dividend. And in addition to that, I can add that even if we had paid the dividend at CASA, considering the retention at group level, the hit on the solvency of the group would have been far below 20 bps, so almost nothing considering the buffers that we have. Nevertheless, we are under the supervision of the SSM and of the ECB, so we are not going to do anything which is contradictory with what the ECB tells us. Nevertheless, we've continued to accrue a dividend on the basis of the 2020 results. So we get prepared to pay our dividend in '21 on the basis of 2020 results. And if we enter into 2021 with an excess of capital, which is linked to the fact that we haven't paid our dividend in 2020, somehow, we will repay this excess of capital to our shareholders under a form which is not determined yet, but we have many, many tools to do so. And you know that besides all the tools that are accessible to all the banks, we have this very specific mechanism within the group, which is the Switch. And we have the capacity to continue to dismantle the Switch mechanism, which is, of course, consuming some solvency at our level but which is improving our recurrent earnings capacity, which is a way actually going forward to increase our remuneration that we pay to our shareholders. So these are the moving pieces. The last, maybe, element I could point is the fact that amongst the different measures taken by the ECB in order to ease a little bit the solvency constraints on European banks, there's one element that is here to stay, which is the implementation of Article 104a, which is, in itself, reducing our requirement by something like 50 to 60 bps. So all things being equal in itself, this decision of the ECB has increased -- without any necessity, has increased our buffer above the SREP by around 50 to 60 bps. So it's too early to -- because of the moving pieces to which we are faced, it's too early maybe to reset our targets and to redesign our capital trajectory. But to summarize what I just said, we are very comfortably above any kind of requirement. We have continued in H1 this year to generate profits and to generate solvency. And our intention, at the level of CASA, is to continue to be investor and shareholder-friendly, which means to remunerate properly our shareholders, the majority shareholders but also the minority shareholders.

Great. So another topical area, as it often is in the sector every 3 or 4 years, is M&A. And the recent proposed transactions in Spain, and in particular in Italy, suggest we could finally see a broader wave of consolidation in the sector. Do you agree with this view? Or do you think that these 2 geographies are specific, and the focus is likely to remain on in-market transactions only? In particular -- well, in Italy, you have high market shares in the country in the product factories, as you'd like to call them, Pioneer, Agos, Leonardo, CA Vita in insurance, yet you still have low market share comparatively on the retail side, I think 4%. So is it kind of inevitable that you would have to participate?

Well, let's start with the broad picture and then perhaps zoom in through to Italy and our position in Italy. If I stick to the broad picture, what I would say is that I partially agree with what you just said. It's true that we are seeing some movements on the consolidation front in Europe. And namely in Italy, we've seen a transaction that has now been completed, which is the acquisition of UBI by Intesa. And in Spain, we are seeing some rumors about the potential combination between Bankia and Caixa. And those 2 transactions involve quite, I would say, significant players on those 2 markets. So it seems that actually after several years, during which everybody was talking about consolidation and nothing was taking place, we are now seeing some clues that there is a certain movement towards consolidation. But we are seeing only domestic operations. Those are not cross-border consolidation operations. And in my opinion, this reinforce what we have always said, which is that a global cross-border consolidation operation would face very significant hurdles and very significant headwinds in Europe, namely, regulatory headwinds, because actually, there is not a single banking regulation and banking supervision area. And if you have entities in several European and even Eurozone countries, it's not that easy to upstream or downstream liquidity or capital despite the fact that we are supposedly in a single banking union. And at the same time, you don't have a single banking market. We are facing -- in retail and commercial banking activities, we are facing a very fragmented market, actually. And in the different European countries, you have different credit policies, different credit products, different savings products, different tax regimes for the savers, different legal regimes in case of insolvency and so on and so forth. So it means that the capacity of generating cost synergies by merging 2 commercial and retail banks into European and Eurozone countries is not here for the time being. So it means that from our viewpoint, the 2 operations I just mentioned, the one that has taken place and the one that is possibly going to take place, are the proof that domestic consolidation is clearly accelerating, especially in countries where domestic consolidation is needed. It's not a proof that we are heading towards a wave of pan-European cross-border consolidation. As far as our group is concerned, you know that it's been now several years that we insist on the fact that we think we have the capacity to participate in the consolidation within several business lines in which we have a very significant player and in which we think the European market is more mature than for retail and commercial banking activities. So it's the case in consumer credit. It's the case in car financing. It's, of course, the case in asset management and so on and so forth. And so we've been steadily developing the capacity of all these specialized business lines that exist within our group to distribute their products beyond our footprint in retail that we have in France, and to a certain extent, in Italy. And so this is through this approach that we've entered into several significant partnerships in Spain, in Italy or in other countries. I didn't mention custody activities, but it's also an area in -- proven that we have the capacity of closing significant transactions in order to reinforce our positioning and our profitability and our scope. Last point, in Italy, where we have a retail market operation, we've proven in the last 2 years that we have the capacity of reinforcing our franchise by integrating some smaller banks that fit within our model. This is -- so what we did beginning of '18, and the integration actually was completed during '18 and beginning of '19 with the 3 regional banks that we've bought. So we have the capacity to continue to do so if we find some targets that fit within our model. But we've proven also at the same time that even if we are still small in retail banking in this country, in Italy, we have had the capacity to find opportunities for our specialized business lines to expand beyond, and sometimes far beyond, our small retail network. So this is the case for the asset management activities, where we distribute actually our products through UniCredit, and this is the case also for our [Technical Difficulty]

Great. So I think we've only got 5 minutes left. So what I'll do is ask a final question from myself as well as one from the audience. So just from me, could you update us on the consumer finance business? This is clearly important for you, and many fear that we could see significant losses as real unemployment rises into next year. Could you touch on how the business differs today compared to as recently as 2012, 2013, when it did see significant losses? There have been some regulatory caps on interest rates and then strong growth in cap finance. So how should that impact the loss experienced this time around? And then also in terms of commercial performance, there's been a bit of a dichotomy between the group's joint ventures performing well, but then competitive pressures on the rest of the business. So could you give us an outlook on demand for this area as the economy normalizes? I think I might have -- we might have lost some sound. But I guess my first question was on consumer credit. And then the -- if we can maybe move on to the audience question, which was just looking at the Banque de France, which upgraded its GDP forecast this morning due to a better recovery in consumption in August. So the participant is asking if Cred Ag has seen that in its August numbers in terms of volumes, fees, credit card volumes across LCL. All right. I think we've lost sound from Crédit Agricole. So I think we'll leave it there given that we've run out of time, in any case. Thank you all for participating. And hopefully, Jerome, if you can hear me, thank you for joining us. Bye-bye.