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

This presentation is for Bank of America clients only. If you are a member of the media or the press, please disconnect now. Good morning. I'm very pleased and delighted to welcome today with us, Jerome Grivet, Chief Financial Officer of Credit Agricole S.A. Thank you very much, Jerome, for giving us some of your time in this busy period. It will be Q&A only. So the audience can ask questions through their -- through the screen. And then we can start straight away. So thank you, Jerome.

Maybe some first question and the obvious one is on the COVID and implication on your earnings. On the revenue side first, maybe you can actually shed some light on how you managed to still sustain actually quite good operation in first half with positive jobs in most divisions, and how is that sustainable in the light of the developments we're seeing at the moment?

Good morning to everyone of you. It's a very wide question you are asking, Tarik. I'll try to give you some light or some elements, but I'll try not to be too long in my answer. It's true that we've been posting quite solid results in the first half of this year. And we've been -- amongst different elements, we've been posting an improvement of the gross operating income over the first half of the year by close to 3% for Credit Agricole S.A, and even more than 5% excluding another increase in our contribution to the Single Resolution Fund. And it's true that we've been improving also the cost-to-income ratio during this period of time as compared to the previous year, thanks to a very resilient top line. I think the resilience of our top line is explained by 2 main elements. The first one is that we have a very diversified set of activities, and they don't react the same way to this -- to the present situation, and I'll come back on this element a little bit later on. And the second feature that we have and that is also helping the resilience of the top line is that we manage to permanently improve the capacity of our different business lines to work together, which means that we increased regularly with revenue synergies, which are a very significant help to the resilience of the top line of most of our businesses. If I dig a little bit deeper into what happened in the different businesses in H1 or Q2, it's clear that all retail-related businesses have had a low level of activity during Q2, because definitely, Q2 was earmarked by, let's say, 6 weeks or even 2 months of lockdown, which means that all activities that require a proactive commercial effort from our salesperson were really impacted. So you have to read across our results, the fact that 2/3 of the second quarter was indeed very much impacted for retail activities, which cover retail banking activities, but also all retail-related activities, like, for example, consumer credit and car financing businesses. But it's clear that in those retail-related activities, we have seen a very sharp rebound in the level of activity starting in June and continuing across the summer. So just to give you a few examples, it's been the case for the loan production. It's been the case for the gross commercial or customer capture. It's been the case for inflows on savings products or the opening of new savings accounts and so on and so forth. So it means that clearly, we are at least partially catching up with all the operations that we've missed in April and May. At the same time, we have had a very good momentum across the lockdown period in all our large customers' activities because, of course, those activities don't require the same setup of branch opening, of physical meetings than retail-related activities. And actually, the second quarter of this year was marked by a very high density of operation, for example, financing operation in the CIB, but also a very good level of activity in the custody businesses. And then last point, in the asset gathering activities. So asset management and insurance. We've been penalized by 2 elements, the market volatility and the downward-oriented market trends that penalize all valuation that we have to take into account in our revenues. And then the second element was clearly the fact that, again, in retail-related activities, we've missed at least 6 weeks or 2 months of business. So this had an impact in the number of new insurance policies that we sell or on the new -- our inflows in unit trust, be it with Amundi or within life insurance policies. So globally, a solid -- a good resilience of our activities despite some weak levels of activity across the second quarter. But if we try to foresee a little bit what can happen, I think, one must keep in mind the fact that more than 3/4 of our revenues are indeed recurring revenues, i.e. they are already here at the beginning of the year. It's the case, of course, for the net interest income, for a very large proportion, but it's also the case from many, many fees-generating businesses because their fees are linked to the handling and the management of a contract. And in most cases, all the contracts that we have with our customers, be it for payment tools or for insurance policies or for savings, account management, all these contracts last a very long period of time. Generally, it's in a region of 10 years. So it means that we are adding up regularly new contracts and new policy to our stocks, but we are -- we can count on the fact that we start the year with a high level of revenues more -- again, more than 3/4 of our revenues being recurrent. When it comes to the cost base and I will be shorter on this issue. I think we stick to our general policy, which is to asset -- to assess and to assign to each business line a dedicated cost-to-income target. Of course, all these cost-to-income targets being coherent with the global cost-to-income ratio target that we have for the group globally, and to actually decentralize the effort, the concrete efforts in terms of cost management that are required to meeting those targets. And this -- through this policy that we have seen, for example, in the last 3 or 4 years, we have seen a decrease in absolute terms of the cost base at LCL without any massive redundancy plan or without big announcements, but simply with a steady effort to optimize the cost base, to optimize the cost of the back offices, to optimize the setup of the network and this has indeed helped LCL to very significantly improve its cost-to-income ratio. So to put it in a nutshell, when it comes to the operational parameters of our activities, we are, I wouldn't say, optimistic because, of course, there are lots of uncertainties, but we have, I think, the tools to continue to be efficient and to continue to have a very satisfying level of [indiscernible].

Thank you. I will just follow-up on the recovery. In Q2, you mentioned that collecting some data from the regional banks, you can comfortably say that you're observing a v-shaped recovery. It'll be interesting, actually, to know what are the metrics that you collected and that you are actually following and looking out to draw this conclusion because since some of your competitors use the same shape of recovery. And the flare-ups in infections that we've seen in the last two -- week or 2, is that impacts somehow this conclusion, or are you still confident? Because for example, if you look at [indiscernible] yesterday, I mean that's [indiscernible] from yesterday, but we announced that all bars and restaurants will be closed in the rest of the metropolis, basically, but 10 p.m. curfews. So how would that impact your conclusion in terms of the shape of the recovery?

Clearly, there are still a lot of uncertainties around us and so it's very difficult to forecast what is going to happen in the coming months or even quarters. What we've been looking at, for example, is the trend in car payments, the trend in withdrawals at our ATM machines, the trend in the number of home loan simulations, the trend in the opening of savings accounts, the trends in terms of new P&C insurance policies that we signed with our customers. And all these indicators have indeed shown a v-shaped trajectory, i.e., a sharp decrease between March and May as compared to a very decent level of activity in the beginning of the year, in January and February, and then a sharp increase in May, in June, continuing in July. Of course, August was a little bit less significant because it was the summer holiday period. But the starting -- the start in September was also very, very positive. In addition to that, what I can mention is that we've seen, starting in August and September, the end of the 3 months payment holidays that we had granted from our retail customers in consumer loans or in home loans. And actually, the effective repayment on a normal basis of those installments after the payment holiday was very satisfactory. Also 93%, for example, of all the consumer customers that benefited from a payment holiday actually started to pay normally their installments after the 3 months period. So it was completely in line with what we expected. So this is globally the, I would say, micro indicators that we assess. On a more macro viewpoint, maybe I can just try to elaborate a very quick reasoning showing what we are still, I would say, carefully optimistic, carefully because of the uncertainties, but optimistic because of the macro figures. If I take just an example of France. The GDP in France was due to be around EUR 2.5 trillion this year. We are going to lack around 10% of that. Actually, the latest figures are closer to 9%. But let's stick to 10% decrease in GDP between '19 and '20. So it means that we are going to face a loss of wealth creation of around EUR 250 billion, which is quite huge indeed. How is this taken in charge by the different economic agents. The public agents i.e. the states of social security, the local governments and so on and so forth are going to absorb 60% of that loss. We are going to see a deterioration of EUR 150 billion of all the public deficits in 2020 as compared to 2019. So of course, this is raising long-term questions on how it's going to be repaid. And what are the impacts on the monetary policy and so on and so forth. But as far as 2020 is concerned, it means that 60% of the losses in GDP are taken in charge by the public authorities, which leaves only "around EUR 100 billion of losses for the private agents." If I zoom a little bit on the different categories of private agents, we have the household and individuals, which are actually almost not impacted by what happened in 2020. Actually, we assume that between 5% and 10% of the losses, so definitely less than EUR 10 billion, are going to be taken in charge by the individuals because actually, most categories of individuals are not going to be hit revenue-wise. All the pensionaries are going to keep their pensions as expected. All the public employees, civil servants are also going to keep their revenues as they expected. Then all the employees of the large corporates are also going to be almost not impacted. And so only self-employed persons, plus also the new unemployed are going to lose some revenues. But it means that actually the revenue losses for households are going to be very little in 2020. So it means that it leaves, let's say, around EUR 90 million of losses for the businesses, SMEs, medium-sized enterprises and large corporates. From a liquidity viewpoint, this loss has been more than covered by the state-guaranteed loans, by the payment holidays and so on and so. The state-guaranteed loans only represented in France, more than EUR 120 billion and it's still available for the coming 3 months. So it means clearly that this EUR 90 billion loss for the businesses is not raising any liquidity issue globally. I'm not saying that functionally, in some sectors, or in certain areas, we are not going to see difficulties and actually we have seen difficulties. But globally, the wealth losses that are incurred by the businesses are more than covered by the liquidity lines that have been provided to them. So this is raising a medium-term issue, which is the capacity of those enterprises, those businesses to absorb these losses across time in order, first, to repay normally their loans, their current loans, amongst them the state-guaranteed loans, but also to be able to continue to grow and to continue to invest in order to fuel the recovery and to fuel the future GDP growth. But clearly, and this is why we are quite positive on what has been put in place in France. Clearly, liquidity wise, all the setup of governmental measures is more than covering the losses incurred by the businesses.

Very good. And this is, Jerome, maybe a good transition to talk about cost of risk in general. So you don't give a guidance for a full year or even less for next year. But I think from your comments, different occasions, we can understand that second half will definitely be lower than first half. But I guess the -- really, the question mark is when all these guarantee schemes would stop when we will actually have a check of these provisions were enough or not. I know in France, one of your core markets, there are talks about an extension, not an extension of the PG, like the guarantee scheme, but a cap in interest rate for some of the loans that will be extended and so on. How is that fits with your risk management and risk profile? Because if you are stuck in rate, and you get some clients coming through the door that you actually -- the pricing doesn't cover your risk, are you obliged to check these clients? How really the dynamics work in there?

Lots of elements in your question. Just to answer your last point. What has been said is that as far as the extension of the state-guaranteed loan is concerned, you know that the state-guaranteed loan was granted for 1 year. And then after the first year, the client has the right to choose, to repay or to amortize the capital that has to be paid up to 5 years. So the question that was discussed with the -- mainly the finance industry was what type of rate will be applied to the amortization period, if any. And so we ended up with the idea that the rate for the amortization period could be in the range 1%, 2.5%. So for the first 2 years, up to 2 years, and then between 2% and 2.5% for an amortization above 2 years, up to 5 years. So it's a range. It's -- we've been discussing that, assuming that when the amortization period starts, we will have more or less the same monetary conditions than the one we have now, which is probably not a very aggressive bet, because clearly, we expect the monetary policy to remain unchanged in the coming months, at least, I would say. So this rate setting of the amortization period of the state-guaranteed loan is not real constraint, is not an issue for us. It simply is the continuation of what we have accepted and what is clearly, considering the monetary policy that we have, that is perfectly coherent. Then when I come to the risk issue that you raised. It's true that in the first half of the year, we had to adjust our macroeconomic scenario in order to calculate the need for additional Stage 1 and Stage 2 provisions. And this, indeed, represented a significant part of the cost of risk that we've booked in Q1 and Q2. Considering all the latest forecasts that were issued by the Banque de France, by the OECD, and so on and so forth. We are not going to update further our macro economic scenario, at least for Q3. So it means that as far as Stage 1 and Stage 2 provisioning is concerned, in Q3, we are -- we will have only to take into account all the evolution of our portfolio, but no additional macroeconomic evolution. So it's leading probably to a lower level of Stage 1 and Stage 2 provisioning than in the H1. Then as far as stage 3 is concerned, of course, we will depend on, I would say, idiosyncratic elements or informations or events. So it means that normally, we shouldn't see, in Q3 and Q4, a wave of default as some expected it, but we are positively facing as it happened in the first half, some events unexpected, not necessarily in line with the global macroeconomic trends. But as you know, in Q1 and Q2, we had to book some quite significant individual provisions because of some events like growth in certain areas. So this can happen. It's not possible to forecast it. But we are not seeing, as of now, the way of default that would generate a significant need for additional Stage 3 provisions. So again, we don't want to give guidance on the level of provisions -- on the level -- more exactly on the level of provisioning for Q3 and Q4, but I want to remind again that the provisioning effort on one single quarter must be -- must take into account and, take indeed into account all the previous provisioning efforts that we've made. And actually, as you know, Crédit Agricole Group started this year with a very low level of NPLs and a very high level of provisions covering those NPLs. And so of course, our additional provisioning efforts take into account the existing provisions that we have in our books, which are now in excess of EUR 20 billion globally for the group and in excess of EUR 10 billion for CASA.

Very clear. Thank you. Maybe we can spend a few minutes on Italy, your second home market. I mean, first of all, I don't mean to be a wide question, but just give us what's on the ground you see if your business in terms of, I would say, underlying business growth is going in line with the plan. And my second question on Italy is on the change in the landscape. We had a big merger already starting Intesa with UBI. We have rumors of another one coming. I mean, you have a big bank there. You have a decent market share. Do you feel threatened or the dynamics might change if you don't participate in this? Is there any sense of fear of missing out something? Or you are just heading with your strategy and carrying on?

Just as a start, let me remind you that we have a comprehensive and global set of businesses in Italy. And so it means that actually, retail banking activities are, of course, a key component of our setup of businesses in Italy, but it accounts for only between 1/4 group and 1/3 of our net profit. I think it was a little bit less than 1/3 of the net profit that we generated in Italy last year. So it means that actually, of course, we are very, very focused on what is happening in the retail banking business in Italy, but what is very important for us also is to be able to continue to develop our specialized businesses in maybe asset management, consumer credit, car financing, leasing, factoring, wealth management, CIB, name it. So clearly, when we look at Italy, we don't want to look only at retail banking activities and add retail banking and in the transactions that are or are not taking place in this country. That's the first point. The second point is that when it comes to banking activities, our business model is skewed towards retail precisely. And actually, it represents now half of the loan book of Cariparma Credit Agricole Italia. And in these activities, considering the way we do them, considering the locations of our branches actually we have been posting regularly in the last quarters, a level of activity that was above the market average. So it's clear that the level of activity in Italy has been impacted by the situation. But when it comes to our own network, its level of activity is better than the average of the market. When it comes to M&A, well, we said when we publish our medium-term plan last year, and this was only a reiteration of what we had said before that we were ready to consider or contemplate M&A transaction that would fit in our business model, and that could show, I would say, financial metrics that are, I would say, acceptable for us with, amongst other elements, a capacity of generating a return on investment after 2 years, above 10%. Actually, what we did with the 3 small savings banks that we bought at end of '18 was exactly that: a sound balance sheet, a weak operating profile, a small size, a good location. And at the end of the day, a return on investment, which was significantly above 10%, and also a level that really covered a significant part of the capital consumption of the additional obligations that we've booked. So we are not now in a situation of examining any kind of concrete file, but we'll say that we are ready to conduct it -- that type of transaction. I think that I will not comment further the Italian situation beyond that statement, which is simply, again, the reiteration of our strategy in this country.

So we could still see you doing what, in your current strategy, which is taking -- still doing more partnerships, more business line kind of consolidation, that's still okay. I mean maybe on the M&A. I will link it to capital, but we'll get to capital and dividend a bit later on. I mean if you list this in a scenario where the regulator or the ECB or whoever or the SSA have decided extend the ban on dividend. I mean your capital position is already quite high, and will keep growing then. And in the other hand, you will have some assets that are much cheaper than a year or 2 years ago. I mean is your view could be flexible in that front and thinks, okay, maybe we have to be opportunistic as well because we don't want to run with too much excess capital. We have a group backing us and valuations are cheap. So maybe we can use more bad will and change a bit our -- because the strategy you set in plan was mid-2019, where the world was, I would say, quite different.