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

Good morning, everyone. Thanks for joining us for a fireside chat with Crédit Agricole. I am joined by Jerome Grivet, Chief Financial Officer from Paris. Hi, Jerome, how are you?

Hello, fine. And yourself?

Good. Good. Thank you. Look, before we go into Q&A, I would like to ask the audience a brief polling question, please. So what do you think is most important for Crédit Agricole's share price rerating over the coming 12 months? A, a positive outcome of corporate actions in Italy. B, continued delivery on gross operating income, so [indiscernible] operating [indiscernible]. C, asset quality, so cost of risk closed through the cycle 40 bps. D, a faster repayment of the remaining part of Switch. And then lastly, update on 2022 target. I'll leave some time for the audience to vote. And in the meantime, I will start with the first question. We'll go back to the result of the polling in a few minutes. So Jerome, looking back to the medium-term plan that you presented in 2019, Crédit Agricole has already achieved some targets despite the pandemic and I'm talking notably about the cost income below 60%. The payout of 50% despite -- at 50% same-store agreement with SAS La Boétie on the scrip. So that was welcomed by the market. But some targets look quite far away. In particular, the revenue carrier, up 12.5% and the net income group share up EUR 5 billion. And of course, the ROTE up 11%. So do you think it is time to assume that we need a further year, so 2023, to reach these targets? Or how should we think about the 2022 target?

It's, of course, a very important question. But maybe before trying to answer this question, I'd like to just give you a few highlights on something that you already, of course, know, all of you. But I think it's important to keep it in mind. It's what we've managed to generate in terms of P&L and capital position in this very bizarre and very specific year of 2020. Because if we look back at 2020, considering all the lockdowns, considering all the difficulties through which we had to go, considering all the turmoil on the different markets that we have seen, both credit liquidity and equities markets, I think that the performance that we've managed to post are very, very resilient and very robust. As you remember, we've managed to increase the revenues by more than 2% on a full year basis. We've managed to reduce slightly the cost base by 0.3%. So we've managed to increase the gross operating income by close to 5%. The cost of risk was, of course, very high. It's a multiplication by more than 2 as compared to 2019. But nevertheless, on an underlying basis, the net profit was down only 16% at CASA and we've managed to post a net profit which was close to EUR 3.850 billion. And this happened thanks to a very good momentum across all business lines, I mean, every time the lockdowns stopped and every time we were able to operate, I would say, almost normally. And another point which is important to keep in mind, and again, I'll go to your question just after that, is that this very exceptional year confirmed us that our strategy was relevant. That we needn't change this strategy. We needn't change our priorities. And I would say, on the contrary, this very difficult and special year reinforced us in the belief that our priority that we give to the clients to our social responsibility and to the empowerment of all our employees are really very relevant, very useful and helped us to last in managing this very special year. So going now to your question on the 2022 medium-term plan target. I would say it's a mix because we've managed last year to reach some of these targets 2 years in advance. It's the case, for example, for the cost-to-income ratio. We were targeting to be below 60% in 2022. And actually, thanks to this capacity that we had last year to increase the top line, we're maintaining at a very low level of the cost line. We've managed to improve the cost-to-income ratio quite significantly and actually to be below 60% for the full year. So this is an example of targets that we deem were relevant, continue to be relevant and continue to be our guideline for 2022. As far as the return on tangible equity is concerned, it's true that last year, we were a little bit below the expectations for 2022 at around 9.5%. And it's true that we were also below what we've managed to realize in 2019, where we're actually close to 12%. But if you assess fully the situation, a significant part of this underperformance, which was nevertheless a very good performance as compared to most other European listed banks, is partially due to the fact that actually we have a higher capital position than the one we had in mind when we posted the -- and we published this target. We are targeting to have a CET1 ratio at 11%. And actually, last year, we were at the level of CASA above 13%. So of course, obviously, with a certain level of profit, a higher capital position is generating a lower return on tangible equity. It was the case last year. So in this crisis, of course, we are going to and we regularly internally update our trajectories. So for the time being, the uncertainties are a little bit too important for us to restate potentially certain targets. So we state the dates at which we expect those targets to be made. But we expect also the stabilization to take place somewhere in 2021. And as soon as the situation is stabilized, both on the sanitary and economic viewpoint, we will definitely update the market on our targets. And if needed, reset certain targets, if we think it's relevant. So to summarize. For the time being, we consider and we have good reasons for that, that globally, those targets are not completely irrelevant despite the fact that the environment is completely different than the one we had in mind. And when the situation is stabilized, we will, if needed, update targets -- update the market on certain targets.

Thank you. Let's discuss the revenue on the -- evolution a little bit more in detail. So large customers in 2020, the revenues there were up 13% year-on-year. French retails were flat and the remaining provisions were down. So if we look forward in 2021. What is the outlook? In particular, let's start with the CIB, given the high comp base.

Well, it's true that in CIB, 2020 has been an exceptional year. And part of the revenues that we've generated was due to this exceptional year, be it the volatility of certain markets that generated some additional revenues for our treasury activities or be it the fact that certain customers, corporate customers, had a very high level of demand for new operations, especially in terms of bond issuance. So it might not be as buoyant in 2021 as it has been globally for 2020. But nevertheless, what is for sure is that in 2020 in the businesses that we have defined as priorities for our CIB, I think that we have improved our ratings, improved our positioning and thus improved our capacity to benefit from the customer demand as soon as this demand is materialized. So of course, we are not going to grow again the top line by 15% in 2021 as it was the case in 2020. Of course, we will have -- it's going to be challenged even to maintain the top line at the same level. It's going to be challenging. But nevertheless, I think that in 2020, we have secured a better level of positioning towards our customers than was the case before. And so I expect that we will be in a position to continue to be able to benefit from the customer demand as soon as this demand materializes.

And then can I ask you, we have seen industry data around [indiscernible] in insurance with a net growth versus a decline in 2020. So what are you seeing on the ground? What's the appetite for, in particular, investors to switch part of their deposits into more manageable investment products for that?

Yes. I realized that actually, I didn't fully answer your previous question because your question was on revenues across the board and not only in the CIB. And I actually had answered only in the CIB space. So maybe just a few additional words on revenues, prospects in retail, in France and in asset-gathering activities. And this will lead us to your question in -- regarding insurance. In retail, it's clear that the pressure that we have on the net interest margin will continue to be important in 2021 as was the case in 2020. So we've managed to offset this pressure and to stabilize the top line, thanks to the volume growth and thanks to the increase in fees and commissions. And we will continue to increase the volumes in 2021. The credit demand is here. It's here for equipment loans for businesses. It's here for home loans from household. And we will continue to increase the equipment rate of our customers with insurance policies, with savings products and so on and so forth in order to continue to develop the fee-based revenues in retail banking activities. So we expect, again, to at least stabilize and possibly increase slightly the top line in retail banking activities again in 2021. Then, I'll come to your question regarding insurance. And especially your question regarding all the cash that our customers keep for the time being on their site deposits and the capacity that we have to transform this cash at a certain point in time into longer-term investments. I think we are perfectly positioned to take advantage of a change in behavior of the customer as soon as it takes place. For the time being, it's not really fully taking place because uncertainties are still too high and our customers continue to wait for the stabilization of the sanitary situation and thus, the economic situation before deciding to invest longer term their -- the cash that they've secured on their site deposits since 1 year. But it's absolutely certain that as soon as they will see some more clarity in the landscape globally, they will probably spend part of this cash. And so increase and boost the consumption, which is good for the economy globally. But they will also search some longer-term investment, support investment products. And clearly, considering the fact that we are able to serve them with asset management products with real estate proposals and with, of course, life insurance policies in euro or in units, we are very well positioned to be able to transform part of this cash into longer-term investments yielding revenues, both for the insurance company, life insurance company, credit card and for R&D as soon as we're talking about [ connecting ] products. Last year, even if the inflows in the insurance activities were significantly down as compared to the previous year, the proportion of unit-linked significantly increased actually, both in the inflows and the outstandings. And this is a very positive movement because for the customer, it's better, and it's good news that they understand that long term it's better for them to be invested in U.S. rather than in Europe. Because in terms of yield expectations, it's far better. And for us, of course, it's better because it's consuming less capital at the level of the insurance company. And it's generating fees not only for the insurance company, but also for R&D. So it's a win-win movement that we expect to continue in 2021.

Perfect. Then -- and I want to go back to a point that you mentioned around loan growth. So look, I think, of course, we have seen strong loan growth in corporate, but a weaker momentum in consumer credit, of course. What do we expect going forward? How do we expect this to [indiscernible] in 2021?

Well, what we've seen in the production of new consumer loans last year is that, of course, every time there was a lockdown, the production of new loans slowed down quite significantly for 2 reasons. The first reason is that the access to the branches was, of course, more difficult for our customers. And the second reason was that the access for our customers to retail merchants was also more difficult. So the consumption was really concentrated on what is essential, which is generally not financed through a consumer loan. But as soon as the restrictions were lifted, the jump, the rebound was very, very important. And as an example, I can say that in December, we had the best month of production during the full year 2020. So again, we expect this to happen in 2021. Certainly, and I don't want to give some guidance on what is happening presently in our Q1 figures, but it's clear that this beginning of the year in France is a little bit wishy-washy because we still have significant constraints that apply to all our customers in terms of capacity to move, in terms of the timetable during which the shops are open. So this is clearly a restriction on the capacity of our clients to spend. And this is triggering a certain also constraint on their will to borrow. But I clearly expect that as soon as the restrictions are lifted, we will see, again, a very sharp rebound in the credit demand. This is what all the surveys that we make on our customer base indicate. They wait for the moment when they will be able to buy a car, buy new equipment for their house or simply spend a little money for some vacation. And so as soon as the restrictions are significantly lifted, we will see, again, a rebound in the consumption and a rebound in the production of new customer loans.

Very clear. And look, to round the set of questions on revenues. An inflation is clearly a hot topic these days. And so would you be able to share what is Crédit Agricole's impact from 100 basis points movement of the rate cover? Or how are you seeing the recent shift in interest rates, especially the steepening of the curve impacting your business?

Well, you know that within Crédit Agricole S.A.'s revenues, only 37% is coming from the net interest margin. So it means that the biggest part of our revenues is coming through fees from commissions and from different categories of revenues, not directly impacted by the yield curve or by the level of rates. Nevertheless, it's clear that this steepening of the yield curve is globally going into the right direction for our different activities. Of course, it's important that this is kept under control in order not to trigger some panic on the market and not to trigger some penalization for the businesses that want to invest. But we are perfectly confident that the ECB will continue to monitor the situation and will not let the yield curve speaking too much as it has been indicated by the Supervisory Board of the ECB last week. So we are perfectly confident that this is going to be kept under control. And so long term, of course, it's better if the yield curve is a little bit more steep and if the rates are globally a little bit higher. And as an illustration of that, I can simply talk about home loans, where we see that in France -- you know that in France, we lend most of the time on a fixed rate basis long term. And there has been in the last 5, 6, 7 years, a very sharp decrease in the level of the customer rates for new loans. I think we've reached the bottom back in the middle of 2020. And since that, we've seen a slight increase in the level of the rate for new loans. This increase is limited up to now because I think it represents maybe 10 to 15 bps of increase between the middle of last year and nowadays. But clearly, the fact that all the news flows is about a slight increase in long-term rates, it's helping us to preserve this pricing and possibly to continue to increase a little bit the pricing for new loans. So I think it's going to help.

Okay. No quantification?

No.

I'm saying, no quantification of 100 basis points impact, for example [indiscernible].

Difficult to quantify because there's many ways of calculating. Either you assess the situation on a stable balance sheet or you try to guess what could be the reaction of the customers and what would be the dynamic of the balance sheet. So it's very difficult, and it's spread different businesses. It has impact. So not only it has impact on the insurance activities, it has impact on the retail banking activities. And you know that retail banking activities in France within the scope of CASA represents only a limited part of our revenues and a limited part of our profitability because the biggest part of the retail banking activities of the group is outside CASA. It fits within the balance sheet of the regional banks of Crédit Agricole, so it's outside the scope of the listed data.

Okay. Look, let's now move on to asset quality. So if we look at the aggregating data, French corporate are amongst the most invested in Europe and also the Banque de France has raised the level of risk for the sector. However, the French banks and Crédit Agricole amongst them have had a fairly low cost of risk considering the pandemic in 2020. So how can we square this in your view?

Well, the first point is that when assessing the level of debt of the French businesses or the French corporates, one look generally only at the gross debt and not at the evolution of the net debt. And as an administration of that, last year, the global investment of all French businesses increased by more than EUR 200 billion, which is a lot, out of which EUR 130 billion of state guaranteed loans, but also more than EUR 70 billion, actually close to EUR 80 million, of bank loans outside the scope of the state guaranteed loans. So it's a lot. But during the same year, the cash position of all the French businesses improved by close to EUR 170 billion. So it means that actually the net debt increased by only maybe EUR 30 billion to EUR 40 billion and not by more than EUR 200 billion. So one thing is the level of gross debt. Another thing is the level of net debt. And the level of net debt is not increasing that much in France. That's a very important point because, otherwise, if you miss this, you tend to overstate this level of debt. This being said, it's true that we haven't had and we haven't seen a massive increase in difficulties amongst French businesses last year. On the contrary, we've seen a reduction in the level of failures amongst our customers as compared to 2019. And when we look at the prospects, actually, of course, there are certain industries, certain businesses in which we know perfectly that there will be difficulties because the end of the restrictions will not mean the end of the difficulties and will not mean immediately come back to a normal situation. It's definitely the case for all that is travel related, for example, which is clearly going to struggle for several years before it's back to a more normal level of activity. But besides that, what we see is that the biggest part of the economy in France is kept in an operating state in such a way that as soon as the restrictions are lifted, we will see a level of activity that will be probably close to normal or even above normal. So of course, it will be important that the public support continues to operate in order not to trigger a liquidity cliff for the businesses. But I'm quite confident that the government is fully aware of that and that the public support is not going to be lifted too early. So I'm confident about the evolution of the credit quality in France. Then in addition to that, if you assess the degree of prudence of a bank only by assessing the cost of risk on a single year, I think you don't fully take into account all the elements of the situation. You have to take into account the level of the provisions and not only the provisions that you booked on a specific year. And actually Crédit Agricole Group and Crédit Agricole S.A. entered into 2020 with a very high level of provision, which was far above the average of European banks. And when the EBA updated its transparency exercise mid-2020, we don't have for the time being the end 2020 figures. But I have no doubt that it will confirm this situation. When we've looked at the mid-'20 figures, what we've noted is that at the level of the group, our coverage ratio was 20 percentage points above the average of the European banks. And at CASA only, it was 10 percentage points above the level of the average of the European banks. So we have structurally a high coverage ratio, a high degree of prudence, and we haven't seen a deterioration in the credit quality of our book.

Okay. That's very encouraging. If I can now move on to talk about capital. So look, 2020, of course, 100% payout ratio exceeds the traditional policy of 50% in order to compensate partly the 2019 dividend. So looking forward, should we expect higher payout ratio also for the years to come?

We are not going to change our payout policy and our payout ratio target. So 50% seems to us as a relevant, reasonable level, which is nicely, I would say, parting the profit between the shareholders and the company itself in order to ensure its development. So 50% is going to remain our, I would say, reference. Nevertheless, we think that we've missed the 2019 dividend, which should have represented EUR 0.70 a share for our shareholders. So what we proposed to them in 2021, with reference to the 2020 performances, we represent, I would say, a first down payment, if I may say so, on its missed dividend down payment of, let's say, 30 bps -- EUR 0.30 per share. So it means that in our mind, we keep the idea that we need going forward to find a way of somehow paying back the remaining EUR 0.40 a share. So this means that possibly in the coming years, we will complement the normal dividend coming from the 50% payout by an extra amount that will allow us to terminate, I would say, this compensation for the skipped 2019 dividend.

Perfect. And on the topic of capital, I think the question comes from the audience around Switch. And so clearly, the announcement of Switch being fully retailed by 2022 was welcomed by investors. But the question goes, what determine how quickly Crédit Agricole will take back the Switch?

Well, we haven't fully decided the timetable. It was convenient for us to say we had a commitment to unwind 50% of the switch by end 2022. We changed only the percentage. So we've changed the 50% and the commitment is now to 100% by end 2022. What you have seen is that we were already to be ahead of the curve in unwinding the first 50% because we have started last year. And we have decided to continue and to terminate the first 50% as soon as end of Q1 this year. So we -- it's not a commitment. But up to now, we were rather ahead of the curve than behind the curve. So now we have this commitment. We will have done it by end 2022. And we'll see what will be the timetable. You know that we have 2 windows a year. So it means that the uncertainty is between Q3 '21 and Q1 and Q3 '22. So it's not very uncertain. The scope capability is not very wide.

Yes. No, and that's a fair point. So talking still about -- okay, we just got another question on capital, which I will read out. So what is your preference for share buybacks within the framework of your payout policy?

Well, we have said that the very specific dividend scheme that we have put in place for 2021 will include some share buyback for the reasons that you have in mind, which is that the initial payment is going to create a certain level of dilution, and we want to offset this dilution. But going forward, we think that the best for us is to continue with a cash payment of the dividend and not through a share buyback. Why is that? Because you know that we have a majority shareholder, that this majority shareholder does not intend to sell share on the market. And so if we were to regularly do share buyback operations, we would progressively reduce the free float, which is very high for the time being because it's 45%. But we think that it's better for the minority shareholders that we keep an important free float rather than having it progressively reduced. So going forward, on a normal year, with a normal situation and no regulatory constraints, we will go back to a cash dividend payment.

Perfect. I have to ask a question on Italy. Of course, given where CreVal is trading, so look, we know that at the moment, you have approximately 17% of CreVal shares. Agreed. But still, the company is trading well above EUR 10.5 per share. So any update there? What's the plan? And how strategic is this? Could you perhaps increase the price? Or how are you seeing this?

Well, there's different ways of looking at the price of CreVal. The first way is to look at the share price on the market. But then you have to take into account the volumes. And you can see that the volumes, we are talking about several, maybe around and sometimes less than 100,000 shares a day. So the volumes are very, very tiny, very small. In this context, the only window for an investor that has a significant share in the capital of -- significant stake in the capital of CreVal is our offer. Because it will be an offer in cash. It is fully funded. There's no condition. And so we deem that the price that we've proposed, which represented a very significant premium as compared to what was the share price before our announcement last November, is a very attractive offer for all the shareholders of CreVal that wants to find some liquidity on the stock, which is not, by itself, very liquid. And again, the volumes in the market are illustrating this lack of liquidity. So for the time being, the project that we have announced end of November is perfectly on track. We have got all the authorizations that we needed to have: authorization from the European Commission acting as competition authority; authorization from the Italian government under the Golden Power rule; and yesterday, authorization from the ECB, that allows us to exceed the 10% of the capital seeding; and to take full control of CreVal, i.e., 50% of the capital plus 1 share. So we are going in the coming days to launch formally the offer and we will see.

Okay. Very clear. And look, I want to finish with a more strategic question. In the past year, Crédit Agricole has been quite proactive in expanding its business lines and geographical presence via partnerships. And on this front, to a certain extent, you've been quite ahead of the game in terms of embedding Crédit Agricole products into other brands. So in looking forward, where do you see the most opportunities for this type of organic growth by partnership?

Well, I think we'll continue to go alongside the same trajectory, i.e., first, each specialized business line develops its own strategy, asset management, consumer credit, insurance, car financing and so on and so forth because they have a very good knowledge of their markets, and they have a very good knowledge of their capacity to propose to partners an attractive offer. Second point. Of course, from a geographical point of view, we will continue to concentrate on Europe, even though Asia is an important area for certain businesses like asset management, but also car financing because, as you know, we have a car financing operation in China through a joint venture that is working very well. So focus on Europe with some possibilities of expanding in Asia. And really, the business lines are in the driver seat. We want the business proposals and the business partnership to be really driven by the businesses because they fully know how to structure a partnership, a distribution agreement, what partners they are looking for, what value proposal they can offer and so on and so forth. So we will continue. And we have permanently several discussions going on. Some of them are materializing through an agreement, and then we announced this agreement. Some of them will not and that happens sometimes. So that's life. But this is clearly the strategy that we will continue to develop because we think it's adapted to what is the banking market and the financial services market in Europe. And it's very well adapted to what we are now because each of our specialized business line is clearly -- has the critical size, has the expertise and has really a value proposal for some medium-sized banks or medium-sized partners that we have that we can find in Europe.

Excellent. Perfect. So thank you very much for sharing your insights in -- your insights with us. Any concluding remarks...

No, no. I think that, as I said in my introduction, I think that, of course, we are living very unexpected and bizarre times, and it's not completely over as of now. But we really think that what is happening and the capacity that we have to overcome the difficulties in the last 12 months perfectly illustrate the fact that our strategy, our model, our DNA perfectly fit in this new environment in which we are living. So we are very confident for the future.

Great. Thank you, Jerome.

Thanks, Giulia.