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

Good morning again from my side. This is Jean-Francois Neuez from Golman Sachs. And welcome all to the second session of the day of the Goldman Sachs European Financials Conference 2021 for its first day of the bank's [ track ]. We will continue with our heavy branch touch this morning. And I'm more than happy and it's my pleasure to welcome Philippe Brassac, the CEO of Crédit Agricole [Technical Difficulty] to our [ 2021 ] [indiscernible] financials conference. Philippe, thank you very much for joining our conference. I know you've...

It's a pleasure.

And I wanted to thank you personally and on behalf of the organization for your continued participation. I know that it has been a tough period. I know that a lot of things have changed. Crédit Agricole is by far the largest bank in France.

And maybe a good way to start is, we are -- I think, is today the reopening of restaurants in France. Is that right? And I guess...

Yes. Right. That's right.

And so it's a happy day. And I want to just essentially -- to start with essentially listening to your views on how the COVID crisis is turning to reopening and an opportunity. How do you see this taking place? How do you see its risk and opportunity? And do you see any long-term scarring effect in the economy?

Yes. Thank you so much, Jean-Francois, and I'm very pleased to be connected with all of you. Well, about the question for the economy and the global environment. You said that it was very hard period. But in a matter, I think it was hard period, but it was very interesting period at the same time. I mean this time, banks were part of the solution, not part of the problem and sometimes to times, it is not so bad to have to face this kind of situation. But you know that as a banker, I was said to be during all this crisis an optimistic observer, optimistic banker. But let me just repeat and share with you main reasoning we have to make on this crisis for the last period, of course, but most of all for the future. And let me explain you why I was always -- I've been always very optimistic on the ability of states. And especially of French state, but on a more general point of view of state to master the potential consequences of this crisis on economy. I'm not speaking of the sanitary crisis, but about the consequences about the economy. I was optimistic on the fact that the states could succeed to master all different consequences. Why did I say that? First of all, because we have to remind that this is a discussion point fully incurred to sanitary crisis, not an economic crisis. The only consequences on the economy was coming back from the measures, public measures, that have been taken, decisions that have been made by states to protect the people through lockdowns and curfews. And so when states immediately said, well, we should protect economy, whatever it takes, we knew that this cinematic of a crisis could be mastered even if the bill could be very high for states, but this is another matter. So this decision to protect economy from the first day was taken with 2 main means. The first and the most important one was direct financial helps or aids from the state. For the French state, the bill is set to be between EUR 80 billion and EUR 160 billion in [indiscernible] of the perimeter you take for this addition. So the bill is going be hard. And on top of this, in addition of this, and only in addition of this, liquidity state guaranteed loans and more, it's very important to understand that the main decision was financial -- direct financial [indiscernible]. This was the way to protect economy with, once again, a very high bill for state. And this relation is very important to be reminded because it's easy now to understand that it grows, very simply it grows. When you look at the level of bankruptcies, Banque de France, it's very, very low. It's abnormally low in terms of bankruptcies. And when we look at the matter of the debt for economy, of course, state guaranteed loans for almost EUR 130 billion due to the increased, the gross debt of the economy. But since the economy was saved by direct aids, the other consequence is that several state guaranteed loans increase and sometimes treasuries, cash of economy. You can see probably a curve on the slide about the debt, if you can project to the slide about the debt. When you look at the red curve, you can see that when we take the net debt of economy, it stayed on the trend, on the normal trend from 2010. There's no [ more ] of special debt due to the COVID crisis. This is the first consequence. This is not analysis. This is a report. There's no debt if -- mainly if you add that for state guaranteed loans, the mechanism for repayment is very flexible for 6 years. And then there is no bankruptcies [ wall or cliff ] even if many people are speaking about that because, of course, the target of state is not to postpone bankruptcies, but to avoid them and they pay for this. And the bill is very high. So now you can see that, first of all, yes, economy has been saved. Then conditions for rebounding are all present for time being, simply. But this is an important remark for -- on a macroeconomic point of view, there's no matter for the end of this crisis. But for the individual situations, we have to be very present for accompanying each situation. Why? Because very simply the concrete trajectory of unwinding aid from states and revenues coming back from activities are not exactly the same for several weeks or several months. Even if the end of the story for the customer is good, is sound, we have to accompany the end of the crisis differently that we have to accompany the starting point of the crisis. Now we have to be in a very individual accompanying situation so that we can master the gap between the category of aids that are going back. And trajectory of revenues that are coming back in the [ P&A ] of companies. So all in all, we can see that the situation is good. The crisis, the bill for state and for sovereign debt, of course, but this is a special matter. But we have to be very mobilized, on an operational point of view, very close to territories, very close to each client to accompany them for several weeks, several months to come back to a normal situation. What is the normal situation? This is a situation in which you have more aids, and you have normal revenues linked to activities with the customer. Well, and let me just repeat that. This was not so difficult to be forecasted since the beginning of this crisis. And it was very surprising to be said to be very optimistic to just describe the cinematic of this crisis. So I'm always optimistic for the future. But most of all, we are very mobilized to accompany this trajectory. [indiscernible] is mainly paid not by risk in balance sheet banks, but by state.

Yes. On this very last point on the risk on the balance sheet of banks, [Technical Difficulty] that there is a crisis from a GDP perspective, [Technical Difficulty] yet we have seen a cost of risk, which has been very resilient for the [Technical Difficulty] The current number of bankruptcies in France is lower than it was at the same stage last year. It is surprising to an extent, even with the extent of [Technical Difficulty] Do you expect a surge or an increase in these bankruptcies or some delayed effect on your P&L or balance sheet after the structural measures from the government that aggressively phased out? Or do you believe that they help to bridge it quite effectively.

No. We don't expect a surge of bankruptcies because once again, it's very, very simple to state this point. The tablet of states with this huge level of bill was not to postpone bankruptcies. It could be stupid. The target is to avoid and to create this bridge during this period in which revenues and activities is very low because there are constraints on economy to protect the people. So when you look at this point, many people, for example, ask me what will happen when aids will be withdrawn. What will happen is the fact that revenues from activities will be back, simply. Of course, it's not so simple, customer by customer, for several weeks or several months. It was what I explained about the fact that we have to accompany them because there is kind of a concrete and operational gap between these 2 things. [indiscernible], but the main idea is that aids are -- were just there to offset lack of revenues, and revenues, when revenues are back, it can be withdrawn. That's as simple as that. And you can check this point in the fact that within balance sheet of companies on macroeconomic point of view, you had -- you can report the fact that loans, state guaranteed loans and so on has just increased both debt and treasuries quite at the same level. So when I come back to cost of risk a bit, we explained that from the beginning of the crisis. Unfortunately, the current new mood of the beginning of the crisis, many people were more able to listen to people speaking about future nightmares, all around us. And just to take this example, it's not a joke, but it's not a criticism. We were not listened when we explained what will happen because at the same time, many banks and not only American banks explained that it could be a new nightmare, and this was the reason for which they made a high level of conditions. And then in second half of 2020, they explain that now providence was coming back and they could take back the provisions. And the most interesting point that they were twice congratulated for these decisions. And when we explained that the situation could be mastered since the decision of states to protect, not to save, to protect something, to protect economy from consequences of protection of people. When we explained that, so the situation could be really mastered. And probably, we will see an increase of cost of risk, mainly by Stage 1 and Stage 2 of IFRS 9. That means for some loans, many people thought that we were too optimistic. Many people thought that. So -- but we were not optimistic. We were not pessimistic. We were simply observers of the very singular nature of this crisis. Once again, this was not -- this is not an economic crisis. This is a sanitary crisis for which states have mobilized due to level of amounts to protect the economy, and it works. On an operational point of view, it's much more complex, but on the macro economic point of view, this is so much better, very simple.

So you mentioned the revenues. You mentioned that some of the revenues, which didn't take place during the COVID crisis will just simply -- this is what will happen [Technical Difficulty] reopens. Then what, I mean, your revenues have been quite resilient also during the COVID crisis in a number of [Technical Difficulty] savings management business. But even in [Technical Difficulty] So this is probably a result of the group diversification. But has this surprised you too? And where do you believe that your franchisees have made the biggest structural progress during that crisis, which I'm sure [Technical Difficulty] a lot of people [Technical Difficulty] players.

As you know I'm not surprised by myself and ourselves. We succeed to master our model and our business model for at least the next quarters. Just look at this chart, you can see, for example, the stability of revenues, second quarter to second quarter, third quarter to third quarter, fourth quarter to fourth quarter. And you can see now for the first quarter. What can we see? Of course, that in the worst case, we have a stability, continuity of activity. Let me be honest with us at the beginning -- start of this crisis we explained that. We forecasted that. This can be a surprise. We explained that. And we explained that on the other point. We would be able to master the level of cost of risk and mainly for the explanation side, we give them. So the first point, once again, is the nature of this crisis, since states has decided to protect economy with very high level of amounts on a financial point of view. Then to protect and to maintain revenues of households what could happen during 2020? This is for the global environment. But for the model of Crédit Agricole Group. And yes, the model of Crédit Agricole Group is quite adapted to this kind of situation to have stabilize revenues and performance. I have to highlight once again, I already highlighted this point before the crisis that we have the benefits of what we call the universal model, sometimes to times or very often universal model is said to be a nonoptimized model because we are not specialized enough. But what is really on a complete point of view, the universal model. This is, first of all, mainly the model of the global approach of the given needs of our customer for savings, for loans, for insurance, for retirement solutions, for real estate solutions, including for remote monitoring solution for houses or for flats and so on. The global spectrum of the different needs of our customer. Universal model means something very large, very global in terms of different business lines. Second point, for each kind of clients, with each kind of businesses, on each kind of territories, Universal is really something -- Universal -- we are not the first bank in France by far, by random. This is really DNA of our group. And the consequence of that for the case is that we have a very large basis of activity and of clients. We are by far the first retail basis in Europe. We are the first bank insurer in Europe. We are the first, let's say, European Asset Manager. So we have a very large model very adapted to face different conditions in our environment. And I can add on this point that the technical, the financial model of revenues are more linked to outstanding than on flows by 75% on outstandings. Of course, if the crisis is lasting for 10 years, outstanding is not the only solution. But when you have this kind of DNA model, universal model for clients, for business, for territories, then a model of revenues more linked on outstandings than on flows of course, we are very stable. And the consequence of that is the behavior we had since the very beginning of this crisis, what did we say? That we didn't matter about our business, our P&A. We map -- our matter was above the environment. We're mobilized to help each of our customer to face these crisis, really ready. If you consider the video I gave to all our staff at the first day of the crisis, my only, my main message was, please help each of our customers. Take the decision for that. Of course, this is useful for an environment and for ourselves at the end of the day. But that prove that we were confident enough on the ability of such a model to face the crisis and to be simply mobilized to be useful in our environment. And once again, please, you can now reconnect that we explained that at the very beginning of the crisis, not now, at the very beginning of the crisis. And I would like to highlight the fact that, yes, the model of Crédit Agricole Group and of other banks, but especially of Crédit Agricole Group is very pretty table for this reason I explained through our DNA.

Okay. All right. That's very comprehensive. So I just want to switch gears. And together with reopening the [Technical Difficulty] to resume their normal dividend payments in 2020. For 2021, you have come up with quite an innovative way of remunerating shareholders. Your [ core Tier 1 ] is a fair bit above where it's supposed to be, at least where you want it to be. And your return on equity now is one of the -- it's one of the very highest in the Eurozone banks. So you generate a lot of cash. Now obviously, your last business plan was predicated on a 50% payout ratio. I just wondered what's the [Technical Difficulty] with regards to the remuneration of shareholders, also considering the high bar that you have set for the [ 2020 by 2021 ].

Let us come back to some structural explanation to both our solvency and our ability to pay out dividends for Crédit Agricole return on a very predictable way. I do highlight this point. First, this is a good occasion to repeat the structural advantage of the organization of the share of Crédit Agricole S.A. Why? Because Crédit Agricole S.A. is included in a more global group, that is Crédit Agricole Group, a nonlisting company -- nonlisted company, for which the main trademark mark is a very high level of solvency and of solidity. And second point, Crédit Agricole S.A. is a controlled bank by our majority shareholder, SAS Rue La Boétie. Sometimes to times, it's said to be a disadvantage. I don't know why, but now it was clearly an advantage. First of all, because our target of solvency can be only [ 11% ] because the global solvency of Crédit Agricole Group is more than [ 70% ]. And the second point, when we want to prove to our supervisor that for a scrip dividend, we can grant the fact that a majority of shareholders will take the scrip dividend. We can prove that immediately, thanks to SAS Rue La Boétie. And so our dividend policy for 2020 was not a new negative way. It's just a way to use the advantage of the special organization of the group. And this is the reason for which we were able not only to pay a really normal dividend due to 2020 but to begin to compare to the dividend, we have to pay for 2019. I think we are the only bank that was able to do that. And don't forget that there is still probably for 30 or 40 basis points of core equity tier 1 that we have to pay. The decisions are not taken, but we have to pay for our shareholders due to 2019, so this is, first of all, the situation for our solvency, our core equity tier 1 and our dividend decisions, not dividend policy, the dividend decision for 2019 and 2020. One in -- if you look now, you're asking me about our payout policy for the future, but let us come back to our current solvency, 12.7%, more than 4.8 points of percentage above the set and the Pillar 2 requirements. When you look at this level, and if you compare that to our target of 11%, you can say that, of course, we have a buffer to optimize, but we know how to optimize this point. First, and unfortunately, we have, of course, to integrate some regulatory headwinds, naturally through trained process. It's not a very huge impact, but it's normally negative impacts. We have a way to reinvest our solvencies with a very easily mastered profitability through the unwinding of the switch. And this could have as an impact of 70 basis points of our [indiscernible]. This is a very a relevant way to invest and to have a comeback to go to more than 9% of return on this investment since we paid it for original banks for this -- through this switch, and interest rate is about 9.4%. So we have immediately the comeback of this investment when we shall win this switch. And you know that we committed to globally, completely, and win this before the end of 2022. We have to add some incremental external growth. For example, Credito Valtellinese or Elipso. And most of all, I repeat that we do not forget that our shareholders did not receive the full amount of their dividend for 2019, and probably for 30 to 40 basis points. That means that when you add all these points, you are coming back closely to 11% or 11.5%. So we have to optimize this already high level, good level of profitability. And everything being the same, all on us to increase our return on tangible equity by this list of decisions. And the conclusion of that, is that we don't have to change our payout policy. First of all, because on the long-term and on the lasting situation, this payout policy is now low, is efficient for shareholders. And second point, because this is the best way to get to all our shareholders predictability on the Crédit Agricole S.A. share. We do commit. If we have, the main commitment is to give on the lasting situation, predictability on the main performance of Crédit Agricole Group. I want that to be the main trademark of the share of Crédit Agricole S.A.

Excellent. So now when we talk about capital usage. You said yourself, you've got a few acquisitions coming, [Technical Difficulty]. You've done quite a few also maybe not such high profile as a lot of people would like to see in the banking sector, but quite a few with regards to, for example, Sabadell Asset Management, Santander, [ custody], Agos. And these are the deals in the product factories, which don't attract as much attention, but actually quite powerful from a [ business perspective ]. Do you think that this is something that [Technical Difficulty] that is not coming to an end for you? Or do you think that it's something rolling up smaller business in [Technical Difficulty] And if I may, with regards to your point about the cash rational and the solvency of the group as a whole, the cash rational now have a really, really high [ core tier 1 ] ratio. Very, very high. And in the past, they used to co-invest with [Technical Difficulty] in the Crédit Agricole S.A. [Technical Difficulty] slightly bigger acquisition projects or growth projects. is this something that could come back on the table and see even more synergy between the [Technical Difficulty] and Crédit Agricole S.A. from a co-investment or [Technical Difficulty] growth and...

Well, first of all, there are 2 points. The first one is not to forget that we are already one of the biggest bankers in the world. The tenth largest bank in terms of balance sheet in the world. That means all regional both the critical size, it's for all of us, not for us, simply. We have to be very sound in our mind on this kind of regional. The second point is that you're right, regional banks had a very, very high level of solvency, so much the better for shareholders of Crédit Agricole S.A. That means solvency to be very stable, caricature, I can say, but to be really simple. Solvency, thanks to regional banks, profitability, thanks to Crédit Agricole S.A. And this is the best way for shareholders. And you could refer this point through the increased dividend decisions that have been made for 2020. And this is -- these are 2, first remarks. Then I come back to your question on a global point of view, how could we use our ability in terms of solvency and of capital to accelerate the growth. First of all, we don't have to change our policy because we have opportunities. So we won't change our policy. And our policies will be simple to state and to express. First of all, thanks to our model, fundamental model, priority to organic growth, while priority to organic growth because [ of the ], once again, the universal model. While this mean saving solution, loan solution, financing solution, insurance solution, retirement solution, real estate solution and so on. And when you look at this model that is really on a continuous point of view, just adding new activities to have a global approach of each of our customers. And when you note our different market shares on these activities, from the oldest to the newest, you have a kind of triangle, I mean, coming from 25%, 30% in France on savings, and very low level, for example, on remote monitoring of houses or heads of our customers. This triangle can become a rectangle. Normally, it can become a rectangle. That means that our organic potential is not limited. I don't say infinite, but at least not limited. This is why our decision, fundamental decision to give priority to organic growth is not a decision not to be ambitious enough on the international level, but to be ambitious enough as a universal bank. We must beat all our competitors on this different range of solutions. When I said it, I can add that thanks to this policy, we succeeded to create specialized business lines as Amundi for asset management, as CACEIS for asset servicing, as Crédit Agricole Consumer Finance for consumer finance and so on. We are at already a very high level of customer basis, that means already very efficient, all organized in legal entities, able to corporate with other banks, with the other partners. And so we can add a several kind of priority that is the shared growth with farmers. The organic development or the development of Amundi is the shared development of Crédit Agricole Group. And same thing for CACEIS, same thing for for Crédit Agricole Consumer Finance and so on. And then we simply add to this organic priority for rules than share development. So opportunities if they exist, only if they exist for incremental growth. We do see incremental growth. This is a choice because we don't want to create ruptures within our model. Credito Valtellinese is perfect for us. Well, Elipso is perfect for us because we are already much bigger than the target. And so able to master this kind of acquisition without rupture within our model and our efficiency on a global point of view. So this is the global approach of Crédit Agricole Group. I stated it as soon as 2015. And of course, we go on. Even when the weather is very fine, 2016, 2017, 2018, 2019. When the weather is very bad, 2020. And you can report that the strategy is really operational, whatever are the conditions all around us, including 2020. And my mind, of course -- my idea, of course, should go up to go ahead within this global policy because this is really safe secure for us. And at the same time, quite efficient and profitable and normally for -- in terms of return for our shareholders.

One last point I wanted to ask you before we end this session [Technical Difficulty] I remember your planning in [Technical Difficulty] complete, in fact, I remember also because when you disclosed it, it was on the day of the government's financials conference as it happens. I have to read all the...

It was my pleasure.

But one of the key points which at that stage was very differentiated and today becomes a lot more common, was the inclusion of a strong [Technical Difficulty] impact as a backbone of your strategy going forward. Then we hear these words about just about everywhere. Can you tell us a bit more how this has helped us [Technical Difficulty] and in particular to COVID.

We structured our medium-term plan in 2019 on 3 pillars. And this is a comprehensive approach. The client view, the management view for human teams, for staff and the societal view. And of course, these are not different pillars. This is different ways to like to give information about our impacts for customers to acquire them, for our teams, for our staff to have a higher level of of commitment within the group and then for the society because the main shift of the last decade is probably the fact that marketing has to shift from individual positive impacts and adding collective positive impacts to the society. You can choose. You have to make both individual positive impacts and the global and collective positive impacts. And what we can see on the last decade that -- and this is why we structure our plan with a customer project, a human project and a societal project. The last one was focusing about environment, fighting against the climate change and then about inclusion. Always providing the progress of the society to the highest level of numbers of customers from the richest to the most modest people on the general point of view. But the most important shift on the last decade that according to me, and I want to be a little precise at this point, we have to turn the page of ESG policy. This is no more energy policy. When we speak about ESG consumer, we are speaking about added responsibility. What does it mean? Normal business, then added responsibility about ESG. Normal business with customer and then some commitments, for example, for trees on the planet, for people and so on. As if it was simply something to correct or to offset bad impacts of business. The great shift that responsibility must be now an integrated responsibility within really our businesses. We must stop with the race kind of beauty contest about announcements that are always very limited with -- on different parameters. We must manage, we must commit to steer and to drive all number impacts every day in our society and, of course, try to improve positive impacts and to decrease negative impacts. This is really the shift. And through our societal projects, we are really working nowadays very hardly on this point, we want to present not only in September or in October, really something radically different I mean, once again, driving our impact and not simply giving some positive decisions on some points. We must be not only leaders of green bonds or sustainable finance, but we must master a finance that is sustainable. And this is really the difference. So this is our coming month. This is how we work, and it's probably absolutely linked to our DNA as we are very -- on that, as we are a universal bank as our footprint must be very stable on the society, we can do anything else than to integrate really not special commitment, but permanent commitment in terms of impact on the society. And this is -- this will be a permanent and ongoing process. We shall explain that probably in September and October of this current year.

Okay. Well, that's the -- appointment is taken. So that was -- this concluded my questions to you this morning. I wanted to thank you very much again for having participated to this conference, as you do every year. I wanted to wish you a great reopening. I hope you will actively participate to the reopening of the restaurants. And as a sponsor of the French national football team, I wish you great success in the upcoming competition, the Euros, et cetera. And as the last question, what's your prognosis on the winner?

For the Euro, well, I can say anything that the French team. But you know that we think that sport is continually important for life. And so most important point for me is that the best can win, the best one, the best team. I think, really, on the [ follow-on ] point of view, it is better than simply supporting your own team. I do hope that the best team will win. And I do hope, this will be the French team, of course. Thank you so much. Thank you so much.

Thank you so much, and see you, Philippe, soon.

Thank you, Jean-Francois. Thank you to all of you.