Société Générale Société anonyme (GLE) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Société Générale conference call. Frederic Oudea, Chief Executive Officer; and William Kadouch-Chassaing, Deputy General Manager, Head of Finance, will present the Group's first quarter 2021 results. Gentleman, please go ahead.

Hello, everyone. I hope you are all well. Thanks for attending this call on our first quarter results. As usual, we will present, William and I, the detailed results, and we will enter into Q&A with our full management team sitting with me today. So let's turn first to Page 4 briefly, the highlights of this quarter, which is, as you might have seen, an excellent quarter and a good start of the year. In terms of revenues, they are up 25% on a like-for-like basis and constant exchange rates. We have a strong performance in capital markets, sustained growth in Financing & Advisory activity and Financial Services and resilient activity in retail. Let me highlight the discipline on the cost management. We have a slight decrease of minus 2.2% on an underlying basis. It leads to very strong improvement of the cost/income ratio. Another element which is very important is the cost of risk, 21 basis points, very low. Despite clearly a very conservative approach regarding write-backs on performing loans, we've maintained our buffer of S1 and S2. And the trends that we see allow us to give you a guidance -- more precise guidance. We estimate that the cost of risk this year will be between 30 basis points and 35 basis points, so a normalization taking place this year. Regarding the core Tier 1 ratio, it is up 10 basis points in spite of small impacts on the regulatory side, as anticipated. Let me say we concentrated our managerial time, of course, accompanying our clients, as we did in 2020 in a better economic environment, at least when we look at the recent data. And of course, on delivering on our strategic initiatives, we have different projects which will create a lot of value. The merger of our French networks, so-called Vision 25, is on track. The development of our growth engine: Boursorama, which, for example, posted a record level of new clients into -- in the first quarter, more than 200,000 new clients; and for example, with ALD, in particular, with these small and bolt-on acquisitions, which are very value creative, the most recent one being the one announced with Banco Sabadell. And let me just, of course, remind you that on the 10th of May, we will explain what we want to achieve in CIB to deliver a sustainable and profitable growth. That's for the 10th of May on the back of these results. Let me also remind you that we have completed our refocusing program with the announcement of the disposal of Lyxor asset management in April to Amundi. Next slide, Page 5. One word on ESG. ESG is everywhere, and as you know, we are putting that at the center of our new strategic thinking for all our businesses. We were among the 43 banks -- international banks which have just created a new alliance, Net Zero Banking Alliance, and we are committing to achieve carbon eternity by 2050 in our banking portfolios. Beyond these long-term commitments, let me say I think it's very important to give short-term objectives, which show -- illustrate the fact that we pivot, and it's very clear when you look at our commitment in terms of the portfolio to finance extraction of oil and gas. It did go down by 10% between 2015 and 2019. And we have started the journey in particular regarding our U.S. reserve-based lending, which is going down by more than 25% in 2020. We've said we would stop this activity in particular. Beyond, let me highlight that we are recognized as one leader in innovation also around the development of new financial solutions. We are also ahead, I think, providing -- we are the first French bank to offer in our retail network a 100% SRI saving range in open architecture. And of course, we will carry on working on that journey, which is just start. Now I turn the floor to William, who will enter into the detailed figures. William, floor is yours.

Thank you, Frederic. Good morning to all. Let me focus first on Page 7. So as Frederic said, we have the strong increase in our underlying net income to EUR 1.3 billion. This translates into a return on tangible equity of 10.1%. Reported net income is also obviously strong here at EUR 814 million despite the full impact of the IFRIC charge. The main driver behind the performance and the first key driver is the strong growth in the group pre-provision operating income. As you can see on the slide, it is up more than twice relative to the first quarter of 2020, explained by strong positive jaws. Revenue is up 21%; 25%, in fact, adjusted for perimeter and foreign exchange impact. Costs are down 2.2%. That translates into a strong decrease in the cost-to-income ratio on an underlying basis. To put this in perspective, so gross operating income is not only strongly up relative to the first quarter of 2020. It's also 16%, 1-6, up relative to the first quarter of 2019, and that reflects strong efforts we've done in improving the breakeven point of the company. Page 8, that tells the whole story about what we have achieved in terms of costs this quarter. Costs, again, are down 2.2% relative to the same period of last year despite, I'm talking here underlying cost, the pro rata increase of the IFRIC charge, the systemic tax. As you know, particularly the SRF is -- the contribution is holding up. Overall, the IFRIC charge is up 21%. And despite the fact that we obviously, as we had announced, have an increase in variable cost to support growth in revenues across businesses, so that cost performance reflects the outcome of our ability to decrease rent cost. Moving to the segment, a key explanation in the increase in the net income, cost of risk. Cost of risk, as highlighted by Frederic, is low at 21 basis points in the quarter, which is similar to what we had in 2019 and obviously, strongly down relative to last year in absolute terms, which is EUR 276 million relative to EUR 820 million in Q1 2020. The NPL ratio is stable and still low at 3.3% with a gross coverage rate at 51%. As Frederic said, we now are in a position to specify the guidance pertaining to cost of risk. We see the cost of risk for 2021 between 30 or -- 30 and 35 basis points, which is consistent with through-the-cycle cost of risk. What explains the cost of risk this quarter is very much shown on the Page 10 of this presentation. On the left-hand side, you see limited defaults, i.e., stage 3, at EUR 300 million, which are very consistent with what we had pre crisis. So we continue to not see an increase in defaults, and we don't have [ many ones] in the pipe either. And on the other hand, we still keep a very prudent approach on provisioning, which is what you have on the right-hand side. We've kept quasi intact our inventory of stage 1, stage 2 provisions [ on year-over-year ] perspective. This EUR 3.6 billion equates to 2.8x the 2019 stage 3 provisions. Capital is strong and so are the other ratios, be capital or liquidity. The core Tier 1 is up 10 basis points this quarter. Very simply put, strong organic capital generation, plus 26 basis points; some consumption on regulatory. The trend within that is approximately 10 basis points, and then we have other regulatory headwinds in the quarter. And as you can see, we have on the pro forma calculation, factoring the impact of the disposal of Lyxor activities, close to 20 basis points and the potential share buyback, which we intend to implement in the second part of the year. Liquidity ratios are all strong as well. The liquidity reserve is strong at EUR 237 billion. Let me move on to the businesses, starting as usual with French retail, with one slight difference in the approach, which is that now we have decided to make a specific focus on Société Générale; and Credit du Nord networks, the new bank that would be created through the Vision 2025 projects; and Boursorama, for which we provide you with some specific data points. Starting with the French networks ex Boursorama. What you have here is clearly what is the dynamic we see in this period. We still see the transitory period with impact on confinement. On the left-hand side, we have on-balance-sheet outstanding. As you can see, loan outstanding growth is primarily explained by the increase in corporate loans. And in and of itself, this is associated by the strong increase in state-guaranteed loans. All other loan components have a more muted growth, be it consumer lending or the corporate lending. At the same time, you have strong increase in deposit outstanding. That explains some pressure we still see on the net interest margin. On the other hand, you have a very positive trend on financial savings across the board, whether this is life insurance, Private Banking, and leading to strong financial conditions, up plus 7%. As well as P&C and personal protection, you see premia up 3%. Boursorama, you see there another record quarter with 203,000 new clients and 2.8 million client base. Actually, the speed of growth of Boursorama continues to accelerate, and you see on the right-hand side of the page very strong growth in outstanding. Here, you have the on-balance-sheet outstanding. But on the financial savings, you would find also very strong data. 56% of the life insurance net inflows associated with unit-linked products, which tells a lot about Boursorama quality in terms of [ franchise ]. In a nutshell, for French retail, very resilient return. Despite pressure -- still pressure on the revenues, you see 10.4,%, translating into 11.3% return excluding Boursorama. Net interest margin, as I said, still see some pressure given the dynamic I've described before. Commissions are up year-on-year 0.8%. We've seen some pressure on service fees more than compensated by strong growth in financial fees. And thanks to strong cost discipline and decreasing cost of risk, we end up with high -- resilient return I just described. Turning to international retail. In some sense, you see on the balance sheet side the same dynamics I described largely for France, where loan outstanding grew but particularly in Eastern Europe was stable, like in Africa. In Russia, we have the specificity of some large corporates having redeemed their loans but grow at a lower pace than pre crisis. And clearly, we have the impact of confinement on production. At the same time, we have a strong increase in deposits. And overall, in the context of interest rate year-on-year, although positive, has decreased, you have that impact on revenues. At the same time, you have good trend in some countries on fees. And you see that some areas are able to grow their revenues. Sub-Saharan Africa obtained growth of 3%. Overall, that combined with strong discipline on cost and decrease in cost of risk, leads to a strong return on normative equity of 14.6%. Financial services. There, again, after the past 2 quarters and particularly the fourth quarter, is the story of growth, structural growth across the board. Financial services to corporate, i.e. ALD plus leasing, is up 10%, very strong in ALD this quarter again. You can see that insurance is up 4%, particularly driven by life insurance and the trend. Again, here, strong discipline on costs, decreasing cost of risk. The yield is 21.1%. In a nutshell for IBFS, you see that we are back to type of return we had pre crisis at 17.4% for the quarter. Usually, we have between 17% and 18% for that pillar. Turning now to CIB. This is clearly the area where the growth is the most impressive. And starting with Global Market & Investor Services. You have growth across the board. Of course, global markets, you see the strong growth both in equities and FIC. In order to focus on normalized numbers, we also provide you with comparisons relative to Q4 '20 and relative to 2019. And you see that we have very strong quarters for both equities and FIC. This is the best quarter for equities since 2015. That obviously benefits -- we're benefiting across the board from favorable tailwinds in the market, but I'd like to point out that we will be happy to discuss that with Slawomir Krupa. That -- it also reflects the strong -- the strength of the franchises because the growth is made across the board, both in terms of products and geographies and despite the fact that we have gone through important adjustment of FIC activities in '19, an important adjustment of equities risk profile in 2020. Just one note on securities services. They had a strong growth in the quarter year-on-year. Financing & Advisory, growth which is very consistent with the pattern that you have seen over the years and the past quarter. So Financing & Advisory, 3% when adjusted -- growth when adjusted for foreign exchange and perimeter impact. Let me remind you that Q1 2020 was particularly strong already, so that's a good performance. And that's performance achieved across the board. Financing activities grew. Asset-backed products, of course, relative to a low base in first quarter 2020, are up. Investment banking is up in many areas. Capital markets, case in point, is up double digit. And transaction banking has resumed its growth trend at 5%. In Asset and Wealth Management, let me focus on Private Banking. Private Banking revenues are down 1%. But this is a bit tale of 2 stories. You have very positive commercial dynamics with positive net inflows at EUR 2 billion across all geographies, compensated by some pressure on net interest margin. Let me remind you that our Private Banking operations are usually in countries where you have either negative rates or pressure on the interest rate. So in a nutshell, for Global Banking & Investment Solutions, an outstanding quarter. The underlying return is 18%. The return even factoring in the full impact of the IFRIC charge, which goes on GBI's shoulder for about 63%, so this is the area where you have the most impact, is 10%. That's obviously due to a strong growth in revenue, 60%when adjusted for foreign exchange and perimeter impact, but also a strong discipline on underlying costs. Despite what I've said before, which is some pro rata impact on the SRF charge increase and of course, the investment in variable component of the cost base, underlying costs decreased by 0.8% relative to the first quarter of '20. Corporate center, I'll be quick. You see the underlying gross operating income at minus EUR 44 million, which is a bit of a nonevent. Operating expenses underlying are slightly down relative to Q1 2020. The thing I would like to highlight is that we have decided now to report transformation charge pertaining to the transformation of our businesses and functions in the corporate center. This is to be -- to have a clearer communication and allow you to have a better comparison relative to peers in terms of underlying increase in profitability of businesses. You see in the footnote the split of the EUR 50 million, 5-0, that we have for the quarter across businesses. I now turn again to Frederic for the conclusion.

Thank you very much, William. Just as a conclusion, again, good start of the year. We are considering it will help us and going forward confirm that 2021 will be a year of strong rebound for Société Générale. And again, our priority is really to pursue the accompaniment of clients as we see a progressive exit of the crisis, thanks in particular to the vaccinations; and of course, execute perfectly well and in a disciplined way all our projects. But we are confident on our ability to do so. Now we have finished the presentation. The floor is yours for questions. [Operator Instructions] The floor is yours.

[Operator Instructions] We have a first question from Jacques-Henri Gaulard from Kepler Cheuvreux.

The first one, it really seems that for the first time, Frederic and team, you have a lot of optionalities. You have a 13.5% CET1 ratio. You have done all your disposals. I completely appreciate what you're saying about accompanying the client base in 2021, but if you can protect yourself -- and without giving away what your strategy would be, what do you reckon your priorities will be into deploying this money or this capital you have now or basically, the activities you would like to put the focus? It's point 1. And the second point would be on Czech Republic. I know you had guided very well about the fact that you were expecting a trough in revenues in 2021 at your Investor Day last year for Czech Republic, but it's still a big trough. So do you maintain your guidance about the recovery in revenues nonetheless? Or is there any thing in those results in Q1 to make you amend your guidance for the Czech Republic by 25?

Jacques-Henri, I will let Philippe Aymerich answer on the Czech Republic. On your first question, we have effectively a very sound capital base. We see for us the opportunity to use that capital, to allocate capital to the businesses where we see more growth opportunities and profitability; of course, absorb the regulatory headwinds without any problem. And we have, of course, in mind Basel IV there. We had communicated a 115 basis point estimate in the fourth quarter. And of course, pursue an attractive dividend policy, 50% of our underlying net profit every year. In terms of the businesses, can I say -- my own view is that really, we are entering into a period of disruption for the financial services. And I would like to highlight first that we want to give more resources to alternative business models that we have been able to develop in the past very successfully and where we see strong growth. And here, I have in mind, on one hand, something like Boursorama but also ALD, which are delivering again very well. Beyond -- and again, here, on Monday, we will give more flavor on what we want to do, for example, but we see a good development on the Financing & Advisory side with a growth in the coming years expected on infrastructure, energy transition, renewable and of course, in certain retail activities for certain clients, where -- provided, of course, the economies are rebounding. And we are overall pretty optimistic. We can, here again, finance a resumption of the growth of loans, in particular with corporate clients. So we have this capacity. We will be very selective. We want to ensure good profitability. But we are confident on this ability to do that with such capital ratios. Philippe, Czech Republic?

Yes. So yes, that's true that Czech Republic was really impacted by the lockdown and all the restriction on people, mobility and business activities plus, of course, the decrease of the interest rate environment. And this definitely explains the revenues -- the decrease of revenues during this first quarter. This being said, we do remain confident for various reasons. The first one is that there is definitely an improvement regarding the situation from a health standpoint. The emergency state was terminated mid-April. Second component is that there will be continuity regarding the proactive economic policy. We expect the rates to remain stable for most of the year with a possible increase during the fourth quarter. So that's for the external components. But also -- I mean I have also to add that actually, during the first quarter, the commercial performance was pretty good with an increase regarding lending, including with the SMEs, with also quite good performance regarding financial figures. And you have seen also tight control regarding cost despite a significant investment program. So again, this is a very mature entity so with really good monitoring of the situation, which is not easy. But at this stage, there is no change regarding our guidance.

Next question from Giulia Aurora Miotto from Morgan Stanley.

Two questions from my side as well. I will start with costs. A very strong delivery in the quarter and somehow different from some of your peers, which are actually seeing growing costs. So I was wondering if you can give us a little bit more color around the initiatives that are really driving these cost savings because the ones that you used to talk about, i.e., the French retail and the GBIS are not expected that quickly. And in particular, is there any investment that you are maybe postponing in order to deliver these cost results? So that's my first question. Then secondly, another area of strength in the quarter was equity. And what do you see as a sustainable sort of level for SocGen on the equities revenue line given the volatility of the past year or so? And how do you see the activity continuing after Q1?

Giulia, I will leave William to answer on the cost. And it's true it's across the board. It's not related to investments that we don't do, but it's a benefit of a long-term initiative and discipline. And we have more to do, as you said. And then, Slawomir, on the equity business. William?

Giulia, as Frederic said, and we can reassure you, there is no such thing such as a quick-fix like postponement on investment. If anything, we have a record level of IT investment. We have had that ever since 2019, and that continues. And same with the remediation as we had said. We have peak investments in remediations, and it's meant to decrease starting 2022. So in fact, in 2021, we don't have the lack of investment or the lack of [ initiatives ], you might say . But you have some key elements to consider. First of all, it's true that we have a component of the cost cuts we have launched for CIB last year, in addition to the full implementation of what had been launched in 2018. As we had said to you, we have a continuous investment in the efficiency of central functions. But also, we have some areas where we continue to be very strict on hiring, on discretionary costs in the context that it remains uncertain and also with good habit statement by businesses' and functions. On the other hand, it is clear that we have, like everyone, an increase in the tax levy. As I said, for us, the SRF contribution increase is material. And an investment in variable costs, which is very -- we have provisioned what we needed to provision according to the performance of the businesses. So we don't underinvest both CapEx and Opex.

Slawomir, on the equity business?

Yes. I would say that the performance of this quarter is a mix of the last phase of recovery, if you will, which started, as you remember, as soon as last Q3, continued into Q4. And this is the final stage of this recovery. So we have put behind the whole repositioning of the structured products offer in the space. We have been helped in terms of the speed of the adjustment but also a revenue preservation by better market conditions, healthier markets in terms of margin in this structured product space, in equities. And so the balance there in terms of the derisking versus the lost revenues ended up better -- significantly better than what we had expected at first. So that's one of the drivers. Second driver is the ability -- the maintained ability of our business to capture the opportunities that were there in the market in Q1 linked to the healthy level of volatility trends in the market, the whole replacement trend and its impact on the equity market aspect of protection. And all these good trends have driven an increase in our commercial activities and a clear capacity for our business to capture this commercial opportunity. And then there was like an extra outperformance linked to the sheer market conditions and basically, what we usually call the conditions -- the hedging conditions, which were much better than usually and were making a lot of things easier than they usually are. So you see there's some structural performance there that is here to stay and some outperformance linked to the pure market conditions and more to come on Monday.

Next question from Delphine Lee from JPMorgan.

So just on the -- 2 questions. First of all, if I can come back just very briefly on French retail. If you could give us a bit of color around the guidance for full year. I think the last time we spoke in Q4, you seem to be a bit less negative. I mean are you still seeing significant headwind on NII and on the state-guaranteed loans rates? If you could provide color around the different components, the rate on the state-guaranteed loans that you've seen versus your outstanding book and the structural benefit as well which we could expect in the coming quarters. And my second question is going back to cost of risk. This is a very big change in the outlook, in the guidance that you're giving us today. And just wanted to get a bit more color of where -- by division, where this is mainly coming. Is this mainly corporates and CIB and French retail? I mean just if you could give us a bit more color on this change in confidence on the outlook.

Delphine, so I will leave the floor to Sebastien to answer your first question on French retail and Diony Lebot on the risk.

Yes, Delphine. So in our view, Q1 figures don't reflect the full year financial performance we anticipate and we can expect for French retail revenues. We expect an improving momentum and increasing activity as we will exit progressively the different lockdown period. And so what does it mean? It means service fees should progressively tend towards the pre-crisis levels. Credit production should be stronger, which will boost fees. And in terms of net interest margin, again, Q1 doesn't represent the full year expected performance. Nevertheless, in a still low and negative interest rate environment, combined with huge increase in deposits inflows, we still expect remaining pressure on NIM in 2021. Keeping in mind that we would have, as I said, mitigant effect with better credit activity and a potential positive impact coming from TLTRO [ other modification ] by the end of the year or H2. So having said that, I think that it's fair to say we may anticipate the range between minus 1% and plus 1% versus 2020 in terms of revenues for French retail.

Diony, on the cost of risk?

Yes. Cost of risk, as you've seen, is very low this first quarter at 21 basis points, and it's almost exclusively stage 3, meaning that we have a quite low cost of risk and lower number of defaults. And this is across the board, in all our businesses and geographies. We have kept unchanged our total reserves on stage 1, stage 2. We have neutralized the output of our models, which have led to reversal of over EUR 100 million of stage 1, stage 2 provisions. And we feel quite confident of the guidance based on improving economic outlook, although our scenarios are still quite conservative. The quality of our portfolio, as you know, we have constantly communicated on the fact that we are monitoring, in a very proactive basis, rating migration provisioning. And the third element of comfort is the stack of provisions and very prudent provisioning we had with stage 1, stage 2 stack of over EUR 3.5 billion. And as William said, this 2.8x now versus the peak of '19. So overall, the improvement of the economic outlook and very low cost of risk allow us to refine our guidance, which was below 2020, and we are now quite confident of this 30 to 35 basis points for guidance.

Next question is from Flora Bocahut from Jefferies.

Congratulations on the strong results this morning. The first question I'd like to ask is going back to provisions, and thanks actually for providing a guidance for '21. I'd like to ask about '22 as well. Would you actually agree with the statement that 2020 provisions were abnormally high and then we have 2021 provisions that are abnormally low and we can hope maybe that 2022 gets closer to the normalized level, which, and correct me if I'm wrong, would be roughly, what, 35, 40 basis points? So that's the first question. Then the second question is about the French retail business. First of all, I'd like to have the confirmation whether you still account for the TLTRO funding cost at minus 67 basis points. And then asking how confident you are that later this year, you can expect also to get the benefit of the second modification, the minus 100 bps, also for the second year, also considering that the corporate loan growth seems to be a bit lower at the moment.

I will let Sebastien answer your second question, Flora. I think it's a little bit premature to comment on 2022. Let's see how things are developing, but I'm pretty optimistic. And what I'm just saying is that you saw the support of governments in certain geographies, not everywhere. Everywhere, we have a low cost of risk. I tend to think that you will see a strong rebound on consumption in many geographies. So even in the sectors at risk, tourism, restaurant, et cetera, you might see a good momentum in the coming months. And what is absolutely remarkable is the cost of risk with large corporates, which is 0. And the liquidity on the market, the fact that private equity have done the job to recap when needed, you might see actually a cost of risk which might be lower also than what you say in 2022. I think it's premature. Let's wait how things are developing. We have been able to refine the guidance that we gave for this year. It's not necessary that it's that low. We have not written back anything of S1, S2. This is, again, that the economies actually are reacting better probably than anticipated. So let's wait. Let's see how things are developing. Let's see about the vaccinations. There is still some uncertainty. And we will be able, beginning probably next year, to give you more guidance for 2022. What is remarkable, the stability of NPL, 3.3%. There is, again, no deterioration from that point of view. Sebastien, on the French retail, the TLTRO?

Yes, Flora. So I confirm we take into account positive impact of the TLTRO. But we don't take into account the -- what we call [ other modification ] of TLTRO in Q1 -- in our Q1 results. We are nevertheless very confident in our capability to reach the benchmark target by the end of the year for this [ other modification ].

And let me just remind you, we will account for that over 3 years, so it will be spread with potentially a catch-up. Maybe we will see that at year-end, taking into account the beginning of the implementation of the TLTRO. So it might be that in the second half, you might see a benefit from that.

Next question is from Omar Fall from Barclays.

Just a couple of questions for me. So firstly, you had excellent risk-weighted asset control in the quarter despite higher volumes and activity in CIB. Could you give us some color on that and maybe some guidance for underlying RWA growth for the rest of the year? Should we think of the usual 3% annualized quantum as a good base? Then secondly, sorry to come back to the equities business, but the restructuring and derisking that you announced for this business was meant to reduce volatility. It seems to have reduced downside volatility this quarter. So is this kind of EUR 850 million of revenue the new level for us to base our forecast on? And I did take into account the answers you made earlier, but should we still be thinking of EUR 600 million as normalized, steady state? I'm using EUR 600 million because that's what you told us at the restructuring announcement, that you'd lose EUR 200 million to EUR 250 million in revenues from the 2019 base. And obviously, that gap makes a big difference to the sustainable returns at group level. So I'd love some more color there.

Omar, first, I will leave the floor to William on the risk-weighted asset. And again, to Slawomir on your question on the equities perspective.

Omar, as you know, there have been 3 components in the evolution of RWAs, which [ used to be 2 ]. One is the underlying business consumption. Then you have the regulatory impact, particularly pertaining to models, so-called TRIM and TRIMIX. And then there's rating integration. We do differentiate in the disclosure of the 3 components. On the first one, there's no change. I mean the usual EUR 5 billion to EUR 6 billion RWA that the business consume -- that we allow the business to consume as an incremental level of should be the type of things you could keep in mind. TRIM, we haven't changed the assumptions. So we had told you we were seeing roughly 30 basis points of TRIM/TRIMIX consumption for the year. We have consumed 10. So let's keep 15, 20 for the rest of the year in terms of basis point equivalent. You will see as well some potentially other RWA impacts stemming from CRR2, but we think those are manageable. And then you have rate integration. And this is the area where, potentially, we could have less than what we had expected. I think we had told you EUR 7 billion to EUR 8 billion for the year in Q4. In fact, when you look at Q1, it is less than the pro rata of that. So this is potentially where we could have less, but allow us to keep some caution. We will continue to be always cautious in any representation we make of capital. If anything, that reinforces our guidance that we should be well above our midterm target of 200 basis points by the end of the year.

Slawomir?

So let me start by saying that no, the Q1 performance cannot be the new benchmark across the cycle for the equities performance. You have to remember that Q1 was marked by exceptionally conducive market conditions, right, with high but stable volatility trends in the market, people looking for protection, looking for exposure at the same time. And so it was quite unique if you look at the last few years. And you may have noticed that in Q2, volatility -- for example, realized volatility crashed and is in the 6%, 7% area. And so this is something which obviously drives also the performance in this business. Now again, coming back to your comment on the repositioning of the structured products portfolio. It was a redesign. So the idea was that we wanted to run this portfolio with probably a smaller nominal footprint in some products but also a different approach in terms of risk management. So that, we believe, came at a certain cost in terms of top line, which it has, but to a much lower extent than what we were expecting. So what I'm saying here is, yes, there is in our review a better protection on the downside, capacity to be active in this important space. But at the end of the day, the equities are designed to take advantage of good market conditions, which is exactly what they did in Q1. But again, the market conditions were particularly strong in Q1.

Sorry, just a very quick follow-up. Historically, you told us that you were somewhat underweight listed products versus structured products, which I guess we know of. You do quote high volumes in listed products. Was that a meaningful contributor here or really structured -- the core structured products franchise was the driver?

So we'll talk about this some more on Monday, but the quick answer is it's probably fair to say that it's more balance today, including -- also because of acquisitions we made typically in -- the EMC acquisition in Germany. And so the contribution of all of the business was pretty balanced.

We will be able to enter probably into more detail on Monday.

Next question from Pierre Chedeville from CIC.

One question regarding Private Banking at the international level. It seems that things are going a little bit better. Can you confirm that? And how do you see the evolution in Switzerland, in the U.K.? Are you happy with the evolution and the restructuring? And can you give us a little bit more color on this division, which will be very alone now with the sale of Lyxor? And my second question is, have you begun to initiate customer actions to transfer balance or deposits toward asset management savings because we can see that short-term deposits are very high due to COVID? And how do you see the transformation of this, particularly in France, toward more, I would say, off-balance sheet products and with more fees, I guess also?

Sebastien will answer your 2 questions.

Yes, Pierre. So my first comment would be to say that Private Banking outside of France will not be alone, so to speak, in terms of supervision, for sure. That's a business, obviously, which is very important for us. It's 40% of the total AUM, the Private Banking AUM. And as you just said, dynamics are good in terms of AUM, net new money. And we're structuring the franchise to go, I mean, well, according to our plan and especially in the U.K., which is positive. And as you may know also, we have decided to outsource to Azqore, which is a subsidiary of Indosuez Wealth Management, our back office and IT services for Switzerland and Luxembourg and Monaco and U.K. So we basically opened the franchise outside of France. The IT for all the franchises -- back office and IT services will be outsourced. So it will help reducing the cost base of the franchise, which is one of our key objectives. And in terms of revenues, I will not elaborate as William gave [ objective ] color on this point. Regarding your second question, clearly, one of our key objectives, and that's what we have asked the commercial teams to implement, is to convince our clients to convert their site deposits into more value-added products such as life insurance or term deposits. That's something which is very important, and it also explains why, despite a challenging environment, we have been able to post positive growth in terms of fees during this quarter. So that's something key for us and the first priority as far as the deposits are concerned. And we don't intend to charge fees on deposits [ that converts ] as an example, on the French market. Our strategy is convince the clients to convert their site deposits.

Next question from Tarik El Mejjad from Bank of America.

Two questions, please. One follow-up first on the French retail. So the guidance of plus/minus 1% in revenues, does that include PEL/CEL and also the potential extra bonus from TLTRO to be booked in the second half? And the second question on CIB. I mean indeed, I will be very interested on Monday to understand the dynamics of how you managed to reduce volatility on the downside and not at all on the upside. And also, maybe we can touch base now on the -- how come you've managed so quickly to fix the equities? Because when it was announced to us in -- last year, it sounded to be quite big projects that will go over a few quarters, not 2 quarters. And is there any risk that you've been some stop-and-go strategy there? Or do you feel really you've done the whole work and now you have the new [ gain sheet ]? And then just last question on GSIB (sic) [ GBIS ], on global markets. It looks like you didn't accrue any variable comps for this amazing Q1 in equities. Is that still to come? Or is it just basically no cost for these revenues?

Tarik, so first, Sebastien -- and on your 2 questions regarding the equity market, we took 3 quarters actually to do it, but it was done swiftly and effectively [ under cost in the computation ]. So perhaps, Sebastien, first.

Yes, Tarik. When I talked about between minus 1% and plus 1%, it's excluding PEL/CEL, and it does take into account the [ other modification ] for 2021, again, in H2.

And again, in a conservative way, I understand that. And because we are pricing over 3 years, so probably, you need to understand exactly what our peers are doing, whether they do it immediately, whether they do that for over 1 year. So again, on our side, we are in the most conservative approach, spreading for also 2022 and the remaining of 2023. Slawomir?

So on the equities side, those -- kind of 2 questions. How were we able to do this in 3 quarters, as Frederic said? I think this was a very well-designed plan with a very specific, targeted logic of rebalancing the portfolio towards a better mix of risks, if you will, while preserving, right, our leadership, our franchise there. And the choices that we made were simply the right ones. And where we were helped to a tune which was higher than what we were expecting initially is the market conditions, right? Because a lot of these products, basically, also in terms of lowering our nominal footprint, benefited from simply conducive markets, growing markets and then higher valuations on the markets. And so the speed of execution was helped by the market conditions. But the quality of the outcome is linked to, one, a well-designed plan; and two, as I said earlier, to better market conditions in terms of margins on these products because of a healthier competitive dynamic. I guess some of our peers are thinking about their own footprint and their own way of addressing this market at the same time, which again translates into better margins on this market. So to the sub-question of are we in the stop-and-go mode, absolutely not. This was executed very rigorously. And we're done with the restructuring, and we expect our business to continue to function normally. Again, Q1 has embedded some extra performance linked to the quality of the market conditions, to the higher ease in hedging conditions, which helped the overall picture for the quarter. But again, we have experienced a much smaller revenue impact because of the restructuring. In terms of the variable comps, no, it's not to come. It's taken into account in our current costs in a normal way. So of course, there was a higher -- significantly higher provision for variable comps in our Q1 figure for GBIS. And has this not have happened, we would have had a decrease in our cost base to the same tune.

Your next question from Jean-Francois Neuez from Goldman Sachs.

I just wanted to ask on French retail net interest margin in particular, so not net interest income but just the margin component. And as for many banks, there continues to be pressure on the margin component. And I just wanted to understand what you think are the initial effects which are yet to play out or for how long and how much you think that there can be pressure on the actual level of margin sequentially and in particular, whether there is further pressure on the margin component further than 2021, so for example, from rates or from commercial margin pressure, replacement effect or any other components that is currently putting pressure on the margin. And the second thing I wanted to ask is just more broader, on capital. Recently -- obviously, last year, there has been the quick fixes, et cetera. And then earlier in the year, there have been -- I think the EBA has issued a document on alternative ways to calculate some of the Basel IV element, and there was these discussions on parallel tax and all of these type of things that may help the industry reduce or mitigate this impact. Is there any discussions that you guys are taking part to or any view that you're willing to share with us on this particular item, given your current Basel IV guidance?

Jean-Francois, I will let Sebastien answer. Knowing there are very, very different elements, the flow of deposits, how precisely we are able to [ absorb ] people investing elsewhere, [ what they consume ], level of rates, et cetera, et cetera. Sebastien, if you can try to give some color. And I will take the floor on your Basel question.

Yes, Jean-Francois. As I said, Q1 doesn't represent the full year expected performance in terms of net interest margin. Having said that, I think we have 2 different components. The first one which is out of our hands is the low and negative interest rate environment. And it's fair to say that it will continue to weigh on the NIM, on the net interest margin for the coming months at least. And on the opposite, it's -- there is all the different parameters we cannot have an action on, obviously credit activity and also what I said about convincing our clients to convert their site deposits into for more added value -- value-added products. That's an area where we put clearly a strong pressure on our commercial teams because it has a mitigant effect and impact on the net interest margin. So when we combine all of this, pressure will still exist on the NIM. But again, don't take Q1 as the view for the full year. It doesn't reflect our view on the full year.

And regarding your first -- your second question, Jean-Francois, on Basel. First, we still, of course, try to explain what is at stake with this Basel implementation, whether it's on the financing side; on the capital markets side; the need to have a level playing field; the fact that it's clear that in the U.S., there would be no direct capital consequences; and as the commission had said, initially at least, that there would be a moderate impact. So we carry on explaining all this. In terms of timing, I think it is likely now that it will not happen in 2023, just for the time of the process at the political level, as the commission has postponed by September its own proposal. So it's difficult to consider that it will be 2023 piece. A lot -- very short time frame to have the full adoption in the process of Europe. Regarding the calibration, if I may, we have taken, I think, the most reasonable assumption, the one which has been taken by the SSM, if I'm not wrong, I think. And [ William is controlling ] their study.

ECB specific.

ECB, sorry. So let's say, this is probably the SSM. The parallel stack is more for the output floor, as far as I know, and we will see. So it's not included in that calculation, something more for 2027 to 2028. And we'll see effectively -- there are certain countries which are working on this topic. We'll see how it goes. It's, I think, premature. I can't tell you much more than that. So I think the 115 basis points, again, is our best assumption based on an updated balance sheet, and that's what we can say at this stage.

Next question from Stefan Stalmann from Autonomous Research.

I wanted to start with your return on tangible equity, which was around 10% this quarter. If you normalize it appropriately, and you can probably take some haircuts for the equities performance and maybe cost of risk, but you're probably still at around 9%. How -- in light of this set of results, how do you think about your medium-term ROE or tangible book value ambitions? I was wondering if you could comment on that, please. And the second question relates to your cost of risk guidance. Does it include any meaningful releases from stage 1 and stage 2 provisions during 2021? Or would any of that come on top of this guidance, please?

Stefan, I will take your 2 questions. First, we will communicate in due course how we see the midterm return on tangible equity for the group. But as you have highlighted, first, it gives you -- it illustrates the capacity to meet a pretty acceptable one. And clearly, the equity business has done tremendously well and as we've said, probably benefiting from exceptional conditions. On the other hand, all the businesses are still to improve and recover. And of course, on top of that, Boursorama, which is still accelerating its development, we have in mind that it will generate a strong profit in 2025. So there are many levers which we have still in our hands, provided we execute -- we're executing well and in mind also the combination of the 2 networks. So I mean again, we will communicate in due course, probably beginning of next year, first half because I want to wait -- we have Basel IV now. We want to wait to have more clarity on the economy, on the Basel IV program, proposal by the commission so we'll have all the elements, ingredients to communicate that more in detail. But of course, it gives you an indication of the kind of return we can achieve. Putting -- there might be pluses and minuses, but at least it gives you some indication. Second, can I say, we are not lagging significant write-backs. I mean I don't know what you call significant write-backs. We have seen very few defaults. I mean it's fair to say what we have, more or less, in mind is potentially, with the exit of crisis, there's a slight increase of the defaults, but a moderate one. And in particular, looking at the large corporates, it's remarkable to see the absence of any significant cost of risk. And then probably -- potentially some minor mechanicals will grow write-backs but not something massive, and the idea is -- would be probably to keep the bulk beyond 2021. So we are going to work on that in the coming months to see exactly how things are developing. As Diony said, we were very conservative by not writing back more than EUR 100 million of S1, S2 this quarter. We wanted to keep that going forward. And then we'll see how things are developing. But there is a message of confidence which goes beyond the improvement of the economy. It's again what we see concretely with our portfolio.

Next question from Anke Reingen from RBC Capital Markets.

Actually, just 2 follow-up questions. Firstly, on the equities performance. I'm sorry to come back but I don't want to ask on Monday. Is there like any meaningful contribution from hedging or reserve releases? I mean you gave us the hit last year. I just want to make sure there's not a material benefit this quarter. I heard you mentioned it earlier, but just making sure it's more underlying performance rather than reserve releases. And then secondly, on your capital ratio. I mean you ride above your target, and I hear your comments about uncertainty. But is it fair assumption that the 50% payout ratio might look a bit conservative when you draw up your next plan?

So Anke, on the equity, the reserve, there is nothing that significant.

It's purely underlying performance.

Yes. So nothing significant there. And listen, the 50% payout ratio, I mean, you take the math with a reasonable capacity to finance growth. With the Basel IV impact, with the 50% -- I think at this stage, at least, 50% is a kind, if I may say, of standard payout ratio, which gives a good yield to investors. At this stage, I think we don't think that perspective. So let's wait to see more on the regulatory side and the environment. But we have also in mind to fuel the business growth. If there is an opportunity for clever M&A, why not too? I mean -- so I don't think we are going to change that immediately, and we think we are really in line with our peers on that front. So it should give you a lot of comfort for the coming years on all these items. That's what I can answer, Anke.

Next question from Matthew Clark from Mediobanca .

So 2 questions from me. First one is on the French retail revenue commentary. So I'm struggling a bit to reconcile the guidance of this plus or minus 1% corridor for the full year, with the guidance that the first quarter doesn't represent the run rate for the year because, if I annualize first quarter revenues, then already, you are at the top end of that plus 1% compared to the full year of 2020. So I'm just curious why you're -- how to reconcile those or why you're not more optimistic than that plus/minus 1% full year guidance given how impacted last year was by the crisis. And then second question is on International Retail Banking revenues. They were down quite a bit first quarter versus fourth quarter in Russia and in Africa. I'm just wondering whether there were any particular lumpy seasonal effects there and whether we should think of the first quarter as being the run rate level for Africa and for Russia or whether we might expect a recovery as the year progresses.

Matthew, on the first question, I will turn to Sebastien and then Philippe Aymerich on the international retail.

Yes. Matthew, the minus 1%/plus 1% takes into account all the different parameters, including, as I said, continuous pressure on net interest margin and especially on the deposit margin because of the low interest rate and the deposits -- increased deposits. So that's our view on the full year and again, including all parameters and probably stronger fees, services and financial fees, but this pressure weighing on the NIM in the coming months.

How then -- why then would subsequent quarters not be worse than the first quarter? You seem to be saying that the first quarter doesn't represent the potential for French retail. You talk about a rebound of -- activity increases when lockdown ends, et cetera. So I guess my question is are things getting better or getting worse versus the first quarter?

Listen, I think we are still considering at this stage different scenarios on different parameters. We are a bit prudent. We want to wait to see how things are developing on the economy. Again, there's probably a touch of conservatism, but we are realistic, on the -- again, for example, if deposits stay or even further increase, it might still weigh on the interest margin. So we remain a little bit cautious, if you wish. We are, again, same thing, refining our guidance. But it's still work in progress. Let's wait for the second quarter, see how the economy is rebounding. We remain a little bit prudent, so we prefer to be on that side.

And Matthew, if I may, I think you have to take, and I know you do that, the big picture. I would -- what we've said in Q4 is that we are confident that the revenues at group level will rebound relative to 2020, consistent with the positive JAWS. What we've said as well is that we expect that to happen in -- across all businesses with one question, which is, as you heard, this may be in the more mature retail, i.e., French retail. It could be minus 1%, plus 1%. So overall, it doesn't jeopardize at all the overall picture that we've talked about, which is a strong rebound in revenues potentially.

Philippe, on the international retail?

Yes. Thanks for the question. So regarding Russia, regarding the revenues, first, you have to take into account that they have been impacted by a new accounting scheme regarding some fees which are paid to the car dealers as part of our consumer finance business. Previously, these fees were accrued, and now they are paid upfront. So it has some base effect. There is also another base effect when you look at the performance of Russia. It's that the first quarter of 2020 was impacted by very important credit lines withdrawn by corporates as precautionary liquidity buffer. All this put aside, it's -- again, in a difficult context, the performance of actually Russia was quite good, strong increase in mortgage, also a strong increase in consumer loans and as you have seen, a strong deposit collection. I have also to say that they are completely on track regarding their strategic initiatives. I can share with you, for example, one number. Because you know that we are also tracking all our progress regarding digital transition, and in the first quarter for Rosbank, 48% of the core products were sold in full digital mode. So really, they are on track regarding this transformation. Regarding Africa, strong momentum in Sub African, so slightly less regarding Mediterranean Basin. But when you look at all the metrics, they are also on track. So it was probably a little bit slower for the beginning of the year, but there is absolutely no reason to change our guidelines and our perspective in these areas. There is definitely some movement of the activities, and I think we will catch it.

We have no more questions.

Okay. Well, thank you very much for attending this call, and have a very nice day. Speak to you soon. Thank you. Bye-bye.

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.