Good morning. I'm very pleased and delighted to welcome today with us Jerome Grivay, Chief Financial Officer of Chile COLSA. Thank you very much, Jerome, for giving us some of your time in this busy period. It will be Q and A only. So the audience can ask questions through their to the screen, and then we can start straight away.
So thank Thank you, Jerome. Maybe some first question and the obvious one is on the COVID and implication on your earnings. On the revenue side first, maybe you can actually shed some light on how you managed to still sustain actually quite good operation in in first half with positive jaws in most divisions, and how is that sustainable in the light of the developments we're seeing at the moment?
Good morning to every one of you. It's it's a very wide question you were asking, Dominic. I'll try to to give you some some light or some elements, but but I'll try not to be too long in in my answer. It's true that we've been posting quite solid results in the first half of this year, and we've been amongst the different elements. We've been posting an improvement of the gross operating income over the first half of the year by close to 3% for Kildecker SA and even more than 5% excluding another increase in our contribution to the single resolution fund.
And it's true that we've been improving also the cost income ratio during this period of time as compared to the previous year, thanks to a very resilient top line. I think the resilience of our top line is explained by two main elements. The first one is that we have a very diversified set of activities, and they don't react the the same way to this to the present situation. And I'll come back on this on this element a little bit later on. And the second feature that we have and that is also helping the resilience of the of the top line is that we we manage to permanently improve the capacity of our different business lines to work together, which means that we increase regularly the revenue synergies, which are a very significant help to the the the the the resilience of of of the top line of most of our businesses.
If I dig a little bit deeper into what happened in the different businesses in h one or q two, it it's clear that all retail related businesses have had a low level of activity during q two because, definitely, q two was earmarked by, let's say, six weeks or even two months of lockdown, which means that all activities that require a proactive commercial effort from our salesperson were really impacted. So you have to read across our our results the fact that two thirds of the of the second quarter was indeed very much impacted for retail activities, which cover retail banking activities, but also all retail related activities like, for example, consumer credit and car financing businesses. But it's clear that in those retail related activities, we have seen a very sharp rebound in the level of activity starting in June and continuing across the summer. So just to give you a few examples, it's been the case for the the loan production. It's been the case for the the the gross commercial or customer capture.
It's been the case for inflows on on savings products or the opening of new savings accounts and so on and so forth. So it means that, clearly, we are at least partially catching up with all the the operations that we've missed in in April and and May. At the same time, we have had a very good momentum across the lockdown period in all our large customers' activities because, of course, those activities don't require the same setup of branch opening of, you know, physical meetings than retail related activities. And, actually, the the the second quarter of this year was marked by a very high density of operation, for example, financing operation in the CIB, but also a very good level of activity in in the in the the custody businesses. And then last point, in the asset gathering activities, so asset management and and insurance, We've been penalized by two elements, the market volatility and and and and the the the downward oriented market trends that penalized all evaluation that we have to to take into account in our revenues.
And then the second element was clearly the fact that, again, in retail related activities, we've missed at least the six weeks or two months of of business. So this had an impact in the number of new insurance policies that we sell or on the new our inflows in in in unit trust, be it with m and d or within life insurance policies. So globally, a solid a good resilience of our activities despite some weak levels of activity across the second quarter. But if if we if we try to to to, you know, foresee a little bit what can happen, I think one must keep in mind the fact that more than three quarters of our revenues are indeed recurring revenues, I e, they are already here at the beginning of the year. It's the case, of course, for the net interest income for a a very large proportion, but it's also the case for many, many fees generating businesses because the fees are linked to the to the the the handling and the management of a contract.
And in most cases, all the contracts that we have with our customers, be it for for payment tools or for insurance policies or for savings account management. All these contracts last a very long period of time. Generally, it's in the region of ten years. So it means that we are adding up regularly new contracts and new policy to our stocks, but we are we can count on the fact that we start the year with a high level of revenues more again, than than than than three quarters of our revenues being referenced. When it comes to the cost base, and I will be shorter on on this issue, I think we stick to our general policy, which is to asset to assess and to assign to each business line a dedicated cost to income target.
Of course, all these cost to income targets being coherent with the global cost to income ratio target that we have for the group globally, and to actually decentralize the efforts, the concrete efforts in terms of cost managements that are required to meeting those targets. And this is so this policy that we have seen, for example, in the last three or four years, we have seen a decrease in absolute terms of the cost base at LCL without any massive, you know, redundancy plan or without big announcements, but simply with a steady effort to optimize the cost base, to optimize the cost of the back offices, to optimize the the the the the setup of the network. And this has indeed helped LCL to very significantly improve its its its cost to income ratio. So to put it in a nutshell, when it comes to the operational parameters of our activities, we are, I wouldn't say, optimistic because, of course, there are lots of uncertainties, but we have, I think, the tools to continue to be efficient and to continue to to have a a a very satisfying level of the cost of operating cost.
Thank you. I'll just follow-up on the recovery. In q two, you mentioned that collecting some data from the regional banks, you can comfortably say that you're observing a V shaped recovery. Interesting actually to know what are the metrics that you collected, and that you actually following and looking at to draw this conclusion. But since then, some of your competitors use the same shape of recovery.
And and the the flare ups in infections that we've seen in the last two week or two, is that impacts somehow this conclusion or you're still confident? Because for example, if you look at something, if you look at Maxey yesterday, I mean, that's new. That's from yesterday, but we announced that all parts and restaurants will be closed in in the rest of the metropolis, basically, but at 10PM curfews. So how would that impact your conclusion in terms of the shape of the recovery?
Clearly, there are still a lot of uncertainties around us, and so it's it's very difficult to forecast what is going to to happen in in the coming months or or even quarters. What we've been looking at, for example, is the trend in in in in car payments, the trend in in withdrawals at our ATM machines, the trend in the number of home loan simulations, the trend in the opening of savings accounts, the trends in terms of new P and C insurance policies that we signed with our customers, and all these indicators have indeed shown a v shaped trajectory, I. A sharp decrease between March and and May as compared to a very decent level of activity in the beginning of the year in January and February, and then a sharp increase in May, in June, continuing in July. Of course, August was a little bit less significant because it was the summer holiday period, but the starting the the start in September was also very, very positive. In addition to that, what I can mention is that we've seen starting notice in September, the end of the three months payment holidays that we had granted for our retail customers in in consumer loans or in home loans.
And, actually, the effective repayment on a normal basis of those installments after the payment holiday was very satisfactory also. 93%, for example, of all the consumer credit customers that benefited from a payment holiday actually started to pay normally their installments after the three months period. So it was completely in line with what we accept we we expected. So this is globally the, I would say, micro indicators that we assess. On a more macro viewpoint, maybe I can just try to elaborate a very quick reasoning showing what we are still, I would say, carefully optimistic.
Carefully because of the uncertainties, but optimistic because of the the macro figures. If I take just the example of France, the GDP in France was due to be around €2,500,000,000,000 this year. We are going to lack around 10% of that. Actually, the latest figures are closer to 9%, but let's stick to 10% decrease in GDP between 1920. So it means that we are going to face a a loss of wealth creation of around €250,000,000,000, which is quite huge indeed.
How is this taken in charge by the different economic agents? The public agents, I. E. The states or the social security, the local governments, and so on and so forth, are going to absorb 60% of that loss. We are going to see a deterioration of 150,000,000,000 of all the public deficits in 2020 as compared to 2019.
So, of course, this is raising long term questions on how it's going to be repaid and and what are the impacts in the monetary policy and so on and so forth. But as far as 2020 is concerned, it means that 60% of the losses in GDP are taken in charge by the public authorities, which leaves on the, quote unquote, around €100,000,000,000 of losses for the private agents. If I zoom a little bit on the different categories of private agents, we have the household and individuals which are actually almost not impacted by what happened in in in in 2020. Actually, we assume that between 510% of the losses, so definitely less than €10,000,000,000 are going to be taken in charge by the individuals because, actually, most categories of individuals are not going to be hit revenue wise. All the pensioners are going to keep their pensions as expected.
All the public employees, civil servants are also going to keep their revenues as they expected them. All the employees of the large corporates are also going to be almost not impacted, and so only self employed persons plus also the new unemployed are going to lose somehow some revenues. But it means that, actually, the revenue losses for household are going to be very little in in 2020. So it means that it leaves, let's say, around 90,000,000 of losses for the businesses, SMEs, medium sized enterprises, and large corporates. From a liquidity viewpoint, the this loss has been more than covered by the state guaranteed loans, by the payment holidays, and so on and so on.
The state guaranteed loans only represented in France more than €120,000,000,000, and it's still available for the the the coming three months. So it means clearly that this 90,000,000,000 loss for the businesses is not raising any liquidity issue globally. I'm not saying that country in some sectors or in in certain areas, we are not going to see difficulties, and, actually, we have seen difficulties. But globally, the weight losses that are incurred by the businesses are more than covered by the liquidity lines that have been provided to them. So this is raising a medium term issue, which is the capacity of those enterprises, those businesses to absorb these losses across time in order first to repay normally their loans, their current loans amongst them, the state guaranteed loans, but also to be able to continue to borrow and to continue to invest in order to fuel the recovery and to fuel the future GDP growth.
But clearly and this is why we are quite positive on what has been put in place in France. Clearly, liquidity wise, all the setup of of governmental measures is more than covering the losses incurred by the businesses.
Very good. And and this is, Tony, maybe a good transition to talk about cost of risk in general. So Mhmm. You don't give a guidance for a full year or even less for next year. But I think from your comments, different occasions, we can understand the second half would definitely be lower than than first half.
But I I guess the the really, the question mark is when all these guarantee schemes will stop and when we will actually have a check of these provisions were enough or not. I know in France, one of your core markets, there are talks about an extension, not an extension of the PGE, like the guarantee scheme, but a cap in interest rate for some of loans that will be extended and so on. How is that fits with your risk management and risk profile? Because if you're just captain rate and you get some clients coming to the door that you actually the pricing doesn't cover your risk, are you obliged to take these clients? How how really the dynamics work in there?
Lots of of elements in your question. Just to answer your last point, what has been said is that as far as the extension of the state guaranteed loan is concerned, you know that the state guaranteed loan was granted for one year. And then after the first year, the client has the right to choose to repay or to amortize the the the the the capital that has to to repay up to five years. So the question that was discussed with the with the I mean, the the the the finance ministry was what type of rate would be applied to the amortization period, if any. And so we ended up with the idea that the rate for the amortization period could be in the range one, two and a half percent.
So for the first two years, up to two years, and then between two and two and a half percent for an amortization above two years up to five years. So it's a range. It's we've been discussing that assuming that when the amortization period starts, we will have more or less the same monetary conditions than the one we have now, which is probably not a very aggressive bet because clearly, we expect the monetary policy to remain unchanged in the coming months, at least, I would say. So this rate setting of the amortization period of the state guaranteed loan is not really a constraint, is not an issue for us. It simply is the continuation of what we have accepted and what is clearly considering the monetary policy that we have.
It's perfectly coherent. Then when I come to the risk issue that you've raised, it's true that in the first half of the year, we had to adjust our macroeconomic scenario in order to calculate the need for additional stage one and stage two provisions. And this indeed represented a significant part of the cost of risk that we've booked in q one and q two. Considering all the latest forecasts that were issued by the bond de France, by the and so on and so forth, We are not going to update further macroeconomic scenario at least for q three. So it means that as far as stage one and stage two provisioning is concerned, in q three, we are we will have only to take into account all the evolution of our portfolio, but no additional macroeconomic evolution.
So it's leading probably to a lower level of stage one and stage two provisioning than in in h one. Then as far as stage three is concerned, of course, we will depend on, I would say, idiosyncratic elements or informations or events. So it means that, normally, we shouldn't see in q three and q four a wave of default as some expected it, but we are possibly facing as it happened in the first half, some events unexpected, not necessarily in line with the the global macroeconomic trends. But as you know, in in q one and q two, we had to book some quite significant individual provisions because of some events like froze in certain areas. So this can happen.
It's not possible to forecast it, but we are not seeing as of now the wave of default that would generate a significant need for additional stage three provisions. So, again, we don't want to to to give guidance on the level of provisions on the level more exactly on the level of provisioning for q three and q four, but I want to remind again that the provisioning effort on one single quarter must be must take into account and takes indeed into account all the previous provisioning efforts that we've made. And, actually, as you know, Credit Agricole Group started this year with a very low level of NPLs and a very high level of provisions covering those NPLs. And so, of course, our additional provision efforts take into account the existing provisions that we have in our books, which are now in excess of €20,000,000,000 globally for the group and in excess of €10,000,000,000 for Java.
Very clear. Thank you. Maybe we can spend few minutes on Italy, your second home market. I mean, first of all, I don't mean to be a wide question, but just give us what's on the ground
you see if your on business in terms of,
I would say, underlying business growth is is going in line with the plan. And think this question initially is on the change in the landscape. We had the big merger already done with Jessa Newby. We have rumors of another one coming. I mean, you have a big bank there.
You have a decent market share. Do you feel threatened or the dynamics might change if you don't participate in this? Is there any sense of fear of missing out something, or or you are just heading with your strategy and and carrying on?
Just as a start, let me remind you that we have a a comprehensive and global set of businesses in Italy. And so it it means that, actually, retail banking activities are, of course, a key component of our set of of businesses in Italy, but it accounts for only between one fourth and one third of our net profit. I think it was a little bit less than one third of the net profit that we generated in Italy last year. So it means that, actually, of course, we are very, very focused on what is happening in in the in the retail banking business in Italy. But what is very important for us also is to be able to continue to develop our specialized businesses in Italy, asset management, consumer credit, car financing, leasing, factoring, waste management, CIB, name it.
So, clearly, when we look at Italy, we don't want to look only at retail banking activities and at retail banking and then the transactions that are or are not taking place in this in this country. That's the first point. The second point is that when it comes to banking activities, our business model is skewed towards retail precisely, and, actually, it represents now half of the loan book of of. And in these activities, considering the way we do them, considering the the locations of our branches, actually, we have been posting regularly in the last quarters a level of activity that was above the market average. So it's clear that the the the level of activity yearly is being impacted by the situation.
But when it comes to our own network, its level of activity, it's is better than the average of the market. When it comes to m and a, well, we've said when we published our medium term plan last year, and this was only a reiteration of what we had said before that we were ready to consider or contemplate a a a that would fit in our business model and we and could show, I would say, metrics that are, I would say, acceptable for us with, amongst other elements, a capacity of generating a return on investment after two years above 10%. And, actually, what we did with the three small savings banks that we bought at '18 was exactly that. A sound balance sheet, a weak operating profile, a small size, a good location, and at the end of the day, a return on investment, which was significantly above 10% and also a level that really covered a significant part of the capital consumption of the additional RWA that we took. So we are not now in a situation of examining any kind of concrete file, but we've said that we are ready to conduct this type of transaction.
I think that I will not comment further the Italian situation beyond that statement, which is simply, again, the redirection of our strategy in this country.
So we could still see you doing what in your current strategy, which is taking to doing more partnerships, more business line kind of consolidation that that's still okay. Mean, maybe on the M and A, I will link it to capital, but we'll get to capital and dividend a bit later on. I mean, if you look this in a scenario where the regulator or ECB or whoever decided to extend the ban on dividend, mean, capital position is already quite high, and we keep growing them. And in the other hand, you will have some assets that are much cheaper than a year or two years ago. I mean, is your view could be flexible in that front and things, okay, maybe we have to be opportunistic as well because we don't want to run with too much excess capital.
We have a group backing us and valuations are cheap. So maybe we can use more bad will change a bit our because the strategy you set in plan was mid twenty nineteen where the world was, I would say, quite different.
Yeah. The world was different, but our strategy remains more or less based on the same grounds. The the ground on which we base our capital strategy is very simple. We want to be best in class in terms of solvency at group level, and we can operate at CASA level with a similar level of capital because CAZA benefits from the solvency of the group and from the financial solidarity of the group. So it means that we are able to offer a high level of profitability at and we are not to pilot capital at CAZA across time.
So we had set a target, a c t one target for Caza at 11%. There there have been some recent announcements that may lead us to revisit this target going forward. I think that it would be relevant to wait a little bit until the dust has settled before the year, setting a new target. But we think we have the capacity to set a new and possibly lower target going forward because of some regulatory decisions that have been taken this year. So this is clearly leaving us with the capacity of somehow remunerating our shareholders, which we haven't been able to do in 2020.
Let me remind you that in 2020, we've nevertheless continued to accrue a dividend to be paid in '21. That's for sure. So we are, as any listed bank, facing we are facing the same constraints, which is this recommendation of the ECB, which is this uncertainty on what is going to be the rules in 2021. But we have a specific tool, and we have with the group a capacity of, you know, trying to accommodate different constraints. We have a switch mechanism.
And when we unwind the switch mechanism, this transfers capital from CASA to the regional banks. This transfers profit from the regional banks to Casa, and this doesn't change anything at group level in terms of solvency. So we have this capacity if the normal course of the the the the usual tools in order to remunerate our shareholders are not fully available. We have this capacity of improving going forward our earnings per share, and so improving all things being equal, the profitability at CALZA without having to enter into the traditional remuneration tools, are dividend or any kind of payments.
So so if I understand well, switch to will be your first option to redeploy capital if there's an extension of the band or it could be with payments and some switch to so the first window for you is will be q one next year. Right? Or
Yeah. Two windows a year for the unwinding of the switch mechanism. The first one is in January with the execution of in March, and the second one is September with execution in or is in yeah. August with an execution in September. So we have those two windows every year.
We are committed to unwind 50% of the switch mechanism before 2022. We've done 35%. We still have 15% to go. But the the remaining 50% are also a potential tool if needed if the other tools don't operate properly.
So what do you hear latest on the ECB stance on? I mean, we have some other corporate telling us that they are leaning towards a case by case alone. So let's say, bandwidth for dividend. Have you heard the same? If if it's true, what would be the criteria as used?
Maybe our ears are not as good as the ones of our our competitors, but we we don't hear anything coming from the ECB on this front. What we've seen and what we've read is that this present recommendation is lasting up to the end of this year, and that the situation will be reassessed in December for 2021. But when it comes to a potential case by case analysis, we think it would be perfectly relevant and perfectly coherent with the fact that the ECB has precisely a responsibility, which is to assess concrete situations and to take individual decisions on the basis of concrete situation much more than taking across the board blanket decisions. So, of course, the fact that the ECB may be heading towards case by case decisions is only natural for us. And in such an approach, we think that we are at the forefront for being granted the capacity of paying a dividend because of our good solvency situation and because of our good profitability situation.
Maybe a last question just to wrap up on what we discussed. You had Investor Day in June. You've I mean, many of the other competitors dropped guidance or I mean, you reiterate them. Is this a reiteration they can offer in horizon of 2023? If provisions recovers, you're still confident to achieve the double digit ROE and the levels of distribution and so on?
Or you will contemplate doing an update next year?
Well, up to now, if we say that we are we were not going to change our 2222 targets, it's because all the internal assessments that we do show that we still have the capacity to reach those targets in 2022. So, of course, if at a certain point in time, we have the the certainty with the or the or the the impression with the high level high degree of certainty that some changes need to be to be done to these targets, then we would talk to the market. But up to now, we are of the opinion that if, of course, if we remain very, very strict on our financial discipline, internal financial discipline, cost management, etcetera, etcetera, if we have the capacity to continue to develop properly our businesses, we are able to reach the global targets that we have set for 2022.
Perfect. Our time is up. Thank you very much, Jerome, for your availability and your your answers, and, hopefully, we can meet in person soon.
I hope so someday. Talk to everyone on your way. And thank you, Dominic, for your availability too. Bye bye.
Thank you. Bye bye.