Welcome to the presentation of BNP Paribas Second Quarter 2019 Results. For your information, this conference call is being recorded. Supporting slides are available on BNP Paribas website, invest.bnpparibas.com. During today's presentation, you will be able to ask your question by pressing zero one on your telephone keypad. If you would like to ask a question, please make sure to be in a quiet area to maximize audio quality. I will now hand over to Mr. Lars Machenil, Group Chief Financial Officer. Sir, please go ahead.
Thank you. Fine, ladies and gentlemen, trust you are doing well, and welcome to the BNP Paribas second quarter results presentation. In the usual way, I'll take you through the first two chapters of the result presentation, which I assume you have under your eyes before handing it over to you for Q&A. Let me start with the key takeaways for this quarter. First of all, there is good business growth in all three operating divisions on the back of outstanding loans up 4.7% and the successful development of new digital customer experiences. Secondly, a significant increase in the Common Equity Tier 1 ratio, which is up 20 basis points, standing at 11.9%. Looking more broadly at the first half of the year, the group generated EUR 4.4 billion of net income, up 10.8% year-on-year, with positive jaws, as you can notice.
Looking in a little more detail at our second quarter results on slide three, revenues of the operating divisions were up 2.5% compared to the second quarter 2018. This is driven by IFS and CIB, with domestic markets revenues virtually stable due to the low rate environment. Costs of the operating divisions evolved at 1.8% compared to the second quarter 2018, leading to positive jaws, as I mentioned before. The group cost of risk remained low at 30 basis points over outstandings, thanks to the strong discipline at origination, low interest rates, and the continued improvement at BNL. The group net results came in in the second quarter at EUR 2.5 billion, up 3.1% on the same quarter a year ago.
If you can now turn to slide five, you can see the exceptional items of the second quarter, which had an impact of EUR -150 million net of tax, a tad less in the corresponding period of last year. They included the 2020 plan transformation cost. They included restructuring cost of acquisitions, and they included an additional adaptation measures in BNL bc and asset management. The latter, to address the evolution of the economic environment for these businesses. These adaptation costs amount to EUR 51 million and correspond to new departure plans in BNL and asset management. Certain additional measures are expected to lead to an above 1.5x recurrent full-year cost savings effect, and the full-year effect should be 2021. These are additional cost savings to be added.
In addition, quasi-offsetting exceptional items included the capital gain from the sale of 2.5% of SBI Life, together with the impact of its subsequent deconsolidation, as well as a partial impairment of BancWest's goodwill on the back of recent changes in the economic prospects for the U.S., and in particular, the interest rate scenario. If you now move on to slide six, you can see the performance of the operating divisions in the second quarter, with the top line up 2.5%, as mentioned before, and a positive jaws effect as such translating into a 3.9% increase in gross operating income. If we now zoom quickly on the first half of slide seven, you can see the positive jaws effect, as well as the rise in net income and the annualized return on tangible equity clocking in at 11%.
Now moving to the revenues of the operating divisions, which you can see on slide eight, and those revenues of the operating divisions increased by 2.5%. They were just 0.3% lower at Domestic Markets due to the low interest rate environment, which was mostly offset by good business drive and continued growth in the specialized businesses. They were up 3.4% at IFS on the back of good growth, while CIB revenues progressed by 4%, driven in particular by corporate banking. If you now flick to slide nine, costs of the operating divisions were up 1.8%. In Domestic Markets, costs were down 0.5%, leading to positive jaws with the 1.2% cost reduction in the networks and a rise in the specialized businesses accompanying the growth of that part of the activity. IFS cost evolution reflected continued business growth with a positive jaws effect at constant scope and exchange rates.
CIB's cost increased slightly on the back of the growth of the activity, but benefited from the continued and accelerated implementation of cost savings, which led to positive jaws as well. To sum up, you can see the impact of the cost-saving measures generated by our Transformation Plan and the continued focus on delivering positive jaws. Staying on costs, if you go to slide 10, you have the details on the implementation of our Transformation Plan. In the second quarter, we generated an additional EUR 199 million of recurrent cost savings, taking the cumulative cost savings since the launch of the program to EUR 1.5 billion. I remind you, a target of generating a recurring EUR 3.3 billion recurring cost savings by 2020.
Also, we booked transformation costs for EUR 222 million this quarter, taking the accumulated spending in the first half to EUR 390 million, in line with the target of EUR 0.7 billion for the whole of 2019. I remind you that is the last phase of that Transformation Plan. There will no longer be transformation costs in 2020. In a nutshell, the implementation of our Transformation Plan is in line with our roadmap. If we now look to another part of the profit and loss, which is the cost of risk. If you could flick through the three dedicated slides, which start with slide 11, you can see, as I mentioned earlier, that it was at a low level of 30 basis points over outstanding.
If we take business one by one, you first see that at corporate banking, cost of risk was low at 6 basis points, whereas in the corresponding period of 2018, it has seen net write-backs. If we now turn to domestic markets on slide 12, you will see that the cost of risk was still low in French retail, nil in Belgian retail, and continued to decrease at BNL. In the other retail businesses on slide 13, personal finance saw low cost of risk this quarter due to non-recurring provision write-backs. Europe-Med cost of risk was up compared to a very low base in the second quarter of last year, while BancWest cost of risk was negligible.
If you now swipe to slide 14, where we look at the balance sheet, our strong balance sheet, and in particular, we look at the financial structure, you can see that our Common Equity Tier 1 rose 20 basis points and clocked in at 11.9% at the end of June. This due to the combined effect of the second quarter results, excluding exceptional non-operating items, after allowing for a 50% dividend payout, which added 20 basis points. Also there is the net impact of SBI Life capital gain and the deconsolidation of the residual 5.2% stake, as well as the partial goodwill impairment of BancWest. That leads to another 10 basis points. There is the increase in risk-weighted assets, net of forex, which reduces 10 basis points. All of this makes for a 20 basis points improvement.
Our leverage ratio stood at 4.1%, and the group's immediately available liquidity reserve totaled a massive EUR 330 billion at the end of the second quarter. The evolution of these ratios illustrates the very solid financial structure of the group. With this, if we look at slide 15, you can see our net book value per share stood at EUR 75.7 at the end of June, after payment of EUR 3.02 dividend per share. Looking at the period starting from year-end 2008, the compounded growth rate stands at 4.9% per annum. This slide highlights BNP Paribas' continued value creation through the cycle. I leave you to peruse the next two slides of this introductory part, slide 16, on our ambitious policy of engagement in society. I draw your attention to the Euromoney Award that we just received, naming us as World's Best Bank for Corporate Responsibility.
Slide 17, summarizing the continuous reinforcement of the group's internal control and compliance system. It is. I would now kindly ask you to advance to the results by division, starting with Domestic Markets from slide 19- 25. As you can see, in the second quarter, Domestic Markets showed increased business activity with good loan growth at 4.2% in the retail networks, as well as in the specialized businesses, combined with higher deposits in all geographies. Private banking saw a good level of net inflows at EUR 2.2 billion in Q2. Domestic Markets has continued to improve its digital offer, as illustrated, for instance, by the specialized agency, D-Rating in France, which ranked France Retail Banking as number one among retail banks for a digital offering, progressing strongly at Hello bank! and Nickel.
Moreover, mobile usages have significantly accelerated with over 4 million active mobile users in the networks and a 28% year-on-year increase in connections. Now turning back to the P&L, revenues were just a tad lower at a little over EUR 3.9 billion on the back of the low rate environment, which was partly offset by the increased business activity and the good drive of the specialized businesses. Operating costs were down 0.5% year-on-year, with a significant decrease in the three networks, generating a positive jaws effect. The progress we're making on the cost front results from the ongoing implementation of the digital transformation, as well as new operational models illustrated, for example, by the adaptation of the three branch networks, which have already been reduced by 333 since the launch of the 2020 plan.
Now turning to cost of risk, remained low with a continued decrease at BNL and pre-tax income was a tad lower at EUR 1.1 billion. Looking swiftly at each country and business, I like to highlight in particular that French Retail Banking continued to show good business drive with revenue slightly up and positive jaws on the back of cost-saving measures. BNL continued to gain market share in the corporate segment. Despite lower revenues, pre-tax income has increased 11% year-on-year on the back of good cost control and lower cost of risk. Moreover, as I mentioned, BNL is pursuing additional adaptation measures by leveraging on the new Quota 100 law, which will facilitate early retirements, leading to an overall stepped-up headcount reduction of 1,500 by 2021. Turning to Belgian Retail, it showed sustained business activities, whereas revenues were impacted by the low rate environment.
The business is very active on costs and cost reduction, which were down significantly, thanks to the effect of the transformation plan. Finally, the specialized businesses continued to deliver good business drive with positive jaws and significant income growth. To sum up, Domestic Markets showed continuous good business drive and delivered positive operating jaws in a context of low interest rates. If with this, we look at the second of our divisions, which is International Financial Services, and this from slide 26 - 33. You'll see that this division confirmed good business growth in the second quarter, with loans up 5.6% on a like-for-like basis and net asset inflows of EUR 7.3 billion in our savings business.
IFS businesses have continued to implement their digital transformation with, for instance, the extensive rollout of e-signature for contracts in all IFS businesses, the development of new self-care features, as, for example, in personal finance, where over 49 million self-care transactions are performed directly by clients, and the development of robotics as well as artificial intelligence, with already 268 robots performing controls, reporting, and data processing tasks. If we then turn to the P&L, revenues were up 3.4%, clocking in at EUR 4.3 billion, and 1.2% on a like-for-like basis. Given effective cost control, operating jaws were positive on a comparable basis, leading to a pre-tax income of EUR 1.4 billion, just down year-on-year and stable on a comparable basis. Let me now zoom quickly on the main components of IFS.
If we start with personal finance on slide 28, it continued to show good business drive with revenues up 4.3%, costs evolving at essentially the same pace, with the business confirming its target of positive jaws for the full year and a pre-tax income in the second quarter of EUR 454 million, slightly up on last year. If we now switch to Europe-Med, slide 29, it showed loan growth on a like-for-like basis, with revenues up in all regions, while costs were down, thanks to cost-saving measures and generating largely positive jaws. Cost of risk was higher compared to an especially low base in the second quarter 2018, mostly on the back of an increase in Turkey. Pre-tax income was up over 9% but slightly down at historical scope and exchange rate due to the depreciation of the Turkish lira.
If we now turn to BancWest on slide 30, on a like-for-like basis, it showed moderate loan growth compared to last year. Private banking assets under management increased 11% year-on-year to reach EUR 14.9 billion. Revenues were down due to lower interest income despite higher fees, and costs were adjusted at higher, reflecting good overall control at BancWest is continuing to rightsize its headcount. On the whole, its pre-tax income was down 11% year-on-year or 5% at historical scope and exchange rate. Lastly, if we look at slide 31- 33, and I mean lastly in IFS, our saving businesses saw net asset inflow in all of its sub-businesses. Assets under management rose to EUR 1,089 billion at the end of June.
Our insurance business continued to show good business development, growing its international presence through partnerships, as illustrated by the recent signing of the long-term partnership with Scotiabank in Latin America, which will provide access to its 9 million clients across four countries. Revenues rose by 6%, with costs progressing at a slightly lower pace, and pre-tax income marking a 4.6% increase year-on-year. Turning to wealth and asset management, revenues were down 4.7%, with wealth management and asset management revenues marking an overall slight increase. On the other hand, real estate showed a drop due to a very high base in the second quarter of last year. Costs decreased by 1.2%, thanks to the effect of cost-saving measures, in particular in asset management.
As I mentioned in the introduction, this business line is implementing additional adaptation measures to streamline its product offering, regional organization, and entities, which will result in additional cost reduction. Overall, wealth and asset management pre-tax income was down 13.8% year-on-year. To wrap up IFS, IFS showed good business growth and confirmed its significant income contribution in the second quarter of the year. If I can now ask you to turn to the third and last division, and we go to slide 34, which is Corporate & Institutional Banking, which has continued to accelerate the implementation of a transformation plan along its three main axes, namely the continued streamlining of activities, the intensification of the industrialization, and the selective growth on targeted clients.
The latter being illustrated by our preliminary agreement with Deutsche Bank to provide service continuity to their prime brokerage and electronic execution with the transfer of the necessary technology and staff. In Q2, CIB continued to strengthen its leading positions in Europe, as evidenced by its number one position for all bonds in euros, syndicated loans, and high yield issues. Besides, Exane confirmed its top spot in Europe in equity, research, and brokerage. CIB's revenues stood at EUR 3.1 billion in the second quarter, marking a 4% year-on-year increase. Costs were up a limited 1.3%, leading to a 2.7-point positive jaws effect and benefiting from the cost-saving measures, as well as from the implementation of end-to-end digitalized processes and the automation of operations. If we look at cost of risk, it remained low and only marginally higher year-on-year.
As a result, CIB generated close to EUR 1.1 billion of pre-tax income, marking a 6.2% year-on-year increase. If we now look at the business lines of CIB one by one, we start with Global Markets. Revenue showed again, good performance in a lackluster context, marking just a 1.2% decrease year-on-year on a comparable basis. Fixed income revenues were up 11.7% with a good performance in forex credit and primary issues. Whereas equity revenues were down 14.3% compared to a high base in the second quarter 2018, but with good client activity in equity derivatives. Global Markets is stepping up its market shares and is pleased with the preliminary agreement signed with Deutsche Bank to provide continuity of service to the fund manager clients of its Global Prime Finance and electronic equities. There's very good cooperation with the Deutsche Bank teams, and work is advancing faster than expected.
Now turning to Corporate Banking, revenues increased by 7.3% on a comparable basis, with very good business development in Europe and continued growth of cash management and trade finance. As you can see, our Centric platform is continuing to develop well, with already 10,900 clients and over 17,000 daily connections as at June. Finally, Securities Services saw a sharp rise in assets under custody and under administration on the back, in particular, of the integration of Janus Henderson assets since the end of March, and revenues were up 12%. In a nutshell, CIB delivered a good performance with revenue growth and a positive jaws effect. This concludes my introductory remark of the group's second quarter 2019 results. The main takeaway from today's presentation are, i n the second quarter, we continued to successfully implement new digital customer experiences. The group enjoyed business growth in the three operating divisions.
In the first half, we delivered higher income and a positive jaws effect. Besides, the group generated an annualized ROTE of 11%, and our Common Equity Tier 1 ratio increased further to 11.9%. Finally, ladies and gentlemen, I thank you for your kind attention, and I will now be pleased to take your questions.
Ladies and gentlemen, if you would like to ask a question, please press zero one on your telephone keypad. Please lift your headset, ensure that the mute function on your telephone is switched off, and that you are in a quiet area to maximize audio quality. We will take questions in order received, and we will take as many as time permits. If you find that your question has been answered, you may remove yourself from the queue by pressing zero one. Again, please press zero one on your telephone keypad. We have one first question from Mr. Jean-Pierre Lambert from KBW. Sir, please go ahead.
Good afternoon, Lars. I have three questions if possible. Can you hear me?
Yes, I can. Go ahead.
Okay. The first question is, the dialogue with Deutsche Bank is progressing well. Can you explain the status of this agreement, because it's a preliminary agreement? What is the size of that business relative to BNP? If you could give some metrics so we have an idea of the potential impact on revenues or cost. The second question is regarding TRIM. You indicated previously a potential impact of 20 basis points. Do you have any further insight or updates in terms of timing or the business units exposed? The third question is about disposals. You have disposals in the pipeline in West Africa. Are there any more disposals under consideration which are not strategic or where the returns are insufficient? Thank you.
Jean-Pierre, thank you for your questions. On your first question, yes, there is a preliminary agreement. The idea is that BNP Paribas would be the referral bank for clients, for example, in the domains considered. That discussion is progressing. The interactions between the teams of Deutsche Bank and BNP Paribas are very constructive and very positive, and the progress is advancing faster than we anticipated. Overall, this is a process we have to go through. It's also a process that we have to discuss with the client, because it's a transfer eventual of clients. We also have to see the supervisors alignment. This is going to take some time. We anticipate that that phasing of transfer, which can take time, should be, let's say, finalized in entirety by the summer of next year. That is a bit the overall process.
It's progressing well, and as I said, the interactions with the teams, both at Deutsche Bank and at BNP Paribas, are very well. When it comes to impact, let's be fair, if you look at the scale for us, this is an activity which is very collateralized and therefore is not weighing that much on the prudential capital. We anticipate that by the time those transfer will have happened, the impact on our Common Equity Tier 1 will be 5 basis points. That is a bit the idea. It's intrinsically an activity which is very useful and for their clients. That's a bit where we stand, and so we will continue to update you on the progress, and as I said, the process is advancing faster than expected. That's the first thing. The second question is on TRIM.
TRIM, let's not forget, TRIM is not something like a new Basel definition where there is an impact which is uniform for all. TRIM is an exercise where the supervisor looks into detail in the models, validates the model, disvalidates the models, and so forth. For us, it is not something where for, like a new Basel agreement, you can estimate what the impact is. We basically anticipated a ballpark estimate of 20 basis points, but there is not much more I can say. Those 20 basis points, as I said, it's an impact which could fall this year, which could fall that year. There is not much more I can say. The only thing I will say is that whenever there is an evolving clarity that comes, we will, of course, provide updates.
On your third question with respect to disposals, as we said, there is not much I can say. There is, as you know, there are some reviews that we have said that if there is over time an activity that maybe has not led to us being able to beef up those activities, we will look into that, but there is not a specific list of things to share. That will be my three answers, Jean-Pierre.
Great. Thank you very much, Lars.
Thank you, sir. We have another question from Mr. Stefan Stalmann from Autonomous Research. Please go ahead.
Good afternoon, Lars. I have also two questions, please. The first one is, you're now I guess one quarter away from being at your 12% CET1 target. The question is, what are you going to do afterwards? In particular, would you maybe willing again to look at bolt-on deals? Second question relates to the goodwill impairment at BancWest. There's about, I think, EUR 2.5 billion goodwill left. The question here is, how should we look at this remaining goodwill? Could there be further impairments looming? Could you give any color on what determined the impairment that you took in the second quarter, what may have triggered it? Also what may have led to the size of EUR 500 million as opposed to more or less? Thank you.
Stefan, thank you. Yes. You've seen our continuous improvement of Common Equity Tier 1, and this is a bit a reminder of what we are positioned. We create a recurring profit on a yearly basis. 50% of that is being paid in dividends. Of the other 50%, there is the equivalent of 20 basis points that we need to support growth, and there is an additional generation of 30 basis points. Of that 30 basis points, as it typically falls, there is zero in the first quarter because of taxes, IFRIC, and so forth. There is 10 basis points every quarter to come. That is what we saw in the second quarter, and it was a bit strengthened by the fact of SBI Life and the goodwill impairment that it became 20 basis points.
Indeed, one could assume, and that's what we said, we had an initial plan of being at 12% in 2020, that it will be 2019. Our overall stance with respect to that is that indeed we are not in the business of stacking up capital. However, there is the discussion ongoing to finalize Basel III, which might lead to an increase in capital requirements. We basically estimate that this could be, in its current form, something around an inflation of 10%, which would mean that we have to accumulate that free capital for the next couple of years to be ready for Basel. It all depends. Our intention is to accumulate going forward, to be ready for, and then we will see in the end how the finalization of Basel falls out and what we will do with it.
That is basically our overall stance. When it comes to bolt-on deals, independent of that, let's be fair, for us, what we are doing is also a lot of client transfers, right? That is something that we continue to do. We've done that in the past with RBS. We have a pre-agreement to discuss this with Deutsche Bank. That is the kind of things that we will continue to do. That would be on capital. When it comes to the BancWest situation, as you probably have seen, and as you might see tonight, we'll see the economic environment has slightly evolved recently, and particularly the economic outlook is maybe a tad below what was initially foreseen, and in particular, the interest rate scenarios are different from what initially was foreseen.
This basically, in the accounting of IFRS, forms a trigger for the goodwill to be reviewed. We had to look at the goodwill. We looked at it, and we basically took a conservative stance, and we impaired it by EUR 500 million. This EUR 500 million basically doesn't have an impact on the P&L because, well, there is the SBI Life gain, which is basically in the same order of magnitude. That is basically where we stand.
Thank you.
Thank you, sir. We have another question from Mr. Pierre Chédeville from CM-CIC. Sir, please go ahead.
Yes, good afternoon. I have two questions. First question regarding the cost of risk. We can see that there are some write backs, in particular in the CIB division. It's been a long time since we can observe some write backs in this division. I wanted to know where do these write backs come from, what types of file. Are there some, I would say, general provision on specific files? I wanted to know if these write backs hide, actually, a rise in the cost of risk regarding the big corporates, and we all know that there are some, I would say, dossier plus, one or two dossier plus, as we say in French, that are quite worrying. That is my first question. My second question relates to inflows in the insurance business.
I didn't find in your presentations, maybe I missed it, I don't know, the share of unit-linked products in net inflows and in outstanding in the insurance business. I know that this is a part that is decreasing, so if you could give me the number, it would be useful. Thank you very much.
All right, Pierre, thank you for your questions. First of all, when it comes to the cost of risk, you know that we have a very prudent approach. When there was a phase when there are some deteriorations, or even sometimes when the supervisor or the regulators ask us to provision because they consider all of the exposure of all the banks similar, which is not the case, we typically take provisions over and above what we typically need. That is what we saw. Our prudent approach led to some over-provisioning in the past, and so what we see now is that in the environment of today, those counterparties are doing well, and we can take back those provisions. On the other question, as we are very prudent in our provisioning, it is not that we wouldn't provision other files.
Overall, it is just a write back of historic environments where we provisioned, and for the rest, there is nothing particular to mention. When it comes to your other question on the insurance, the unit link, as you know, it is around a third of the activities. That is basically where we stand. Pierre, that would be my two answers.
Thank you.
Thank you, sir. We have another question from Madame Quoirez from UBS. Madame, please go ahead.
Hi, Lars. Good afternoon. Just a few questions for me. You disclosed the impact of the potential agreement with Deutsche Bank as far as the CET1 ratio is concerned. Can you give a similar number for the leverage ratio and explain if you are comfortable with that? Second thing would be on personal finance. Are we already seeing the benefit of the acquisition of Opel, or is that something that will come at a later date? Finally, on Securities Services, you integrated the asset of Janus Henderson now. How should we think about this quarter revenue numbers? Is it sort of a new base, or when you talk about the specific transaction, is that related to something else? Thank you.
Lorraine, thank you for your questions. When it comes to the preliminary agreement of the activities, where Deutsche Bank would refer clients to us, indeed, the consumption in capital is around 5 basis points. When it comes to leverage, it is around 10 basis points. As you see, we are above 4% in our leverage. Nor the 5 basis points on Common Equity Tier 1, nor the 10 basis points on leverage are a concern. As a reminder, this is a profitable activity. It would be a very good redeployment of the prudential assets. When it comes to personal finance, well, we don't break it down in each of the activities, but the Opel transfer is now part of the activity that we report on.
When it comes to Janus Henderson, yes, we have now included those assets under management, and those provide for a lift in activities. However, when we mentioned a specific point, it is indeed due to a run-of-the-mill activity, but we don't specify what it is, but it's a one-off event. Lorraine, those would be my three answers.
Thank you. Is it possible you kind of quantify a little bit that one-off transaction?
The fact that we didn't specify it much, you can understand that on the bottom line, the impact is not multiple of 10s. I'll leave it to that.
Thank you, Madame. We have next question from Mr. Tarik El Mejjad from Bank of America Merrill Lynch. Sir, please go ahead.
Hi, good afternoon, Lars. Two questions, please. The first one is on the retail and more specifically on the Domestic Markets. I was wondering when, or if are you updating your guidance in terms of revenues or NII in 2020 and beyond. The last time you gave us a guidance, expectations for rates were a bit more optimistic than where we are now. Second question is on the CIB, I mean the EUR 5 billion RWA exits that you announced in Q4, there were around EUR 200 million-EUR 300 million revenues attached to them. When are we seeing the impact of these revenues down? For now we see somehow the RWA is going down, but not the revenues impacted by these. These are my two questions. Thank you.
Tarik, thank you for your questions. First of all, on Domestic Markets for the outlook and the targets, and it's wider actually than Domestic Markets. If you look at our targets for 2020, indeed we are in an environment where there are some uncertainties about growth. Growth will be there and maybe a tad lower. When you look at the overall target, we look at the return on equity, because the return on equity includes revenues but also costs, also these elements that you can work on. What you should focus on is indeed on that ROE target, which means that we will indeed continue on all the adaptation plans and delivering on the additional cost savings of our transformation plan. These are the important points, and these are the important points to support our return on equity. That is on Domestic Markets.
When it comes to CIB, as a quick reminder, so we basically said that yes, we would reduce some of the RWA consumption and then basically redeploy it in other activities. Of course, the activities that we stopped were activities that were typically with one product or with one client and so on. Typically also products which had a return, which was at that stage, not where we want it to be. That is why you see an impact on RWA, and you see less of an impact on the elements of the P&L. Tarik, that would be my two answers.
If I can follow up quickly on the first one on retail. What you are saying is, let's not focus on NII, don't worry about that, we will actually cut costs if needed, and then we'll deliver the ROE we intended to do. Does that mean you're looking at announcing further cost cuttings? What about, are you implementing also provisions going up in that?
Tarik, your first part of your synthesis is indeed correct, but we're here to talk about the second quarter results, and that is basically it. We'll see how things evolve. What I'm saying is we are focused on delivering the ROE, and we'll observe how things evolve and how we go. Indeed, into your example, as we saw in there that at BNL in the overall environment, it was a little bit more lackluster. We really stepped up the cost reduction exercise in order to warrant the overall bottom line and warrant the ROE. That is basically where we stand.
Thank you very much.
Thank you, sir. Next question from Mr. Omar Fall from Barclays. Sir, please go ahead.
Good afternoon, Lars. Just three questions. Last quarter, you mentioned that you had some securitizations that would be delayed into future quarters and would therefore benefit capital later. I think at the time you mentioned 10 basis points of CET1 also. Is that still to come, or is some or all of it in the Q2 figures? The second question is, I know you haven't given this to us in the past, but given the importance of the sector of the increasingly negative rate environment, it would be really helpful for our modeling to know how much of the deposits at the group are reinvested at their effective duration via replication portfolios or bonds, and what the average duration is. Maybe even if you just gave us the figures for the domestic market retail units, that would be very helpful.
Lastly, just coming back to Stefan's earlier question, just to confirm the 10% increase in RWAs that you're guiding for under Basel IV, that's not fully loaded for the output floor, right? That's just the day one impact in 2022? Thank you.
Omar, thank you for your question. Indeed, in the first quarter, we mentioned that the typical elements of when we provide lending is that on one hand, we syndicate, on another hand, we securitize. The syndication has that production end of the quarter. Didn't happen in the first quarter, it happened in the second quarter. However, on the securitization, it was a bit delayed because there were some new regulations being crystallized, which weren't fully crystallized. That is basically done now, but it was basically too late to really have that securitization going on in the second quarter. That securitization is going to come in the second half of the year.
When it comes to your question on how ALM and other elements are handled in the mismatch, this is, as you know, we typically what we consider as really elements which are also important with respect to competition and so forth. That is information we do not share. When it comes to the Basel IV impact, yes, the Basel IV, what we anticipate is that the impact of the form of total and in fully loaded would be a 10% inflation of the RWAs. That is for the moment what we read in the text and what we will position ourselves to have as an impact.
Perfect. Thank you so much.
Thank you, sir. We have another question from Mr. Nick Davey from Redburn. Sir, please go ahead.
Good afternoon, everyone. Three questions, please. The first one, Lars, can I ask if you'd be happy to make any comments about the absolute levels of cost that we might see next year? I know there are uncertainties about planning in absolute terms. There does seem to be quite a big gap between what you're saying on slide 10, which is sort of EUR 2.2 billion or so of cost efficiencies and lower transformation costs next year, and consensus, which I think has got about a EUR 600 million decline in costs. I wonder if there's anything you can do to help us bridge that divide. A second brief question, just could you remind us, please, on how you'll treat things like the SBI Life gain and the goodwill impairment when it comes to dividend?
The third question, if I could just invite some comments about French retail net interest income, because you've been showing this sequential margin stability for a few quarters now. The backdrop, it seems to be becoming more competitive, and it does seem quite a striking disconnect that your net interest margin there is above 2%, and pretty much every French asset I can see is on the front book yielding 1%-ish or less. Any comments you could make about the sustainability of French margins, please. Thank you.
Nick, thank you for your questions. When it comes to the question on the costs, the thing is, in the end, we have, being a diversified bank, we have different types of costs. We have some costs which are structural. We have some costs which are variable. Those costs that are variable, they can be in terms of what is happening in CIB, but they can also be in the activities that work through joint ventures or distribution aspects, like for example, in the car leasing through dealerships. From that point of view, in the end, we basically manage the return on equity. Depending on how we see the revenue grow, if there is revenue growth in those specialized business, the cost will go up. Basically asking me, how will the cost go? I honestly, I cannot have a sensible answer to that.
My sensible answer is we look at the return on equity, therefore it is on the revenues, and there are costs that accompany those revenues. That is how you should look into it. I repeat what I basically said, we will have that evolution, and intrinsically, independent of that, we will have the delivery of the cost reduction. We already have EUR 1.5 billion, and it will go up into 2020 to EUR 3.3 billion. I know that this is a bit difficult for you to put that into your overall analysis, but it depends on what happens to the revenues. Costs are not fixed. They go in that. It's a dynamic part. The other thing is next to the cost, the savings, let's not forget that the transformation costs that you see today, they will go to zero.
If you even do it very simple, you basically take the cost, you drop the EUR 700 transformation cost to zero, and you pump up the EUR 1.5 billion savings that you have this year to EUR 3.3 billion. That's the simplest thing you can do if you want to have those numbers in your views. That's the first one. When it comes to your demand of exceptional elements when it comes to dividend, our overall guidance is that the dividend is 50% of the bottom line. That's basically it. W hen it comes to French retail, the dynamics, let's not forget French retail, it's not necessarily that every bank is very comparable. There are some banks which are much more focused in the metropolitan areas, therefore they are much more focused on corporate and they are more focused on wealth management.
The dynamics that you have between several banks can be different by the kind of activity. That is basically the color I would give on French retail. Nick, that would be my three answers.
Okay. Thank you.
Thank you, sir. We have next question from Mr. Kiri Vijayarajah from HSBC. Sir, go ahead.
Yes. Good afternoon, Lars. Just a couple of questions from my side. Firstly, on Arval and the car leasing business, rapid growth in volumes there, it's ticked up slightly now running at 11% year-on-year. Given what you said about weaker economic growth, I just wondered how sustainable that is for the next few quarters. What's your outlook for residual values? Are there any clouds on the horizon that are sort of popping up for you? S econdly, on transformation costs, you said you're going to be all done by the end of this year, so nothing in 2020. I see this quote-unquote adaptation costs have also now crept in. Could those additional kind of exceptional costs creep in for 2020?
I guess what I'm asking is if you sort of just changed the name of your exceptional items to allow you to book some more of these exceptional costs into 2020. Thank you.
Kiri, thank you. When it comes to Arval, there is indeed a sustainable growth because basically through the partnerships that we have, we can capture, so we have new access to clients and distribution, which basically step it up. That is what we see. When it comes to the revaluation, what we see now in the continuity and in the way we basically handle upfront and later on the redistribution of those cars, we don't see a concern on the revaluation. That is on Arval business going well. Secondly, on the transformation. Let's not forget the transformation costs that will basically end this year. They were basically in a plan to do a transformation. A transformation basically digitalizing. I remind you that's why initially we said those transformation costs would be EUR 2.7 billion over the three years 2017, 2018, 2019.
They were EUR 3.3 billion of costs and that would deliver in the digitalization EUR 2.7 billion of cost savings. This is basically a process which was helping us to change the interaction with the clients. As if I can say, "A byproduct would lead to cost reduction because we optimize the interactions." What we have done is basically focused it a bit at the beginning of the year, more on cost savings. Instead of EUR 3 billion, we do EUR 2.7 billion investments, and instead of EUR 2.7 billion recurring savings, we stepped it up to EUR 3.3 billion. That is basically the plan that is ending, and that was driven by a transformation digitalization. What we do now in the adaptation that we basically stepped up at BNL and in asset management is really saying there is an environment which is changing.
We're changing into a new system in one. There is a new social environment in the other. We basically step up the cost reduction measures. It is something else. It is something that generates new savings, over and above the ones that we have announced. It's really a focus on cost savings. That basically means that it is relatively rapid in yielding a return, and the return is typically at least 1.5 x the investments. It's a different dynamic. It's not just an extension of, it's a different dynamic that we apply to be really well prepared if an environment is a little bit more lackluster. Kiri, that will be my two answers.
Okay, got it. Thank you.
Thank you, sir. We have a next question from Mr. Jean-François Neuez from Goldman Sachs. Sir, go ahead.
Hi, good afternoon. I wanted to ask also about the cost base, because we can see, as you said yourself, that you're adapting this to the environment on revenues, and we've seen what the central bank policies were. Just to put this crudely, I think your target, if you take 64.5% of cost to income ratio of the revenues of before, which we are updating with the presentation of the fourth quarter of 2008, I guess that would be EUR 29.4 billion of cost for next year. I just wanted to understand whether this number, including potential measures to do new savings, so upfront kind of restructuring charges as the EUR 50 million of today, whether that number is a number that you think you can achieve next year. That was my first question. The second question I wanted to ask was on BancWest.
I just wanted to understand whether obviously beyond the accounting things which have triggered the goodwill impairment, whether you think that the performance of BancWest is of a nature of at some point making you reconsider that as a part of your portfolio of holdings, just as you have at the time of First Hawaiian. Lastly, I just wanted to ask on fixed income, which has been very strong compared to peers this quarter and the quarter before, whether you think the run rate of revenues, essentially whether the last year's run rate of revenues was too low, whether it had been impacted by maybe one-off losses or bad trading environment, whether that makes the current run rate maybe more, let's say, sustainable, or whether you're gaining revenues through new clients or anything like that this year.
I'm just trying to understand where the difference of the comparison base comes from. Thank you.
Jean-François, thank you for your questions. Back on the costs. As I said, you have to look at it. In the end, we focus on the return on equity. On the return on equity, that means that there are several levers that we will optimize. When it comes to net interest income, well, there is the environment that we talked about. That basically means we want to step up our fee and commission-generating businesses. Overhead, we want to reduce the costs. We already have the full impact. We will have the full impact of the transformation plan, and we basically step it up if there are environment that are faced with changes that we really step up the cost reductions. That is what we'll do. To top it off, it will also be in a low interest rate environment.
There is the cost of risk, which should be normally milder than anticipated. That's basically why I say it's all the levers that we use, and the main focus is the return on equity, and that is the one that we focus on. When we look at BancWest, indeed, let's not forget BancWest, there are a lot of saving measures that are implemented. There is an FTE reduction. There is also the middle office, which is being transferred into other states, like for example, Arizona, and that is what we keep on doing. It is so very important that the plan is to be very focused on the core franchise, strengthening the cooperation with the group. These are things like corporate banking, wealth management, therefore delivering positive jaws.
Let's not forget, if you look overall of the U.S., how that has an economic dynamic, and therefore it is a strategic asset for the group. When it comes to your third question on fixed income, as I said, 2018 is a bit of a period where there was the uncertainty, which was crystallizing around the rates and therefore the fixed income activities. Therefore, we accelerated really our transformation. This is a transformation where we went to from a kind of averagely bespoke activity that we pushed into, or a very industrialized approach or a very bespoke approach. That means that you do have to change things. You have to digitalize. At the same time, you have to make sure that people can handle that interactive and integrated approach to clients. That is a lot of changes that we have done.
That is basically that transformation. We have it plugged in since the beginning of the year. That is why we have been able to step up, as we talked about market share. We have done better in forex. That is a bit the situation that we face. It's a tremendous effort that we have done. It's a tremendous step up through all the changes that I mentioned this year. Jean-François, that will be my three answers.
Thank you.
Thank you, sir. We have a next question from Mr. Geoff Dawes from Société Générale. Sir, please go ahead.
Yeah. Hi, good afternoon, Lars. Two questions from myself. It's Geoff Dawes from SocGen. The first question is on the gearing to rates. We've been through a lot of the headwinds that you might face with rates going lower. Are there any business lines where you think the gearing could be the opposite, so you get some positive P&L response if rates go lower? I'm thinking possibly of the personal banking, consumer financing division, where funding costs are quite sensitive, loan losses get better and so on, but would be keen to your thoughts about that. Second question is on your online banking brands. There's just very little color on them in this presentation.
Perhaps if you could give some idea of how they're gearing up in terms of your revenue expectations, and also whether the lack of color on them is a reflection of how you see them developing, whether they're not perhaps developing as quickly as you anticipated. Those would be the two questions. Thank you.
Geoff, thank you for your questions. When we indeed look at it, we are a diversified bank, diversified in activities, diversified in exposure. If you indeed look at the interest rate environment, there are activities that basically benefit from indeed the overall funding and so on. Those examples are the logical ones are Arval leasing and consumer finance, and to some extent, the same is true for insurance. That is the kind of businesses that are typically positioned well. When you look at the online banking, let's not forget, we do have a kind of an all integrated approach. If you take in France, for example, we have the high-end of the customers, which are still the ones who have relatively the high touch.
You have the branch network, then you have Hello bank!, which offers the same services as the branch network, but without basically the branch, so with the digital aspect. Y ou have the last one, which is Nickel, which is the introductory kind of services that we have. That is basically what we are doing. If you look at the clients, the Hello bank!, if you look at it for Domestic Markets, has now 3 million customers. If you look at Nickel, which is a startup, it's the third largest retail distribution network in France, just to give you an idea. That is an increase of 61% versus what we saw a year ago. From that point of view, and this is basically what you can find on slide 20 and beyond.
We are having this approach where we serve different customers with different aspects of digitalization. That means also that they come at a different cost platform to do it. As I said, these are the different ones. If you look at the Hello bank! and if you look at Nickel, they are really progressing well. Even the new ones like Lyf Pay, which we are introducing, they are all having a good pickup. Just those would be my two answers.
Just to check, can you give us any revenue indications of those two brands?
As I said, we consider the activities as an integrated approach. We don't go into these kind of environments because it then also makes it for a competitive, interesting information. We basically leave it at this, Geoff.
Okay. Thank you. Thank you for your time.
Thank you, sir. We have another question from Madame Flora Bocahut from Deutsche Bank. Madame, go ahead.
Good afternoon. I have two questions as well. The first one is regarding the Belgian NII, which I think is down close to 7% year-on-year, despite 5% loan growth, and which sounds a bit worse than what we are seeing for peers. The first question would be really if you could explain a little bit what's going on in Belgium NII, especially considering that some of your competitors in the country have made positive comments regarding the front book margin on mortgages year to date. The second question is going back to the Common Equity Tier 1 ratio. Just wanted to check if I understood correctly some of the comments you made on this call, where you basically said that we could expect around 10 basis points of capital buildup organically in Q3, same amount in Q4.
I think you're also saying that the 10 basis point delay that we had in Q1 from the securitization process is still to come in H2. Would that be fair to assume that we can expect a 30 basis point of capital generation in H2 excluding any other impact like TRIM? Thank you.
Flora, thank you for your questions. When it comes to the net interest income in Belgium, the best way to look at it, because there are some evolutions quarter by quarter, is to look at the six months. If you take the first half, you see that there is an evolution of -3.6%. That is the intrinsics on which we guided that we know given the pricing, which is differently in Belgium than it is, for example, in France, this is something we've guided that we would see. As I said, if you look at the first half year, that's the trend that you see, and that's a trend that is similar to what you see in Belgium. When it comes to the Common Equity Tier 1, there's a couple of clarifications.
When we talked about the securitization that they were basically postponed in the first quarter, that they would come later, let's be very fair that the securitization is part of our overall setup. When I said that normally you should have 30 basis point generation, you shouldn't add the securitization part. It is in there. O f course, let's not forget, we said that we cannot exclude that there will be a 20 basis points impact of TRIM. That will be the clarifications that I bring forward.
Thank you.
Thank you, Madame. Next question from Mr. Matthew Clark from Mediobanca. Sir, please go ahead.
Good afternoon, three questions from me as well. Firstly, on the Deutsche deal, could you just clarify whether this gives you any new capabilities that you don't already have? Is this purely in adding clients to your existing capacities? Next question is on net interest income in France. I'm just trying to understand some of the lumpiness there. Could you clarify when you booked the special dividend that was paid by Crédit Logement? I think it was announced at the end of last year, but was that booked in the fourth quarter or first quarter, or could you clarify specifically on the special dividend there? Finally coming back to Belgian retail net interest income. If I understand, or perhaps you could just give us the decline in net interest income second quarter versus first quarter.
It looks to me to be about 8%, and you seem to suggest there are some distorting aspects there. Could you clarify what those distorting aspects are, please? Thank you.
Can you just repeat that last question?
Sure. In Belgian net interest income, could you tell us what the decline second quarter versus first quarter was? You seem to be suggesting there were some distorting items there. Could you clarify what those distorting items were in terms of the quarter-to-quarter progression?
Yes. All right. With respect to the discussions we're having and the preliminary agreement with Deutsche Bank, so if we conclude, what will it bring? It will bring several points. It will bring people that are very knowledgeable and capable in that activity. It will bring platforms. That is all of the things that will be very beneficial. It's new clients, it's technology. That's basically what it is. If you look in France, listen, we look at the evolution that we give is a bit of the run-of-the-mill. In the run-of-the-mill, there are indeed some kind of exceptional, quote unquote, elements that return every so often, and that's part of, as I said, the run-of-the-mill, it's below our thresholds, so we basically don't specify it. In this case, it is not part of the Q2 results, and I leave it to that.
As I said, in Belgium, what you do have, if you look at it, you should look at the first six months, which basically lead to an evolution of -3.6%. That would be the three elements to your question.
Why should we look at the first six months and not the quarter to quarter? I'm just curious why there would be a major distortion in the quarterly numbers that you disclose in Belgium.
You can have some activities or some elements that fall just on the pivotal point between the two. That can have a stock impact on a period which is basically to be seen over the year and not just over that quarter. I'll leave it to that.
Thank you.
Thank you, sir. We have one last question from Madame Giulia Miotto from Morgan Stanley. Madame, go ahead.
Yes. Hi. Thank you for taking my questions. I have a couple left. The first one is on cost of risk, 30 basis points in the quarter. Asset quality continues to be benign. Provisions in Turkey were up 29%. I was wondering if there is anything like a trend or something that we should be mindful of in there. That's my first question. The second one, it's just a follow-up on your previous comments on the Deutsche Bank deal. I hear it's going to be 5 basis points and 10 basis points, and it's going to bring over people and tech. I was just curious in terms of PBT or P&L impact, how should we think about that? Thank you.
Thank you, Giulia, for your questions. On the cost of risk, yes, if you look at Turkey, yes, Turkey has added a couple of tens of millions on the cost of risk. On the overall scale, you should put it that way. We don't expect any further degradation. On top of that, part of the degradation that we've seen is an IFRS 9 artifact. Under IFRS 9, you have to take into account forward-looking scenarios. That forward-looking scenario is a more dire forward scenario, which basically leads to that. The step-up that we see is not driven by what you actually see on the floor, but is what is delivered by the IFRS 9 required for forward looking. That is basically what you see. As I said, it's a small part of what the bank represents, and we don't expect a further degradation.
That's on the cost of risk. When it comes to the discussions of preliminary agreements with Deutsche Bank, it is as you said. Capitalistically, it's 5 basis points, Common Equity Tier 1, 10 basis points on the leverage, and we hope to onboard client people and tech. That's basically it. For the rest, it really depends. It's a profitable kind of business. I let you be the judge what the impact will be, and we will clarify it once we have advanced in the discussion. Giulia, those would be my two answers.
Thank you very much.
Thank you, Madame. I have no more questions. Back to you for the quick conclusion.
Thank you. As you have seen, we have delivered the digital customer experiences, business growth in the three divisions in the first half, rise in income, positive jaws, ROTE 11%, an increase of Common Equity Tier 1, clocking in at 11.9%. I thank you very much for your attention. Have a good day, and if applicable, good holidays. Bye.
Ladies and gentlemen, this concludes the call of BNP Paribas Second Quarter 2019 Result. Thank you for your participation. You may now disconnect. This conference call is dedicated to sell-side analysts only. A live webcast is available at bnpparibas.com.