Welcome to the presentation of Ben Te Paribas Second Quarter 2019 Results. For your information, this conference call is being recorded. Supporting slides are available on the BNP Paribas website, invent. Bmpparibas.com. During today's presentation, you will be able to ask I will now hand over to Mr.
Lasse Schnee, 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 results presentation, which I assume you have under your eyes before handing it over to you for Q and A. So let me start with the key takeaways for this quarter. So 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.
And secondly, a significant increase in the common equity Tier 1 ratio, €4,000,000,000 of net income, up 10.8% year on year with positive jaws as you can notice. So looking in a little more detail at our 2nd quarter results on Slide 3, revenues of the operating divisions We're up 2.5% compared to the Q2 2018. This is driven by IFS and CIB with domestic markets revenues virtually table due to the low rate environment. Costs of the operating divisions evolved 1.8% compared to the Q2 2018 leading to positive jaws as I mentioned before. The group cost of risk remained low at 30 basis points Over outstanding, thanks to the strong discipline at origination, low interest rates and the continued improvement at BNL.
The group net results came in, in the 2nd quarter at €2,500,000,000 up 3.1% on the same quarter a year ago. If you can now turn our slide or whatever to Slide 15 5, sorry, Slide 5, you can see the exceptional items of the 2nd quarter, which had an impact of minus €150,000,000 net of tax, a tad less in the corresponding period of last year. They included the 2020 planned transformation cost, they included restructuring cost of acquisitions, And they included an additional adaptation measures in BNLBC and Asset Management. The latter to address the evolution of the economic environment for these businesses. These adaptation costs amount to €51,000,000 and correspond to new departure plans in B and L and Asset Management.
Certain additional measures are expected to lead to an above 1.5 times Recurrent full year cost savings effect and the full year effect should be 2021. And 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 rates scenario.
If you now move on to Slide 6, you can see the performance of the operating divisions in the 2nd 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 7, you can see the positive jaws effects 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 8, 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 9, Cost 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 the 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 rate. NCIB'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 €199,000,000 of €9,000,000,000 of recurring cost savings, taking the cumulated cost savings since the launch of the program to €1,500,000,000 And I remind you, a target of generating a recurring €3,300,000,000 recurring cost savings by 2020.
Also, we booked transformation costs for EUR 222,000,000 this quarter, taking the cumulated spending in the first half €390,000,000 in line with the target of €700,000,000 for the whole of 2019. And I remind you that is the last phase Of that transformation plan, there will no longer be transformation costs in 2020. So in a nutshell, the implementation of our transformation plan If we now look to another part of the profit and loss, which is the cost of risk. So if you could flick through the 3 dedicated slides, which start with Slide 11, you can see, as I mentioned earlier, that it was at the low level Of 30 basis points overall standing and if we take business 1 by 1, 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 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's cost of risk was up compared to a very low base in the Q2 of last year, while Bank's West cost of risk was negligible. If you now Swipe to Slide 14, where we look at the balance sheet, our strong balance sheet and particularly 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. And this due to the combined effect of the 2nd quarter results, excluding exceptional non operating items After allowing for a 50% dividend payout, which added 20 basis points, then also there is the net impact SBI Life capital gain and the deconsolidation of the residual 5.2% stake as well as the partial goodwill impairment of Banquests.
So that leads to another 10 basis points. And then there is the increase in risk weighted assets and that of ForEx, which reduces 10 basis points. So all of this makes for a 20 basis points improvement. Then our leverage ratio stood at 4.1% And the group's immediately available liquidity reserve totaled a massive €330,000,000,000 at the end of the Q2. The evolution of these ratios illustrates the very solid financial structure of the group.
And with this, if we look at Slide 15, you can see our net book value per share stood at €75,700,000 at the end of June, After payment of €3.02 dividend per share. Looking at the period starting from year end 2,008, the compounded growth rate And this slide highlights BNP Paribas continued value creation through I leave you to peruse the next two slides of this introductory part, Slide 16, on our ambitious policy of engagement in society and I draw your attention to the Euromoney award that we just received naming us as World's Best Bank for Corporate Responsibility. And Slide 17, summarizing the continuous reinforcement of the Group's internal control and compliance system. So with this, I would now kindly ask you to advance to the results by division, starting with Domestic Markets from Slide 19 to 25. As you can see, in the 2nd 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.
Besides, Private Banking saw a good level of net inflows at €2,200,000,000 in Q2. Domestic Markets has continued to improve its digital offer as illustrated for instance by the specialized agency D Rating In France, we ranked France Retail Banking as number 1 among retail banks for a digital offering, progressing strongly at HelloBank and Nico. Moreover, mobile usages have significantly accelerated with over 4,000,000 active mobile users in the networks And a 28% year on year increase in collections. Now turning back to the P and L. Revenues were just a tad lower at a little Over €3,900,000,000 on the back of the low rate environment, which was partly offset by the increased business activity and a good drive of the specialized businesses.
Operating costs were down 0.5% year on year With a significant decrease in the 3 networks generating a positive jaws effect. The progress we're making on the cost front results from Ongoing implementation of the digital transformation as well as new operational models illustrated, for example, By the adaptation of the 3 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 pretax income was a tad lower at 1.1 Looking swiftly at each country and business, I'd 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 In the corporate segment, despite lower revenues, pretax income has increased 11% year on year on the back of good cost control Moreover, as I mentioned, BNL is pursuing additional adaptation measures By leveraging on the new quota Cento law, which will facilitate early retirements leading to an overall stepped up headcount reduction of $1500,000,000 by 2021. Turning to Belgian Retail, HRL 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 continue 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 the context of low interest rates. If we look at the second of our divisions, which is International Financial Services And this is from Slide 26 to 33. You'll see that this division confirmed good business growth in the 2nd quarter with loans up 5.6% On a like for like basis, a net asset inflows of €7,300,000,000 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, For example, in Personal Finance, where over €49,000,000 healthcare transactions are performed directly by clients And the developments 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 and L, revenues were up 3.4 percent, clocking in at €4,300,000,000 and 1.2 percent on a like for like basis. Given effective cost control, operating jaws were positive 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%, cost evolving at essentially the same pace with the business confirming its target Positive jaws for the full year and the pretax income in the Q2 of 4.55 €4,000,000 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 Q2 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 percent year on year to reach $14,900,000,000 Revenues were down due to lower interest income despite higher fees And cost to adjusted debt higher, reflecting good overall control at BancWest, is continuing to right size its headcount. On the whole, its pretax income was down 11% year on year or 5% at historical scope and exchange rates.
Now lastly, if we look at Slide 31 to 33, and I mean lastly in IFS, our savings businesses saw net Assets inflow in all of its sub businesses. Assets under management rose to €1,089,000,000,000 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 9,000,000 clients across 4 countries. Revenues rose by 6%, which cost progressing at a slightly lower pace and pretax 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's revenues marking an overall slight increase, on the other hand, real estate Showed a drop due to a very high base in the Q2 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 pretax 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 Q2 of the year. If I can now ask you to turn to the 3rd and last division, and we go to Slide 34, which is Corporate And Institutional Banking, which has continued to accelerate the implementation of a transformation plan along its three main axis, 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 €3,100,000,000 in the 2nd quarter, marking a 4% year on year 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 €1,100,000,000 of pretax income, marking a 6.2% year on year increase. If we now look at the business lines of CIB 1 by 1, we start with Global Markets. Revenues 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 Q2 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 Ovid Global Prime Finance and Electronic Equities.
There is 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 It's continuing to develop well with already 10,900 clients and over 17,000 daily connections as of June. Finally, Security 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 2nd quarter 2019 results and the main takeaway from today's presentation are, In the Q2, we continued to successfully implement new digital customer experiences. The group enjoyed business growth in the 3 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'll now be pleased to take your questions.
We have one first question from Mr. Jean Pierre Lambert from KBW. Sir, please go ahead.
Good afternoon, Lars. So 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? And 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 insights or updates in terms of timing of the business units exposed? And 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, So yes, there is a preliminary agreement. So the idea is that BNP Paribas would be the referral bank For clients, for example, in the domains considered and that is that discussion is progressing. So 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. But 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, so this is going to take some time. So 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. So that is a bit the overall process. So it's progressing well.
And as I said, the interactions with the teams, both at Deutsche Bank and at BNP Paribas are Very well. And when it comes to impact, let's be fair for 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. So we anticipate that by the time those transfer will have happened, the impact on our common equity Tier 1 will be 5 basis points. So that is a bit the idea, but it's an intrinsically an activity which is very Useful and for their clients. So 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. So that's the first thing. The second question is on TRIM. So 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, which where the supervisor looks into detail in the models, validates the model, this validates the models and So for us, it is not something where for like a new Basel agreement, you can estimate what the impact is. So we basically anticipated a ballpark estimate of 20 basis points, but there is not much more I can say. These functions And those 20 basis points, as I said, it's an impact which could fall this year, which could fall that year. So there is not much more I can say. The The only thing I will say is that whenever there is an evolving clarity that comes, we will, of course, provide Update.
On your third question with respect to disposals, as we said, there is not much I can say, so there is just 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. So that will be my 3 answers, Jean Pierre.
Great. Thank you very much,
Thank you, sir. We have another question from Mr. Stefan Stalmann from Autonomous Research. Please go ahead.
Good afternoon, Lars. I have also 2 questions, please. The first one is you're now, I guess, 1 quarter away from being at your 12% CET1 target. And the question is, what are you going to do afterwards? In particular, would you maybe willing again to look at bolt on deals?
The second question relates to the goodwill impairment at Bankwest. There's about, I think, EUR 2,500,000,000 Goodwill left. So the question here is, how should we look at this remaining goodwill? Could there be further Impairments looming. And could you give any color on what determined the impairment that you took in Q2, what may have triggered it and also what may have led to the size of €500,000,000 as opposed to more or less?
Thank you.
Stefan, thank you. Yes, so you've seen our Continuous improvement of common equity Tier 1 and this is a bit a reminder of what we are positioned. So we create A recurring profit on a yearly basis, 50% of that is being paid in dividend. Of the other 50%, There is like 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 0 in the Q1 because of taxes, if we can support And then there is like 10 basis points every quarter to come.
And that is what we saw in the 2nd quarter. And it was a bit strengthened by the fact SBI Life and the goodwill impairment that it became 20%. So indeed, one could assume and that's what And we had an initial plan of being at 12% in 2020 that it will be 2019. So 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, so 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.
So it all depends. So 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. So that is basically our overall stance. And 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. So 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. So that is the kind of things that we will continue to do. So that would be on capital. When it comes to the Banquest 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 particularly the interest rate scenarios are different from what initially was So this basically forms in the accounting of IFRS forms a trigger for the goodwill to be reviewed.
So We had to look at the goodwill. We looked at it and we basically took a conservative stance and we impaired it by €500,000,000 And this €500,000,000 basically doesn't have an impact on the P and L because it's basically Well, there is the SBI Life gain, which is basically in the same order of magnitude. So that is basically where we stand.
Thank you.
Thank you, sir. We have another question from Mr. Pierre Chedeville from Centimeters CAC. 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. And it's been a long time since we can observe some write backs in this division. And 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? And I wanted to know if these write backs hide actually rise in the cost of risk Regarding the big corporates, and we all know that there are some, I would say, dossiers plus 1 or 2 dossiers 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 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 could be useful. Thank you very much.
All right. Pierre, thank you for your questions. So first of all, when it comes to the cost of risk, You know that we have a very prudent approach. So 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 the provisions over and above what we typically need.
And that is what we saw. So 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. And so on the other question, it doesn't as we are very prudent in our provisioning, it is not that we wouldn't Provision other files. So 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 linked, as you know, it is around a third of the activities. So that is basically where we stand. Okay. That would be my two answers.
Thank you.
Thank you, sir. We have another question from Madam Quares from UBS. Madam, 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 CET1 ratio is concerned, can you give a similar number for the leverage ratio and explain if you are comfortable with that? Second thing will be on Personal Finance. Are we already seeing the benefit of the acquisition of Opel?
Or is that something that will come at a I think that will come at a later date. And finally, on Security Services, so you integrated the asset of Janus Understand 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 could refer clients to us, indeed the consumption in capital It's around 5 basis points. When it comes to leverage, it is around 10 basis points. And as you see, we are above 4% in our leverage. So nor the 5 basis points on Comenity 1 noted 10 basis points on leverage are a concern.
And as a reminder, this is a profitable activity. So 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. And when it comes to Janus Anderson, 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 it is well, we don't specify what it is, but it's a one off event. So, Laurent, those would be my 3 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 times. So I'll leave it to that.
Thank you, madam. We have next question from Mr. Tarik El Mejat from Bank of America, Meriden. 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 beyond? Because the last time you gave us a guidance, Expectations for rates were a bit more optimistic than where we are now.
And second question is on the CIB. I mean, the €5,000,000,000 RWA exits that you plan to you announced in Q4, there were Around EUR 200,000,000 to EUR 200,000,000 revenues attached to them. I mean, when are we seeing the impact of these revenues down? Because For now, we see somehow the RWA is going down, but not the revenues impacted by this. These are my two questions.
Thank you.
Tarek, thank you for your questions. So first of all, on domestic markets for the outlook and And the targets, 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. And so 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. So what we do what you should focus on is indeed on that ROE target, which It means that we will indeed continue on all the adaptation plans and delivering on the additional cost savings of our transformation plan.
So these are the important points and these are the important points to support our return on equity. So that is on domestic markets. And 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 stop were activities that were That we're typically with 1 product or with 1 client and so on. So typically also products Which had a return, which was at that stage not where we wanted to be.
And so that is why you see an impact On RWA and you see less of an impact on the elements of the P and L. So, Tarek, that will be my two answers.
And if I can follow-up quickly on the first one on the retail. So 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 intend to do.
So does that mean you're looking at announcing further cost cuttings? And what about are you implementing also provisions going up in that?
Erik, your first part of your synthesis is indeed correct, But we're here to talk about the Q2 results and that is basically it. So we'll see how things evolve. And what I'm saying is we are focused On delivering the ROE and we'll observe how things evolve and how we go. And indeed, as we into your example, As we saw in there that at BNL in the overall environment, it was a little bit more lackluster. So we really stepped up The cost reduction exercise in order to warrant the overall bottom line and warrant the ROE.
So that is basically where we stand.
Thank you very much.
Thank you, sir. Next question from Mr. Omar Fall from Barclays. Please go ahead.
Good afternoon, Lars. Just three questions. So 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 bps of CET1 also. Is that still to come?
Or is some or all of it in the Q2 figures. And then the second question is, I know you haven't given this to us in the 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, are there 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. And then 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. So indeed, in the Q1, we mentioned that the typical elements of When we provide lending, it's that on one hand we syndicate, on another hand we securitize. And so the syndication has that production End of the quarter, didn't happen in the Q1, it happened in the Q2. However, on the securitization, it was a bit delayed because there were some new regulations Being crystallized, which weren't fully crystallized. And so that is basically done now, but it was Basically too late to really have that securitization going on in the Q2.
So that securitization is 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, so that is information we do not share. When it comes to the Basel IV impact, yes, so the Basel IV, what we anticipate is that the impacts 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
Thank you, sir. We have another question from Mr. Nick Davy 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, but there does seem to be quite a big gap Between what you're saying on Slide 10, which is sort of €2,200,000,000 or so of cost efficiencies and lower transformation costs Next year and consensus, which I think has got about a €600,000,000 decline in costs. So 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. And then 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, but obviously, the backdrop, it seems to be becoming more competitive. And there is it does seem quite a striking disconnect that your net interest margin there is above 2% Pretty much every French asset I can see is on the front book yielding 1 ish percent or less. So 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. And those costs that are variable, they can be in terms of what is happening in CIB, but it can also be in the activities that work through joint ventures or distribution aspects Like for example, in the car leasing through dealerships.
So from that point of view, in the end, we basically manage the return on equity. So depending on how we see the revenue go, if there is revenue growth in those specialized business, the cost will go up. So 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.
So that is how you should look in it. And 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, so we already have 1.5 and it will go up into 2020 to 3.3. So 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.
And so 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 0. So if you even do it very simple, you basically take the costs, you drop the €700,000,000 transformation costs to 0 And you'll pump up the €1,500,000,000 savings that you have this year to €3,300,000,000 That's the simplest thing you can do if you want to have Those numbers in your views. So 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.
So that's basically it. And when it comes to French Retail, the dynamics, let's not forget, French Retail and 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. So the dynamics that you have between several banks can be By the kind of activity.
So that is basically the color I would give on French Retail. So Nick, that will be my 3 answers.
Okay. Thank you.
Thank you, sir. We have next question from Mr. Kiri Vijayarajah from HSBC. Sir, please go ahead.
Yes. Good afternoon, Lars. So just a couple of questions from my side. Firstly, on Arval and the car leasing business, rapid growth in volumes there, it's picked Slightly now running at 11% year on year. So given what you said about weaker economic growth, I just wondered how sustainable that is for the next few quarters.
And what's your outlook for kind of residual value? Is there any clouds on the horizon that are sort of popping up for you? And then secondly, on transformation costs, you said you're going to be all done by the end of this year, so nothing in 2020. But I see This adaptation costs have also now crept in. So could those additional kind of exceptional costs Creep in for 2020.
So I guess what I'm asking is, have 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. So that is what we see. And then when it comes to the reevaluation, 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. So that is on Agval business going well.
Secondly, on the transformation. So let's not forget the transformation costs That will basically end this year. They were basically in a plan to do a transformation. So a transformation basically digitalized. I remind you that's why initially we said those transformation costs would be €2,700,000,000 over the 3 years, 2017, 2018, 2019.
Sorry, there were €3,300,000,000 of costs and that would deliver in the digitalization €2,700,000,000 of cost savings. And so this is basically a process which was helping us to change in direction with the clients. And as If I can say, a byproduct would lead to cost reduction because we optimize the interactions. So what we have done is basically focused it a bit at beginning of the year, more on cost savings. And so instead of €3,000,000,000 we do €2,700,000,000 investments.
And instead of SEK 2,700,000,000 recurring savings, we stepped it up to SEK 3,300,000,000. So 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.
So we basically step up the cost reduction measures. So it is something else. So it is something that generates new savings. So over and above the ones that we have announced. And it's really a focus on cost savings.
So that basically means that it is relatively rapid And yielding a return and the return is typically at least 1.5 times the investments. So it's a different dynamic. It's not just an extension of, it's a different dynamic that we apply to be really So, Kiri, that will be my two answers.
Okay, got it. Thank you.
Thank you, sir. We have a next question from Mr. Jean Francois Luiz from Goldman Sachs. Sir, go ahead.
Hi, good afternoon. So 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. Now just to put this crudely, I think Your target, if you take 64.5 percent of cost to income ratio of the revenues of before, which We are updating with the presentation of the Q4 of 2018. That would be I guess that would be €29.4 €1,000,000,000 of cost for next year. And I just wanted to understand whether this number, including potential Measures to do new savings, so upfront kind of restructuring charges as the €50,000,000 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 Bankwest. I just wanted to understand whether the Obviously, beyond the accounting things which have triggered the goodwill impairment, whether you think that the performance of BancWest is of a nature 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? And 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 would have been impacted by maybe one off losses or bad trading environment, whether that makes the current Run rate may be more, let's say, sustainable or whether you're gaining revenues through new clients or anything like that this So I'm just trying to understand where the difference of the comparison base comes from? Thank you.
Francois, thank you for your questions. So back on the costs. As I said, I mean, you have to look at it. In the end, We focus on the return on equity. And on the return on equity, that means that there are several levers that we will optimize.
So when it comes to Net interest income, well, there is the environment that we talked about. So that basically means we want to step up our fee and commission generating business. And overhead, we want to reduce the costs. So 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. So that is what we'll do. And then 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. So 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 Bank West, so indeed let's not forget Bank West, there are a lot of Saving measures that are implemented. So 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. But it is so very important that the plan is to be very focused on the core franchise, Strengthening the cooperation with the group. And so these are things like corporate banking, wealth management and therefore delivering positive jaws.
So 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. And therefore, we accelerated really our transformation. So 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. So 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 interacted and integrated approach to clients. So that is a lot of changes that we had done. And so that is basically that transformation. We have it Plugged up, plugged in since the beginning of the year.
And so that is why we have been able to step up as we talked about market share. We have done better in ForEx. And so that is a bit the situation that we face. So it's a tremendous effort that we have done. It's a tremendous step up through all the changes that I mentioned this year.
So Jean Francois, that will be my 3 answers.
Thank you.
Thank you, sir. We have a next question from Mr. Geoff Dallas from Societe Generale. Sir, please go ahead.
Yes. 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, you got some positive P and 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 hear your thoughts about that. And 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 And also whether the lack of color on them is a reflection of kind of how you see them developing, whether they're not perhaps Developing as quickly as you anticipated.
Those would be the 2 questions. Thank you.
Geoff, thank you for your questions. So when we indeed look at it, we are a diversified bank, diversified in activities, diversified in exposure. And so if Indeed, look at the interest rate environment, there are activities that basically benefit from indeed the overall funding and so on. And so those examples are the logical ones are Arval Leasing and Consumer Finance and to some extent the same is true for insurance. So that is the kind of businesses that are typically positioned well.
Then when you look at The online banking, let's not forget. So we do have a kind of an all integrated approach. So we should take in France, for example. We have the high end of the customers, which are still the ones who have relatively the high touch. Then you have the branch network.
Then you have HelloBank, which offers the Same services as the branch network, but without basically the branch, so with the digital aspect. And then you have The last one, which is nickel, which is the introductory kind of services that we have. So that is basically What we are doing and if you look at it, if you look at the clients, so the HelloBank, if you look at it for domestic markets has now 3,000,000 Customers and if you look at nickel, which is a startup, it's basically it's the 3rd largest retail distribution network in France, Just to give you an idea, and that is it's an increase of 61% versus what we saw a year ago. So from that point of view, and this is well, this is basically what you can find on Slide 20 and beyond. But so We are having this approach where we serve different customers with different aspects of digitalization.
So that means also that they come at a different cost To do it, and so as I said, these are the different ones, but if you look at the Halobank and if you look at Nickel, They are really progressing well. And even the new ones like LifePay, which we are introducing, they are all having a good pickup. So just those would be my two answers.
And 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. And so we don't go into these kinds of environments because it then also makes it for competitive interesting information. We basically leave it at this time.
Okay. Thank you. Thank you for your time.
Thank you, sir. We have another question from Madame Flora Benhakoun From Deutsche Bank, Madam, please 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. So 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 From 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 build up organically in Q3, same amount is in Q4. And I think you're also So saying that the 10 basis points delay that we had in Q1 from the securitization process is still to come in H2. So Would that be fair to assume that we can expect 30 basis points 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 6 months. So if you take the first half, You see that there is an evolution of minus 3.6 percent. And so 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.
And as I said, if you look at the first half year, that's a 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 is a couple of clarifications. When we talked about the securitization that they were basically Postponed in the Q1 that they would come later. Let's be very fair that the securities regulation is part of our overall setup. So when I said that normally you should have like 30 basis points generation, you shouldn't add the securitization part, It is in there.
And then of course, let's not forget, I mean, we said that we cannot exclude that there will be a 20 basis points impact of TRIM.
Thank you, madam. Next question from Mr. Matthew Clark from Mediobanca. Sir, please go ahead.
Good afternoon. So 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? Or 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 Credit Logermont. I think it was announced at the end of last year, but was that booked in the Q4 or Q1? Or could you clarify Specifically on the special dividend there. And then 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 Q1.
It To me, to be about 8%, and you seem to suggest there are some distorting aspects there. So could you clarify what those distorting aspects are, please? Thank you.
Can you just repeat that last question?
Sure. So in Belgian net interest income, could you tell us what the decline in 2nd quarter versus 1st quarter was? And you seem to be suggesting there were some distorting items there. So could you clarify what those distorting items were in terms Quarter to quarter progression?
All right. So With respect to the discussions we're having and the preliminary agreement with Deutsche Bank, so what will If we can 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. So that is all of the things that would be very beneficial. So it's new clients, it's technology. So that's basically what it is.
And then if you look in France, Listen, I mean, there are we look at the evolution that we give is a bit of the run of the mill. And in the run of the mill, there are indeed some kind of Exceptional 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. And as I said, in Belgium, What you do have, if you look at it, you should look at the 1st 6 months, which basically lead to an evolution of Minus 3.6 percent.
That will be the 3 elements to your question.
So why should we look at the 1st 6 months and not The quarter to quarter. I'm just curious why there would be a major distortion in the quarterly numbers that you disclosed.
You can have some activities or some elements that fall just on the pivotal point between the two and that can have a Stock impact on a period which is basically to be seen over the year and not just over that quarter. So I'll leave it to that.
Thank you.
Thank you, sir. We have one last question from Madam Julia Miotto from Morgan Stanley. Madam, go ahead.
Yes, hi. Thank you for taking my questions. I have a couple left. So the first one is on cost of risk, 30 basis points in the quarter. Asset quality continues to be benign, but provisions in Turkey were up 29%.
So I was wondering if there is anything like a trend or something that we should be mindful of in there. So that's my first question. The second one, it's just a follow-up on your previous comments on the Deutsche Bank deal. So I hear it's going to be 5 basis points and 10 basis points and it's going to bring over people and tech. But I was just curious in terms of PBT or P and L impact, how should we think about that?
Thank you.
Thank you, Julia, for your questions. So on the cost of risk, yes, if you look at Turkey, yes, Turkey has added a couple of tens of 1,000,000 on the cost of risk. So On the overall scale, you should put it that way. We don't expect any further degradation. And on top of that, Part of the degradation that we've seen is an IFRS 9 artifact, can't.
So under IFRS 9, you have to take into account forward So that forward looking scenario is a more dire forward scenario, which basically leads to that. So the step up that we see It's not driven by what you actually see on the floor, but is what is delivered by the IFRS 9 required for forward looking. So 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, so that's on the cost of risk. When it comes to the discussions, the preliminary agreements with Deutsche Bank, It is indeed as you said.
So capitalistically, it's 5 basis points common equity, 110 on the leverage. And we hope to onboard client, people and tech. And that's basically it. I mean 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. So Julia, those will be my two answers.
Thank you very much.
Thank you, madame. We have no more questions. Back to you for the conclusion.
Thank you. As you have seen, we have delivered the digital customer Business growth in the 3 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.
Ladies and gentlemen, this concludes the call for BNP Paribas Second Quarter 2019 Results. Thank you for your participation. You may now disconnect. This conference call is dedicated to sales side analysts only. A live webcast is available at atbnpparibat.com.