Good afternoon, ladies and gentlemen, and welcome to the presentation of BNP Paribas' second quarter 2018 results. For your information, this conference call is being recorded. Supporting slides are available on BNP Paribas IR 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 would like now to hand the call over to Lars Machenil, Group Chief Financial Officer. Please go ahead, sir.
Cynthia, thank you very much. Good afternoon, fine ladies and gentlemen, and welcome to BNP Paribas' second quarter 2018 results presentation. I hope you have all got a copy of the presentation slides or the press release in front of you. As usual, I will take you through the first two chapters before handing it back to you for the usual Q&A session. Looking at our key messages, which you can see on slide three, let me start by saying that BNP Paribas delivered solid results in the second quarter. Business activity continued to progress well in the context of economic growth in Europe, across Europe, with a good increase of outstanding loans up 3.7%.
If we now look at revenues of the operating divisions, they were up 1% with strong growth in international financial services, essentially stable revenues at domestic markets in the context of low interest rates, down in CIB on the back of negative Forex effect and a less favorable context for FICC activities in Europe compared to the second quarter a year ago. Cost of the operating divisions were 2.8% higher on the back of the continued development of the specialized businesses, but they were down in the retail networks as well as in CIB. Turning to the cost of risk at group level, which was significantly lower, making a 14.4 reduction and standing at 29 basis points in terms of customer loans. All in all, the group's net result clocked in at a solid EUR 2.4 billion, stable compared to the same quarter last year.
This despite a negative Forex effect, which I remind you at the current levels would not be there in the second half of 2018. This result of EUR 2.4 billion also equates to a return on tangible equity of 11.2% for the first part of the year. Beyond the second quarter results, I would like to mention that, as you have probably all seen, we completed at the beginning of the week, the sale of an additional stake in First Hawaiian Bank, which reduced our interest to about 33%. At the same time, we also relinquished effective control by reducing our representation on FHB's board.
This transaction has generated a capital gain in the region of EUR 300 million to be booked in the third quarter, of course, and will have a positive impact of at least 10 basis points on the group's Common Equity Tier 1 ratio, again, in the third quarter. With this, you can advance to slide five, where you can see the exceptional elements of the quarter, which had a negative impact to the tune of EUR 191 million net of tax, which is a tad more than in the corresponding period of last year. If we now swipe to slide six, you can see the performance of the group and of the operating divisions in the second quarter. As you can see, the net income is basically in line with last year.
Overall, in the first half, the group delivered an annualized return on equity of 9.6% or 11.2%, as mentioned, in terms of return on tangible equity. Zooming in on the revenues of the operating divisions by turning to slide number seven, you can see that, as I said, they progressed by 1%, reflecting an unfavorable Forex effect. They were a tad down at domestic markets due to the still low interest rate environment, which was partly offset by good business development, in particular in the specialized businesses. The revenues were up significantly at international financial services, plus 8.7%, driven by the development of these businesses. They were down at CIB 6.8% due to the lackluster market context for FICC in Europe compared to the second quarter of 2017.
Net of the Forex effect and the capital gain realized in the second quarter of 2017 in corporate banking, they were just 1.6% lower. You could now flick to slide eight, you'll see that, as I mentioned, cost of our operating divisions were up 2.8%. We look at each of our divisions, first, domestic markets, costs were up in the specialized businesses on the back of continued business development, down by 0.5% on average in our retail networks. IFS cost evolution reflected business growth, whilst CIB costs marked a decrease benefiting from the cost-saving measures we've implemented. Still on cost, you go to the next slide, which is nine, you'll see we're progressing well with the implementation of our program of new customer experience, digital transformation, and related savings across the group.
By the end of June, we've generated EUR 858 million of cumulated cost savings. In the second quarter, they amounted to an additional EUR 149 million. Savings were fairly evenly split among those three operating divisions, with a slight bias towards CIB. I remind you that we're targeting EUR 1.1 billion of cumulative cost savings by the end of this year. Talking about transformation costs, they stood close to EUR 500 million in the first semester, bearing in mind our expectations of EUR 1.1 billion for the full year of transformation cost, that is. As you can see, the implementation of the 2020 transformation plan is progressing as foreseen. We now shift to cost of risk, I will kindly ask you to flick to the three specific slides on the topic, which start at slide 10, where you see the significant decrease in the group's cost of risk this quarter.
If we now take the businesses one at a time, in corporate banking, you see that the provisions were more than offset by write-backs this quarter, but to a lesser extent than in Q2 of 2017, when write-backs had been very substantial. If we now turn to Domestic Markets, on the next page, we see that the cost of risk was very low in French retail, nil in Belgian retail, and continued to decrease at BNL in Italy. If you now go to slide 12, in the other retail businesses, you'll see that personal finance saw low cost of risk this quarter. Europe-Med's cost of risk marked a decrease, while Bankwest was very low. Looking now to our financial structure, which you can see on slide 13, you can see that our Common Equity Tier 1 stands at 11.5%.
The positive contribution derived from the net income generated, after allowing for a 50% dividend payout, this increase was more than offset by the increase in risk-weighted assets and by our operational risk-weighted assets being brought at the level of the standard method. This explains the slight reduction you see in our Common Equity Tier 1 this quarter, which however, given the additional sale of a stake in First Hawaiian Bank that I mentioned earlier, is again up 10 basis points in the third quarter. Back to the second quarter, our Basel III leverage ratio was at 4%, and our liquidity coverage ratio stood at 111%. To express this in euros and cents, you see that the group's immediately available liquidity reserve totaled a massive EUR 308 billion, and this at the end of June. All in all, very solid balance sheet.
If with this, we look at slide 14, where you see the net book value per share, which stood at EUR 72.4 at the end of June, following, of course, the dividend payment of EUR 3.02 on the 1st of June. Over the last decade, the net book value per share has been growing at a compounded annual growth rate of 5%, clearly illustrating BNP Paribas' continued value creation through the cycle. If with this, I can ask you to peruse the next slide, 15 and 16, of this introductory part, which illustrates our ambitious corporate, social, environmental policy, our commitment for sustainable finance with significant initiatives to promote ethical responsibility, social and environmental innovation, as well as low-carbon economy. Lastly, on slide 17, you'll find a slide summarizing the reinforcements of the group's internal control and compliance systems.
With this, I would kindly ask you to advance to the results by division, we start with Domestic Markets on slide 19. As you can see, Domestic Markets confirmed good business drive in the second quarter on the back of robust economic growth all across the Eurozone. In particular, we continue to see good loan growth in retail networks as well as in the specialized businesses. This alongside an increase in deposits across all countries. In particular, private banking showed good net asset inflows in the quarter as well as Hello bank, which attract 75,000 new clients in the second quarter. Domestic Markets, as you know, is progressively developing new client experiences and pursuing its digital transformation. In particular, it is swiftly implementing new functionalities online, such as accounts aggregation, electronic check deposits, and digital invoice payments.
To these digital aspects, we're also adapting the offer to different banking uses. For example, in France with Nickel, which has already opened 950,000 accounts, and Lyf Pay, universal mobile payment solution, which has over 820,000 downloads to date. We're deploying robots to automate processes. 150 are already operational in our domestic markets, and a further 120 will be added by year-end. In our French retail banking, we're implementing the delivering of the regional management setup that will also be fully completed by year-end. If we now look in terms of P&L, the revenues were slightly down at EUR 3.9 billion. As mentioned, we saw good business drive in other domestic markets, but as expected, we continue to be impacted by the low interest rate environment.
Operating costs were somewhat higher with an increase in the specialized businesses on the back of their continued development, but marked, as already mentioned, a 0.5% reduction on average in our retail networks. Given a reduction of cost of risk, especially at BNL, pre-tax income topped EUR 1.5 billion, marking a significant 7.6% increase compared to the second quarter of last year. This is a dynamic which is positive and in line with the plan. Looking at each country and business, I can mention in particular for domestic markets, if we take French retail, it showed good business drive and income growth on the back of good cost control and a lower cost of risk this quarter. In particular, renegotiations and early payments reconfirmed their sharp decrease since June 2017.
Of course, this weighs on this quarter as we get less renegotiation and early repayment penalties, but means that revenues evolutions going forward should improve, in particular, in the second part of this year. When we go to Italy, BNL bc's gradual improvement in business activity continued with market share gains in the corporate sector. There was, of course, the impact of low rates on revenues, but thanks to the continued cost of risk reduction, BNL showed a sharp rise in income this quarter. When we turn to Belgian retail, it continued to show sustained business activity and marked income rise this quarter, despite the impact of the low rate environment. The specialized businesses continued to deliver strong growth. To wrap up, good income growth for our domestic markets on the back of the rise in business activity, and this despite the headwind of the low interest rate environment.
If with this, we shift or we advance to slide 25, where you see International Financial Services, which is a division and a strong engine of growth for BNP Paribas. In particular, loans progressed well at Personal Finance and in our international retail banking. Assets under management of our insurance and savings business progressed by 2.7% year-on-year, and the operating division continued its active implementation of digital transformation, as well as new technologies across all the networks and the specialized businesses. This IFS division is actively implementing its digital transformation and new technologies, and this across all the businesses. It has enhanced client experience with, for example, the rollout of electronic signature at Personal Finance, which represents 72% of contracts in France, Italy, and Spain, and the implementation of new online features at Wealth Management, such as biometric identification.
It also continues to roll out new technologies with already 75 robots used at Personal Finance. In terms of P&L, looking at the revenues, they reached EUR 4.3 billion, up 8.7% compared to the second quarter 2017, and actually 9.4% higher at constant scope and exchange rate as the division was affected by an unfavorable Forex effect this quarter with a rise in all the businesses. Costs evolved at a lesser pace than revenues as a result of business development, leading to a pre-tax income of more than EUR 1.5 billion, up strongly 9%, reflecting the continued growth of this division. Zooming now into the different businesses one at a time. If you can go to slide 27 on Personal Finance, which continued to show strong business drive in the second quarter.
For example, outstanding loans were up 12% on a comparable basis, thanks to high demand across Europe and the positive effect of new partnerships. The business also continued to implement successfully the integration of the GM Europe financing business acquired last year, and it continued to implement a digital transformation with the international rollout of its CRM system called Vizir. A further illustration of the digital development at Personal Finance is that already more than 22 million monthly statements are issued in digital format, also representing 72% of all statements. Now, in terms of results, revenues progressed by more than 13%, or 9.3% on a comparable basis, in connection with higher volumes and the positioning on better risk products. Costs increased by 16%, or 8.3% on a comparable basis, as a result of this good business development.
Lastly, cost of risk was at a low level this quarter, and pre-tax income reached EUR 450 million, slightly up on last year. To recap, in a favorable context across all Europe, Personal Finance continued to show strong business drive and good operating trends. If with this, you can go to Europe-Mediterranean on slide 28, where business activity continued to progress well with good loan growth and deposits increasing in all regions. Our digital banks in the region are continuing to win new clients with, for example, Cepteteb in Turkey at 560,000 clients and BGŻ Optima in Poland at more than 200,000. We also continue to strengthen our digital offering. For example, in Poland, where we recently launched GOmobile, which is an app to manage accounts via smartphone, and which is proving to be a success with over 140,000 downloads in six months.
Now, talking euros and cents, looking at the P&L at constant scope and exchange rates, revenues were up 16% on the back of higher volumes and margins alongside a good level of commissions. Costs increased as a result of this good business development, but at a much lesser pace than the revenues, generating a significantly positive jaws effect. Overall, given a lower cost of risk this quarter, Europe-Mediterranean's pre-tax income surged 53% to stand at nearly EUR 200 million. Given the unfavorable Forex effect I mentioned earlier, pre-tax income increased by 31.5% when we look at historical scope and exchange rates. If with this, we now leap over the ocean and go to the U.S., or you go to slide 29 actually, where you see the results of Bank of the West, which confirmed good business drive in the second quarter.
At constant scope and exchange rates, loans were up 3% and net of securitization that took place in the fourth quarter, while deposits increased by 5.5% compared to the same period a year ago. Private banking assets under management progressed by 6% to clock in at $13.4 billion. Moreover, we'll soon be launching a new car loan offer leveraging personal finance expertise in this domain. Still, at constant scope and exchange rate, revenues were up 3.9% on the back of this volume growth. Costs were well under control. Bankwest generated a positive jaws effect in the quarter. On the whole, given a very low cost of risk, Bankwest pre-tax income increased by 22% on a comparable basis.
Given again, the unfavorable U.S. dollar euro effect, pre-tax income was up 12% at historical scope and exchange rates. In a nutshell, very good business drive and strong income growth for Bankwest in the second quarter, an unfavorable Forex effect. If with this, you could kindly swipe to slide 30 to end off in International Financial Services with insurance and saving businesses, which saw assets under management progress by 2.7% year on year to stand at EUR 1,060 billion at the end of June. In the first part of the year, we actually saw net inflows of EUR 13.4 billion, whereas the performance effect was negative. The Forex effect for the first semester was marginally positive.
On the bottom right of this slide, you can see the steady increase in our assets under management over the past three and a half years with a EUR 166 billion increase, of which nearly two-thirds from net asset inflows. If we stay on the insurance side of the business first, which is on slide 31, it continued to show good business development with strong net asset inflows into unit-linked policies, which represent two-thirds of net inflows in the first half of the year. The launch of our protection and casualty insurance offer in the French retail, which is a joint venture with Matmut, has got off to a promising start with 30,000 contracts already sold in May and June. In terms of results, insurance revenues were over 18% higher, costs progressed at a lesser pace than revenues on the back of the continued development.
Pre-tax income marked a 17% increase to stand at EUR 440 million in the second quarter. As you can see, good business growth and sharp rise in income for our insurance this quarter. The last part of IFS, if you can move to slide 32, which is wealth and asset management, it also showed good development. It was awarded the prize of Best European Private Bank at WealthBriefing Awards for the second year running. Asset management continued to broaden and adapt its offer. Real estate confirmed strong business growth, in particularly in advisory in Germany and France. Again, euros and cents, wealth and asset management revenues showed a good overall performance with a 9.8% increase year on year. Cost increase on the back of the development of the businesses, pre-tax income marked an 8.9% reduction, a 1.2% increase when you exclude non-recurring items.
Globally, good business development for wealth and asset management in the second quarter. If with this, we could go to slide 33, which is the slide on the third division, which is Corporate and Institutional Banking. Revenues stood at close to EUR 3 billion, down 6.8% compared to the second quarter last year. This reduction was limited to just 1.6%, net of the above-mentioned unfavorable Forex effect, mostly on the U.S. dollar and of the capital gains booked in corporate banking in the second quarter of 2017. Looking at the costs, they were 0.9% lower, thanks to the cost efficiency measures that have already generated EUR 259 million of cumulated recurring cost savings since 2016.
Leveraging a digital transformation, CIB has already automated over 80 processes out of 200 identified and is pressing on with the implementation of four end-to-end projects on credit process, Forex cash, client onboarding, and fund administration. All in all, CIB generated just under EUR 1 billion of pre-tax income, down 26% to a very high comparison basis in the second quarter 2017 that had benefited from capital gains and significant provision write-backs. As you can see on the bottom right of the slide, pre-tax income marked a strong rebound compared to the previous quarters, and was actually the second highest quarter, bar Q2 2017, since the beginning of 2016. Taking the first half of the year, this translates in a more than respectable pre-tax return on notional equity of 17.7% for CIB.
If we now zoom in on the three parts of our Corporate and Institutional Banking, and those are the slides 34 to 36, we can see that if we start on 34 with global markets, whose revenues were down 5% on the back of the lackluster context for FICC activity in the European market, and this compared to the second quarter last year, and this effect was partly offset by good volumes in equity and prime services. FICC revenues were actually down 17% compared to the second quarter 2017, as I said, which was characterized by good volumes. Client activity on rates remained weak in Europe, and the market context was lackluster for Forex and credit. The business confirmed strong positions in bond issuance in the first semester, where the bank ranked number one for all bond issues in euros, and number eight for all international bonds.
When we look at equity revenues, on the other hand, they showed strong growth of 12% on the back of higher client volumes in equity derivatives and the good development of prime services. If now we advance to slide 35, where we have corporate banking revenues, which were down 30.7%, but only 1.7% excluding the Forex effect and the capital gains that I mentioned already on the second quarter of 2017. This quarter, corporate banking saw fewer significant transactions in Europe, in particular as some IPOs were postponed, but delivered good performances in the regions Americas and Asia Pacific. Transaction banking continued its good development in cash management and trade finance, and the business confirmed its number one position for syndicated loans in the EMEA region. At constant scope and exchange rates, customer loans were up 4.6%, boding well going forward and rolling into the second half of the year.
If you flick to slide 36, security services, the third part of our corporate and institutional banking, had its revenues increased by 3.9% on the back of a good business drive and the positive effect of new mandates. Indeed, security services announced this quarter a major agreement with DWS covering EUR 240 billion of assets in Germany, Luxembourg. On the digital front, the business has already automated 30 processes and with a further 44 that are being developed. To wrap up, negative Forex effect and less favorable market conditions in Europe for FICC businesses compared to the second quarter a year ago, but strong equity, good security services, and almost stable corporate banking with a rebound in terms of pre-tax income versus previous quarters. This concludes my introductory remarks for the group's second quarter 2018 results.
As takeaway, I would like you to retain that the group delivered good business growth and higher revenues in the context of economic growth across Europe. We're continuing to actively roll out new customer experiences, and we're implementing digital transformation through the group. In the second quarter, the group generated a solid net income of EUR 2.4 billion, which translates into return on tangible equity of 11.2%. Fine, ladies, gentlemen, I thank you for your attention, and I'm ready to take your questions.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press 01 on your telephone keypad. Please lift your handset, ensure that the mute function on your telephone is switched off, and that you're in a quiet area to maximize audio quality. We will take questions in the 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 02. Again, please press 01 to ask a question. The first question is from Jon Peace from Credit Suisse. Sir, please go ahead.
Thank you. Hi, Lars. Can I ask a question about cost of risk and one on insurance? On the cost of risk, do you think we will stay at these sort of levels under IFRS 9 absent the divisions where you've actually got write-backs? Or do you think IFRS 9 has some inherent volatility and we could see some upward pressure in some quarters going forward? Then on the insurance business, what was the level of the capital gain in the current quarter? I'm just trying to get an idea of where it might normalize to in the third quarter. Would you be able to disclose how much your policyholder surplus reserves are as a percentage of technical reserves, and whether that's a sum that might need building? Thank you.
Jon, thank you for those questions. First, when it comes to the cost of risk. Yes, intrinsically, the cost of risk came in low. Let's not forget that also in an environment of low rates, this is not totally abnormal. It's even a bit linked. The low interest rate gives some pressure on the top line, but gives some fuel when it comes to the cost of risk line. When it comes to the impact of IFRS 9, intrinsically, yes, IFRS 9, which is forward-looking, includes when you have to calculate your cost of risk, it takes into account forward-looking scenarios. For the moment, those forward-looking scenarios are not dramatically different than they were in the first quarter. It is true that at some point in time, they might evolve, and that might lead to some additional volatility in the cost of risk.
Let's not forget also, that is normal. The cost of risk typically evolves somewhat over the cycle, and that will not be different under IFRS, except that the cycle will be a little bit different in the positioning of it. That's basically all there is to say. For the moment, no additional volatility due to IFRS 9. When it comes to your question on insurance, you're absolutely right. We cast our insurance figures in the accounts of a bank, which is not always very representative. You're right. You have to look at the gross written premiums evolutions, which is, as you can see there, very well. The second thing is, to be very fair, the accounts of the insurance are typically to be seen on a yearly basis, where it basically also includes all the effects when it comes to the insurance holder.
You will understand that these things are a little bit also of a marketing perspective and versus the other competitors. I'm not able to give you more details on this.
Okay. Thank you.
We now have a question from Mrs. Delphine Lee from J.P. Morgan. Please go ahead, madam.
Good afternoon. Thanks for taking my questions. I just had two questions, Lars, if you may. First of all, is it possible to get a bit of color or guidance around, generally, the top-line trends in Belgium and BNL? The first half did highlight a bit of pressure on revenues with -3% in Italy and -0.6% in Belgium. Just curious a little bit about sort of the margin trends, but also the fees issues that was highlighted around rescission fees. The second question is more on global markets and particularly fixed income. If you could comment a little bit about how we should see the first half performance. Are you seeing anything that is changing or improving around the rate environment in Europe, or anything you can comment on will be very helpful. Thanks a lot.
Thank you, Delphine, for your questions. If we first take the retail question on the top line, if you look in Belgium and in Italy. What we said in Belgium, as you know, we have been proceeding with a repricing of the liabilities, which we said at some point in time, starts to become much more limited. We hinted that at some point in time, it could be that this would be weighing somewhat on the net interest income line, which is what we see. Nevertheless, as you know, we're also working on advanced services, which is typically stimulating the fee and commission. We've guided that it is not impossible or unlikely that it would turn negative. That is basically what occurred in Belgium. When it comes to Italy, it's a bit the same thing.
We said that we expect the top line in Italy to evolve better than what we saw last year, we basically stick to that. There also, it's the same thing. Let's not forget, in Italy, we are not a dominant player. We have around 5% market share. We're focusing on the export-oriented larger corporates. We're also providing added value services to the individuals, which are generating fees and commissions. That is basically how you should see the retail top line in those countries. When it comes to global markets, as indeed, there is a different trend in Europe when it comes to FIG and equities. When it comes to FIG, let's not forget that a year ago, at the end of 2017, the demand of those kind of products were relatively limited all over the world.
At some point in time, there was some clarification on the U.S. side of what would happening with the tapering and all the likes, and it basically re-jolted the fixed income activity. That environment is not yet completely hitting on in Europe. I think that is a bit the lackluster environment that we talked about. It is, of course, better than what we saw at the end of 2017, but it's still having some of that impact. That would be my outlook on FIG, Delphine.
Okay, thanks a lot.
We now have a question from Tarik El Mejjad from Merrill Lynch. Please go ahead, sir.
Hi, good afternoon, Lars. I have a couple of questions as well. The first one is on FIG. I understand the lackluster environment in Europe, but when you look at the U.S. banks that reported, they all reported now, they didn't really highlight any pressure or any weakness in Europe, and some of them even gave the sort of breakdown. My question here is the competition from U.S. banks is too fierce. Are you struggling with this to actually continue to gain market share? Because you tend to be losing some. Also, you always said that your business is a lot of repeat business driven by your retail network. Can you just maybe describe the competitive environment there? Second question is on capital. I understand what you've done in terms of model changes and on op risk and moving into a standardized approach.
Should we expect this to happen every other quarter or quarter as your ongoing implementation of Basel IV? Is it fair to think that capital should be and stay around 11.5%-12% more, or actually 11.5% in the next 2, 3 years while you implement the new regulation? Thank you.
Tarik, thank you for your question. On the first one, when you look at FIG, if we see all the market shares and those evolutions, we are doing very fine. I cannot comment about the U.S. banks, but when you read what the U.S. banks are saying on their evolution, let's not forget that they are reporting in U.S. dollars. Where I said that I report in EUR and I had a negative effect impacting from the U.S. dollar, it is logical that the U.S. banks would have had a positive effect. I think that would be my core on that read, because on the market share and all the other elements, we're doing fine.
Let's not forget also, we can see this, when I said about the lackluster environment in Europe, we also clearly see that for our platform in the U.S., they had a very good performance. That is how I synthesize this. When it comes to capital, no, the 11.5% is not something that you should say is here to stay. Let's not forget that we mentioned as part of our plan that we would float First Hawaiian, right? You've seen that we basically done this at the beginning of the week, which adds another 10 basis points. Moreover, if we will do at some point in time, we're not in a rush, we take the time, but once this will be totally done, that will further lift our Common Equity Tier 1. That's basically what I have to say about it.
Can I just follow up on the last one, please? I understand you have some disposal that could help your capital, but that would come to offset basically the Basel IV that at some point you have to migrate some of your RWAs or add more. My question was more, are you waiting for the end of the time until the regulation comes into European directive, or are you intending to do it time to time implementation? What triggered your model change this quarter, basically on op risk?
Tarik, no worries on that. For the moment, as we said, we basically are in the current environment. We set forth to reach 12% wave of Basel finalization, as Basel IV is called now. That is something which will be discussed by the next European Commission, which is something, I don't know, which will come 2022 or something like that. That will be part of our next plan, not of this one. Just to provide some color when it comes to this operational risk. We have to back check every year our models that are in advance and so forth. Of those, some of the operations on operational risk side required complementary analysis. That's basically why we took a prudent stance and put it at standard model. There is nothing else to be said. We go for the 12%.
That's basically it, will be the next year and that's it.
Okay. Thank you.
The following question is from Mrs. Flora Bocahut from Deutsche Bank. Please go ahead, madam.
Yes, thank you, and good afternoon. The first question I have is regarding the leverage. There's been talks at the European Parliament that they could consider calculating the leverage on a daily basis. The question is how that could potentially change your ability to be active in the repo business. The second question is actually coming back to capital, where we haven't had any capital build up organically for 2 quarters now. If I only look at the retained earnings versus organic RWA growth. The question is whether we should still expect, as you had before, something like 25 to 30 basis points of organic capital generation per year. Thank you.
Flora, thank you for your questions. First of all, let's not forget on leverage, for the moment, there is no rule which is applicable. Let's not forget that. Leverage in Europe is to be part of the next wave of rules, which is to come, which will probably come end of this year or the beginning of next year. That's basically it. In the meantime, as you see, we are at the 5% leverage. We in the meantime are accumulating our capital and our position. As I said, for us, 4%, yes. This is not a concern. That's basically it. By the time this will become binding, we will be ample, even if they would change the calculation on an average daily or whatever it is. That's basically it.
Let's not forget that for us, the real metric, which is the one that we find very representative in the business that we do, is the Common Equity Tier 1. We are structured in such a way that if we respect the 12% Common Equity Tier 1, we also respect all the other elements like leverage above what will be then the minimum. That's basically on leverage. When it comes to capital, yes, allow me to remind you that at the beginning of the year, of course, we had the introduction of IFRS 9. We had the clarification on things like IPC, which basically lowered our Common Equity Tier 1. As I said, for the rest, we have all the things which were in the wings as foreseen, we will get to our 12%.
There is no concern about that, we will get there at the latest at the end of next year. The one thing which is positive, if you look at this quarter, is, as we said, there is a pickup in our lending needs from our clients, and particularly across Europe. As I said, there's more than 3% uptick in lending. This also means that there is this uptick in RWA. As I said, when it came to, for example, the activities in CIB, there has been origination going on, the distribution is still ongoing. Actually, the fact that the risk-weighted assets picked a bit up towards in the Q2 is actually a good news and bodes well for the next periods to come. That will be my answer, Flora.
Thank you.
We now have a question from Jean-Francois Neuez from Goldman Sachs. Please go ahead, sir.
Hi, good afternoon. Jean-Francois from Goldman Sachs. My first question is on costs. You've talked a lot about the new initiative, digitization, new product, et cetera, across the presentation. I just wanted to do a little check on costs and see how confident you are in reaching your targets which have been laid out in the business plan. The point I'm trying to make here is just that there is the investment in your programs, which are progressing as planned. When we look into the various divisions, even those with very high revenue growth, where we would expect at these levels of revenue growth to see more operating leverage, there is additional investment mentioned as a reason for the double-digit cost growth, or close to 10% for some of them.
I just wanted to understand whether compared to where you thought you would be, where you are, and whether there is enough in the plan budgeted for the initiatives you think you need. My second question is on capital versus volumes. Right now, for example, in a quarter like this one, your growth in risk-weighted asset does not allow you to form capital, even if I take away the 10 basis points of operational risk change. If you have to choose between building up towards 12% or taking the investment in the cost as well as the volume growth or building up the capital, which one would you have to choose? Would you feel that to reach 12%, you would have to maybe turn down some of the business which is currently coming in as we see every quarter?
Jean-Francois, thank you for your questions. When it comes to cost, yes, indeed, let me remind you that overall, there is a pickup in cost because we are investing in digitalizing and so forth. Also, of course, on the businesses which are a bit under pressure on the top line, we are reducing the cost, and then the ones, the specialized businesses, which are growing, we are fueling that growth. Let's be very fair. If you look at that growth, that growth is very strong. That means that if you do this growth, you have to accompany that in the appropriate ways of sales. If you have in the specialized businesses where you basically do point of sales or where you have other ways of interacting with the customer, we really have to make sure that we follow that in the right way.
That is why we have this cost pickup now to basically put in place those costs. We're ramping up these things. It's the same thing of ramping up what we're seeing in the digitalization, right? As we said, we are ramping up the savings which have come there. For example, next year, we will have EUR 1.8 billion of savings to be accompanied by this EUR 1 billion of investment. That's basically the thing. We are investing in our transformation, and we're also investing in the fast growth that we see in the specialized businesses. Those costs for the moment outweigh a bit part of the growth, but they are putting in place a structure that will generate cost savings and revenues going forward. That is on the cost and in particularly the driver on the specialized businesses.
When it comes to capital versus volumes, we already said it, and I say it again, we are there to accompany our businesses in their growth. As you can see it, there is strong growth across Europe, and we are there to basically serve them, and we are well-positioned just by executing the plan to reach our 12% Common Equity Tier 1. That's basically what we will keep on doing.
Just to clarify, you can do both the capital buildup and the volume you're seeing now, and you think your end point in cost is no different to what you thought it would be a year and a half ago. Is that correct?
Yes, sir.
Okay, thanks.
The following question is from Jean-Pierre Lambert from KBW. Please go ahead, sir.
Hello, good morning. Good afternoon. Three questions, if possible. First one is if you could provide some more information or details about the optimization of the CIB financial resources, which had quite a material impact this quarter. Is that only the sale of portfolios, or is there any other action? A second question is the cost reduction in French retail network. You indicate that there's more regional management level to be removed by the end of the year. Is that impact included into the cost-cutting related to digitalization, or is it some different element? The third question is, could you give an indication of how much the cost of compliance and control procedures account in your total cost base? Thank you very much.
Jean-Pierre, just two questions. Where are you, as you said, good morning. Could you just repeat your third question, please?
Yes. If you could give an indication of how much the cost of compliance and control procedure is as a % of cost, roughly. Is that booked in the corporate center or spread across divisions?
Okay. Jean-Pierre, when we look at your first question on the CIB resources, as we said, what we basically look at, we are fully focused on the creation of value. That basically means that if we have product which were originated before the changes in Basel regulation, which at that time were creating value, but following the changes in rules would have a lower profitability. Those products, if there would be buyers, which are not necessarily banks, which are in a bit of a different situation compared to those, that is basically what we're doing. That is what we continue to do, and we're basically almost at the end of that. When it comes to the cost reduction on France, which is part of the traditional business that we do in France, just as we have it also in other businesses that we are doing.
When it comes to your cost on compliance, our cost of compliance are, of course, in the business. We don't have those costs separated. They're into the business, and that's basically it. It's part of the total business. It's part of doing business. It's at several lines. It's not one specific cost. It's just the accompanying that we do in the business.
Thank you very much, Lars.
We now have a question from Lorraine Quoirez from UBS Limited. Please go ahead, madam.
Hi, good afternoon, Lars. Just one question on Turkey. Obviously, the situation is a bit concerning there. Inflation is high, the central bank doesn't seem to be doing much about it. Could you perhaps give us a little bit of an outlook on how we should think about the Turkish business going forward? Also, if you have exposure to non-Turkish lira-denominated loans in the region. The second thing is, it would be nice to have a little bit of comment on competitive pressure in the domestic retail markets, if possible. Thank you.
Sure, Lorraine. Thank you for your questions. First, on Turkey. If we look in our activity, which you know, we have a relatively small market share in Turkey. We have very good management, and of course, we are very focused on the products and on the underwriting that we do. What do we see? We see that as every time when there is the liabilities which are being repriced, we of course also work on the asset side. It always takes a bit of time. That is why you see the evolution. Moreover, if you look at the cost of risk of our activities, it's basically stable year-over-year. That's basically fine. That's Turkey. I'm not saying it's not a point of attention. Of course, it's a point of attention.
As I said, we have very strong management on the floor, which are very closely watching the underwriting that we do and the evolutions and the repricing as they are ongoing. That's Turkey. When we look at the competitive environment, it's a bit different, of course, country by country. If you look, for example, in Italy, there is still banks which are positioning themselves and addressing their situation on their non-performing loans and so forth, which is sometimes leading to a competitive environment where maybe the ROE is not as important as it is. That is some competitive environment, and if that is blocking us from growing the lending business because we cannot necessarily do it at the profitability that we set forth, then so be it.
There were a bit of similar things in Belgium where you had a bank which was looking to be floated and which was having also a bit of a transition in some activities. That's basically it. That's in the retail domain things we would say. Lorraine, that would be my answers.
Thank you.
The following question comes from Mr. Bruce Hamilton from Morgan Stanley. Please go ahead, sir.
Hi, good afternoon, Lars. Thanks for taking my questions. Firstly on France, in terms of the sort of NII and revenue outlook, it doesn't sound like you've changed your message, i.e., sort of an inflection towards the end of this year and then growth in top line beyond. I just wanted to make sure that was still correct given the flattening of curves and what that might mean for some of the reinvestment pressure in the book. Secondly, in terms of competitive dynamics in French retail, obviously you're having good success with growth in Compte Nickel as well as in Hello bank! Are you seeing any change in the level of competition from new entrants?
In terms of all the growth coming in online clients, is there any sort of risk from cannibalization in terms of lower sort of revenue dynamics per client there versus your branch base and just whether there's a mismatch between the revenues from new clients and the cost coming out of the business. Thank you.
Bruce, thank you for those questions. First of all, while it's basically both on France, if you look on France, that inflection that we talked about is indeed what we're still talking about. That's the point what I said compared to the evolution of last year, which that transition came to an end, and therefore that inflection is still what we anticipate. When it comes to the competitors, it is true that what we see of those new digital kind of services, also, it is important to have a wide range of services that are being offered. That's an important one, and that's the relationship with the client, which is very important. Now, at the same time, or as an illustration, if you look at Hello bank! it is generating two-thirds of its clients are basically new clients. Not clients of the bank.
From that point of view, it's a different way of offering these kind of products, which we will continue to do. We're very pleased with the way we are able to melt together the pure banking skills that we have for ages and the new digital kind of skills that we or develop ourselves or bring on board or get on board. That would be my two answers, Bruce.
Thank you.
We now have a question from Mr. Alex Koagne from ODDO. Please go ahead, sir.
Hi, Lars. This is Alex from ODDO. A few questions from my side as well. The first question is on Global Markets. If we look to the revenues evolution since 2012, it is in the range of EUR 5.2 billion-EUR 5.7 billion, meaning that it is EUR 1.4 billion in average per quarter. You need EUR 1.8 billion to meet your target in term of revenue for 2020. It seems pretty difficult to see how you will deliver that target. What are we missing over here in term of business dynamic or in term of market share transforming into revenue growth? Second question is on the cost of risk at BNL. It seems that there is a kind of acceleration into the decrease of the cost of risk. Can you make any comment over here in term of reaching your target of 2020?
Is there any risk to think that you can be below the 50 basis point you got for? Second question has to do with the level of revenue in a corporate center. That seems to be a bit high compared to your guidance. Any comment out there? The last question is basically linked to the comment that I saw this morning on Reuters saying that you're expecting your Specialized Services to grow by 5%-10% on H2 2018 versus H2 2017. Was that a true statement? If so, can you just give us a bit of color on what are the driver of this growth? Thank you.
Alex, thank you for your question. First, when it comes to global markets, the main thing is, as I said earlier, we, of course, assume that there is a continuation in the business we can do, the market share that we can grab and so forth. This, as I said earlier, is really what is realizing for the moment. That's fine. However, this is of course also on the back of what is happening in the market. For the moment, what we do see in Europe is that the market demand is lower than what you might have seen in the past. This is, as I said, where we'll have to see, or just like in the U.S., this will come back over time. That's it. If not, we'll have to see how we adapt to that situation. That is global markets.
When it comes to BNL, the cost of risk, as we always said, would taper off. Why? We have been getting out of the segments which were not necessarily naturally ours. As I said, we've been refocusing on the larger corporates, which are export-oriented. We are oriented also on the individuals, on the ones with the more advanced services needs and so forth. That basically means that we always guided that the cost of risk of that legacy would taper off because that legacy would basically taper off, and we've guided towards the 50 basis point. That's basically where we see that we would be. There is no change on that. Let's not forget also the cost of risk can evolve a bit on quarter by quarter. We stick to overall trending towards 50 basis points in Italy.
When we look at the corporate center, when it comes to the top line, there is nothing particular to mention. In the second quarter like this one, you have the dividends which are being paid. That is a bit what is impacting, but there is nothing special to talk about. The other thing is on your fourth question, I think the guidance that has been given, it's an evolution of the second half, and it was basically a high single digit that was being mentioned. Alex, that would be my answers.
Yes. Sorry to come back on the, if I may, on a follow-up on the last answer. Is that for international specialized service, or is it only for consumer finance?
Alex, it's on what we call the specialized businesses. If you look at international finance, there's a specialized business are part of that, but there are also retail which are part of that.
Sure.
Okay.
That's very clear. Thank you.
Thanks.
We now have a question from Mr. Pierre Chédeville from CIC. Please go ahead, sir.
Yes. Good afternoon. Two questions for my part. The first one is regarding the CIB and more generally, a comment you made regarding cross-selling between Bank of the West and CIB. I wanted to know if you could give us a little bit color regarding what type of operation do you mean by this cross-selling. Are you selling auto call, for instance, these type of products in the network of Bank of the West, or is IPO with customers of Bank of the West? If you could give us some example. More generally, regarding the CIB, do you think that it could be an option for you, or do you have room to do that, considering the fact that, as you said, the current environment in Europe is not very good. You could allocate more capital to your CIB activities in the U.S. and change a little bit your model there. That is my first question.
My second question is regarding Compte Nickel. I wanted to know if you have any view regarding the potential of cross-selling regarding Compte Nickel, because my view is that with EUR 20 fee per customer, at the end of the day, even if you grab a lot of customers, at the end of the day, it's not a lot of net banking income. I guess that you wish to develop cross-selling, and I would like to know if you have observed any positive things on that side. Thank you very much, Lars.
Pierre, thank you for your questions. Indeed, when it comes to the U.S. with cross-selling CIB Bank of the West, you don't have to look at for something very particular. It's a bit the activities of what we do in Europe. In Europe, we're really strengthening when we have clients in individual sector, which are also corporate leaders or corporate captains. We're really trying to help them in their needs for that. For example, syndicated loans, structured financing, and so forth. That is a thing we need to do. If you look at our Bank of the West activity, for example, the market share that we have on individuals is above the market share that we have when it comes to corporate.
For us, we just want to make sure all that, what we have, for example, in Europe, is that when we have that same customer in our individual base, that we can really ramp up the corporate financing that he needs as well. That is basically what we do. When it comes to capital allocation, of course, let's not forget that in the U.S., when it comes to CIB, we want to basically help our customers. We want to help European customers going into the U.S., U.S. customers coming into Europe, or our Bank of the West customers that are having their needs. That evolution is basically what we have planned, and that is where we have the capital to support that. That's that. When it comes to your question on Nickel, it is true that intrinsically we always aim to do cross-servicing.
That is why, indeed, when it comes to Nickel, we're also experimenting with added value kind of services. As you know, for Nickel, we basically figured out that that would be things like insurance, it would be consumer finance, and so forth. That is why, for example, we have launched a thing called, I know it's very spiritual, but it's called Nickel Chrome, which probably for you English-speaking doesn't mean anything, but in French it basically means something. There is already 25,000 cards, Nickel Chrome, that have been distributed. Let's not forget that our situation with Nickel is that it is profitable, which is not always obvious when you look at other startups, but that's the case for us. Pierre, those will be my two answers.
Thank you.
The following question comes from Stefan Stalmann from Autonomous Research. Sir, please go ahead.
Good afternoon, Lars. I would like to come back to markets and balance sheet developments around that, please. I appreciate that market opportunities in European FIG are maybe not as good as in the U.S. right now. At the same time, you have actually quite massively built your trading balance sheet, your trading inventories year to date, plus EUR 200 million, roughly. Why is that, given that you don't really see so great opportunities with clients? It's slightly related to that, what you have said before, that you're not too fussed about leverage. Why have you actually engaged the ECB in this legal battle about the definition of leverage? What is there to win, really, given that it's not an important ratio for you and it's not a big impact on your leverage ratio anyhow? Thank you very much.
Stefan, thank you for those questions. When it comes to, for example, the trading and the balance sheet, again, let us not forget that leverage intrinsically is not the ideal metric to manage a bank when you are focused on risk. If you look at really the risk, you can see that those elements in your balance sheet are hedged on the other side of the balance sheet. Therefore, the overall risk is much lower than that. On top of that, the demand of these products to at year-end period is very low. I'm saying this a bit jokingly, but in the last week of the year, basically institutional corporates, they all take the Christmas holidays. There is a lot less demand in those kind of products.
That is why it picks up in basically at the beginning of the year, as they always do, and it does pick up at the balance sheet. Intrinsically, really, when you look at the risk, this is not really a necessary point. Why do we pick a bit of a battle on the definition of this leverage ratio is that it is already a metric, which, as I said, pushes a bit the envelope towards a non-risk kind of stance. If there are elements in there, which is, for example, in France, the Livret A, that is not necessarily coherent. We basically wanted to draw the attention to that and to make the metric more relevant from that point of view. That is why we engaged a bit.
As we are a bank, pan-European, we want to step up and point to these things to iron out any fickle elements in the regulation. That's basically it.
Okay. Thanks, Lars.
We now have a question from Kirishanthan Vijayarajah from HSBC. Please go ahead.
Yes. Good afternoon, Lars. I've got a couple of questions on the fee and commission side of the business. Firstly, on Italy and your mutual fund assets. You're showing them nicely up year-over-year. I wonder if you could comment on how flows were in the second quarter and into the summer. Was there any impact from the political uncertainty in Italy and how the retail investors are feeling there in terms of risk appetite right now? Just going back to the Belgium fee number, I wonder if you could quantify specifically the impact of the retrocession fees and confirm whether that's a recurring ongoing item, or was the second quarter really just a blip? Thank you.
Kiri, thank you for your questions. The first one is, if you look at Italy, there basically has not really been an impact from the situation and the political environment. From that point of view, the flow remains good, and that's basically it. As you know, for us, that is an important part of the kind of customers that we serve, the ones that have those needs, and we saw them coming in for those. That's fine. When we look at Belgium, in Belgium, on the fees, there are indeed several elements. There was a bit of a high a year ago, and there is the all-over evolution on the commissions.
There is the fact that there is this other network that we use and that we shift a bit from the current network into that network, which basically moves costs into commissions, and that is a bit the retrocessions that we saw in the top line. As I said, I cannot really give you those numbers because it's a bit of a competitive savvy kind of information. Intrinsically, this is a move where we basically bring the cost down and we take, of course, then up the retrocessions. That is basically an ongoing process that we see in Belgium. That will be my answer, Kiri.
Great. Thanks.
We now have a question from Maxence le Gouvello from Jefferies. Please go ahead, sir.
Yeah. Good afternoon, Lars. You're focusing on Italy. Why the personal finance cost of risk is up by 50 basis points on the quarter? Have you changed your policy in light of the political event recently? The second, can you give us a wrap-up of what is your funding position in Italy, taking all the business that you have over there, which means retail with BNL, consumer credit, and wholesale banking, and can we have also the idea of the size of the TLTRO? Last question would be regarding the RWAs. Where have you allocated the additional operational risk that you have taken into account of your calculation for the quarter one at the business level? Is it included or not? If I remember well, you calculated your capital at the beginning of the period. Thank you.
Yes. Maxence, thank you for those questions. When you look indeed at Italy, the impact on the cost of risk of personal finance, it's not that material. If you look at overall the flow quarter by quarter, there is some fluctuations in that. That is a bit pushed a bit to a more volatile, as I said, under IFRS 9, because if you see things happening like what you see in Italy, you can have a bit of a tilting towards a more deteriorating scenario, which can accentuate a bit this volatility in the quarter. That's basically what I would say. There is not much more to be mentioned. When we look at the funding, when we stay on Italy, when we look on the funding, yeah, there is a total kind of funding that we have, which was around EUR 10 billion, which we are basically tapering off.
We basically, as in Italy, as the demand for the profitable loan growth is relatively slow, whereas the deposits are still picking up very well. This is basically something which is now down to around EUR 5 billion, so it's nothing material. When it comes to the steps that we took on the standard model on the operational risk, yeah, this is something where we basically apply to all of our businesses, or we will apply to all of our businesses. That's basically what we said. We didn't keep that central. We basically allocate that to the businesses. We assumed in our calculation that it is applicable to all.
Okay, in the Q2 result is already in at the business level or it's just at the group level?
No, it's basically what we've done in the calculation of the businesses, we already took it into the business.
Okay. Most of it should be into the investment bank and you're still down. That mean that your level of optimization of capital has been huge.
Maxence, if you look at the operational risk, the operational risk is something which is spread across all of them. That means that as I said, the evolution is basically linear to what it was everywhere. It's basically something which is not only, or not even at corporate and institutional banking, and indeed the corporate institutional banking, let's not forget, they have been reducing by several EUR billion, the portfolios which were less yielding in the current environment.
Okay. Have a good break.
The last question comes from Anke Reingen from RBC. Please go ahead.
Thank you very much for taking my questions. Two questions as well. First, coming back on the costs, please. Can you just confirm that you reiterate the 63% cost income ratio for 2020 as well, because understood that you confirm the cost base, but what's the binding constraints? If the revenues are lower, could the cost be lower than what you said at the investor day? Secondly, sorry, coming back on the capital. The growth in credit risk-weighted assets in Q2, by about 2%, what I calculated, is all because of business growth. I was wondering, should we expect some impacts like on an ongoing basis or do you think we probably wouldn't even see it in the numbers? Thank you.
Anke, thank you for your questions. Yes. We confirmed our outlook for 2020, so the cost income of 63%. When it comes to capital, indeed, as you mentioned, the capital, the RWA growth is on the back of the lending increase that we have performed. That's basically it. The elements, for example, TRIM that have been done last year didn't have a material impact. There is a TRIM to come. As you know, the TRIM intrinsically, we are supportive of it because it's a way to validate the advanced models that we in Europe are using. What will be the outcome of that when they look at credits? Honestly, that I do not know. As I said, for what we've seen so far, that's a positive evolution.
Thank you.
We have no further questions.
Ladies and gentlemen, I thank you very much for your attention, and if it's applicable, wishing you a very good August. Thank you.
Ladies and gentlemen, this concludes the call on BNP Paribas second quarter 2018 results. Thank you for your participation. You may now disconnect.