Good afternoon, ladies and gentlemen, welcome to the presentation of BNP Paribas' first quarter 2018 results. For your information, this call is being recorded. Supporting slides are available on BNP Paribas IR website, invest.bnpparibas.com. During today's presentation, you'll be able to ask your questions by pressing zero and then one on your telephone keypad. If you'd like to ask a question, please make sure you're in a quiet area in order to maximize your audio quality. I would now like to hand the call over to Lars Machenil, Group Chief Financial Officer. Please go ahead, sir.
Thank you. Good afternoon, fine ladies, gentlemen, welcome to BNP Paribas Q1 2018 result presentation. I hope you've all got a copy of the presentation in front of you, in my usual way, I take you through the first two chapters and then hand it over to you for a Q&A. Starting with our key messages on slide three, you'll see that business activity continued to progress well in the context of economic growth across Europe. This was illustrated by the group's 2.7% growth in loan outstanding compared to the first quarter a year ago. When we turn to revenues of the operating divisions, they were 1.4% lower on the back of a negative Forex effect, especially due to the US dollar depreciation over the period and the less favorable market context for fixed income activities in Europe, again, compared to the first quarter 2017.
The economic pickup saw retail banking and services divisions grow its revenues by 2% year-on-year. If we turn to costs of these operating divisions, they were 1% higher, but stable, net of the impact of the increased annual taxes and levies that you know are fully accounted in the first quarter, and this per IFRIC 21. The cost of risk at group level was still at a low level, equivalent to 32 basis points over outstanding, which is essentially in line with what we saw in the first quarter of 2017. The group's net result clocked in at a solid €1.6 billion, just 3.8% lower than the same quarter a year ago, this net of exceptional items and the impact of the annual taxes and levies. I also draw your attention to the drop in corporate income tax.
It stands at 27%, which is a structural drop of two percentage points, this on the back of the decreases that have been noticed both in the U.S. and in Belgium. These solid results of €1.6 billion are in line with the trajectory of our 2020 business plan. I remind you that in that 2020 horizon, we have an ROE objective above 10%, which, if the current outlooks materialize, will be closer to 10.5%. Having just mentioned these exceptional elements of the quarter, I would like to kindly ask you to advance to slide five, where you can see that they were moderately negative this quarter, whereas they had been moderately positive a year ago. In fact, after tax, they impacted the first quarter 2018 results to the tune of minus €56 million versus a positive impact of €76 million the year before.
If we now pick the next slide, which is number 6, you can see the impact of the higher taxes and contributions accounted this quarter for the full year as per IFRIC 21. The total amount increased by a tad less than EUR 100 million compared to last year, from EUR 1 billion to EUR 1.1 billion. For your guide, on a yearly basis, the increase should be limited to EUR 47 million, as EUR 33 million were booked in the second quarter of 2017 and are now crystallized in the first quarter. As a reminder, these taxes included, in particular, the EUR 572 million contribution to the Single Resolution Fund, which stood at EUR 469 million a year ago. If you now can swipe to the next one, number 7, you can see the performance of the group and of the operating divisions in the first quarter.
I draw your attention to the fact that pre-tax income of the operating divisions, excluding this IFRIC 21, was -3.6%, which is in line with the -3.8% of net income, excluding exceptional items and these taxes. Net income held up well and equated to an annual return on equity of 10.2%, excluding exceptional items, or 11.9% in return on tangible equity. If we now zoom on the revenues of the operating divisions, and for this, let's turn to slide eight, you can see that they were impacted by negative Forex effect that I mentioned. They were up at Domestic Markets on the back of good business development, which was partly offset by the low rate environment this quarter. They marked a good increase at International Financial Services driven by the development of the businesses, and this both in an organic and in a bolt-on way.
On CIB, they were down 9.8% on the back of the lackluster market context, in particularly in FIC in Europe, and this again, compared to the first quarter 2017. If we continue flicking and go to page nine, you'll see what I mentioned, these costs of our operating divisions are stable, excluding the impact of IFRIC 21. In Domestic Markets, costs were down 0.3% on average in our retail networks, but they were up in the specialized businesses on the back of their continued business development. International Financial Services cost evolution reflected business growth, while CIB costs marked a strong decrease benefiting from the cost savings measures we've been implementing. If we remain on costs, and if you could just swipe to slide 10, you'll see the good progress we're making in the implementation of our program of new customer experience, digital transformation, and savings across the group.
The three axes of our 2020 Plan. By the end of March, we've generated a little over EUR 700 million in accumulated savings. In the first quarter, they amounted to EUR 175 million and were fairly evenly split among the three operating divisions. I remind you that we're targeting EUR 1.1 billion of accumulated cost savings by the end of the year, and transformation costs stood at just over EUR 200 million in the first quarter, bearing in mind our expectations of EUR 1.1 billion for the full year 2018. As you can see, we're actively implementing our 2020 Transformation Plan.
If we now shift to the next line in the P&L, namely the cost of risk, I would kindly ask you to flick through the three specific slides on the topic, which start at page 11, you can see that the group cost of risk remained at a low level. Taking the businesses one at a time, we see that in corporate banking, provisions were offset by write-backs this quarter, but to a lesser extent than in the first quarter of 2017. Cost of risk was low in French retail, very low in Belgian retail, and continued to decrease at BNL in Italy. In other retail businesses, like Personal Finance, saw low cost of risk. Europe-Med's cost of risk was stable at a moderate level, while BancWest was still at a low level.
Turning now to slide 14, which reflects our very solid financial structure, where you can see that our common equity T1 ratio stands at 11.6%. As we already said, on January 1st, the ratio reflected, amongst others, the introduction of IFRS 9, as such, starting the year at 11.6%. As every quarter, the CET1 ratio increases by the net income generated after, of course, allowing for a dividend of 50%. In Q1, given the impact of IFRIC 21 taxes, this effect is basically offset by higher risk-weighted assets, net of ForEx, and this in connection with the good business activity that I mentioned before. On the other ratios, we have the leverage ratio, which stood at 4.1%, and our liquidity coverage ratios stood at 120%. All that is doing fine.
On that liquidity coverage ratio, you know we also express it in the immediately available liquidity reserve, which totaled a whopping EUR 221 billion at the end of March, half of which is deposited at the central banks. If we now turn to slide 15, where we see that the net book value per share stood at EUR 73.6 at the end of the first quarter, compared to a pro forma of EUR 73.1 at the beginning of the year. I remind you, this pro forma to reflect the impact of IFRS 9, as we already said. As you know, this is purely an accounting change, and it doesn't alter the actual value of the bank, nor its profit generation capacity going forward.
If we synthesize and if we look since 2008, the net book value per share has been growing at a compounded annual growth rate, CAGR, of 5.3%, clearly illustrating the continued value creation through the cycle. I leave you to peruse the next two slides of this introductory part which covers our ambitious CSR policy, illustrating, for example, our strong support to the carbon neutrality, and also a slide on our reinforced internal control system. Would now kindly ask you to advance to the results by division, and we start with domestic markets on slide 19. As you can see, domestic markets confirmed good business drive in the first quarter on the back of robust economic growth in the Eurozone. In particular, we continue to see good loan growth in the retail networks as well as in the specialized businesses.
This combined with an increase in deposits across all geographies. Taking to private banking, it showed a good net inflow in the quarter. Hello bank! attracted 110,000 new clients in the first three months of the year, up 15% compared to the first quarter last year. Domestic markets is progressively developing new client experiences and pursuing digital transformations. In particular, it is speeding up clients' use of mobile banking services by releasing new features in mobile payment systems, for example. To illustrate, client acquisition through digital channels now accounts for roughly one-third of new customers and active mobile users are up 21% compared to last year, so well on track. When we turn to the P&L, revenues were 0.4% higher at close to EUR 4 billion. As mentioned, we saw good business drive in our domestic market.
As I mentioned, the loan growth, for example, is up 5% in Belgium, 7% up in France. As expected, we continue to be impacted this quarter by the low interest rate environment. If we now turn to the operating costs in Domestic Markets, they were a bit higher due to the already mentioned IFRIC 21. If we look at really the retail networks and we exclude this IFRIC 21 impact, we see that the costs were actually down 0.3% on average, while they were higher in the specialized businesses, this on the back of their continued development. As you know, we are, of course, continuing to simplify and optimize our branch networks.
For example, in France, the delayering of the regional management setup is being implemented this year, this along the lines of what has already been done at BNL in Italy and BNP Paribas Fortis in Belgium. This will shorten decision-making process, improve operating efficiency, and reduce, as a consequence, the cost base. If we look at the cost of risk, which is reducing in particularly at BNL, pre-tax income reached EUR 658 million, marking just a 1.5% reduction excluding the IFRIC 21 impact. If we look a little bit, zooming in on the countries in Domestic Markets, what can we mention? For French retail, we showed a good income resilience on the back of good business drive. Particularly, the good news is that the renegotiations and early repayments confirmed their sharp decline since June 2017.
Of course, it weighs on this first quarter as we get less renegotiation and early repayment penalties, means that the revenue evolution should improve in the second part of the year. When we go to Italy, BNL BC's revenues were down. However, with a gradual improvement in business activity and a sharp rise in income, thanks to the continued cost of risk reduction. If we go to Belgium, the Belgian retail continued to show good business drive, offset, of course, by the impact of the low rate environment this quarter. Finally, the specialized businesses continued to deliver strong business drive. To wrap up, for Domestic Markets, slight revenue increase on the back of good business drive, despite the headwinds of the low rate environment.
If we now take the other part of our retail activity, namely International Financial Services, and you advance to slide 25, where we can see that this division remains a very strong engine of growth. In particular, you can see on page 25 that loans progressed well at Personal Finance and in our International Retail Banking. Our insurance and saving business showed good asset inflows, and the operating divisions actively implemented their digital transformation as well as new technologies, and this across all the businesses. If we look at the P&L, the revenues topped €4 billion, up 3.8% compared to the first quarter 2017, and actually 5.5% higher at constant scope and exchange rate with the rise in all businesses. All as a division, of course, we mentioned it before, were affected by an unfavorable Forex effect this quarter, in particular, the strengthening of the euro.
When we turn to costs, they evolved at roughly the same pace as revenues as a result of business development, leading to a 3.4% increase in the gross operating income, or a 6.2% when we look at constant scope and exchange rate and IFRIC 21. If we look at the other element, the cost of risk, it was EUR 50 million higher than in the first quarter 2017, but still at a low level. As a result, International Financial Services pre-tax income came close to EUR 1.3 billion, up 4.8%, and reflecting the continued profitable growth of this division. If we now, again, zoom on several of the businesses into International Financial Services, and you flick to slide 26, where we have Personal Finance, which continued to show good business drive in the first quarter.
Outstanding loans were up 12% on a comparable basis, thanks to high demand across Europe on the back of favorable economic context and the positive effect of the new partnerships. The business also continued to implement successfully the integration of the General Motors Europe financing business acquired, I remind you, last year. It also continued to expand its digital footprint and new technologies, resulting in 72% of contracts already signed electronically in its main three markets, France, Italy, Spain. If we turn to the P&L, revenues progressed by nearly 13% with higher volumes or in connection with the higher volumes, and the position on better risk products. Costs grew at roughly the same pace as revenues or 4.9% on a comparable basis, and this as a result of the good business development.
Cost of risk was at a low level and pre-tax income reached €373 million, up 5.5% compared to last year. To recap, in a favorable context across Europe, Personal Finance continued to show good business development and strong income growth. If we now move to another part, which is International Retail Banking, and there, let's look at Europe Med on page 27, where businesses activity continued to progress well, as well as deposits in all regions. Last month on this topic, we announced the acquisition in Poland of the core banking operation of Raiffeisen Bank Polska. This will boost our market share to more than 6% in terms of loan and deposits, reinforcing our number 6 ranking in Poland. This bolt-on acquisition is expected to have a positive impact of plus 1% on the group's net EPS in 2020, which implies €100 million of additional net income in 2020.
Looking in more detail at the P&L, we see that at constant scope and exchange rates, revenues were up 7% on the back of this strong volume growth. Costs increased as a result of the good business development, but at a lesser pace than revenues. Overall, cost of risk was essentially stable in Europe-Meds , and therefore pre-tax income was up 17.6% in the first quarter on a comparable basis. If we now take a plane and fly over to the U.S., to California, and we go to slide 28, where we see that BancWest confirmed good business drive in the first quarter, but in EUR terms was, of course, impacted by a 13% year-on-year depreciation of the U.S. dollar. Therefore, if we look at constant scope and exchange rates, loans were up 4.2%, while deposits increased by 9%.
The assets under management of our private banking marked a further progress of 11.6% to clock in just above $13 billion. On the digital front, BancWest opens some 8,000 accounts online in the first quarter, and this is twice the number of the previous year and representing over 20% of total accounts opening over the period. If we continue to look at the P&L at constant scope and exchange rates, revenues were up 3.5% on the back of the volume growth I mentioned. Costs were kept well under control, and BancWest generated a positive 1.8 points of jaws effect. On the whole, given an essential stable cost of risk at a very low level, BancWest pre-tax income increased by close to 9% on a comparable basis. Given the unfavorable Forex effect I mentioned, it was -8.5% at historical scope and exchange rate.
In a nutshell, good business drive and solid operating performance for BancWest, but an unfavorable Forex effect. If you could now kindly swipe to page 29, where we look at our insurance and savings business, which saw assets under management stable versus year-end 2017 at EUR 1.051 trillion at the end of March. Assets under management were positively impacted by good net asset inflows in all the businesses, which were, however, offset by negative performance and Forex effects. If we now focus first on insurance on slide 30, which continued to show good business development, both in terms of saving and protection insurance. We saw good growth in France and also internationally, while net asset inflow into unit-linked policies marked a further significant increase.
The business continued its partnerships initiatives, as for example, in Japan, where we are about to launch new insurance products together with the Sumitomo Mitsui Trust Network, and in France, where jointly with Matmut, we are launching this month car and home insurance products. In terms of results, insurance revenues were 10.8% higher due to this good business development. Cost evolution reflected also this continued development of the business and including a good performance of the associated companies, pre-tax income marked a 13% increase to clock in at EUR 369 million. If we now move to the last part in IFS, which is wealth and asset management, which you can see on slide 31, it also showed good business activity in all businesses.
In particular, I remind you that wealth management announced the acquisition of ABN AMRO Luxembourg Asset Management, continued its digital transformation using for the first time the blockchain technology and real estate confirmed significant business growth, particularly in Germany, where it's a leading property service provider. When we look now at the P&L, wealth and asset management revenues progressed by 2.8%, this despite lower capital gains in asset management compared to a year ago. Costs increased on the back of the development of the businesses and were impacted by some specific project in asset management and by costs related to, I remind you, the acquisition of Strutt & Parker in the U.K. Net of these, they were up 4.8% on last year.
When we look at the cost of risk, it was in this kind of activity, normal negligible, I remind you, in Q1 last year, had benefited from a net write-back of EUR 40 million. As a result, pre-tax income stood at EUR 187 million, down 13.9% compared to a year ago. Globally, continued good business development for the business lines of wealth and asset management. With this, we turn to the last part of our divisions, that's on page 32, where we look at corporate and institutional banking, which faced a less favorable market context in Europe, in particular for FIC, this, of course, compared to the first quarter last year, which had seen strong client volumes. However, the division continued to successfully develop its business activity and deliver on its 2020 development plans.
As such, grabbing market share and delivering a pre-tax return on equity above 18%. Revenues stood at EUR 2.9 billion, down 9.8% compared to the high comparison base I talked about a year ago, also being impacted by a negative Forex impact of almost three points in that reduction. Total CIB costs were 4.7% lower versus a year ago, 7.2% lower, excluding the impact of IFRIC 21. Of course, they benefited from the cost efficiency measures that we've been implementing in the CIB division since 2016, that have already generated EUR 297 million of recurring savings. CIB, of course, continues to be proactive in this area, with the automation currently underway of some 200 processes and the implementation of three so-called end-to-end projects, this is on credit processes, Forex cash, and client onboarding. The last part for the CIB P&L is the cost of risk.
They marked net write-backs this quarter, as in the first quarter 2017, to a lesser extent. Overall, CIB generated EUR 558 million of pre-tax income, marking a 15% reduction excluding the impact of IFRIC 21, this compared to a first quarter 2017 that had benefited from a favorable context for FIC activities in particular in Europe. We now turn to the next three slides, 33-35, let's peruse a bit more in detail each of the three businesses in our corporate and institutional banking. We start on page 23 with global markets, whose revenues were down 14.6%, as the pickup in volatility seen from the end of January resulted in a wait and see stance by European fixed income clients. However, also with an increase in volumes in equity and prime services.
If we look at FIC revenues, they were actually down by 31% compared to a very high base a year ago, which I remind you had strong client volumes in Europe. We confirmed our strong positions on bond issuance, and we ranked number two for all bonds issues in Europe and number eight for all international bonds. If we now turn to the other aspect, namely equities, and we look at their revenues on the other hand, they showed strong growth of 19.3%, and this on the back of higher client volumes in equity derivatives. If we now look to the second part of corporate and institutional banking on page 34, and that is corporate banking, revenues there were impacted by an adverse Forex effect for 5.7 points, and so they were down by 8.8%, but as I said, two-thirds of that on the back of this adverse Forex effect.
Also remind you that the first quarter of 2017 included a high level of fees due to several deals that were closed that quarter. Corporate banking revenues, if you look at areas, were lower in the Americas due to this Forex effect, but also due to the decision to stop financing non-conventional oil and gas. They were slightly lower in Europe and they increased in Asia-Pacific. When we look at transaction banking, they showed a good performance in Europe and in Asia. In particular, we strengthened our client positions on large corporates in Europe, where the penetration rate in cash management reached 41%, and that of corporate banking arrived at 65% according to the latest Coalition Greenwich survey. To round up this corporate banking, let me add that the deal pipeline is quite good, with several significant mandates that should be executed in the coming months.
If now to close off corporate and institutional banking, if we look at slide 35 with security services revenues, which progressed by 5.7% on the back of good growth in assets under custody and under administration. Security services continued to gain significant new mandates as, for instance, with Intermediate Capital Group, and finalized its strategic partnership with Janus Henderson in the U.S. with EUR 138 billion of assets under custody. In the first quarter, the business line also announced the acquisition of depository banking businesses of Banco BPM in Italy. Moreover, security services continued to develop joint offers in cooperation with global markets in areas such as execution and netting of derivatives and in collateral management.
Wrapping up corporate and institutional banking was impacted this quarter by a negative Forex impact and by an adverse comparison base in FIC, which shifted from limited client demand in Europe in 2018. Whereas it had been particularly good in Europe the year before. However, the division is continuing to successfully develop its business activity, strengthening market positions, and with a good pipeline of deals for the rest of the year, and as I said, operating at a pre-tax return on equity above 18%. This, ladies and gentlemen, concludes my introductory remarks for the group first quarter 2018. As a takeaway, I would like you to retain that the group saw good business growth in the context of robust economic evolution across Europe, and we continued to strengthen our commercial positions.
We also delivered a solid net income of EUR 1.6 billion despite the adverse Forex effect and the lackluster market context for fixed income in Europe. Thirdly, we're continuing to roll out new customer experiences, and we're implementing digital transformation throughout the group. Lastly, these results are in line with the trajectory of the 2020 plan and the achievement of its targets. Fine, ladies and gentlemen. I thank you for your kind attention, and I'll now be pleased to take your questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please could you press zero and then one on your telephone keypad now. Please lift your handset and ensure that the mute function on your telephone is switched off, and that you're in a quiet area in order to maximize your audio quality. We'll take the questions in the order received, and we'll take as many as time permits. If you find your question has been answered, you may remove yourself from the queue by pressing zero and then two. Again, please press zero and then one to ask a question. Our first question is from the line of Jacques-Henri Gaulard of Kepler Cheuvreux. Please go ahead. Your line is now open.
Yes. Good morning, Lars. Good afternoon. Sorry, it's been a long day. Two questions, please. You've done quite well in equities versus peers. Effectively the question was, how do you find the markets, and do you find people retrenching? Have you gained market share necessarily there? A little bit of color on your equities performance would be good. The second question, interestingly, going through your slides, you've been through quite a lot of bolt-on acquisition now, which obviously is good because the quality of the name you've bought is effectively good. When I look back at your plan, I realized that the free cash flow was 15% of the RWA, if I remember well. That would be about EUR 4.8 billion-EUR 5 billion of acquisition. How far are you towards your full plan of bolt-on acquisition towards the end of the plan?
Those are the two questions. Thank you.
Jacques-Henri Gaulard, thank you for your questions. If I take the first one on equities, it is true that the environment for equities was different than the one in fixed income. In fixed income, and particularly in Europe, there remained people or the institutions and the corporates were having a bit of a wait-and-see attitude. However, on equities, on both sides of the Atlantic, there was a pickup in demand and we basically served our clients into that. That's on equities. When it comes to the redeployment of the free cash flow, let's be very fair. This is a thing. There have to be opportunities. I cannot say how much exactly we will redeploy. If there is, for us, a bolt-on, it means that it has to be literally bolt-onable. It doesn't have to be too large. It has to be complementary with activities that we have.
As long as that is possible, we will announce these things. There's not much more to say on that. Next question.
Okay. Our next question is of the line of Jean-Francois Neukomm of Goldman Sachs. Please go ahead. Your line is open.
I just wanted to ask firstly on the
Well, can you repeat? We lost you a bit.
Yes. I just wanted to ask you about the fixed income performance. Can you hear me better now?
Yes, I can.
Over the past few years, you had gained market share, and I understand that the environment was not necessarily all that great in the first quarter, but you've underperformed peers fairly materially, if you take the industry as a whole and in constant currency. It was also the case in Q4 after a run of good market share gains, and I just wanted to understand what has changed in the fixed income side. Obviously, that has driven a bit of delay in the implementation of, or in, say, the achievement of your targets, at least if I take a linear path, and I just wondered whether you could give us a little bit of color as to what you embedded when you raised your ROE target. Did you take into account those tougher conditions, or is it somewhat of a headwind for the achievement of your plan?
The second thing I wanted to ask was about the jaws in the retail part of the business, which obviously is tough to achieve right now. I wanted to understand whether the reduction of the cost is well implemented already, or whether you have more to come here because the jaws in the domestic market continue to be negative at this stage, and stubbornly so in a sense.
Jean-Francois, thank you for your questions. First of all, in fixed income, let me answer along three axes. The first one is, if you look at the results evolution of BNP Paribas, you have to remember that we are focused for a big chunk on European activities when it comes to fixed income. If you look at the evolutions, when you compare to peers, you really have to make a distinction between peers which are mainly active in the U.S. and peers which are mainly active in Europe. When there was indeed this pickup in volatility as of the end of January, beginning of February, there was intrinsically a different stance on both sides of the Atlantic.
You see the evolutions and the demands were really picking up on the U.S. side, and this is where you see some evolutions, which was not the case in Europe, and that is why you see a different evolution for those serving their clients on fixed income in Europe. That's the first thing. The second thing is, let's not forget that when we oriented ourselves, when we made our plans for each of the divisions, we had a bit of a different orientation depending on which division. For example, our International Financial Services, which was having the appropriate level of returns, and therefore we said growth is the main thing. When we looked at CIB, we said that growth would have to be accompanied by cost measures and by a reduction of capital employed. That is basically the key elements of what CIB has been doing.
That is what we see when we look at the pre-tax ROE of CIB, which is above 18%. That is where the evolution of what is foreseen is really, as I said, on track with the overall plan. This being on track is what I said, we are basically the results that we have this quarter are in line with what we have in our trajectory reaching to 2020. Overall, if we look, as I said, for CIB in general, if we look at the performance, let's not forget that in 2017, BNP Paribas was also as a performance which was higher compared to this. This is also an element which is ordered. But overall, I repeat, the trajectory of the first quarter is totally in line with the trajectory we are implementing to 2020.
As I said, the 2020 ROE, we planned it to be above 10%. If elements remain, like the evolutions of what we expect in GDP, evolutions of what we expect in rates and what has been put into tax, for example, we will be gravitating more towards 10.5 than to 10. When it comes to cost reductions on domestic markets, yes, of course, we are progressing with the things we have been doing for a while. We are optimizing our branch networks and the layers of management and so forth. At the same time, let me remind you that the three axes of our 2020 plan are, of course, starting from customer journeys to changing, evolving towards customer journeys that the customers really need. Doing this through digitalization.
As a third consequence of all this, we will basically have further cost efficiency because you distribute products or you get in contact with customers via this more digitalized way. This is the thing we are developing and which will be further levers as we announced of the jaws effect. That will be my answer, Jean-Francois.
The follow-up, how is the business environment compared to that of Q1 now? If you described that as lackluster in Q1, how would that be now?
I invite you, Jean-Francois, to come back for when second quarter because it's not What we do, however, observe if you look at generic elements is that the volatility that we've seen has picked up a bit. As I think we have one month out of three months going, I do invite you on August 1st when we will publish our second quarter results on this topic. Maybe the only compliment, I understood your question on the global market side. The one compliment is that on the corporate banking side, and maybe your question was on the corporate banking side, is, of course, the corporate banking in general. Now that we are more moving into originate to distribute and other things, is a bit more volatile quarter to quarter.
When we look at the pipeline for corporate banking, it is well filled, one would assume that several of those will crystallize in the second quarter. Those were the answers.
We now go to the line of Delphine Lee of J.P. Morgan. Please go ahead. Your line is now open.
Good afternoon. Thank you for taking my question Lars. Two quick ones. First of all, would it be possible to get a bit of color on your performance in equities by geographies and by business, if that's okay, just to understand a little bit where the strength is coming from, with the structured and geographies. The second question is on costs. Could you remind us a little bit sort of now your target for 2020 in terms of cost base was, I think, EUR 29.9 billion, but obviously there's been some acquisitions and maybe other moving parts. If you could maybe just give us a little bit of the contribution from Poland, for example, or anything else that has changed. Thank you.
Delphine, thank you for your question. On equities, if you want on sectors or on regions, overall, we've performed well. If I would have to say U.S. maybe a tad even more than Europe, and institutional maybe a tad more than retail. Overall, as I said, it has been performing well across zones and across sectors. When it comes to the acquisitions that we have done, as you know, what we basically foresee is that those acquisitions as they are bolt on, that basically means that the cost income after those acquisitions should typically improve. That's the trend you can take into account. There is not much more I can say about that. That will be my answer, Delphine.
Okay. Thank you.
We now go to the line of Kirishanthan Vijayarajah of HSBC. Please go ahead. Your line is now open.
Yes. Good afternoon, Lars. Just starting with the insurance business. You're doing double-digit growth there in revenues and in profits. My question is really how sustainable do you think that is, particularly when interest rates might rise and the investment gains and realizations you're booking there on the bond portfolio maybe start to fade a bit. Secondly, actually still sticking with insurance on SBI Life in India, what's your latest thinking there? What's holding you back from maybe selling down further tranches of your stake of what's really, I think you said is a non-core asset for you in India. Thank you.
Kiri, thank you for your questions. If I take the SBI Life, I don't recall that we said it's non-core. It's something that we often do joint ventures where we can bring experiences and so forth and grow together. It's because, let's say the other party wanted to float part that we aligned on that one. There is nothing much more to say on that. Generically on insurance, let's be very fair. On insurance, the way it is presented in the accounts, let's be very fair, just like on some activities in the bank, one quarter is not necessarily the trend for the full year. That is what we should look. However, if we look at how the volumes are going and how intrinsically the markets have evolved for them, as I said, it is off to a good start.
For the further evolution, we should definitely be in line with what we had in the plan. I also invite you to come on August 1 to give you an update on it. That will be my two questions.
Great. Thank you.
Sorry. The next in the queue is Omar Fall of Mediobanca. Please go ahead. Your line is now open.
Hi there. Two questions, please. Firstly, just wanted to understand when we would start to see real operating leverage in two areas, in particular, Personal Finance and other domestic markets. More broadly, you told us that the cost savings we'd seen delivered in CIB with this year start to be factored into the rest of the group. I guess it hasn't really started this quarter, or at least I can't see it. These two areas in particular, seeing very strong revenue growth, but extremely sizable investments. Just to give us a sense more of timing rather than the scope of jaws. Then, again, just on other domestic, Arval is probably half the business. Are you not seeing the effects of lower car sales results similar to some of Arval's peers?
Is there something about the fleet that means it's less exposed to the issues around diesel? Anything you can tell us to help us get comfort on what's a sensitive topic where sadly there isn't much disclosure. Thank you.
Omar, thank you for your questions. If I take the operating leverage first. You ask about PF, so Personal Finance , and you ask about other domestic markets. When you look at Personal Finance , there is one little thing you have to keep in mind. We are slightly shifting the kind of underwriting we do in Personal Finance , shifting towards the better counterparty. That basically means that the top line basically squeezes a bit. However, we recuperate on the cost of risk line. If you look at just jaws between top line and cost, you might see some kind of pressure on Personal Finance , which is basically recuperated on the cost of risk side. That is the one thing I would like to say. If you look at the overall performance and evolution of Personal Finance , it's intrinsically well. It's up.
Our pre-tax income is up 5.5%, there is this dynamic which shouldn't fool you, which at first glance might say that the jaws are not positive, but you have to take into account that we position ourselves slightly different on other products and therefore more on secured products, and therefore have leverage, if I can say, quote-unquote, "via the cost of risk." When we look at other domestic markets, it is true that this is one of the elements where we are investing in digitalization because it is where we believe that steps are to follow rapidly. There it is more on the horizon of more, let's say, next year, 18 months to see these effects. When we stay on the domain of other domestic markets, and particularly on Arval, I remind you that Arval for BNP Paribas is a very diversified activity.
When we provide the kind of service, it's not just the service of financing a car, it's a much wider series of services that we provide. On top of that, we are doing this in a very international kind of basis. Maybe you can be concerned of some issue in one country or one city or one brand or whatever, which is in a diversified setup like ours, very manageable. From that point of view, that basically the car I would provide, Omar.
Next question, please.
Next question is over to the line of Flora Bocahut at Deutsche Bank. Please go ahead, Flora. Your line is now open.
Yes, good afternoon. The first question I have is regarding the provisions in the division personal finance, following on what you were just explaining regarding the change in mix, the negative impact on revenues, the positive on cost of risk. I had in mind that you were guiding for higher provisions under IFRS 9. I think you were guiding for 170 basis points from this year onwards, obviously it is much lower than that in Q1. The first question is whether you could comment on the cost of risk in personal finance. The second question is regarding the put option you have with Ageas, which, as you know, you can exercise until the end of this half year. What's your thinking there? Thank you.
Thank you, Flora, for your two questions. The first one is indeed on personal finance. What we said is with the introduction of IFRS 9, for relatively stable evolutionary businesses, the impact of IFRS 9 should not be that materially different from IAS 39 that we had before, except for businesses that grow rapidly. Why? Because we have to provision at origination those loans. If you have a lot of origination, that is something that could add during the period of the ramping up towards additional cost of risk. That is what we've guided for, that we expected in the first years of IFRS 9 to have a little bit of a pickup. That's why we said that although we were gravitating around 150 basis points, we could go towards 170.
If we look at today in an environment where the interest rates are very low, we still see that the cost of risk is indeed very low. That is the main thing. We still believe that over the cycle, when there will be a pickup, we would gravitate towards 170. For the moment it is low. Let's be very fair, the 170 we guided for, which is more a guidance of what you should see over the plan in 2020, probably if all remains the way it is, it's much more going to be 150 basis points in the year 2018. On your second question on the put option of Ageas, there is not much I can say. As you know, we're very pleased with the way things are going, and there's nothing more I can add.
Thank you.
We are now over to the line of Jean-Pierre Lambert of KBW. Please go ahead, Jean-Pierre, your line is now open.
Thank you. Good afternoon. Two questions. The first one is on Italy. If we look at the Italian revenues, there seem to be a kind of deterioration versus the fourth quarter in terms of dynamics, both for NII and fees and commissions. When do you expect some form of stabilization of the revenues in Italy, if you can, or if you can indicate what kind of dynamics you expect to recover. The second question is, in terms of economy in Europe, there's a bit of a debate if there is a slowdown and are we at a point where it is as good as it gets. Any sign you can see from parameters and metrics in your business that there's a sign of slowdown on your front? Thank you.
Jean-Pierre, thank you for your question. If we look at Italy, in Italy, indeed, to look at the P&L, let's look at the balance sheet first. You see that the volumes, in particular on credit side, are basically stable, even if you look at it. Basically in that environment, it is also normal that the margins and the revenues we are making are a bit in line. The question is, when will we be in a situation where there will be a material pickup in lending demand in Italy? We are staying present to our clients in the needs that they have. Overall, the growth is still a little bit subdued in the segments we are active, so we'll have to see when that one picks up.
One could assume that there is now what we observe is there is some economic growth in Italy, which is forecasted to be around 1.5%. One would assume that on the back of that, we would see over these coming quarters, we would see that pickup. On your second question on if we see any indicators of a European slowdown. As you know, when you look at our results of the first quarter and you look at the growth in several of the areas, you see the strong pickup. As I said, you have the 5% in Belgium, the 7% in France. If you look at our specialized businesses in Europe, it's a bit the same trend. In the client segments where we are present, we see a strong pickup in activity as we mentioned, which led to our solid results.
That will be my answer, Jean-Pierre.
Thank you very much.
We now go to the line of Anke Reingen of Royal Bank of Canada. Please go ahead. Your line is now open.
Yeah, thank you very much. I just wanted to ask you if you can help us a bit to understand the FX impact in the quarter. Normally on your slides on the revenues and costs of the operating divisions, you give an adjusted number at constant scope and exchange rate. I was just wondering if you can please help us out on the revenues Q1 and the cost Q1. I just wondered about the investments. I understand you're investing quite obviously in line with your strategy for organic growth. I was wondering, would you say that Q1 is usually a seasonally higher rate in the investments, or would it be slower relative to the rest of the year? Thank you very much.
Anke, thank you for your question. Just a clarifying one for me on the second. When you mean investments, you mean investments like in transformation cost, or you mean investments like in M&A?
No, more like in the investment for business development, like you mentioned for domestic markets. You think the run rate on this is higher in Q1 than it would be in other quarters. Thank you.
Okay. If we look at Forex, indeed, if there is one thing, if you look at, for example, the EUR versus the USD or the EUR versus the TRY, the EUR strengthened quite a lot compared to a year ago. Depending if you look end of quarter, average of quarter, and depending on which currency, but it's between 10%-15% of strengthening that happened. Just imagine that if we would have made exactly the same earnings as a year ago, translating that into EUR would basically reduce it by 10%-15%. That is why we mentioned that the Forex effect into the translation of our activities, which are, for example, in USD or in TRY, in Turkish lira, are a bit subdued by that, and you have to look indeed for them at the constant scope, and which is what we do.
If we look at our activities, for example, BancWest, or if you look at our Europe-Mediterranean, we do provide them the evolutions at constant change rate to give you the idea. That will be that. Maybe one last thing, when we talk about Forex, this is the evolution that we have of the translation of the P&L effects. Of course, the Forex also works on the equity. That is why, if you look at our Common Equity Tier 1, the impact of evolutions is basically limited, right? That's the difference between those two. When I come to your question of your investments, let's say in overall business development or other elements, there is not necessarily that the first quarter is, or there is any pattern specific for the quarter.
It can be that if it's a new thing, that costs ramp up a bit in order to roll it out or to strengthen the setup. For this quarter, it's not necessarily that the costs of those investments are materially higher than what you would have otherwise. It is a bit different for the transformation cost. That's why I wanted to ask. The transformation cost, they clocked in roughly around EUR 200 million for the first quarter, whereas we've guided that on a run rate, they would be more around EUR 250 million for the quarter. There we could expect that it would pick up. Those would be my answers, Anke.
Are you able to give us a specific number, like you normally do for the operating divisions wouldn't be down 1%, but they would be up x% at constant currency and exchange rate, constant scope and exchange rate, or should I follow up later on with the Investor Relations?
No, you can follow up, if you look at the evolutions quarter-on-quarter for the operating divisions at constant scope and exchange rate, the NBI, so the top line would be down 1%, and that's basically it. Do reach out to the investor relations if you want more detail or other elements, that is basically the top-line figure.
Okay, thanks.
We now go to the line of Jon of Credit Suisse. Please go ahead. Your line is now open.
Yes. Thank you. Hi, Lars. My first question was just on the equity derivatives business and whether you'd seen any negative impact on the business from hedging the volatility in the quarter. The second question was on the Europe-Mediterranean division. There was quite a large other non-operating item, could you just remind us what that was, please? Thank you.
Jon, thank you. There is nothing particular on equity derivatives to mention. On your second question had to do with the income in emerging markets?
In the Europe-Mediterranean division.
Yes. As you know, our Europe-Mediterranean division is a constellation of several kind of activities. In these several kinds of activities, they are sometimes structured in different ways. We are evolving those structurations. Yes, from time to time, we have some contribution which are falling in different lines, depending on the way they are. There is nothing material to be mentioned.
Okay. Thank you.
We now go to the line of Maxence Le Gouvello at Jefferies. Please go ahead. Your line is now open.
Hey, good afternoon, Lars. Two question on my side. When we had the pleasure to meet you at the time post Q4, you confirm us that you were expecting some corporate loan growth in the range of 5%-10%. Looking at what you've achieved, it's already 5.9% in the French retail and 6.5% in the corporate. Do you believe that you are more going to stay in that range or closer to the 10% by year-end? The second element is regarding your capital allocation in the market activities has been shrinking significantly over the quarter. Is it an FX impact or is it going to be structural? Many thanks.
Maxence, thank you for your questions. When we look at corporate loan growth, as we said, in the current environment, loan growth is strong. If it continues the demand in the way it is, it's probably going to be somewhere in the middle of that range. It is indeed looking good, and as I said, it is a strong reflection of what we see in the loan demand. As I said, if you look at it, if you look, for example, in France, the demand of loan growth is around the 7%. It is indeed probably ticking up towards the higher end of the options.
When it comes to your second question on the capital allocation in global markets, I remind you that indeed, on global markets, we set out on saying, yes, we embark in following our customers in their needs, but at the same time, we wanted to materially reduce the cost base at which we do that, and also materially reduce the capital consumption. That is basically what we've been doing. I remind you that some of the activities that we had were dating from pre the Basel III regulation. When Basel III came along, the capital requirement was stepped up in a very material way. That's the kind of business we basically stepped out of, which we have been announcing that for several EUR billion, we would reduce that, and that is what we have been doing.
That is why overall, indeed, if you look at CIB, the return on this equity is basically, as I said, above 18%, even though there is some pressure on the top line, but we recuperated on the cost, and we recuperated on the positioning of the type of businesses that we do, and therefore, the capital allocation. It's one of the things we focused on on global markets.
Okay. Can I ask one last question?
Sure.
Just how you have been able to manage your dollar funding through the LIBOR-OIS crisis. Has it been an issue for you, or can you give us a bit more color because it seems to have been some difficulties from some Swiss bank.
Yes. Thank you. No, let's not forget that we are, I was going to say we are a French bank, but you know that my story is that we are an international bank. If you look at our activity in the U.S., we're actually very balanced. Let's not forget that we have, just like we have in France, in Belgium, in Italy, we have a diversified set of activities from retail banking through BancWest, and then we also have corporate and institutional banking that we are active in. That basically means that we have all the activities just like we have in all the other countries that generate the deposits, that generate the loans, and that generate an equilibrium growth for the activities. For us, not really an issue.
Thank you. Have a good trip.
Thank you.
Our next question is over to the line of Tarik El Mejjad at Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Hi. Good afternoon, Lars. Just one question actually on the digital bank and Hello bank!. Can you give us bits of color on how competition was since October, November, when Orange Bank launched and Revolut and other neo banks ramped up their activity in France? Clearly, you showed that actually you had 110,000 new clients in Q1. That's very strong. Can you just give us a bit of the environment and the competitive environment, sorry. Yeah.
Sure. Thank you, Tarik. As you know, what we are doing, we're basically focusing on providing value-added digital kind of services. This is what we do with Hello bank!. We don't come in with one product. We basically provide the full banking service in digital, and as you said, basically we attracted 110,000 new clients. The same is true, for example, if we take Lyf Pay. Lyf Pay, where it sounds like pay, and people can think of it's a payment system, but it's much more than that. It's a value-added system where we basically manage coupons, where we manage cards, so forth. That we've added an agreement with Casino, for example, in France, which will add another 500 distribution points where this value-added can be distributed. That is the key focus that we do.
We're providing the full value-added of the banking services, and even when we go in specific items, even there, we really focus on the value-added. That is what we keep on doing, and we see that the pickup by clients and future clients is very strong.
Okay. Thank you.
Would that have been the last question, operator? Operator?
Yes. There's currently two questions. I'll send you over the first one, which is Lorraine Grice of UBS. Please go ahead. Your line is open.
Hi. Hello, Lars. Good afternoon. I have a question regarding Belgium. I thought the revenue actually are holding quite well, particularly the net interest income, that despite the low interest rate environment. You did show that the loan growth was actually quite strong and supportive, but was just wondering whether there was anything else in there, like hedging gains or something, and whether you expect the trends we're seeing now to actually sustain this year. My next question will be on First Hawaiian Bank. I was wondering whether it's more like the deconsolidation is more something that would be a next year story rather than this year's story. Thank you.
Lorraine, thank you for your question. If you look in Belgium, as I said, if you look at the driver for evolution and growth, you see that loans are picking up by 5%, which is fine. As indeed, we are in an environment of low interest rates, this basically means that one has to reprice. As we said before, we basically come to the end of the repricing on the deposits, we have to reprice on the other side. Now, the other side, it takes more time. When you reprice deposits, you reprice the stock. When you reprice loans, you don't reprice the stock. That is where this is the thing we keep on doing. We've been doing this now for several quarters. We'll see how that evolves. When it comes to First Hawaiian, as we said, we are not in a rush.
You will see when these things evolve. We're not in a particular rush. We'll see how market evolves, how things evolve, how demand evolves, we'll act accordingly. That will be my answer, Lorraine.
Our final question is the line of Pierre Chédeville of CIC Market Solutions. Please go ahead. Your line is open.
Hello, good afternoon, Lars. Just two quick questions. First question is regarding slide 31, where you mentioned regarding asset management, specific project of transformation. Could you remind me exactly what you mean there? What would be the impact of this specific project on the cost in this division? Regarding the insurance business, could you give us, maybe you give us, but I didn't see it, the part of unit link in the commercial development this quarter in order to compare with peers. Thank you very much.
Pierre, thank you for your questions. When it came to the transformation in asset management, it's a project called Aladdin. It's one of the things.
Okay
with BlackRock, that's basically the change that we've announced. Could you repeat your question on insurance on unit link? I didn't fully grasp your question.
What is the part of unit link regarding the sales of general account savings. In your production for 100 of savings, how much is related to unit linked products?
Yeah, the big bulk, it is around 80%.
Eighty?
Yes.
No, it is not possible.
Unit linked, that is what you asked, right?
Yeah.
Inflows. That's what you basically asked for, right?
Yeah. 80%?
Yes.
Okay.
Sorry to surprise you.
No, it means that you mainly sell unit linked products this quarter.
Yep.
Okay. Thank you.
That will be my answers. Operator, back to you.
We have a final question, and that's over the line of Alexandre Kojeve at Natixis. Go ahead. Your line is open.
Sorry, my question has been answered. Sorry for that.
In that case, please pass the call back to you for any closing comments at this stage.
Thank you. All of you, thanks again for the time you spent with me. As I just repeat the main messages, you've seen the business growth in the context of economic recovery in Europe. We continue to strengthen our commercial positions. We have a solid bottom line at EUR 1.6 billion. We keep on rolling out the new customer experiences and the implementation of the [Chess book]. The first quarter of 2018 is fully in line with the trajectory of ramping up towards our 2020 objectives. With this, I thank you very much and wish you a very good day.
This now concludes today's call. Thank you all very much for attending, and you may now disconnect your lines.