Ladies and gentlemen, welcome to the Société Générale conference call. Frédéric Oudéa, Chief Executive Officer, and William Kudasch-Chassaing, Chief Financial Officer, will present the group's first quarter 2020 results. Gentlemen, please go ahead.
Thank you. Good morning to all of you. Thanks for attending this call. First of all, let me, of course, say that I hope you are all well. We decided in a market environment, which has been volatile and with rumors flying around, to anticipate by one week the communication of our results and present as soon as possible a complete and stabilized vision of these results for the first quarter. Let me just mention the only limitation to that is that we will not be able to comment in detail on our quoted subsidiary, as we will release their IFRS figures on the sixth of May. We will enter into figures very quickly. I will leave the floor to William, and of course, we will answer your questions. I just would like to say a few introductory remarks.
First of all, as we all know, this crisis is first a sanitary crisis. I just would like to highlight that, of course, we had as a core priority to protect the safety of our clients and of our staff, and I think we were able to demonstrate a capacity to do that efficiently. Secondly, this crisis will have very serious economic and financial impact. I've gone through different crises in my career. I've lived the 2008, 2009 financial crisis. It's certainly a crisis which will have more impact, as we see, and with still a lot of uncertainty. We are working still on different scenarios for the GDP impact. We have a base case, which corresponds to a - 6.8% drop of GDP in the Eurozone, a - 6.6% in the U.S., which seems to be the one developing.
It corresponds, in particular, to a two-month confinement in these economies. We have other scenarios, in particular, an extended health crisis scenario, which might be related also to a second wave of contagion at the autumn, and which corresponds more to a - 13% drop of GDP, in the Eurozone. I think we need to remain very humble, of course, on these scenarios, but also on the impact of the government reactions and authorities' reaction to this crisis. While this crisis is extraordinary by its magnitude and diversity, the response of the authorities, central banks, governments, and regulators have been also extraordinary. When I say this, I have in mind, of course, in particular, the capacity to quickly implement these extraordinary schemes.
Let me just say, if I take France, just five weeks after having started to implement this new guarantee scheme, the level of demand for the overall banking sector is EUR 80 billion. We stand on our side at EUR 14 billion, and at the French level, that concerns 420,000 companies. What I mean is that this capacity to put that quickly in place will, of course, have an impact, which is still difficult to factor and forecast, but on the cost of risk and the timing. Final point, I'm sure that we will see additional measures, whether it's in Europe, for example, to think about how to finance and stimulate the rebound of the economy, or whether it could be, for example, to even transform certain of these exceptional loans into semi quasi-equities.
Just to say that we are still facing uncertainty as we speak. If I go to page five, I just would like to say that if the concept of being a responsible bank means something, and responsible banking, I think it is in this crisis that we can illustrate this. There are a lot of talks explaining, I think it's true, that banks are part of the solution, and we have to commit. As I said, we have committed to protect our staff and clients. For me, it's extraordinary to see what we've been able to achieve. To a certain extent, the fact to be able to communicate and discuss our figures a week in advance is one illustration, I would like, of course, to thank the team for that.
Beyond the way we also deal everywhere in the world with our major projects, whether it's business project, we were able to complete an important milestone in the migration of the former Commerzbank equity business end of March, but also on the remediation projects. That's very comforting. The second thing is the capacity to deal with our clients. I've mentioned the government schemes, but much beyond, we've been able, and all our teams are on the ball with our clients. For example, with all the DCM businesses that we saw. I think, thinking forward, that what we are delivering today will help to further enhance the relationship we have with our clients. Our clients will not forget the way we have behaved. Third, with the communities. Of course, our societies are heavily impacted in many sectors, as we all know, in many countries.
I feel that we have also the duty to try to help as much as we can. We have designed a global solidarity program with an overall envelope that we estimate at something like EUR 50 million, which will be an international one with different donations. I just wanted to mention that we, as the management team, will contribute to the financing of this program, as we have decided and informed the board that we will give up half of the variable compensation that the board will decide to attribute to us in due course for the 2020 year. Let me now turn to page six just to say, I really believe that we are entering into this crisis with a strong risk profile and a stronger risk profile than in 2009, if I take this comparison.
When I look at our credit risk, clearly, we have drawn the lessons of the previous crisis, and I think stick to the strict origination criteria. We will go through, I'm sure, our different exposures in detail and the quality of this exposure. Just would like to take one example, which is one sector that people, of course, look at in crisis like this, the LBO. We've maintained a EUR 5 billion direct exposure unchanged in several year. More importantly, when you look at the quality of the exposure we had in 2008, 2009, for example, junior exposure, second lien, things like this exposure today is much better protected, much better quality, and predominantly European. As you see also on the slide, we have a portfolio with a low NPL ratio, 3.1%. It has even gone slightly down in the first quarter.
It's even lower when you look at the way the EBA measure that, below the average in Europe and with a good coverage ratio. The second thing is, of course, the capital level. We started with a 13.2% Q1 ratio, reintegrating the provision on the 2019 dividend. We stand at the end of March at 12.6%, 12.7% actually pro forma of disposal that is proceeding this year of our Norwegian and Swedish Scandinavian leasing business, which means that it gives us a 350 to 360 basis point buffer above the regulatory threshold, the MDA, which now stands at 9.05%. You will see that we have also increased our liquidity buffers. William will go on that more in detail. The third element is that we are functioning and operating a more compact business model with good franchises across the board.
Effectively, we feel confident because we have a good position, including when I look at the geographies, and here it's a very difficult thing, all geographies will be, by definition, impacted. Let's face it. Overall, I think we have countries which can support the economies and/or we don't have big exposures. For example, when I think about the U.S. retail operations of banks with consumer credit, et cetera, we have safety net in Europe, which will limit the impact, for example, on individual clients. Overall, we feel we can deal with this crisis. Fourth, this crisis for probably many companies, but for us, has been a way to test also our digital and technology infrastructure. It worked very well, as I said, across the board, whether it's in developed economies or, for example, with our offshore operations in India, everything functions.
That's good, because if we were to come back to confinement, we can do that. We will probably, of course, going forward, deal in a different way in our functioning. Now let's turn to the figures. I will just say a few words on that, page seven, and then William will enter more into detail. Clearly, we have mixed results. When I say this, actually, there's nothing really to say on the bulk of our activities. Retail operations, you will see, are doing pretty fine, have remained solid. Of course, they have started to see the impact of the crisis end of the quarter. We have also resilient financial services operations, and we have had in GBIS, a very strong FICC business on the capital market and good activity on the financing side.
We had one, of course, big disappointment, which is on the equity revenues and more specifically on the structured investment products. We'll come back on that more in detail. You will see that there's a mix of things, some increase of reserves, the EUR 1.75 million, but also the negative impact of the dividend cancellation and, of course, the cost of the GBIS. We will come back to that much more in detail. The second element of these figures is, of course, the increase of the cost of risk. This cost of risk stands at 65 basis points. It's three times higher than in the first quarter of 2019. We see there the first, of course, impact of the COVID scenario. Same thing, we will enter more in detail in this cost of risk.
What we've been doing in the first quarter is, beyond provisioning for certain specific files, including because of the COVID, is to add overlay provisioning. We will refine our scenarios going forward. I think in the second quarter, we'll have more clarity in terms of what is the most likely scenario for this year and effectively integrate then a more forward-looking IFRS 9 effect. What I just would like to say, and with all the prudence and the modesty of the capacity to predict, but we went through our portfolio, and we looked at what kind of scenario in terms of cost of risk we can expect on the two scenarios I've just described. Our best estimate, at least to date, is for the 6.8% GDP drop in Eurozone and base case scenario of 70 basis points cost of risk for the full year.
Something not very dissimilar to what we had beginning of this year. In this prolonged scenario of low activity, 100 basis points in this downgraded scenario. Same thing, we can elaborate on how we built these figures. The last thing is we are providing also an indication for the capital. William will elaborate further on all the detail. I will answer your question, what we try to factor is reasonable assumptions on all the factors which will impact the capital. Of course, the P&L, but also the downgrading of counterparts, the drawings of existing facilities, the full impact of the regulatory TRIM effect, the 50 basis points. We factored some increase of operational risk also at year-end.
All this means that we think we are able to tell you that we will remain within a range of the 200 basis points and 250 basis points above this 9.05% MDA level. Of course, depending on the assumption that we are taking in terms of paying potentially at year-end an exceptional dividend. That's something we will review, of course, based on the further evolution of the situation. Now I will turn the floor immediately to William, who will enter more into detail.
Good morning, everyone, and thank you for making yourself available on short notice. I will now turn to the Q1 results presentation, which is slide nine, for an overview. Let me start by saying that, as Frédéric highlighted, we had actually a very good start of the year across all businesses, I must say, January, February, and for retail, spanning until mid-March. Effectively deteriorated at the moment most countries went into confinements and the market dislocated. This is what you see reflected in this page very much. You look at the retail operations, both French and international, you see, in fact, a small revenue decrease in French retail, which is fairly consistent, a bit worse than what we had indicated for the whole year, beginning of the year, a 0 to -1, so it's -1.2 year-on-year in Q1. Good commercial dynamics.
We provided you with a lot of details in the back of this presentation. You can see that the outstanding gross credit and deposits were dynamic. That's on the franchises, particularly wealthy clients, Boursorama clients, brokerage volumes, unit-linked, in life insurance, that was positive. That was combined with a decrease in cost, close to 4% down, -3.8% year-on-year, resulting in a return on normative equity of close to 11% at 10.7% underlying. International retail banking, there again, positive until mid-March with a slowing down in production, as you may imagine, as well as the beginning of impact on the cost of risk. Revenues were up close to 3%, adjusted for foreign method and exchange rate. You have to take into account that international retail, we incur, obviously, the impact of the disposals for the headline numbers that we have completed in 2019.
That's why there is such a difference between the headline number and the adjusted number. Here, again, good commercial dynamics. We've provided numbers on the back of this presentation. Well-contained costs, return on normative equity 13.2%. Insurance and financial services, revenues are slightly down, and we have a very resilient performance overall with a return on normative equity of 19.6%. Obviously, the picture is much more negative on GBIS, particularly revolving on two issues. One, on markets, as Frédéric said, and I will come back to this, so allow me not to comment too much on that page. We had a very poor performance in equities, -99% revenues in Q1. Otherwise, we had a good performance in FICC, resilient revenues across the rest of the business.
The other element beyond the very poor performance in equities, which impacts revenues, is the strong increase in cost of risk that you can see in GBIS for the quarter. Overall, the return is negative for that pillar. Corporate center, I will comment more in detail later. It's a bit more of the same as far as the fundamentals are concerned, i.e., the cost of funding of the company as well as the OPEX. We have some volatile P&L elements linked to interest rate and own credit, which I will comment. Overall, as you can see, group net income underlying is EUR 98 million. The headline number is -EUR 326 million, which is significantly down from last year, as we said. On the next page, I would like to point you to what we have in mind in terms of cost.
I would like to reiterate that for this quarter, we are very much in line with what we had initiated last year and the years before in terms of executing various cost plans, which you know, in CIB, in French retail, international trade, in financial services, as well as central functions across the board, i.e., a trend of decreasing cost in absolute terms. This is why you see in Q1, a 3.6% decrease in underlying cost from one year to another. The first thing we would like to say is that there is no issue as to the execution of the savings plan that we have announced to you in the previous years, including the CIB plan last year. They are well on track.
They will be executed, they will be, as we expected, beyond any context of COVID, a decrease in absolute term of the cost base, starting with EUR 17.4 billion underlying cost base as you know in 2019. On top of this decrease, this is very important to have in mind, this is on top of this decrease. We add an additional set of savings of EUR 600 million-EUR 700 million. You have the type of measures that we have taken in the context of COVID, ban on travel and events, very strict consumption as far as consulting, IT services, external providers is concerned, hiring freeze, obviously touching on variable compensation, as you may imagine, and being much more selective on the Change the Bank expenses. To be clear on that point, we will not stop Change the Bank.
As you know, we have almost EUR 2 billion expense for IT development every year in cash terms. We would be much more selective, focusing on two areas, is remediation from a regulatory standpoint, as well as every project that helps us transforming the company and decreasing the cost base going forward. The rest of the project will be canceled or postponed. Cost of risk is the next page. As Frédéric said, we have an increase in cost of risk, which is material this quarter. Obviously, we were 21 basis points in Q1 2019, and end of the year at 29, i.e., 25 for the full year. This is threefold more at 65 this quarter.
I will come back on the detail, but mostly revolving on GBIS, although we're starting to have provisioning up in French retail as well as international retail banking financial services on the back of IFRS 9 provisioning rules. I will come back on the details on the next page, I will just point you to what is on the right side of the page. We still have, and this is a good start for us, a good position to start the price this week. We have a good number for non-performing loan, which is still low at 3.1%, and a comfortable gross coverage rate of 55%. Frédéric said, we're guiding the market depending upon the scenario, that for cost of risk, that would be materially higher than our previous expectations, as you would imagine, between 70 and 100 basis points for the year.
Just to give you an order of magnitude, 100 basis points equals to EUR 5 billion, to be compared with EUR 1.3 billion in 2019. This is a hefty number. Next page, give you a bit more detail on how to think about what we had in terms of cost of risk for the quarter. As I already commented, you have on the pie, the concentration on GBIS, representing 42% of the net cost of risk for the quarter. As you would expect, as a European bank and a European bank dealing with large corporate, this is where you would find more of the impact of cost of risk to be compared with what we have seen with many U.S. banks, where maybe the increase in reserve was more revolving around retail.
I think you should expect that this is more around the corporate world that you see cost of risk increase as far as we are concerned. The split is as follows on the EUR 80/20 million cost of risk that we had for the quarter. We have, first of all, roughly EUR 400 million of cost of risk, which we consider is a normal cost of risk, i.e., around 32 basis points. That refers what we have given you as an indication at the beginning of the year, that we would expect normal condition, the cost of risk to be between 30 and 35. I think we are very much in the ballpark of the small increase we were expecting.
We have for COVID-related case, i.e., the provisioning, that you would expect under the IFRS 9 rules this time, based on overlays mostly, roughly EUR 300 million, EUR 295, which is 24 basis points. This is the very bulk of what's happening here. On top of it, as Frédéric said, we have some specific files, including frauds, with some counterparties for nine basis points or EUR 120 million. The next page, I will not comment too much in detail. I'm sure you will have questions. We had the opportunity to discuss with some of you already on that when we provided you a few weeks ago some more details. There are many more details in the appendices and supplements. We want to reiterate that we feel that we have a strong and diversified credit profile.
You have here on the left-hand side the corporate portfolio is EUR 326 billion of total for the EAD, approximately one-third. You can see that there is no high concentration of problematic sectors, although obviously, as you would expect, most of our provisioning is around some specific sectors, such as oil and gas, shipping, aircraft. We have little exposure to LBOs, less than EUR 5 billion. As we already said with Jean-Yves a few months ago, we have a very strict discipline in terms of structures in LBOs and underwriting commitment, so that we can come back on that later. On retail, we have a very well-diversified geographical exposure.
Let me stress the fact that as far as mortgages are concerned or home loans are concerned in a country such as France, which is where we have the bulk of our mortgages, you have high securities through insurance schemes. This is a totally different environment than what you would find, for example, in the U.S. Turning on to capital, which is the next slide. As Frédéric said, we have for Q1 a ratio of 12.6% at the end of the quarter. Pro forma, the already announced sale of SG Finans, our leasing business in Norway, we end up at 12.7%, which is, as I said, more than roughly 350 basis point buffer above MDA. Let me remind you that we have always said that for us, what is comfortable is to be around 200 basis points above MDA, so we are definitely well above.
You will find in the appendix, the split in terms of RWA increase, which I'm sure is an important element for you. RWAs increased that quarter by EUR 10 billion, EUR 345 to EUR 355. What you have here is EUR 4.5 billion of increase in market RWA, and you have EUR 3.5 in credit RWA. The rest is linked to regulatory, including some TRIM and some securitization under CRR 2. What is important to remind, to put in context what Frédéric said, is the target by the end of the year to be running the company with a buffer in between 200 and 250 basis points, depending upon the dividend assumption that you take. First of all, as it has been said, we have in our forward-looking buffer, totally accounted for the negative regulatory impact.
We still have what we have announced to you as for the TRIM impact and other regulatory impact totally in the ratio. We think we have probably a conservative approach on that. Let me say, I think it's a realistic approach to take that into consideration. On the other hand, we did not take, as of yet, any of the potential benefits stemming from the recent announcement by the ECB, nor some flexibilities that have been allowed. For example, you don't have in this ratio four basis points we could have taken for the phasing of IFRS 9. This is a totally fully loaded ratio. We did not take, as of yet, in the computation of the 200 to 250 basis points, a buffer announced by Frédéric, any benefit from the potential non-deduction of software. This could represent for us almost 30 basis points.
We did not take the benefit of the fast forwarding of SME discount factor. That would be another 10 basis points for us. The discount factor of the infrastructure financing, that would be an additional two basis points, and the going forward IFRS 9 phasing would represent six basis points. The 200-250, again, includes increasing other giveaways linked to the context in the year, increase of other giveaways linked to TRIM, none of these potential tailwinds. On the liquidity and funding, which is the next page, let me remind you, that we have actually improved the liquidity profile of the company in the first quarter. The liquidity buffer is up to EUR 203 billion from EUR 190 billion at the end of 2019. The LCR ratio is up 144%. To give you an order of magnitude, this is a stress ratio, as you well know.
This represents a EUR 58 billion buffer. NSFR is comfortably above 100%. We remain A-rated company, as you know. More importantly, I would say, we've been able to access to funding, I wouldn't say easily, because everyone is aware that the conditions overall were more difficult for the term, particularly in Q1 for all banks. We could complete an additional issuance of senior non-preferred. We have been able to access easily to short-term liquidity, and we had recall deposit collections. We benefit from the fact that across the board, especially in emerging geographies, we are considered as a very high-quality counterparty for depositors. I won't comment the next page, and turn now to the businesses. French Retail, again, we will leave it mostly to the questions. You have details in the appendices. I've already said revenue is slightly down.
Commissions are down. You should have in mind that the financial commissions are strongly up. There were a lot of volumes. We had retail clients, especially on the wealthy side, on Boursorama, willing to trade or willing to invest in unit-linked, for example. Net interest margin is up on the back of very strong volume of production up until, as I said, mid-March. Discipline on cost, as I said, and close to 11% underlying return. I will leave it for questions if you want to go more into the detail. International Retail Banking and Financial Services. I've already mentioned revenues up year-on-year, adjusted for perimeter and foreign exchange, + 1.6%. Operating expenses are up 2.6, but if you adjust it for some one-offs, including contribution to solidarity fund or bank funds or insurance funds across geographies, we have actually a 1.5% increase.
It's slight positive draw and return 15.4%. I will spend maybe a bit more time on GBIS, which obviously is the area of underperformance for the quarter. As you can see, our revenues are down 27%, headline number, adjusted for a base effect, 26 revaluation in Q1 2019, as well as disposal in private banking in Belgium and the exit from commodities businesses. You have still revenue down 21%. The performance leads to, overall, a reported group net income negative of EUR 500,307 million on headline terms, which obviously is not satisfactory. It revolves around two things, which I will comment more in detail. One is global markets, especially with a big hit on revenues on the equity side. As far as financing advisory is concerned, very different revenue development.
As for all the other businesses in GBIS, apart from equities and market activities, but yet a strong increase in cost of risk, as I've already commented. I think what is worse, and we have both Séverin and Jean-François Grégoire, the Head of Global Markets. If you have questions, we'll be very happy to answer them, is to spend some more time on the markets. To begin with, I would like to summarize how we saw the world from our perspective in the first quarter, because clearly, there's a difference in the way banks performed in the first quarter depending upon their business model and the type of exposures they have in markets. There were clearly positive trends in Q1 up until the end of the month. Strong volumes in equity benefiting to our flow business. Our cash equity business was up.
Our listed products, including those we are integrating from Commerzbank, which proves to be, in that perspective, a good acquisition, were up. The prime services, as you know, we've refocused on equity prime were also favored by the trend. We may not be a very big player in the space, but we benefited from it as other banks. Good momentum in fixed income markets, particularly in rates and foreign exchange, and clearly less favorable in credit, depending upon the category we're talking about. Overall, very good trend in fixed income. Overall, that was compensated by severe and somewhat unique elements. Equity market collapse is the first one, and the speed at which the collapse was done, which obviously is unfavorable for businesses, which for us, particularly on the structured product side, are path driven.
Second, extreme volatility with VIX level never reached, as well as increasing correlation, which obviously very unfavorable for the hedging of our positions in structured products. Lastly, sharp decrease in dividend futures. You all are aware that announced dividends have been largely cut across industries, starting with banks, which obviously was not in our numbers. When you look at what happened effectively in our numbers, which is the page next, you can see that we have strong increase in our FICC revenues, despite headwinds on the credit side, we had very positive numbers. Excluding run-off activities, i.e. commodities and the cargo trading, it is even higher than the 32% you find on this slide.
This is an increase of 52%, very good performance including compared to peers that were published to date with equity as almost zero revenue at plus EUR 9 and were severely impacted despite the strong performance in prime services, listed product in cash and flow derivatives. We had to increase market reserves. We had a negative impact of linked to the dividend cancellation of EUR 200, increased hedging costs, which led to a very poor number in exotic products, and some default of counterparties, especially with some hedge funds, as you have seen other banks announcing it as well. This is clearly the basis of a poor performance overall in that segment. We will come back to that when you have questions, I'm sure. I'd like to comment finally on the corporate center, which is the last slide on my side.
As I said, nothing much to mention on the usual stuff of normal quarter in corporate centers. Cost of funding has not increased and actually still compares good well relative to budget. Same with operating expenses. We had already mentioned to you that we would have some transversal project, automation project, but this is very much what we had announced, and that explains the increase year-on-year. The main element to explain here is the volatile component, what we qualify as a volatile component on the net banking income of the corporate center. For that, I will just refer you to the fact that the corporate center does fundamentally two things which may translate into some volatility, as we have seen in previous years, by the way, particularly in 2014 and 2015, but also in other years, one way or another.
The first thing is, as you know, the corporate center raises the long-term liquidity for the group, and also hedges on behalf of the group, the equity participation from any structural rate risk. The hedges we have to take to transfer fixed into variable for capital instruments, such as AT1 or AT2, as well as the equity stakes, such as the equity stake in Commerzbank are accounted for, can't benefit from the hedge accounting methodology from an accounting standpoint. That creates an asymmetry. We have a reaccount of the hedging market, which the underlyings are discounted. That creates a mismatch. That mismatch is a pure accounting asymmetry and will converge to zero over time. I think it's a pure accounting factor that has no economic implication.
The second element of what the corporate center does is being the counterparty of all of our businesses as far as liquidity is concerned. Particularly, there is one specificity with market activity, which are both providers and borrowers of liquidity, which is that the market activities live in a mark-to-market world with the corporate center, lives in a discounted world. When we raise the liquidity through structured products, we have EUR 65 billion of liability in the form of structured products. When the variation on the spread, i.e., Société Générale spread, we have some impact on the liability side, which are, over time, totally compensated by inequities. Over time, that converge to zero between P&L and equity. On the asset side, we also have some variation, but which is neutral for the group, because what you find here is compensated as well.
Overall, this is massively accounting asymmetries links to rate and spreads, and is either compensated inequities, or is neutral for the group, and mostly will converge to zero over time.
Thank you very much, William. Just a few words of conclusion. We are, as we know, facing an extraordinary crisis, still an uncertain environment. What we've tried to do is give you perspective beyond the results where we think we can articulate figures with all the prudence that these figures are related to scenarios. Of course, as I said, now with one big question, which is, of course, the answers of governments and their efficiency. Beyond, let me just say, and I think it's for me, very positive that this year the bank is up and running absolutely functionally, for all its operations, clients, projects, et cetera. We want to move forward beyond this year. We will start thinking, of course, for 2021, 2025, in a different environment. Needless to say, this crisis will have long-term impact.
We will take that into account to determine the roadmap during all the lessons learned in this crisis. A crisis is also a way to make further progress. That's what we wanted to do. Now let's enter a Q&A as always with the same discipline, please. Two questions per people. The floor is yours.
Ladies and gentlemen, if you wish to ask a question, please press star 1 on your telephone keypad. Your first question comes from the line of Delphine Lee from JP Morgan. Please ask your question.
Yes, good morning. Thanks for the presentation. My two questions, the first one would be on capital. Just trying to understand a little bit your guidance of around 11%-11.5% CET1 by year-end. If we pro forma where you are right now of the TRIM impact, you're around 12.2%. It looks like there's another at least 70 basis points negative impact. If you could just give a bit of color of how that breaks down between the different components. The second question is on cost of risk, your guidance of 70 to 100 basis points. If you don't mind giving us a little bit of color in particular on your GDP assumptions for 2021, and if you could provide as well, the different weightings between scenarios, base case, favorable, and worst-case scenarios.
Also if you have any sensitivities, just for us to understand, because in terms of cost of risk to GDP or unemployment, because when I look at your 100 basis points, it's only 30 basis points higher than your sort of base case, despite GDP declining at double the base case. Just if you could give us some color to understand provisions, that would be great. Thank you so much.
Yes. Delphine Lee, William will again come back to the different elements that we take into account into the capital calculation and guidance. Diony Lebot will answer your question on the cost of risk. What you see now, we have not given any guidance for 2021, first. Diony will explain to you that we, in both scenarios, consider that the cost of risk would go down slightly, but would remain relatively high. Because even, again, if you have more GDP, there's again, perhaps a time lag between the default with the government schemes and of course, with all the uncertainties I've mentioned of additional further action that we don't know yet and which might be implemented. That's where the exercise for 2021 is very complex. Again, Diony will elaborate on the different scenarios. William.
Hello, Delphine . We can't give you all the different bits and pieces. What we can confirm is, first of all, as I said, you have in this ratio, still the expectation of at least 50 basis points of regulatory impact. We operate, as Frédéric said, as a normal company. We continue our project, we continue to deal with clients, and we continue to build remediation, including remediation of risk models, and we expect the add-ons, at least conservatively, we consider it would be an important factor. There may be some variation around this number. That's the number we have given to you. That's first thing. Second, we obviously consider that we should have an increase in RWA for the year. As you see, there is an increase in the market RWA for the quarter.
We allow ourselves, having learned our lesson, to perform potentially some additional increase. Maybe this is not what would necessarily derive from what we observe today in terms of stress VaR and VaR computation, at least we think it's good to be on the conservative side. As far as credit RWAs are concerned, it is clear that, as you can see already starting in Q1, particularly in the financing and the treasury side, there's been a number of drawings by counterparties, which explains mostly the increase in RWA. There is effectively, as I'm sure you will ask Philippe Aymerich to comment, a strong production on the corporate side and professional side in France, mostly through guaranteed schemes, which means probably little RWAs. You should not match the volumes of outstanding with the volumes of RWA. We have some of it as well in international retail.
Lastly, there will be, of course, RWA, we have computed that RWA increase stemming from downgrade of counterparties and ratings migration, which obviously, we take into account.
As you can see, there are many different assumptions. The new production, as William said, the evolution of risk-weighted assets before the crisis, all the TRIM. Based on that, we can give this range. Of course, there is the 50 basis point dividend provision, depending on the assumption we make on the scenario also of paying or not, and what amount of the dividend. That's why we give this range. Jean-Yves, can you elaborate on the methodology, how we think? Because I think it's important to spend time on this.
Yes. Good morning, and thank you for your question. Indeed, there are still a lot of uncertainties, a lot of questions, in designing reliable scenarios. First, of course, taking into account the length of the lockdown periods in the various countries and regions, and also the time it will take to go back to normal. Also taking into account government and policy actions, which vary from one country to the other. Noting that in France, measures were very quick to implement, and a lot of them are already in place. In designing our scenarios, and by the way, we have not applied them for Q1. These are scenarios we designed to give you the range of the guidance of 70 to 100 basis points.
As William said, for Q1, we based our cost of risk calculation mostly on overlays and really a review of sector by sector, country by country, of the initial impacts of the crisis and, of course, the downgrade we have already proactively implemented. What we call base scenario, and this is what today seems the initial scenario, is an average lockdown of eight weeks and 12 weeks to return to normal. This would lead to a recession of -6.8% in the Eurozone, -6.6% in the U.S., to give you just two data points. We would see an almost V-shape type of scenario where in 2021, which was your question, in the Eurozone area, we would be at +6.6%, and for the U.S., +6%. This is what we call base scenario.
The prolonged scenario, which is more stressed, relies on average lockdown of 12 weeks, and 18 weeks to return to normal, and this could also include stop-and-go type of scenarios. In this case, the GDP drop in Eurozone would be close to 13%, and we would have in 2021, a + 10.5%. Again, although this is almost a V-shaped type of growth, as you can see, in both our scenarios, we are not back to pre-crisis GDP levels in absolute terms. In the projection of our cost of risk, this means that under IFRS 9 and probability of default increases, rating migrations, we would have also to take into account the impact of policy measures and massive relief measures already implemented.
This will result in a delay of defaults, but we still believe that defaults will continue to materialize later in 2020 and even in 2021, which means that cost of risk, yes, will be much higher in 2020. This is our 70 to 100 basis points scenario, and as William said, this is EUR 3.5 billion-EUR 5 billion. It's a really significant increase to our pre-crisis level over the guidance we had indicated in a normal context. Cost of risk will continue to be high, lower than that, but high in 2021, because we believe that more defaults will arrive as the moratoria will come to an end, will mature. Also because part of the government support and the public support actually results in transforming losses to debt. At a certain point, the most impacted sectors will see more defaults.
In summary, the two scenarios are very much dependent on assumptions which we will have more clarity on in Q2, which is average lockdown period, and anticipating the time to return to normal. More impact, of course, moving forward, but also taking into account the government support. Also, as far as we are concerned, taking into account the quality of our portfolio, and as Frédéric said, we have done significant work over the past years to reduce the riskiest parts of the portfolio, drawing the lessons of the past. We gave you a few numbers, and exposure details in our slides. LBO, for instance, is less than EUR 5 billion.
We have also, in the last year, anticipating a downturn, have taken much more protections, did more risk transfer transactions, really applied an LGD policy, which makes us confident that our portfolio is well diversified, it is sound, and can resist the shock compared to the previous crisis, still doubling or even tripling the cost of risk, which is the 70-100 basis points guidance.
Just to elaborate on the methodology to come to the 70 and 100 basis points, have we reviewed all the sectors, the portfolios?
Yes. It's a combination of applying the scenarios, and the migration of ratings, and increase of probability of defaults associated to these type of scenarios related to GDP. Also taking into account a review sector by sector, portfolio by portfolio, country by country, and adding overlays where we think it is necessary, because of the nature of this crisis, and more sensitive sectors, or applying some shock absorbers, given, as I mentioned, the magnitude of government support which is provided, which will delay
Some of the consequences, not in 2020, but also towards 2021. We take an approach which is forward-looking and taking, of course, a very granular review of our exposures, portfolios, and applying all the necessary scrutiny in terms of potential add-ons. We call these overlays, or shock absorbers, and lessening the impact of the crisis towards 2021. Thank you. Next question.
Great. Thank you very much.
Your next question comes from the line of Tarik El Mejjad from Bank of America.
Hi. Good morning, everyone. Just a couple of questions. The first one on capital and dividend, and please don't tell me it's too early to talk about dividend. I wanted to have your sentiment about the ECB action and dividends, because clearly it's harming the sector when it trades at a deep discount. It will more encourage the sector to shrink rather than grow, which was the first incentive from ECB. What's your thinking on that, and have you discussed that with ECB, and do you see really their action as something temporary, or we fear that arriving the first of October, they actually extend the ban for another quarter or two? If we fast-forward, I think in October, this is where really situation will be tough, where we start to get unemployment rising much higher, sustainable unemployment, not just furloughing people.
More specifics to you for the dividend. Thank you, William, for taking us through the moving parts of the capital. Should we take now MDA as your new guidance in terms of buffer and where you want to stand? I assume you're using all the Pillar 2R kind of forbearance and so on. Second question is on costs. I understand the EUR 600 million-EUR 700 million are driven by stopping projects that are not harming your overall kind of improvement of efficiency and so on. How do you think this is really realistic and feasible in the current challenging societal environments where, even at Bank of America, we have a firing freeze. My question actually goes beyond this, because that only offsets a fraction of the cost of risk you will have this year.
Underlying, because when we all discussed, you said, cost of savings underlying will not stop in 2022, it will go beyond. How do you think you can still implement some of these essential cost savings to help your underlying cost of risk? Thank you.
Yeah. Tarik, hello. I must say, very difficult to answer your very good question on the dividend. I think, first of all, the supervisors feel that they made the right decision, given the uncertainty, to ask us not to pay a dividend and protect as much as possible the capital ratios entering into the crisis. Where shall we stand in October is of course a big question mark, and by definition, to be frank, today, I don't know, and the kind of perspective and how defaults will have materialized, the perspective for 2021. I think they will look at this, they will look at how capital ratios, P&L, have evolved, and they will make a new decision.
It's clear that they know it was not an easy decision for them, and they know the impact on the market, and so they will take that into account, but of course, with this priority of securing the system. Beyond, I think, yes, the MDA, and I think is the new reference, and if I may, and here we go into even more long-term perspective, which is still unclear. At the end of the day, once you have implemented all the TRIM, you have absorbed bad debt, those supervisors will be very comfortable with their models. Effectively, they had in mind to then adjust their requirements on the ratios. What they did in the crisis is anticipate by basically eight months, but something which was already in the regulation, in the P2R composition, and also with the P2G.
What they did here is an anticipation of something which was decided, which was part of the framework. We feel, yes, it's the right reference, knowing, of course, this ratio will be applied to higher risk-weighted assets, but based on the review of the modeling. The second point is on the cost. Here I would like to tell you, yes, we are absolutely clear we can do that, because it's overall, I would say, discretionary expenses and expenses under our control. When we talk about IT projects, it's mainly external providers. Regarding the restructuring elements, as William told you, we are pursuing our existing projects. The further restructuring of the network, we actually, finish a plan for 2020. What we said to our trade unions is we will not launch, before September, any new projects.
I think, as you mentioned yourself, in U.S., in Bank of America, if I may say.
There's a kind of decent approach, responsive approach towards that. I must say, when I think about 2021, 2025, we have to cover that, taking into account the adjustment of the behaviors of the clients. Everybody speaks about the fact that digital penetration will have increased, et cetera. We'll factor this, and of course, we will see how we have to adjust our setup. That's more for 2021, 2025. It's not related to what we've given you, the figures that we will effectively deliver, including in this more complex social environment.
If I may add on capital, just to make sure that the modeling on your side is right, and hello, Tarik, and thanks for the question.
As said, we feel that guiding on the buffer of MDA, so long as the MDA reference is a permanent one, which it is, because the fast forwarding of CRD5 has been adopted, and the fact that we have ample Tier 1 instrument that allow us to benefit from it, has been adopted. The decrease in countercyclical buffers , where applicable, has been adopted. This is permanent. We consider that a buffer above MDA is the right thing to steer the company capital. Why? Because it gives ample comfort to the investors, be it equity investors as for the potential dividend or hybrid holders, that there should be no worry at all as to the expectation should we be able, of course, pending the ECB debate, to pay the one and of course, the coupons are not at stake.
Let me also remind you, as far as hybrids are concerned, that we don't have any call on the hybrid instrument before April 2021. I want also to reiterate what I said, which is that it is a totally, fully loaded ratio. You will see some banks taking some benefit on IFRS 9 phasing. We have not done it, so it's totally, fully loaded. Again, that would be four basis points for us. We don't, at this stage, envisage, we don't have in our forecast what I said, which is the result of the announcement of the ECB of April 2028, i.e., on software, the SME discount factor, discount factor on infrastructure, and also, as I said, the IFRS 9 transitional arrangements. That is quite important, because this is when we have clarity, numbers you may add to the picture. Thank you. Next question.
Thank you.
Your next question comes from the line of Jon Peace from Credit Suisse. Peace, ask your question.
Yeah. Morning, everyone. I wondered, given the exceptional circumstances, you could talk a little bit about how has trading been in April. I think some of your peers have said the fixed income environment is still quite robust. Is equities back to a kind of normal run rate? Have you seen any losses from the EMC acquisition? My second question was just on a dividend. If we're in a lucky enough position to pay a dividend at the end of the year, how do you think about sizing it? Do you go to the 50% payout policy, or do you pay out down to taking the CET1 ratio down to the top end of your new 200-250 basis point buffer? Just how should we think about that? Thanks.
Hello, Jon. I will let Séverin answer your first question. Your second question, it's again very premature because as I said, we need to have more clarity on the environment for 2021, as we will be able to anticipate the way the supervisor will think about it. At this stage, we will provision the 50% payout ratio in our computation. We need to wait. The money is there, but what we will do and what we will be able to do, to be frank with you, I think I cannot say at this stage. Séverin, can we comment on the trends, knowing that we do not comment?
Usually, as you know, Jon, we do not comment on the current quarter. I can say anyhow, the market condition, as you saw, has progressively stabilized in April after this dislocation we had to manage in March. We have to say that the uncertainties remain very high, and there is now some optimism from clients on the investment solutions side. We see still some flows and some activities, but there is some additional optimism today, so we have to be very prudent. On the EMC, we had taken over a migration last year, two parts of the EMC franchise, the ETF, which is now within Lyxor, and a part which is a small one, a structured product, which was not really significant. There is no specific loss on the EMC acquisition.
The big part of the EMC has been migrated at the end of March, which is a listed part of the activity of EMC. We have no P&L, if I may say, no revenue on this part in the first quarter. This part has been positively, if I may say, impacted by the price, but we have not benefited from that in the first quarter.
Thank you. Next question.
Your next question comes from the line of Giulia Miotto from Morgan Stanley. Please ask your question.
Thank you very much. Good morning. I have two questions on my side. The first one, we haven't touched upon any outlook for revenues yet.
Yes.
Of course, the current market conditions are likely to impact transaction fees, for example, but also loan growth on the household side. How are you thinking about the outlook for revenues? That is my first question. Secondly, the government measures, as you said, the French government has been very proactive. Yes, on the guarantee side, it doesn't take the full risk. There is still something vested to the banks. What we are seeing in other countries is that when the bank has skin in the game, it usually takes longer for the credit to flow to the economy. I was wondering if you can give us some color here as well on how well do you think this is functioning from a practical perspective. Thank you.
Giulia, good morning. I will leave the floor to Philippe for the French retail and Philippe with the caveat that he cannot actually comment so much on the subsidiary, so he will probably provide you with a very brief answer, actually. Knowing that it's impossible to provide guidances in this environment, because overall, I would say the behaviors, even of the clients, remain relatively unknown or difficult to predict. Whether you will see further mortgage very soon is a question mark on the saving attitude. That's why it's difficult to provide the guidance. Perhaps we can give you some qualitative assessment of what we see today and how, again, the scheme functions. Philippe, I invite to start with France.
Hello. Yes. Good morning. Thanks for the questions. Regarding the activity, of course, it has slowed down quite significantly since mid-March with the individuals. I would say except on financial products, for example, we have seen in Boursorama a very good level of activity, actually including an increase of the opening of financial accounts. That's a positive sign. Apart from that's true that with the individuals, significant slowdown on the activity, even though we are still doing mortgages which were initiated before the lockdown. On corporate and individuals, on the contrary, it's quite active, especially with this state-guaranteed facility. Yes, I can share with you some numbers. At this stage, at the level of SG Group, we have received approximately 57,000 requests from clients for an amount of EUR 14 billion.
We have already approved 46,000 files at an amount of more than EUR 7 billion. Of course, we are making sure that these files are processed quickly in order, as you say, to go to the clients and to support the economy. We are very careful with that. Again, we have created a specific task force to make sure that we are able to deal with this important volume of operations. That's what I can share with you. As you know, this facility is guaranteed depending of the kind of companies, but up to 90% by the state. At this stage, our refusal rate is approximately between 3%-4%. It's low, but still, we are careful. In some cases, companies were in trouble before the crisis, and this facility is not supposed to support them.
We have other mechanisms to support these kind of companies. I think that, again, this product didn't exist five weeks ago. It was created quickly, implemented quickly, and I think that we are careful, and for the time being, we have found the right balance between strong support to the economy and still being careful regarding our risk profile.
Okay. Yes, maybe now on the international part of our network, you know we operate in many countries, maybe I will focus on the most important, let's say, setup. The pattern that we see across the board, let's say, measures taken to support retail clients and corporate clients, with this idea of granting a moratorium, depending between the countries, three to six, up to nine months, for example, in Romania, both for retail clients, once again, and corporate clients, with a percentage of state guarantees that can vary a lot. It's up to 90% in France. For example, in Czech Republic, it's 80%.
In Russia, the state support comes from the fact that the state is financing minimal wages. We have a similar setup also in Germany, as you know, what is called the Schnellkredit. We have something also similar in Morocco. What I need to highlight is that those setup has been put in place, let's say, end of March, beginning of April. It's little bit early to give you, let's say, a consolidation of all those exposures and all the consequences of that.
Thank you. Next question.
Your next question comes from the line of Jean from Goldman Sachs. Please ask your question.
Hi, good morning. I have a question on the investment bank. I have a question on the cost of risk guidance for this year.
Yes.
I just wanted to understand in the 70-100 basis points cost of risk guidance, essentially, what theory you could give us as to what you think the cost of risk would have been in the event where the corporate guarantees by the government would not have been in place, and essentially how certain or how confident of the way that they work and how they can shield your P&L. I think to an earlier question, there was the point that the sensitivity between the 2 different GDP assumptions on the cost of risk was not all that high, at least at first glance, and I just wanted to understand whether those corporate guarantee scheme were efficient or how you model them in that assumption.
My second question was on the investment bank and on the quarters in equities with regards to the mark to market, and to an extent, whether you think that even without a rebound in activity, whether you think that some of the factors which have led to the hedging losses are reversing, and whether you could book them back or whether they are just gone. Also in terms of this mark to market differences, I remember in 2008, for example, you had, I think if I remember well, like a EUR 2 billion gain in CDS when credit blew out. I just wanted to understand whether in the revenues of today there is any gains on those CDSs also that might revert if you still have some hedging of your corporate loan book. Thanks a lot.
Yeah. Hello, Jean. I will let the floor to Séverin to comment on your revenue question. I think it's very difficult to model what would have been the cost of risk without this intervention, because it's easy to say there will be potentially, thanks to the support, no cost of risk, but how much would that be? It's more complex. I just would like to highlight qualitatively two things. The governments basically across the world are more or less saving the airline companies. In practice, they are nationalizing, putting a lot of equity or loans which might become, at some point, equity, let's face it. Without this intervention, of course, there would have been an impact of companies probably going bankrupt. They would have much higher cost of risk, and probably something will be close to zero.
On the other spectrum, if we talk about professionals in France, there is, at this stage, as we said, guaranteed loans representing up to three months of turnover, subsidies by the government to a solidarity fund. You have the subsidies to finance people who temporarily are not working. You will have even relief of taxes and of social and income taxes and net income taxes. You see that, of course, the governments are doing a lot because they try to save the companies, the jobs, and we are the channel for liquidity through these schemes, where we keep a risk, which is a whip of the government to ensure that there is a reasonable decision behind the loan. Of course, with the support of the government, and it's true across the world, it's true in Europe, it's true in the U.S., in many jurisdictions.
Very difficult to give you a figure, I must say, but you have examples where you can see that, of course, it will mitigate the cost of risk. As I said, there is a big question mark, which is today, it's the urgent things which are being dealt with. Of course, the governments are also thinking about how to help the economy to rebound as quickly as possible, and we don't know that yet. Séverin, perhaps on the revenues.
Okay. Oudéa, I will take the answer. You have this quarter, on the equity side, specifically, as mentioned by Frédéric and William, different impacts. We mentioned clearly the dividend cancellation. We mentioned clearly a default on one counterpart, which is for EUR 55 million. There is another point to have in mind. If you look at the swing in term on the market reserve between the first quarter last year and the first quarter of this year, there is a swing around for the global market, not only for equity, of around EUR 300 million. Last year, we had a release of reserve. This quarter, we have a new reserve constitution of around EUR 200 million for the global market and EUR 175 million for the equity, as mentioned earlier.
This part, which has not been observed, though, in the revenue, and there is a swing compared to last year. It's important to have in mind, due to the market conditions, will be over time visible in the P/L. It's fair to say there is part of the revenue which are lost also. The hedging cost we had to suffer, to pay during this quarter, which explains the gap between what I said, delta in reserve, dividend cost, and counterparty loss. There is still, to explain the revenue of equity, a gap. This gap is the hedging cost, which is lost. That's, I think, the answer to Jean-François's first question. Regarding the CDS, very important to have in mind that in 2008, and you made a reference to this period of time, we had a big significant CDS book, and we have completely changed this exposure.
Today, we are using very limited part of CDS as an insurance, as a coverage, as a hedge on our credit risk in the portfolio of GLBA. It's fair to say that we have some impact, a positive impact in that case, on the revenue of the first quarter, but it's very limited. It's not significant.
Thank you. Next question.
Okay. Thank you.
Your next question comes from the line of Lorraine Quoirez from UBS. Please ask your question.
Hi. Hello. Thank you for the presentation. I have a question on the state guarantee loans. Basically, I'd like to better understand the math and how it works from the P&L for the different years. Year one, year two, and year three, because I think I understand that you carry the cost of the guarantee in year one, and also to understand how RWA moved. Do you actually, if you have a loan, let's say 100, do you only take 10 of RWA? And what is actually the profitability of these loans in year one, two, and potentially in year three? Just to better understand how this compares in France with other markets. The second question I have is, I have to say, I did not really understand the explanation of the fair value adjustment in the corporate center.
If I'm not wrong, I think you said some is linked to capital markets activity. I wonder why this is not booked in the capital market business. You also said that some will reverse over time, how much is going to reverse over time, and when do you think this will reverse? Thank you.
Yes. Lorraine, hi. I will leave William answering the second question. Perhaps Philippe Heim can explain to you the detail of the scheme and how it works.
Hello. Regarding revenues, for year one, that's also true for the other years, but for the year one, at least we know the cost of liquidity, which is at this stage a floor at 0%. For year one, the client pay 0% plus the cost of the guarantee. The cost of the guarantee, which is when there's a guarantee up to 90%, and for the small companies, the cost of the guarantee is 25 basis points. For the part covered by the state, the 25 basis points will go to the state, which makes sense. For the part which is not guaranteed by the state, which is supported by the banks, the 25 basis points will go to the bank.
Yes, you're right, the 25 basis points are paid upfront to the state by the banks, and we will recover this money to the clients at the end of the first year. Regarding the following years, that's the same principle, except that, of course, we do not know yet the cost of liquidity. The mechanism will be cost of liquidity plus the cost of the guarantee, and the cost of the guarantee changes according to the duration of the loan and the size of the company. It goes up to 200 basis points for large companies for a credit of five years. That's basically how it works on revenue side. Again, basically cost of liquidity, which is of course unknown within a year, and the cost of the guarantee.
Based on the risk weight that I said, it will stay like it is, and 90% will not be weighted, except at the beginning for the initial two months. The first two months are not guaranteed. There is a kind of threshold. By definition, as the loans are there, within three months, there will be very few defaults in practice. You will then have a full benefit, and it will stay alongside. If the client decides to keep for three, four, five years, well, you will have the same thing, zero for the part which is guaranteed by the government, and we will weight the 10%. In itself, I don't think it will change very much the picture, as we expect some clients will say, "Okay, I want to amortize." There will be an amortization also. Sorry, it will be amortized.
For the first year, it's not amortized, but then it will be amortized. What is important also is you have, again, specific files. Large files can be tailor-made sometimes, like we saw recently. It's more or less the same principle, but you could have some small adjustments of large files. William?
Lorraine, thanks for your question, and I'm sorry if I was not clear enough. As I said, the bulk of the P&L impact on the corporate center stems from accounting asymmetries. A large portion is due to rates, and that's this mismatch between the hedges on capital or quasi-capital instruments, accounted for as mark to market versus the underlying, which is discounted. That stays in the corporate center, and that mismatch obviously can move if rates go down further. It will reduce if rates go up. This is fundamentally something that vanishes over time when one instrument matures. There is another accounting asymmetry which stays within the corporate center, which is again, quite significant in the number, which is due to the liability side, or what I said, the stock of structured notes.
Normally, obviously, the P&L impact is compensated in equity through OCI, but there is some vibration for methodological reason, and also because the duration of the underlying instruments is modeled as opposed to contractual. As you know, given the structure of the parameters can change and the duration can vary. There is a small vibration, which is why I say normally it should be 100% compensated by equity, except for some time difference in the adjustment of the hedges. Yes, there is a portion which I would say in the number I've given you is a smaller portion, though, which is due to the cost of funding and the spread paid by our market activities principally. Not just market activities, but they are mostly the one mark to market vis-à-vis the corporate center. That's why I said it's neutral for the group.
Some of it, by the way, has probably been or certainly been accounted for as reserves. There's no direct P&L, so that as well may come back over time. That's why I mentioned that notion. Let me just finish on saying that I don't think we are unique. We've looked closely at other disclosures, and I think, as I said, we had this type of volatility in the past. We have seen this type of volatility with others because the spread of every bank have gone up massively in the course of March, and then until they started to come down. The rates were down in many jurisdictions, so you can have this type of volatility. I've seen that some good books, the last little portion I mentioned, directing the market activity. Some good books directing the corporate center. It's a convention.
Thank you. Next question.
Your next question comes from the line of Omar Fall from Barclays. Please ask your question.
Hi. Good morning. Firstly, sorry if I missed this, within the capital guidance for this year, how much in the way of earnings do you include exactly in the 200-250 buffer? I guess looking at it quite simply, in the last three quarters of last year, you had something like EUR 5 billion of pre-provision profit, which will be going down a lot this year, presumably even with the cost savings. I guess if you then factor in your cost of risk target of EUR 3.5 billion-EUR 5 billion, it's unlikely you would have much this year. Just a question for Jean-Yves, I guess. What is the current stock of outstanding loans that's under payment moratorium or holiday across the group, please? Not the guaranteed loans, just the payment holidays.
Can you confirm that you're not taking provisions or stage migration on those outstandings as per the EBA guidelines? Similarly, what is the oil price implied in your cost of risk assumptions? Thank you.
Sorry, Omar, can you repeat your last question?
Oil price.
oil price. Okay.
Sorry.
Briefly, nice price for the P&L. We are not discussing what we said. We've taken what we feel are reasonable assumptions given the context. Second, I think that we can give you the figure for France. We cannot give you any detail for subsidiaries outside France, as I said, because they will release their own figures in a few days. For France, we can give the figure in terms of loan.
Yes. That's the figure which is mentioned on page 26. At this stage, because of course the number could change, we have deferred EUR 1.8 billion of payments. Basically, deferred for six months. It's a relatively small amount, actually. We don't provision, I think, on these loans. On the oil price
When you look at our oil and gas exposure, which we have given to you, and we have included a slide, you have a very small part which is directly sensitive to the oil price. The composition of this exposure is integrated companies, which are almost all of them investment grade, so 22%. You have LNG exposure, which has almost no sensitivity to gas or oil price because it's relying on the take-or-pay contract. You can see the various breakdown, and then you come to the part which is more exposed to oil price, which is the upstream independents. That's 20% of the total exposure, roughly EUR 4 billion. Within that, we consider that the most risky and exposed to oil price part is our reserve-based finance activity in the U.S. This is EUR 1.7 billion.
We have stressed this portfolio, and it can support the stress of going down to $15-$20, and also taking into account that for this year they have hedges in place. In terms of cost of risk, the impact would be limited, in terms of defaults related to variation of the oil price. Of course, we will see rating migrations associated if the oil price remains at a low level for a very long time, and we are going to see it more in the stage 1, stage 2, and of course the ratings of the company. Overall, we are quite confident with the quality of our portfolio and the sensitivity on oil price in terms of cost of risk. Of course, we already took some overlay provisions on the sector over the years.
Including this quarter, we have added to this overlay provisions on the oil and gas sector.
Thank you.
Thank you. Next question.
Next question comes from the line of Guillaume Tiberghien from Exane. Please ask your question.
Yes, good morning. The question relates to capital again. You highlight that you'll be at about 200, 250 basis points above MDA at year-end, and that you're comfortable with that level. The question relates to what level would you see as uncomfortable. What pain threshold would you be accepting to take if your forecast of 11%-11.5% Equity Tier 1 doesn't materialize this year? Would you accept to fall to 10.5% or you think 11% is a minimum for you?
Guillaume, listen, as we've said, we've taken reasonable assumptions across the board. We think we have the flexibility to adjust parameters if for any reason we were not in line with that. I think we keep really this range in mind. I think, yes, 11% for me would be the right target for the end of the year. In such an extreme environment, we are talking here about an extreme environment, with, of course, elements that we will have to carry. We've mentioned the downgrading, we've mentioned the drawings on facilities. We've taken assumption on all this, which in our view are reasonable. Yes, I think for us, 11% is probably what we target as the minimum threshold.
Okay, thank you. I've got a second question on the oil again. In your EUR 3.5 billion-EUR 5 billion of overall provision, how much of that is on the oil and gas exposure? If I ignore the little pie, which is, by the way, very useful about the breakdown of the oil and gas exposure, but if I just consider the fact that about a third of your EUR 20 billion of exposure is non-investment grade, so about EUR 7 billion, what if I wanted to say I'm going to lose half of that non-investment grade? That would be already on its own, about EUR 3.5 billion. I know it's extreme, this scenario that I just described, but I just wanted to understand, out of the EUR 3.5 billion-EUR 5 billion, how much of that is for oil and gas?
We don't disclose with this level of granularity here. I think that Jean-Yves has tried to explain to you that actually, when we look more in detail, there are many of these exposure, which is, for example, backed by contracts, which are not impacted by the oil price, or which are related to gas price, and with security there. Second, as we said, for example, even in the reserve-based lending portfolio, it's very important to understand that there are hedges with the producer for at least this kind of environment of 12 months. To a certain extent, it might be more in 2021 that we might see the default, depending on how long the crisis will last. We don't disclose that granular information, but I think you are absolutely extreme in thinking.
We'll see what kind of more information we can provide you. It's absolutely an extreme figure and we think very differently. As we've said, we review the portfolio pretty substantially, knowing that we saw the crisis in 2016. I remember the 2016 crisis also on the oil price. We did not suffer that much. We've also very low price on oil in the exposure.
Okay, thank you. Maybe final question, if I may. Still on the cost of risk, you said that in 2021 it will remain elevated but less than in 2020. Are you trying to guide us towards EUR 3 billion being a realistic number for next year?
No. Listen, Guillaume, we don't give any figure on purpose because I think it would be too risky. Let's say, in our own simulation, what we can say is it will be still relatively high, but below. We stay there, we'll see when we can say more, but it will take some time, I think. Let's be realistic. A lot is still to happen on the development of this crisis and the government schemes.
Okay, thank you very much.
Next question. Next question, please.
The next question comes from the line of Jean-Pierre Lambert from KBW.
Yes, good morning. I would like to come back on the impact of guarantees on the IFRS 9 macro scenarios. How are the guarantees incorporated? Is it because you assume a less fall of GDP, you change the Loss Given Defaults, or you assume lower PD migration? Or is it combination of all, or you focus on one parameter? The second question is, on the 100 basis points cost of risk guidance, if you want, what is the breakdown between corporates and the rest of the business, or if you can give some indication of allocation. Thank you.
Jean-Pierre, hello. I will leave the floor to Jean-Yves on your first question, and maybe the second one too.
It's absolutely substitution take into account the guarantee, and for the part which is not guaranteed, we apply our normal PD LGD on this part, which we are part assured for the government.
Your second question first, we can't comment again on the international retail, unfortunately. What I would like to say, France strategy is clearly support companies in practice to save as many jobs as possible, and then compensate for the people who might not work. It's absolutely fair to say it's mainly driven by more corporate than individual clients. We are very different, for example, from the U.S., where people are immediately without any revenues. We see a very different pattern. Of course, in retail it's more corporate by definition. I would say it's more geared towards corporate given the portfolio of activities we have. We will comment a little bit more in the sixth of May when we will discuss figures on the international retail. Next question.
Your next question comes from the line of Azzurra Guelfi from Citi.
Hi. Good morning. Thank you for your time. Two quick question. One is on the provision, if you can give us a split between what is the macro assumption and what is the specific, and if there is any timing between Q1 and over the rest of the year. The second one is on your cost additional savings guidance. Is it fair to assume that some of these would revert once the economy restarts and business comes back to normality? Thank you.
I will leave William answering on the cost. No, the bulk is savings, which will of course happen this year. We will, I hope, travel again. I think that we might, at some point, hire again, et cetera. I would not clarify this as the necessary structural savings. We will also draw the lessons of how to function in this new world. Now, we have learned many lessons with remote, et cetera. We think about perhaps new categories of savings that we might not have had in mind six months ago, but the bulk, I would say, will be more one-off, and then we will prepare the 2021/2025 strategic plan. Jean-Yves, on this macro and versus specific, I think it's a little bit of both, I would say, actually, in the way we look at it.
Your question is on Q1, I think, Azzurra, right?
In Q1, yeah, in the scenario. Yes, we will see probably more IFRS 9 effect in the second quarter as we crystallize the scenario.
Exactly. In Q1, actually, we have, and William gave you the breakdown in the EUR 820 million, we have part of it which is related to the crisis, and it's EUR 295 million. It's a combination of overlays, rating migration. We have also this fraud-related one-off, so EUR 127 million. The normal, I would say, the stage 3 defaults. Moving forward, indeed, as I explained earlier, we are going to have a combination and a higher impact of the scenario, stage 1 and stage 2. The defaults will materialize later in the year, according to our analysis and the moratorium in place. We believe there will be some time lag effect.
Thank you. Next question.
Your next question comes from the line of Stefan Stalmann from Autonomous Research.
Yes, good morning, everyone. Just two questions left on my side. The first one relates to your African operations. I was wondering if you can give a little bit of color on how you think they will be affected by the current crisis. I imagine it could be quite different from your conclusions for, let's say, core Europe, either much worse or much better. The second more technical question, you had at the end of 2019, still about EUR 160 million of CET1 deductions for expected loss shortfalls. Have you basically used all of those now in Q1, or are there still some left to offset against further stage one and two provisions, please? Thank you.
Stefan, I will let Philippe answer on Africa.
Yes. Good morning, Stefan. Quick word on Africa. It deserves indeed some highlights. The situation for Africa is the following, surprisingly, the sanitary crisis is not so important as we may have feared a few weeks ago. This is a element of history. We have to be humble and wait for further development. As you know, there is no confinement imposed in Sub-Saharan countries, because we are talking of countries of daily subsistence. This is more a system of late curfew at night. In practice, end of March, measures have been taken by governments, to restrict, let's say, the movement of people at night. Our system, our setup is up and running, and we maintain completely open our branches.
You may have seen that in spite of those elements, and one again, we've been impacted by the COVID only in the last weeks of March. You think that the outstanding book went up by 6%. As we speak, and this is in the figures developed by Jean-Yves, the cost of risk for Africa in Q1 stands at 102 basis points. It's where we are for Africa.
Thank you. Second question, William.
Hello, Stefan, I guess you referred to the expected loss by this provision on funds item. Yes, it's back in the ratio for the equivalent of five basis points.
Thank you.
Great. Thank you very much.
Next question.
Next comes from the line of Matthew Clark from Mediobanca.
Good morning, everyone. A couple of follow-up questions from me, please. Firstly, could you just clarify within your 200 to 250 basis points MDA buffer guidance, are you assuming the 70 basis points or the 100 basis points cost of risk to get to that 200 to 250 range? Second question is regarding the fraud charges. Could you just confirm whether you fully provisioned for those exposures or whether there's a risk of further losses related to those two specific cases in coming quarters? Final question from me is just about client appetite for autocalls. Presumably, either you or the private banks who distribute them, clients have taken a bath on these products year to date. Does this create a problem for the earnings power of your equities business going forward if clients no longer want to buy these?
Just some comment there on appetite for these structured products going forward, please. Thank you.
Yes. Hello, Matthew. Séverin will answer about the appetite of clients on structured product. Briefly, if you wish this assumption of EUR 1,100 to 1,150 is based on the base case. If you make your calculation, we would remain in this range even with a EUR 5 billion charge of risk. Of course, with more constraints on the dividend that we could pay at your end.
You can make a very simple calculation. 5 less 3.5 is 1.5. If you tax it's roughly EUR 1 billion net income that goes, divided by two, so times 3, it's 15 basis points that goes off.
Understood.
You had this appetite on the product. I think you had a third question, Matthew. Sorry, I forgot after-
Other fraud charges.
Other fraud charges. I think it's a reasonable level of provision. We'll see how it develops. We might have to add something, but on these two to five, it's always difficult, but I think it's already a relatively good level. We'll see how it develops going forward. I'm still a little bit uncertain. Appetite for product, Jean-François Grégoire, Head of Capital Markets.
Hello, Jean-François Grégoire. It's a bit early to say, but we can give a hint. Actually, the main product is the autocall. That is an equity product that is obviously sensitive to the level of equity. Customers have had some underperformance on those products over this period. Precisely, these products have a protection mechanism that so far are working quite well. If these products are kept until maturity, if we don't go much below the lowest point that we have seen, these products will not lose anything. This protection mechanism, it's precisely in this environment that it will show its strength. Actually, it's precisely this protection that we offer to the customer that is challenging for us to educate, and we do it at the first product.
There are some variations, obviously, in our trading books. It's probable that the appetite for these products will not diminish, but only time will tell. We'll see in a few quarters.
Sorry, could you just clarify what kind of haircut or level of floor is embedded in these products? If I buy, I don't know, a EURO STOXX 50 auto call from you, where's the protection level set below which I end up owning the underlying?
Usually it's - 40% or - 60% from where it has been triggered initially. Even the products that have been sold just two months ago or three months ago, just at the height of the market, are not triggered, so they are still protected.
Very good. Thank you very much.
Thank you. Next question.
Your next question comes from the line of Anke Reingen from Royal Bank of Canada.
Thank you very much for all the detail. I just have two follow-up questions. Firstly, on your cost of risk guidance, you said that incorporates the government guarantees, but is it correct to assume it also includes the EBA guidance on taking a more forward-looking view? I know it's early days, but would you say there's a coordinated approach that is consistent across the different banks, or is it very much everyone does his or her own thing at this stage? On the dividends, I understand there's a lot of moving parts, but just is it my understanding that when you pay dividends, you can incorporate the benefits that might be deferred and the capital benefits that will be coming out of the new EC proposal yet this week? Thank you very much.
Yes. Anke, Jean-Yves answered on EBA. To be frank, regarding the bank choices at this stage, I think each bank now is trying to do its own homework and looking at its own exposure. I think we'll have perhaps more convergence step by step on the scenarios going forward, why we see more. On your question on the dividend, I would say a dividend payment is, I think, never one-year exercise. We will, of course, have to factor what is expected in 2021, where we stand, as we said, effectively in practice in terms of buffer, we've not factored the additional benefit, and we'll check what it means, but it could be relatively substantial. I'm sorry, but it's too early to answer that kind of question. I cannot answer at this stage, and also, of course, all the supervisors will look at it.
Unfortunately, we will have to wait for probably autumn to have more clarity on all this.
Yes, I think we took into account the guidance of the EBA, obviously taking a forward-looking approach. That applying forbearance or default for the moratorium and delays as long as they are extended to clients due to the COVID crisis. To your question on coordinated approach, no, there is, I think at this stage, applying the guidelines of the regulators, and I think a lot of banks will refine scenarios in Q2, as we said, because we will have more clarity on the extent of the crisis, the lockdown, and all the measures in place.
Thank you very much.
Okay. Is there any more question?
We have no further questions. I'll now pass the conference back to our presenters for some closing remarks.
Okay. Well, thank you very much for attending the call. Have a nice day. Thank you.
Ladies and gentlemen, thank you all for your participation. You may now disconnect.