Ladies and gentlemen, welcome to the Societe Generale Conference Call. Frederic Odea, Chief Executive Officer and William Caduce Chassagne, Chief Financial Officer, will present the Group's Q1 2020 results. And gentlemen, please go ahead.
Yes. Thank you. Good morning to all of you. Thanks for attending this and First of all, let me, of course, say that I hope you are all well. We decided in a market environment, which achieved by Espen Volletta and with rumors flying around to anticipate by 1 week and Chief Executive Officer, the communication of our results and present as soon as possible a complete and stabilized vision of these results for the Q1.
Let me just mention the only limitation to that is that we will not be able to comment in detail on our and Corporate Subsidiary as we will release their IFRS figures on the 6th May. Executive Officer. We'll enter into figures very quickly. I will leave the floor to William and of course, we'll answer your questions. I just would like Adeir.
To say a few introductory remarks. First of all, as we all know, this crisis is and Chief Executive Officer. First, the sanitary crisis. And I just would like to highlight that, of course, Executive Officer. We had a core priority to protect the safety of our clients and our staff, and I think we were able to demonstrate Equity to do that efficiently.
Secondly, this crisis will have very and Chief Financial Impact. I've gone through different crisis in my career. I've lived the 2,008, 2009 financial crisis. It's certainly a crisis which will have more impact as we see and we 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 minus6 Excluding the euro zone, minus 6.66 in the U.
S, Which seems to be the one developing. It corresponds in particular to a 2 month confinement in these economies. And we have other scenarios, in particular, an extended health crisis scenario, Which might be related also to a second wave of contingent at the autumn and which corresponds more to a minus 13 Executive Officer, I think we need to remain very humble, of course, on these scenarios, but also Executive Officer. On the impact of the government reactions and authorities' reaction to this crisis and While this process is extraordinary by its magnitude and diversity, the response of the authorities, central banks, Government and regulators have been also extraordinary. And when I say this, I had in mind of us in particular the capacity to quickly implement these extraordinary schemes.
Let me just say, if I take France, Just 5 weeks after having started to implement this new guarantee scheme, The level of demand for the overall banking sector is €80,000,000,000 We stand on our side Officer. €14,000,000,000 and at the French level that concerns 420,000 companies. And Chief Executive Officer. And 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 for Cat, but on the cost of risk and the time. And 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 Executive Officer.
Exceptional loans into semi quasi equities. So just to say that we are still facing uncertainty as and Chief Executive Officer. If I go to Page 5, and 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 and 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 Client.
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 disclose our figures a week in advance is one illustration, and I would like, of course, to thank the team for that. But 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 at end of March, 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 BCM businesses that we saw. And Chief Executive Officer. And I think thinking forward that what we are delivering today will help to further enhance the relationship and Chief Executive Officer. Our clients will not forget the way we have behaved.
And 3rd, with the communities, Of course, our societies are heavily impacted in many sectors, as we all know, in many countries. And 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 €15,000,000 Which will be an international one with different donations. And I just wanted to mention that we as the management team will contribute and Chief Financial Officer. 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 6 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 and 9, if I take this comparison. When I look at our credit risk, clearly, we have Emeritus. Drawing the lessons of the previous crisis and I think stick to the strict origination criteria. We will go through, I'm and Chief Executive Officer. Sure.
Our different exposures in detail and the quantity of this exposure. Just would like to take one example, which is one factor that and Chief Financial Officer, we've maintained a €5,000,000,000 direct exposure, euro and change But more importantly, when you look at the quality of the exposure we had in 2,008, 2,009, for example, and Chief Executive Officer, 2nd Lean, things like this. This exposure today is much better protected, much better quality and Predominantly European. As you see also on the slide, we are have a portfolio with a low NPL ratio, 3.1%. It has even gone slightly down in the Q1.
It's even lower when you look at the way the EBITDA measure that The second thing is, of course, Officer. The capital level, we started with 13.2% core Tier 1 ratio, reintegrating the provision on the 2019 dividend. We stand at the end of March at 12.6%, 12.7% actually pro form a of disposal That is proceeding this year of our Norwegian and Swedish candy and leasing business, Which means that it gives us a 350 to 360 basis point buffer and above the and Regulatory threshold, the MBA, which now stands at 9.05%. Executive Officer. 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 and Company. Functioning and operating a more compact business model with good franchises across the board. Executive Officer. And effectively, we feel confident because we have good positions, including When I look at the geography, and I hear it's a very difficult thing, all geographies will be by definition impacted, let's face it.
But overall, I think we have countries which can support the economies. And all, we don't have big exposures. For example, when I think about the U. S. Retail operations of banks with Consumer Credit, etcetera.
We have safety net in Europe, which will limit the impact, for example, on the individual plan. So overall, we feel We can deal with this crisis. And 4th, this crisis for probably many companies, but for us has been a way to tackle So our digital and technology infrastructure and it worked very well, as I said, across the board, whether it's Developed economies or for example with our offshore operations in India, everything functions and that's good because if we were To come back to confinement, we can do that and we will probably, of course, going forward deal in a different way in our function. Now let's turn to the figures. I will just say a few words on that, Page 7, and then William will answer more in detail.
Clearly, we have mixed results. And 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 and Chief Executive Officer. We have also resilient financial services operation And we have had in GBIS a very strong, thick 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 Executive Officer.
On the structured investment product, 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 1,750,000, but also the impact, the negative impact of the dividend and of course, the cost of hedging. We will come back to that much more in detail. The second element of these figures are of course Of course, the increase of the cost of risk. This cost of risk stands at 65 basis points.
It's 3 times higher than in the Q1 of 2019. We see there the first, of course, impacts of the COVID scenario. Same thing, we will answer more in detail in the cost of risk. What we've been doing in the Q1 is beyond Turning for certain specific files, including because of the COVID, is to add over the provisioning. We will refine Our scenarios going forward, I think in the Q2, 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 The modesty of the capacity to project, but we went through our and Company. 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, we have our best estimate at least to date For the 6.8% GDP drop in Eurozone and base case scenario, 70 basis Equine, cost of risk for the full year, so something not very dissimilar to what we had beginning of this year. And in this prolonged Scenario of the low activity, 100 basis points in this downgraded scenario. Same thing, we can elaborate on how we built these figures. And 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. But what you try to factor These reasonable assumptions are all the factors which will impact the capital. Of course, the P and L, but also The downgrading of counterparts, the drawings of existing facilities, the full impact Of the regulatory TRIM effect, 50 basis points, We factored some increase of operational risk also at year end. So all this means that we think we are able to tell you that We will remain within the range of 200 basis points and 250 basis points above this and Chief Executive Officer.
905 percent MDA level. Of course, depending on the assumption that we are taking In terms of paying potentially at year end an exceptional dividend, but that's something we will review of course Officer. So now I will turn the floor immediately to William, who
will answer 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 9 for an overview. Let me start by saying that as Frederic highlighted, We had actually a very good start of the year across all businesses, I must say, January February and for Retail and Chief Financial Officer. Spending until the period of until mid March and 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, when you look at the retail operations, both French and international, you see, in fact, 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, I. E. 0 to minus 1, so it's minus 1.2 year on year in Q1. Good commercial dynamics. We provided you with a lot of detail In the back of this presentation, but you can see that the outstanding, both credit and deposits were dynamic that's on the franchises, particularly Equity clients, Boursorama clients, brokerage volumes, unit linked in life insurance that was positive and that was combined and Company.
With a decrease in cost close to 4% down, minus 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 and Chief Financial Officer. The beginning of impact on the cost of risk, revenues were up close to 3%, adjusted for pre 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 and well contained costs, return on normative equity, 13.2%. Insurance and Financial Services, Adeir, Chief Financial Officer of 19.8% 0.6%, sorry. Obviously, the picture It's much more negative on GBIS, particularly revolving on 2 issues. And Co. 1 on markets, as Frederic said, and I will come back to this, so let me allow me not to comment too much on that page, but We had a very poor performance in equities, minus 99% revenues in Q1.
But otherwise, we had a good performance and Chief Revenue across the rest of the business. So 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 will comment more in detail later. It's a bit more and Chief Financial Officer.
The same as far as the fundamentals are concerned, a. E, the cost of funding of the company as well as the OpEx, but we have some Volatile elements, volatile P and L elements linked to interest rates and home credit, which I will comment. Overall, As you can see, group net income underlying is €98,000,000 The headline number is minus €320 €6,000,000 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 and Co. First of all, I would like to reiterate that for this quarter, we are very much in line with what we had Last year and the years before in terms of executing various cost plans, which you know in CIB, in French Retail, International Insurance Services as well as central functions across the board, I.
E. A trend of decreasing costs in absolute terms. This is why you see in Q1 3.6% decrease Equity. In absolute in cost, underlying cost from 1 year to another. And so the first thing we would like to say that There is no issue as to the execution of the savings plan that we have announced to you in the previous years, Equity Officer.
Including the CIB plan last year, and they are well on track. They will be executed, and they will be, as we expected, Beyond any context of COVID, there's a decrease in absolute terms of the cost base starting with EUR 17,400,000,000 and Co space, as you know, in 2019. On top of this decrease, and this is very important To have in mind, this is on top of this decrease, we had an additional set of savings of EUR 600,000,000 €700,000,000 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, Hi, Chris. 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 €2,000,000,000 expense for IT development every year in cash terms, but we would be much more selective and Company. Focusing on 2 areas is remediation from a regulatory standpoint as well as every project that helps us Cost of risk is the next page. As Frederic said, we have an increase in cost of risk, Which is material this quarter. Obviously, we were 21 basis points in Q1 2019 and ended up the year at 29, maybe 25,000,000 for the full year. This is 3 fold more at 65,000,000 this quarter.
And Company. And we'll come back on the detail, 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 Equity Officer. As 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 And this is a good start for us to a good position to start the crisis with.
We have a good and Chief Financial Officer. Number for nonperforming loan, which is still low at 3.1% and comfortable and Chief Executive Officer, a growth coverage rate of 55%. As Frederic said, we guiding the market depending upon the scenario That for cost of risk, that would be materially higher than our previous expectations, as we would imagine, between 70 basis points 100 basis points For the year, just to give you an order of magnitude, 100 basis points equals to €5,000,000,000 to be compared with EUR 1,300,000,000 in 2019. So 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 Executive Officer.
So as I already commented, you have on the pie, The concentration on GBIS representing 42% of the net cost of risk for the quarter. So as you would expect, as a European bank and the European bank dealing with large corporate, This is where you would find more the impact of cost of risk to be compared with what we have seen with many U. S. Banks, Well, maybe the increase in reserves 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 in as far as we are concerned.
The split It's as follows on the €80,000,000, €20,000,000 cost of risk that we had for the quarter. We have, first of all, roughly EUR 400,000,000 of cost of risk, which we consider is a normal Cost of risk, I. E, around 32 basis points. And 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%. So I think we are very much in the ballpark That you would expect under the IFRS 9 moves, this time based on overlays mostly, Roughly EUR 300,000,000,8295,000,000 which is 24 basis points.
So this is The very bulk of what's happening here on top of it, as Frederic said, we have some specific files including frauds with some counterparties Equity, 4.9 basis points or EUR 120,000,000. 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, But 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 226,000,000,000 of the total AED, Approximately 1 third, and 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 €5,000,000,000 And as we already said with Geonene a few months ago, We have a very strict discipline in terms of structures in LPOs and underwriting commitment, so that we can come back on that later. And on retail, we have a very well diversified geographical exposure. And let me stress the fact that as far as mortgages are concerned or Home loans are confirmed in countries such as France, which is where we have the bulk of our mortgages. You have the high securities through insurance schemes.
So this is a totally different environment that what you would find for example in the U. S. Turning on to capital, which is the next slide.
And Chief Executive Officer.
So as Frederic said, we have for Q1 a ratio of 12.6 and Co. At the end of the quarter, pro form a, the already announced sale of AG Equinor, our leasing business
Executive Officer. In Norway, we are not at 12.7%,
which is, as I said, more than roughly 350 Basis points buffer above MDA. Let me remind you that we have already 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. So RWAs increased that quarter by €10,000,000,000 so €345,000,000 And so what you have here is €4,500,000,000 of increase in market RWA And you have 3.5 percent in credit RWAs. The rest is linked to regulatory, Equity Officer, including some TRIM and some securitization in the CRR2.
What is important and Chief Executive Officer. To remind, to put in context what Frederic said is the target by the end of the year to be running the company with a Offered in between 202.50 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. So we don't have we still have what What we have announced to you as far as the TRIM impact and other regulatory impact totally in the ratio. So we think we have probably a conservative approach on that.
But let me say, I think it's a realistic and Chief Executive Officer. 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 above announced by Frederic Any benefit from the potential deduction, non deduction of software, which could represent for us almost 30 basis points.
We did not take the benefit of the fast forwarding of SME discount factor. There would be another 10 basis points for us, No, the discount factor of infrastructure financing, there would be an additional 2 basis points. And going forward, IFRS 9 phasing and Company. We represent 6 basis points. So the EUR 200,000,000 to EUR 250,000,000 again, increase in RWAs linked to the complex In the year, increase of RWA into TRIM, but none of these potential tailwinds.
Executive Officer. On the liquidity and funding, which is the next page, and Chief Executive Officer. Let me remind you that we have actually improved The liquidity profile of the company in the Q1, the liquidity buffer is up to €203,000,000,000 from €190,000,000 Adeir, Chief Executive Officer. At the end of 2019, the LCR ratio is up 144%. To give you Another magnitude, this is a stress ratio, as you well know.
This represents €58,000,000,000 buffer NSE for NSFR is comfortably above 100%, and we remain A rated company, as you know. But 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, But we could complete an additional issuance of senior non preferred. We have been able to access and Company. Easily to short term liquidity and we had record deposit collections. We benefit from the fact that across the board, 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 detailed in the appendices. I've already said Equity. Revenue slightly down. Commissions are down, but 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 Bostorama, willing To trade or willing to invest in Unit Linked, for example, and Co Founder. Net interest margin is up on the back of very strong volume of production up until, as I said, mid March, and Chief Executive Officer, Mr. Frederic Odera, Chief Executive Officer. Disciplined on cost, as I said, and 11% or close to 11% underlying return. And Corporate.
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 Plus 1.6 percent. Operating expenses are up 2.6 percent, but if you adjust it and Chief Executive Officer. For some one offs, including contribution to solidarity fund or bank funds or insurance funds Across the geographies, we have actually a 1.5% Increased 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, revenues are down 27%, headline number. Adjusted for base effect, it was a 6 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 On headline terms, which obviously is not satisfactory and revolves around 2 things, I will comment more in detail. One is global markets, especially with a big leap on revenues on the equity side. And as far as financing advisory is concerned, very different revenue development as for all the other businesses in GBIS Apart from equities in market activities, but yet a strong increase in cost of risk as I've already commented.
So I think what is worse and Chief Executive Officer. And in the room, we have both Cecrand and Jean Francois Desgrois, the Head of our Markets. So if you have questions, We will be very happy to answer them. He's to spend some more time on the markets. And to begin with, Executive Officer.
I would like to summarize how we saw the world from our perspective in the Q1 Because clearly, there is a difference in the way banks performed in the Q1 depending upon their business and Company. Yes, there were clearly positive trends in Q1 up until The end of the month, strong volumes in equity benefiting to our flow business. So the cash equity business was up. We 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 were focused on Equity Crime, We're also favored by the trend, but we may not be a very big player in the space, but we benefited From it as all the 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, Equity. 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 It's unfavorable for businesses which for us, particularly on the structured product side, are path driven. 2nd, extreme Equity with ZIX level never reached as well as increasing correlation, which obviously very unfavorable for the hedging of our positions and Instructor Products. And lastly, sharp decrease in dividend futures. You all are aware that announced dividends I've been largely cut across industries starting with bank, which obviously was not in our numbers. So 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 and Chief Executive Officer.
Very positive numbers. So excluding runoff activities, I. E. Commodities and Descartes purchasing, it is even higher than the 32% you find on and Executive Officer. This is an increase of 52%, very good performance including compared to peers who have published to date, Equity has almost zero revenue of plus 9% and was severely impacted Equity.
Despite the strong performance in plant services listed product and cash and flow derivatives, we had to increase reserves and Marketing Results. We had a negative impact of linked to the dividend consolidation of EUR 200,000,000 Increased hedging costs, which led to a very poor number in exotic products And some default counterparties, especially with some hedge funds, as you have seen other banks announcing it So this is clearly the basis of a Performance overall in that segment. We will come back to that on question when we have questions, I'm sure. I'd like to comment finally on the corporate center,
which is
the last slide on my side. So 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 is compares good well relative to budget, same with operating Acquisitions, we have already mentioned to you that we would have some transversal project, competition project, but this is very much what we had announced and that explains the increase So 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. And for that, I would just refer you to the fact that the corporate center That's finally 2 things, which may translate into some volatility. As we have seen in previous years, by the way, Particularly in 2014 2015, but also in other years, one way or another.
The first thing is, As you know, the Corporate Center raised the long term equity 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 and Company. To transfer fixed into variable for capital instruments, such as 81 or 82 as well as the equity stakes, such as the equity Equity in Commercial Banca, are accounted for can't be can't benefit from the hedge accounting methodology and Chief Financial Officer. From an accounting standpoint, that creates an asymmetry. So we have we accounted hedging mark to market with The underlyings are discounted, but with a mismatch.
That mismatch is a pure Accounting Asymmetry and will reconverse to 0 over time. So I think it's a pure Accounting Factor that has no economic implication. The second element of what the corporate center does He's 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, live in a discounted world. And so when we and Company.
Raised liquidity through structured products. We have €65,000,000,000 of liability in the form of structured products. Executive Officer. When the variation on the spread is Societe Generale spread, we have Some impact on the liability side, which are, over time, totally compensated by an equity in Adequacy. So over time that converts to 0 between P and L and equity.
And on the asset side, we also have Some variation, but it is neutral for the group, which is what you find here, is contemplated So overall, this is massively accounting asymmetries linked to rate and spreads and is either compensated in equities Would be found is neutral for the group and mostly will converge to 0 over time.
Executive Officer. Thank you very much, William. Just a few words of conclusion. Again, we are, as we know, facing an Extraordinary crisis in 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 Equity.
Scenarios and of course, as I said, now with one big question, which is, of course, the answers of government and their efficiency.
Executive Officer. Let me just say, and
I think it's for me very positive as the CEO, the bank is up and running absolutely and Chief Executive Officer. For all its operations, clients, projects, etcetera. And we want to move forward. Beyond this year, we will Start the 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 road map, drawing all the lessons learned in this crisis. And A crisis is also a way to make further progress. So that's where we what we wanted
Executive
Officer. Your first question comes from the line of Delphine Leif from JPMorgan. Please ask your question.
Yes, good morning. Thanks for the presentation. Equity. So my two questions. The first one would be on capital.
Just trying to understand a little bit your Equity Officer, I'd like to hand over to the financials. Thank you. If we pro form a Equity. Where you are right now of the TRIM impact, you're around 12.2%. So it looks like there's another at least 70 basis points, if Adriaa.
If you could just negative impact, if you could just give a bit of color of how that breaks down between the different components. Equity. The second question is on cost of risk, your guidance of 70 to 100 basis points. Equity. If you don't mind giving us a little bit of color in terms in particular on your GDP assumptions for 2021.
Executive Officer. And if you could provide as well the different weightings between scenarios, base case, Activities. I mean, just for us to understand, because in terms of cost of risk to GDP or unemployment,
Equity Officer. Because
when I look at your 100 basis points, it's only 30 basis points higher than your sort of base case Equity. Despite GDP declining at double the base case. So just if you could give us Some color to understand provisions, that would be great. Thank you so much.
Yes. Yes, Justin, William will again come back and Chief Financial Officer. Due to the different elements that we take into account into the capital calculation and guidance and Denis Leboe We'll answer your question on the cost of risk. What you see now, we have not given any guidance for 2021. First, Jonny will explain to you that we, in both scenarios, consider that the cost of risk would go down slightly, But we would remain relatively high because even again if you have more GDP, There's again a path of a time lag between with the default with the government schemes and of course with all the uncertainties I've mentioned Of additional further actions that we don't know yet and which might be implemented.
So that's where the exercise for 2021 is very complex. And again, Jonny will elaborate on the different scenarios. William?
Executive Officer. Hello, Stephane. Obviously, we can't give you all the different bits and pieces, But 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. So we operate, As Frederic said, as a normal continue of a project, we continue to deal with clients and we continue to deal with remediation, Including the 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, but that's the number we have given to you.
That's the first mistake. 2nd, we obviously Executive Officer, that we should have an increase in RWAs for the year. So as you see, there is an increase In the market RWA for the quarter, we allow ourselves, having learned our lesson, To or for potentially some additional increase, maybe Not, but you would necessarily derive from what we observed today in terms of stress VAR and VAR computation. But at least we think it's good to be and Chief Executive Officer. As far as credit RWAs are concerned, it is clear that as you can see already Accounting in Q1, particularly in the financing and advisory side, there's been Number of drawings by counterparties, which explains mostly the increase in our prepared grades.
They effectively, Officer. As I'm sure you will ask Philippe Henrique to comment, a strong production On the corporate side and professional side in France, but mostly through guaranteed schemes, Which means probably little RWAs, so you have to you should not match the volumes of outstanding with the volumes of RWA. So we have some of it as well in International Retail. And lastly, there will be, of course, RWA, we have computed that RWA increase stemming from downgrade of counterparties and ratings integration, Which obviously we take into account.
So as you can see, there are many different and Chief Financial Officer. Assumptions are the new production, as William said, the evolution of a risk weighted asset before the crisis, all the TRIM. And based on that, we can give this range. And of course, then the yes, there is a 50 basis point dividend provision. So Depending on the assumption we make on the scenario also of paying or not and what amount of the dividend.
So that's why we did this range. Executive Officer. Now, Jonny, can you elaborate on the methodology, how we think because I think it's important to spend time on this?
And Chief Executive Officer. Yes. Good morning, and thank you for your question. So indeed, there are still a lot of uncertainties, a lot of questions Analyst. 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 Norman, also taking into account government and policy actions, which Which varies 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.
So in designing our scenarios and Company. And by the way, we have not applied them for Q1. These are scenarios Executive Officer. We designed to give you the range of the guidance of 70 to 100 basis at this point. But as William said, for Q1, we based our cost of risk calculation By sector, country by country of the initial impacts of the crisis and of course, The downgrade we have already proactively implemented.
So the base what we call base scenario and This is what today seems the initial scenario is an average lockdown of Executive Officer, 8 weeks 12 weeks to return to normal. This would lead to
Equity. A recession of
minus 6.8% in Eurozone, minus 6.6% in the U. S, To give you just 2 data points. And then we would see an almost Equity. The U shaped type of scenario where in 2021, which was your question, In the eurozone area, we would be at plus 6.6 percent and for the U. S, plus 6%.
Executive Officer. So this is the base what you call base scenario. At the prolonged Equity Officer. The 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 In this case, the GBP drop in Eurozone would be close to 13%, and we would have in 2021 a plus 10.5%. Again, although this is almost every shape type of growth, as you can see, in both our scenarios, we are not back Equity Officer.
So in the projection of our cost of risk, this means that under IFRS 9 and probability of default increases, rating migrations, Executive Officer. We would have also to take into account the impact of policy measures and and Chief Financial Officer. Massive relief measures already implemented, and this will result
and Chief Financial Officer.
In delay of default, but we still believe that default will continue to materialize Later in 2020 and even 2021, which means that cost of risk, yes, will be much higher and Chief Financial Officer. In 2020, this is our 7,200 basis points scenario. And as William said, it's EUR 3 and Company. €3,500,000,000 to €5,000,000,000 It's really a significant increase to our pre crisis level or the guidance we had done, and Cost of Risk will continue to be high, lower than that, But high in 2021 because we believe that more defaults will arrive as a and Corporate, and we'll and Chief Financial Officer. But also because part of the government support and the public and Corporate actually results in transforming losses to debt.
So at a certain point, and Chief Executive Officer. So in summary, the two scenarios are very much dependent on assumptions, which We have more clarity on in Q2, which is
and Chief Executive Officer, the average lockdown period
and anticipated time to return to normal. Equity. More impact, of course, moving forward, but also taking into account and Chief Executive Officer. And also, as far as we are concerned, taking into account the quality of our portfolio, and as and Chief Executive Officer. Frederic said, we have done significant work over the past years to reduce the most Risky part of the portfolio, drawing the lessons of the past.
So we gave you a few Equity. Numbers and exposure details in our slides. LGO, for instance, is less than EUR 5,000,000,000. We have also, in the last year, anticipating a downturn, taking much more protections More risk transfer transactions will be applied
in the
NOPD policy, which Makes us confident that our portfolio is well diversified, is sound and can resist Equity, the 70 to 100 basis points guidance.
So just elaborate on the methodology to come to that 70 and one hundred basis points. I will review all the sectors, the portfolios. Yes.
So it's a combination of Applying the scenarios and the migration of ratings and increase of probability of defaults associated to this type of scenarios related to GDP. Executive Officer. And 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 North MQ2 Sectors, or applying some shock absorbers Executive Officer. Given, as I mentioned, the magnitude of government sub quarters you provided, which will delay Equity Officer. Some of the consequences, not in 2020, but also towards 2021.
So we take an approach which is forward looking and taking, Executive Officer, of course, a very granular review of our exposures, portfolios and For shock absorbers and understanding the impact of the crisis towards the
Executive Officer. Your next question comes from the line of Frederic Elmerjat from Bank of America.
Executive Officer. Hi, good morning, everyone. Just a couple of questions, please. The first one on capital and dividend. And Please, Frederic, don't tell me it's too early to talk about dividend.
But so the I mean, I wanted to have your sentiment about the ECB actions and dividends Analyst, I mean, clearly, it's harming the sector when it trades. It's a trading at deep discount. It will Equity. More encouraged the sector to shrink products and grow, which was the first incentive from ECB. So what's your thinking on that?
And have you discussed that with ECB? And Do you see really the action as something temporary? Or we fear that's arriving in the 1st October, they actually extend the band for another quarter or 2 because If we fast forward, I think in October, this is where the situation will be tough, where we start to get unemployment rising much higher, very sustainable employment, not just and Chief Executive Officer. So and then more specifics to you for the dividend. I mean, thank you, William, for the Taking us to the moving parts of the capital.
But I mean, should we take now NDA as your new guidance in terms of buffer And where you want to stand. And that I assume you're using all the Pillar 2R kind of forbearance and so on. And second question is on costs. I mean, I understand the €600,000,000 to €700,000,000 are driven by Stopping projects that are not harming your overall kind of improvement of efficiency and so on. But how do you think this is really realistic and feasible in the current challenging societal environments where I mean, even at Bank of America, we have a firing field, right?
So how is that really and my question is actually goes beyond this because that's the only offset fraction of the cost of risk you will have this year Underlying, because when we all discussed, you said, I mean, cost of savings underlying do not stop in 2020, it will go beyond. So how can you do you think you can still implement some of these essential cost savings to help your underlying cost savings?
Thank you. Executive Officer. Frederic, 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 to Not to pay a dividend and protect as much as possible the capital ratios entering into the crisis.
Executive Officer. Where shall we stand in October is, of course, a big question mark. And by definition, to be frank, today, Executive Officer. I don't know and the kind of perspective and how default will have materialized, the perspective for 2021. So I think they will look at this, they will look at Our capital ratio P and L have evolved and they will make a new decision.
It's clear that they know It was not a busy decision for them and they know the impact on the market. And so they will take that into account, but of course, Officer. Beyond, I think, yes, the MDA is a new and I think it's a new
and Chief
Executive Officer. And if I may, and here we go into even more long term perspective, which and Chief Executive Officer. At the end of the day, once you have implemented all the treatment, You have absorbed that one. The supervisor will be very comfortable with their models. And effectively, they had in mind to then Adjust their requirement on the ratios.
What they did in the crisis is anticipate By basically 8 months, that's something which was already in the regulation in the P2R position and also with the P2G. So what they did here is an anticipation of something which was decided, which was part of the framework. So we feel, yes, it's the right reference, knowing, of course, this ratio will be applied to higher risk weighted assets based on the review of the modeling. The second point is on the cost. And here, I would like to tell you, yes, we are absolutely clear we can do that because Overall, I would say discretionary expenses under our control.
And when we talk about IT project, it's mainly external providers. Regarding the restructuring elements, as Brittan told you, we are pursuing our existing projects. The further restructuring of our network, we will finish a plan actually, finish a plan for 2020. What we said to our trade unions is we will not launch before September any new projects. Executive Officer.
And I think, as you mentioned yourself in U. S, in Bank of America, if I may say, It's a kind of decent approach, responsible approach towards that. But I must say, when I think about 2020 and Company. We have to further that, taking into account the adjustment of the behaviors of the clients and everybody speaks about The fact that digital penetration will have increased, etcetera, so we will activate and of course, we will see how we have to adjust and Chief Executive Officer, but that's more for 2021 2025. And it's not related to what we've given you, the figures
Equity. If I may add on capital, just to make sure that The modeling on your side is right. And hello, Thierry, confirm, 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 unborn Tier 1 instrument that allow us to benefit from it The decrease in complex cyclical buffers where applicable has been adopted. So this is a permanent.
Executive Officer. So we consider that a buffer above NDA is the right thing to steal 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 be be able, of course, pending the ECB debate to pay the 1 and of course, the coupons are not and Chief Executive Officer. Let me also remind you as SAS Group as hybrid are concerned that we don't have any comment 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 from IFRS nine phasing. We have not done it. So it's totally fully loaded. Again, that would be 4 basis points for us.
And we don't, at this stage, Executive Officer, we don't have in our forecast what I said, which is the result of the announcement of the FCP of April 2028, I. E. On software, the semi discount factor, discount factor on the infrastructure And also, as I said, we have 9 traditional 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.
Executive Officer.
Your next question comes from the line of John Peel from Credit Suisse. Please ask your question. Executive
Officer. Yes, morning, everyone. I wondered given the exceptional circumstances, you could talk a little bit about Equity. How has trading been in April? I think some of your peers have said the fixed income environment is still quite robust.
Equity is back to a kind of normal run rate. And have you seen any losses from the EMC acquisition? And then my second question was just on a dividend. I mean, 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 Equity. Taking the CET1 ratio down to the top end of your new 200 to at 50 basis point buffer, just how should we think about that? Thanks.
Hello, John. I will let Stephane answer your first question. And Chief Executive Officer. 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. So At this stage, we will provision the 50% payout ratio in our computation, but we need to wait.
So the money is there, but what we will do and what we will be able to do, to be frank, really, I think I cannot say at this stage. And Chief Executive Officer. Can we comment on the trend during that we will do not comment from usually as you know,
Jan, we do not comment on the current quarter. What I can say here is the market condition, as you saw, has progressively stabilized in April After this dislocation, we had to manage in March. But we have to say that uncertainties remain very high and there is now some attempt from and Finance on the Investment Solutions side. We see there are some flows and some activities, but there are some additional advances in today. So we have to be very prudent.
Equity. On the EMC, we had taken over and migrated last year and Corporate. 2 part of the EMC franchise, the ETF, which is now within LiXOR and a part which is a small one, a structured product, which is not really Significant. So there is no specific loss from 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.
So we have no P and L, if I may say, no revenue on this part in the Q1. And Company. And this part has been positively, if I may, 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 Julia Molter from Morgan Stanley. Please ask your question. Thank you very much. Good morning. And Chief Financial Officer.
I have two questions on my side. The first one, so we haven't touched upon any outlook for revenues yet. Executive Officer. And of course, the current market conditions are likely to impact transaction fees, for example, Equity Officer. But also loan growth on the household side.
So how are you thinking about the outlook for revenues? That is my first question. And then secondly, so the government measures, as you said, the French government has been very proactive. But yes, it doesn't on the guarantee side, it doesn't take the and
Chief Executive Officer. There is still something
vested to the banks. And what we are seeing in other countries is that when the bank has skinned the game, it usually takes longer for the credit to flow Economy. So I was wondering if you can give us some color here as well on how well do you think this is and Functional Perspective. Thank you.
Yes. Silvia, good morning. Executive Officer. I will leave the floor to Philippe Emerick for the French retail and Philippe Berg with the caveat that he Cannot actually comment so much on the sub delivery, so he will probably provide you with a very brief answer actually. And knowing that we would be it's impossible to provide guidances in this environment because overall, I would say the behaviors given of the clients You know, remain relatively unknown or difficult to predict whether you will see further mortgage very soon is a question mark on the setting attitude.
So that's why it's Difficult to provide the guidance, but perhaps we can give you some qualitative assessment of what we see today and how again the scheme functions. Philippe, may I start with France?
Hello. Yes, good morning and 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 Porzorama, A very good level of activity, actually including an increase of the opening of Financial Accounts. So that's a positive sign.
But apart from that, that's true that with individual Significant slowdown on the activity even though we are still doing mortgages, which were initiated before and Corporate Individuals, on the contrary, it's quite active, especially with this So yes, I can share with you some numbers. So at this stage, at the level of AG Group, we have received Approximately 57,000 request from clients for an amount of €14,000,000,000 We have already approved 46,000 files At one amount of more than EUR 7,000,000,000 of and of course, we are making sure that these files Our process quickly in order, as you say, to go to clients and to support the economies. So we are very careful with that. Executive Officer. Again, we have created a specific task force to make sure that we are able Executive Officer.
That's What I can share with you, as you know, this facility is guaranteed depending on the kind of companies, But up to 90% by the state. At this stage, our refusal rate It's approximately between 3% 4%. So 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. I mean, we have over mechanisms and Company.
So I think that, again, this product didn't exist 5 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.
Pierre. Yes, so maybe now on the international part On the talk, we are operating in many countries. So maybe I will focus on the most important, let's say, setup. The pattern is that we see across the board, let's say, measures taken to support retail clients and corporate clients, With this idea of granting moratorium depending between the countries, 3 to 6 up to 9 months, for example, in Romania, Both for retail client and corporate clients with and Chief Financial Officer of state guarantee that can vary a lot. It's up to 90% France.
For For example, in Czech Republic, it's 80%. In Russia, the state's response comes from the fact that So the state is financing minimal wages. We have a similar setup So in Germany, as you know, what is called the channel credit, 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. So it's a little bit early to give you, let's say, a consolidation of all those exposures and all the consequences of that.
Executive Officer. Your next question comes from the line of Jean Louis from Goldman Sachs. Exane.
Hi, good morning. I have a question on the Investment Bank and I have a question on the cost of risk guidance for this year. I just wanted to understand in the 70 bps to 100 bps cost of risk guidance, what type if And actually, 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 could not have been in place and essentially how certain or how confident
and Chief Executive Officer of
the way that they work and how they can shield your P and 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 first glance. And I just wanted to understand whether those corporate guarantee scheme [SPEAKER FRANCOIS XAVIER BOUVIGNIES:]
Where I see
how you model them in that assumption. And 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 loss Are reverting and whether you could book them back or whether they have just gone. And also in terms of this mark to market differences, I remember in 2,008, for example, you had, I think, If I remember when, like a €2,000,000,000 gain in CDS when credit blew out. And 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.
Yes. I will hello, Jean Francois. I will let the floor to Severin and Chief Executive Officer. To comment on your revenue question, 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 the BIM is more complex. I just would like to highlight qualitative two things.
The governments basically across the world are more or less saving the airline companies. Executive. In practice, they are nationalizing, putting a lot of equity or loans, which might become at some point equity, let's say, Executive Officer. So without this intervention, of course, there would have been an impact to the companies probably going bankrupt. And I would have much higher cost of risk and probably something will be close to 0.
And on the other spectrum, if we talk about professionals in France, There is at this stage, as we said, guaranteed loans representing up to 3 months of turnover, Executive Officer. Subdities by the government through solidarity funds, You have the subsidies to finance people who temporarily are not working, and you will have even relief of tax of taxes and of social and income taxes and Net Income Tax. So you see that, of course, the governments are doing a lot because they try to save and Chief Executive Officer. The company, the jobs and we are the channel for liquidity through these schemes, Where we keep a risk, which is a way for the government to ensure that there is a reasonable decision behind the loan. But 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 geographies. So Executive Officer. 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. And as I said, there is a big question mark, which is today, it's the urgent things which are being dealt with. But 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.
Executive Officer. On the revenues.
Yes. Okay. So, Antigu, I will take the answer. So you have this quarter on the equity side specifically as mentioned by Fennec and William different impacts. We mentioned clearly the dividend cancellation.
We mentioned clearly a default on one counterpart, which is €55,000,000 and Chief Executive Officer. And there is another point to have in mind if you look at the swing in terms on the market reserve between the Q1 last year and the Q1 of this year. There is a swing around for the global market not only for equity of around EUR 300,000,000. And Chief Executive Officer. Last year, we had a release of reserve.
This quarter, we have a new reserve constitution of around €200,000,000 for the global market and and $75,000,000 of the equity as mentioned earlier. This part, which has not been not released though in the revenue and there is a swing with Compared to our sales in product development due to the market conditions, we'll be over time, over time visible in the channel. But it's fair to say that it's part of the revenue which are lost also. And the hedging cost, We had to suffer during this quarter, which explains the gap between what I said, delta in reserve, dividend cost and Carla Parti. Lars, that is to expand the revenue of equity, the GAAP.
This GAAP is the hedging cost Executive Officer. With this, which is first, but I think the answer to Jean Francois's first question. Regarding the CIDR, 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 Chief Executive Officer. And we have publicly changed this export. Today, we are using very limited part of CDS as and Insurance as a coverage as a hedge on our credit risk in the portfolio of GLBA.
So it's fair to say that you have some Impact on positive impact in that case on the revenue of the Q1, but it's very limited. It's not significant.
Executive Officer. Thank you. Next question? Okay, very clear. Thanks.
Your next question comes from the line of Lorraine Nkirev from UBS. Ed. Please ask your question. Hi. Hello.
Thank you for the presentation. I have a question on the state guarantee loans. Basically, I'd like Equity. To better understand the math and how it works on the P and L for the different years, so year 1, year 2 and year 3, because I think I Ed. You carry the cost of the guarantee in year 1.
And also to understand how RWA moved. So do you actually if you have a loan, let's say, EUR 100,000,000, do you only take EUR 10,000,000 of RWAs? And what is actually the profitability of these loans in year 1, 2 and potentially in year 3? Just [SPEAKER FRANCOIS XAVIER BOUVIGNIES:] To better understand how this compares in France with other markets. And then the second question Officer.
I have to say, I do not really understand the explanation of the fair value adjustments in the Corporate Center. If I'm not wrong, I think you said some is linked to capital markets activity. And then I wonder why this is not booked Asset Management. And then you also said that some will reverse over time. So how much is going to reverse over time?
Equity. And when do you think this will reverse? Thank you.
Yes, Lauren, hi. I will leave William answering the and Chief Executive Officer, Frederic to enter into the release the detail of the scheme and how it works. Hello.
So regarding revenues for year 1, And that's your 2 for the operators, but for the year 1, and at least we know the cost of liquidity, which is at this stage floor at 0%. So for year 1, the clients pay 0% plus the cost of the guarantee. The cost of the guarantee, which is when there is a guarantee up to 90% and for the small companies, The cost of the guarantee is 25 bps. So focus part covered by the state, the 25 bps We'll go to the state, which makes sense. And for the part which is not guaranteed by the state and which is supported by the banks, The 25 bps will go to the bank.
And yes, you're right, this the 25 bps Equity. Are paid upfront to the state by the banks, and we will recover this money to the client at the end of the 1st year. Regarding the following week That's the same principle, except that, of course, we do not know yet the cost of liquidity. So the mechanism will be cost of liquidity plus the cost of the guarantee. And Cost of 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 5 years. So that's basically how it works on revenue side. Again, basically cost of liquidity, Which is, of course, down within a year and
the cost of the currency. Aside from the risk weighted assets, it will stay like it is, 90% will not be weighted except at the beginning for the Initial 2 months, so yes, the 1st 2 months are not guaranteed. There is a kind of threshold by definition As the loans are there with 3 months, there will be very few defaults in practice. So you will then have the Could benefit and it will stay alongside. If the client decides to keep for 3, 4, 5 years, well, you will have the Same thing, 0 for the part which is guaranteed by the government and we will wait the 10%.
So in itself, I don't think it will change very much the picture. As we expect, some clients will say, and Chief Financial Officer. Okay. I want to amortize and there will be an amortization also. Sorry, it will be amortized.
It's not yet for the full 1st year, it's not amortized, but then it will be amortized. And what is important also is you have, again, specific files. Large files can be tailor made sometimes Like we saw recently, so it's more or less the same principle, but you could have so small adjustments of large
price points. And Chief Executive Officer. William? Lorraine, thanks for your question. And I'm sorry if I was not clear enough.
So as I said, the bulk of the P and L impact on the corporate centers stems from accounting asymmetries. Agnes. A large portion is due to rates and that's this mismatch between hedges On capital or quasi capital instruments accounted for as mark to market versus the underlying, which is accounted Equity. Which is discounted. That is the state in the corporate center and that mismatch obviously Can move if rates go down further, we reduce if rates go up, Equity.
But this is fundamentally something that vanishes over time when instrument matures. There is another accounting asymmetry, Which stays within the corporate center, which is again quite significant in the number, which Due to the liability side, I. E, what I said, the stock of structured notes, normally, obviously, this is Equity. The P and L impact is compensated in equities through OCI, but there is Some vibration for methodological region and also because the duration of the underlying instruments is modeled
and Chief Executive Officer. As opposed to contractual, as
you know, given the structure of the parameters and change and the duration can vary, so There is a small vibration, which is why I say normally it should be 100% compensated by equity, except from Some time difference in the adjustment of the hedges. And then yes, there is a portion, which I would say in the number I've given you It's a smaller function call, which is due to the cost of funding and the spread Paid by our market activities principally, not just market activities, but as they are mostly the one mark to market Visavis the corporate center. And so that's why I said it's neutral for the group. Some of it, by the way, and Company has probably been or certainly been accounted for as reserves. There's no direct P and L.
So that as well May come back over time, so 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 passively in the course Martin, until they started to come down, the rates were down in many restrictions.
So you can have this type of volatility. And Chief Executive Officer. And I've seen that some good books, the last little portion I mentioned, directing the market activity, some book it Directing the Corporate Center. So it's a convention. Thank you.
Next question?
Executive Officer. 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, but within the capital guidance For this year, how much in the way of earnings do you include exactly in the 200 to Equity. 250 buffer, because I guess looking at it quite simply, in the last three quarters of last year, you had something like Equity, EUR5 1,000,000,000 of pre provision profit, which will be going down a lot this year presumably even with the cost savings. So I guess
Equity Officer. If you then factor in your
cost of risk target of €3,500,000,000 to €5,000,000,000 it's unlikely you would have much this year.
Executive Officer.
Then just a question for Johnny, I guess. What is the current stock of outstanding loans that's Underpayment moratorium or holiday across the group, please. So not a guaranteed loan, it's just And can you confirm that you're not taking provisions or stage migration on those outstandings and Chief Financial Officer. As per the EBA guidelines. And similarly, what is the oil price implied in your cost of risk Assumptions.
Thank you.
So sorry, Marc, can you repeat that your last question was it?
Oil price. Oil price.
Okay, okay. And Chief Executive Officer. Briefly, nice price of the P and L, but we have not disclosed what we said. We've taken what we feel are reasonable Assumption given the context. 2nd, I think that we can give you the figure for France.
Again, we cannot give you any detail for subsidiaries outside France, as I said, because they will release their own figures and Chief Executive Officer. 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 €1,800,000,000 of payments. So to be clear, the first for 6 months.
So it's a relatively small amount actually. We don't provision, I think, on these loans. And on the oil
price. When you look at our oil and gas Exposures, which we have given to you and we have included a slide. You have a very small part, which is Directly, since it used to the oil price, the composition of this exposure is Equity. Integrated companies, which are almost all of them investment grade for 22%. You have LNG exposure, which has almost no sensitivity to gas or oil price because Equity Officer, Relying on the take off any contract, so you can see the various breakdown.
And then you come to Equity. The part which is more exposed to oil price, which is the upstream independence. That's Excluding the total exposure, roughly EUR 4,000,000,000. And within that, we consider that the most Equity and Exposed TO Oil Price Part is our reserve based finance Equity in the U. S, and this is $1,700,000,000 So we have stressed this portfolio, and it can support the stress Equity Officer, of going down to $15 to $20 and also taking into account that for this year, they have hedges Equity.
So in terms of cost of risk, the impact would be Equity. Limited in terms of defaults related to variation of the oil price, of course, where we see Rating migrations associated with 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, Equity on oil price in terms of cost of risk. Of course, we already took some overlay provisions and Chief Executive Officer. On the sector of the year and including this quarter, we have added to this overlay provisions on the OMDR sector.
Executive Officer. Thank you. Next question.
Next question comes Executive Officer, from Exane. Please ask your question.
Yes. Good morning. The question relates to capital again. So you highlight that you'll be at about 200, 250 bps above MDA at year end and that you're comfortable with that level. The question relates To what level would you see as uncomfortable?
So what time threshold would you be accepting to take if Your forecast of 11% to 11.5 percent Equity Tier 1 Doesn't materialize this year. So would you expect to fall to 10.5% or you think 11% is a minimum for you?
Listen, I mean, as we said, we've taken reasonable assumptions across the board and we think we Equity. The flexibility to address barometricity for any reason, we were not in line with that. So I think we keep really a bit range in mind. And Chief Executive Officer. And 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 and Chief. To carry, we've mentioned the downgrading. We've mentioned the drawings on facilities. We've taken assumption on all this, which are in our view are reasonable. So yes, I think for us, 11% is probably what we target as a minimum threshold.
Okay. Thank you. I've got a second question on the oil again. In your EUR 3,500,000,000 to EUR 5,000,000,000 of overall provision, How much of that is on the oil and gas exposure? Because 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 €20,000,000,000 of exposure is non investment grade, so about €7,000,000,000 What if I wanted to say I'm going to lose half of that, of that non investment grade? So That would be already on its own, about €3,500,000,000 So I know it's extreme, this scenario that I just described, but I just wanted to And out of the EUR 3,500,000,000 to EUR 5,000,000,000, how much of that is for oil and gas?
We don't disclose with this level of granularity. Officer. I think that Jonny 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 and Company. Contracts which are not impacted by the oil price or related to gas price and with security there. 2nd, as we said, for example, and Chief Financial Officer.
Even in the reserve based lending portfolio, it's very important to understand that there are hedges with the producer for this kind of environment of 12 months. So to a certain extent, it might be a bit more in 2021 that we might see the default depending on how long the prices will have. So we don't disclose that granular information, but I think you are absolutely extreme in thinking alongside. We'll see what kind of more information we Equity. I can't provide you, but it's absolutely an extreme figure and we think very differently.
And as we've said, we review the portfolio Executive Officer. Pretty substantially. Knowing that we saw the crisis in 2016, I remember the 2016 crisis also on the oil price, And we did not suffer that much. We've also very low price on oil in the exposure.
Okay. Thank you. And 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. So are you trying to guide us towards €3,000,000,000 being a realistic number, Alex?
No. Listen,
Guillaume, we don't give any figure on purpose because I think it would be too risky. But Let's see. In our own simulation, what we can say is it will be still relatively high, but that's We'll stay there and we'll see when we can see more, but it will take some time, I think. Let's be realistic. A lot is still to happen on the development of the Equity and the Government's schemes.
Okay. Thank you very much.
Next question, Jean. Next question, please.
Executive Officer.
Your 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. Executive Officer. How are the guarantees incorporated? Is it because you assume less fall of GDP?
You changed the loss given defaults? Or you assume lower PD migration or is it combination of all or you focus on one parameter? And then 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 Gunny on your first question and maybe the second one.
So it's Institution will take into account the guarantee and for the part which is not guaranteed, we apply our normal PDHG and Chief Executive
Officer. And your second question, first, we can't comment again on the international retail, unfortunately. Equity. What I would like to say, France strategy clearly support companies, in practice to save as much and Chief Executive Officer, many jobs as possible and then compensate for the people who might not work. So it's absolutely fair to say, mainly driven by more corporate Than individual clients.
And we are very different, for example, from the U. S. Where people are immediately without any revenues And we see some very different pattern. And of course, in wholesale, it's more corporate by definition. So I would say it's more geared towards corporate given the portfolio of and Finance.
And we will comment a little bit more in the 6th May when we will discuss figures on the international retail. Executive Officer. Next question?
Your next question comes from the line of Fagdou Raguenti from Citi. Executive Officer. Hi, good morning. Thank you for your time. Two quick questions.
One is on the provision. If you can give us a split between what is the and Chief Executive Officer. What is this specific and if there is any timing between like 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
I will leave a really answering on the cost. 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, etcetera. I mean, yes, so I would not clarify these as the So, restructure savings. We will also draw the lessons of how to function in this new world.
We have learned many lessons with remote. So, We think about perhaps new categories of savings that we might not have had in mind 6 months ago, but the bulk, I would say, will be more a one off and Chief Executive Officer. And then we will prepare the 2021, 2025 strategic plan. Jonny, on this Macro 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.
And
Chief Executive Officer. In Q1, yes, in the scenario and yes, we will see probably more IFRS nine effect in and 2nd quarter at least crystallized the scenario.
Exactly. In Q1, actually, we have and William gave you the breakdown and Chief Executive Officer, we have part of it which is related to the crisis and it's €295,000,000 It's and Chief Financial Officer. A combination of overlays, rating migration. We have also this fraud related one offs of EUR 127,000,000 Executive Officer. And the normal, I would say, Stage 3 results.
And 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, And the results 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?
Executive Officer. And your next question comes from the line of Stefan Stalmann from Autonomous Research.
Executive Officer. Yes, good morning, everyone. Just two questions left on my side. The first one relates to your African operations. And Chief Executive Officer.
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. And The second more technical question. You had at the end of 2019 still about EUR 160,000,000 of CET1 deductions
and Company.
For expected loss shortfalls, have you basically used all of those now in Q1 or are there still some left Officer. To offset against further Stage 1 and 2 provisions, please. Thank you.
Stephane, I will let Executive Officer. Philippe, I'm answering on Africa.
Yes. Good morning, Stefan. So quick quote on Africa. And Chief Executive Officer. So it deserves indeed some highlights.
So the situation is the following. So surprisingly, Executive Officer. The sanitary crisis is not so important as we may have feared a few weeks ago. And Chief Executive Officer, we have to be Amber and wait for the further development. As you know, there is no Confinement imposed in substandard countries because we are talking of countries of Daily Subsistence.
So this is more a system of late curfew at night. So in practice, end of March, a merger has been taken by governments, So to restrict, let's say, the movement of people at night, our system, our setup It's up and running. We maintain completely open our branches. You may have seen that in spite of those elements, And once again, we've been impacted by the COVID only in the last weeks of March. Executive Officer.
You think that the outstanding book went up by 6%. And as we speak, And this is in the figures developed by Duni. The cost of risk for Africa in Q1 stands at 102 basis points. So it's where we are for Africa. Thank you.
2nd question, William. Hello, Stefan.
I guess you referred to the Expected loss balance provision on funds item, yes, it is back in the ratio for the equivalent of 5 basis points. Executive
Officer. Thank you. Great.
Thank you very much.
Next question?
The answer comes from the line of Equipe from Mediobanca.
Good morning, everyone. So a couple of follow-up questions from me, please. Executive Officer. 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? Executive Officer.
Second question is regarding the fraud charges. Could you just confirm whether you fully provisioned for those Exposures, whether there's a risk of further losses related to those two specific cases in coming quarters? Executive Officer. And then final question for me is just about client appetite for auto calls. Presumably, your or either your or the private banks You distribute them.
Clients have taken a bath on these products year to date. So does this create a problem for the earnings power of your Business going forward as clients no longer want to buy these? Just some comment there on appetite for these structured products going forward, please. Executive Officer.
Thank you.
Yes. Hello, Matthew. So, Severin will answer about the appetite of clients on structured product. Briefly, If you wish, this assumption of 11.50 is based on the base case. But if you make your calculation, we would remain In this range, even with a €5,000,000,000 charge of risk, but of course, we're more constrained on the dividend that we could pay at year end.
So So it's really, yes,
you can make a very simple calculation, EUR 5,000,000 less the EUR 3.5 billion is EUR 1.5 billion. If you tax it, Equity. It's roughly EUR 1,000,000,000 net income that goes divided by 2, so times 3, it's 15 basis points and Chief
Executive Officer. Understood.
Alain, you had this appetite on the product. I think you had the first question, Matthew. Sorry, I forgot after After
port charges.
After port charges, but I think it's a reasonable level of provision. We'll see how it develops. We might have to add something, but it's on this 2 to 5, it's always difficult, but I think it's already a and Chief Financial Officer. We'll see how it develops going forward. I'm still a little bit uncertain.
Appetite for product, Jean Francois Leguard, end of Capital Markets. And Co. Hello, Jean Francois Agua.
So it's a bit early to say, but we can give hints. Actually, the main product is the Autocol, that is an equity product This is obviously sensitive to the level of equity. So customers and Chief Executive Officer. I've had some underperformance from those products over this period. But precisely, these products have protection mechanism That so far are working quite well.
And 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 use anything. So 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 replicate and we do it at the first order, then there are some vibration obviously in our trading books. Executive Officer. So it's probable that the appetite for these products will not diminish, but only
and Company.
And sorry, could you just clarify what kind of haircut or level of Law is embedded in these products. So if I buy, I don't know, a Eurostox 50 and Chief Executive Officer, where's the protection level set, below which I end up owning the underlying?
Executive Officer.
Usually, it's minus 40% or minus 60% from where it has been Triggered initially. So even the products that have been sold just 2 months ago or 2 months ago just at the height
of the
market Are not triggered, so they are still protected.
Okay. Thank you
very much. Thank you. Next question?
Executive Officer. Your next question comes from the line of Annke Reingen from Royal Bank of Canada.
Executive Officer. Yes. Thank you very much for all the detail. I just have two follow-up questions. Firstly, on your cost of risk guidance, Executive Officer.
I mean, you said that incorporates the government guarantees, but is it correct to assume it also includes Executive Officer, the EBA guidance on taking a more forward looking view. And I know it's early days, but do you think there's a coordinated Would you say there's a coordinated approach that is consistent across the different banks? Or is it very much everyone does Executive Officer. And then on the dividends, I see that I understand there's a lot of moving parts, Executive Officer. But this is my understanding that when you pay dividends, you can incorporate the benefit that might be deferred and the partnership benefit that's been coming out of the new EU EC proposal this week.
Thank you very much.
Yes. I think, Joni will answer on ABA. To be frank, regarding the bank choices at this stage, I think Citibank, which tried to do its own homework and looking at its own exposure. So I think we'll
and Chief Financial Officer. I'll pass more convergence step by step on the
scenarios going forward and why we see more. And on your question on the dividend, I would say and Finance. Dividend statement is, I think, never 1 year just exercise and then we will, of course, have to factor what is expected in 2021. Executive Officer. Where we stand up, we said effectively in practice in terms of buffer, we've not factored the additional benefit and we'll check and Chief Executive Officer.
What you mean that it could be relatively substantial. So I'm sorry that it's too early to answer that Kind of question I cannot answer at this stage and also of course, some of the supervisors will look at it. So unfortunately, We will have to wait for probably our time to have more clarity on all this. And regarding the first
Yes, if we took into account The guidance of the EA, taking a forward looking approach also that applying For Verint, so before the moratorium and delays as long as they are extended Equity Officer, to clients due to the COVID crisis. And to your question on coordinated approach, No, there is, I think, at this stage applying the guidelines from the regulators. And I think a lot of banks will refine scenarios in Equity. 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. Executive Officer. Is there any more questions?
We have no further questions. I'll now pass the conference back to our presenters for closing remarks.
Executive Officer. Thank you very much for attending the call, and have a nice day. Thank you.
Executive Officer. Ladies and gentlemen, thank you all for your participation. You may now disconnect.