Ladies and gentlemen, welcome to the Société Générale conference call. Frédéric Oudéa, Chief Executive Officer, and William Kadouch-Chassaing, Chief Financial Officer, will present the group's fourth quarter and full year 2018 results. You will hear music until the presentation begins.
Okay, great. Good afternoon to all. Thanks for participating to this presentation of our yearly results. As usual, we have a team in Paris with members of our general management who will also participate to the Q&A session. Let me perhaps start with the first slide, page three. Just first of all, to highlight that this first-year result is an opportunity to see what we achieved and effectively give you, I think, a lot of visibility for the next two years. We'll come back to that more in detail also with, of course, our CFO, William Kadouch. In a nutshell, first of all, when we look at the performances of the businesses, we consider we have delivered in most of our growth initiatives. We'll come back to that.
With a few limited exceptions, of course, in particular, the capital markets, and that's an area where we want to effectively improve. Knowing that after the Q4 results of other banks, you've seen that the disappointing performance was probably better and actually showed a good quality of risk monitoring. Nevertheless, we want to improve. Second, in terms of efficiency plan, we are on track, but we'll come back to that. One of the objectives is really to enhance the cost-cutting, in particular in GBIS. We'll give more detail. Cost of risk is absolutely in line with our guidance on the low range. It's very important, because it gives comfort in terms of asset quality, and we are also giving a precise guidance for the next two years on the cost of risk. Let me highlight one thing, which is very important, which is the litigation.
You will remember that we have put behind us the financial uncertainty behind the three litigations that we had opened at the beginning of last year. We have currently no litigation which can, in our view, distort in any way the P&L in the coming two to three years. In particular, let me just take the opportunity to mention that we have received no demand from the European Commission regarding the survey they just announced launching on the trading of sovereign bonds, and we are not part of these, apparently, eight banks. Again, it should give you a lot of comfort in terms of P&L generation for the next two years. Last thing, in terms of delivery, we have launched very efficiently. You will see more detail also, our refocusing plan. We are selling assets. We are selling good assets at good prices, as William will elaborate.
That's for, I would say, 2018. When I look now going forward for the next two years, which is a pretty short-term horizon. First of all, we'll elaborate a bit later, but I really believe the environment has changed mid-2018. Effectively, with a slower growth perspective in particular, and in particular more in 2020 actually than 2019, we have taken lower interest rate assumptions, which weighed in particular on the French retail, but we'll come back to that. More importantly, structurally, again, when we look at our businesses, where we did not deliver, it is in the capital markets. You will see that on the financing side, things have gone, on the contrary, very well. We are addressing that. We have gone through a full review of the portfolio of activity, and we want effectively to refocus on the fixed income.
When I say fixed income, it's credit rate and commodity. When I say this, it's taking into account not only the environment, and it's not a reaction just to the fourth quarter. It's a reaction to the fact that when we see now the next five years, the way the market is evolving with the regulation in Europe, whether it's more capital demand, whether it's MiFID, if we don't act, meet an acceptable return on normative equity. That's why we will refocus and concentrate the capital allocation to our areas of excellence, as well as having an efficiency plan, an additional one of EUR 500 million at the horizon of 2020 in this division. Also, we have a clear target on the capital.
You will see the granularity of our forecast for the next two years with, on one hand, I would say, more visibility on things such as what we have called TRIM. It's actually the sum of the evolution that we can expect today in the next two years in terms of modeling, following all kind of audit, et cetera, from the SSM. It's not just the TRIM as such, and we are giving a range between 30% and 50%. On the back of that, we are also in order to complete the trajectory and give a lot of comfort, and again, you will see the detail. We have also decided to raise the target for the disposal program. As we've said, we have been able to sell well, and we increase our target range from 50 to 60 basis points to 80, 90 basis points.
Hence, you should have a lot of comfort in our ability to finish the trajectory of meeting our target, which does not change, which is 12%. That's what I wanted to say in a nutshell, and now I will turn the floor for more detail to William.
Thank you, Frédéric. It's a pleasure to meet you in person this time around, rather than just on the phone. The presentation which you have is organized around three topics. As you would expect, first topic is Q4 and full-year results. Second topic is reflecting upon 2018, where do we think we are in sync with the plan Transform to Grow, and where do we think we have more challenges or work to do? Thirdly, what are the adaptation to our assumptions and execution we will articulate to you. Moving on to the first section, I'm on page five. Here, you have the highlight for Q4. The first thing I would like to stress is obviously the fact that we have an underlying net income for the quarter, standing at EUR 744 million. In published terms, this is EUR 624 million.
The return on tangible equity for the quarter is close to 6% for the year. The published result is close to 3.9%, underlying result 4.5%. The published result is up quite significantly. We had one-offs last year. The underlying return is at 9.7%, so on track with the plan as far as 2018 is concerned. For the quarter, what you find on this page is very consistent with what we already articulated to you and the market a few weeks ago. It's a contrasted performance across businesses. Very strong in International Banking and Financial Services. Very strong in some areas of either French retail banking or Global Banking, mainly Financing & Advisory in the latter. In line overall in French retail, very disappointing on capital markets. If I start with International Retail Banking and Financial Services, you can see revenues are up close to 10% in International Retail.
This is very broad-based across the board. We have a very good volume growth as well as revenue developments in our retail geographies. Insurance and financial services, you find here 2.2%. Adjusted for the residual value impact on ALD, you would find 7%. It's very strong on the gross margin for ALD. X residual value, 5% on insurance, close to 10% in equipment finance for the quarter. Overall, this is consistent with also strong return on equity, respectively for the quarter, 18% on retail, a little more than 20% on insurance and financial services. You have also the stats for the year. French retail banking, we have a decrease in revenues for the quarter of 5%. Let me stress, though, that for the whole year, we are well within our guidance. We had set forth guidance of -1% to -2% in terms of revenue decrease for the year.
We end up at 1.8%. In fact, we will discuss this later, we have good commercial dynamics, good volumes on the credit side, good fee production. The fee increase for the year is 1.4%, for the quarter is 0.5%, particularly strong on services fee, less strong, obviously, on financial fees. The drawback is obviously on the NIM, especially on the deposit margin. I'm sure we will discuss it. Overall, the return on equity for French retail stand at 10% for the quarter, or close to 10%, 9.9%, and about 11% for the year. Moving on to Global Banking and Investor Solutions, you see a disappointing revenue base here. Very consistent with what we had said. In fact, when you look at Financing & Advisory, we're up 19%, 19, this quarter compared to last year. For the whole year, it's 8% increase in that business.
Quite strong, including compared to some of the peers who have already published their results in Europe. Let me remember, this accounts for a good third of the global banking division. Nevertheless, in capital markets, we have the decrease very much in line with what we expressed in our press release on the 17th of January, -19% for Q4 relative to Q4 of the same period of last year, -8% for the year, compared to the -20% and -8% that we had announced. Corporate Center, let me just comment the -EUR 288 million. This is the number you should compare with our guidance of minus EUR 400 million underlying GOI for the year. As we already said in Q3, we were expecting that we would beat the guidance, which is what we've done. I won't comment all the details on the next pages. You have the numbers.
Moving on, page six, to the French retail banking results, let me stress the numbers on commercial activities, because this also spans onto next year in terms of commercial dynamics. Still very strong on client acquisition for Boursorama. For the year, we had 460,000 new clients. Client base of Boursorama stands now at 1.7 million. Remember, we had initially an objective to reach 2 million by the end of 2020. Clearly, we will be done as early as 2019. Home consumer credit production is very strong, double-digits. Is, as well, the production on corporate loans. The corporate loans outstanding are up 5% in the year, and the retail client credit outstanding are up 3% for the year. Bank insurance has high single-digit increase in P&C and protection, and still an increase despite the last quarter with, obviously, less temptation to invest for our clients.
An increase in the life insurance. Over the year, the private banking in France has a net new money up EUR 3.3 billion, and the client base grows 3%. This is clearly the good part of the story here. The less so good part is the fact that the net interest margin is down in the quarter 8%, down for the year -5%. Very focused on the fact that we have an important buffer of deposits, which we invest in the low end of the curve, i.e., still negative rates, and that obviously has increased in the past quarters given the temptation of people to invest rather in sight deposits with a zero rate rather than in mutual funds. Let me stress, finally, on the cost side, we had said for the year that we would be investing very much in transformation. We are on track.
We said that cost would go up a little less than 3%. They are up 2.6%, within the guidance. International Retail Banking and Financial Services results, I've already commented pretty much that the growth here has been broad-based. This growth is associated with positive jaws, and hence, a very strong increase in profitability, both relative to last year, as well as in terms of profitability ratio. Would like just to highlight, if I focus on the International Retail, that in the European area, including Commerzbank, Romania, and our consumer credit activities across Western Europe, revenues are up at constant perimeter and change 8% for the year.
Russia is up 10%, Africa is up 10%. If I move on to the financial services, ALD for the full year, very strong, +10% in the fleet, 7% for the gross margin increase, insurance +5%, as I said, equipment finance +3%. Global Banking and Investor Solutions results. As I said, this is more mixed, obviously a disappointment on the capital market relative to what we had expected earlier in the year. Relative to last year, you can see that the overall revenue of the division are down -2% at constant perimeter and foreign exchange for the year. They're obviously down a little further for the quarter. Already commented on it. Still very strong, as I said, on Financing & Advisory, and we continue to see the momentum in the building up of our books and on the capital markets.
Still, despite the disappointment, let me stress the fact that we did not incur a loss in the market division for the quarter. We have a small profit and not satisfactory return, but we did not incur a loss at all. Operating expenses are up 2%, negative jaws. That explains the disappointing less than 8% return for the year in this division and the fact that we want to act upon it beyond the structural view we have on the business. Corporate Center, I've already commented. I will leave it, if you don't mind, to the questions, but we are very much in line. I tell you, we beat the guidance. Let me comment, page 10, on the balance sheet and funding, starting with the right-hand side of the page.
At the extreme right, you can see the pro forma ratio of 11.5%, pro forma for a 50% take-up in the option of the scrip dividend that our board has decided to propose to the general assembly in May, and pro forma as well, the already signed and announced and accounted for, at least for the IFRS 5 part, as you know, disposals as well as acquisitions. Overall, the pro forma ratio stands at 11.5%. When we issued our press release back in January, we said it would be between 11.4% and 11.6%. It ends up at pretty much in the middle. As you can see, we have obviously, consistent with what we have said, a very strong increase in the market risk RWA for the quarter, which obviously is something we are happy to explain, stemming mainly from technical factors. We didn't breach any of our risk limits.
This is very important to stress. Including our stress tests did not provide numbers that means we had a problem with the overall risk assessment and management of the division. Yet, there are mechanical factors. We had breaches of VaR. We had the mechanical impact on the calculation of the RWA associated to Stressed VaR. We would expect that in more normal conditions, some of it would reverse through 2019. Let me stress as well on this page, moving on to the left-hand side, the fact that we are TLAC and MREL compliant with quite a margin on TLAC. As early as now, the requirement by 2019 will stand at 19.5%. We end up the year at 22.9%, which means that it is all in subordinated debt. It's not a requirement. The requirement allows for 2.5% senior. In fact, we're already compliant with all junior debt.
MREL, we are among the 50% of European banks compliant from the beginning. As far as this ratio is concerned, our leverage ratio increases from 4.1% to 4.3% in the quarter. Nothing to comment on liquidity ratios. They are comfortably above 100%. The buffer stands at EUR 372 billion. I will not comment page 11. Leave it to the questions, if you have. I would like now to move to the second part, which is reflecting upon 2018. We announced our trajectory through 2020 back November 2017. Clearly, 2018 is the first year out of three years of execution in our plan. The first thing I would like to discuss with you is where do we stand in terms of revenues. We had articulated during our plan that we believe strongly we are a bank that is able, across its various pillars, to deliver effective growth.
In fact, I think we can comment on it. There are many areas where we have launched growth initiatives that works very well, sometimes above plan. There are two areas which are significant, obviously, in the P&L, where we have disappointment. As Frédéric already said, Global Markets is one. The deposits, obviously, and the NIM on deposits is two. Less relevant is the disappointment we have relative to our international private banking activities. Across the board, however, I already commented upon many of those. Boursorama, the wealthy and mass affluent clients in France, consumer credit, professional corporate in France. I commented upon the volumes, but I should have also commented upon the client base, which does increase on the corporate and professional side. These are real growth areas for us. I already commented on the geographies and financial services in IBFS.
We continue to think that it will materialize in the next quarters. Global Banking and Investor Solutions, very strong on Financing & Advisory. Let me pick global transaction banking. This is an area where we believe we do not have our fair share because of maybe not focusing on it enough in the past years. The increase in revenues in that division is +15% for the year. French private banking and ETF, I have already commented at least the first. If I move to page 14, the second commitment we had made is on the cost efficiency. Clearly, we were of the mind that this cost efficiency plan was primarily meant to compensate also for some structural investments we would make.
Our view remains that after 2020, there will be more to come in terms of efficiencies when we have, for example, fully digitized all the processes to take one example. What you can see on this page, especially on the right-hand side, which I am sure is more of interest to you, is that we are on track, basically. We are sometimes even a little in advance in French Retail, especially turning on to the back office disclosures and the automation of key processes. I mean, we leave it to question. This plan is based on a lot of granular initiatives. Some are more structuring. I talked about the French Retail, you know well the transformation we have embarked into. Another thing I would like to stress is what we do on technology.
The fact that we were amongst the very first to push strong on cloud adoptions, as well as open source, allows us, of course, to decommission some of the operating systems or apps, as well as to decrease the cost of usage of the bandwidth. Page 15, very important thing for us, and as Frédéric said, we think this is an area where we achieve our goals. This is risk management, and particularly on the credit side. We have what we would qualify as reasonably low cost of risk at 21 basis points for the year. You may remember in the previous quarter, we had discussed about our exposures, especially in the geographical exposures, but our sector exposures. We also explained how we manage the non-investment grade segments, and we are happy to discuss this. But clearly, this translates into this cost of risk that is very satisfactory.
Let me remind you that the initial target we had set forth was 25-30. We moved it down to 20-25. We end up the year at 21. We still think that there will be normalization in the cost of risk. So we expect for next year 25-30 basis points. We do not hope that we will reach that level, but we expect at least it be embedded in our business plan. I would like to point your attention to the non-performing loans. We continue to have a very active policy of decreasing those non-performing loans. They are down to 3.6. And last, on 2018, I think it is fair to say that we are on track, if not, in fact, in advance relative to our Transform to Grow plan and our M&A plan.
You remember, this is above in the page that we had said we would sell assets for the equivalent of in between 50 and 60 basis points of capital. We have announced that we have concluded the sale for the equivalent of 37 basis points. So this is more than half of the plan already achieved. We give you some more data this time around because we know this is the questions you have, i.e., the net income impact, both on the disposals compared to the GOI we expect on the acquisition of Equity Markets and Commodities. Happy to discuss it, but you can see that this is an okay rationale for a rotation economically. And more importantly, we give you some indication as to the multiples that we have concluded those sales at. You see that they range from 1.2x to a hefty 1.5x book.
We conclude reasonably well these disposals. Now, as Frédéric said, there are headwinds. One headwind we mentioned on the economic environment. And there are also some underperformance in some of the businesses, which leads us to adapt our execution and adapt some of our assumptions. There are really three things we want to discuss here. One is a new rate assumption and the implication on our revenues going forward. Two is the Global Banking and Investor Solutions division reshaping, and both on the strategy as well as on the deleveraging and cost plan. And three, the capital journey towards creating a buffer above our 12% objective. The first one is very self-explanatory. We give you here our new assumptions for the NIM across the group.
We calculate, we consider that the impact for the revenues of the group by 2020 relative to our previous plan, so I'm not talking 2018, 2020, but relative to our previous plan, is in the area of EUR 500 million. Strategy in global markets is clearly something that I'm sure we will discuss with you, but something that we are very focused on. This will be done, and we're happy to provide you with as many details as we can. At this stage, it's focused on three key elements. One, we will refocus some franchises where we consider we don't have enough scale, maybe not enough competitive advantage, and where we do think that we won't achieve the profitability that we want consistently with our objectives. This is mainly revolving around the FIC franchises.
We will discuss it more in detail. It can imply things such as flow credit, for example, but also in other areas. We can also talk about other areas such as the legacy prop trading or the cash equity where obviously we could do some moves. Second, we want to concentrate more our client portfolio, and it is clear that there are costs associated with operating with some Tier 2 accounts, sometimes costs associated as well with onboarding too many accounts which will not generate enough revenues. Third, we want to concentrate on key areas where we have leadership, especially on equity derivatives. As we already said, this is consistent with our recent acquisition. The conclusion of this refocusing would yield an EUR 8 billion diverging impact through 2020, starting from 2019 onwards in the execution. This is a very consistent effort.
Let me remind you that the RWA for our market activities are in the area of EUR 70 billion. This is more than 10%, to which we will add the EUR 2 billion in the other areas. The cost base of GBIS as a whole will also be an area of work for us in the next quarters. Page 20, you have here what we aim for. We aim for a decrease in the cost base from 2016 pro forma, and clearly from 2018. The pro forma number for the cost of the GBIS division are EUR 7.3, as we put it. We already decreased it slightly to EUR 7.2, and despite the EMC acquisition, we aim for circa EUR 6.8. That is to compare with what we had articulated to you back in November 2017, a stabilization of cost.
We clearly aim with this EUR 500 million cost plan to decreasing the base. French retail banking, I would say we will comment on it more in details in a deep dive in Q2, so I will not go into too much details. We're not changing dramatically the perspective here. Obviously, we have already updated you on the rates impact. Most of the EUR 500 I mentioned, let's call it two-third, are within the French retail banking. One thing I would like to point you to is the first line. We're working in an environment that is also tougher on commissions with the yellow jackets impacts translating into the French banking industry committing to some measures. This will have an impact on our revenues of about EUR 70 million from 2019.
International retail and financial services, we continue to see very good growth associated with positive jaws and good momentum in terms of earnings creation. The only thing I would say on this page is that in the streamlining of our capital distribution to the businesses, discriminating more across businesses, this is clearly an area that we will protect going forward. The outlook, which we have on page 23. Group RoTE is now forecasted revised down from the 11.5% we had initially set forth to 9.10%. Downward revision for French retail banking, 11.5%-12.5%. If you input what I've said on rates as well as the yellow jackets commission impact, you pretty much get from the 14.5% we had. Let me stress that we don't abandon our ambitions in other areas of revenues and cost.
We increase the target for International Banking and Financial Services from 17%-18%, consistently with the momentum we see. Global Banking and Investor Solutions was 14%, moving down to 11.5%-12%. Obviously, we consider we have a lag in revenues, we will have some revenue growth, obviously, in the next years in our plan, although we have factored in some lags to be still in the books. Obviously, we have the benefit of the cost plan. The rest doesn't change. Target CET1, 12%, and the dividend policy doesn't change. Let me stress now the journey on the capital. Starting with the idea that we don't change the target of 12% CET1. We continue to think, and this is very consistent with the discussions we have with our supervisors, that 12% is the right level to steer Société Générale.
However, we want to make sure that everyone understand that we're taking the measures that will allow us to be at a comfortable buffer above the 12%, that there is no surprises. How do we do that? You have it, page 24, articulated. First thing, we have a growth in revenues in mind. However, we want to be much more focused, and we will decrease overall RWA growth for the next years from an initial 3% we had in the plan every year, compound rate of growth, to 2%. That is an economy of about 30 basis point of capital relative to the previous plan. We will have an impact of, obviously, of this consumption of -50 relative to -80 initially forecasted. Global markets RWA, I already commented on it. It's 8 billion equaling to about +25 basis point impact, on the contrary.
There are additional RWA optimization for at least 10-20 basis point. That includes, as well, some additional originate to distribute we want to do in the CIB, and I will comment with Séverin if you have questions, but also some measures we're taking to be more agile on the balance sheet. We have some regulatory headwinds, which we wanted to communicate about. One is a question some of you asked in the previous quarter, i.e., the impact on IFRS 16. We said it would be not material. It's actually not material. We expect -5 basis point starting from Q1. On TRIM, let me say, we say it's TRIM, but it's actually the whole modeling exercise, including TRIM, that we refer to on this page. We expect it to be between 30 and 50 basis point, through 2020, with the main impact in 2019.
The disposals, we raised the bar from 50 to 60 to 80 to 90 basis points, meaning we're already at half of it, as we speak. We have two years to go for the second half. When you look at page 25, it is clear that if you add up all the metrics I mentioned to you, with earnings, which obviously are more consistent with the new target, i.e., a little revised down relative to the previous plan. You will find a 25 basis points around organic capital generation, to which you would add the various measures I talked about, deleveraging, RWA optimization, more M&A. You have an employee share scheme that will also yield some capital. Less the headwinds I mentioned, we should be between 2.3% and 2.7% by the end of 2020, so pretty much well above the 12% target.
Thank you, William. Just perhaps next slide to reflect that we are increasing the net assets value per share this year. The EPS is stable and the dividend too. If I move to the last slide, just to really highlight again, for the next two years, which is a relatively, as I said, short-term horizon, five main objectives. Grow. We will grow the revenues at a lower rate than expected, because of what William expected, but we will grow the revenues of the group. The transformation, the digital side is absolutely crucial. I remain absolutely convinced that it is the number 1 operational topic for any bank in Europe. We are happy with the progress that we make step by step, but it's going to be, of course, a long journey, but we are convinced of the long-term benefit of what we are doing. Third, the cost.
We have, again, highlighted that we are increasing our cost plan, with EUR 500 million on top of the EUR 1.1 billion. The refocusing in order to build a group which will be more compact, simpler, and concentrating on the core geographies and the core businesses. Very confident to complete the journey with assets, which again, where we've seen signs of interest, so there's, in our view, no issue. Fifth, last but not least, again, I would like to insist on this issue of responsibility in the banking sector. 2018 has been a year during which we've seen the emergence of new issues. From that point of view, we are starting this two-year journey with a clean sheet and no issue, touch wood, as I've said. What we try to do is that the way we do business today will not trigger, of course, an issue in the coming years.
I think we've put behind us, where there were lacks in the culture, in particular in CIB. When you look back, at the end of the day, on the litigation of Société Générale, we will have less litigation than most, let's face it. We will have paid less than most. Very concentrated in CIB. We did not have any big commercial issues, so very concentrated in CIB. I think that what we've been doing in the last 10 years is a change of culture, which I think is fundamentally more robust. If I may say, of course, also on the other element of social responsibility, we are also in line with our climate change ambition, with 69% of our plan of EUR 100 billion of financing to the renewal, which is achieved.
This is also something which is more and more important, to which we are very committed. That's what we wanted to say for the presentation. Now the floor is yours for Q&As.
Ladies first.
Yes, good afternoon. Thanks for the presentation. I have two questions. First of all, just wanted to go back to your comment around the EUR 500 million impact from rates. Just to understand a little bit, I guess this is mostly French retail, but just wanted to understand if you have made some assumptions, on the impact of global markets with GBIS around that issue. What if rates don't go up, as per your slide on the pickup in OAT and EURIBOR, what would that mean for your 2020 targets, in terms of revenues? Second thing is just to understand also the impact of disposals, which are now a little bit bigger. Do you expect much impact from those RWA reduction, but also from the optimization that you have in GBIS?
Obviously, there's a EUR 500 million cost savings, but any color you can give us as well on the EUR 8 billion reduction of RWAs and any earnings related to that would be helpful. Thank you.
Perhaps, first, William, on the rates.
Yeah.
Then, Séverin, on the impact of the EUR 8 billion on the revenues for GBIS. Of course, it's different. The EUR 8 billion reduction, and then, of course, what we call the disposal is something different than the sale of business, to make it clear. William.
On the assumption, the number 500, obviously, we start with the new rate assumption, which we have set forth here. We actually do some sensitivities because the forwards you could see in the market are a bit below these rate assumptions, and the forwards are somewhat a volatile metric, so we take some sensitivity around it. First of all, you're right, this is more than two-thirds revolving around the French retail. The rest of the impact would be mostly in the GBIS, less than 20% of the total, and a bit in the IBFS, but not very significant. Why is that? It's because fundamentally, you have to take the part of our deposits, which are euro-denominated, and this would be the ones, 70% of our EUR 400 billion deposits are euro-denominated. You have to take the fixed part.
In order to have the biggest impact in a negative rate environment, you have to focus on those who are very short-term. Especially in the recent year, as we already explained, we have created a buffer, what we call a volatile buffer, for putting aside a significant portion of our deposits, because we felt the growth of these deposits was totally due to the fact that we were in negative rate environment, and so we will not expect that these deposits would be sustainable should the rates pick up. This is mainly this portion, and a bit of what you have in GBIS and in the transaction banking cash activities in transaction banking. The bulk is in French retail. We have already taken some sensitivity. Yes, there is always a risk that it goes even further down.
I think relative to the previous plan, we're quite comfortable that we are more cautious in this calculation.
Séverin, GBIS?
Yes. Thank you for the question. The total deleveraging plan for GBIS, as you know, is EUR 10 billion, of which eight are forecast on our global market activity. The remaining EUR 2 billion will be delivered in the financing activity, thanks to a higher distribution ratio. Coming on the market activity, we have reviewed in the detail, and at a very granular level, the projected capital allocation and the projected return on capital of all our activities in the global market. This review will allow us really to reduce by EUR 8 billion the capital allocated to global markets. Doing that, we will stop or reduce the capital allocation to the lowest profitable, of course, activities. This will cover mainly the fixed income activity, as mentioned earlier by William, but in all the three main activities, I mention rates, in credit, and in commodities.
We will have two dimensions. First of all, on some product, and that where we consider that there is no ability for us to recover the return, we will reduce dramatically the capital allocated. On client side also, because we have revisited all our client return and profitability, and in some cases, we will be more selective in term of client capital allocation. This will allow us to deliver this EUR 8 billion. Importantly to say, this EUR 8 billion deleveraging is not counting any market parameter recovery or normalization, as you observed at the end of last year, we had an increase in the risk-weighted assets allocated to our global capital market activity.
We can comment on that. Even if there is a normalization of the parameter, it will be on top of this EUR 8 billion. For us, it's a low return activities which will be first, it will cover also, which is under review, for example, our prop trading activity, which is, as you know, not profitable for the time being, it is under review also. All that will need this. In terms of revenue, the current level of revenue, it will be the lowest return. The order of magnitude we have at this stage of the study is around EUR 200 million in terms of loss of NBI.
I think next question.
Jean-Francois Neuez from Goldman Sachs. I wanted to ask again on the EUR 500 million revenue impact from the rates assumption. Having looked in the past at the disclosure around sensitivity of interest rate in annual report, et cetera, I know they are theoretical, but the impact here compared to the change in the interest rate outlook seem quite a lot more than sensitivity reported in those documents. I just wanted to understand whether you've essentially taken margins compared to this, or otherwise, could you please essentially reconcile the differences and how for us to understand if things were to change again? Secondly, on the investment bank, just more generally, since the early 2010s or a bit before, European banks in general, French banks also, they've done several cycles of adaptations, starting with the dollar, et cetera.
This has generally led to returns improvement that have not yielded all of the expected benefits because in the meantime, European banks have lost lots of share to U.S. banks. I just wanted to understand what assumptions you've taken for share and for fee pool growth over the next coming few years. I read these comments this morning that you didn't expect mergers in Europe of any size in the coming years. I almost wonder at this stage, given all of these adaptation plans that have been done in a row by many banks, in a sense, why not almost now?
Okay. Perhaps, on the rate, I don't think there is a difference.
It is always difficult to comment relative to data points, or specific you have in mind, so we can discuss it later. Fundamentally, we have given an idea of what is the impact on our revenue in a year of a plus or minus 10 basis point, especially in the short-term end of the curve, which is more relevant to us to calculate the impact. Until recently, we were saying was about EUR 40 million for the French retail, about EUR 50 million for the whole group. We moved it up a little because there was an increase in the site deposits. Now it is EUR 50 for French retail and EUR 60 for the whole group, which is in a year impact for ± 10. You should easily calculate now.
Another way to calculate it, and to help you on that, if you consider we have a volatile deposit buffer of about 40 basis points, and we take the difference in the rate assumption we have here, especially again, on the short-term end of the curve, it is easy to multiply, and give you the impact in 2019 and 2020 should the rates be where they are.
Séverin, can you comment on our evolution of market share?
Yes, thank you for this question, Jean-François. If you just had looked on the fourth quarter results, which is interesting in my view, in term of evolution of our market share in that quarter only, which is not structural because it's only one quarter. We have been in a position to grow by 19%, for example, our SNA NBI, in a market which was more or less decreasing if you compare with the competition. In the transaction banking area, we have grown last year by 16%, which is much bigger and faster than the market growth. Even if we take the equity-related franchise on the last quarter, you saw probably that our performance is not among the worst among the competition. What I mean saying that is even if the global market is not growing at a fast speed, we have opportunities.
If we are investing and focusing our capital allocation to the area where we are a leading position, we can win market share. Exactly what I want to do now for GBIS. When we are thinking about deleveraging, we will deleverage on products and activities where we consider we have no competitive advantage. It doesn't mean we will not be able to distribute that product, that we could distribute that product as we self-distribute our capability. On the other hand, when we have this competitive advantage, we can grow and gain market share. Exactly the sense or the meaning of what we are doing.
Simultaneously, and very important in my mind, we are building, we are developing our SG Markets Platform, which is a marketplace for financial services for business clients, where we'll expose to the market in Europe and to our clients, all our internal capabilities in term of product and services, but also third-party capabilities. It's a way for me to answer your question. We can win market share where we are strong, the rest we will distribute third-party products.
Let me take the time to elaborate on the last topic on the consolidation. What I've said exactly is I don't see actually any consolidation in the next two years. Let me explain why. First of all, I think things have changed compared with 12 or 15 months ago. Let's just go back 12, 15 months ago. There was politically, I would say, probably more optimism on Europe, the momentum, et cetera. 12 months later, it is fair to say, I think that Europe is in a situation which is more complex. When I just try to plug in the next two years what can happen, probably it might take, and I don't even talk about the Brexit, but it might take up to the end of the year just to have maybe the new Commission established.
It means that putting aside all the trends toward the current fragmentation that we see, before we have an agenda for this new commission, it will take time. Before we have visibility on things, just as the regulatory implementation of Basel, it will take time. First of all, if I may say, we have to really try to change the mindset from a situation where there is fragmentation and still the tendency to have fragmentation, and check that, at the end of the day, the way I describe it, if I may say, European banking is a little bit like a house which has been started to be built, which is half built, but again, for the time being, there is no more work on it.
You have to have the political, if I may say, energy to complete the job, knowing that today we are paying the cost of the banking union, but we don't get the benefit. When I say we are paying the cost, the EUR 430 million of net of tax that we pay to the SRF, for what in practice, in terms of benefit? I think it will take time. In order to think about things like consolidation, you need to have more visibility. You need to have more willingness to achieve a kind of strategic landscape, and it will take probably, let's be realistic, the next two years. Beyond, is it a solution?
I mean by this, I think that when I look at the potential value creation that we can achieve by just completing this roadmap, first of all, there is much more there in our hands than looking at other options. Really, the priority should be that. Address the business model, complete the refocusing, transform the French retail further, which is not an issue of consolidation. When you talk about fixed income, will the situation on the fixed income on certain activities be resolved through consolidation? I have my doubt. There is a need, first, I think, and for most banks, to still improve structurally their profitability.
I hope, but it's, I would say more a hope than uncertainty, I've always said that again, at some point, with more visibility, the political conditions will be there to effectively complete this banking landscape, which is still too fragmented, which is not consistent from one regulator to the other. I hope to have even then more efficiency. What we are saying, basically, is that if we could have had the hope 12 months ago that the energy could have been on this, just on the Brexit, look at the time which is fundamentally spent on the Brexit, I could say, mid-2019, maybe the first topic will not be to complete the banking union. You see what I mean? There is delay there. Again, I hope it will be completed, but I'm not sure. For us, it can mean different strategy.
It could mean more Europe, less Europe, the percentage of the business model. I think it's fair to say the jury has to remain open. Let's see, probably we'll have more visibility in the next two years. I think that we will have then more energy available if we achieve that, and it's a strong commitment to then think about something different. That's why I don't think personally a lot will happen.
Good afternoon, Jean-Pierre Lambert, KBW. Three questions. The first one is on the execution of the plan. What are the risks you're seeing, and what is the corporate governance you have to manage the project in terms of resources? Because I see you have a turnover in terms of management level. Second question is, you have a ROE target, which you indicated this is in favorable economic conditions, let's say, apart from rates, no slowdown, no recession. What is the over the cycle ROE you have in mind? Third question is, the equity derivatives, do you see a normalization in terms of trading? Some of your peers have indicated that. Do you share that view? Thank you.
I will let Séverin explain how we want to effectively organize and adjust the management change which took place. We are factoring a slowdown. Let's be clear. As I said, to a certain extent, we are getting ready for an acceleration of the slowdown in 2020. Our economies remain relatively positive for 2019. Knowing that, yes, there is a slowdown in Germany. Yes, you saw the forecast for Italy, the most recent one, that there is a technical recession for the last two quarters of this year, and now it's 0.2 for the commission. We remain actually more positive for France because consumption will be probably supporting growth. 2020, our economies have a slowdown in the U.S., not a recession, it's fair to say, but a slowdown in the U.S., more significant.
Slowdown in China, slight slowdown in Germany still, sluggish growth in Italy, a slight slowdown in France. Yes, it's a slowdown that we have input in our process. For example, the cost of risk, really, we have highlighted the quality of the portfolio. When we see today the number five, it's extraordinarily low, but we are factoring even the IFRS nine elements. That's why we are moving from 25, 30 basis points this in 2019, we stick to the 35, 40 basis points for 2020. We take that into account, in the cost of risk. Séverin, can you explain perhaps how we are going to execute, with which team?
Yes. Thank you. This is referring to the new appointments we discussed this morning also. As you saw, we have appointed Jean-François Mazaud, the former head of our wealth management and private banking activity as group transformation head. His main mission is to deliver, first of all, our savings plan, our cost-reduction plan. This cost-reduction plan is encompassing not only direct costs on allocated costs to GBIS, but also part of central costs. There is also a group-wide initiative for implementation, and Jean-François will be in charge of that, reporting directly to Gianni, to me, and Frédéric Dubret. Of course, every action, and it's a very detailed plan, which will, under definition, and we share in more detail with you a bit later on and with the union in France for the French part.
In every business unit, sorry, and service unit, Philippe will have its own part, and he will have own delivery capabilities. At the group level, to secure the implementation and the delivery of this plan, we have appointed a very high-level management team, and it will be supported by the group function also to deliver that plan. It's a group-wide, if I may say, initiative.
Perhaps you were referring, you can comment on the change of the head of market.
Yes. Frank Drouet, who has been the head of our market activity for 2.5 years, and he has spent 29 years with the company, will pursue new opportunities. He's replaced from this morning by Jean-François Grégoire. Jean-François Grégoire, who has spent 22 years within the bank in the global market activities, and he was, until yesterday, Deputy Chief Risk Officer. Jean-François background is trading mainly and equity derivative and structured products. Jean-François spent a lot of his time in Asia. He was the head of liquidity derivative product in Japan, then he had the trading activity in Asia, and he became head of trading in the U.S. afterwards, before becoming the global head of trading at the group level. Three years ago, he joined the risk division as the Deputy CEO.
Jean-François has a very big value in terms of trading, exotic trading, and equity derivative trading.
On the back of that, he has also, I think, with three, four years spent in risk, a perfect knowledge of what the regulators are expecting. I think that we are changing, adjusting the strategy, and really trying to optimize the capital allocation, taking into account the next five years, if you wish, and the request. That's, I think, the adequate profile to run that, when Frank was probably more a guy of development of activities.
On the activity, the recovery normalization of trading?
If you wish, the market conditions are back to normal, I would say. What I think I would like to say on equity trading, in particular, a strong comfort I got is precisely to look at how things have we've managed the fourth quarter. Compared with some others, we did not, as William mentioned, experience any problem with one big loss, one product. It gives me a lot of comfort. Apparently, if others start to review their own activity, and we saw in the last two to three years, pricing, et cetera, which I think it will be positive also for the equity derivatives and structured products, fundamentally. These kind of events help also to have the industry making progress.
Flora Bocahut from Deutsche Bank. The first question is regarding revenues. Could you shed some more light on the revenue assumptions that you are now making, especially in French retail and in GBIS? Obviously, that is where I suppose you have cut your revenue outlook versus the initial expectations. To get to your 9%-10% RoTE, what assumptions have you embedded in your plan regarding revenue growth for these divisions? Why are you not being more transparent already in the presentation this morning on such targets? The second question is regarding the regulatory impact that you expect, the 30-50 basis points in the quarter one. You mentioned TRIM and other headwinds. Could you explain what other headwinds you have in mind? One last question regarding RWA inflation.
Obviously, there was some in market risk, also in credit risk, which seems to be driven by the corporate center. Just wanted to understand why. Thank you.
Perhaps Philippe Aymerich , on the French retail revenue outlook, Séverin, in April, we will update you on the French retail and give you more figures, on the two businesses. Then William.
Okay. Philippe, Aymerich, thank you for the question. Maybe first, when you look at the evolution between 2018 and 2017, to understand the evolution of the NBI, basically, the evolution is the -EUR 150 million. There are two important negative components. The first one, as mentioned, which is close to EUR 190 million, is the impact of interest rates, especially on the margin on deposits. The second one is that we have approximately EUR 50 million less of fees related to renegotiation, anticipating payments, and this kind of thing. You know that we have a lot of renegotiation in 2017, now we have stabilized this momentum. Coming back to the first one, what you can see is that there is definitely a slowdown in the decrease of the margin on deposits.
If we compare the first quarter of 2018 versus the first quarter of 2017, this margin on deposits was - 9%. When we compare quarter two versus quarter two, it's - 7%. For the last part of the year, quarter three and four, it's - 6% and - 5%. We have a slowdown in this dynamic, which helps us to give a positive outlook for next year. Same thing regarding the impact of repayments and renegotiations compared to 2017. We are not going to have this kind of movement. Again, we see that as a stabilization. Overall, we have also, as mentioned by Julien, a strong momentum in fees, notably on the services, which is very important because it does reflect the day-to-day work with our clients. It also reflects the increase of the number of clients, notably in the Groupama.
That's also going to fuel a positive momentum for next year. Overall, as mentioned, we have stated that an improving outlook for revenues is expected.
Séverin on the GBIS?
On GBIS, yeah. We gave you a guidance on the return on normative equity for GBIS between 11.5% and 12.5%, and we gave you also a cost guidance. The reason of this range in terms of return is mainly driven by the uncertainty on the market situation and the market activities. We don't know exactly, so we have this range. The rest of our business is still in line with what we shared with you during the event today. We are completely on track in terms of growth initiatives, as I mentioned earlier, on Financing & Advisory and position banking, and this, and on private banking in France, which are the main three initiatives we have. The answer to your question, Flora, is our top-line evaluation is consistent with this range of return on equity.
All in all, if you wish, what we have in mind, instead of the 3% on a like-for-like basis that we had, is around 2% for the group. If you mix the whole thing, retail in France, GBIS, IBFS, knowing that, of course, we will have also the impact of the disposal, which will reduce slightly the revenue base. Albert, the other elements?
Yes. I hope you won't be disappointed. It's a bit boring to go into our little kitchen. You're right. There is an increase in the fourth quarter in the corporate center RWA, which is made of various different elements. Some of it, I can't list all of them because it would be deeply boring for you guys. One is the fact that we transferred some assets from businesses to the corporate center. For example, the Visa shares owned by businesses, we like it to be quite clean when we know a disclose on IFRS 9.1. This has an impact. This is weighted to 170%. Another element has to do with some Forex hedging impact. We hedge our quarter one, there's always a residual hedging position that we have that had some impact. One thing is related to DTAs associated with temporary differences that would fall here.
There is also a technical factor. We do, at the end of the year, some correction when we close the account for the year, some accounting reconciliation of the RWA, that would be a mixed bag of things that would fall into the corporate center that we made, and we allocate to the businesses. Overall, these are purely technical factors. The truth of the matter is we obviously had an increase in the RWA that we want to reframe for the next years. That's the main thing.
Perhaps, Jenny, can you comment on the 30-50 basis points with the different elements regarding the so-called TRIM and modeling?
Yes, sure. Good morning. The TRIM side, this is our best estimate at this stage. As you know, this is a long-term process that started already two years ago. The TRIM exams had started on what we call the high default portfolios, so mainly on mortgages to make it simple. On these we had decisions with impacts which were not material, quite limited, and already taken in our existing capital. We have more missions which are ongoing. None of them are finished. We didn't get final decisions. Those are going to come, and this is on the low default portfolios, so mainly large corporate financial institutions, market activities. The 30-50 basis points is our best estimate, taking into account ongoing missions and, in a way, benchmarks.
Also taking into account the fact that the way these TRIM missions are carried, we see that they result in add-ons in capital mostly based on improvement required in terms of documentation or auditability rather than performance of the models themselves. They could be lifted once you implement the necessary changes based on the TRIM guidelines. All this put together, we consider that this 30 to 50 basis points is a reasonable range. This is for the rest of 2019 to 2020, probably concentrated on 2019, given the ongoing missions and what is announced in terms of programs.
Yeah.
Hi, Andrew O'Flaherty from Credit Suisse. Just to follow up on the question about disposals, too, if I may. How should we think about the net profit impact from the remaining disposals? You've announced 37 basis points that's linked to, I think, 125 per annum. Should we just straight line that in terms of the second half? Is that oversimplistic? Just putting that, if we assume, for example, that comes from the international division, it's quite a chunky amount. It's about 20% of future net profits from that division. How should we think about the net profit impacts of the future disposals? Related to that, what's the reason for the additional 20 to 30 basis points from those disposals? Is it the change in expectations?
You gave some numbers on pricing or a change in the way you're thinking about disposals and your criteria to what's non-core. Just to try and understand how you've reached this extra capital positive impact. Thank you.
First of all, on the impact is a little bit of both. Probably a better execution, effectively adding a few assets, a limited number of additional assets. In terms of the future profit, probably not that different, but I mean
It's difficult to just draw a line because sometimes we sell assets which have a profit, and they are not consistent with the group strategy. We've given you the criteria on the page. Again, they are the same. Sometimes they are good assets, profitable assets, but doesn't move the needle for the group. It's not necessarily synergistic. Sometimes we're selling asset which makes a loss, such as private banking in Belgium, good asset, but making a loss. In the basket of what we have in mind, which is clearly identified with processes that are about to be launched, they fall into both categories. If you take a view starting from the EUR 125, you probably get somewhere that is not inconsistent, keeping in mind that maybe one or two of these assets may be actually loss-making.
One thing I want to stress, if you may, although not all of this will be into the international division.
No.
Yeah.
Yes, good afternoon, Pierre. Two quick questions. First, regarding asset management and private banking, you said firstly that asset management, you had ideas to develop some products. Could you elaborate a little bit on that? It's not very clear. Regarding the private banking, you said that internationally it's not satisfactory. What is your strategy coming forward for this part of this business? Regarding Africa, I'm not sure here, but I heard or read somewhere that you are trying to expand into English natives countries or having a partnership with another bank. I'm not sure. Could you tell us a little bit more about that? I know everybody focus on risk-weighted asset, but business also is interesting. Thank you.
Yes, Pierre. Perhaps Séverin on the first part and Philippe, I'm on our African development.
I am not sure to understand what you are referring to in terms of new asset management products. Perhaps it's referring to our global market activity, where we are developing today quantitative investment strategies. We have some deep asset management products. If it is that, it's not in the wealth management business, but in our global market activities. You're right to say that is one of the growing development we have in this specific area. In terms of private banking activity, it's fair to say that the French private banking as a joint venture we have with the French retail is very dynamic and very growing today, and we are expanding this, what we call the patrimonial client in France, and Philippe can also mention that and discuss on that, and we will continue to grow in that direction. Where we are disappointed is internationally.
It's fair to say that we have launched now for a while a de-risking process, meaning that we are clearing some clients where we think that we are not comfortable to work with, and we have launched this de-risking process for a while in Monaco, in Switzerland, and in Luxembourg, and now Belgium is nearly out of the group. This is one of the reasons why we are not at the level of return we are expecting. We can say now this de-risking process is over, meaning that now we have entered a new era in terms of asset under management collection and growth, which is a good news.
It will take some time to retrieve the right level of return, but in the next two years, my conviction is because we have finished this de-risking process, we will be in a position to improve the return on equity of this part of the activity. In the U.K., as you know, it's an integration project which is underway today, which is also costly. There is a clear vision that we will recover our returns in international private banking. Why? In asset management specifically, even if it was not your question, as you know, has two main activities. They have the ETF franchise, where we are the leading position in Europe, which is a very, if I may say, good franchise and profitable franchise. We have also the alternative asset management activities, which is somewhere we have to improve in terms of return.
In our plan, we have also a specific action on Lyxor to raise the return on equity on Lyxor during the next two years.
Philippe, we can't hear you.
Not yet.
Yeah.
Okay.
Now we can hear you. Yeah.
Good morning, everyone. Pierre, to your question on Africa, just to highlight some elements. It's true that we've got in Africa a good momentum. If you look at the top line growth, we are talking of +10%, and more specifically, on Sub-Saharan Africa, it is around 15%. Down the road, our objective is to increase the efficiency of the setup. You know that we have localized in Casablanca our IT centers. We moved the IT capabilities from Paris to Casablanca, and to develop IT project at African cost. It's obvious. We have also decided to reorganize the setup through two regional hubs in West Africa and Central Africa, where we can, let's say, gather expertise. It's true that the potential we've got there is very significant. Down the road, your question is how we can move maybe faster.
We have decided to establish partnership with Absa, the spinoff of Barclays in Africa. If you look at the map, the two networks are very complementary. We are putting together the French-speaking countries with a lot of English-speaking countries around South Africa and the corner of around South Africa. We want to build synergies in cash management, in market activities, and this is a first step to develop our connectiveness with this part of Africa.
More generally, I tend to think that in this world, which is so demanding for large banks, the idea of developing partnerships can make sense. When I see what we have been doing with DBS, for example, selling good private banking assets in Asia, but with a scale which was not big enough to compete in the long term to them, and then sign an agreement to sell our commercial structured products, I think it works very well. I could add OTP. OTP is buying our Balkan subsidiaries, and we signed also an agreement with OTP. They are probably today better shareholders of these relatively small subsidiaries benefiting from synergies, because sometimes they have a presence in these countries. Effectively, not having the burden of a global fee of all kind, more capital, more reporting, whatever, in those small businesses.
At the same time, trying to develop then a partnership with a bank with former subsidiaries and a capacity, whether it's with certain products themselves they might not have, whether it's on the cash management, et cetera, something which could be positive. Absa, it's a little bit the same. No clear option today to grow that strongly in certain geographies. Here, we have a partner, normally, which should share, in terms of compliance, hopefully, the same kind of culture, having belonged to a Western bank. A natural complement setup, and the idea to develop products, in particular, for example, for cash management to large corporates and cover the whole African continent. This is the way we think, and I think more and more banks will also look at these avenues.
It can be in those geographies, it can be in certain businesses, to share cost, to do things. I could also mention with La Banque Postale Transactis, which has been able to build a common platform for everything regarding credit card, et cetera, very efficiently. These are avenues we are further thinking about going forward. Nick? Yeah. Oh, yeah, sorry.
Hi, Omar from Barclays. Just three questions. The first one, sorry to go back to French retail, I am confused by the guidance of improved revenues in 2019, because the fourth quarter was the worst quarter for revenue growth, and it has gotten progressively worse through the year. You have the EUR 500 million of interest rates, and then you have the EUR 70 million of impact. I take your points on the base effect of renegotiations, I still do not know how the numbers work out for revenues to be up. That is the first one.
The second is just on slide 16 and the comment you made about the EUR 125 million of disposals, in terms of net income, being good value relative to EMC. I guess it is good value because the earnings are more visible, higher return, they grow more than other parts of the bank, which is why you get a good price. In that context, what visibility can you give us on the EUR 150 million at EMC, given that is now even more important given the cuts in revenues elsewhere? The last one is just on originate to distribute. Could you help us just by telling us where you are in terms of distribution rate of loans?
Your peer who say they are the best are at about 70%. Another peer say they are at 40%. Just to help us track that metric going forward. Thank you.
I will let Séverin answer on the OTD. Philippe Aymerich answer on the French retail. Again, we are not just comparing. What we are saying is we have been able to sell for 37 basis points of Core Tier 1 at between one and 1.5x book, including asset making no money. Let's face it, making no money. Why? Because their natural buyer will get the benefit of the synergies. Just that. It's as simple as that. It makes sense for them. A lot of sense, same thing, more than for us. Typically, buying a nice, clean private bank with a few billions of EUR of assets in Belgium, if you can plug just the assets and get the synergies, it makes a difference.
This is very rational from a buyer point of view, and it also makes sense from a seller point of view, if I may say so. The only acquisition that we are going basically to make, because I must say, I don't see a similar opportunity than, and I know Barclays was looking at it, by the way, but this acquisition fits perfectly, match perfectly in terms of our businesses, existing businesses. On top of that, with synergies on the cost. Same thing, I would say the reverse of maybe the Belgium thing, with a very strong position in Germany, which is of interest for us. This kind of arbitration of portfolio makes a lot of sense. May I say, really, we are acting on our side.
I have not seen so much of that, and I don't see, actually, similar opportunities as interesting as EMC today in the European banking environment. Perhaps, Philippe, can you come back to the revenue, and then also on the OTD, Séverin?
Okay. Going back to the revenues. First, I should add regarding the fourth quarter, in addition to what I've already said regarding the margins on deposits, two other aspects which had actually a negative impact. It's true that the financial services were below the level of the equivalent quarter of 2017. The markets were not good. We had an impact of approximately 20 million EUR of difference between the two quarters on the financial fees. The second aspect, when you compare, again, these two quarters, is that in 2017, we had a significant capital gains on some financial participation linked to the business of approximately 13 million EUR. Again, the comparison between the fourth quarter is complicated by this element.
As I said, regarding the deposits, the margin of deposits, we see the trend changing. Regarding the margin on credits, we are very cautious on the origination. We are focusing on the right clients, and we are making sure that the margin at the originations make sense. Regarding the last component of fees, as I said, we have many growth initiatives with additional clients, additional products. We are believing in banking as a platform, bank as a service. You have also to take into account all these new activities. At the same time, we are in the guidance regarding the evolution of cost. Last year, there will be definitely a deceleration in the increase of cost, and you will see a decrease in cost in 2020.
Overall, with all these components, with also a strict control on the RWA, it leads us to the new guidance regarding the return on equity. A bracket between 11.5% and 12.5%.
OTD, Séverin?
The definition of this ratio of distribution is quite heterogeneous. When we are referring to 70%, I know what it is really, it's probably the final bank which is 30% on the primary syndication before the closing of the deal. If we take the global means we have in term of distribution, meaning syndication, secondary sale, securitization, insurance coverage, and so on, our global finance business is distributing 50% of its global origination. It's the order making we have been doing the last two years, three years, and it's something we can increase if we need it. It's one way for us to manage the risk-weighted asset consumption.
It is very important to say that it goes beyond the CIB, what we're trying to do when we say on page 24 that we will work towards optimizing RWA. This OTD, of course, it's buying CDS insurance, securitization, but that will go beyond the CIB. We are looking very actively at securitization of corporate loans, for example, in the retail, and things like this, to be more agile and be able to rotate more of our assets on a more opportunistic basis.
Hi, everyone. Nick Davey from Redburn. Three questions, please. The first one, just on the financing business. You've spoken with some pride about the 9% revenue growth, but at the same time, some of your slides are warning about the clouds that are forming. I suppose the question to you is, how confident are you in the quality of business that you're writing? We have seen other European banks talking about slowing down here. Why are we not seeing that in your case? The second question, please, on the TLTRO. The ECB has said seemingly that they need some more convincing that it should be permanent. Can I just ask you in your thinking for the next two years, do you expect it to persist, or do you allow for its removal?
The third question, just on the scrip dividend, I'm surprised it hasn't got a bit more attention so far. Can you commit to a cash dividend from here? I can see in the capital plan, your plan is for a 50% cash payout. When I look at the dividend language, it's still excluding the word cash. Can you commit, or do you just plan for that? Thanks.
Perhaps I will take this last question and let Séverin and William answer. First of all, I, as a CEO, cannot commit to anything on the decision which relates to the board. First thing. Second, the board took the decision, in particular, in light of the TRIM, because with this -30 to -50, 2019 potential impact are largely concentrated. We did not, at least I said to the board, I think it would be better to maintain a level of capital at a reasonable level. Third, we are clearly planning, and to your horizon, give you, I think, hopefully, good visibility. We have not planned, effectively, any scrip option for 2019, beginning of 2020. We are giving, hopefully, enough comfort with this 12.3% to 12.7% range to avoid having a second time a scrip dividend.
I think given the 30 to 50 basis points, I think it was the right decision to take beginning of 2019 for 2018 dividend. Séverin, the comfort we have on our credit origination.
Yes. I have a look back into 2018, the global origination volume has increased by 38% in terms of volume last year. We see a real dynamic in terms of client demand and in our own franchise, and specifically on asset finance area. When I mean asset finance, I mean in our case, mainly shipping, aircraft finance and real estate, where we had a significant boost as we announced during the investor day presentation, that we will invest in that direction in new geographical area where we were not very active in the past, mainly in Asia, in the U.S., and also in Europe. We are taking market share here in that direction even.
The second area where we had a good dynamic this year is our energy and natural resources franchise. As you know, we are one of the leaders in renewable energy, which is doing well still today. When we speak about cloud, I don't know if you are referring on our own presentation regarding clouds or on our peer's presentation. The clouds we were mentioning were more affecting our Global Markets activities, the risk appetite of our investor clients to buy our structured products. In terms of structured finance, which is the other part of our business, I mentioned coming up, we think that there is still a good dynamic, in my view, and this good dynamic could last for a while.
May I say, we've been very prudent on LBO. We already commented that we are seeing stretched structures for now, what, at least 18 months, Séverin?
More than that. We have revisited our guidelines with banks, with JVs, all those four. Now we have lost market share in LBO. It's a decision we took, and we are completely assuming that decision. What I'm mentioning is growth initiative in other parts of the business other than LBOs.
The TLTRO.
TLTRO, three things. One, we are a small participant to the TLTRO. Two, our funding plan, you have to go beyond the 20, given the timeframe of the TLTRO, assumes that there is no replacement of TLTRO. To be very clear, we are not dependent upon any replacement of TLTRO. Three, should there be a replacement of TLTRO that is economic to us, maybe we'll participate to it. That would be a very opportunistic move, but obviously, we do not depend upon it to happen again.
Personally, I would prefer to see the deposit rate to go to zero, to be frank, because it would make more sense than, again, building a funding infrastructure and perhaps having people also lending with a lack of discipline in terms of conditions. If I were able to make the decision, I would go more that route.
Yes, good afternoon, Kiri Vijayarajah from HSBC. Could I go back to French retail? I hear what you were saying, that you've got reasonable line of sight that the revenues will grow this year in French retail. I wonder if you could make a comment about the jaws, particularly in relation to one of your peers yesterday committing to delivering positive jaws in domestic markets as early as 1Q. Is that something that's a bit too optimistic for your French retail? Secondly, just more a clarification. Did you mention that Boursorama in 2020, the earnings contribution is going to increase meaningfully? Does that mean, or does that imply a change in the customer acquisition strategy, that you're going to lower your marketing costs, for instance, to try and boost the profitability there, or did I misinterpret that? Thanks.
Perhaps, Philippe, I just would like to highlight, on the comments, by definition, there's always a little bit uncertainty on the revenues. What we are saying is there will be, in our view, the beginning of the improvement versus 2018. One thing which I really would like to highlight, and I will, again, leave Philippe answering in detail. We've had, as a policy for the last two, three years, to be selective in credit origination. We could have a better dynamic, if we were adding a mortgage. We've been, in particular, on mortgage, selective. Again, you can argue whether it's the right strategy or not. I was very reluctant when I look at the price and the potential dynamic in this market of, I think, personally, on the client side.
Less stickiness overall, at least on certain products, such as the insurance credit, where you can renegotiate every year. We were reluctant to take too much of that if it was not for massive clients. Where, and you know it's consistent with our view, where the wealth management will be, at the end of the day, at the heart of the future relationship, in particular with traditional network. In five to 10 years' time versus the Boursorama, which is concurring client with a very high level of satisfaction, and which can provide a very good service for people who might not have the same wealth needs. I just would like to tell you this decision is looking at the next 10 years, considering that the people will have taken mortgage at 1.0 something for 15, 20 years.
They will not reimburse if they can, because it will be very beneficial, and that would be left with it for the next 15 - 20 years. That the people will not capture, as we did in the last 10 years, certain products. That's where we have been very selective. I think personally it's the right strategy, which leads also to a return on equity, which is at least, we've not seen all our French peers, but compared with the ones which have communicated, which is much better. We prefer to perhaps compromise a little bit the revenue dynamic, and effectively, maintain a better return on equity as well as actually also a better cost-income ratio. Here it's a strategic decision. We'll stick to it.
I must say, I think this French market still lacks also of discipline in the pricing of credit. I hope that at some point we'll see something a little bit more disciplined than what we saw. Perhaps because also certain players precisely are just to maintain the dynamic of the revenues, I'm reluctant to enter into that strategy. Philippe, if you can comment a little bit more also, the other details.
For sure. We do not foresee a positive show as early as 2019, because we consider that it is very important to complete the transformation effort we are doing. Again, we are preparing for the long term. This transformation, there are many components related to the branches, the training of the people. There is also a very important component related to IT, including, in order to prepare us to the new ways of doing banking. I mentioned earlier, bank as a platform, bank as a service. This effort is on track. It's a three-year effort. We have a good momentum. As explained previously and including during the Digital Day, for some aspects, we are ahead of our schedule. We are doing the reorganization of the back offices, we'll see a positive impact very soon.
We want to continue this effort because we consider that it's critical to our future and not only the next two years. Regarding also the comparison with peers, as mentioned by Frédéric, you have also to look at the numbers such as cost income and return on equity in absolute terms, and not only on evolution, you will see that, I think our numbers, not the return on equity is quite attractive. Regarding Boursorama, the priority of Boursorama is definitely to acquire clients, Boursorama is doing a very good job. I remind that for last year, they have recruited 460,000 clients. Leader regarding the number of clients, and leader also regarding the number of clients acquired. They are real clients, that's why that, yes, Boursorama, notably in 2020, will contribute notably with a significant increase in fees because these clients are using products.
They are buying services from Boursorama. I want also to stress again that this acquisition effort, we monitor it very quickly. 90% of the cost for client acquisition are variable. If we exclude these acquisition costs and marketing costs, Boursorama is, as of today, an entity which is profitable.
Hi. Jacques-Henri from Kepler Cheuvreux. I would like to understand something at a collective level on French banks. Actually, the question is for you and probably for the guys who reported yesterday. The relationship with the supervisor and the visibility they give you on your capital levels, for me, it's really not clear. Can you shed some light on that?
Listen, we've not yet received the threat. Effectively, they don't give you a precise figure. They refuse to give you a precise figure. It's more, you feel their comfort towards the trajectory. What I can say is our trajectory for the next two years, I think they are comfortable with the trajectory. It's never a figure. It's more
The question is more, do you perceive the goal posts have changed on your side somewhat since you presented in November?
Not just the level of capital. They look at your business model, your capacity to make money, et cetera. It's a recurrent dialogue, but it's never, do that such a level at this point in time. It's never like this. It's not as clear as this. You have to interpret, you have to see. Effectively, we consider that reaching this kind of level is fine. That's what we can say. Again, as part of what I was saying also in When you look at the U.S., we will have to have a discussion with Mr. Enria.
He's just landing in his position, to tell him, "Mr. Enria, depending in the U.S., if I'm not wrong, I've not seen in detail for the fourth quarter, but I saw in the third quarter the CET1 of big banks going down. You have a J.P. Morgan, which is the largest bank in the world, which is piloting itself at 12% CET1 ratio. I'm sorry, but if I may say, a bank like Société Générale, which is much smaller and getting simpler, why should it be above 12%? At some point, there is a question of what do you want at the end of the day for the European banking sector? We did not have yet this discussion. It's just beginning of February. I know Mr. Enria very well, and I think he's someone pretty pragmatic, able to take the whole thing. I agree with you.
Fundamentally, at some point, the regulator, which should not necessarily give figures, but at least integrate all this and say, "I'm comfortable with whatever the level of capital," blah, blah. Taking into account the TRIM. The problem is, probably he does not know at this stage himself because the TRIM exercise is not finished also. It's not completed. They are still in this process of looking at all the banks, et cetera, and determining, blah, blah. That's where it's still in this uncomfortable situation. What I would say, with the kind of figures that we've presented, it is fine.
If I may add from an investor standpoint, with the 11.5 pro forma, we have a comfortable buffer above MDA, whether this is the debt investor or whether this is the equity investor. We will improve from now this buffer. What we can say is that it will start in 2019.
I think that we have a question online.
Yeah.
Perhaps
Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. We have a first question coming from Bruce Hamilton from Morgan Stanley. Sir, please go ahead.
Bruce?
Bruce Hamilton from Morgan Stanley. Sir, please go ahead.
Maybe we might have lost Bruce.
I will pass to the next question. Next question is from Maxence Le Gouvello from Jefferies. Sir, please go ahead.
Yeah, good afternoon. One final question on my side. Can we have a little bit of flavor regarding the cost base and the market activities? You have a cost income ratio of 100%. It seems that you are still doing some investment. Can you give us the granularity of which part is recurrent and which part is not? Because it's quite surprising to see revenues to be down by - 20% and the cost flat. Thank you.
Séverin?
The main variable part on the cost of market activities is variable bonuses, and the rest is variable, but not at the short term. It's variable at the, if I may say, a horizon of one year, and exactly what we are doing is planned. When we are just guiding you on globally speaking on the 18 months horizon, is because there is enough in terms of cost base. When we will deliver this, not immediately. The only variable part immediate is bonuses. When you have a low year like this year, you have also a kind of trough in terms of compensation of your teams. When you are in a low environment and a low result like today, you have not such flexibility.
The only flexibility we have is to build on the more organizational and more, if I may say, longer term action, what we are doing now.
Okay. Thank you.
Next question.
Question comes from Anke Reingen from Royal Bank of Canada. The floor is yours.
Yeah. Thank you very much for taking my questions on the phone. It's really about our plan B, so to say. Your new ROE target looks a bit, from what we know, as more of a top-down target. If the environment would be worse, does the ROE target still stand and you would work on the costs, or where would you sort of try find the additional lever? On your slide 25, which is very helpful, if I'm right, I guess your earnings contribution assumes close to a target ROE, and also obviously there are additional disposals coming in on which I don't have any visibility yet. If these two things are not really coming through, where is the additional flexibility? Is this risk-weighted assets reduction or the stock dividend, or I guess it just depends. Thank you very much.
Anke, may I say, first of all, we talk about a 23-month horizon currently, if I may say. To a certain extent, it is not a top-down plan. It is of course, as usual, a bottom-up and top-down discussion, taking new assumption for the business with a range which is relatively large. 9%-10%, it is relatively large as a return on tangible equity target. If really it was effectively the end of the world, we would take additional measure, whether it is on the capital and certain assets or on the cost. As I said, we have already factored a slowdown in the economy. On the cost of risk, these things, we have ways to look at the watchlist, the next 12-24 months outlook, et cetera, on the cost of risk. It would be very surprising if we had a big difference.
You can have variation of our revenues, et cetera, that, to a certain extent, factored in the range. I am not sure to have understood the second part of your question. Can you elaborate a little bit on what you mean?
In order to follow your path on page 25, I basically have to give you credit for the EUR 45-EUR 55 additional benefit from disposals, I have a similar earnings benefit from what you have factored in. If that is not the case and it is not coming through, or are you very certain on the disposals, would you think that additional deleveraging, higher risk-weighted assets optimization is the next tool, or is it the stock dividend? Just in terms of the plan B. Thank you.
Maybe a few things. First of all, if you want to be successful, execute your plan A without having necessarily a plan B in mind. We will focus on plan A, taking into consideration your questions, maybe a few highlights. First of all, the earnings we have here, they are obviously more conservative than they were before. They factor in all the bad news we were talking about. It is really based on a granular plan, business by business, it factors in a situation that is the following: softer on revenues, stronger on costs. It does factor in as well, all the impact that we can project of the foreseen disposals. Meaning, if we do not do the disposals, obviously, we still have the earnings to the extent these are profitable entities we are referring to here. There is a reasonable buffer in this first leg.
Secondly, you're right to point out that there's always a risk of execution in M&A. I would say that we had said 50 - 60 basis points through 2020. Our track record is that we've executed in one year, more than 70% of it. Since 2012, we've executed a lot of disposals. I think we have a good track record. On some of the assets we've identified to add here on the list, we've already had proactive approaches by potential buyers. Nothing is certain, but we have good visibility. Last, you're very right to point out as well, that our plan is also based on active work on RWAs. Trimming down the RWA growth, obviously, would be very easy if we are in a less favorable economic environment, there would be less production. Beyond that, we are talking about deleveraging in market activities.
Whether this should be eight, or in certain situation, we could do more, possibly. We are talking about RWA optimization measures. I refer to the flexibility we want to have going forward to touch upon not only CIB portfolios, but also retail portfolios. We'll add some flexibilities. The plan really, we consider is credible because it's based on more conservative earnings and a track record on M&A, plus new measures we are taking here to adapt on deleveraging.
Okay. Thank you very much.
Thank you.
Next question is from Guillaume Tiberghien from Exane. Sir, please go ahead.
Yes, good afternoon. The question relates to slide 25 on the capital path. I was wondering, out of the 120 basis points or so that you intend to deliver from disposals and optimization of RWA and shrinking of RWA, how much of that do you think you can generate this year, to offset TRIM and IFRS 16? Of course, you have already the 26 basis points for the disposal that are not yet in the full year 2018. The underlying question is whether you can build capital in 2019 from the level of pro forma 11.5%.
Maybe I start with the conclusion. In our plan, we're foreseeing capital build-up in 2019. Not to 12%, but we're foreseeing capital build-up in 2019. That's the answer number one. On the M&A, we have already 37 basis points in the 80-90 basis points, that is for sure, out of which a portion is already closed or will be closed in the next weeks. The 10 basis points of EMC will span across 2019 and 2020. You remember we had discussed it before, with the analyst community. We will have the RWA coming on our balance sheet as we onboard the portfolios. Some of it is a bit back-loaded in 2020. I can't tell you exactly whether we have a five or six basis points impact in 2019 or the reverse in 2020.
I think maybe we'll have at least 30 basis points in M&A based on what we've achieved. We're hoping to do more. Obviously, this is, as your colleague rightly pointed out before, depending upon negotiations that always have a certain element of risk.
I can say we can add the shareholder plan for the staff, which is also planned for this year. five basis points is a low assumption because we have not had any rights issue dedicated to the staff for some time. I would say at least, normally it should be more on the high range of the range.
You didn't mention, by the way, the Global Markets RWA reduction. We plan to do a portion of it as early as 2019.
Guillaume? Yeah, I guess it's fine.
Thank you very much. Yes.
Anything else? Any other question?
We have no other questions on the phone.
Okay. Well, thank you very much. Just one word of conclusion. We are committed, totally committed and confident to deliver. Thank you.