Ladies and gentlemen, welcome to the Société Générale conference call. Gentlemen, please go ahead.
Hello. Good morning to everyone. Thanks for attending this conference call. I know you have a very busy day with many releases from many banks, so we'll try really to be as efficient as possible. You have, as usual, the whole management team of Société Générale. I will leave the floor in a minute to Claire to comment the figures. I will comment no figures. I just would like to say, very strong start of the year. What I'd like to highlight, very good results across all businesses. That's very important. Second, we initially had in mind to present our midterm financial roadmap. Obviously, I wanted to have clarity on Russia before doing so we are postponing by one quarter that communication.
Third, I would like just to say that beyond these very strong results, the satisfaction is that we've been able to move ahead exactly on time on all our strategic projects. Definitive agreement between Boursorama and ING. We had signed the framework agreement for the sale of the acquisition of Rosbank. On the merger of our two networks, the brand architecture and a second agreement with our trade unions, signed by all our trade unions to enable us to deal with the social impact of this merger. If I turn the page to Russia, what I can say is the process is moving forward smoothly. In terms of timing, what I can say is, we expect that in the very few coming weeks.
We think we can move ahead quickly on that process. Let you have the. You know the impact, but and Claire will enter into the detail. The bulk of the impact is actually, in practice, already embedded in our quarter one, and the residual impact in the second quarter will be very limited. We will book the impact in the second quarter. A word on the ESG, next slide, just to say that it's at the heart of our strategy. In all our businesses, we are updating our new targets for 2022 and 2025 in terms of sustainable finance to a figure of EUR 300 billion.
As you can see on the slide, it's roughly 1/3 of financing and 2/3 of bond issues where we play a leading role in those issuances. If I look at the next slide 7, let me just say the current situation on the energy market linked to the conflict in Ukraine does not change our commitment to shift step by step our portfolio of financing. We stick to our commitment, in particular regarding fossil energy, -10% by 2025 for oil and gas. Of course, exit in thermal coal in 2030 in the OECD countries, 2040 elsewhere. As you can see beyond this, of course, where we look at the other sectors and we are also working on our own, for example, carbon emissions.
I now turn the floor to, Claire, who will comment the figures.
Hello, good morning. As mentioned by Frédéric Oudéa, Société Générale realized another solid quarter. The underlying gross operating income stands at EUR 3 billion in Q1. It's up 38% compared to Q1 last year, and 30% on a reported basis. This significant increase of the gross operating income results from the combination of strong business performance and a continued strict management on costs. Indeed, yields are very positive. Revenues are up 16.6% versus last year, while underlying costs only increased by 5.6% in the quarter compared to last year. This cost evolution is largely due to, first, an increase of nearly 50% in the contribution to the SRF. Second, higher variable compensation associated with the high quarterly performance. Lastly, the impact of foreign exchange.
Stripping out these items and adjusting for the disposal of Lyxor, the underlying cost base is up less than 2% versus last year. Once again, these figures are a concrete illustration of our cost discipline, which remains a key focus for the group. In the end, the underlying cost-to-income ratio in Q1, excluding the SRF, is down almost seven points points compared to last year. It's 56%, 66.4% for the first quarter of the year. Let's now have a look at the cost of risk, slide ten. The cost of risk remains contained at thirty-nine basis points, which is equivalent to EUR 569 million, EUR 61 million, with a large part of stage one and stage two statistical provisions, 45%.
The quarterly cost of risk largely relates to the Ukrainian-Russian conflict, which impacts both onshore and offshore Russian exposures. In Q1, Russian exposures accounts for more than 60% of the total cost of risk in the first quarter. It comprises EUR 136 million booked on the disposed onshore exposures, and EUR 218 million on the Russian offshore portfolio. As a whole, EUR 354 million. Excluding the cost of risk booked on the onshore Russian exposure, the cost of risk at group level lands at 31 basis points. Based on our current assumptions in an environment that remains volatile, we now anticipate the cost of risk to be between 30 and 35 basis points in 2022. It includes the cost of risk already booked in Q1 on the onshore exposure.
Regarding the NPL ratio, it's stable at 2.9%, and the gross coverage rate remains satisfactory at 49%. Let's turn to the next page, slide 11. The key factors behind the breakdown of the cost of risk count remain similar to past quarters. First, a limited number of defaults. We continue to see limited defaults leading in Q1 to an accounting level of stage three provisions in line with with last year. Excluding the disposed Russian onshore exposure, it's even lower than in Q1 last year at EUR 277 million. Second, a prudent statistical provisioning. We continue to adopt a prudent approach with very few write-backs. We thus book additional overlays and sensitivity factors on top of the existing ones accounting during the COVID crisis.
Our inventory of stage one and stage two provisions slightly increases at EUR 3.6 billion to reflect the uncertain macroeconomic and geopolitical context. By way of comparison, it covers 2.8 times the 2019 stage three provisions. Let's now focus on our Russian offshore exposure, slide 12. First, on our credit risk exposure. The offshore exposure on Russian external counterparts is managed in run-off mode and is carefully monitored from a risk perspective. It's been reduced up to EUR 2.8 billion in exposure at default at the end of Q1, thanks to a good level of payment collection, in particular in the trade finance activity, whose maturity are on average short. The residual exposure is mainly composed of structured and sector loans for more than 70%.
Transactions are covered by high-quality security, such as insurance for more than 30%, private interest charge, physical collateral, bank guarantees. Therefore, based on our last portfolio review and best estimate, we still consider the net exposure at risk to be below EUR 1 billion. To date, we have not experienced any payment defaults on that portfolio. Second market exposure. On market exposure, there is negligible residual exposure towards Russian external counterparties as of today. Since the beginning of the crisis, trades have been proactively managed and unwound at good conditions with minor financial impact. Let's now turn to capital and liquidity, slide 13. The cost-income ratio, the Q1 ratio remains comfortably above requirements at 12.9% in Q1. It's also well above our guidance, which is to have a minimum buffer between 200 and 250 basis points over MVA.
Looking in detail, the evolution on the capital ratio since Q4 has three main origins. The Russian crisis has impact on the rating of various counterparts, notably Russian. These rating migrations have a negative impact of 21 basis points in Q1 on the quarter one ratio, of which 14 basis points linked to onshore Russian counterparts that will be reversed post-closing of the sale of Rosbank. The increase in interest rates is generating an OCI on the valuation of sovereign, mostly within our insurance activities. It impacts by -12 basis points the quarter one ratio. Third, regulatory headwinds account for 35 basis points this quarter. It fits between the deduction of the IPC as requested by the ECB, the ECB for 15 basis points.
An additional impact linked to TRIM and IRB repair for a total impact of around 20 basis points this quarter out of the 40-50 expected this year, indicated in last Q4. The RWA organic growth impact is compensated by the net earnings plus distribution, despite the weight in Q1 of the contribution to the SRF. Note the impact on the sale of our Russian activities, which is expected around -20 basis points, which should be mostly compensated by the reversal of the impact of the rating migration on the onshore portfolio, 14 basis points, with a net impact of around -6 basis points expected in Q2. For the other ratios, they are also all comfortably above requirements, and the funding program is well advanced. Let's turn to business performance, and let's start with the French retail activities on slide 16.
Looking at the commercial activity, loan production has proved dynamic in Q1. For example, home loan production is up 39%. Production in corporate medium long-term loans are excluding PGE increases by 68% thanks to good level of activity this quarter. Globally, loans outstanding is up 1% compared to last year. Deposit collection remains steady, standing up 5%. With respect to balance sheet savings, we continue to see strong growth in flows both in life insurance and private banking, reflecting the quality of our client profile and the results of our strategic initiatives. In P&C and personal protection, the bank is also progressing in line with our objectives. Moving on to Boursorama, slide 17.
On client growth this quarter again, Boursorama posts a strong growth on the client base, reaching 3.7 million clients with a record number of new clients in Q1, close to 400,000. We now expect the client base to be between 4-4.5 million by the end of this year. Reaching this target will benefit from the integration of ING clients, which is tracking well. It's however too premature to provide more precise guidance at this stage on the final outcome. On client quality, Boursorama continues also to progress on monetization. Loans outstanding are up 29% year-on-year at EUR 14 billion, with home loan outstanding being up 30%, that is Q4. Deposits and financial savings are up 19% year-on-year, with deposits 24%. Looking at the P&L, slide 18.
Compared to Q1 last year, revenues excluding PEL/CEL are up 6.4%. Net interest margin excluding PEL/CEL is up 2.8%, mainly driven by corporate credit and private banking. This increase in margin is partially affected by the increase of the Livret A rate, whose weight on the net interest margin will grow over the year. Fees increased by 6.9% with a continued momentum in financial fees and a rebound in service fees. Underlying costs are at 4.5%, notably due to client acquisition costs on Boursorama and variable costs notably related to the profit-sharing scheme and also to the SRF. Jaws are positive, and the ROE adjusted for PEL/CEL is strong at 14.3% and 16.1% excluding Boursorama. In international retail banking, slide 19, commercial dynamics remain solid.
Volumes are increasing across all regions once again. Loans outstanding are up 6%, and deposits are up 3% at constant perimeter and foreign exchange rate in Europe. In Africa, despite more challenging environment, we observe a positive momentum with solid growth in sub-Saharan countries. The net interest margin is very well-oriented in Europe, at 17% at constant perimeter and forex rate, benefiting notably from the newest interest rate hikes in Eastern Europe. Consumer finance activity also are doing very well, with a 6% increase in revenues. Excluding Russian activities, international retail banking posts once again a very satisfactory performance this quarter, with an underlying ROE at 17.5% and an underlying net income of around EUR 217 million. Let's turn to financial services, slide 20. Insurance revenues are up 6% at constant perimeter and foreign exchange rates.
Life insurance remains at a high level of outstanding at EUR 134 billion with 36% share of unit links. P&C premiums are strong across regions with a 12% increase. Financial services to corporate posts a very positive quarter with a 44% growth in revenues at constant perimeter and foreign exchange rates. ALD's strong momentum continues with a record NBI quarter, thanks to a still very favorable remarketing environment with a used car sale results above EUR 3,100 per unit in Q1. In addition, primary activity is evolving very well with a 4.8% increase in the funding fee, despite current shortage in car deliveries.
Boursorama financial services posted once again an excellent quarter with an underlying growing ROE of 28%. Contribution to group underlying net income amounts to EUR 342 million in Q1. In summary, we observed another solid quarter in international retail banking and financial services results, slide 21. Revenues are up 19.3% at constant perimeter and foreign exchange rate. Thanks to positive yield, gross operating income is up 35%. Underlying RONE is at 16.5% with a contribution to underlying group net income of EUR 453 million. Excluding the activities disposed in Russia, the underlying RONE is around 23%. Turning to global markets and investor services, slide 22. Total revenues are up 19% versus last Q1.
Starting with global markets, it was a very excellent quarter, the best one since 2009, with revenues amounting to EUR 1.8 billion. This new strong quarter validates our strategic roadmap and its good execution. This strong performance is well-balanced between fixed income and equities, but also between products and regions. Equities continue to be strong, supported by a high client demand. We kept an unchanged risk profile and a strict monitoring of our risk. At EUR 1 billion, NBI increased by 20% versus a high Q1 last year. On fixed income, with rate hikes, high interest in inflation products and relatively on forex, the environment was favorable to our business mix, margins toward rates in Europe. All in all, revenues on our fixed income platform are up 22%.
Security services also showed a good quarter, with a 7% increase in revenues compared to last year. Let's turn to financing and advisory, slide 23. Revenues are up 24% versus last Q1. We benefited from good dynamics in natural resources, notably in renewable energies and trade commodity finance, and also captured sustained growth in asset-backed products and registered good results in investment banking before the beginning of the crisis, even though capital markets have slowed down since then. In transaction banking, performance continued to progress with a 26% increase in revenues compared to last year, thanks to better environment for this activity with rate increase. This validates the investment done in this activity as presented in our strategic roadmap.
To sum up, slide 24, GBIS delivered an outstanding quarter, driven by, on one hand, a strong dynamic across businesses with revenues up 18% and on the other hand, a disciplined cost management with costs only increased by 5.6% compared to last year, mostly due to higher regulatory needs and earnings growth and higher contribution to SRF, which is up 50%. Excluding SRF, underlying costs are up 2.6% year-on-year. Despite the higher cost of risk linked to offshore Russian counterparties, we have gained a very strong underlying ROE at 20.8% this quarter and 24.1% excluding SRF. Underlying net income amounts to EUR 734 million, which is a 17% increase versus Q1 last year. On corporate center, slide 25. I will make it short.
As usual, the operating expenses include transformation charges for a total amount of EUR 143 million. The gross operating income stands at -EUR 139 million in Q1. Frédéric,
Yes.
Allez de l'avant.
Thank you very much, Claire, and I will be very short in my conclusion just to highlight that beyond pursuing, of course, on this strong commercial dynamics in all our activities in 2022, it's a pivotal year to establish in the next four quarters what I would say a new business model or at least more balanced and more resilient with, of course, the new bank in France. Legal merger should take place January 1, 2023. The IT migration will take place in the first half. Also Boursorama with 4 to 4.5 million clients and the undisputed leader in online banking in France. Very attractive, I think, positioning in this French market. Pursuing the transformation of our international retail banking, which are delivering very strongly.
Of course, on GBIS, show to you that 2022 will be another year of strong delivery in a very different environment, as we can see, of course, in the first quarter. Of course, the creation of this mobility pillar around ALD Automotive. We have the ambition to close the transaction at year-end. Very intense months ahead, but we are very encouraged, and all our teams are, of course, very encouraged by this very strong start of the year. We are now ready to answer your questions. Please, let's try to stick to this good discipline that we have had so far. Two questions per person. Floor is yours.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. First question from Omar Fall from Barclays. Please go ahead.
Hi, good morning. Could you give some more color on the Rosbank sales process, please? Specifically what elements need to be finalized before closing? Is it just local regulator approval? You know, over what time frame would the legal transfer of the assets occur subsequent to that? You know, just in general, what do you see as the risk to the closing of that transaction at this stage? Secondly, could you just give an outlook for French retail revenues this year, please? I guess on one side you've got the Livret A impact, and on the other, you know, activity is seemingly better and, you know, the interest rate sensitivity that you've got is mainly coming from French retail, so that should start as well. Thanks.
Yes. Hello, Omar. I will leave the floor to Sébastien Proto to comment on the French retail. On your first question, what I can say first, we have to have some local authorization, Central Bank of Russia, antitrust, which is not an issue as the buyer has no banking activities. We don't have any other approval from European supervisors. Second, it's a transaction which was with no due diligence, so it's not a question of a due diligence process. Of course to establish the framework going forward of this bank, establish the payment, also the settlement of the payment, it's the traditional things which are not particularly complex that we have to organize.
What I can say is, it is moving ahead smoothly. We have not today one big obstacle at this stage. What I can say, and I can't be by definition more specific, the very few coming weeks, which means, short time frame than, four weeks ago, again, our whole attention is on this topic. We know it could be very positive for the group. That's what I can say to you. There is again a process which is moving ahead smoothly at this stage at least. If there were one. If I had to highlight one complexity, of course, if Mr.
Potanin was to be sanctioned in the coming days before the closing. We would have probably then to go and try to ask for a license. I think this is really the potential issue I could imagine on the roadmap of this process. Sébastien, on the French retail.
Yes, good morning, Omar. On the French retail, let me start by saying that your performance realized in Q1 2022 is a very good one compared with 2021, but also with 2019. We are clearly above in this performance who are supported by both fees and net interest margin. Having said that, we don't take for granted that this performance would be replicated each and every quarter in 2022 for different reasons. The first one is an environment which remain uncertain and an increase in deposits even at a slower pace, which is weighing on the deposit margin.
Second point, in the context of higher inflation, in that context, the government, who already decided last January to increase the Livret A interest rate, could decide again in the coming months another increase with another negative impact on our revenues. Keep in mind that the decision he took in February cost us on a full year basis around EUR 100 million. Third point, there are some base effects which would materialize in H2 as we benefited in H2 2021 from the second bonification of TLTRO and the repurchase of state-guaranteed loans. It creates this base effect in H2.
Last point, obviously the acceleration of Boursorama's client acquisition and in particular, the transaction with ING will have an impact on our revenues again in H2.
Thank you. Next question?
Thank you. Next question from Flora Bocahut from Jefferies. Madam, please go ahead.
Yes. Good morning. The first question I wanted to ask you is regarding the cost income guidance for this year. You know you have provided us with the guidance with Q4 results for 2022, 66%-68% cost income ex SRF. Obviously you do so much better than that in Q1 at just above 56%. Just wanted to ask you whether that guidance is maintained, and if it is, why the caution there? The second question is regarding the market business. A year ago, so in May 2021, you organized a deep dive on GBIS, and back then, you gave us a target of a EUR 4.5 billion run rate for revenues in market on average.
You highlighted then that you had better resilience, a better predictability also of your revenue base. Now we are a year later, and obviously you've done so much better than that over the past quarters. You hit a record in the market review this quarter. Just wanted to ask you if you could update that guidance or if you stick to it despite the strong performance lately. Thank you.
Hello, Flora. I will turn the floor to Claire and, Slawomir, who is on the line too. To Claire.
Yeah. Hello, Flora. The low underlying cost income ratio excluding SRF in Q1 illustrates perfectly the quality of the model with on the one hand, the solid overall performance of the group. On the other hand, a very disciplined management of the costs. We are very early in the year, it's only Q1, so we did not revise our guidance at that stage, but make sure that we manage our costs in a very disciplined way, and it will be the case for the rest of the year.
Slawomir, on the market revenues.
Yeah. Hello. Let me put it this way. We have gone through a number of quarters where the market conditions were conducive for our business, coupled with a very good execution of the repositioning, redesigning that we had to do. If I take this quarter with a lot of things going well from sales activity, capacity to manage our risks, sales retention, sales credit retention rates, and a mix effect which is favorable too, right? I mean, you've heard me in the past explain that while credit was booming for some of our competitors, we were at a slight business mix disadvantage there. We're obviously at a slight business mix advantage when rates are so active as they were this quarter.
All I'm saying is the reason we're outperforming is we're doing well what we intended to do. We benefit from growth opportunities and from markets which are conducive to us. Now, do we believe that our through the cycle average performance in our capital market activities might be better and revised upwards? Most likely. It's not gonna be revised upwards to EUR 7 billion a year, that's for sure. I think more to come in our Q2 update on the longer term targets. That's what I can say at this stage.
Thank you.
Thank you, Slawomir. Next question.
Thank you. Next question from Jon Peace from Credit Suisse. Sir, please go ahead.
Yeah, thank you. First question is on your helpful cost of risk guidance of 30-35. I appreciate it includes what you've taken on Russia in the first quarter, but I just wondered what you'd embedded in that guidance for any additional costs on Russia, either in the second quarter for the onshore business or, how you think about the risk of the offshore business as we go through the rest of the year. My second question is just on the dividend. I assume you'll exclude the EUR 1.1 billion non-cash charge from the Russian exit. Are there any other adjustments you make to earnings? I'm thinking in particular the restructuring charges on French retail, which I guess you're running through operating expenses, so maybe they're not excluded. Thank you.
Yes. Hello, John. I will turn the floor to Sadia Ricke, CRO, for your first question, and we'll take the second one.
Good morning. For 2022, the guidance is primarily based on our current assumptions of an environment that remains volatile. It does embed the cost of risk accounted in Q1 2022, which is, as Claire discussed, very largely due to the Ukrainian and Russian conflicts and the ensuing sanctions, which impacts our onshore and offshore Russian exposures. As you've seen, it comprises as well a large part of the statistical provision in stage 1 and stage 2, which account for 45% of the Q1 2022 cost of risk, and does not factor any significant write-back in 2022.
Excluding Russia, we do not expect at this stage material cost of risk for the rest of the year with an occurrence of default which remains limited, particularly in France. Now turning to the offshore portfolio, as you have seen, in the Q1, we provide for a contribution in terms of provisioning of EUR 218 million. Again, that is largely driven by S1, S2 components. Next one. Maybe forward looking, again, with this, a large provision in S1 is up to EUR 223 million, and we take comfort as well from the constitution of the nature of the various facilities composing this offshore portfolio.
We have communicated again, I reiterated, John, that what we see really at risk among the EUR 2.8 billion, which has been reduced in the first quarter, is below EUR 1 billion. We think it's again something very manageable. On your second question, let me just highlight. First, we want to project an underlying performance, underlying net results, which is the structural way of the company to deliver revenues, net profit, and of course, the return on tangible equity. That's one thing. We exclude and we answer more the intuition wish, but in particular, exceptional items, M&A, whether it's a loss or a capital gain, or CTA, cost to transform. It's a way to again, I think, better project the capacity of the business to deliver in a structural way.
We have our distribution policy, which is based on this item, which takes, of course, into account on top of that, results, immediate results, the capital trajectory, and which is, as you know, 50% of this underlying income, which is split between distribution of the dividend and share buyback. That's what I can say regarding your question. The idea, if you wish, in that from that perspective is to consider the Russian impact, the Russian loss as an exceptional item and not in the underlying profit. Next question, and knowing, of course, it's a Q2, it's a Q2 topic. Next question.
Thank you. Next question from Giulia Aurora Miotto from Morgan Stanley. Madam, please go ahead.
Yes. Hi. Good morning. My first question is on the Russian offshore exposure. You very helpfully highlighted that the exposure at risk is lower than EUR 1 billion. I wonder what you consider as essentially at risk. Also, I saw a headline this morning saying that the estimated net Russian exposure to date was less than EUR 1 billion. How do I reconcile that versus the EUR 2.8 billion? Essentially a clarification on that would be helpful because the way I read it is that I would expect that to end up in provisions at some point this year, but maybe that's too conservative of a read on my side. That's my first question.
I just want to be 100% sure that I understood your answer to the previous question. There will be two one-off impacts from the sale of Russia, EUR 2 billion, and write-off of the net book and EUR 1 billion non-cash item. Both of them would be considered exceptional and so would not impact the dividend. Is that correct? Thank you.
Yes, Giulia. I will let Slawomir answer your first question. Exactly, I mean, again. There is one concept that we like, as I said, underlying net profit. If I were to include some part of the Russian impact, which is an exceptional item, I think we will agree, I would distort this capacity, this presentation of the group capacity to deliver profit. We have
Okay.
A dividend policy. We have a dividend policy, which is based on the payout ratio based on this. If I may say from a theoretical point of view, if we wanted to adjust the distribution policy, we would adjust the payout. At this stage, as I said, we would confirm that we want to implement. There's no reason to change our dividend policy. Is it clearer?
Yes. Thank you.
Okay. Thank you, Slawomir. First, can you elaborate a little bit on what we mean by this EUR 1 billion net current dividend?
Yeah. Again, EUR 2.8 billion is the concept of EAD, so Exposure at Default, mostly within global banking and advisory business, which is fairly diversified in terms of sectors, but obviously with a heavy representation of natural resources and energy there. The translation, right? How to put it? The EUR 2.8 billion become less than EUR 1 billion of at-risk exposure through a line-by-line analysis and judgment on what is the exposure which doesn't benefit from very strong security structure or guarantee, like ECA. You have to have in mind that, let's say, roughly a third of this exposure in gross commitments is, for instance, ECA-backed.
You understand that this exposure is obviously part of the EAD, but it's not part of what we would consider at risk. Once we have done this analysis line by line, we came to the conclusion that out of this EUR 2.8 billion of EAD, what is theoretically at risk is less than EUR 1 billion. Now, it won't translate in a 100% provision because again, it doesn't mean that this is what we're going to lose. It means that this is the portion which doesn't benefit from guarantees which make the repayment extremely likely. I hope this is clear. I can give it another go if it isn't.
No, thank you. This is clear.
Thank you very much, Giulia. Next question.
Thank you. Next question from Jacques-Henri Gaulard from Kepler Cheuvreux. Sir, please go ahead.
Yes, good morning, everyone. Two quick questions. The first one on the corporate center, I think you mentioned the positive value change of financial instruments. I was wondering if this would reverse potentially towards the year-end and if the volatility seen here is something that is a bit artificial. The second question, Claire, if you don't mind coming back on the CET1 impact, which for an old brain like mine went a little bit too fast, particularly the regulatory impact and the breakdown. I noted -20 basis points on TRIM out of the 40 basis points you're expecting in 2022 and OCI -15. If you can just come back on that would be great. Thank you.
Hello, Jacques-Henri. Yes, well, I will leave Claire answering your question on the revenues of the corporate center and the potential reversibility and then explain probably the IPC, which is again related to this nasty Single Resolution Fund, you know, which unfortunately will end next year. Now, Claire.
Yes. Regarding the revenues of the corporate center, we never guide on the revenue. This year, once again, we will not guide on the end of year revenue. Regarding your second question regarding the regulatory impact, you're right. We have two kinds of regulatory impact. The first one is the implementation of some TRIM and IRB repair adjustments for a total of 20 basis points out of a total amount of 40 to 50 basis points we expect this year. The second impact is fifteen basis points regarding the IPC deduction. You may know that the ECB requested that all banks would deduct the IPC from their quarter one.
Some of our peers will deduct it on an accruals basis all along the year. We made the decision to deduct it one shot at the first quarter, and the impact is the 15 basis points we disclosed.
Again, the IPC is the non-cash contribution.
Yeah, exactly. It's a commitment.
A portion of-
Yeah, yeah.
The contribution which is not paid directly.
Exactly.
Charge through this, P&L.
Yeah. Regarding the SRF contribution, Frédéric may speak hours about this contribution because he is quite obsessed about it. This contribution is paid within two parts. The first one in cash, which you have in the operating expenses, and on one-off mode, at the first quarter of the year. The other part is we committed amount, we are committed to pay and the ECB requested to all banks to deduct it from their quarter one . All the banks went to court, but we have been requested to do that in the SREP later. All banks, all French banks will do so this year.
Some of them on an accruals basis, the others on an upfront one.
Thank you. Next question.
Thank you. Next question from Guillaume Tchidjian from Exane BNP Paribas. Sir, please go ahead.
Yes, good morning. Two questions, please. Number one, on the resolution fund, can you tell us for next year whether we should expect a further increase? Then for 2024, how much would you expect the contribution to fall? Would it fall like 80%? The second question relates to Boursorama. You had highlighted a year ago or so that once you reach 4 or 4.5 million, you would stop advertising costs. This target of 4 million seems to come earlier than expected thanks to ING France. Does it mean that we should expect Boursorama to be already in profit next year as opposed to 2024?
Yeah. Hello, Guillaume. I will leave Claire explaining on the SRF, the mechanism, and then turn to Philippe on Boursorama. Claire.
The SRF mechanism aims at covering 1% of the deposits in the Eurozone. You may remember that at the very beginning of this kind of framework, the target was around EUR 50 billion. We now have a new target, which is considering the steady growth in deposits, which is around EUR 80 billion for all banks. Our increase in our contribution is mainly correlated to the increase in deposits in Eurozone. You have other mechanisms such as adjustment or things like that, but the main driver is increase in deposits. Regarding the end of the FRS, as far as today, we consider and we see no reason why this mechanism should come to an end.
Considering the contribution shouldn't come to an end, consider of course. Of course, as the target is to cover 1% of deposits, maybe there may be some small adjustments to cover, if need be, an increase in deposits. After 2023, we see no reason why this contribution shouldn't come to an end.
To clarify, what contribution do you expect next year from 864 this year?
We still haven't the invoice for next year. Keep in mind that it should be correlated to the amount we pay this year with a potential increase correlated to the level of the deposits in Eurozone. It's a very complex mechanism, the way the SRF contribution is calculated. We know by the end of the year we have a better view on the next year contribution. As of today, our main estimate is something correlated to our anticipation of the level of deposits in the Eurozone. We will be in the position to give you a better view by the end of the year, considering the complexity of this mechanism.
Okay.
I think just have to add, beyond the increase of sight deposits, there is also the allocation key between the different markets was initially factored in a way that there was an adjustment. It's again mechanically in the system with the French banks in particular. I don't know necessarily for the other markets. Everything being equal are paying more year after year, but the bulk of it is probably in 2022. I think there's less.
Exactly. Exactly.
Yeah.
The mechanism Frédéric refers to is the fact that at the very beginning of the process the base of the assets of the contribution was a local one, which means a French one. We progressively switched to a European and mutualization view. The huge impact this year for all French banks is also related to this kind of adjustment and mechanism, which could come to an end this year.
If I'm absolutely cynical, I will say to you that the mechanism was very complex, well understood by European negotiators, less by the French ones, but effectively it's a system where large banks and in particular in Europe, French banks are paying an excess amount, let's face it. And again, we can't do a lot about it. It's a kind of black box. As I said, I'm pretty sure that we are being so vocal with the French government that again, nothing similar will be put in place. And that again, what we will have to pay beyond 2023 is just a marginal element of increase of the said deposit, which is by definition much less than when you have to constitute the fund.
It is becoming a very significant tax on large banks and in particular, I must say, French banks, and that's why I'm so unhappy about it. Now, let's switch to Boursorama, Philippe.
Yes, good morning and thanks for the question. At this stage, we have not changed our targets, and we will have the opportunity to provide you with updated targets at the end of the process of integration of ING clients. What I confirm is that for sure we continue to target for high profitability in 2024.
Maybe I take the advantage to share with you the three axes on our strategy of Boursorama. The first one is to continue to expand this client base. I think we are building a unique customer base in France, you know, with the average age is 30 years old.
These clients you know are you know reasonably wealthy and with high potential. The first objective is to continue to build this client base. The second one is to increase the revenues with three levers. The first one is the equipment of the client and making sure that they are real clients, which is the case. The second lever is to the growth of loans, of the assets under management on the deposit.
We are making sure that it works both globally and cohort by cohort. The third lever is, you know, through a partnership with third parties. The last objective, it is of course to manage to control the cost base with, you know, a significant decrease of customer acquisition costs. For example, during the last quarter it has been reduced by 20%. Of course, to maintain at a low level all the other costs. I remind you that we had less than 900 people in Boursorama, so taking care of this huge number of clients.
Thank you.
Thank you. Next question.
Thank you. Next question from Kirishanthan Vijayarajah from HSBC. Sir, please go ahead.
Yes, good morning, everyone. A couple of questions, if I may. Firstly, on capital and your capital waterfall you show on slide 13, and in particular, I know you've talked about various elements, but on the OCI movement and the adverse rating migration, is it fair to assume those two items have continued to be a headwind after the quarter-end? Or have those items been a bit more stable into April and May? And could you just remind us how much of your CET1 capital is made up of OCI reserves at the first-quarter stage? And then secondly, just a quick clarification on something you said on French retail Boursorama, ING France. Is
Do you think the consolidation that you're doing, you know, Boursorama getting bigger, taking out a reasonably sized competitor, is helping to lower customer acquisition costs? Or is it really a case that, you know, there's still plenty of other challenges there in the French market and, you know, the customer acquisition costs probably remain at that kind of current level for a while yet? Just some color on how customer acquisition costs evolve post some consolidation in the market. Thank you.
Yeah. Hello, Kiri. I will let Claire answer your question. I think definitely we have the ability to reduce step by step the cost of acquisition. It's not just a question of consolidation of the market, but the sheer scale that Boursorama is getting, because there are also some fixed elements in the acquisition cost. It's not just variable, and we are benefiting from that. We've also this brand, which is better and better known. You know, it's a very well-rated bank, so there is a capacity to attract. The strategy is also of course to step by step decrease the cost of acquiring clients. Claire, on whether it's a recurrent item and the amount of OCI?
The OCI impact comes from our investments in sovereign which are booked in the corporate center. It mainly comes from the mark-to-market on the sovereign that goes to OCI, the minus quarter one when the mark-to-market is negative. Mainly comes from our buffers, but they are asset swaps, so they are protected against interest rate variations. The impact that we face this quarter is mainly related to some investments of some own funds in our insurance business in sovereign. This impact is related to the interest rate increase. It's quite.
It's far less significant than for some of our peers because of the interest rate protection we have mainly on our buffers. The OCI variation will depend on the interest rate variation, but keep in mind that most of our interest rate is hedged. This explains why the OCI impact is less significant than for some of our peers.
The amount of OCI, we have that in the management. We'll provide it to you later, Kiri. Okay?
Okay. No worries. Thanks, guys.
Next question.
Thank you. Next question from Tarik El Mejjad from Bank of America Merrill Lynch. Sir, please go ahead.
Hi. Good morning. Just a couple of questions, please. First on the costs, operating costs, can you tell us, give us some color on what you see on the ground in terms of all the inflation you've seen in Q1 and what should we expect in the coming quarters, in France and in other regions? If you can update us, please, on the sensitivity to rate hikes in the Eurozone and CE, given that the timeframe for potential rate hikes has changed and the magnitude as well potentially. Just one clarification, so the remaining regulatory costs you have for this year is 20 basis points, if I understand, from TRIM and the IRB repair, and Basel IV is still 110 basis points. Thank you.
Hello, Tarik. I will let Claire answer your question on the sensitivity of the interest rate of the interest rate margin to interest rates. Very quickly, again, on the regulatory side, yes, Basel is still an estimate. We have not changed the estimate to this 100 to 110 basis points. And again, as we've said, 20 is already booked regarding IRB TRIM, and we expect 40 to 50. So it's between an additional 20 and additional 30 basis points. On the first question on inflation, let me just highlight, we are again confident with the management of costs this year. We have negotiated the salary increases. We don't think there is anything there in 2022 to expect negatively.
And again, as we said, we are not changing our guidance. As you saw, we have done much better in the first quarter. We have not changed our guidance. We will wait a little bit more, but we feel pretty confident with the cost monitoring. Of course, the inflation varies from one country to the other. In Europe in general, keep in mind that it's probably lower than in the U.S. or even certain emerging markets because there is a buffer which the government sets limits by absorbing or limiting the increase of the energy prices. Claire, can you answer Tarik's questions on interest rates and
Regarding interest rates, I would like to remind you that we are currently in a very particular interest rate environment and very uncertain with very different views from economists from which some of them consider that we should face low rate. Others anticipate high inflation and high interest rates. Forwards have an upward trend. We are really in an uncertain environment. My second disclaimer, which is quite important, is that the impact of an increase in the interest rates is of course very positive in the long term for the banking industry. However, the impact on the net interest margin depends on several factors.
For example, the behavior of a client, the magnitude, the speed of the increase in rate hikes, the, of course, also the absolute level of rates. All that being said, at this stage and all things being equal, the sensitivity of our net interest margin would be around EUR 80 million at the group level, for year two in case of a parallel shift in the interest rate curve. Once again. Yes, what did I say?
No, you did not.
For ten basis points, of course. Once again, be very cautious with this estimate because of course, it depends of the client behavior. Also if you have a high inflation, you will have, for example, for the French banks, a huge impact and a strong pressure on the net interest margin, considering the Livret impact.
Sorry, Claire. The line was cut. How much you said for ten basis points? How many millions? Sorry.
For ten basis points.
Yeah.
I said at the group level, which means all our businesses included, EUR 80 million for year two.
Okay. Thank you.
80. 180 for year two. Is it clear?
Yeah, very clear. Thank you. Sorry about that.
Yeah. I'm sorry. At group level for all our businesses, which mean African and French and the Eastern Europe one.
Okay.
Thank you, Claire. Thank you, Tariq. Next question.
Thank you. Next question from Delphine Lee from J.P. Morgan. Madam, please go ahead.
Yes, good morning. So I've got two questions. The first one is on just to come back on the Russia exposures. Well, first of all on Rosbank, just on the process of the sale, because I mean, back in April, you were saying within weeks, and now you're still saying within weeks. Just wondering, you know, sort of what are the main hurdles. Is there anything regulatory or I mean, just to get a bit of clarity on the process. And also on the offshore exposures, can we have the duration of that book? It's just to understand, you know, how quickly you could potentially reduce that those EUR 28 billion of exposure. My second question is on just to go back on Tarik's question on the interest rates.
What assumptions, you know, are you using when you guide to that EUR 80 million regarding deposit beta? Do you assume that the so-called current accounts or demand-side deposits remain at zero? I mean, just to understand a little bit, you know, what assumptions you're using for that sensitivity. Thank you.
Hello, Delphine. I will let Claire answering your second question regarding again the interest rate sensitivity. On the weeks, and maybe it's a question of language. What we've said on the eleventh of April, we are just the fifth of May, so probably we are now four weeks later. It would be within weeks. By definition, in a process like this, you don't know if it's six or ten weeks. It means that whether it's six or ten weeks minus four, I mean, I take these figures as an example, you go from two to six, if my math are right. It's within the second quarter. I cannot tell you within whether it's two or six. By definition, you know, in those processes, as I said, there's no today, there's nothing.
The process is moving ahead. No big obstacle, which is stopping the whole thing, but it takes some time. We are just four weeks from the announcement. That's what I can say. Again, maybe my English is not right, but I was saying, maybe the additional to comment was very few weeks, which I see as less than within weeks. Maybe it's my English, which is not good enough. Claire, on the kind of assumption-
Yeah. I understood. Yes. Coming back to the net interest margin.
Yeah.
The kind of assumption behind the figures I gave. The first one is at group level, I mean, including all our business lines, Eastern Europe, Africa, and the Americas. The second one is that it's for translation, a parallel translation by ten basis points of the interest rate curve. The third one is that it's at a constant equivalent balance sheet. That's why I put so many disclaimers, because as you see, the client behavior may have an impact because one of the important capacities behind these figures is this notion of equivalent balance sheet. Of course, it's mandatory to assess the impact.
If I may, if I understand well your question, we stick to, for example, in France, we don't pay sight deposits, so we don't take the assumption that we would pay. We model and we consider in NIM that of course, we might see shift from sight deposit to other product at certain level of interest rate in the ALM. It's more through the dynamic modeling than by considering we would pay 50 basis points on sight deposits in France. It can be different in other markets, by the way, of course, Czech Republic or Romania, depending on the local practices.
Okay, great.
Next question. Yeah, sorry.
Hello.
Yeah.
Maybe on offshore, whether
Sorry. I was. Yeah, sorry. Forgetting Slawomir Krupa. Slawomir Krupa, how quickly can you reduce the offshore exposure?
The schedule is two ideas. The schedule is lowering. The exposure is getting lower fast with the following, let's say without disclosing the exact maybe figure right now, but let's say by 2027, you have little left, and everything that's left is basically ECA backed. That's the answer I can give you.
Thank you very much.
Can you give an indication in the shorter term? I mean, twenty-
Shorter term, you can say by 2020, it's more than EUR 1 billion less in the next two and a half years. The farther you go, the lower the risk, because the long-term exposure is the one that is the most ECA guaranteed.
Thank you.
Understood.
Thank you, Slawomir Krupa.
Thanks so much.
Thank you. Next question.
Thank you. Next question from Stefan-Michael Stalmann from Autonomous. Please go ahead.
Yes. Good morning, everyone. I want to ask, please, on Rosbank, you have these two special items coming up in the second quarter, the impairment effect and the OCI recycling. Can you give us a guidance on whether you expect a tax expense or a tax shelter against these losses, please, in the second quarter? The second question relates to your capital progression. You currently have a buffer of 370 basis points, but we already talked about the 110 basis points coming off from Basel IV. LeasePlan will be about 40 basis points. You still have the last leg of TRIM.
Basically, your buffer drops to around 200 basis points on a pro forma basis, which is still in line with the lower end of your target, but obviously not as comfortable anymore. Are you planning anything, any particular actions over the next, let's say, 12 months to get the buffer up again, the pro forma buffer? Thank you very much.
Hello, Stefan. Tax shelter, I'm turning to Claire. I think we were not considering any specific benefit from a tax perspective, to be frank, in our tax computation. Second, well, we consider we will have a good capital generation this year to build beyond your pro forma calculation, the quarter one. As I said, we are confident in the performances of our businesses. We think it will, of course, help in 2022, and there is no specific action beyond a disciplined approach on our organic growth of risk-weighted asset. And as I said, a good result. We can, of course, permanently also take out capital through securitization, synthetic securitization like we did in the past.
This, I would say, is part of the usual business, if I may say.
Right. Thank you.
Next question.
Thank you. Sorry. Next question from Matthew Clark from Mediobanca. Sir, please go ahead.
Good morning. Can I ask a question on your mortgage appetite, please? In the past, you have called back and ceded market share when you thought mortgage pricing was a poor risk reward. I'm just curious how you see the current environment. Have you managed to satisfactorily reprice your mortgages for the rise in long rates? I guess it, yeah, how does that affect your appetite? At what point would you rather buy a government bond at 1.5 basis points rather than issue a mortgage at 120 basis points or something like that? Just how are you thinking about mortgage pricing at the moment? Thank you.
Yes. Thank you, Matthew. I will turn to Sébastien. Because I guess your question is mainly on France.
Yes. Thanks.
Yes. Good morning, Matthew. On mortgages, as you have seen, the production was good in Q1, robust, I would say. Having said that, the increase in interest rates will put more pressure on the margin in the coming months as far as mortgages are concerned. Obviously the market will adjust, but it will take, I guess, a little bit time before all the competitors adjusting their pricing. We will keep our selective credit policy, which aims to protect our market share, but also protect our margin, and at the end, protect also the cost of risk.
Thank you.
Okay. Thank you.
Next question.
Thank you. Next question from Mateusz Nemeth from UBS. Please go ahead.
Yes. Good morning, and thank you for the presentation. I have two questions, please. The first one is on operating expenses. I think you had 5.6% year-over-year increase in underlying cost terms. It seems like the large part came from increase in variable comp, presumably in the markets businesses. If I stripped it out, the increase actually only around 3%. I'm just wondering, is this a good indication for the remainder of the year? I'm being mindful that you still haven't revised your cost income ratio of 60%-68%. So that's the first question. The second one is just a technical one. Could you give us a sense of the expected remaining transformation charges for this year? Thank you.
I will turn the floor to Claire Dumas at UCL regarding the additional CTA. On the cost, just to reiterate, on the fixed salaries, we have yearly negotiations and we have achieved these negotiations, so we don't expect the big switch from that. For the rest, let me highlight that we are permanently pursuing our different efficiency plans. If I may, what you see, as you said, and beyond, of course, the adjustment of our variable compensation to the level of performance, like with last year, is the result also of a permanent focus on many fronts.
As I've said, we are confident with our guidance on the cost/income, and we'll change it in due course if needed, but at this stage we don't change it. Perhaps on the CTA.
Regarding the CTA, let's remind that the transformation charges are booked in the corporate center and are not part of the underlying result, which is used, of course, to calculate the distribution provision. This being said, when it comes to 2022, most of the expected restructuring charges relate to the French retail merger, with the bulk of the remaining costs booked in 2022. I mean, around from EUR 350 million to EUR 400 million out of the remaining EUR 500 million-EUR 600 million. In addition, we anticipate transformation costs related to the integration of LeasePlan. It will be accounted as soon as 2022.
It means between EUR 100 million and EUR 150 million. We will have transformation charges associated with our other initiatives, GBIS, central function, and other efficiency plans related, for example, to our IT saving plan.
Thank you. Next question.
Thank you.
Thank you. We have no more questions by phone. Please go ahead for the conclusion.
Okay. Well, listen, no, I will take no time for conclusion. Thank you very much for attending. Again, I look forward to seeing you soon, and keep safe. Thank you very much. Bye-bye.
Thank you, ladies and gentlemen. Thank you all for your participation. You may now disconnect.