Earnings Call: H1 2021

Aug 19, 2021

Ladies and gentlemen, welcome to the BCB twenty twenty one Half Year Results Conference Call and Live Webcast. I am Alice, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. The conference must now be recorded for publication or broadcast. For the call today, the speakers We'll refer to the slides, which are available for viewing on the IR section of the BCB website since this morning. At this time, it's my pleasure to hand over to Pascal Kiena, CEO. Please go ahead, sir. Thank you very much. Good afternoon, everybody. Maybe good morning for Some of you calling from the U. S. Let me go direct on Page 4. I think we have good result or very good result in this first Given the context, they are not as good as 2018 or 2019, but those 2 years were record years, but nevertheless, very close To them with a net profit of CHF 173,000,000, I think CHF 10,000,000 short of the best result in the last 2 years, I think. Now I will concentrate on some business evolution in our different business lines, and Thomas then will concentrate on the more financial Elements of this presentation, P and L, balance sheet, etcetera. So I'll go directly on Page 6. 1 of our main business, mortgage business, we have a growth of 2%, which is totally in line with the growth of Contonvo. We don't have the latest statistic of the Swiss National Bank, but according to the statistic we have, in the last 6 months, The business in Switzerland grew by roughly 3.5% 4% in growth. So we are totally in line with the market growth. And other loans, I will come back to that, mostly an increase a slight increase in trade finance. And deposit, as usual, in the last Couple of semester, this is still increasing, probably a bit too much. We have to be careful on that. We come back to that. And AUM, of course, net new money with the performance of the market, significantly up. Now other highlights, I will not mention that on Page 7. I think this is self explanatory. Let me go to the different business lines. So Page 8, Retail Banking, an increase of 3% in the mortgage or slightly probably above the market. And we are focusing, as you know, on several areas in the market and not on all regions Of Cantonvo, since the vacancy rates are quite different from region two regions, we're focusing on those regions, mostly around the lake, We have the vacancy rates are still low. We have a very good traction in Asset allocation funds for those products are doing very well. We are also able to transform From savings account into those off balance sheet accounts, this is, of course, very interesting in this period. That's not easy, but this is improving quite fast. And as I said, an increase of inflows from customer, Basically, if we look at the market dynamic, post finance as well as UBS have Change the condition, orders as well. So we are following here. So we always said we don't want to be here a leader. We follow the market and we try to reduce as much as possible the inflow coming from all the banks, But it is not easy when you have a customer that brings you CHF 10,000 or CHF 12 times in 1 year. It's difficult To track really very well, and it's difficult to prove that this is a kind of arbitrage. So it's difficult to do that. Nevertheless, we're going in the next weeks to adapt some of our pricing condition to make sure that We are not the ones which receive all those flows going out from certain banks. Otherwise, you see that revenue operating profit are quite up. Nothing great to mention. I mean 2020 was not a very good year. So in a way, there is a kind of a base effect here. Corporate Banking, quite stable in terms of overall volume, an increase in revenue and profit. But I think it is most important to discuss the different business activities within this division. So first of all, the SME, mostly Contemvo SME, as you know, this is very stable in terms of credit limit, In terms of drawdown, privatization of those limits, I think it's very stable. Those COVID-nineteen bridge loan issued last year from the bank and backed up by the Swiss Confederation, we have roughly 12% paid back already. You see that those SME are quite liquid with a deposit up 6%. I mean, they are very stable, and this is a sign that the Vo economy is very resilient, very, very steady. We don't have an increased number of SMEs or companies Showing having problems. This is very stable. I mean, it's clear that for some sectors like tourism, Gastronomy, entertainment, etcetera, those sectors have really suffered quite a lot during this This is not over. They have been held from the States. This is clear. But we don't have a significant exposure. It's rather small. And most of those very small SVs are active in gastronomy or entertainment. They don't have credit basically. They might now have some COVID-nineteen credit as possible. So historically, We cannot really see what's going on in this market because they don't have any credit. So only 1 third or 40 percent of SMEs have credit in terms of loans. Large corporate, so this is a volatility based basic pricing here. So we are very strict in terms of negative interest rate condition, and some deposits went down, including to other banks. And Trade Finance, for those of you who follow us, We decided in 2020 to reduce our exposure in March last year because we didn't know exactly what was going on with this Pandemic, with this crisis, so reduced exposition, and we did that For the whole year 2020 and only at the beginning 2021, when we saw that The market is recovering, that the economies around the world are doing much better than the supply chain are working. We decided again To increase progressively our exposure, we are not back at the level that we had in 2019 or 2018, But we are going to go in this direction during this year, probably the beginning of next year. So you see an increase, It doesn't reflect directly yet in the revenues because we are not yet there. And in terms of credit risk, As I said, the books I mean, the SMEs in Toronto are very resilient. The book is sound, Being trade finance, large corporate or SMEs, not at all affected by the COVID problematic. And we have some provision this year or this semester, less than in the first half of twenty twenty. Nevertheless, I think €8,000,000 or €9,000,000 This is due to only one case. I insist on that. One case, a local company, And that has nothing to do with the COVID-nineteen. So this is in a way bad luck. I mean, this is a credit business. This is not a sign that the portfolio is having problem or something like that. This is just A very special case, probably a fraud, but I cannot mention much more about that. But the main message has nothing to do With the COVID-nineteen crisis. Wealth Management, so basically Private Banking as well as Institutional Asset Management as well as our subsidiaries, Piguet Gallant, you see the numbers are good. This is quite normal Given the financial market and we see here the effect of performance and increase in valorization, Effect directly on revenues, on commissions, quite also a strong transaction activities. I think you see that in most private banks or private bank related businesses. Nothing really special to mention here. Trading, quite stable. Basically, two effects. First one is the reduced revenues in the ForEx business, I repeat here, we don't do any prop trading. This is customer driven activities. And in ForEx, Basically, in the first half twenty twenty one, there was less volatility in the market than in the first half twenty twenty. So we profit from volatility usually, so basically less revenues. That was compensated by a very, very robust Activity in Structural Products. So we have innovated 2 new persons there. We have made some changes, and this is picking up Quite well. And there is an increase of more than 50% in revenues. This is also due to the market A condition. Let's be clear on that. Okay, I'm done and I'll hand it over to Thomas for the Financial part. Thank you. Okay. Hello, everybody. So I'll give you some comments on the more financial part. So on Page 13, EBITDA is up 13% 3% that will develop as a multi stage just after. The key element here to highlight is probably that the other provisions were €8,000,000 or minus €8,000,000,000. Last year, you remember last year, we had total risk costs of about €20,000,000 The balance sheet part of it is in the net interest income and for the thermal costs on Off balance exposure, we had to put it under other provisions. Now this year, this is at least for this line completely different. We had only some releases on other provisions. So with the well managed chart Costs, we'll also develop this in more detail after. We have operating profit up 13% with taxes of €13,000,000 we get Net profit of €173,000,000 Now looking at the different lines on Chart 14, obviously, The key element to have in mind is that the commissions and fees income was outstanding, at least with regard to the up Increase of €17,000,000 to 11%. Well, just mentioned, this is mainly linked to the Valuations and the transaction levels. Also in this line here with regard to commissions, we have trade finance and contra commission level Already picking up more than interest income over S1 'twenty one. The trading income has just been In net interest income, so I take the lower chart on Page 14, Well, it's always interesting to understand well what's going on, on the loan, on the NII before impairment charges. Well, it's under pressure of minus 2%. Obviously, here we have on one side the whole dynamics, Which are linked to the ongoing negative interest rate environment. They are The total lines are more or less stable, meaning that there is income pressure coming from the repricing Mortgages which is only partially offset by the mortgage growth. On the liability side, we have some repricing of course on the our own bonds as well on the hedge book, Whereas we are stuck on the deposits, as you mentioned. And as Pascal already highlighted, there is Ongoing steps of bringing more negative interest rates to the clients. But however, At the moment, it's less than 1% of the clients or about 15% of deposits volume who have negative rates. However, it's important to say that probably the minus 5% is It's linked to the fact that trade finance is still above below normal. And as Pascal highlighted, we expect with the normalization of the environment And also trade finance will continue to step up. Now in our risk charges here On the balance sheet part of the credit exposure, as Pascal mentioned, we have one isolated case, which gives the main numbers. Obviously, there are always a continuous No offer of some SME defaults as you know, but they wouldn't show any significant number. Here is one isolated case, which is Neither COVID nor trade filing, which gives us the net interest income of down -one percent. On Page 15, the security operating charges. Well, the protocols are up, I would say, for a good reason. We have in sourced another step of IT specialists and you know that this is always interesting for BCB Because we reduced margin paid to IBM and the VAT and at the same time we Apply our own discipline in management and inefficiency. So this will then drive through to some cost reductions. On other operating expenses, we see already lower IT costs and the minus 2% therefore. And depreciation is stable. Headcount, well, headcount basically finds the increase linked To the IT guys, which I just mentioned, on total assets, well, up to the balance sheet is marked By the high level of liquidity, be it at P and S and cash and equivalents with other banks. Obviously, there's also some part of treasury optimization and particularly to the increased Also in the increase what we have put in its reverse repo agreements, well, the business side, Pascal explained already very well what's Going on on loans and mortgage loans. So I turn to Page 18 with regard to total Live with the equity, here, of course, you see the inflow of customer deposits, which is partially high On S1, 2021 and that's why we will be that will tighten our conditions. Ongoing increase of bonds, even though we are very liquid, but obviously this is linked to have a structural solid And same finance structure. Well, paying more dividends and the income of benefit of First of S1 means that shareholder equity is down on June compared to end of year. On Chart 19, some numbers on assets under management, which have already with regard to net new money and performance being Mentioned by Pascal and what our key message here is that we this is pretty Nice. Pretty good situation, in particular, and as I mentioned, in private banking and I know some execution clients. But in these numbers, there also are some inflows of deposits on the bench, which are too high. On Page 20, our CET1 ratio is slightly down for two reasons. One is the trade side is coming back. And secondly, Our Pfannenfriesentrale, our institute, which is financing So by Cabotbond has decided at this last General Assembly had a capital increase And every participant, Candida Bank, participate in this increase. And it is already committed. That's why it's already with impact on the CET1 ratio. So well, leverage ratio is obviously down due to this balance sheet which is increasing And liquidity, ACR ratio is very high because of the optimization to do in treasury management As a result, very high ACR numbers to make it simple. Okay. These are all my comments And I hand over again to Pascal. Okay. Thank you. Okay, I'm going to finish with just The outlook. So in terms of economic situation in our region, as you can see, GDP development for 2020 was not as bad as foreseen. This is always the same when there's a crisis, Always again, certain exaggeration. So instead of the minus 5% to minus 6%, we will land by minus 2%, minus 3%. And the estimate for 2021, we estimated growth in Switzerland or in Cantonvo Of around 3%, let's say between 2.5% and maybe 3.2%. So basically, we are more or less back That's where we were in 2019. So we recovered. I think this is similar in certain parts of the world as well. So Going forward, we I believe the number 2021 are probably rather right between 2.5 to 3.2. I would say 2022 could be a bit lower, but certainly lower not lower than 2%, 2.5%. So rather optimistic about the future here. In terms of real estate prices, you see The trend continues. Again, we saw an increase in the last 6 months Of prices being on flat apartment or single family homes, this is clearly due to a strong demand, But as well as the environment of very low interest rates for mortgages. Now the good news here is that For the first time since 2010, the vacancy rate is going down. I mean, this 1.4 to 1.3, so this is not a lot, but nevertheless, it seems that This trend is stopped. Two reasons, there is again a population growth above 1%. We had till 2016, 2017, roughly 1.21% population growth, then it went down to 0.7, 0.8 For 3 years, I think, and now we are back at a bit more than 1.2%. And in the same time, I think A little bit less new objects on the market, so new buildings. So probably that explains this Slight decrease in the vacancy rate. Now whether it stays like that, it's difficult to say. So I am not going to Our mortgage policy focusing on quality, focusing on the areas where the vacancy rate is low. I mean, 1.3, 1.4, this is the average for Contrevo. But basically, it goes from 2.5 in certain regions Down to 0.3 around Lausanne, the main city and around the lake. So This is, of course, where we focus our effort. But I don't see that There will be a burst of a bubble in the next couple of months. I mean, the population grows, is growing And the price of mortgage are still low due to negative interest rates. So probably this dynamic will carry on, But we have to be clear, I mean, prices cannot go up to the roof. I mean, at one point in time, that should Level off, and I don't know exactly well. Okay. More specifically for the bank, Unless there is, I don't know, a huge problem, either in credit, which I don't foresee or in the environment or A new variant of this virus, I'm rather optimistic For the second half, which would be similar as the first half, so probably a result around €340,000,000, €350,000,000 So enough to pay our dividend, which is basically our base commitment to our shareholder To have a stable dividend, no surprise. That's the value proposition of PCV. And if we can increase the dividend, we'll But for the time being, I don't think this is given the uncertainty, this will be the right move. Okay. Thank you a lot. We'll take our questions as you have. The The first question comes from the line of Stefan Stahlmann with Autonomous Research. Please go ahead. Yes. Good afternoon, gentlemen. Thank you very much for taking my questions and for the call. I have two questions, please. The first is on what you said Negative interest rates and the potential to do a bit more there on pricing. Can you maybe give us a rough idea How much potential there is? I think for last year, you disclosed interest income from negative rates of about EUR46 1,000,000. If you could maybe put the additional potential from here into perspective relative to this number. And the second question, I guess, is somewhat related to this. You now have this very, very generous LCR ratio, 150% even in the Q2. And you did mention some optimization in the treasury, so this is not all coming from You call it inflow. This is also coming from something that you have done in your HQLA portfolio, I guess. Does it now give you additional Degrees of freedom to either make more money in the treasury or maybe even push client deposits out of the bank If they're not willing to accept repricing? Thank you very much. Okay. I'm going to take the first one. I mean, I cannot give you Six figures, but you see, I mean, there are 2 ways. We're going I mean, more and more every, let's say, 3, 4 months, we increased the number of Clients, customers who are affected by negative interest rate. So we charge them minus €0.75 So We don't really change the pricing. We increase, let's say, the circle or the scope of clients going down slowly, And it's also kind of a competitive game. It depends what the others are doing. There is another way. I mean, this is increasing a transaction cost, increasing cost for an account, increasing fees, And we will, in the next couple of weeks, months, introduce Some new pricing schemes for certain type of account, etcetera. So that might not increase the Revenue of interest, that will increase commission because I mean those fees on commission are not in interest rate. Interest rate depends basically on the growth of the mortgage. And I think with 3%, 2.5%, 3 We are in line with the market, so we don't want to go much faster than the market, 0.5 I said more why not, but not much more than that. And the rest is just trying to carry on, to continue, Let's say increasing the scope of the negative interest rate. We will carry on doing that. I cannot give you That would be a wrong guidance. So sorry for that. But we have I mean, we do You see, it depends really what the others are doing, and we have to follow that to make sure that we don't get too much inflow. Our goal is not really to get people out of the bank. I mean, You have to think long term here. I mean today we don't need ultrasound, but maybe in 5 to 10 years from now we might, We don't know. We try to not to attract new customer here who doesn't want to who don't want To invest in the Asian markets, so just having a selling account, we try not to accept those customers. We try to Detect to see the situation where we have the impression or the proof that The client is arbitrating us. And then we apply, we get the interest rate or the guy has to leave the bank. So it's not an easy task to do. So I cannot really commit to any numbers here. We will do, let's say, the maximum we can given the situation of the competition. Now in this 1st semester, I think the increase in inflow is a bit too high. I want to make sure that I can slow it down in the next couple of months. Now you cannot change just like that. You have to send a letter to customer, etcetera. So you have to be careful with those conditions. You cannot just change overnight. So but we are ready. I cannot also give you all information here, but we have analyzed the situation and we will Increase our condition in the next few weeks, but that might translate more in increase in commission, but in negative In interest rate revenues, I hope that you have kind of guidance and I give now the word to Thomas for the second Okay. Hi, Stefan. With regards to your LCR question, well, I mean, first point here is that The ACR currently, I mean, is not directed, right, because from a From a strategic point of view, financial strategic point of view, we would put them at 110 or 120, But it's now rather the result of optimization getting actually the most out of the This is Swiss National Bank gives us this is exemption level. So it's a result. Now here you must understand that and I I think we I can't put it bluntly on the table because if you combine numbers you can see it on your own That this exemption level continues to increase as a matter of fact for BCVE Because there's a matter of fact, which you can read, our legal liquidity reserve firm It's been increased for some accounting reasons 2 years ago and the exemption level It's a result of the 3 years moving average. So basically this increase of the liquidity reserves It has a positive result of increasing the exemptionable month after month, the 3 Year's moving average going up. So that's the key element, right? That's the key element. We have This is basically HQLA, if you want to say it quite that way, which is increasing because we want to fill up at least At least Philip, the extension of the Swiss National Bank and everything as follows, right? So if you fund it with something which is Longer than 35 days, then obviously this will be a very positive on SGR. Okay. So let's see the main driver and I think this should have answered to your question. That's great. Thank you very much for this. The next question comes from the line of Andreas Venditti with Santovo. Please go ahead. Yes. Thank you for taking my questions. I would have some related to trade finance. Maybe you could Discuss a bit how you see the market evolving, maybe also in terms of margins, given the withdrawal, at least The stated withdrawal of some competitors in this market, so this will be helpful. And then in terms of Volumes and the gradual recovery you mentioned, where do we stand here? You mentioned that this will continue In the second half and probably also at the beginning of next year, in order to recoup somehow the volume You decided to withdraw last year. And then also in terms of revenues, I think if I understood you right, On the net interest income, it's more lagging. I guess that's obviously the averaging effect. While if If I got it right, on the fee and commission side, this has already been in partially, obviously, in the numbers in the first half. Did I get this right? Thank you very much. So I'm not sure I understand the last part of your question, but let's try to take the first one, which is more strategic, I understand. You're right. Some big players withdraw from this business. So we We just want to take opportunity to increase our lines credit lines within our customer at the same time because we were in The strategy of being very cautious. They did that very professionally. So that means at one point in time, we We thought that there might be some liquidity problems in the trade finance business, not for us, but also for the clients and for also other banks. This did not happen because those banks that withdrew did it very professionally and over time. So for us, Innovate is an opportunity. On the other hand, we want to be very careful. We don't want to say, but those were large credit lines. And what we see is that some American banks as well as Asian banks Entering the market. Those most two banks, European banks that we drew are being replaced Slowly by some American banks and Asian bank. So that will not have a significant effect on us. What is changing though is we try to increase price because you see there were some, Let's say some fraud cases, and I think most banks have realized that they went too far In the last 5 years with, let's say, low pricing and very loose credit So basically, those significant fraud cases In Asia, Singapore, not to name it, as well as the withdrawal of some banks I've created in a way a reaction within the trade finance banking community Where I think the business is going to be a bit more, let's say, healthy in the next couple of years With a slight increase in overall price and especially a better risk management, I think banks will no longer accept several conditions and the clients will have to adapt and not the banks. So given this situation, we're going to increase slowly. I cannot give you an exact timing when I expect to Back at, let's say, 2018, 2019, 2011, but if things carries on like that, probably mid of 2020, We should be back at mid of 2020. Mid of 2022, sorry, yes. Mid of 2022, We should be back at the level we had in the previous years. But you see, this is A ramp up, this has increased, so you don't see the full impact at once. It takes a bit of time to realize. If we get by June 2020 the level we had on average in 2019, I mean, It's just at the end of the first half. So you will see only one effect and Park effect in 2022. So I hope that answered the first part of your question. So the market is a bit healthier, I think. And the let's say the European competition is replaced by some Asian And American competitors. For us, not much change. We will just take advantage of, Let's say this Asia market by being a bit tougher on the credit condition by trying to increase on a selectivity basis Increase prices by 10 to 20 basis points. I hope that answers your question. Sure. Thank you very much. There are no more questions at this time. Back to you gentlemen for any closing remarks. All right. Thank you very much. Sorry? Sorry, we have a follow-up from Mr. Venditti. Okay, good. No problem. Mr. Venditti, your line is open. Thank you very much. Sorry for that. I thought I gave space 2 other people asking, otherwise, I can continue. One of the strengths that, in my view, that we saw today in the results was obviously from fees and commission, Which were nicely up. Maybe you can give a bit more of light. You mentioned several times, I think, during the presentation, Strong transactional activity, strong trading from clients. So maybe you could give a bit of color of how much this Was responsible for the increase of the fee and commission line? Thank you. I can't maybe Thomas you can give a bit more. I can't give you precise figures. Maybe Thomas I don't know. Well, I would say it's really the Strong majority part of that increase. We have also, as I mentioned, whereas total Trade finance income is still below S120. It is in the commission part higher. So we have also contribution on trade finance here, right? So it's you can really put The 8% of the increase on the market performance and the higher transaction level. Okay. Thank you very much. That was the last question. Back to you for your closing remarks, gentlemen. Okay. Thank you very much. And we'll talk to each other probably in a couple of months. Bye bye. Thank you very much for attending this conference. Thank you. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.