EuroBusiness Media (EBM): BNP Paribas, one of Europe’s largest banks, reports 2018 full year results. Jean-Laurent Bonnafé welcome! You are the CEO of BNP Paribas.
Jean-Laurent Bonnafé: Thank you!
EBM: What are the highlights of the Group's full year results?
Jean-Laurent Bonnafé: The Group displayed good business activity with higher outstanding loans in a context of economic growth across Europe. The revenue evolution was however penalised by the still low interest rate environment and an unfavourable market context with particularly challenging conditions at the end of the year.
Revenues of the operating divisions showed overall good resistance and were just marginally lower. Domestic Markets revenues were slightly lower in the networks but progressed well in the specialised businesses; International Financial Services showed good growth despite an adverse forex effect, and CIB’s revenues were impacted by the lacklustre market context and very challenging conditions at year-end.
Costs of the operating divisions evolved on the back of the development of the specialised businesses in Domestic Markets and IFS but were down in the retail networks and in CIB.
Cost of risk at Group level has improved 4.9% compared to 2017, equivalent to
35 basis points of outstandings.
The Group’s net result stood at 7.5 billion euros, slightly lower than in the previous year. It reflected the spot impact at period-end of the sharp fall of the markets on the remaining equity stake in First Hawaiian Bank and on some assets marked-to-market in the Insurance portfolio. This value should normally return, at least partly, as markets gradually normalise as illustrated by the sale of the remaining part of First Hawaiian Bank in January which captured a significant part back.
In terms of financial structure, the Group is well capitalised and the fully loaded Common Equity Tier 1 ratio reached 11.8% at year-end up 20 basis points compared to the pro-forma level at the beginning of the year.
Finally, for the full year 2018 we have proposed a dividend payment of 3.02 euros per share, in line with last year despite the slightly lower net result given the point in time impacts at year-end I mentioned and as we pay a lot of attention to the consistency of our dividend policy.
EBM: Client activity across the Eurozone has remained well oriented despite a slower pace of growth. How have your Domestic Markets fared in this context?
Jean-Laurent Bonnafé: Our Domestic Markets showed good business drive in the context of economic growth in the Eurozone with loan growth in all business lines and deposits increasing in all countries. And Private banking’s net asset inflows stood at
4.4 billion euros in the year.
Domestic Markets is progressively developing new client experiences while pursuing its digital transformation. Overall we have over 8 million digital clients in our Domestic Markets and we’ve been ranked number 1 in France by D-Rating in terms of mobile functionalities. In terms of digital banks, Hello bank! has continued to acquire new clients reaching 3 million clients and Nickel topped 1.1 million accounts opened, marking a 44% progress versus year-end 2017.
Domestic Markets is also adapting its offer to new uses through innovative products such as LyfPay, our new mobile payment solution which has already had 1.3 million downloads in France.
Concurrently Domestic Markets is streamlining its operational model thanks to a combination of simplification, end-to-end digitalisation of customer journeys and processes automation while continuing to right-size the branch network.
In terms of P&L, revenues were only slightly lower at 15.7 billion euros, still impacted by the low rate environment which is however partly offset by the good business drive I mentioned and strong growth in the specialised businesses.
Operating costs were marginally higher due to the continued development of the specialised businesses but were 0.9% lower in the retail networks.
Given a reduction of the cost of risk in particular at BNL in Italy, pre-tax income marked a 3.4% increase to 3.7 billion euros.
So, wrapping up on Domestic Markets, good business drive and higher income despite the persistently low rate environment.
EBM: Personal Finance continues to be a revenue driver for the Group. What are the highlights for your consumer finance business in 2018?
Jean-Laurent Bonnafé: Our Personal Finance continued to show strong business drive in 2018 with outstanding loans progressing by nearly 13% on a comparable basis thanks to good demand across Europe and the beneficial effect of new partnerships. As a reminder, the business line acquired the financing business of General Motors Europe at the end of October last year.
Personal Finance is actively implementing its digital transformation as illustrated by the 97 robots already operational and 31 million self-care operations done by its customers, equivalent to nearly three quarters of the total.
In terms of P&L, revenues increased by 12.4%, or 9% on a comparable basis, in connection with higher volumes and the positioning on better risk products. Costs were up 13.9%, or 7.9% on a comparable basis implying positive jaws. Cost of risk was at a low level in terms of outstandings but higher in absolute terms due to the increased volumes and the application of the new accounting norm IFRS 9 as of 2018. As a result, pre-tax income stood at over 1.6 billion euros, up on last year. On a comparable basis, pre-tax income progressed by 5.9% versus last year.
Summing up, in a favourable context across Europe in 2018, Personal Finance confirmed its very good business drive on the back of strong operating trends.
EBM: Still on Retail banking, how have your international retail networks performed in 2018? What’s the latest update on the situation in Turkey?
Jean-Laurent Bonnafé: Our International Retail networks showed a good overall performance in 2018.
Looking at Europe-Med, loans and deposits were up on a comparable basis. In 2018 Europe-Med completed the acquisition of the core banking activities of Raiffeisen Bank in Poland, strengthening its position as the sixth largest bank in the country. This acquisition should be over 1% accretive for the Group’s net Earnings Per Share in 2020.
It also continued to implement its digital transformation as shown by the successful development of its digital banks with Cepteteb in Turkey reaching 665,000 clients and BGZ Optima in Poland at 223,000. And we extended the use of e-signature for different kinds of transactions.
At constant scope & exchange rates, Europe-Med’s revenues were up 12.5% with an increase in all regions. Costs increased at a much slower pace than revenues, generating significantly positive jaws. Cost of risk was up as a result of a moderate increase in Turkey. Overall, Europe-Med generated 684 million euros of pre-tax income up 24% compared to the previous year. At historical scope & exchange rates the income evolution was still strongly positive but was affected by the marked devaluation of the Turkish Lira over the period.
Focusing on Turkey, where actions taken by local authorities have helped stabilise the economy, cost of risk was moderately higher as I mentioned and this was partly offset by an increase in revenues. All this is quite small at Group level as our activities in Turkey represent less than 2% of the Group’s total outstanding loans and mainly comprise the bank TEB which is well capitalised, very liquid and has strong deposit inflows.
Turning now to US retail banking, BancWest continued its good business drive in 2018. In the course of the year it sold an additional 43.4% of First Hawaiian Bank retaining at year end an 18.4% stake which has been sold in January.
At constant scope & exchange rate, loans progressed by 1.6% and deposits by 3.5%. Private banking’s assets under management grew 4.8% to 13.7 billion dollars at year-end.
BancWest continues to implement its digital transformation with already 30% of new accounts opened online. It also continues to develop business co-operation with CIB with over 50 deals finalised jointly in the year and with Personal Finance for auto loans.
Still at constant scope & exchange rate, revenues were up around 2% on the back of volume growth and costs were up slightly higher. Overall, BancWest generated 819 million euros of pre-tax income, up 3.3% on last year but down 1.4% at historical scope & exchange rate.
So, in a nutshell, strong income growth in Europe-Med and a good operating performance at BancWest in the US.
EBM: How have your savings & insurance businesses evolved given the volatile market context in the last part of the year?
Jean-Laurent Bonnafé: Our savings & insurance businesses continued their development in 2018. Assets under management stood at 1 trillion and 28 billion euros at year-end marking a 2.2% decrease year-on-year. They were impacted by a significantly negative performance effect in conjunction with the sharp drop of financial markets at the end of the year despite a good level of net asset inflows in particular in Wealth Management and Insurance. In the course of 2018 we also integrated the assets under management deriving from the acquisition of ABN Amro’s activities in Luxembourg.
Focusing first on the Insurance business, it continued to show good development especially with a good performance in protection insurance in Asia.
In addition, our recently launched protection & casualty offer, developed jointly with Matmut, has already resulted in over 100,000 contracts sold in our French retail network since May and our partnership with Orange for phone insurance is proving successful.
In terms of results, Insurance revenues progressed by 6.6% thanks to good business drive but were affected as I already mentioned by the spot impact of the drop in markets on assets marked-to-market. Costs progressed as a result of business development while pre-tax income was optically lower due to the SBI Life capital gain booked in 2017. On a comparable basis pre-tax income was only marginally lower than last year at close to 1.5 billion euros due to the spot impact I mentioned and that we could recover over time.
Turning to Wealth & Asset Management, Wealth Management as I said finalised the acquisition of ABN Amro’s activities in Luxembourg that will strengthen its positioning on the local large entrepreneurs. Asset Management continued its industrialisation by rolling out an IT outsourcing solution. And Real Estate confirmed strong business activity, in particular in real estate fund management in Germany and in Advisory business in Germany, France and Italy.
In terms of P&L, Wealth & Asset Management’s revenues were up 3% driven by the Real Estate business but were impacted by the unfavourable markets at the end of the year and by the introduction of the MiFID 2 regulation. Costs increased at a higher pace on the back of the development of the business and of some non-recurring items. Globally, pre-tax income stood at 681 million euros down 24%
To wrap up, continued business development in our savings & insurance businesses but impact of the unfavourable markets evolution at the end of the year.
EBM: There has been record market volatility in the last quarter. How has this impacted your CIB businesses?
Jean-Laurent Bonnafé: Our CIB faced a very unfavourable market context this year but it confirmed its leading positions in Europe where it ranked joint-third and maintained its global market share after a gain in 2017. It also continued its good development on targeted client bases with over 300 new corporate groups on-boarded world-wide in the past two years.
CIB’s revenues stood at 10.8 billion euros, down 7.5% compared to last year with contrasting evolutions in the different business lines. If we take them one at the time, starting with Global Markets: revenues were down 15.4% on the back of a lacklustre context for FICC activity in Europe and a particularly negative market context for Equity & Prime Services at the end of the year.
FICC revenues were actually down 21% year-on-year as client activity on rates and credit in Europe remained weak due to the monetary policy while forex activity performed poorly especially in emerging markets. There were however good performances in primary markets and in structured products and FICC confirmed its top ranking for all bond issues in euros.
Equities revenues for their part were down 6% year-on-year due to the impact of extreme market movements towards the end of the year and a loss on index derivative hedging in the US. However, client activity on equity derivatives and prime brokerage progressed.
Turning to Corporate Banking, revenues were down 5% but actually up slightly excluding some capital gains booked in 2017 and the impact of our retrenching from some sectors due to our CSR policies and some perimeter effects. Cash management & trade finance continued their good development consolidating their leading positions in Europe and developing well in Asia. We also confirmed our number 1 position for syndicated loans in the EMEA region.
Corporate Banking continues to actively implement its digital transformation as illustrated by the successful client on-boarding on Centric, our corporate digital platform that accounted close to 10,000 clients at year-end.
Looking at Securities Services, revenues progressed well on the back of strong business drive with gain of significant mandates. On the digital front, the business has already automated over 40 processes with a further 30 under way.
Moving now to total CIB costs, they were down 1.3% thanks to the cost efficiency measures, which stood at 221 million euros in 2018, with the ongoing implementation of shared platforms, end-to-end processes digitalisation and automation of transactions leveraging 180 robots. In CIB we’ve steadily reduced costs over the past 3 years.
Cost of risk was down at a low level as provisions were partly offset by write-backs. Overall, CIB generated 2.7 billion euros of pre-tax income, down 21% compared to the previous year as the negative market impact was somewhat mitigated by cost reduction and effective risk management. However we need to intensify the transformation of our CIB to improve its profitability.
EBM: Precisely, you have reached the halfway point in your 2020 plan in a contrasted global environment. What are the main highlights of your business plan implementation so far?
Jean-Laurent Bonnafé: The Group is actively implementing its 2020 plan in what you correctly refer to as a contrasting environment. In fact, while economic growth remains favourable on the whole, it is nevertheless expected to slow down, and interest rates, which are particularly low in Europe are expected to increase only gradually.
Leveraging its integrated and diversified business model, the Group is successfully implementing its digital transformation and pursues differentiated development strategies in its three operating divisions, while concurrently supporting its ambitious policy of engagement in society with significant initiatives to promote ethical responsibility, social & environmental innovation and a low carbon economy.
Based on the 2018 results I’ve just illustrated, it emerges that both Domestic Markets and International Financial Services have trajectories that are largely in line with their 2020 targets. CIB on the other hand has been faced with a particularly unfavourable context in 2018 and hence needs to intensify its transformation in order to redress its trajectory towards 2020.
Starting with Domestic Markets, which as I said is in line with its objectives, it will continue to implement its action plan to boost its revenues, improve operating efficiency and maintain a rigorous risk management approach. It will enhance its cost reduction measures by generating an additional 150 million euros of recurring cost savings in 2020 and we want to deliver positive jaws from this year. All in all, we confirm our Domestic Markets pre-tax return on notional equity target for 2020.
For IFS, despite an adverse forex effect, it is also in line with its plan focused on pursuing growth and improving operating efficiency. Here too we’ll intensify cost reduction measures with over 120 million euros of additional cost savings while delivering positive jaws overall. Pre-tax return on notional equity should rise to a level very close to the initial 2020 target.
CIB as I mentioned was impacted by a particularly unfavourable environment in 2018 that led to a decrease in its profitability despite the successful decrease in operating costs in the past 3 years and the proactive actions taken to reduce the allocated capital .
In order to intensify its transformation, CIB will focus on three main axes:
First, a review and potential stopping of non-strategic and insufficiently profitable business segments with a preliminary scope of around 250 million of revenues and over 100% cost/income as such generating savings in the region of 250 million euros in 2020;
Second, an intensification of the industrialisation of CIB in order to reduce costs which will generate a further 350 million euros of additional cost savings in 2020, bringing the cost savings in the two years to come to 850 million euros; and
Third, a focus on even more selective growth allowing to continue strengthening on targeted client segments.
Hence, we’ve adjusted the 2020 trajectory of our CIB focusing on profitable growth combined with an additional cost effort and some business exits that should allow us to improve the return on equity to a level close to the initial target.
Globally, we expect the return on equity to improve in all three operating divisions by 2020.
EBM: So, what are your expectations for 2020?
Jean-Laurent Bonnafé: The Group has updated its 2020 estimates with an expected revenue growth equal or above 1.5% per year versus 2.5% in the original plan and a 600 million increase in recurring cost savings from 2020 to a cumulated total of 3.3 billion euros.
The Group expects risk-weighted assets to grow by at least 2.5% per annum over the next two years but they will be stable for CIB. We plan an active management of the balance sheet which entails sales of non-core equity stakes and/or assets.
Moreover, we’re not envisaging new acquisitions. As such, in terms of capital management we expect an organic capital generation of at least 30 basis points per year after dividend distribution.
Based on what we see today, we expect the Return on Equity to improve to a level of 9.5% in 2020, equivalent to a Return on Tangible Equity above 10.5%.The Common Equity Tier 1 ratio will be at least 12% in 2020.
Overall, we expect an increase of the earnings per share of more than 20% between 2016 and 2020 leading to an increase of the dividend per share of 35% over the same period, based on a dividend pay-out of 50%.
EBM: Jean-Laurent Bonnafé, CEO of BNP Paribas, thank you very much!
Jean-Laurent Bonnafé: You’re welcome!
