EuroBusiness Media (EBM): BNP Paribas, one of Europe’s leading banks, reports results for the full year 2014. Jean-Laurent Bonnafé, welcome. You are the CEO of BNP Paribas. What are your comments on the Group’s performance for the full year?
Jean-Laurent Bonnafé: BNP Paribas closed the year with a profit of 157 million euros. Our 2014 results were mostly impacted by the costs related to the comprehensive settlement with US authorities which amounted to 6 billion euros in 2014.
If we exclude this and some other non-recurrent items and look at the underlying performance, the adjusted net result for the Group reached a significant 7 billion euros.
Revenues progressed in all our divisions, marking a 3.2% increase excluding one-offs. This revenue growth was also sustained by our specialized businesses which delivered a very strong performance in 2014.
Effective cost control in our 3 main divisions together with the ongoing implementation of our Simple & Efficient plan across the Group, meant that our gross operating income marked a healthy 5.6% increase excluding exceptional items.
Cost of risk was lower at 57 basis points, as the higher cost of risk of BNL in Italy was more than offset by improvements especially in CIB – Corporate Banking and Personal Finance.
Hence we delivered a good operating performance in 2014 and, despite the US settlement, we are proposing – as already announced – an unchanged dividend payment in cash of 1.5 euros, which equates to a yield of some 3%.
EBM: Your Domestic Markets proved resilient in 2014 despite a lacklustre economic backdrop across Europe. What can you say about the performance of your different businesses?
Jean-Laurent Bonnafé: In 2014 Domestic Markets maintained a dynamic sales and marketing drive in terms of deposit gathering in France, Belgium and at Consorsbank in Germany.
In terms of credit demand, we saw this progressively stabilize over the year.
And in cash management we consolidated our European leadership as well as our top position in France and Belgium.
2014 also marked the first full year of our digital bank, Hello bank!, which increased its client base to over 800,000 in Germany, Belgium, France and Italy at year-end.
In addition, despite the lacklustre backdrop you mention, we continued to invest in our Retail network by implementing our new differentiated branch formats to respond to our clients’ changing needs.
Domestic Markets proved successful in maintaining revenue growth in 2014 on the back of strong performances of our Belgian Retail and of our specialised businesses: Arval, Leasing Solutions and Personal Investors. This was quite an achievement especially considering the persisting low level of interest rates.
The continued effort in terms of cost control, related also to the implementation of Simple & Efficient, meant that the cost base was kept stable in 2014. Thanks to a 1.3 positive jaws effect, we succeeded in improving yet again the cost/income ratio of our Domestic Markets.
Overall, Domestic Markets confirmed a high income generation capacity with 3.4 billion of pre-tax income in 2014.
EBM: International Retail Banking is still experiencing healthy loan growth. Could you provide some colour on this?
Jean-Laurent Bonnafé: Sure. If we look first at the Europe-Med geographies at constant scope and exchange rates, loan growth stood at +12% compared to last year. This was particularly due to the strong loan growth of TEB in Turkey. In parallel with this we continued to grow our deposit base in most countries.
The resulting effect on our P&L was double digit revenue growth.
Operating expenses were kept under control despite investments to strengthen the commercial set up in Turkey and Morocco.
Although Europe-Med’s cost of risk was affected by events in Eastern Europe, pre-tax income still showed an increase versus the previous year totalling 385 million euros.
All in all a dynamic year for our Europe-Med. It’s also important to mention the acquisition of Bank BGZ in September in Poland that will make BNP Paribas a reference bank in the country.
Over in the US, BancWest had loans increasing at over 6% during the year driven by strong corporate and consumer loan demand. This healthy growth was matched by increasing deposits which progressed at a similar pace.
BancWest was also successful in increasing the Assets under Management of its Private Banking, which stood at 8.6 billion dollars at year-end, and in continuing to develop its Mobile Banking which has reached close to 280,000 monthly users.
Revenues improved by 1% in 2014 but benefitted from lesser capital gains on securities’ sales than the year before. Net of this, revenues actually progressed by 3.6%. Revenues were positively affected by good volume growth and negatively affected by the unfavourable level of interest rates.
Operating costs were penalized by higher regulatory expenses, in particular those related to CCAR and IHC, the strengthening of the commercial set-up being partially mitigated by savings generated by the branch network streamlining.
Overall, BancWest confirmed its significant contribution to the Group’s profitability with a pre-tax income of 732 million euros.
EBM: In consumer finance, you’ve been very active in developing the business. How would you qualify Personal Finance’s 2014 results?
Jean-Laurent Bonnafé: Personal Finance has had a successful year further boosted by its new partnerships and bolt-on acquisitions it finalised during the year. I’m referring to the acquisition of the remaining 50% stake in LaSer – which helped us strengthen our leading position as European consumer credit specialist – and I’m also thinking of the acquisition in South Africa of RCS and the consumer finance activities of JD Group.
Furthermore, we’ve developed new partnerships in the distribution sector in promising markets like China and Brazil, and new partnerships in auto finance in some key markets for our development like Turkey and Belgium.
This successful business development translated into increased revenues with a good development in geographies like Germany, Belgium and Central Europe.
Given good cost control and an improving cost of risk, Personal Finance’s pre-tax income grew by over 16% on a comparable basis, topping 1.1 billion euros.
EBM: How has your CIB division performed in 2014? You have recently announced a new governance for CIB: what are the main changes you’re implementing?
Jean-Laurent Bonnafé: CIB had a good overall performance in 2014. Revenues grew 2.1% excluding the first time introduction of the FVA which impacted our Fixed Income for 166 million in 2014.
Revenue growth was driven by client activity in Advisory and Capital Markets while our VaR remained very low.
Fixed Income performed well on forex and rates while credit activity was more subdued during the year.
In Equities & Advisory, equity derivatives showed good progress on structured products and on flow activities.
Corporate Banking revenues saw strong growth in Asia-Pacific and good dynamics in the Americas. In Europe, revenues decreased in Energy & Commodities activity but increased slightly elsewhere.
On the cost front, CIB had to face higher regulatory costs. Concurrently it continued to implement its development plans whose costs were partially offset by the significant benefits accruing from our Simple & Efficient plan. As a result, the cost/income ratio was essentially in line with the previous year excluding the one off FVA impact.
CIB’s cost of risk was at a low level this year also due to some write-backs during the year. As a result, pre-tax income at constant scope and exchange rates grew by 13.7% exceeding 2.5 billion euros.
As regards the new governance of CIB, it is now called Corporate & Institutional Banking to reflect its focus on the need of our 13,000 corporate and institutional clients. The new governance encompasses:
- the creation of a new Global Markets business line grouping together all market activities;
- bringing together the CIB activities with those of Securities Services; and also
- the simplification of the regional approach by creating three large regions, that is EMEA, Americas and Asia-Pacific.
These changes we are implementing have a three-fold aim:
1) First, strengthen the Group’s presence with institutional clients while broadening the global offer;
2) Second, adapt and simplify the corporate clients organisation and strengthen the financing platform; and
3) Third, improve the operating efficiency through a structural cost reduction and greater platform industrialisation and mutualisation.
More generally, it is for CIB a step further allowing this division to speed up the evolution of its model.
EBM: For the Investment Solutions business, what are the main take-aways from your 2014 performance?
Jean-Laurent Bonnafé: In 2014 Investment Solutions’ managed assets increased by 63 billion reaching 917 billion euros. This was mostly on the back of a strong performance effect and to a lesser extent a favourable forex effect and net asset inflows.
Asset inflows were good in Insurance and in Wealth Management while Asset Management managed to reduce significantly its outflows compared to the previous year.
Securities Services continued its strong development in 2014, gaining some sizeable mandates – like that of Generali Group in Europe.
Insurance continued to expand its international activities through partnerships. In 2014, its gross written premiums increased by 8.5%.
As a result, revenues increased by 3.7% at constant scope and exchange rates with a significant contribution from Securities Services, who benefitted from increased transaction volumes and higher assets under custody, and Insurance which continued to benefit from growing protection insurance in Asia and Latin America and growing savings in Italy. Wealth & Asset Management revenues were also up.
Overall, Investment Solutions’ costs progressed at a lesser pace than revenues, leading to a 7% growth in pre-tax income which was just over 2.2 billion euros.
So, I would say that Investment Solutions delivered a good overall performance.
EBM: Regarding your balance sheet, BNP Paribas emerged from the AQR with a minimal impact. Could you update us on where you stand with regard to your Common Equity Tier 1 ratio?
Jean-Laurent Bonnafé: Our Common equity Tier 1 ratio was stable at 10.3% compared to last year. This was quite an achievement and confirmed the Group’s strong capital generation capacity considering that it includes:
- the impact of the settlement with US authorities,
- the minimal impact from the AQR that you referred to and that we have already taken into account,
- the anticipated introduction of the Prudent Valuation Adjustment, and
- the three bolt-on acquisitions we completed in the year, that is Bank BGZ, LaSer and DAB Bank.
EBM: Overall, if we exclude the US settlement, where do you stand regarding your 2014-2016 business plan? And beyond this, do you see more headwinds or tailwinds, especially when considering additional regulatory requirements and levies?
Jean-Laurent Bonnafé: Excluding the US settlement, in 2014 we delivered a good operating performance which confirmed the strategic vision of our business plan.
This was depicted, for example, by the promising trends of our specialised businesses and of our geographical plans. But we have also launched some new projects that are very important to prepare tomorrow’s Retail Banking. I’m thinking, for example, of digital banking such as Hello bank! or new online payment solutions such as PayLib or Sixdots.
As I mentioned before, we’ve also made 3 bolt-on acquisitions in 2014 which will bring 1.6 billion euros of additional revenues by 2016.
Looking beyond 2014, if we consider costs, we are incurring additional compliance and control costs as compared to the plan. A significant part of these costs relates to our resolve to strengthen compliance and internal controls over and beyond the Remediation plan. But we’ll also incur additional costs related to new regulatory projects.
However, given the success of our Simple & Efficient programme and the progress we’ve made in implementing its projects, we’ll be able to fully compensate these costs via further cost savings. In fact we have revised up our target for Simple & Efficient from 2.8 billion to 3 billion euros by 2016 while maintaining transformation costs unchanged.
Moving to risk management, in 2014 we confirmed our ability to effectively control risks, as shown by the overall stability of our cost of risk. However, cost of risk in Italy went higher than expected. As the economic situation is improving at a slower pace, BNL’s cost of risk will have a less favourable trajectory over the plan’s horizon. But we believe that other Group businesses should compensate the gap in BNL’s cost of risk. This was the case in 2014 with lower than expected cost of risk in Corporate Banking and Personal Finance.
Beyond this, the actual economic and interest rate environment is worse than expected. Interest rates in particular are significantly lower, both short and long-term, especially on the Euro. This has a negative impact on revenues generated on deposits in Retail banking.
Credit demand remained subdued as GDP growth in the Euro zone disappointed. In fact our new scenario shows significant negative gaps in terms of cumulated GDP growth over the remaining years of the plan.
Recent developments could however potentially improve the picture going forward. I’m thinking in particular to the significant drop in the value of the Euro and in oil prices.
That’s not all. Recent developments on the regulatory front mean that we have to factor in some significant additional levies and costs compared to our plan.
The most significant impact comes from the increased costs of the Resolution Fund. Beyond Europe, we also have supplementary costs in connection with new regulations for foreign banks in the US. I’m referring in particular to set-up costs for the Intermediate Holding Company and to implementation costs of CCAR. The Group has also to factor in the future TLAC mechanism.
We estimate that the combination of all these levies and costs will impact our 2016 net result by something like 500 million euros, meaning a negative impact of about 70 basis points on our 2016 Return On Equity. This impact should be reduced afterwards as systemic taxes will taper off and the cost of CCAR will lessen after 2016. Also the contribution to the Resolution Fund will run only until 2022.
So, overall I would say that tailwinds don’t quite offset headwinds but we have shown yet again our ability to adapt to a changing environment and to deliver a good performance thanks to our diversified model and the trust of all our clients.
EBM: Jean-Laurent Bonnafé, CEO of BNP Paribas, thank you very much!
Jean-Laurent Bonnafé: You’re welcome!
