Société Générale's CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 7.13 | About: Societe Generale (SCGLY)

Société Générale SA (OTCPK:SCGLY) Q1 2013 Earnings Call May 7, 2013 6:30 AM ET

Executives

Frédéric Oudéa – Chairman and CEO

Philippe Heim – Group CFO

Didier Hauguel – Head of Specialised Financial Services and Insurance and Group Chief Country Officer for Russia

Laurent Goutard – Head of Societe Generale Retail Banking, France

Analysts

Delphine Lee – JP Morgan

Kinner Lakhani – Citi

Guillaume Tiberghien – Exane BNP Paribas

Maxence Le Gouvello – Credit Suisse

Flora Benhakoun – Deutsche Bank

Cyril Meilland – Cheuvreux

Anke Reingen – RBC Capital Markets

Lorraine Quoirez – HSBC

Alex Koagne – Natixis Securities

Pierre Chedeville – CMCIC

Andrew Lim – Execution Noble

Nick Davey – UBS

Jon Peace – Nomura

Frédéric Oudéa

All right. Good afternoon for most of you and maybe good morning for an early start to our colleagues in the US. Welcome to this Conference Call for our First Quarter Results, and thanks for attending. Let me just mention that we aim a one-hour-and-fifteen-minute conf call. I’m sure you’re very busy. There are the releases of different firms today. What I propose is that I will make a very short introduction, and then I will leave the floor to Philippe. And then we will answer, with all our teams, your questions.

In terms, just precisely, of discipline and in order to stick to this timeframe, I would suggest each of you not to ask more than two questions. So, I would like you to go to slide four, page four, just again as an introduction. I would like to highlight three things.

First of all, we had a good start of the year with a solid first quarter, and strong business performances. I think it is very positive to see revenues from businesses which are stable despite a difficult economic environment and also after all the transformation which have already taken place.

Secondly, you will see that more in detail that our cost/income ratio is down for all businesses that reflect a strong focus on cost control. And we have also posted a decrease in our commercial cost of risk versus end of this – of 2012. We will come back to that also in more detail.

Altogether, we report a group net income of €364 million. But when you exclude the exceptional items that you have in the appendix, the reevaluation of our own financial liabilities in particular and the other non-recurrent items, you end up with €852 million in net profit. That’s the first thing.

The second element is that we have launched, as you know, the second step of our group transformation at the beginning of this year. We have announced a reorganization of the group. We’ve, as you remember, in mid-February, reorganization focusing on three pillars: the front retail; the international retail; and the financial services activities, and the CIB; and Private Banking custody; and Wealth Management business. The objective is, of course, to further develop revenue synergies, better share our clients but also, of course, reduce costs.

And we announced, as part of these results, a second stage of transformation with €900 million of additional saving over the 2014/2015 period of time. And when you add it to the €550 million already saved in 2012 and consolidated, that leads to a €1.45 billion of savings over 2012/2015 that represent 9% of our pro forma cost base of 2011. We work on the simplification of the organization, cost optimization, business synergies, process simplification, Philippe will give you more flash on that in a minute.

And then third thing, the strengthening of the balance sheet. This is reflected by our core Tier 1 ratio full Basel 3 we communicate for the first time after the adoption of the CRD-4 in Brussels. We present an 8.7% core Tier 1 ratio. This is fully-phased and there is nothing which is not included in that. And we are very confident to meet our objective and to raise that figure close to 9.5% by year-end. We think this target is well – is perfectly suited for our group.

Let me just remind you we have a systemic surcharge of 1%. We belong to the first bucket of global systemic financial institution. That means actually that starting 2014 we are already compliant with our regulatory requirements. Regarding the liquidity, we will come back to that in more detail, but we also confirm that our LCR at the end of the first quarter is above 100% under current rules.

Overall, with all these actions, the strong business performance and the confidence we have to further effectively generate good activity, we say we present that the group is able to deliver by end of 2015 a return on equity of 10%.

Now, I will leave the floor to Philippe for more details.

Philippe Heim

Good morning, everybody. So, I suggest we move to slide number six. Well, just like to illustrate what have been said by Frédéric, to demonstrate, I mean, our ability of the group to adapt to its business setup.

During the first quarter, despite a current weak economic backdrop, the performance of our businesses during this period was resilient with stable revenue in spite of the adaptation efforts and have taken and constraints that we applied on the businesses. And I would like for illustration the evolution of our RWA, moving down 8% during first quarter of 2012 and 2013.

We have applied a strong focus on cost control with operating expenses down minus 2.3% on a like-for-like basis. And it provides further support to around July, which as a result was 4% versus the same quarter last year.

Now, moving to the transformation plan. As you know, last year, the group delivered on cost reduction mainly through the restructuring for SG CIB for a total saving of €550 million. Société Générale is now ready to go further as part of the second stretch of this transformation plan as announced in February of this year. So, we have three main objectives.

First to simplify the group, to accelerate decision-making processes, to alleviate reporting task, and in order to ensure that everybody focuses on clients. Second objective, we want to extract cost synergies by letting the organization. And lastly, we want to increase the operational efficiency of the group.

The achievement of this objective should translate into an additional €900 million of frequent savings by 2015. So, the total prediction for the period 2012 to 2015 will be growth to a total amount of €1.450 billion, representing, and this is important, 9% of the 2011 pro forma cost base. And the proper execution of the cost reduction plan is subject, of course, to monitoring at the highest management level of the group.

So, moving to slide number eight, I would like to give you more flesh on this cost reduction program. First, it is important to bear in mind that this cost reduction program is already being implemented, and you will – you see on the right-hand side the levers we will use to apply to this program. So, we would like to streamline the organization, we’d like to increase the operating efficiency, and we’d like to optimize external costs.

A number of projects are already being implemented and I would like to elaborate a bit on the most significant ones. First, a detailed plan to right-size the head office in Paris and marginally simplify the organization of support functions was presented to trade unions a couple of weeks ago. You know that. It’s been commented in the press. It should start to be implemented in the course of the summer. And around 620 positions will be cut in areas like finance, HR, International Retail Banking, head office and so on.

Second example, the French retail banking division is currently executing a plan to adjust the marketing setup in the network. It will continue – it continues to rationalize its back offices and, as I said, a plan to conform right volumes on fewer platforms.

Third kind of example, a number of reorganizations are under way in our International Retail Banking division, most notably in Russia, in Romania, in Czech Republic. Similar projects exist already in the Specialized Financial Services divisions; for example, GEFA in Germany. Our leasing arm is currently rolling out a plan to optimize its commercial organization.

Then fourth example, SG CIB. Our CIB is devised with Accenture, a plan to create good platform policy products. And this platform would under Société Générale operations, but it will be open to third parties, generating substantial economies of scale for all participants.

Beyond the projects already under way, additional cost-cutting initiatives shall be launched later in 2013 and early 2014. And this will reflect positively and will be reflected positively on year 2015 financial statement. Overall, the cost-reduction plan has now reached a high degree of maturity, with significant projects under execution.

And I would like also to highlight that the group paid specific attention to change management, most notably in France where an agreement was signed with all the representative trade unions in February. This agreement is important. It defines the way the social consequences and transformation of the group will be handled. It also ensures a smooth execution of process, for example, with clear and defined timeframe for social consultation. No need to elaborate, it is important in a French environment.

Now moving to capital, slide number 10. So, during this first quarter, the group strengthened its capital base further. Strong retained earnings and the positive impact for asset sales and deleveraging efforts boosted our 2.5 core Tier 1 ratio by a total of 85 basis points and thus compensating the negative impact so 95 bps from changes in accounting and regulatory rules that took effect on January 1 and these changes that has been anticipated.

And which we communicated already confirm the inclusion of consolidated insurance subsidiaries in the credential parameter, the application of the revised IAS 19 norm governing post-retirement benefits and the move to market base CVA. As a result, so the group’s Basel 2.5 core Tier 1 ratio stood at 10.6% at the end of March.

Then, as mentioned by Frédéric, we communicated for the first time in Basel 3 and following the vote by the European Parliament of 34, we published for the first time our fully loaded core Tier ratio under Basel 3 based on our understanding of the rules and including, I have to mention that, the Danish compromise for insurance subsidiaries.

On the basis – on this basis, the ratio stood at 8.7% at the end of March and confirms the guidance provided in February. So, we have to mention this is a fully loaded and 100% pure core Tier 1 ratio.

The Basel 3 roadmap we gave you in February contained an estimated minus 30 bps from the treatment of insurance subsidiaries and a minus 210 basis points impact from Basel 3. Adjusting for the positive expecting impact for the Danish compromise and you know it is estimated at 40 bps, so roughly minus 70 bps impact we report here for the impact of insurance, lead first Danish compromise to a net minus 30 bps guidance for insurance.

If we include the positive benefit of Danish compromise to our end-March Basel 3 core Tier 1, ratio of 10.6%. This ratio would stand at 11%. Therefore, the Basel 3 impact is currently. So, you have deduct this 11% minus 8.7%, which equals to an impact of switching to Basel 3 of total amount of 230 basis points.

This figure is expected to drop at 210 basis points by year end as we guided in February. We will achieve this objective through earning generation in the course of the year, through optimization relating to other aspect of the application of Basel 3 that has not been fully implemented at this stage.

As mentioned by Frédéric, our objective is to raise this Basel 3 fully loaded core Tier 1 ratio to close to 9.5% by the end of this year. Already program actions such as scrip dividends, capital increase reserved for employees and additional deleveraging of legacy assets would raise this ratio by 20% at this stage. And we will – we are confident to reach a level close to 9.5% by the end of this year.

And as mentioned by Frédéric, this target of 9.5% is put perspective with our systemic surcharge of 1%. We are in the soft buckets of global systemic institutions, while some of our peers are subject to a surcharge of 2% to 2.5%.

Now moving to funding and balance sheet, so, moving to page number 10. The group balance sheet structure has been significantly strengthened over the past two years through deleveraging, deposit gathering and a conservative approach to long-term funding. You know all of that. At the end of March, loan-to-deposit ratio confirms its downward trend standing at 117%, down 8 points versus Q1 2012.

The group long-term funding program is well ahead of schedule with a total amount issued of more than €13 billion, representing roughly two-third of this year’s program. And thanks to these efforts, our excess of stable resources of our long-term assets has risen further to €58 billion at the end of March, at €7 billion on the quarter. And the group liquid asset buffer stood at €135 billion and covered 108% of our short-term need, up 7%. And last but the not least, it was mentioned by Frédéric, Société Générale’s LCR is above 100% under current assumptions.

Now, moving to cost of risk, this is page 11. So, the net allocation to provisions during this first quarter of 2012-2013 is at €892 million, up versus Q1 2012, down versus Q4 2012. It includes an additional €100 million general provision for disputes in the Corporate Center.

During this first quarter, the cost of risk excluding for disputes at group level, this is red line you have on the slide, decreased at 75 basis points, falling in almost all businesses compared to the previous quarter. In the French Networks, it remains stable at 65 basis points on loan to individual customers but that’s a continued high level on mid-size corporates. Additional provisioning this quarter concerned a limited number of medium size as far as exposure to which it’s shared with some of our peers.

Now, for international networks, we have a drop in the cost of risk in Romania and the Mediterranean Basin, while Russia and Czech Republic, in those countries, it remained moderate. Overall, cost of risk in this division declined to 154 basis points.

In Specialized Financial Services, cost of risk dropped significantly to 113 basis points, declining both in Consumer Finance and Equipment Finance.

In CIB, low level of provisioning in Q1, which reflects the softness of our credit portfolio. So, overall, the group’s doubtful loan coverage ratio, excluding legacy assets and entities disposed of during the quarter, stood at 77% at the end of March.

Let’s look to the slide number 12. So, let’s now focus on consolidated results. At the consolidated level, NBI was €1.1 billion for the first quarter, restated for the impact from non-economic and non-recurrent items stood at €6.2 billion in Q1 2013. And it reflects resilient Retail Banking revenues and a strong performance on the CIB franchise. I will explain it later on.

Operating expenses were down overall by more than 6% and down 2.5% on a like-for-like basis. As a result, first-quarter group net income, excluding non-economic and non-recurring items, stood at €852 million, while reported group net income for Q1 was €364 million including the impact of different items we’ll explain in page 31 of the annex. I’ll let you see that. I can explain it later on.

So, now moving to the businesses, first, I would like to focus on the French Networks. No need to mention that we had to navigate through a deteriorated macroeconomic environment in France. And in this context, the French Networks business, activity was satisfactory during the quarter. Deposit on funding rose plus 9.2% versus Q1 2012, with a strong growth coming from both individual and business customers.

The French Networks remain fully committed to service the customers and continue to assist businesses and individuals with the financing of their projects. But in an environment of economic uncertainty, of course, the demand for financing remained low in Q1, and outstanding loans remain roughly stable versus Q1 2012.

As a result, the average loan-to-deposit ratio improved by 10 points at 118% in Q1 versus the same period of last year. The French Network revenues were resilient with net banking income of roughly €2 billion, only slightly lower than in Q1 2012. Net interest income remained globally stable versus Q1 2012, thanks to an increase in the average loan margin and helped by the increase in outstanding deposits, which partly offset the effect of the decline in investment rate.

Now, fees and commissions, they declined minus 3.4% versus Q1 2012 with drop in service commissions, but also in financial commission on the back of the low financial transaction volumes. Operating expenses were down minus 2.7%, reflecting the effect of cost-saving plan and – already implemented. And it allows gross operating income to rise up plus 1.3%. Against the backdrop of a weak French economy, cost of risk amounted to 75 basis points in Q1 2013, as mentioned before, stable versus the previous quarter. And the contribution of the French Networks to group net income totaled €256 million.

I would like to switch with the slide, page 15, that our network has shown the ability to change the business model and to adopt the distribution tools. We are at the forefront of the Internet and mobile transformation. And Société Générale is clearly leader in Internet and mobile banking in France. The bank provides an innovative online offering to its customers, attracting more and more high international rankings.

Separately, Boursorama, our subsidiary, has positioned itself as a market leader in France in a comprehensive online banking platform is well on track to reach 500,000 online customers in France by the end of this year. With increased use of online services, the group is as well positioned to be a winner in this competitive field and to gain clients through innovation and superior customer satisfaction.

Now, moving to International Retail Banking, the International Retail Banking division continued its gradual adaptation during this first quarter, showing healthy commercial activity against the backdrop of an economic slowdown in Europe. At the end of March, deposits outstanding were substantially higher, plus 7.1%, versus Q1 2012 on the back of robust inflow in Russia, Central and Eastern Europe countries and Sub-Saharan Africa.

At the same time, loan outstanding were up plus 3.7%. But in spite of this good commercial activity, the low interest rate environment in the main European countries caused revenues to be down slightly, minus 1.3% versus Q1 2012. Costs were contained despite inflation, barely increasing year-on-year, leading the division to post gross operating income of €433 million in Q1 2013 with a cost/income ratio of 61.7%, slightly in progress. Cost of risk was up plus 6.3% adjusting for our withdrawal from Greece and Egypt. And the division’s contribution to group net income totaled €75 million.

A word on Romania, revenues were lower in Q1, minus 4.5%, due to weak volumes and pressure on net interest margin. But thanks to a decline in cost, minus 2.5% versus Q1 2012 last year, and the cost of risk divided by half versus at the end of this quarter, our subsidiary is close to a breakeven point with a group net income of minus €5 million.

Now, I would like to say a word on Russia. So, in Russia, this first quarter – so, you have on this slide the consolidated view of SG Russia, including Rosbank, Delta Credit, Rusfinance, Société Générale Insurance and ALD Automotive. So, the first quarter constant improvement observed in the previous quarter following commercial initiatives launched in 2012.

There was a steady increase in activity on the corporate segment with a solid pipeline and tangible revenues synergies between Rosbank and SG CIB. We see significant transactions in Q1 as the group’s CIO, Rosneft deal with the achievement of 17 bonds issuance mandates.

Loan to individual customers grew substantially in Rosbank at 21%, particularly in the ruble-denominated segment and was accompanied by equally robust deposit inflow over the same period plus 73%. On the cost side, measures to improve operating efficiency introduced in 2012 helped to reduce the operating expenses sharply by minus 6.5% despite high inflation.

Considering all of the group activities within the SG Russia perimeter, the contribution to the group net income was, for this quarter, €39 million. And our return on equity is 12% for this quarter.

Now, moving to Specialized Financial Services and Insurance. For the first time, we dedicate a slide to this business line just to illustrate that this activity is a key partner for our retail networks. During Q1 2013, the group improved its market position in France and mainly in three directions. You see a positive net inflows of €800 million in life insurance; the successful development in the Personal Protection segment, with premiums rising 19% versus Q1 2012; the continued significant market-share gains in Property/Casualty insurance, as evidenced by a premium growth of 7% over the past year.

Steady growth dynamics have ensued also – operates abroad. And we – here, we leverage on the wide coverage of the International Banking network and the specific business expansion effort in Poland and Russia.

And to illustrate this dynamic, premiums in Personal Protection and Property and Casualty insurance doubled when compared to the first quarter of 2012. And the contribution to the group net income of the insurance activities was, for this quarter, an amount of €80 million. That’s almost 10% versus Q1 2012.

Now, moving to Specialized Financial Services, other specific business line. In Q1, Specialized Financial Services continue to demonstrate profitable transformation dynamics. ALD showed profitable growth in a difficult market. Equipment finance focus is origination efforts on high margin businesses, while reducing is reliance on group funding.

Consumer finance reaped the rewards of its successful refocusing. And the reduction in operating expenses and the cost of risk boosted the contribution of the group net income to a total of €112 million in Q1 and if you add to this the €80 million of insurance, the total contribution of this division break a new record this quarter.

Now, moving to Corporate and Investment Banking, during Q1, revenues at SG CIB were resilient at 2% at a roughly €1.9 billion versus Q1 2012. But we have to appraise the performance of this. We have to correct the impact of the move to market base CVA and DVA this quarter.

And for the net loss of loans sold in Q1 2012, as part of the group’s strategic refocusing, thus the evolution of quarter-to-quarter, in revenues, were down minus 6%. On the same restricted basis, revenues on market activities were down 7% versus a very strong Q1 2012. So, this quarter, we saw a strong performance from equities which saw revenues rise by 12% versus Q1 2012 driven by increased volumes in Asia, particularly in structured products and a good performance in flow of businesses, especially stock lending.

Revenues in fixed income, currencies and commodities were down minus 20% against a very strong Q1 2012 which had benefited from the market normalization in the wake of LTRO. Business in this division was good in structured products during Q1.

Then, financing and advisory, again, on an adjusted basis, registered 10% decline in revenues, reflecting the refocusing of activities during 2012. Structured finance show a strong performance in this quarter and capital markets saw sustained activity in debt insurance and corporate finance. I have to mention that the legacy asset portfolio had a limited impact this quarter with NBI contribution of minus €10 million and a cost of risk of minus €35 million.

The full effect on the last year restructuring plan and the continued efforts on costs pushed operating expenses down, minus 5% versus Q1, and maintained the cost/income ratio at a low level of 61%. But you have to mention that – it is mentioned that 61% include legacy assets. RWAs were stable versus Q4, but down 20% versus Q1 2012 affecting deleveraging and reduction in VaR.

SG CIB’s contribution to group net income was roughly €500 million, which, on a Basel 3 basis, was up 7% versus Q1 2012. And last but not the least, the Basel 3 return on equity with a 10% normative capital allocation was 15%, but including legacy assets and 20% further growth activity and it demonstrates a continued strong profitability of SG CIB in a Basel 3 environment.

Page number 21 shows some awards and significant achievement of this year. I will move to page number 22. Few words on Private Banking and Global Investment Management and Services. In this first quarter of 2013, Private Banking and Global Investment Management and Services recorded positive fund on the commercial front and despite the disposal of TCW, Private Banking, so asset under management and revenues-wise, thanks to a strong client activity.

So, as we assess, we see an increase in assets under custody and under administration with a strong discipline on growth. At Newedge, the implementation of the research in plan is ongoing. Overall, the division made a contribution to group’s net income of €73 million, which was higher than in Q4 2012, but lower income versus Q1 last year.

I will finish by the Corporate Center. So, in the first quarter of 2013, the Corporate Center registered a negative impact from the reevaluation of the group own financial liabilities of minus €1.045 billion before tax affecting the sharp decrease in the bank’s funding cost since the end of last year. Let me remind you, but you know that already, that this is non-economic item. And it does not affect neither the group’s prudential ratio, neither the dividends.

Nonrecurring items, I think in this quarter results in the Corporate Center are the cost of risk which includes an additional €100 million provision for disputes this quarter as the sales of our subsidiary in Egypt and a small positive adjustment of €21 million for the closing of disposal of TCW.

So, after all, the NBI of the Corporate Center remained driven principally by the cost of the measures taken to strengthen the group’s balance sheet structure. So, we increased the liquidity buffer. We have taken measure to ensure our MCR compliance, and we expect during 2013 a gradual decrease in this negative impact which would bring the Corporate Center gross operating income to convert to around minus €1 million for this year. So, we confirm our guidance for the Corporate Center.

And I will leave now the floor to Frédéric for the conclusion.

Frédéric Oudéa

Thank you Philippe. Just a few words as a conclusion, I think that as the Chairman and CEO of this group, I would like to reiterate a few points. First of all, I think this quarter reflects the good commercial franchises and again the capacity to adapt particularly through the CIB business. It’s something I had already commented to you previously.

We have refocused in 2012. I am convinced that we have a good business model, well-balanced. We are very close to plans, and the momentum is positive. And I think that the figures reflect this capacity to gain market share progressively as well as to deliver a profitability based on the 10% Basel 3 capital nominative allocation between 14% and 15%.

I must say I’m also happy with what we’ve been achieving in the French retail. In terms of cost monitoring, the evolution of NBI was expected. The commercial activity is good, but as you know, there are some headwinds in terms of low interest rates and commissions, which are going down because of different regulations. The strong effect from the costs means that the gross operating income is up. And again, as you know, it’s what we have in mind at least to compensate this negative impact on the NBI, thanks to the effect on the cost.

And regarding the retail outside France, let me highlight that there is more work to be done here, but clearly, the trends are on the right direction. Russia, as we have highlighted, and I had in the past few quarters commented to you, on the positive momentum between the different businesses to leverage on synergies and also, of course, benefit from the strong effect on cost, I think it is reflected in this first quarter.

There is more to be done, but again, I think it goes in the right direction as well as the decrease of the cost of risk in Romania. So, as you can see, a lot of work has been done there, but we get the first fruit, and we are confident to further develop again this business model in this new environment.

Secondly, we have, as I’ve said, in mind to effectively adjust our cost base, a little bit like what we did in 2012. I mean, maintaining the impact of our businesses with our clients. And what we had in mind was not just to give an objective but, really, to work hard on the different initiative, discuss regarding the French activities with our trade unions to be able to implement something which would be efficient. And Philippe has highlighted what we have in mind, and I’m confident again to deliver.

And so, overall, with this balance sheet which is compliant with Basel 3, we are confident to meet our target. The idea is, in an economic environment that we consider will remain sluggish in Europe. We don’t factor such a strong improvement in the coming two to three years. We should be able, in our view, to deliver an acceptable return on equity to our shareholders of 10% by end of 2015. And that will be clearly our management focus for the coming quarters.

That’s what we wanted to tell you. And now, we are happy again to answer any questions you have.

Question-and-Answer Session

Operator

(Operator Instructions). We have a question from Delphine Lee from JP Morgan. Please go ahead.

Delphine Lee – JP Morgan

Yes. Hi. Delphine Lee from JP Morgan, just two questions. So, first of all, I just want to come back on the cost-saving program just to get a bit more flavor of how much the 620 staff reduction that you mentioned represent out of the €900 million. And how should we think in terms of how that’s split between the €450 million in Retail or the €300 million in CIB and Private Banking.

And then just secondly, on – just to come back on French retail provisions. So, I guess given that the guidance is 60 basis points cost of risk for the full year, how much decline should we expect for next few quarters and in the fourth quarter in particular where, generally, there is a seasonal increase?

And also, is it possible on French retail to get the NPL coverage and NPL ratio for those mid-sized corporates? Thank you.

Frédéric Oudéa

Delphine, I might take these two questions briefly. The 620 cost – head count reduction is a relatively small part, at the end of the day, of the total program. And again, it concerns the head office. So, we’d get that it’s pretty well allocated across the board.

Some of that, of course, reflects the setting in the businesses that we put together and because there were different teams involved, and we might just need one, instead of two. So, overall, I would say, relatively well spread. But again, it is something which is not that significant compared with the €900 million which reflect a series of initiatives as previously mentioned.

Regarding the French retail, let me again just highlight that. The cost of risk is impacted by, in particular, a few files, mid-sized and relatively large corporates. So, I must say, today, it’s premature I think to resize the guidance to 60 basis points. As we said, end of year 2012, it’s very difficult to guide by 1 or 2 basis points when you have such files.

What is good, again, and I would like to reiterate that, the cost of risk with individual clients have been very low. Again, it’s pretty concentrated in certain sector. So, let’s wait a little bit how it goes going forward. It’s a bit premature to comment. We stick to this guidance for the time being. And in terms of coverage of NPL, in the French retail, we stand, I think, at 71%, something like this.

Delphine Lee – JP Morgan

For the overall business or that particular segment?

Philippe Heim

That’s for the French retail. For the group as a whole, I think it’s 77%. I think you have that in the appendix. And you will find the figures in the appendix.

Delphine Lee – JP Morgan

No, I just meant on the French retail itself.

Philippe Heim

Yes, French retail is 71%...

Delphine Lee – JP Morgan

Okay. Okay.

Philippe Heim

And 77% for the group as a whole.

Delphine Lee – JP Morgan

Okay, great. Thank you.

Philippe Heim

Next question.

Operator

We have a question from Kinner Lakhani from Citi. Please go ahead.

Kinner Lakhani – Citi

Yes. Hi. So, I have a few questions. Firstly, just wanted to start off with the cost savings, the €900 million. In trying to understand how we’ll see the impact on a three-year view, what kind of underlying cost inflation do you think we should be thinking at a group level? Trying to get a better sense as to whether these cost savings will just lead to more flat cost on a three-year view as opposed to an absolute cost reduction.

Second question, on the liquidity buffer and the cost of that going to the Corporate Center, I’m just trying to understand, what the outlook is going forward and in terms of LTRO repayments, where do you stand on that?

Thirdly, on the Basel 3 guidance, just wanted to make sure I understand, to what extent the corporate CVA exemption and the SME release that’s been forwarded by CRD4 is in the numbers? And finally, if I may on MBIA, where there was a settlement with Bank of America yesterday, I believe, this obviously, leaves Soc Gén as the last kind of remaining counter-body to be settled. What do you see as the financial impact of this and what the value of the CDS hedges at the moment, which I guess will have seen some negative experience following the tightening of spreads? Thank you.

Frédéric Oudéa

Okay. Kinner, you asked four questions. You will be forgiven, but please, let’s stick to this rule. I will leave the floor to Philippe and for the liquidity buffer, Basel 3. MBIA we will make no comment on this file. Cost saving, I think it’s more around effectively a stability of the cost base, taking out, of course, all the businesses that we have got rid of.

And let’s say, these two effectively, the €900 million, probably will help to compensate – more than compensate investments or offset an inflation cost, which can still be reflected in certain areas like in retail outside France, for example, there is an inflation there. So, I would say that that’s probably what you can take overall, if you wish, again, in an environment which would remain relatively sluggish and with a parameter of businesses, which would not change dramatically. So, that’s more or less what you can take.

Perhaps, Philippe, on the liquidity buffer, the outlook and the reimbursement of LTRO and a few precisions on the Basel 3 calculation.

Philippe Heim

Yes. So, you’re right. So, we have a liquidity buffer. We have a net cash and cash equivalents of €64 billion. Of course, this has a cost. We are beginning to grow. So, we have launched the acquisition beginning of this year. So, we will continue. It’s difficult to give you more background of what we’ve said before, so we’re growing the total cost of liquidity will be within the estimation of GOI impact on Corporate Center of €1 billion for the whole year. This is, at this stage, our best estimates.

You asked a question regarding the positive treatment of SMEs. If we compute that in our fully core Tier 1 ratio, so the ratio we disclosed is a pro forma based and on our understanding of the directive here before, and the regulations that we adopted in April. And as a result, the positive treatment of SMEs, I confirm, is a part of our computation and it has an impact of roughly 15 bps.

Frédéric Oudéa

And we have also taken I think the exemption of the SMEs

Philippe Heim

Yes.

Frédéric Oudéa

But on the other hand, we will also take the full chapter on the GTA. I mean, certain firms sometimes communicate without taking this impact of GTAs. So, it’s, again, a fully paid and fully compliant with the CRD IV calculation.

Kinner Lakhani – Citi

That’s right. Thank you very much.

Frédéric Oudéa

Next question.

Operator

We have a question from Guillaume Tiberghien from Exane BNP Paribas. Please go ahead.

Guillaume Tiberghien – Exane BNP Paribas

Yes, good morning. I just wanted to clarify whether I understood correctly this morning that the International Retail, and I guess the other divisions as well, are now being charged the funding cost of the goodwill, if that’s correct what is the amount per division, please?

And if that’s also correct, does it mean that I suppose the Corporate Center benefits from it? And if so, then does your guidance of €900 million – oh, sorry, of €1 billion negative pre-provisioned profit for 2013 in the Corporate Center is inclusive of this benefit or not?

Frédéric Oudéa

Guillaume, I will again leave the floor to Philippe. Philippe?

Philippe Heim

So, it’s true that so you put the charge-off, excuse me, the goodwill is now a charge for every business line. So, you will find the difference in the annex through the slide deck. So, for example, if you look for our International Retail division – I’ll just move to the right page, excuse me.

Guillaume Tiberghien – Exane BNP Paribas

Sorry, in what page is it?

Philippe Heim

Page 44 for the impact of goodwill is included. It’s €24 million in the net banking income. But this did not lead us to revise our guidance for the Corporate Center with GOI of €1 billion for this – for the year.

Guillaume Tiberghien – Exane BNP Paribas

Okay. So, it’s correct to say that it’s actually marginally worse in the Corporate Center because now you benefit from this payment of all the divisions to the Corporate Center. And just to clarify, the minus €24 million is just for International Retail. How much is it for the whole group?

Philippe Heim

In fact, this effect was already forecasted. It was included in our estimate.

Guillaume Tiberghien – Exane BNP Paribas

Okay. And how much is it for...

Frédéric Oudéa

And there is no real deterioration because what we’ve done is to try to precisely review the rules in terms of capital and goodwill. But overall, the negative impact on the business is not that high. So, I mean, you should not consider that there has been such a big change actually between the Corporate Center and the businesses. We’ve tried to simplify the rules effectively in practice, allocate this – the financing of goodwill but, again, also simplifying the rules regarding capital. So, overall, the net impact is not that significant.

Guillaume Tiberghien – Exane BNP Paribas

Okay. My second question is with regard to capital markets. The performance, obviously, on a relative basis versus other French banks is very strong. Would you care to qualify maybe the beginning of Q2 so that we have a feel as to how sustainable Q1 was?

Frédéric Oudéa

I will leave the floor to Didier.

Didier Hauguel

I will not. Let’s say, we are just pleased with this quarter results. So, I will not comment, let’s say, after four weeks. So, you will be disappointed there, Guillaume. But I think that you’ve seen the evolution of the markets, although (inaudible). So, no comment to make on this. I think we will not comment on a monthly basis the evolution of the capital market.

What I was willing to say that the first quarter was strong. I think it confirmed the fact that in a market environment that was also less behind compared to last year in term of benefit from the LTRO, our, let’s say, fixed-income platform was able, let’s say, to confirm that it made progress over the last quarters.

And on the equity, let’s say, I think that it also showed – shows that the equity business on the structured product that was mentioned by Philippe and also on the listed products and equity lending and borrowing was able to perform well as soon as equity market is getting a little bit better.

So, I think it showed that the performance and the franchising equities are very strong. And on the fixed income that we are making progress even if we are, let’s say, clearly a Tier 2 franchise.

Guillaume Tiberghien – Exane BNP Paribas

Thank you.

Frédéric Oudéa

Guillaume, and I know we had discussions in the past, and again, Didier is too modest to say that. But I must say I’m very happy in the way – again, the refocusing has been managed in 2012. I’m happy with, again, the focus we have, as Didier mentioned, clearly, we are number one in the equity derivatives business. And we’ve seen, as we have highlighted in particular in the structured products, good activity.

On the fixed income side, I must say when you look at our positions in terms of bonds in euros, I think clearly we are definitely one of the top firm. And as you know we are also developing in a focused way our credit platform in the US. We had a series of very good transactions in the first quarter with our client base, which I think really highlight the benefit of that.

We issued, we were one, with Deutsche Bank one of the active book-runners of a USD for example, bond issuance for Sinopec and also true for our Russian clients beyond our traditional and European clients. So, I’m very happy, I must say, with the development there.

And on the structured finance side, again, we have been, I think, able to – and I’m meeting, myself, a lot of clients, maintain our leadership expertise in natural resources, infrastructure finance, in energy, et cetera.

So, I feel it’s a model which is again well-suited for a new world which has to, again, take into account a new regulatory framework but I think which is delivering and shoring its capacity to do that in a resilient way despite the fact that we are probably a bit more European than US. Overall competitive with other firms, and it’s probably fair to say that Europe is suffering from an environment which is probably less dynamic than the US from a capital market perspective.

Guillaume Tiberghien – Exane BNP Paribas

Have you quantified the impact of regulation on CIB?

Frédéric Oudéa

No, because I mean, I don’t know what you mean by quantifying. We had to get rid of certain businesses, et cetera. Again, I must say this quarter reflect something where, in terms of activity and financial parameter, it’s pretty close to what I have in mind for this business going forward.

Guillaume Tiberghien – Exane BNP Paribas

Thank you.

Frédéric Oudéa

Didier, would you...

Didier Hauguel

No, I think that’s well. To quantify the impact of regulation you need something that we have to absorb, let’s say, on an ongoing basis now because each time you have a regulation that is behind you, you have a new one which is put on the table. So, what is important is that we have, let’s say, strongly adapted the business right here. We have also refocused our franchise in a more, let’s say, account-driven orientation than what it used to be pre-crisis.

Also, let’s say, we have taken into account, let’s say, some of the used parameters, so CVA, DVA, FVA, all that is already in our P&L. So, I think that now the franchise is able, let’s say, to continue to grow and to deliver with adding, let’s say, net all these others in the past quarters in terms of target, I say, Frédéric cast a target of delivering a return on equity Basel 3 at 10% between 13% to 15%.

In the first quarter, we were, let’s say, above this level but Q1 is always a strong season from a seasonal point of view, so it’s logic that we have a strong Q1, and you’ve seen that for the whole industry. And we are willing, I say, to maintain this profitability matrix by, let’s say, continuing to develop the activity growing the business but also being disciplined on both cost and risk.

Guillaume Tiberghien – Exane BNP Paribas

Thank you.

Operator

We have a question from Maxence Le Gouvello from Credit Suisse. Please go ahead.

Maxence Le Gouvello – Credit Suisse

Yes. Good afternoon, everyone. My question would be regarding the intra-group funding with Eastern Europe, can you give us an update? It was at €5 billion at the end of December with €1 billion for Russia.

And my second question would be a follow-up on Kinner’s question regarding the legacy book. Are you blocked until the MBA solution to cut more your legacy book, or are you still believing that you have seen some good potential capital gains? And if that’s the case, can you provide us the level of capital gain that you can expect because it was not disclosed in the presentation today? Thanks.

Frédéric Oudéa

Hello, Maxence. We leave the floor to Didier on the legacy book and to Philippe just on the funding to give you figures. Let me just really highlight and that’s also something we wanted to show is that the adjustment – adaptation of our businesses on the retail side, take into account the strict discipline in terms of funding. And when you look at Russia, it’s, for example, very clear with the improvement of loan to deposit.

I would like to insist that we could carry on providing cheap funding to Russia. That would be a way of developing the business, but that’s not what we are doing. And we are putting pressure on ways to fund, to collect deposit fund with (inaudible) and you have the figures for Russia. And that’s definitely a way, I think, to develop in these emerging countries by also limiting this risk. And so, I think it’s well-suited and well-appropriate for this new regulatory environment.

Now, in terms of figures, Philippe, can you give the evolution?

Philippe Heim

Yes. In terms of evolution, just I would like to highlight that the loan-to-deposit ratio of (inaudible) stand at 98%. So, the total funding group to Eastern Europe is roughly today, out of €5 million and down €2 million from last year the first quarter. So, it was a pretty good evolution and a trend. And I mean, our mission is to increase this funding from the group in the (inaudible).

Frédéric Oudéa

Didier, on the legacy portfolio.

Didier Hauguel

Yes. On the legacy portfolio, no, we are – MBIA is one of our exposure, and I will – as Frédéric mentioned, we’ll not comment on it, but we have capability as I said to continue to deleverage the portfolio. But using the balance in the first quarter, and I say, we sold almost €650 million of nominal tides were opening healthy in May with strength of our current product sure we of assets. And I’d say it was evenly split between money bad and money good. We continue to show some benefits from amortization by €300 million in the first quarter.

And so, as a result, the decline of the exposure from €8.8 billion end of last year to €8.3 billion this year, of which €2.8 billion are, let’s say, non-investment grade compared to €3.1 billion last year. So, let’s say we continue to manage this portfolio. You’ve seen that impact in the P&L is manageable with minus 10 only in term negative revenues and minus 25 in term of positioning. So, we continue to, let’s say, manage these as a leverage to rebuild, contribute to the building of the capital ratios by the end of this year and going forward.

Maxence Le Gouvello – Credit Suisse

Okay. Thanks.

Operator

We have a question from Flora Benhakoun from Deutsche Bank. Please go ahead.

Flora Benhakoun – Deutsche Bank

Yes. Good afternoon. Two questions from me as well, please. The first question is on the return on equity target of 10% that you have communicated for 2015. I just wanted to make sure that I understand fully the parameter that you’re considering here, and especially I wanted to know if this includes the interests that are paid to the pre-subordinated note-holders. I understand also that this is excluding legacy assets.

And if I make a quick calculation, just as the current consensus, I end up to an adjusted net income implied by your return on equity that is around 15% to 20% above consensus. So, I just wanted to see whether this is in line with your thinking that you think you could achieve more than €4.5 billion of adjusted net income in 2015?

The other question is very simply on the €100 million of provisions that you have taken in the Corporate Center on provisions for disputes. This comes on top of the €300 million in Q4. So, I just wanted to know whether we should expect some more, and for what as far as exactly this is being provisioned. Thank you.

Frédéric Oudéa

So, and you know I don’t have in mind the consensus for 2015 so I can’t comment on the figures. But, let’s say, I would guess you are able to make your own calculation. We are – it is clear here what our objective and we think that with, again, the development of our business like the (inaudible) plus these efforts on cost, good monitoring of cost of risk, again in an environment which would not be particularly good, this is a realistic target. It’s not – it’s something which I think we think appropriate to this kind of environment.

Secondly, litigation, there is nothing new to report, versus what we have put in our annual document, no new file. And I’d say, for us, it’s a question of prudence. Litigation commercial we’d regulated is one feature of the banking industry. And we felt it could make sense to add it to the provision. Next question.

Flora Benhakoun – Deutsche Bank

Okay. Thank you. Just, sorry, as a follow-up, because I didn’t hear the beginning of your answer. Did you say that the interest on depreciable subordinated debt that...

Frédéric Oudéa

I’m sorry. All that is included. I mean, there is no change in the way we look at the return on equity, so that’s taken into account also.

Flora Benhakoun – Deutsche Bank

Okay. Thank you.

Frédéric Oudéa

Yeah. Sorry. Next question.

Operator

We have a question from Cyril Meilland from Cheuvreux.

Cyril Meilland – Cheuvreux

Yes. Good afternoon. Actually, most of my questions have been answered, but I just had one quick one on the level of loans to customers in CIB. It seems there have been quite a drop in Q4, and then you are back up to more or less the same level as you were in Q3 last year in – at the end of Q1. So, what is explaining this?

And more generally, and it’s probably a good opportunity to discuss this, what do you see in terms of activities in the financing business? We’ve seen quite a lot of issues in the capital markets, in the debt markets. Can you qualify what you are seeing for your activity in Corporate Banking and structured finance?

Frédéric Oudéa

Didier?

Didier Hauguel

Well, on the figure, it’s – well, it’s the balance-sheet figures, so it’s not exactly what we have in the management information tax. We’d have to check and see whether there is some repos and professional could answer to this question.

Regarding more the trend, that’s what we are doing. Let’s say we – well, you’ve seen first that in term of syndicated loans in euro, in the EMEA, let’s say, we regained ground, let’s say, compared to last year.

We were definitely focusing more on the repositioning of the franchise by deleveraging. I think that now what we can see is that on the natural resources, we continue to see a strong demand on a global basis. And this is where, let’s say, we continue to invest and to develop both in terms of project finance and also in terms of tight committee financing.

So, which is more, let’s say, short-term financing of the two of our clients. In infrastructure, I’d say, we have seen some interesting development, but, I would say, a lot of that – those who are conditioning by the economic recovery in Europe, especially in a project in peripheral countries where there is still some question mark, let’s say, on the bank-ability of this project.

Export finance, let’s say, we have reduced our exposure to this, but we feel that now there is a lot of appetite for us to continue to originate this type of deals by distributing to investors, and we are working on this. And leverage finance and acquisition finance, I would say, acquisition finance more cyclical. And, let’s say, at this stage especially in Europe, you’ve seen the M&A movement which is quite poor. So, we haven’t seen a strong demand from that part of the business.

On leverage, let’s say, we’ve seen some interesting rebound in the US even if we are small, let’s say, we have capability, let’s say, to see that. And in Europe, let’s say, we also see some interesting demand, which is most of the time, let’s say, quickly refinanced or partly financed by (inaudible) let’s say, we made some investments so that, let’s say, we can distribute these assets and also capture a part of the economical transaction with these new activities.

Cyril Meilland – Cheuvreux

Okay. Thank you.

Frédéric Oudéa

Question?

Operator

We have a question from Anke Reingen from RBC Capital Markets. Please go ahead.

Anke Reingen – RBC Capital Markets

Yes. It’s Anke from RBC. Just a few follow-up questions on that, too. On the costs, can you just maybe confirm, you said almost a 9% cost reduction, so that would suggest a cost base you’re looking at €16.1 billion and would we assume that sort of like – you said and you hope that cost savings could offset inflation. So, I just wonder how we should look at an absolute cost base or are you willing to give us some sort of like cost/income ratio target, or would this be coming with the Investor Day?

And then how do the additional cost savings split over the years 2013, 2014 and 2015? And then just coming back to Flora’s question on your 10% ROE target, given your comments you made on relatively muted comment on revenues on your flat cost. So, what’s the biggest driver of your – the improvement in the net profit from probably about €3.2 billion annualized in Q1 to above more than €4.5 billion in 2015? What are the biggest levers? Thank you.

Frédéric Oudéa

Again, I will leave perhaps Philippe comment on the cost base. As I’ve said, we have been mindful of French retail overall. Our revenue line, which – NBI line which will remain under pressure in the next two to three years with the different headwinds I mentioned, low interest rate, commissions which are being down and the different regulations, at some point, of course, it will stabilize.

But again, we factor that in the NBI. So, a lot will be done on the cost and progressive view also with an improvement on the cost of risk even if, as I’ve said, the environment in France should remain relatively sluggish and we have in mind a 0% GDP growth in 2013 and 0.5% growth in 2014, so we are, I think, a little bit behind below the consensus for 2014 and certain official forecast like the European Commission or the IMF.

Clearly, I expect the retail outside France to do better than what you see here with – effectively on geographies which should progressively improve. I’m thinking about Romania, I’m thinking about even the Chez Republic or Germany which should do better in 2014.

Clearly, we have the benefit of all the efforts to stimulate synergies on the revenue lines and, of course, when needed, further make cost savings and improve also the cost of risk and because the – we have a target which is lower. That’s what we see today, just for example, for Romania.

I must say Specialized Financing and Insurance, as we have highlighted, had been able to adapt very well to this new environment. I mean, with scarce resources under strict constraints, and I would guess that we should expect that to further develop.

And then CIB. CIB I don’t expect necessary such a strong market going forward, but I mean, we should gain market share. I mean, my view is the next two to three years, there might be a bit less banks committed to certain businesses, and I think we should gain the market share with low cost-income ratio, a competitive one, and a cost of risk under control.

So, these are the different elements versus – in terms of businesses. Plus, as I’ve said, all the efforts at the group level, to simplify or reduce the headcounts in the head office. And then on the Corporate Center, clearly, normalization of this excess liquidity. We still carry something like €55 billion to €70 billion in the Central Bank.

I would not expect something like this in 2015 in a normalized market. I think we could work and make our business with, again, fundamentally less of that. We’ve a balance sheet which will further evolve also with more deposits. You know the growth of deposits and I don’t expect the growth of loans which will be the dynamics on the French retail in particular.

So, all that would help also to alleviate certain costs in the Corporate Center. That’s in a nutshell, if you wish in the – in the 10% calculation. Now, I turn to Philippe on the cost base.

Philippe Heim

Yes. Good morning, Anke. So, you wanted to have more color on cost reduction ambition. And so, I confirm that this 9% objective will manage – will make it possible for us, in fact, to get stable towards end of the quarter recurring cost base versus pro forma 2012. So, this is the current objective to offset the effect of the inflation.

And you also asked a question regarding the selling of cost of transformation. So, as I said, it’s very difficult to be very specific. But broadly speaking, I would say that 50% will be charged on 2013 but more than 40% in 2014 and the rest for the rest of the plan.

Anke Reingen – RBC Capital Markets

And how will the cost savings plot over the three years? The €900 million?

Frédéric Oudéa

More in 2014 and 2015 because, for example, I mean, there are again plans which are currently implemented. But for example, for the head office, there’s a three-month consultation process. So, it will be – it will start to be implemented in July. So, in practice, I would say the impact will be relatively limited in 2013 and then the bulk more in 2014 and of course 2015.

Anke Reingen – RBC Capital Markets

Okay. Thank you.

Frédéric Oudéa

Next question?

Operator

We have a question from Lorraine Quoirez from HSBC. Please go ahead.

Lorraine Quoirez – HSBC

Hi. Good afternoon. I guess most of my questions have been answered now, but I still have one, what sort of dividend payout ratio do you see going forward if you get to 9.5% Basel 3 core Tier 1 by year end?

Frédéric Oudéa

I will answer in the same way that I did in the past. I mean, which is that it will be the board’s decision and I must say, it’s a bit premature, but my view is to have a range in mind between 35% and 50%. And then we will decide in due course.

Lorraine Quoirez – HSBC

Okay. Thank you.

Frédéric Oudéa

And of course in cash. We stick to our policy which is to provision for this year a 25% payout ratio and we will decide at year end whether or not we have a scrip option. And then once we are on target and the priority is again to build the capital base, I have in mind this kind of range.

Lorraine Quoirez – HSBC

Okay. And the 9.5% is basically the target with the scrip options, isn’t it?

Frédéric Oudéa

Yes, because, again, as we’ve said, yes, we’ve actually 20 – in pure calculation term, the scrip option benefit of the dividend 2013 will come in 2014 actually. We have to deduct as if it would be paid in cash. So, we deduct 25% of that calculation. And on the basis, as we’ve said, we should be close to 9.5%. So, again, we will decide at year end about whether or not we will have this kind of option, it would be a board decision at year end.

Lorraine Quoirez – HSBC

And 9.5% is basically the sort of level you’d like to run with in the coming years?

Frédéric Oudéa

Yes. Because we can see from a different angle, and I consider it’s really appropriate for the group with the business model we have which is really to further Retail and recurrent activities in the CIB business. When you look at the allocation of capital and 60% retail, 30% with the goodwill, with 30% CIB and 10% Private Banking and securities businesses, I think it’s a relatively stable business model.

Secondly, as we said, we have to have a 1% buffer versus the, in terms of global business. So, having a 1.5% buffer beyond that seems to us to be absolutely adequate. So, yes, we think it’s a target which is well-suited to the business model we have in mind.

Lorraine Quoirez – HSBC

Thank you.

Operator

We have a question from Alex Koagne from Natixis Securities. Please go ahead.

Alex Koagne – Natixis Securities

Yes. Good afternoon. Two questions from my side. The first one is on the cost-saving plan. I’m just wondering whether you can provide kind of a cost-to-income ratio you have in mind for 2015. And then, secondly, I know that there is not fixed yet, but I’m just wondering whether you can give your leverage ratio on the Basel 3 with the result of today. Thank you.

Frédéric Oudéa

Alex, I think we will not give you a lot of flesh. I mean, on the cost income, we will communicate that in due course. It will be part of our full strategic plan beginning of 2014. And regarding the leverage ratio, we don’t communicate that today, but you can probably make a calculation, and you have the balance sheet, the funded balance sheet.

And there are some studies which should compare the leverage ratio based on normalized accounting rules taking into account your balance sheet. And, I must say, you will see that there is no such difference with other banks and, of course, the leverage ratio will further progress with more capital put in the bank every quarter.

Next question?

Operator

We have a question from Pierre Chedeville from CMCIC. Please go ahead.

Pierre Chedeville – CMCIC

Good afternoon. I have two questions. First question is regarding your impressive ROE in the CIB, which is 20%, and when we compare it to some of your French peers, it’s much higher. Some of these peers but, of course, I guess, that they are very jealous, consider that this level is not sustainable. And particularly when we look at your cost of risk in the CIB, they think that it’s not sustainable and not realistic regarding classical financial activity. What’s your view on that and do you effectively think that ROE of 20% for your CIB in Basel 3 is sustainable?

My second question is that obviously within less than two years, European banks and certainly French banks would be well capitalized. Can we imagine that after the reaching of your objectives in terms of core Tier 1 you will be able to increase significantly your capacity to finance the real economy, but it’s probably today a little bit restrained, not only because of the current context, but also because of your targets in terms of increasing your core Tier 1. Thank you.

Frédéric Oudéa

We’ll think this one, Pierre, but first I will leave the floor to Didier on the retail on equity.

Didier Hauguel

Well, first, as you’ve mentioned, the 20% underlying retail on equity is well above our target, so we are more let’s say planning across the cycles something between 13% and 15%. Then when it comes to the cost of risk, it is low. I think it’s – we flag the soundness of the portfolios which is well diversified, which is also well structured. I think the structured financing, the teams that we have are clearly world-class, and so this means that they are able to bring to play structure which limit, let’s say, all swing – in case of delinquency that says – the cost of fees that we highly incur.

I’m not sure that, let’s say, our French peers are jealous of the cost of fees as I’ve seen the results. They are also (inaudible), and it’s relatively low, so I think that what we have in mind is that for this year, let’s say, maybe to have a cost of fees in the region of, let’s say, of the 35 to 40, 45 bps could below or equal looking at the economic cycle.

We are actually well below in the first quarter. We know that one file could also create a blip in the provisioning. But at this stage, I’d say I sleep well. I don’t have, let’s say, my worksheet file which are, let’s say, ringing loudly. So I can, let’s say, continue to manage my portfolio relatively efficiently on the coverage ratio, let’s say, also my NPL is above 80%.

So, I’m well reserved, and I think that this is one of the characteristics of the structural financing activity of the French banks to have, let’s say, this capability to grow relatively low cost of risk across the cycle compared to straightforward corporate lending.

Frédéric Oudéa

And really, I would like to insist, Pierre, from my perspective, the objective I give to Didier is a 14% to 15% return on equity. So, that reflect that 20% in itself will not be in my view as necessarily sustainable. But what we just wanted to highlight is that we are able, definitely, taking a full year in the normal environment in our view to deliver the 14% to 15% when I look at the performance in this first quarter.

Now, to come to your point on the financing of the economy, let me just say a few things. First of all, and I think it’s good for the French economy, France with Germany is one of the two markets where you did not have a decrease of credit in the last four to five years. The French banking system has been able to increase the lending and really the – to the benefit of the economy.

Let me also say that there is this intermediation process which takes place. And I think, when we look at the financing to the economy, we should look at both market activities and lending. What I have in mind in particular, and it’s a figure for the end of February 2014 versus February 2012, so sorry I don’t have the figure for March, but what I have in mind is an increase of the net debt by corporate by around 4% with an overall €1.25 trillion of financing; two-thirds with credit and one-third with capital market activities, bonds and things like this.

The credit is progressing as something like 1%, with clearly a more dynamic – more dynamism on the SMEs. On the SMEs, it’s around 2.5%. So, it’s a pretty robust figure. Less under large corporates because the market activities have progressed by 10%.

So, I think there is a capacity to deal the financial system as a whole when you look at the two in France and two other French clients, unfortunately for them, to have access to the financing their need knowing that, clearly, we have also to take risk which makes sense. We cannot finance equity, but really the credit is flowing, I think, pretty well given the environment and, at the end of the day, the low demand.

Going forward in the next two years, as I said with the kind of economic assumption we have in mind, I don’t believe that there will be a particularly strong increase of the loan outstanding in our French retail. We should have more dynamic outside France because we are in economies which should grow at a higher rate than in Eurozone as a whole.

And on the CIB, I think you know again there is this originate-to-distribute process which should develop. So, we might see from time to time a bit more, but fundamentally probably more the same intermediation to be expected.

Pierre Chedeville – CMCIC

So, if I may, and thank you for this answer, what are you going to do with your capital?

Philippe Heim

Again, if you can wait for beginning of 2014 to have the full and detailed answer in allocation to the businesses, but let me just highlight my ambition. And that’s something I’ve mentioned previously, but I would like to come back to the market. As I’ve always said, with a full 2014 year being able to show that we have facts supporting the story we have. The idea is to say, not such a strong capital requirement, I would say, for the French – in the next two to three years, but at some point, growth will come back. So, for the very short term, not such a strong request, beyond that probably a bit more. But let’s say, again, it would be a mature economy, Eurozone, the country. Let’s be realistic. Not such a strong increase.

Much more dynamism, I think, in retail outside France. You’ve seen that, yes, the loans are growing, but still we can expect more, I think, in countries like Russia and Romania, for example, and still growth in Mediterranean Basin and Africa. So, yes, this business should request capital.

CIB, more modestly, but perhaps a bit more overall with a mix of market business and financing. And then, well, wheeler, as I said, increased the payout ratio, the 25% is not our target. And as I’ve said, the range between 35 and 50, we will refine the range of the adequate figures based again on the growth capacity and we will come back to you beginning of next year with that figure.

Pierre Chedeville – CMCIC

Thank you.

Operator

We have a question from Andrew Lim from Execution Noble. Please go ahead.

Andrew Lim – Execution Noble

Hi there. Regarding your core Tier 1 ratio guidance, I was wondering if you included the Basel 3 SME rebate within that. And if you could tell us how much are those for Soc Gen? And then for your equities revenues, there were particularly strong. I was wondering if you could just share with us what franchise strengths Soc Gén has with respect to its peers, consistent with it being a number one franchise, or is there something different that you are doing versus your peers that’s generating that strong performance? Thank you.

Frédéric Oudéa

I believe again, Didier – I’ll refer to Didier regarding the equity product. We have answered your first question which is, yes, we are taking into account this SME calculation and it’s 15 basis points roughly. It’s a 15-basis-point impact. Didier, on equity, again, elaborate on our equity derivatives from (inaudible) in particular.

Didier Hauguel

Yes, Andrew. Thanks for the question. Let’s say, just well to remind you a few facts. Let’s say, we are, let’s say, strong in equity derivatives for 15 years. It’s a market, let’s say, where we are suddenly one even if not the leader worldwide, let’s say, with – and you can see on page 21 that we have awards. But more importantly, let’s say, I think our team are recognized in that field for, let’s say, 15 years.

So, definitely, this capability that position us as a different franchise compared to most of all the, let’s say, investment banks with – which tend to have usually a relatively important exposure to cash equity, let’s say, mid-size. And we know that cash equity currently – well, you know that better than I do, let’s say, suffering from the lack of volume and lack also of primary activities in Europe.

We have, let’s say, no exposure to company, which sometime also could be a slight disadvantage but, let’s say, we are as I said extremely strong in terms of Lucid products with their own certificates in term of structured product, and it was extremely strong in the first quarter in Europe for the retail networks and in Asia on a global basis. Let’s say, as I said, we are presenting industry, let’s say, a large financial betting, so US, Asia and Europe.

And also in security lending and borrowing, we have a strong platform, and we had a very good Q1. So, altogether, this explains why, let’s say, the mix is slightly different from what you can find, let’s say, with some of our competitors, less leverage, let’s say, on the pure flow side like the cash equity and cash balance and more, let’s say, on the derivatives so with the structured product which are more diversified, more global than, let’s say, a pure, let’s say, cash equity you can franchise. I hope this answer to your question.

Andrew Lim – Execution Noble

That was great. Thank you very much.

Frédéric Oudéa

Next question.

Operator

We have a question from Nick Davey from UBS. Please go ahead.

Nick Davey – UBS

Yes. Good afternoon, everyone. Two questions, please. From my side, the first on interest rate sensitivity with your P&L, if you could just please outline, firstly, any impact from falling base rates, if you never keep all else equal, money market rates equal and any impacts on the near-term from a moving base rates. And then maybe just on this 2015 plan, if you could maybe give us any indication if you’ve priced on any rising interest rates – rising reference rates? That’s the first question, please.

And then the second question, back to the Corporate Center revenue line, please. I realized that you’ve given us some detail around your expectations this year and then your expectations for that to slowly improve over time.

I suppose my question is, at what point would you consider taking some of this negative cost of liquidity and passing it out to your various divisions, divisions that most use these scarce resources in a bit to drive up repricing in those areas? Thank you.

Philippe Heim

Nick, regarding the interest rates, I don’t think the decrease of the 25 basis point is that sensitive because it’s a mix of positive and negative. You can have, of course, with the swaps some impact, which is negative on the French retail but also maybe a decrease of the remuneration of assets.

So, you know there are pluses and minuses. I don’t think you should take that into account. This has not changed very much the picture. And regarding 2013, we have kept pretty, I would say, conservative assumptions in terms of interest rates and not taking into account a particular increase of the curve to improve the NBI. So, as I’ve said in the French retail, in particular, something relatively sluggish and difficult for the next two to three years.

Regarding the Corporate Center, perhaps, Philippe, you can again elaborate a bit more, but again I would like to insist the idea that the main impact is to say we might not need €70 billion in central bank at 0% forever. So, that would certainly help and more deposit – more and more deposits versus also, obviously, funding that should help going forward. Beyond that, Philippe, any comments?

Philippe Heim

No, we mentioned this point before. I mean, it’s true that during last year, we put in a place a cushion – I mean, an issuance in terms of funding, and this liquidity provides a cost. And then to have an idea of what this cost going forward, it’s pretty difficult. So, that’s why we stick to our guidance. So, our best estimate, we confirm this guidance, would be roughly – I mean, the cost of the non-volatile effects of the Corporate Center within a GOI effect of €1 billion for the year.

Nick Davey – UBS

That’s very clear. Could I ask a quick follow-up question, if I may? If I could just ask you to give us some flavor, please, on your experiences this year as far as the marginal cost of deposits versus the marginal cost of wholesale funding because I know you have this target this year to issue in medium- and long-term funds less than what’s maturing.

But if I look at your annual report, it looks to me, at least from the outside in, that your average cost of deposits is more or less the same as your cost of long-term fund. So, if you could just give a flavor as to whether you’re seeing this as a P&L-accretive process. Thank you.

Frédéric Oudéa

First of all, we don’t remunerate the side deposits in France. The cost of deposit savings and regulated varies according to inflation and interest rates, so it can vary. Today, savings is at 1.75%. It might go down, perhaps, a little bit this year.

Outside France, regarding corporate deposits, I’ll turn to Laurent, it depends, but we offer products depending on the duration. And then, on retail outside France, it’s pretty mixed. So, it’s, I think it’s difficult to compare. We might come back to you with some comparison. But really the markets are very different from Russia to France.

Overall, I must say and I speak in Laurent’s control, but in France, may I say that the situation we see which is a moderate loan growth and people saving a lot of money means not a deposit world like we’ve seen maybe elsewhere in Europe. There is competition. But in a reasonable way, Laurent, perhaps, do you want to comment?

Laurent Goutard

Yes. I will agree on that. What we can see for the present time and probably for the next month on corporate side, dynamic growth, thanks to new product and probably little things to the cost structure for clients. But I don’t see for the future a stronger one on deposit side.

Nick Davey – UBS

Okay, very clear. Thank you.

Frédéric Oudéa

And perhaps then a last question, because we, now we are, 2.5, 2 hours, it’s 2.5. Perhaps, last question, Jon.

Operator

We have a last question from Jon Peace from Nomura. Please go ahead.

Frédéric Oudéa

Something like 1.3, 1.5.

Jon Peace – Nomura

Thanks. I’d just make a one quick one then. I just wondered if you could give us a comment about what you think the impact to the French with transaction tax might be, both in terms of customer volumes and in terms of how it might change your own funding model for repos, for example. Thanks very much.

Frédéric Oudéa

Jon, it’s a last question which could require a lot of explanation, so I will try to be quick. May I say it would have certainly a significant impact in the – for the whole industry and much beyond, I must say, the banking industry and for the economy. So, I have the feeling that there is more and more voices which are saying it cannot be implemented like it stands.

In terms just of timeframe, to be realistic, it’s beyond 2015 if there’s anything implemented. And again, as I say, there are many voices from the corporate world, from the insurance world, from the asset management world, from the banking world and even some governments which say that the plan, like it stands, really would be detrimental to the Eurozone and beyond that.

So, I think there will be some changes. Again, repos are one element, of course, as it stands. I think the repo market will basically more or less disappear. So, certainly that’s also a concern for central banks, and it will be, I think, adapted.

Didier Hauguel

Actually, something that should be normal.

Jon Peace – Nomura

Great. Thank you.

Frédéric Oudéa

Okay. So, I suggest that we call it for the day. Well, thank you very much for your attention. Bye-bye.

Operator

Ladies and gentlemen, this concludes the conference call. Thank you all for attending. You may now disconnect.

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