Societe Generale Spo's CEO Discusses Q2 2013 Results - Earnings Call Transcript

|
 |  About: Societe Generale ADR (SCGLY)
by: SA Transcripts

Societe Generale Spo (OTCPK:SCGLY) Q2 2013 Earnings Conference Call August 1, 2013 7:00 AM ET

Executives

Frédéric Oudéa – Chairman and Chief Executive Officer

Philippe Heim – Chief Financial Officer

Bernardo Sanchez Incera – Deputy Chief Executive Officer

Analysts

Jean Francois Neuez – Goldman Sachs

Delphine Lee – JPMorgan

Lauren Torres – HSBC

Kinner Lakhani – Citigroup

Stefan-Michael Stalmann – Autonomous

Jon Peace – Nomura Securities

Nick A. Davey – UBS

Alex Koagne – Natixis

Kiri Vijayarajah – Barclays

Cyril Meilland – Kepler Cheuvreux

Flora Benhakoun – Deutsche Bank

Maxence Le Gouvello – Credit Suisse

Anke Reingen – Royal Bank of Canada

Pierre Chedeville – CM-CIC Securities SA

Federico Salerno – MainFirst Bank

Jean-Pierre Lambert – KBW

Frédéric Oudéa

Hello good morning or good afternoon for some of you. Thanks for attending our conference call for our second quarter results. As usual we’ll make just a few introductory remarks and then leave the floor to Philippe Heim, our CFO who will comment more detail our results.

Then we will of course answer your questions. As usual, I would like also to recommend that people who comply to the same discipline, I mean to questions per person and if we could stop, I would say it’s a quarter past two I think it would be good for all of us.

So let’s start and if I just turn to Page 4, what I would like to highlight for you, for a lot of company now for many years is that, really I think the results of this quarter is, are the results of not just one quarter, but a long-term and determined transformation, which has started two years ago and when I say this, it goes much beyond I would say just this financial and balance sheet, but also regarding the businesses.

The fact that we wanted to preserve your front size, develop the client satisfaction, et cetera. And when I think of the key satisfaction, I have, is that we can see across-the-board the positive momentum, again which reflect the capacity of this bank to grow despite the pretty negative overall economic environments in Europe. And to do that, we have a good risk monitory.

So you will have seen probably the figures reported group net income of €965 million, underlying €1.1 billion you see this in less non-recurrence item, very positive to see the evolution of the cost income ratio and the implementation of our cost saving program. We did well, I think in terms of the execution as the beginning of this year. And we are moving ahead with €170 million of recurrence cost secured out of these €900 million three year program.

One think which I think is also interesting is that the underlying return on equity is 10% for the second quarter, 8.7% in the first half. So we can see that this target of 10% is really in our reach in value, if we carry on with the same dynamic and with the same capacity to adapt the businesses.

Of course I know that the market is focusing on balance sheet, may I just say that there are more than balance sheet, but I know that’s important. I think it’s a very detailed step forward and you can see that we have a 41 ratio of middle order of 9.4% at the end of the June. May I say that we have already secured in July an additional 10% in practice? We did have share issue of the staff. So we are going to be inline with our target six month ahead.

Regarding the leverage ratio, let me see that we have said already today at 3% and so we’d be above 3% at year end. And also in terms of liquidity with that more in detail, but we are really in a good shape, in particular with significantly above 100%. So I think we done a lot on the balance sheet. And it’s of course very positive because it enables us. Now we need to focus on growth and profitability, and on that front also I think we are moving in the right direction. I will conclude the presentation by a few words precisely but with that now I turn the floor to Philippe to groove more into detail…

Philippe Heim

Yes. Good morning everybody. So I would like to redescribe which has been mentioned before by Frederic, and first part of my presentation I will give you a broad overview of key aspects of the group, it’s business performances, capital, liquidity, cost of risk, and our program of transformation and then we will give you some details regarding each of our businesses.

First I’ll go page number 6 to decide the solid performance of the businesses I would like to focus for one moment on the evolution of the gross operating income which is for us a good indicator as it captures both the revenues and the cost, and during this two years we have indeed in terms of the cost of reinforce as a group capital and improve our balance sheet.

And at the same time, we manage to keep good financial momentum and if you look at this page to slide number six, if you compare first half of 2012 and first half of 2013, you see as GOI up 4% and you see a positive trend in all businesses be CIB private banking, specialized financial services, even international retail banking and also the French network, it shows the resilience of the French network. So the first conclusion of this quarter is a very good momentum of our businesses.

Now I move to page number seven, to give you some updates regarding capital as mentioned by Frédéric. We reached decisive steps this quarter as we are in fact very near to our target of 9.5% of a Basel 3 fully loaded Core Tier 1 ratios. So we increased by 70 basis points our Core Tier 1 ratio by three factors; the first string, retained earnings and scrip dividends.

So you have an effect there of 27 basis points, significant legacy asset deleveraging 12%, and also a reduction in the Group’s CVA capital consumption of 19%. So to say it very, I would say simply, in fact, we had reached our target of 9.5%, as we are – we have secured a five basis point impact of the capital increase at reserve for employees and also we have carried out some deleveraging operation regarding our legacy asset portfolio end of July.

Regarding leverage ratio, I know this is an important topic for you. So as mentioned by Frederic, in fact, we are already at 3% of leverage ratio. 3%, in fact, according to CRD4 and with numerator I think it’s a Tier 1 capital, of course. And this is a leverage ratio expressed in the CRD4 computation. Regarding Basel 2.5 Core Tier 1 ratio, it stood at 11.1% at the end of June.

Now, I move to page number eight, just would like to give you an illustration how we manage to reach this level of 9.5% Core Tier 1 ratio. So clearly through three main factors, first, a strong capital generation, which has played a significant role in boosting our capital.

Our group shareholders equity has risen by €1.8 billion although this two years period to €49.4 billion. The second contributing factor of course is very – legacy assets deleveraging and practically concerning the non-investment grade part of the portfolio, which has been reduced by 50% between April and July.

The impact is of course significant because of the treatment of budget securitization on the budget. Overall you can see that the credits risk weighted assets has dropped by €25 billion of those past two years and this is positive result of significant business and portfolio disposal.

And I want to insist there are if there is one factor that is absolutely not contributing towards the credits risk weighted assets prediction, it is the change to our credit internal models and to prove this, we have projected in the low address here you will find on page number eight is price yields to be better from our trajectory reports and it reflects the evolution of the average risk weighted of our ERB credit portfolio and you will see that for each credits the portfolio we have divided, so risk weighted assets amount by the risk exposure at Q4, and as you can see average weighted to our exposures to corporate to financial institutions and for mortgages, it actually increased slightly.

So, so much for capital and now I want to move to liquidity and the first thing I want to mention here is that the funding environment of the group remained excellent. As a result we have been able to complete our long-term funding needs of Europe. We have raised already more than €19 billion and to do so we have continued to attach diversified sources of funding predominantly unsecured and with the significant share of maturities bidding to an average of 6.3 year maturity.

In parallel we have continued to structure our balance sheet. Our loan to deposit ratio has improved by 6% during the quarter coming at 111%, and I mentioned here that it benefited from an increase of €12 billion of additional deposits predicted. So globally this is a reflection of our restructuring of our liabilities as deposits have increased. W have at the same time reduced our short-term funding by €15 million. And overall our short-term funding is covered of the 136% by our liquidity buffer.

Going forward our target is to reduce our funded balance sheets by reducing central bank deposits standing right now at €78 billion on the asset side and you are just seeing, our recourse to wholesale funding on the liability side.

Now with regarding our cost reduction program, we are on track and remember that our target is to reduce our cost base by €900 million over a period of the three years, want to stabilize our cost base in 2015 as is similar as it stand in 2012 and this cost reduction program is a key element in our roadmap to reach 10% return on equity by the end of 2015.

Our determination to deliver in this respect is starting two years positive results and in fact, during the first half of the year, the group has already secured €170 million of recurring earnings, that will materialize positively into P&L and dominantly lower the cost base by 215 and to achieve the reductions targeted by this plan, a total of €125 million, when of course has been booked in the first semester, most of it was €100 million into two, this cost includes about €85 million of provisions or actual expenses, all added to severance packages.

And if you want to, I’ll give you more color, more details about some specific initiative and about specific projects, so I will like now to move to cost of risk, page 11. I would like you may be to focus on the bold red curve on your right side, it shows you the trend the commercial cost of risk, (inaudible) which decreased further during Q2 to 67 basis points concerning the trend of the previous quarter and returns to a level, it’s the last switch in Q3 2011, so this is a positive movement.

More specifically, for the French Networks there was a decrease in the cost of risk on mid-sized corporate, while it remained stable at a low level on individual customers. Overall, (inaudible) for the French Networks for the full year will be little of 60 basis points. In all the other businesses, the trend is one of the facility. In international retail banking, the cost of risk remains overall stable, including at Czech Republic, normalizing in Russia and remaining at high level in Central and Eastern Europe.

In Specialized Financial Services, cost of risk was also stable. Finally, in CIB, the cost of risk remained at a low level, affecting the soundness of the portfolio. I have to mention that the cost of risk for this quarter of €855 million includes an additional €100 million for our general provision for disputes. And to complete the picture, let me mention that we have €131 million net of cost risk on legacy assets. Mainly it comes from a sizeable provision we took in order to grow, further reducing the size of our non-investment grade legacy asset book, which decreased by 50% from €2.8 billion at the end of March, down to €1.5 billion at the end of July.

Now move to the consolidated results, page number 12 where we summarized our consolidated results. So, as commented by Frédéric in the introduction, Q2 saw a strong NBI at €6.2 billion, supported by solid performance across all the businesses. Adjusted for changes in Group structure and this is important because we dispose, for example, Egypt – and at constant exchange rates. NBI is up 4.4% just this Q2 2012.

Regarding operating expenses, if we take out transformation plus dimension – just before of the €125 billion, booked in the first half, costs for the first half of the year remained stable, just first half of 2012.

On an underlying basis, the cost income ratio of the group dropped by 2.6 points year-on-year during Q2. And as mentioned by Frédéric the group net incomes stood on an underlying basis at €1.1 million so up 40%, and it was at €955 million on percentage basis. So it was multiplied by 2%. So I would like now to move to businesses starting by the French networks. So maybe to start with the French network we like to first to give you I mean an overview view of the current macroeconomic situation in France.

So what we see is France going slowly at authorization, and we see very slow recovery next year. Interest rates remain low during the quarter, affecting the (inaudible) monetary policy in the Euro Zone. But despite this challenging environment the business performance of the French networks during the quarter remain good with dynamic deposit collection from individual customers and corporates at almost 10%. But stable credit outstanding, as a result the loan to deposit ratio continues it’s (Inaudible) reaching 114% to down 11 points versus one year earlier.

Revenues were brilliant at 3% on the quarter versus previous year, affecting increases in net interest income plus 1.9% and higher fees in commissions at 4%. The small increase in operating expenses of 1.6% is entirely driven by one-off factors and must stable on the right strength. What is positive results with dynamic revenues and discipline on costs, we have GOI’s or gross operating income at strongly plus 5% and cost income ratio at most full point to 62.5%.

This performance is good performance for – we had leaders to adjust before our expectation for the full year. So we see the NBI to increase by 1%. We see zero increase in costs or better and as a result the gross operating income is expected to rise significantly versus 2012.

Moving to page number 15. We are providing you some information on MCIB our unique midcap banking platform which is organized with GV between the French Networks and SG CIB. It occupies a leading position on the French midcaps segments, helping corporate to access capital markets and diversify the sources of funding. And it will equate the synergies we are able to achieve within the groups with high level of cross selling.

Now I move to page 16. Let’s move on to international retail banking which is continuing with the source to adapt itself to a constrained environment. So what we see is, I mean the global environments we had is that, in Africa, be it Northern Africa or Sub-Saharan Africa we still have a dynamic growth between 3% to 4%, while we have a depreciation across eastern and central Europe. With the exception of Romania between good sign of recovery and Russia keeping a good momentum with gross prospects around 3%.

In this mixed environment, deposit correction remains dynamic in most countries. Loan to individuals customers continue to grow and lending to the corporate sector in CE is affected by the difficult micro limit situation.

As a result, overall with the Group’s gross is positive but low at 1.3%. With positive momentum is Russia, in Sub-Saharan Africa, contrasting with negative growth in Czech Republic, where very low interest rates continue to waste on deposit margin.

And also in Mediterranean Basin, we have overall good shipping on operating expenses. This is, I would say a great achievement if it comes to some of those countries, we still have important inflation, and as a result these revenues fluctuates and cost maintained stable. To GY increased in Q2 by 5% just as a preview here.

Mid year focus, the focus of me on Russia and the Romania, I’m moving to page 17. So, in Russia the second quarter continued to flow in encouraging results we have in Q1. Events, unfortunate events in the months of May have nets and impact on us with the recent provision and maybe we would did you mark the background, responding to your question loan and deposit volumes on the (inaudible) customer segment was grouped in the double-digits during the quarter plus 16% and 12% compared to the year before.

Business with corporate showed good developments, cost remained on the control and the contribution toward the (inaudible), excuse me there is a contribution toward the growth net income of our recent operation suited at €26 million for this quarter.

Regarding Romania now, BRD already manage to return to (inaudible) in Q2 first of all a difficult quarter. Our subsidiary is well positioned to take advantage of a renewed economic growth, as expected by values forecasting agencies and it is illustrated there in this page. We’ve got number one network by size. We hold leading positions on key markets such as home loans, lost corporate segments and market activities. We are among the most efficient banks in Romania with the cost income ratio at 52% and we expect a further gradual normalization of the cost of risk in the coming quarter, so we keep (inaudible) said positive, out look for Romania.

Now moving to insurance page number 18, you knows that this is an important business for us, as its enables us to extract synergies by distributing insurance product through our values retail platforms, we continue to see nice expansion good in France and international. Business development in France was sound in Q2, while international development showed strong growth momentum.

For example, driven by premium growth in personal protection in Poland and in Russia, for example, we had progression of surplus 75%. Revenue were up by almost 9% just as Q2 .2012, and the group net income was €81 million at 8%, while the gross income remain very low.

Moving now to the specialized financial services division, it continues to function under resource constrains with stable capital allocation in 2009 as it is something I’d like to highlight. Moreover, we encourage this business to increase excess to its small funding. And they managed to collect more than €2 billion during the first half of the year.

The groups specialized financial services businesses continue to increase at profitability in Q2 and the contribution to the group net income was up strongly plus 26% versus Q2 of 2012; it stands at €160 million and we got a return of 12%.

Now I will move to at SG CIB; SG CIB showed a solid performance with NBI from core businesses; that’s 20%, and 16% on an underlying basis, Equity saw revenues increased by 38% versus Q2 2012.

Revenues were strong in this division on flow equity derivatives in Asia and structured products result, as for fixed income we managed to achieved very good results with revenues up 17% year-on-year and on an underlying basis and thus despite a clear volatile markets condition.

We have seen sustained demand for structure of products I might say an institutional clients and solid results from on the rates and commodities. Financing and advisory was down by 7% year-on-year; this reflects a reduction in the loan book portfolio following last year’s leveraging. Performance was good in the natural resources, infrastructure and export finance. While DCM showed a dynamic performance and leveraged finance was solid.

To finish on, as you said, maybe a word regarding our legacy asset portfolio. As you know in May, which settlement with MBO and tell us to dispose the use of MMBS which were covered by this month. Additionally as mentioned earlier, in the course of the second quarter the charge of minus €131 million was booked notably in view of the deleveraging another largest year of MMBS. That took place during the month of July and as a result and I repeat this, we managed to reduce the size of noninvestment grade buckets. I know as legacy asset portfolio moving down 50% from €2.8 billion to €1.5 billion.

Page number 21 you have the global picture of SG CIB. In total, revenues were up strongly and the cost income ratio was maintained at low-level 61% in Q2. Overall the contribution to group net income of SG CIB stand at €374 million in Q2 and €868 million for the first half of the year, it was up very significantly. What also is very positive is that we got for SG CIB Basel 3, return on equity at 13% in second-half and 18% for the core businesses.

Now I move to private banking, global investment management services also a good quarter. It was in fact best performance since Q1 2011. in private banking, assets under management through that is EUR 84.5 billion end of June. While revenues were up by 25% year-on-year, security services showed stable revenues with assets under custody and assets under managements up, Newedge stabilized its NBI and pursued its restructuring plan. And Amundi contributed EUR 27 million to the group net income into two.

Now I’ll move to the Corporate Centre page 23, the impact of the revaluation of the group’s own financial liabilities in the second quarter is limited at the EUR 53 million before that. I mentioned also that we registered for this quarter, EUR 43 million gain on as a disposal of a stake in Piraeus Bank which we received from the disposal of opportunities and corrected from these two elements. the underlying growth operating income for the Corporate Center stood at minus EUR 145 million during the quarter and EUR 446 million for the semester and this is full in line with our expectation and we can transact our guidelines.

Now, I’ll leave the floor to Frédéric for the conclusion.

Frédéric Oudéa

Philippe, thank you very much. I just would like to say a few words on the priories for the coming months. Let me say that the priority is of course to pursue this transformation, the adaptation of the business model. I’m thinking that this first half’s results are very encouraging for us. and may I say that the most important thing is, for me as the CEO is to have in mind and to feel that six years after the beginning of the financial crisis, we have teams as it’s tied to motivation to pursue this transformation and to deliver growth.

And I’m convinced that we have a business model which can deliver growth. There is still one growth engine which has not yet delivered in terms of financial performances which is retail outside France. But here also I’m positive, it will take time, it will be two year to three year effort. But I’m convinced that we will see also there the progressive improvement.

So that is again across the group positive dynamic and of course, we monitor our costs generates very strictly, I’m very happy to see the way we failed even just the small turbulences of the market in the second quarter. And regarding the cost, as you have seen, we are implementing with the same discipline our transformation which will not just lead to cost reduction but also to more efficiency.

The second priority from a capital and balance sheet is of course to achieve all the work we have been doing. We again stand at this €9.4 million, with the 20 basis points additional, which comes from deleverage further deleverage and Societe is up to staff in the capital revenues the retained earnings, I think we should be close to 10% something like this at year end. So above our long-term objective, liquidity profile as you have seen the dynamic is also very positive and we have a strong collection of deposits and limited group of loans at the end of the day, but that’s also part of our strategy.

And then leverage, again, as Philippe has commented, the leverage ratio is of course benefit of on one hand more capital. And further, I would say a refinement at the margin of the business model and the size of the balance sheet. So I think really we are on track and we will pursue with the same determination to same long-term view this transformation. And again I’m considering that we will be able then to deliver this 10% return on equity by end of 2015 that we have in mind.

Now I turn to you to answer your questions. First question.

Question-and-Answer Session

Operator

(Operator Instructions) We have our first question from Mr. Jean Francois Neuez from Goldman Sachs. Sir please go ahead.

Jean Francois Neuez – Goldman Sachs

Hello good afternoon. So two questions, the first question is at the previous results in Q1 I think you commented about the fact that if you reach 9.5% Basel 3 by year-end, you would very strongly consider returning to a normal payout in cash for the dividend.

Is this still valid and has anything with leverage or anything like it potentially postponed that or we essentially well on track even the results of the core Tier 1 this quarter. And the second question, I just wanted to ask very technically and detail question on the insurance treatment in your leverage calculation, I just wanted to know essentially if in the asset base you have deducted the insurance assets or not, with the treatment of (inaudible)?

Unidentified Company Representative

We will leave the second question for Philip. May I just say and as I talk to the market, can we agree that we should take some step back off that calculation. We are just focusing on that and they are probably now four, five, six, different definitions, which are being frown either by regulators (inaudible). We need to take some distance. Let me just reiterate that from my perspective.

As a Bank Manager, we should push for regulation, which bank managers to look at the risk to take into balance sheet. Leverage ratio was a backstop, fine. Leverage was the backbone for the regulation. I think it will be a recipe for catastrophe. So I would like to highlight this because I would not like the market again to spend also too much time on what, just one parameter, which I think is not the essential one and also really of course concentrate on what is key is the business potential.

Regarding the dividend policy, may I say, it to be premature to comment on that. For the time being, I think it will be about to decide and let me where it would be a (inaudible). I stick to the idea of 25%, the out ratio for this year and affectivity from to 2014 onwards range between 35 to 50 and it will be the Board decision and we will redo at your wish.

As part of our strategic planning, what we can efficiently allocate to the business in the profitable way that was the reason to refine our full process. So for the time being no change, but obviously the development which are taking place are positive for an increase of the payout ratio going forward.

Unidentified Company Representative

The technical calculation, that’s we fully compile in calculating our ratio to the sale before the solution. So we divide very simply to Q1 ratio by leverage exposure and we take into consideration, of course our exposure to insurance particularly on that. Next question?

Operator

The Next question is from Mrs. Delphine Lee from JPMorgan. Madam, please go ahead.

Delphine Lee – JPMorgan

Yes, hi. Two questions on my side as well. Just to come back on your Core Tier 1 ratio Basel 3 and just to understand, because you had almost about 20 basis points, 25 basis points of improvement on legacy assets deleveraging, is there anything we can expect probably for 2014 maybe given that you still have about 1.5 billion of non-investment grade assets and of which probably half of the billion is (inaudible). The second question is sorry just to come back on your leverage ratio.

I guess you’re fine on still before definition at 3%. But, how do you intend to deal with the phasing out of your hybrid which you currently have included in your joint capital and have you stopped at thinking of how potentially could address, potential if any happened income to meet the assets reduction or what could actually be the EBITDA and to address that. Thank you.

Unidentified Company Representative

On the legacy assets there is again €1.5 billion

non-investment grade, I think something like 500 CMBS we would try to further reduce that may, I see end of 2013 if we would not be anymore an issue. So 2014, we would see above the capital allocated with the minimal and the impact on P&L, zero. So again it is basically behind us.

Again regarding the leverage, may I say we have an equity base of lease which would again further increase, we have of course, ways to improve the balance sheets, reduce the balance sheet. And we just gave one example I don’t think we will keep forever €78 billion of money in the Central Bank. So whether it will be €40 million or €50 million going forward, I don’t know and let’s wait.

But I mean the just on that item way to reduce the balance sheet and improving even the P&L. There are ways to improve that, so for me leverage ratio is not a concern. And I think we will end at this process of again every bank, every regulator having the clever idea to find a way to define leverage ratio.

As I said, I think it’s very important to raise your rates in a rational way, yes, for backstop let’s define it in the best way to make sense, but not as I said in the backbone of regulation. And I think from that perspective, Europe has to be local perhaps potentially versus the U.S. But I think it’s very important to reiterate that.

Delphine Lee – JPMorgan

Okay, thank you.

Unidentified Company Representative

Next question.

Operator

We have our next question from Lauren Torres from HSBC. Madam, please go ahead.

Lauren Torres – HSBC

Yeah, hello I’d like to have a bit more of color on the French retail. So first you see you have a quite strong deposit growth both in individual and corporate. Will it be possible to know what’s the growth in the corporate segment? Also I think costs have increased a bit. Could you explain what the drivers behind this are? And also did you keep this 60 bps cost of your guidance for the year? Thank you.

Unidentified Company Representative

Yeah I will turn the floor to (inaudible). We tell it just say yes we stick to the 60 basis points and the second quarter results the cost of risk shows that you think, so (inaudible) on the dynamic, on the deposit, and on the cost base…

Unidentified Company Representative

Yes. What you’re speaking is right. We have on the second quarter, as in the first quarter, I would say dynamic and resilient increase in deposits for both segments. It means there is a bit more than 8% for individuals and almost 14% for corporate segments. And I would say, we have been able to balance volume and across the deposits. Thanks to proximity of the relationship with clients and thanks to innovation in new products. Speaking about cost, general cost for French retail are hooked by 1% on 6% mainly due to exit from the items. I would speak about systematic facts and VISA would exit from the items cost of flood for the June process.

Unidentified Company Representative

So just for you to remind, I mean we reallocated the systemic impacts of the businesses, digging up the euro, so there is a difference of treatment compared with last year.

Lauren Torres – HSBC

Okay. Thank you very much and can I just try next one, what’s the ROE at SG Russia for this quarter?

Unidentified Company Representative

Yeah do you have the figure?

Unidentified Company Representative

8%.

Unidentified Company Representative

8%. So we stand at basically 10% more or less for the first half of the quarter.

Unidentified Company Representative

For the first half.

Unidentified Company Representative

Yeah, okay.

Lauren Torres – HSBC

Okay. Thank you very much.

Unidentified Company Representative

Next question?

Operator

The next question is from Mr. Kinner Lakhani from Citi. Sir, please go ahead.

Kinner Lakhani – Citigroup

Hi. Good afternoon. A good set of results. But I just wanted to focus on a few areas. Firstly on Corporate Banking, where the revenue trends, or the Financing & Advisory business, shall I say, where the revenue trend seemed to continue to deteriorate, just wanted to get a better sense for where you see the floor in revenue trends over there and to what extent you feel that the teams are back in business?

Number two on corporate center I think you may have reiterated your guidance, but I just wanted to kind of recheck on Q2 certainly the run rate excluding the exceptional we are certainly looking somewhat better than full year guidance and whether that a function of any dividends that you received in the quarter or if there is any kind of genuine improvement in terms of the cost of funding your liquidity buffer?

And a final point was on the KCVA, I just wanted to get a better sense for how this mitigation has taken place and final question if I may just on SFS particularly in the fee for leasing business whether it benefited from and if revaluation of used car prices? Thank you.

Frédéric Oudéa

Okay. I got questions so again I remind everyone about the discipline I…

Kinner Lakhani – Citigroup

Apologies.

Frédéric Oudéa

I (inaudible) comment on corporate banking and CVA and Philippe Heim from on the corporate center let me tell you and there is no exceptional item coming from the revaluation of our costs we have I think monitored well structured early the capacity to retail cards with no loss go through the structure of the contracts and a very efficient second orders sales distribution channels, so it’s something structural and there is no one off, and (Inaudible)

Unidentified Company Representative

Looking at high on the corporate well financing and advisory we ended the quarter at €401 billion revenues but as you seen as footnoted to say we have to incur the 109 losses on the tax claim which has been built in revenue negative.

So the underlying is a (inaudible), which we’ve got to see what we told you. I think it was in Q4, when we had the question on control, we expect to have this EUR 0.5 billion a quarter as a run rate for this year. So that well the decrease of course is a consequence of reduction that we made last year. And we sold some portfolios, we lost as a carry and not just as a negative net impact due to the discount on the book value. And I think that is also what is important for us is to continue not to regrow the activity.

But having the originate distribute context I think your less balance sheet usage or are your balance sheet position? And we have seen some successes. I have seen the second quarter as you’ve seen in Tombstone that we put on the slides. I think we are so and compared to a lot of our peers you’ll see that the revenue to risk weighted assets or revenue to asset (inaudible) is variable of our peers. We have not just let’s say increase percentage of fees into the revenues, but also I think we are more efficient in the usage of the income balance sheet.

So that is for the year of corporate banking. Second one on the KCDA, it’s a very simple hedging, so we are on the CDA a lot of, and I would say exposure with banks for example. And so just by hedging the credit component of the KCDA (inaudible) banks. We are optimizing the consumption of capital, so we have started to hedge some of this exposure in Q2. And we are lucky to continue to and to have now dynamic hedging throughout the year to hedge these type of exposure, and as a result we would have a less volatility in P&L on the CDA which is now on the market based package, but also a solo consumption on the capital side.

Unidentified Company Representative

Please enter.

Unidentified Company Representative

Okay (inaudible) I would like to also to mention that half of the effect for this quarter has been to the fact that we’ve deleverage MBA for the (inaudible) because of the MBA. Now moving to the corporate center, just to tell you that if we take the corporate center, we’ll get GY for the first half of the year of spending at €446 million; so you may have seasonal effects on corporate center, but globally, we confirm our guidance for an overall cost of year of €1 million, it may become negative, but you see that it schedules our assumption.

Kinner Lakhani – Citigroup

Great. Thank you very much.

Unidentified Company Representative

Next question?

Operator

Your next question is from (inaudible). Sir, please go ahead.

Unidentified Analyst

Yes, good afternoon. I’ve got two questions. One related to total capital on end of Basel 3. Have you set a broad or have you got to view roughly where you think your total capital free loaded are to be in the medium term. And the other question related to the derivative business, have you got some assaults on the impact that the centralized hearing could have from next year onwards? Thank you.

Unidentified Company Representative

Hi. For the total capital at this stage, we have a range between 14% and 15% in line. And I turn to Jean on the derivative business, Jean, as we change our mind which is actually no so many impacting our business.

Unidentified Company Representative

No, we knew that lets says on the policy clearing. Let’s say we already see a asset if it is one and two in term of the dot Franc, which will impact up in running, and I see that the overall, I’ve seen an impact will be marginal. We’ve already said that on the equity side, the impacts likely to be removed as a result (inaudible) that’s our region of stock exchange let’s say on trade, and on the 16 consultative, we expect the limited impact. We are adapting ourselves let’s say I’m treating infrastructure to be a player on that field.

Unidentified Analyst

Thank you very much.

Frédéric Oudéa

Next question.

Operator

The next question is from Stefan Stalmann from Autonomous. Sir please go ahead.

Stefan-Michael Stalmann – Autonomous

Yes good afternoon. I have two questions please, the first one on revenue in some of your businesses, if I look at businesses like private banking, specialized financial services also French Retail, you’ve actually had very good quarter-on-quarter revenue trends at a time when your balance sheet aggregates were actually often down and also assets under management were actually down during the quarter. Could you shed a little more light on what exactly you have done to achieve this good revenue momentum in these businesses? Second question relates to your transformation expenses, you say you have booked $125 million first half, are you booking that across the segments or where would I find that? Thank you very much.

Frédéric Oudéa

I will leave the second question to Philip. Let me just say a general comment. I think that it is, we put, let me take specialized financing, for example. We are reflecting that we’ve kept the same amount of capital for now four years. There’s no more capital. So it is by working hard on first of all and getting rid of the franchise which are not delivering refining the business model, exiting the small geographies, it is by when we can re-pricing the credit, it is by increasing the level of services which can be included and the level of seniorities which can be included if you wish in the businesses. But I think we are able to show this improvement and including this growth of NBI.

Insurance is developing in Frontier, but also at the Frontier product and again in Synergy with the distribution network, fleet management is growing its business, as I said it’s a very resilient model consumer finance has refocused very much and compared we were, where it was standing five years ago. And private banking is doing the same I see we decided to as you know sales for example, Japanese small franchise private banking is a core business, core business in synergies we were GIB and the retail network but at the same time getting out of soft and small franchises, which actually are sub-scaled and do not generate revenues help also to then improve the results and I think it’s a very good discipline and it’s something we will of course pursue when appropriate. Your second question (inaudible)

Unidentified Company Representative

Yes, regarding the second question you are asking us how we booked one-off costs and there concerns as we moved across the segment. I just say we don’t provide I mean this is a tight because it was moving a little better in EMEA for the next quarter we’ll give you all you need maybe to a bit high to detect but overall there is no significant impact.

Stefan-Michael Stalmann – Autonomous

Thank you, very much.

Unidentified Company Representative

Next question?

Operator

The next question is from Mr. Jon Peace from Nomura. Sir, please go ahead.

Jon Peace – Nomura Securities

Yeah, thank you. I had three questions please. The first one, I just wanted to clarify on the leverage ratio. You did say that you’re at 3% today. And that includes the EUR4.3b of additional Tier 1 capital under Basel 3 that you have on slide 35.

And the second question is about the International Retail business. Back at the 2010 Investor Day, you originally laid out a plan of how that business line was going to earn between about €800 million and €1 billion in annual net profit. And obviously since then the world’s got worse. You sold Greece. You’ve exited Egypt. But looking at this business in a couple of years’ time, what sort of business profitability do you think that line can deliver and how soon might you be able to get there? Thank you.

Frédéric Oudéa

Hello again. On the leverage, I will ask Philippe to reiterate how we calculate this CRD4. So Tier 1 define – and the assets as defined by CRD4. On international retail, I’m convinced that, again, the subsidiaries like Romania and Russia can deliver 15% return by the end of 2015. So that’s really where, as I said, we can further improve. I was in Romania myself just a few weeks ago. We should have a better environment in terms of economy, 2% growth, something like this. We should see, at least, certainly the government is willing to be more efficient in their spending in terms of infrastructure.

You had the end of the adjustment of the budget, and now they are below 3%. So the environment should get better after a severe recession. And on our side, we should be able to have growth, compared with the last few years and the decrease of the cost of risk. That’s the plan. Now, as you know, for retail, it’s determination, patience, a lot of details to fix, but that’s the kind of figure we have in mind. Just on the leverage. I’ll just confirm that one again. Also this is the leverage ratio according to CRD4, I confirm with them right now at 3%. And you decide for this, the Tier 1 capital, right decision of the leveraged exposure according to CRD4, very simply.

Jon Peace – Nomura Securities

That’s great. Thank you

Unidentified Company Representative

Next question?

Operator

The next question is from Mr. Nick Davey from UBS. Sir, please go ahead.

Nick A. Davey – UBS

Yes. Good afternoon, everyone. Two questions on from my side, please. The first, if you could talk a little bit around capital allocation. Just firstly around international retail banking, it looks like quite a big drop on the quarter as far as capital allocated to the international business, so could you just detail what’s going on that, and second, and linked to that, please if you could talk a bit about the $12 ex you’ve got sitting in corporate sense, so whether there is any discussions as part of the strategic review, ahead of next year for that to be pushed out to various business lines?

And then the second question please, it’s around gross assets and the gross balance sheet, I understand very clearly your message around leverage, and also if commented a bit about cash balances coming down. But please could you just outline any other gross balance sheet moves, you would have anticipated in the second half as part of this leverage ratio increase, and any financial that they might have. Thank you.

Unidentified Company Representative

Again the international retail – the fact that we’ve sold SGCIB at the end of their first quarter so you no more SGCIB going forward. Again on the leverage mix, I am happy with the business model first of all. So the idea is to give a lot, big business model with residents on front retail an adaptation an growth in the other two major businesses.

That does not mean that we cannot refine again the balance sheet beyond the cash on CIB business, et cetera. But fundamentally I am happy with the business module, and I don’t think we should and have to significantly reduce the balance sheet as it stands.

On the $12 billion, it’s a corporate center, and you’ve asked about the corporate center, the capital allocated to corporate center?

Unidentified Company Representative

That is it.

Unidentified Company Representative

Again you have the goodwill now fundamentally, now around $5 billion, and then the excess of potential Tier 1. We are looking normality on 9% for all the business except CIB was then, and you have an excess of capital, which will be there and we stay there. So there is nothing to expect related to the equity story.

Nick A. Davey – UBS

Okay, great. Thank you.

Unidentified Company Representative

Next question.

Operator

The next question is from Mr. Alex Koagne from Natixis. Sir, please go ahead.

Alex Koagne – Natixis

Yes, hello. I just have a one very quick question on the leverage ratio. I just need a clarification over here. As on the phone, you have the big sort of technical provision from your total assets. I was just wondering if the capital of the insurance subsidiary is deducted from your capital Tier I or are you just considering that the capital you have including the Danish compromises the ones that should be used. Thank you.

Unidentified Company Representative

To respond to your question; yes, we apply to the Danish compromise, that’s pretty clear? But then won the game, we take the full exposure to insurance when we calculate the average ratio going back.

Unidentified Company Representative

May I insist, just to see the time we spend on that reflect the total confusion as I said organized by regulators and banks on definition of the, I think to be frank if we step back altogether as a community of people looking at businesses, and not just ratios, I think it’s crazy. Let me just say that, I think it’s crazy. Next question?

Operator

The next question is from Mr. Kiri Vijayarajah from Barclays. Sir, please go ahead?

Kiri Vijayarajah – Barclays

Yes. Good afternoon. If I could come back to the liquidity buffer slide 9, you do show a big step up in the liquidity buffer there and I wonder what actually changed during the quarter to make you do that. Could it look like it sort of stabilized to even start to shrink at the back-end of last year. And related to that if this is kind of the permanent thing or if it’s further short-term growth in the liquidity buffer, do you need to revise the guidance you gave for the revenue drag from the liquidity buffer, if this sort of level of liquidity buffer, it’s a permanent feature? Thanks.

Unidentified Company Representative

And I think we in line, with what had in mind. We had in mind to reduce again structurally, fundamentally, the reliance on all sales funding with more deposits, we have in mind to reduce the liquidity buffer. It will be done progressively according to market conditions. That said it’s a kind of insurance premium, but we in line with what, we had in mind previously. Yeah.

Kiri Vijayarajah – Barclays

Okay. So there is no actual sort of trigger to actually step up just during the quarter.

Unidentified Company Representative

I mean again we’ll talk to these reductions of short term funding.

Kiri Vijayarajah – Barclays

Okay.

Unidentified Company Representative

And then we will adapt, of course according to that and all of the parameters that set the deposit issuance, but – the amount of money on the Central Bank again, structurally we don’t need so money at the Central Bank.

Kiri Vijayarajah – Barclays

Okay.

Unidentified Company Representative

Regarding to liquidity, this is embedded in our guidance, July of minus EUR 1 billion for the year.

Operator

Okay, all right.

Unidentified Company Representative

Next question?

Operator

The next question is from Mr. Cyril Meilland from Kepler Cheuvreux. Sir please go ahead.

Cyril Meilland – Kepler Cheuvreux

Yes good afternoon. I have two questions. The first one is a follow-up on the liquidity buffer question which was just asked, and you mentioned at some points in the past that, so you were trying through some of these cost of each divisions. So I understand that it hasn’t been done yet. Can you confirm this?

And regarding the management of this liquidity buffer, you seem to indicate that you wanted to improve or to reduce the negative carry. Let’s put it this way. And it doesn’t seem that increasing the Central Bank deposits is a way for this. So is there anything that has changed? Because you seem to be on a downward trend for Central Bank deposits. It seems to be bucking the trend in Q2.

And my second question is regarding Russia and Romania. You mentioned, Frederic, that you were expecting these two subsidiaries to post a 15% return on equity. Could we have an idea what it would represent in quarterly net profits if these two subsidiaries would be at 15% already right now?

Frédéric Oudéa

Cyril, I don’t have the figures on top of my mind for the two subsidiaries. If we cannot provide you the figure during the call, we will be able to do so later on. Again on the liquidity buffer there has been no decrease I think of the money in the Central Bank. It fluctuates between 60% and 80% and may I say that. It’s again overall domestic liquidity in the system, there are a lot of variable and we are reducing to a certain extent to collect some money.

My view is to say, to have different milestones in mind in the end 2014. First the housings are developing. First step the next six months, so you will have further, I think, a further adjustment of the balance sheet end of this year. What will be the magnitude it’s still premature, but we will have the first step. And at the end of the European Banking, the process of the European Banking Union, end of 2014, the end of these adjustments, that’s the way I think.

Now it’s a bit difficult to if you wish gives you already more figures. Is the reasoning you see that first primary step and I think that’s end of 2014 will have a new regulator, the bank balance sheet behind us, et cetera. I would hope to come back definitely to a system where, I would say probably the Fed, pulling back some liquidity mostly into 2014 all that would mean probably kind of normalization of this liquidity. And we are not allocating to the businesses if you wish, because of this excess liquidity because it will disappear in month’s time and I think it would destroy the figure situation.

I was provided with the figures apparently for Russia as a whole. So not just what it stood in retail and please take that into account. So taking also into account the proportion of Specialized Financing revenues, this could be €200 million a year, so I mean more or less multiplication by two of what we have achieved today roughly, a little bit over than two where our first half has been 25 and 49, so 64 through some (inaudible) multiplication by 1.8 and Romania roughly $150 million net. So we will discover set of calculation, but that’s more or less what you could expect.

Cyril Meilland – Kepler Cheuvreux

Okay. Thank you. And sorry, just as a follow up on the Corporate Center, I understand that you keep guidance, there’s still quite a lot of volatility from one quarter to another, as Philippe mentioned from €145 million to basically €300 million in the second quarter. Should we expect the same kind of volatility going forward even though you give the guidance or have you taken steps to reduce it?

Frédéric Oudéa

Yes, we can take the assumption that we may have some of the volatility, that’s why once again, we keep this, let’ say competitive guidance for the year with minus EUR 1 million as guidance on GOI.

Cyril Meilland – Kepler Cheuvreux

Okay. Thank you very much.

Frédéric Oudéa

Next question…

Operator

The next question is from Flora Benhakoun from Deutsche Bank. Madam, please go ahead.

Flora Benhakoun – Deutsche Bank

Yes, good afternoon. Two questions from me as well, the first question was on the cost of risk, I just wanted to see whether you consider that your probation have now peaked and that they are going to continue to decrease and where do you see your normalized level of provisions, let’s say in the mid-term?

And the second question is on the legacy assets, I may have understood wrongly, but I understood from the core that you said there will be almost no more P&L impact from that line in 2014, and I had in mind that we would still have around, let’s say €40 million of net loss per quarter. So I just wanted to check on that and see also whether you include legacy assets when you give the target 10% return on equity. Thank you.

Frédéric Oudéa

First of all on the legacy assets, what I said is, we stand at €1.5 billion. We will try to further reduce that. So it means that in practice, I don’t expect any more P&L impact in 2014 and beyond. For this year, I would say we keep the same guidance more or less minus €50 million because if we carry on deleveraging more or less, again it can vary from one quarter to the other more or less minus €50 million per quarter.

With the amount of legacy asset, I said which will remain, actually it’s included in the 10%, but again it’s so small that will not be an issue. So you can include in you calculation. Regarding the cost of risk, let’s look at this business. We’ve said 60 basis points of the retail. For this year we keep this guidance. In international retail, I would expect the cost of risk to still marginally decrease, in particular in Romania. Specialized Financing should remain probably overall stable, and CIB, that’s at low level. We have a good credit portfolio that can vary a little bit, but we have good credit portfolio. So that’s what we could say on the cost of risk.

Operator

Okay. Thank you. Your next question is from Mr. Maxence Le Gouvello from Crédit Suisse. Sir, please go ahead.

Maxence Le Gouvello – Credit Suisse

Good afternoon, everyone. Just one question. Can you elaborate a little bit more on your target of 1% growth in the French Retail? Why you are more comfortable to give a target, while you were quite cautious at the beginning of the year and which kind of products you are very comfortable with? Thanks.

Frédéric Oudéa

I think if you wish, we had in mind risks in the regulation. We have some negative impact, but that’s probably at least a little bit less than what we could have said. We have also the benefit of good commercial activity and I’d say the confirmation of certain stability of the economic activity and further the decrease of the remuneration of the (inaudible) will also help.

Maxence Le Gouvello – Credit Suisse

Okay.

Frédéric Oudéa

[125] 1st of August.

Maxence Le Gouvello – Credit Suisse

And regarding the mortgage production, have you seen a real inflection point on Q2 or it’s where it’s probably it’s very small?

Unidentified Company Representative

Some pick up in the production also of mortgage loans in the second quarter.

Maxence Le Gouvello – Credit Suisse

Okay and it is new loans or re-negotiation?

Unidentified Company Representative

It’s a mix, there are re-negotiation which are taking place, either way it’s difficult for us to have a statistics, it’s a mix. Probably it’s likely also coming from a bit more comfort from individuals.

Maxence Le Gouvello – Credit Suisse

Yeah. Okay. Many thanks.

Unidentified Company Representative

Welcome. Next one?

Operator

Your next question in from Mrs. Anke Reingen from Bank of America. Madam, please go ahead?

Anke Reingen – Royal Bank of Canada

No it’s Anke Reingen from Royal Bank of Canada. I just had a question on your cost habit, I’ve never seen that you said that your aim with your cost savings to keep costs flat 2015 versus 2012, and I just wanted to make sure, I look at the right, actual cost base in 2012. And then, when you talk about keeping costs flat, I was just wondering, what would be the related assumption on revenue cost, would 1% to 2% per year be too ambitious. And then just lastly on the benefit from the CVA, did I understand it correctly that half of this is the benefit of MBIA, and what if the cost of – perhaps in P&L impact, is it costly? Thank you.

Unidentified Company Representative

You’re right. Half of the decrease is structural, because it is related to effectively to disappearance of this counterparts, and then as (inaudible) said, we’ve put in place CDS on the counterparts, to be frank, I think the cost is virtually minimal.

Unidentified Company Representative

François, the cost is minimal as let’s say you have the premium and caliber, it is limited compared to the gaining of capital we need.

Unidentified Company Representative

Now, in terms of cost evolution, yes, we said stability, because what we have in mind and we will again give you more flash next year as part of our Investor Day and both on revenues and cost, the idea is to say, we need to invest in certain businesses, it makes sense. we need to further give the businesses the opportunity to compete. And on one hand, we’ll make some savings to effectively, basically more or less stabilize the customers of total costs compared with 2012.

As the figure on top of my mind with similar parameter, roughly $16 billion, I think if you take out what we sold. And as I said now the ideas of activity to deliver growth in international, retail and the new Global Banking, Corporate and Investment Banking division with Private Banking. we will then give you more flash on that next year.

Anke Reingen – Royal Bank of Canada

Okay, thank you very much.

Frédéric Oudéa

Next question?

Operator

The next question is from Pierre Chedeville from CM-CIC Securities. Sir, please go ahead.

Pierre Chedeville – CM-CIC Securities SA

Hi, good afternoon. One question regarding Africa, we all know that Africa will be one of the most billing area in the coming year, and BHFM has there in my view significant know-how. And that is quite a pity to see that, do you have any more a lot to say regarding Africa. And some months or quarter ago, you began to initiate, I would say, a strategy with other things like that.

And we don’t feel now that you want to develop this part or you are a little bit silent on this subject. Do you have something to say regarding your views on Africa? Because I think it could be something interesting to boost the profitability of BHFM. And my second question related to the slide page 10, regarding your platform on P&Es and SMEs.

Unidentified Company Representative

Do you think right, you have a lot of potential in France, regarding this cross-sell I would say cross selling, and do you think that you may implement is kind of structure of may be you’ve done it already in (inaudible) in Romania or in Russia and with the same efficiency? Thank you.

Unidentified Company Representative

Yeah, hi, I’ll leave Bernardo Sanchez to comment on that free cash, and then press (inaudible) what we are doing in France. Then perhaps Jean to further elaborate on our project in terms of further synergy between our internation retail and CIB. First Bernardo Sanchez on Bernardo on the African strategy.

Bernardo Sanchez Incera

Sub-Saharan Africa is 10% of (inaudible) overall, slightly higher than the last year, so basically because this is a growth area for (inaudible), and as you rightly point out, this is promising continent, growing with a potential for growth, but coming from a very low basis.

So impact on the total growth of the Group will be still limited for a while, even though the growth is there and the potential for growth is there, and that, it is exact to say that we have strong positions in many countries, especially in Côte d’Ivoire, Comoros, Senegal and some of the countries of the region where we have all the ingredients for growth. We have a growing population, there are natural resources which are being exploited more and more sensibly than in the past. And they have huge programs of infrastructure which are needed to cope with the growth of the populations of the cities.

So we will continue to invest and we will continue to monitor closely the growth on those countries because those economies are not yet have fully organized and we need to be sure that where there is growth, there is growth on solid basis. We keep a lot of efforts to make sure that every of our bank is well balanced. There is a good equilibrium between loan and deposits and that we’ve have closely monitored the cost of risk, including operational risk.

Pierre Chedeville – CM-CIC Securities SA

And what about the (inaudible)?

Unidentified Company Representative

Thank you. And I would turn to Laurent to comment on (Inaudible) what we are doing in the potential there?

Laurent Goutard

It’s a great question and I share your interest for the slide 15. I think the MCB platform is a really very strong tool on the French market. Really between the given with the data and we decide to one year ago to allocate more, more power to this platform and as you can see things to that were able to deliver to corporate (inaudible) in France, product placement, IPOs, M&A and product equity and the first half of the year was very dynamic and when I see the portfolio, the pipe for the next month, I’m also very confident in the way I will continue to focus on to activity on cross selling between GIB and BDDF for that as well a crucial needs for medium sized corporate clients in France.

Unidentified Company Representative

Thank you, and just on with [VHSN] and we already had several years ago as the first platform at the JV between the CIBN and commercial banker and loan that quite well. because they used run commercial bank and now we are 4 JVs in Romania, in Russia, and recently opened in Morocco, and Sweden, that say we have capability to share at the revenue specialty market size and we were also a bit leverage that is in the base of these large entities of the group, for example we were active last year in the chase of electricity produced in Czech Republic bond insurance.

More recently let’s say beginning of this year we went to net for gas, gas pipeline with financing which into they count jointly with commercial banker and just to mention in Russia, where our experiment was successful in term of cross selling. We did that spend to the Rosneft acquisitions of TNK-BP stake and also yet to date we rank number three on the Euro bond insurance for corporate (inaudible) showing that liable at (inaudible) on the last couple of years in Russia, in Czech Republic, in Romania, just to mention most of the, over the last entities. So we continue to do that on the capital market and also with national banks

Operator

The next question is from Mr. Federico Salerno from MainFirst. Sir, please go ahead.

Federico Salerno – MainFirst Bank

Hello there. Just a quick question on an area of weakness, I’m afraid, again, on Russia. Was the slowdown in revenues entirely caused by the corporate governance issues we know about or there was something else? Thank you.

Unidentified Company Representative

No, it’s not at all related to the corporate governance. Well, Didier, on the evolution of revenues in (inaudible)

Unidentified Company Representative

The revenues in Russia in sink with all expectation, I have seen that its path of the growth of load portfolio and on the blip that happened is as we had some difficult market in June, we had less positive result from pure trading activities, basically no impact whatsoever in the activity of the Bank and in the revenue generation by the corporate governance issues.

Federico Salerno – MainFirst Bank

Thank you.

Unidentified Company Representative

Next question?

Operator

The last question is from the Mr. Jean-Pierre Lambert from KBW. Sir, please go ahead

Jean-Pierre Lambert – KBW

Yes. Good afternoon. I would like to come back on Russia. Just to understand your point of view, your management diagnostic of what went wrong with the operation in general, and how do you see the mechanism which contributes to weak performance in general? And second question then related to this. What is the red line for you before considering not keeping the business or taking more drastic action? Thank you.

Unidentified Company Representative

I will leave the floor to DJ let me say and I was also understand quite of in Russia, I’m positive on what we can achieve in Russia. We have capacity to improve the performances and together to obtain the first half was play back we need to consolidate that and convince about our potential there, it will take sometime like in any retail acquisition but I’m positive on that, you gave that, can you again elaborate further.

Frédéric Oudéa

So just, not be too long but to take some step back and to come back to say 18 months ago, what we observed is that the revenue generation was not dynamic enough, that we had, because of we had to merge and consolidate, we had this on mismatch between our revenues and our cost base, and then on, we had this serve element that was a handicap. That we had from prior to the acquisition of the Rosbank acquisition by Societe Group, some legacy portfolio that was creating some exceptional cost of risk.

We decided from that, to launch to turn around the strategy and basically we’ve basically once boosted as a revenue generation addressed very significant and aggressive cost reduction program and we’ve basically, we’re in a country where inflation is close to 6%. You can observe that we have year-over-year cost that are down and we have in the same time covered the legacy portfolio. We have basically clarified this strategy, we’ve cleaned up the balance sheet and we are also building a strong momentum, with a re-enforced management team.

Jean-Pierre Lambert – KBW

Thank you very much.

Operator

We have no other questions for the moment.

Frédéric Oudéa

Thank you very much for attending this call. I wish you a very good August, and let’s again speak for our next results for the third quarter. Thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!