Societe Generale (OTCPK:SCGLF) Q2 2016 Earnings Conference Call August 3, 2016 6:00 AM ET
Frederic Oudea - CEO
Philippe Heim - CFO
Jean-Luc Parer - Co-Head, International Banking & Financial Services
Laurent Goutard - Head, Retail Banking France
Didier Valet - Head, Corporate & Investment Banking, Private Banking, Asset Management, Securities Services
Didier Hauguel - Co-Head, International Banking & Financial Services
Lorraine Quoirez - UBS
Delphine Lee - JPMorgan
Pierre Chedeville - CM-CIC Securities
Jean-Francois Neuez - Goldman Sachs
Jean-Pierre Lambert - KBW
Maxence Le Gouvello - Jefferies
Bruce Hamilton - Morgan Stanley
Nick Davey - Redburn Capital
Kiri Vijayarajah - Barclays Capital
Stefan Stalmann - Autonomous
Guillaume Tiberghien - Exane BNP Paribas
Anke Reingen - Royal Bank of Canada
Tarik El Mejjad - Bank of America/Merrill Lynch
Flora Benhakoun - Deutsche Bank
Good afternoon to everybody. Thanks for attending this conference call on our Second Quarter and First Quarter Results. As usual, with Philippe Heim, our CFO, I will briefly present our results and then, with our management team, we will answer your questions knowing that I would like again, like in previous calls, all of you to comply with this good discipline to ask a maximum two questions per person.
So if we enter into the presentation Slide 4, you have a summary of our results. I think we have posted good performances in obviously a challenging financial environment for the second quarter as well as the first half with the benefit of a diversified business model. In the second quarter, our revenues came up 11.5%, benefiting from the capital gain of the sale of our share in Visa Europe. Excluding this benefit and the non-economic items, revenues are stable, which means that we are able to compensate the decrease of the global banking investment solutions by the other activities.
Operating expenses are under control, plus 1.3% on a like-for-like basis, plus 0.6% for the first half. And overall the cost of risk is also down 5% on a like-for-like basis at 38 basis points in the second quarter for the Group. It's going down for all our businesses and clearly we are below our estimates for the year between 50 and 55 basis points.
Overall, the Group net income totaled €1.6 billion excluding own financial liabilities and DVA, up 45% on a like-for-like basis, benefiting of course again from the capital gain of Visa. One important thing is that the earnings per share, excluding own financial liabilities and DVA, which is the basis for the calculation of the dividend, came up 25% at €2.77 compared with the first half of last year.
Regarding the balance sheet, the capital ratio is stable versus end of March 2016, knowing that we dedicated 14 basis points this quarter for bolt-on acquisitions, Kleinwort-Benson and an asset management business called Parcours in France.
Let me spend a bit more time on Slide 6 regarding again our business model. You have here the contribution, the revenues and the normative -- the profitability on normative equity of our three pillars. The first pillar, as you know, the French retail business. We will enter into the detail but despite the pressure on revenues coming from low rates and even negative rates, as you can see, the net profit of this business is up 4% compared with the first half of 2015. And the return on normative equity on 11% risk-weighted assets remains at the very good level of 14.8%.
May I highlight particularly the strong performance of our international retail banking and financial services which is the result of a long and hard work in the last few years to improve the operational efficiency, to improve the cost of risk. And as you can see, in the first half of 2016 not only of course the net profit is going up but the net contribution of the retail outside France and financial services is at the same level in absolute terms than the Group, than the French retail, and also at the same return on normative equity.
We are going to focus on the second quarter. The second quarter is posting a 16% return on normative equity, so it shows the progress of this division. And I would like to emphasize that these activities are in countries, in businesses which do not encounter this negative rate environment, which is very promising going forward.
Regarding the third pillar, global banking and investor solutions, may I highlight of course compared with the high reference base of the first half of 2015 in very buoyant global capital market activities, the net contribution is going down, but we were able to maintain a high profitability on capital compared with our peers, above 10%, and fare very well over turbulence of this first half and quarter, I mean the beginning of the year with the nervousness around the commodity prices and of course, the very significant shock on the stock markets after the Brexit vote.
When we look at the evolution of our global market NBI versus our peers, we also show a very good resilience, minus 9% on the first half compared with last year, equivalent to our French peer BNPP and much better than our other European peers. It confirms to me all the benefits of the changes of the business model again implemented in the last years, which again provides resilience and, compared with our peers, good profitability on capital.
If I turn to Slide 7 and again this issue of negative interest rate which overall weighs on perspectives for the European banking sector, I would like to illustrate that we have just a small portion of our revenues which are exposed to this trend. When you look at our net interest margin income in the French retail, it is less than 20% of our overall revenues, and it's a portion of it which is effectively potentially more directly impacted by this situation of low rates and sometimes negative rates. I mean the margin income coming from the reinvestment of our stable deposits that represents less than 12% of the Group revenues. We have on the other hand, as you will see, the benefit of good growth of activity in France, growth of credit outstanding, which limits the impact on the net interest margin of that phenomenon, and of course the development of our fee business which also helped to compensate.
The other activities, whether they are related to retail banking and financial services, as I've said, in countries which are not impacted by this negative rate policy or in activities which are not impacted by this rate policy, as well as the global banking investment solutions business, which is less directly correlated, less sensitive to this situation, means a capacity I think to outperform going forward in this rate environment.
Now I will turn the floor to Philippe who will enter more into the detail. Philippe, the floor is yours.
Thank you very much, Frederic. Good morning, everybody. So maybe before giving you more flavor regarding the situation in the businesses, some additional information regarding the Group, starting with costs on page eight. You know that we have launched a topic, many initiatives we are currently working on for the period covering 2015 to '17 to a cost saving plan of €850 million. And we have there described the various details of our initiative. I would just focus on the bottom line, the conclusion, our objective. Without the benefit of the Euribor reform, we want to curb costs so that the evolution will be limited within 0% and plus 1% for this year. So we'll maintain our discipline on costs.
On cost of risk, moving to page nine, if you focus on the bold red curve you see that in Q2 we had a commercial cost of risk standing at 38 basis points, so a very low level, and when again you have to go back before the beginning of the financial crisis to find such a low level. So we stand at 42 basis points for the first half year so we are well below our yearly guidance of a cost of risk between 50 to 55. This trend is, let's say, common all across the board for all of our businesses.
First, you see the French retail business has a cost of risk this quarter at 33 basis points. Maybe more impressive, in our international platform the cost of risk stands at 64 basis points, and, as you have in mind the traffic of the Group, in Romania the cost of risk stands this quarter at 99 basis points while in Russia we are also well below our guidance. We stand this quarter at 244 basis points. In global banking and industrial solutions, cost of risk decreased continuously over the past two quarters with limited additional provision for counterparties exposed to oil and gas sectors. In terms of outlook, I confirm that we will be below let's say 50 basis points for the full year.
Now moving to capital. Bottom line, as mentioned by Frederic in the introduction, the CET1 ratio is stable this quarter at 11.1%. The quarter was marked by a strong income generation. IF you exclude the effect of the covenant [indiscernible] debt, the organic generation of capital stands at 43 basis points, out of which 50% is provision for dividends and then we have decided to invest in the development of our Group with an impact of M&A operations of 14 basis points. You know that we have concluded the acquisition of Kleinwort-Benson in the UK in private banking and the integration of the Parcours France within ALD.
The other element is a slight increase but limited of the risk weighted asset and bottom line the CET1 ratio is stable. And as you can see on this slide by page ten, we maintain an ample management buffer on the top of the SREP requirement for SG standing at 9.75 basis points. Just a quick word on the EBA stress test exercise testing the resilience of European banks. For us, the key takeaways from this very demanding exercise are the following elements. The impact for us stands at minus 240 basis points versus an average impact for the panel under review, the 53 European banks, of minus 280 basis points. And whatever criteria you consider, phased-in CET1 or fully loaded CET 1 ratio, at the end of the day we maintain a management buffer of 175 basis points to the threshold defined by the ECB for this exercise, I remind you 5.5% plus the G-SIB buffer. So a threshold at 6.5% for us and we have in our annex introduced a benchmark to give you elements on that.
And although, we consider the results were satisfactory for us, we are focused on reinforcing our balance sheet and we target, and this is something we can confirm, we have a target of CET1 ratio between 11.5% and 12% in 2018.
So, now moving to the page 11 and 12, this is a summary of the information already described on a quarterly basis, on a half-year basis. So on page 11 you see that Group revenue for the second quarter on a like-for-like basis and excluding revaluation of own debt, is up by 11.5%. If you exclude the benefit of the capital gain on Visa, revenues were stable, illustrating the resilience in terms of revenue of all the businesses in the French retail, within IBFS and notably for financial services to corporates and a sustained revenue growth for GBIS.
In this context, operating expenses increased by 1.3% on a like-for-like basis while costs were flat on a half-year basis. Cost of risk is notably down minus 5% and as mentioned before the Group net income excluding revaluation of our own debt stands at €1,599 million, up 45%. So now I can dig into more details for the businesses, starting with RBF, so the French retail platform, so maybe a quick word on the economic situation.
I would say that after a flying start in Q1 with GDP up plus 0.7% underpinned as you know by strong consumer consumption, a pick-up in corporate investment, GDP was stable in Q2, maybe with the repercussions of social unrest we have witnessed -- we have seen in France in May and June. But overall, we can confirm our view that the French GDP will move up by plus 1.4% for the full year. So against this background of what we can describe as a gradual recovery we maintained a pretty solid and dynamic commercial activity, as demonstrated by the various criteria we usually use to illustrate our activity.
First, customer acquisition still at a high level both for corporate customers with more than 1,500 new relationships the highest level for five years, a strong momentum for Boursorama with 64,000 new customers. We have also a strong growth in credit originations. The loan book bottom line is up by plus 3.5%. We maintain good activity on the mortgage book. We originated €4.3 billion of mortgages in Q2 with a comfortable level of margin. Regarding the corporate book, corporate loan production was up 20, in terms of production up 27% leading to an increase of 2% in outstanding.
Finally, regarding the growth drivers, we can mention dynamic inflows from life insurance, plus €2.6 billion in gross inflows. It's the same pattern for private banking with net inflows up €1.1 billion, up 59% as compared with Q2 of last year.
In the following page we just illustrated, let's say, our initiative to support the development of the corporate business and specifically the services we provide for entrepreneurs through the platform we have expanded in France in main cities. The idea for us is to provide a holistic set of services for entrepreneurs and SMEs and to bring capacity to take care of all their needs and to support them in their daily business, accompany their growth, finance their growth, their development of growth, accompany their managers in their wealth management, for example the transfer of their company. And all in all this is maybe an explanation of the strong momentum we've seen in the corporate activity in this segment. NBI was up by 9% between 2012 and 2015.
Moving to Slide 16, so how the good commercial activity translates in terms of financial results. If I jump straight to the conclusion, as mentioned by Frederic in the introduction, we have increased the contribution on a half-year basis. The contribution stands strong at €403 million for the quarter leading to a return on normative equity around 15%.
So the main parameters contributing to these results are pretty well known. First, revenues are resilient but, as you know, facing erosion. We've got steady operating expenses but that must nevertheless include investment for transformation in the digitized space, and a strong decline in cost of risk. And the outcome of all those parameters are very satisfactory. So revenues, as I've mentioned before, are down excluding PEL/CEL by 2%. Revenues from interest margin fell by 2.7%, reflecting, as you know, the pressure on margin we get on the investment of deposits coming from the yield curve. We've got also on the margin coming from the credit book the effect of the waiver for negotiation in 2015.
Regarding the commissions, they come slightly down in the second quarter, minus 0.8%, but were stable, more than stable and positive with a half-year view, reflecting a mixed dynamic. Service commissions were up by 4% and this is positive, this is an illustration that our growth drivers in private banking and in insurance are delivering, while financial commissions were down by 15% with brokering activity suffering from market environments. Operating expenses increased by 2.8% but this trend mainly reflects a seasonal effect and does not represent the annual trend which will be roughly stable.
Lastly, cost of risk is down by more than 8% and all those elements leading to contribution of the business to the corporate income of €403 million. So now page seventeen. Let's move to IBFS and just maybe to start with some elements of the economic background. So in Central and Eastern Europe the pattern is still pretty similar. We are still in a situation of strong growth of recovery, pretty much decoupled from the one we see in other emerging countries. Growth levels are still very high, around 3%, and in this context Romania in particular stands out with growth which should be above 4%.
Russia is fast returning to normal growth levels, benefiting from the revaluation of oil price in Q2. As a clear indication of let's say the absorption of imbalances, inflation remains flat around 7% and 7.5 % in the past three months compared with high levels of 15% last year. And all observers revised up the prospect of growth in Russia and GDP is expected to be stable in 2016 before a growth of around 1% in 2017.
In Africa, the pattern is still very dynamic, so all in all we operate in a lot of countries and geographies where we benefited from a positive cycle. And the activity of our businesses reflects this situation. In our international retail banking network, the growth momentum is both strong and balanced. You see that the loan book is up by roughly 7% while deposits increased by 5%. All our main geographies illustrated this momentum. In Western Europe, outstandings were up by 8% and notably we have a very good performance in consumer loans and notably in Germany where the loan book is up by 16% with an excellent performance of car loans and leases distributed by BDK.
We have also the same momentum in France. The loan book is up by 5% in car loans. Activity remained excellent in Czech Republic with the loan book up by 9%. In Romania, we have been expecting that for a long time outstanding is now up by 4%, driven both by retail and large corporates. And in Russia we have now a very positive and strong activity on the corporate segment. The production in the corporate segment was up by 80% if we compare H1 of this year and H1 of last year, reflecting, yes, a catch up process with the peak of the crisis last year but nevertheless a strong production of Rosbank on the corporate segment in the second quarter of this year. In Africa, the dynamic is still very strong with double-digit growth in sub-Saharan Africa.
The pattern of growth is also seen in insurance where outstanding increased by €0.6 billion with unit linked share of 76%. And I have to mention an increase of 9% in the premiums coming from property and casualty insurance segments. The momentum is also very strong in financial services to corporates. ALD continued its strong growth with the fleet up by 15%. ALD is the undisputed European leader in terms of fleet and maintained its growth activity.
Regarding equipment finance, growth is also very good, the book is up by 3%. The production is up by 3%, excuse me. The leasing outstanding came to €16 billion, up 5%. To illustrate the momentum within international retail and financial services to corporates, we try to illustrate on page 18 the mix, the kind of mix we have in this division. On one hand you have structurally resilient activities with recurring revenues, such as insurance and financial services to corporates, and on the other hand, you have the upside coming from international retail banking networks operating in high growth economies. And you can see, let's say a clear pattern of improvements all across the board.
And clockwise from bottom right, first ALD, you see the increase of -- the steady increase of the contribution of ALD and pretty impressive. Secondly, the rollout of the Bankinsurance model with steady growth in personal protection and property and contributing to growth in our fee income base. And finally, the international retail banking network, you see the steady growth of revenues in Central and Eastern Europe benefiting from the dynamic economic growth. And to take, for example, the ongoing recovery in Romania, you see that on the first half of this year Romania posted a contribution to the Group net result of €23 million representing in Q2 a return on equity of 20%. And then you have the impressive strong volume growth in Africa with outstanding up by more than 20% over the last 12 months in Algeria and Cote d'Ivoire.
So now let's have a look on the financial results of IBFS. So revenues were up by 4%. Operating expenses have accompanied this growth, up by 2% while maintaining an improvement of cost to income at 55% in line with the lower cost of risk, standing at 63 basis points and the provision to risk is down by 28%. And overall the contribution to Group net income increased sharply, standing at €436 million.
And if I have maybe to give you some flavor on some elements, the contribution coming from Europe is up by 23% and, as mentioned before, 21% just on Q2 coming from Romania, return on equity of 20%, Czech Republic maintaining a high level of performance, contribution of €52 million. And regarding Russia, the normalizing process is confirmed with the loss limited to €12 million in Q2, enabling us to confirm the lower band of our guidance between minus €50 million and minus €100 million for the full year, also a strong growth coming from insurance, up 12%, a contribution of €97 million and coming from financial services to corporate up 25%.
So now let's spend some time on global banking and investor solutions division, first on the business model, which quarter after quarter has demonstrated its resilience and its efficiency. And this story is based on three main characteristics, illustrated on this slide. The first one is our capacity to maintain strong commercial franchises and recognized expertise on financial businesses like export finance, natural resources financing, debt capital market, and of course, as you know, equity derivatives where we have a clear global leadership.
Second characteristic explaining our success is global allocation of capital in favor now of financing and advisory activities. We have decided in that segment to put more capital at work and to bring more resilience to the mix. And you see clearly this policy reaping the fruit and you see the distribution of the breakdown of the capital allocation within the division.
The third element of success is the business mix in global markets, clearly with a mix skewed towards equity businesses and prime services now. In equity especially, we have a business line demonstrating both growth and higher level of profitability. And then last point, a well balanced profile between presence in Europe and Asia. And bottom line, this platform is fit and focused and over the past quarters demonstrating its resilience. And indeed, even though, now on page 21,the comparison with the first part of last year is difficult because, as you know, we had the best ever performance in equity, we have demonstrated, thanks to rigorous risk management and good commercial activity, our capacity to maintain a good commercial performance.
In global markets, revenues were down by 11.3%. Specifically in equities, revenues were down by 29% but, as you can see on the Slide Page 21, you have a continuous quarter-after-quarter trend of improvement. So sequentially, we have constantly improved the performance and the pretty good news is a growing appetite from Asian investors for structured products.
In fixed income, revenues were up by 2.8% when compared with Q2 of last year with a good performance in rates and commodities, and while currency activity was sluggish at the beginning of the quarter, the business benefited from very high customer volumes after the Brexit. In prime services, revenues were up by 23% compared with Q2 of last year, illustrating the benefit of the integration of Newedge and the benefit also to onboard new clients and to extend the set of service to those clients. Customer, custody services showed strong commercial activity while suffered from a low level of interest rate.
Now moving to financing and advisory, page 22. The pattern is roughly the same. A non-favorable basis of comparison because we recorded in Q2 of last year a landmark, an exceptional operation, but overall we maintained a steady increase over the last two quarters. And in particular the natural resources division showed a strong performance.
In capital markets, revenues are up with, let's say, increased market share in debt capital markets. In revenues for asset and wealth management, revenues there were down by 2% on a year-on-year basis. The quarter was marked by the integration -- the completion of the integration of Kleinwort-Benson leading us now to manage €18.5 billion in terms of assets in the UK.
So now page twenty three, coming to GBIS financial results. Revenues were again compared with very high data points, revenues were down by 8.3% on a year-on-year basis. Operating expenses were stable, we're beginning to reap the fruits of our various initiatives to curb costs within GBIS and we will see in the coming weeks, coming quarters, the full effect of those initiatives. Overall the contribution of the business to the Group net income amounts to €448 million, representing a return on equity above the threshold of 10%, a pretty good performance given the kind of environment we have to cope with.
Now I'd like to finish this presentation with the corporate center before leaving the floor to Frederic for the conclusion. To understand the picture in the corporate center you have of course to neutralize some elements. First, the capital gain on the disposal of Visa Europe shares amounting to €725 million. You have second to of course neutralize the usual effect of the revaluation of our own financial liabilities amounting to minus 212 million this quarter. And if we neutralize those two items, the corporate center posted a negative GOI of -- excuse me, a GOI of plus €57 million for this quarter and negative GOI of €188 million for the first half year. So we are comfortable with our guidance of a negative GOI of minus 600 million for the full year. And I have lastly to mention that we booked in the corporate center, as we did in Q2 of last year and in Q2 two years ago, an additional collective provision for litigation of €200 million, increasing our overall provision to €1.9 billion.
So, so much for me and I hand the floor to Frederic for the conclusion.
Thank you very much, Philippe. So a few words of conclusion. Slide 26 just to illustrate the progressive improvement and increase of our net tangible asset per share. You see that it stands at €55.37, up 4.1% compared with last year, and actually it's exactly the same rhythm in the last four years with an increase of 18.4% compared with end of first half 2012. As I've already mentioned, the EPS increased sharply in the first half to €2.77 excluding non-economic items, up 25% compared with first half last year, which is again the basis of the calculation of our dividend.
If I turn to Slide 27 and say a few words on the second half perspective, well, our objective is basically to carry on with this, all our transformation to further consolidate this business model. In the French retail, in an environment which should not fundamentally change, as Philippe has highlighted, we want to pursue this very significant transformation invest in technology, further roll out the transformation of our distribution channels and of course take advantage of our very competitive new business models, whether it's with corporate clients or with private clients with private banking, insurance and payments for example.
In international retail, as Philippe mentioned, in an environment which overall should further improve and probably be better than in the Eurozone for retail activities, we want to further optimize our set-up and performances, take advantage of the growth potential, as well as further reallocate at the margin the capital within this pillar to even further improve profitability.
And regarding global banking and investor solutions, the priority is to further effectively adapt the factor, work on operational efficiency while concentrating on this client-driven business. We are very happy with the strategic choices we've made, for example in prime services, which is a growth driver, while we pursue the enhancement of our franchise in the other businesses, which I think are well suited for the client needs as well as the new regulatory framework.
That's what we wanted to say in the presentation and now the floor is yours.
[Operator Instructions] The first question is coming from Lorraine Quoirez, UBS. Madam, please go ahead.
Can you maybe explain a little bit how the margin on the corporate lending in France is evolving? Obviously, it feels like you're accelerating the cross-selling there but any color on margin would be helpful as well. Cost of risk has improved so we're in a lower environment and actually in lower rate environment since the Brexit and cost of risk for the Group this quarter is 40 bps against, as you said, a guidance of 50 bps for the Group for the year. Do you feel like you can review this guidance already or not? Thank you.
Yes, Lorraine, I will leave Philippe explaining on the evolution of the margins on lending, but just on the second part of your question, I think Philippe was effectively clear by saying we are reducing our guidance on the cost of risk. We will be below 50 basis points with, as you mentioned, on one hand in French retail a low cost of risk, which is not just the benefit of this low interest rate environment but we have in France an improvement of the margins of corporates. We have the benefits also of some tax reduction which were decided by the government and which benefit to SMEs.
As you know, real estate market, mortgage market, which has always been very low in terms of cost of risk thanks to good credit origination and all the efforts we've made in the last years to improve the overall credit origination. Regarding international retail, we've mentioned the fact that we have across also the board an improvement and the perspective of growth and the outlook remains positive there. And on CIB we have as we've said a decrease at a low cost of risk but we are also confident in the quality of the assets. So that's why we are able to confirm this lower guidance below 50 basis points for the full year. Now perhaps, Philippe, in the margins on lending in France?
Yes, good afternoon, Lorraine. So I confirm that the activity was very dynamic on the production side, both on corporates and mortgage. What I can confirm, I think this is underlying this question this is a very competitive market and even though the market is in this situation, we manage broadly speaking to maintain at a satisfactory level our margin. And on a half-year basis, on the mortgage book, on the new production, the margin stands at roughly 71 basis points.
Thank you very much.
The next question is coming from Delphine Lee, JPMorgan. Madam please go ahead.
Yes, good morning. Two questions on my side. First of all, just to come back a little bit on the stress test, it's just to understand a little bit the SREP process for this year and next year. Do you think that the ECB is a bit more focused on the buffer versus the threshold of 5.5% plus G-SIB or is it more the drawdown and do you expect any material changes to the SREP level or not really?
Second question on your cost guidance of basically minus 1% to 0%. Given that the costs at the Group level were already down 2% and it seems that in French retail you're going to basically target more stable costs as opposed to . So do we, should we expect some kind of increase in international retail or GBIS? Can that actually, can you actually maybe outperform on the cost management versus your guidance? Thank you.
Delphine, I will leave Philippe to answer on your question, on your two questions. Let me just say costs in IBFS are increasing but actually we see a positive jaw. You know revenues are up more than 4%. Costs are increasing but at a lower pace. And may I say, I think it makes sense to effectively invest in this growth driver of the Group. But again, Philippe will comment on the overall perspectives on the cost side. Philippe, on both questions by Delphine?
So first question was on the stress test. I already mentioned the two main conclusions of the stress test. The first one is that the impact itself, this factor itself was more limited for us than for the average panel of European banks. And what will be the second conclusion and leading to your question, what kind of conclusion we can expect from ECB from this exercise, and what is important for ECB and this is illustrated in the annex on page 40. It is the kind of buffer at the end of the day you can maintain on the top of the threshold decided by ECB for this exercise, so on the top of the very famous now 5.5% plus the systemic surcharge. And under this criteria, you see that we maintain the same management buffer we want through the cycle to maintain on top of the SREP threshold.
So bottom line, in fact, we target everything being equal a CET1 ratio between 11.5% and 12% and this is the first element I have to mention. Then of course, you know that ECB will revise the framework, the Pillar 2 will be divided between Pillar 2 guidance -- Pillar 2 required and Pillar 2 guidance. We don't have so far let's say more elements on this. We will have further discussion with ECB starting in September and we'll be in a situation to disclose the Pillar 2 required because it will be the crucial element to set the new [indiscernible] threshold. So we can expect disclosure on this in December. So bottom line, we are comfortable with the exercise, keeping in mind that down the road our intention is to still increase and strengthen the balance sheet.
Now moving to costs. Let's say the objective is issue, neutralize the benefit of the Euribor reform we have recorded in Q1. The idea basically is to curb the evolution of cost between 0% and plus 1%. Having said that, the evolution will be different across the board between the diverse businesses. In the French retail, it will be flattish plus which will be a little increase but reflecting some kind of stabilization. Of course, in IBFS it will be a gross, [indiscernible] gross because we need to accompanize let's say, the strong growth of businesses like ALD, like insurance or Africa. And within GBIS, we'll, let's say -- part of the costs are linked with the evolution of revenue, of course. And you have the effect of, let's say, the cost-cutting plan, launched by Didier and his team. And we'll see the effect in the coming quarters.
The next question is coming from Pierre Chedeville, CM-CIC Securities. Please go ahead.
Yes. Good afternoon. Two questions, first question regarding Africa, which is the main part of your international network. And I wanted to know if you are not a little bit disappointed by the growth in the net banking income of this division considering the huge potential because if we look at a like-for-like basis growth on H1, it's only 3%, which could be better, in my view. I hope so. And also, that you have a negative jaws effect, which means that at the end of the day your gross income is decreasing year on year. So do you have any explanation for this I would say, underperformance I would say regarding Africa? And could you give us a little bit more color regarding the future of this part as you see it? And my second question is regarding the calculation of the return on equity. As far as I understand you have included the capital gain of Visa in it. I hope that you did not multiply this capital gain four times, but do you have calculated, I would say a pure return on equity without any one-off items on the H1 2016? And if any, could you give us the pure return on equity? Thank you.
Pierre, I will leave Philippe answering your second question. Perhaps Jean-Luc Parer on the African network and business.
About the African network, just this quarter there have been some non-recurring items. And if we correct the figures from these items, the NBI is growing by 7%, on the cost by 4%. Then that's just showing that there is a positive growth in fact.
And we remain I think positive on our African business. I was myself, I must say, in Tunisia last week. Overall, things are progressing. And we are not in geographies which are the most exposed overall to the energy prices, so I think this will remain a growth driver. And I think we remain positive on the development going forward. On the return on equity, Philippe?
Yes, Pierre, on the return on equity, so on page 11 we have depicted the return on equity. It stands at, excluding the revaluation of own debt, it stands in Q2 at 11%. And you have of course included in that the effect of Visa because at the same time in the APS you have the benefit of Visa, so it reflects the economical return on equity. If you were to neutralize, let's say, all non-recurring elements, namely the Visa disposal, namely the provisions for the additional provisions for litigation of minus €200 million and this is provided in the press release, the return on equity for the quarter should be around 8%, at 8.1%.
Thank you. Next question.
The next question is coming from Jean-Francois Neuez, Goldman Sachs. Please go ahead, sir.
I just wanted to ask you two questions then. The first one is, if your SREP increased, just not trying to figure out the outcome. But if it does increase, would you keep the same management buffer or drop it? And my second question is on litigation cost. So, on your Slide Page 9 you strip it out to calculate your cost of risk. But then it is also to me for the guidance basically saying that this is a non-recurring item. Obviously they've been coming quite regularly and nobody has in consensus a litigation charge going forward. And I just wanted to know whether that's the right assumption, essentially.
I will take this question and will let Philippe answer. We always communicate on the commercial cost of risk and effectively in terms of basis point. After that on the litigation cost we carry on with this prudent policy as at this stage where there is nothing which is changing on the litigation, it's just a potential litigation. I think it makes sense to carry on with that. And it's difficult to forecast, by essence, so we've said we would pursue this in 2016. That's what we are doing, and we decided to add, by prudence €200 million. So yes, it makes your life maybe a little bit more complex, but I think better to compare really what is significant, the commercial cost of risk. Philippe, on the SREP?
Yes, maybe a comment on that, in that respect, we are fully consistent with the policy we apply over the past three years. So we have it always distinguished as the commercial cost of risk and other elements. On SREP, the answer is pretty straightforward. We don't know yet, let's say, the outcome of the revision of the SREP. It will be let's say, officialized end of this year. What is sure is that by 2018, everything being equal, and this is important, everything being equal, we target a CET1 ratio between 11.5% and 12%.
Thank you. Next question.
The next question is coming from Jean-Pierre Lambert, KBW. Sir please go ahead.
Yes. Good morning. I would like to ask three questions around capital. The first one is to come back to the stress test. How was the litigation risk treated, particularly the OFAC situation. And also, if you could comment on the large loss in the first year. The second point is we have opportunities for consolidation, in Central Europe and the Balkans in particular, due to what's happening with some of your peers. Do you feel you have room for maneuver to be active on that scene? And the third question is regarding the Basel IV discussions on risk-weighted assets or risk weights for corporate exposure. Are we still moving away from internal models or will there be a cap at input level? What's your view on the development? Thank you.
I will let Philippe answer on your first question. Let me answer your two other questions. First of all, on Basel, can I mention definitely the awareness of what is at stake at the highest political level and as well as we've, the corporate world is currently much higher thanks to the effort banks in Europe collectively did to explain what was at stake. So I think that's a real progress. It's still premature to of course know exactly what the outcome will be, but again, but I have really doubts that the initial proposal will stay like they are. Secondly, consolidation in Central and Eastern Europe, I've always said that there are too many banks in this region and that they should all these markets should follow the same path than elsewhere, with less bank per market. We've always said we would be flexible on this, happy to participate, but it will not be at the detriment of the evolution of capital ratio. So we'll see how it goes, but I don't think it will be actually in the second half, as far as I see. But going forward, happy to participate and to strengthen our positions, but as I've said, with no impact on the capital ratio. First question, what can we say on the different factors, in particular litigation risk? [Indiscernible].
Yes. As you rightly pointed out, conduct risk and litigation risk was one of the new elements embedded in the exercise. So we have to introduce some assumptions in our trajectory. And all those elements, let's say, are embedded, let's say, in the overall impact, leading to what you know, so a global impact of minus 340 basis points. And also, let's also note, the elements, the values, factors, are described in our disclosure.
Thank you. Next question.
The next question is coming from Maxence Le Gouvello, Jefferies. Please go ahead.
Maxence Le Gouvello
Yes, good morning. I will have two questions. My first one is regarding French retail. Can you give us a little bit of granularity of what is in the corporate growth and to have an idea of, with the production, which is 12.5% of the loan book, is it a good run rate or do we expect more? The second question will be on the cost of risk in Romania. One of your peers in Eastern Europe have called two weeks ago, for some significant write-back. I just want to have a little bit of flavor of do you have some write-back in your cost of risk today in the Romanian activities? Thanks.
Laurent Goutard on more granularity on the loan production, in particular on the corporate side, and then Jean-Luc Parer on the cost of risk in Romania. Laurent?
Yes, thank you. Yes. For the production of new business customers' corporate loans, we have an increase, quarter on quarter, by almost 2%, 1.9%. It's mainly coming from investment loans, roughly 2%. And we have by the way, at the same time a strong production of factoring and leasing activity. On the other side, what is still decreasing is the exposure on the local authorities' loans. It means that we have a good balance of production. And by the way at the same time, we keep for the new loan, business loan, a good level of margin, around a little bit below 1%. And this is in line with what we did, for example last year. It means that really the dynamism of the new production is due to the setup, as described by Philippe Heim, the new agent entrepreneur and the dynamism of both teams, of both teams in Credit du Nord and Societe Generale.
Thank you. Jean-Luc, on the cost of risk in Romania?
Yes. Regarding the cost of risk in Romania, the figure for Q2 is including a provision of the equivalent of €20 million, covering the payment-in-kind impact, potential impact on the mortgage book. That means in the other areas the cost of risk is close to zero.
But we've no particular write-back as such.
But no particular write-back.
No new provision.
You have some plus or minus, but it's just flat. Yes.
The next question is coming from Bruce Hamilton, Morgan Stanley. Please go ahead sir.
Hi. Thanks. Morning, or afternoon, guys. Firstly, just on the insurance momentum, I think Philippe's comments was unit-linked being 76% of share. I just wanted to check that. Is that 76% of your insurance sales were unit-linked rather than euro contract? And if so, I assume that's rather better margin. And then secondly, on the Brexit impact to CIB, it sounded fairly marginal, but it helped a little bit in FX and rates rather than we should think there's anything unsustainable in the trends as we look forward. But I just wanted to clarity that. Thank you.
Yes. So perhaps, first of all, Didier Valet on the Brexit impact on revenue and then Didier again on the precision on the new flow in the insurance business and products. Didier?
Yes. So good afternoon. So on the Brexit, yes, we had some positive flow impact, let's say, following the Brexit. So especially in the FX, as you mentioned, but also on the prime services. What was extremely positive is that since we have well managed our, let's say, position ahead of these events, we were able, as I said, to be open for business on the Friday and the Monday and so to be close from our clients. And that explains why we were also able to slightly benefit from this at the end of the quarter.
Thank you. And, Didier, another one, Hauguel, on insurance?
Yes. As far as unit-linked products is concerned, as far as stocks are concerned on the balance sheet of the insurance company, we are over 21%. But as far as our net flows are concerned, given inflows and outflows, we stand for the quarter at 76%.
Thank you. Next question.
The next question is coming from Nick Davey, Redburn. Please go ahead, sir.
Two questions, please, the first on leverage. In the quarter, the leverage ratio has ticked down 10 basis points and the balance sheet is growing. And also, you've talked a lot about the opportunity in prime services, which I guess is balance sheet intensive. Could you just talk a little bit around to what extent you're managing to leverage ratio these days? And also, a note, perhaps you could comment to the EBA stress tests, where you fall below 3% leverage in the scenario, so just some comments on that as well, please. And the second question, I just want to understand some of your comments around GBIS well. I think you mentioned a couple of times allocating more capital within GBIS towards financing. Is there something new there? I know that was always part of the 2013 plan, but just to understand if that's evolving any differently from the original plan. Thank you.
I will let Philippe comment on your first question regarding the leverage ratio. Can I say, on the financing side? It's nothing new. We said more than two years ago that we wanted to put more capital at work in the financing activity to further enhance the resilience of the contribution of GBIS. And that's what we are doing with of course a distribution policy also, which is important because the idea also is to further improve profitability, so no new strategy, no shift in the capital allocation. Philippe, on the leverage ratio both currently and now the stress test?
Yes. Good afternoon, Nick. Yes, two quick comments. So on the leverage ratio, end of Q2, yes, we have a technical effect in Q2. The leverage ratio was down from 4% to 3.9%. In fact, we were impacted by let's say a very volatile market environment in the last day, which is the last hours following the Brexit and before the cut-off date of Q2. And what we have seen is larger inflows of deposits, and you see the effect clearly on the cash we post on central banks. And this technical effect of course will be corrected in the coming weeks, coming months. And you know that our objective, clear objective is to maintain a leverage ratio between 4% and 4.5%. This is our long-term objective.
So, now a comment on the stress test, just an element of background. In fact we were penalized, and severely penalized by the methodology because in the inventory of Tier-1 instruments we have not the benefit of the grandfathered Tier-1 notes that we have discounted in the exercise, and starting in 2015 and for the three years period of the stress test. So, we are in a situation where we're supposed to issue new instruments, but due to the assumption of static balance sheet, we not have the benefit, the regulatory benefit of having issued 81 instruments. That's why we have this very technical, let's say, effect on €3 billion of Tier-1 instruments. If you neutralize that, our leverage ratio would be roughly 25 basis points higher than the one posted in the stress test.
Thank you. Next question.
The next question is coming from Kiri Vijayarajah, Barclays. Please go ahead.
Yes. Good afternoon, gents. On French retail, I just had a question on the branch closures. Of the 43 you've done in the first half, could you tell us what the restructuring costs are burdening the cost line? And is that a steady run rate to assume in the next few quarters? And I wondered, related to that, if you could talk a bit about the experience you've had in terms of the customer and revenue attrition as you've gone through closing those French branches. Color on that would be useful. Thank you.
Yes. Perhaps Laurent Goutard will comment more in detail on how many branches, what we've experience, as you mentioned, in terms of client retention, etc. I think things are going well because it's well prepared locally. Can I just really highlight that from my perspective one of the very strong success of the first half in the social environment that we've experienced in France in the second quarter has been to precisely present to all our staff in France and our trade unions and negotiate with our trade unions the capacity to roll out, in the next five years, our project, which is, as you know, to reshuffle significantly our distribution channels, in particular review the branch networks. Now, perhaps Laurent, can you give more flesh on what is happening in practice on the ground?
Yes. Thank you, Frederic. So as you know, we announced a few months ago, the branch, the network organization, with the closure of roughly 20% of the network. It means for Societe Generale, 800 branches till 2020. These branches are mainly small branches in the urban area where we are creating bigger branches. It means that we have not only the cost of the closure of the branch, but at the same time the refurbishing of the large bank in order to better fit with the customer expectations.
On the first half of the year, we closed 43 branches. It's, I would say, roughly 80% in Societe Generale and 20% in the Credit du Nord. And we are in line with the figures for the whole year. It means 80 branches for Societe Generale and around 10 branches for Credit du Nord. We are already planning now the new wave for 2017/2018 because clearly what we intend to do is to close the branch and at the same time keeping all the clients and even increasing the satisfaction, with the capacity to deal with the clients in a large branch with more expertise and best quality of service. So it means a closure of a branch I would say is a commercial project. And we already work with our local manager on the plan for 2017 and 2018, and so far we are perfectly in line with the targets for 2020.
And again, I think you need to understand this process is very much a bottom-up process. It's based on very strong local analysis made by the people on the ground, which actually limits very much, after good care of the clients, potential attrition impacts.
Yes. What I say is clearly this is, a big part of the project are in the urban area, where we have a lot of branches. And we concentrate and bring more expertise, and, at the same time, to focus clearly on the capacity to keep all the clients and even have better capacity to acquire new clients, as we did during the last months, and the capacity in fact to increase the satisfaction and the DNBI with the clients. This is the work we are doing for this year and how we want to process in the coming years.
The next question is coming from Stefan Stalmann, Autonomous Research. Please go ahead sir.
Yes. Good afternoon, gentlemen. I have only one question, but with a couple of I guess sub-questions attached. I notice that you have another fairly material jump of your liquidity coverage ratio, and it's the second quarter in a row. Philippe already commented on some of the deposit flows around quarter end, but I was also wondering if it has anything to do with QE related client deposits that you are being inundated with and whether you can run this down over maybe the next couple of quarters or whether this is a level of LCR and balance sheet that we have to get used to. And related to this, you did in fact park quite a lot of money with central banks, but you've also shifted your liquid asset reserves quite a bit away from high-quality liquid assets during the process. Could you maybe add a little bit of color around why that happened and whether the sale of these high quality liquid assets actually generated AFS gains in the P&L at an unusual level? Thank you very much.
Yes, Stefan. Well, I will leave the floor to Philippe.
Yes. Good morning, Stefan. So going back to your question, so the leverage ratio stand, as you see let's say, at 152%. It reflects let's say, a structural pattern and the fact that the markets are pretty liquid. We collect a lot of deposit. Let's say we have been in market activities [indiscernible] at the same time [indiscernible] our position. And structurally let's say, to manage the balance sheet, you have a structural trend, so that the LCR ratio is moving up. Having said that, 150% is not let's say, a longstanding level and let's say, will not stay at this point. We have seen, we have collected deposits this quarter, and you haven't noticed that. You have seen a shift between the [indiscernible] buffer and between our cash and content bank because we are currently let's say, increasing our liquidity buffer in New York. So there is some technical, let's say effect there, but everything being equal, we have, let's say increased our liquidity reserve. And coming to your point, there is absolutely no link between this evolution into the composition of our liquidity. And the P&L registered in our corporate center, there is absolutely no link between the two elements.
Thank you. Next question.
The next question is coming from Guillaume Tiberghien, Exane BNP Paribas. Please go ahead sir.
Yes. Thank you. I have two questions. One is on cost and the other one is on the Kerviel. On the cost side, I would like to know for next year whether it's reasonable to also target flat cost. I guess it's a mix of investment and cost savings, but I wanted to know where we should put the buffer cost for the next couple of years. And the other one is on the Kerviel process, so if you were to lose the tax deductibility on the fraud, if I'm correct, it would be a charge of 2.2 billion. I want to know to what extent the dividend would be impacted by that or whether you would exclude the €2.2 billion from the dividend calculation. And what are the next steps on that issue? Thank you.
May I say, first of all, I think it's really premature, Guillaume, to comment on the cost evolution. Clearly, in the coming years the same efforts will be put on monitoring the costs. It's needed. And, let's say at least in 2017, at this stage, it's not easy to consider a much easier environment. So, we will put the same attention. On Kerviel, can I just first mention that you need to look at the legal element?
Legally, there is absolutely no direct consequence with any kind of outcome of the current trial, which is on -- in English, how do you say that, the interest, civil interest, that should be decided what Mr. Kerviel could pay to in terms of civil interest and the tax deduction. Legally speaking, there is nothing, no direct impact. And as we've already mentioned, on tax, there is in France an administrative court, which is called the Conseil d'Etat, which has had permanently a permanent position to say costs like this or charges like this are deductible except if there is a deliberate willingness by the management team, if you wish, to organize a weakness of controls, et cetera. And it's really difficult to consider that there was anything like this in Societe Generale.
So legally speaking, we feel comfortable and we will wait for this decision, which is based more on, not direct financial impact actually. I don't know how to call it, but more a question of morality, may I say, in the end of September. Now if for any reason we would have to same thing it would be premature. Yes, the absolute potential amount would be around this. As you know, on the capital it could be limited because of the DTA. And I think it's really premature to comment on the dividend because we are very far from anything like this. Next question.
The next question is coming from Anke Reingen, Royal Bank of Canada. Madam, please go ahead.
Firstly, I saw some comment about investment banking on, the second half. I think you said you see again some uncertainty. And I just wondered should we expect a similar decline H2/H1 as we seen last year? But then I guess the first half last year was very strong. Or we could we actually see the second half this year flat versus second half last year? I understand it's obviously very premature, but what you had in mind when you were talking on the news this morning. Then I was wondering, in Asia your revenues at GBIS level, the trends are relatively good compared to what some other banks have reported. Is this just a mix issue or -- it's not just an equities number in there? Or is there something else you would think you should point out too? And then lastly, on the dividend, I was just wondering how formulaic are you on the dividend? Is it just simply the 50% on the profit definition you’ve given us in the past? So you could potentially face -- it could potentially go down in absolute terms next year, or is a growth in the absolute dividend important as well? And I understand it's early days, but I just wondered about your thinking. Thank you very much.
Can I start with perhaps, I will leave the floor to Didier in a minute on the GBIS revenues in Asia, outlook, etc. Can I just say, first of all, my comment or our comment was on the economic and political outlook. Again, I don't think we can imagine something that different actually, up or down, compared with what we experience. And let's say that's why we remain, overall, prudent.
And I guess markets could remain a little bit uncertain. You have elections or a referendum in Italy. You will have the election in US, so you have milestones which can create some wait and see mode for investors, etc. So that's the purpose of the comment.
Second, on the dividend, let me say again it's premature to comment for our policy beyond 2016. What we've been doing, first of all, is stick, like we did in 2015, to our policy. We've put aside 50% of our net earnings per share, which means, based EUR2.77, if I'm not wrong in my calculation, EUR1.38 and something per share for the first half. Second, the policy of the Group has been, and it's to the Board to decide, but you might see, to increase regularly, steadily, both the dividend, I would say, and the net tangible per share. I think in the current environment that kind of policy has delivered and I'm confident we should further deliver. Perhaps more flesh on GBIS beyond the fact that the second half will be more favorable in terms of base effect, clearly, than the first half of 2015. Didier.
Yes. Thank you. I will let you do your own estimate, but it's true that when you look at the pattern, let's say, of the quarterly pattern, and so GBIS, especially on the market side, I would say the change in the environment has been marked as from mid last year. So it's true that we knew, starting 2016, that the comparison in Q1, Q1 and Q2, Q2 will be more demanding, especially on the equity side. Q3, Q4 has been a really, let's say, different environment, as you've seen for most investment banks. So I don't know whether, let's say, we will be able, let's say, to grow from that base, but at least the decrease is likely to be more limited as definitely the change in the market pattern started, let's say, mid-year last year. Regarding also the, why we did outperform some of our peers, as you kindly mentioned, I think it's not, it's just to, about a question of mix, but also just about a question of a lot of work from the teams. We know we, as we said, we are improving on the planned services, and this was a strategic decision that we made two years ago to acquire the full control of Newedge and to integrate it into our market activities. And it is delivering, let's say, successfully, not just the cost synergy, but also the revenue synergy that we were expecting from it.
On the equity, I would say we are able, over the last three to four quarters, let's say, to re-grow the revenue generation thanks to innovation, but also thanks to a better momentum on the structured products in Asia over the last three to four months. And on the fixed-income side, also we have streamlined the franchise. We have, we are less exposed, let's say, to long dated exposure compared to some of our peers, but we are continuing to invest on the rates, FX, but also in synergy with the rest of the bank, as was mentioned, for example, with the French retail banking network, where our JV in hedging on rates and FX, for example, has been able let's say, to deliver for the second year in a row, record performance. And so we believe this the right model. So that's just to give you some more flesh from a qualitative perspective on what we've done and what we should be able to continue to do in H2.
Thank you. Next question.
The next question is coming from Tarik El Mejjad, Merrill Lynch. Please go ahead sir.
Tarik El Mejjad
Hi. Good afternoon, everyone. A couple of questions, first on French retail. I'm a bit surprised that production is still quite strong, especially in housing. I would have thought that basically there will be some deceleration there, intentionally and actively from you, because you are really clearly locking in quite very low, quite spreads there in your branches for the long term. And you still and you need to maintain then high volume growth off the negative of that, which puts you in a vicious circle. Maybe you can clarify me, is it really just a entry product and you make up of this margin loss in other products by cross selling? Just get some light on that.
And still on French retail, on [indiscernible], I thought that the new governor of Banque de France, who understand very well the issue here for French banks, would try to introduce some changes to that. But clearly it looks like we are continuing with this product and the rates will not go down. What's your thinking in there? And my second question, that's for the GBIS. The corporate bond purchase program, could you give some estimate what's the impact on that, negative or perhaps positive? The FCA gave some impact in UK. What's the tradeoff between loss in corporate production and maybe spreads versus more DCM business? Thank you.
I will leave the floor to Didier on your question, but briefly first of all, let me highlight, with corporate clients with loans which have typically a maturity between three and five, seven years, like investment loans, something like this, we feel pretty confident, in particular with the T-LTRO. And then on the mortgage, yes, it's always the entry product. It has not changed. And it's a product which is still needed to capture clients and then try to take advantage of these client to sell more product. That's the business. I think we've been very selective in the credit origination, targeting, as we've said, in particular mass affluent clients. Second, regarding your question of the governor of the Bank of France, that probably reflects that function sometimes is more important than past experience.
Now I turn to Didier.
Yes, so just on the TSBP, let's say what we've seen clearly was a shift in the DCM trends since mid-February, since it has been announced. And when you look at overall, let's say the issuances from corporate bonds, for corporate in euro bonds, it has reached record level let's say, in Q1. And Q2 has been even better. So what we can see is that definitely this announcement from the ECB has led to much more appetite for the intermediate financing from the well rated companies as compress spreads and also has made this cost of financing more attractive. So on our side let's say, what we can say is that definitely as we are one of the leading bank with one of our French peer in the corporate bonds issuance in Europe, we have increased our market share. We are, for the last two quarters both 7% market share, compared to 6.5%-ish last year. And so definitely we are benefiting from this greater appetite for the intermediate financing thanks to our strong franchise in Eurobond issuances.
From a lending perspective, I would say then it's much more limited. You know that the vanilla financing is not where we put most of our balance sheet at work because of the low margins. It tends to be more on the undrawn path, so [indiscernible] and so it has had a limited impact in terms of moving revenues from let's say balance sheet intensive into this intermediated stuff.
Thank you. Next question.
The last question is coming from Flora Benhakoun, Deutsche Bank. Madam, please go ahead.
Two questions on my side as well, the first question is going back to the corporate center revenues. Obviously, they were very strong in Q2. If we adjust for the Visa gain and the own-debt loss, they were even positive this quarter. So, first of all, whether you could elaborate on this revenue trend this quarter. And also you've mentioned it, Philippe, on the call earlier that you are very comfortable with the minus €650 million guidance on the gross operating income. So just to make sure that you're not changing that guidance despite being very comfortable. The second question is regarding the provisions in the finance division. Clearly, they remain at a higher run rate than what we used to see in the past years, even though they have been declining now for three quarters. So, I was wondering whether there's been still some provisioning on oil and gas exposure and whether the let's say roughly €100 million that you had this quarter is the new run rate. Thank you.
No, I will leave the floor then to Philippe first and then to Didier. Philippe?
Good afternoon, Flora. Yes, the corporate center posted a positive GOI this quarter, but it's already very difficult to consider, let's say, the corporate center on a quarterly basis. More relevant for me is to look at the half-year performance, where you have a negative GOI of minus €188 million. And you see that if you take half of our yearly guidance, so it would be roughly minus €200 million.
In fact we're not far off. In the corporate center you have a mixed bag of volatile elements. For example, we are impacted by that in Q1 unqualified hedges. So broadly speaking, we are comfortable with the yearly guidance. And let's say I stick to let's say a vision for the full year of negative GOI standing at minus €600 million for the corporate center.
Thank you. Didier?
So regarding the financing and advisory, you remember that at the beginning of this year, let's say, we said that we were intending to be roughly in line with last year. So this was something between €400 million and €450 million. Year to date, we are €236 million, so let's say we are bang in line with this target. It's true that we've seen some decline let's say after the big peak that we've seen in Q that was reflecting the stress on the oil and gas sector.
It's true that if I look at the allowances this quarter and let's say we have a very limited increase as we said in the press release on the reserve-base lending, essentially because we have well managed our exposure. Also, let's be clear, the rise in the oil price has reduced the pressure on the book. And also, let's say, we are well provisioned. So, just to give you also an idea and because we did provide this information last time, but on the oil and gas we have a 4% non-performing loans ratio and we are cover, on average, at 45%, off top of my mind, so it's sure that we are conservatively provisioned, especially as we have, you remember on the reserve based lending we have a asset backed security. So overall, we feel that we've made the proper provisioning and that it does reflect exactly the guidance that we provided you at the beginning of the year.
Thank you. Next question.
There are no further questions, sir.
Okay. Well, thank you very much. Have, enjoy August. And thanks again for attending this conference call. Bye, bye.
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