Jean-Laurent Bonnafé - CEO
BNP Paribas (OTCQX:BNPQY) Morgan Stanley Conference Call March 28, 2012 4:30 PM ET
Good morning ladies and gentlemen. Well I have told today's presentation swiftly adapting to the changing environment. In fact over the next half hour, I would like to talk to you about, first the way BNP Paribas has adapted through swift and resolute actions to the turbulence seen in the second part of 2011. Secondly, the resilient performance shown by our different business lines leveraging on our traditional strengths such as profitability and risk management and lastly what we are working on for 2012.
Changing world, so starting with the first part. In Q3 and Q4 we were faced with a concentration of factors of uncertainty. These can be summed up as first, the sovereign debt crisis especially on peripheral eurozone countries. Second, tension on liquidity and funding especially in US dollars and third, solvency requirements that were suddenly increased and brought forward by the EBA. BNP Paribas responded to these challenges by immediately implementing a series of specific actions.
On sovereign debt, first of all Greece. We led negotiations on the PSI and increased the level of provisions to 75% by year end 2011. Following the exchange of (Inaudible), the 1 billion you see as residual exposure today has actually been reduced by €0.6 billion, corresponding to the amount of [EFSI] bonds received.
In terms of the global sovereign portfolio, the anticipation of mark-to-market rules meant that the volatility on certain country’s debt could potentially impact our solvency ratios. With that fall, downside of the overall portfolio as you can see on the graph, both in the eurozone and in the rest of the world by 29% in six months.
Our aim is to further reduce on an opportunistic basis, both the overall exposure and the average maturity. So this is for sovereign debt.
Liquidity and funding. The liquidity crisis mainly centered on US dollar funding as the [confident] crisis on Europe debt led US money market funds to sharply reduce the exposure to European NIMs. Here again, we acted decisively reducing trading assets and fixed income securities, as well as the client loan booked especially in CIB. The US reduction plan was largely achieved by year-end 2011, well ahead of schedule. In fact, we reduced our funding needs in CIB by $57 billion versus a target of $60 billion initially given for the end of 2012.
We have now increased these target to $65 billion. And as you can see from the slide, in just six months, we have managed to create a surplus of $19 billion in our mid long-term funding. A similar picture emerge, if you look at the old cash balance sheet. As you can see the overall surplus we have in terms of mid-long term funding amounts to €31 billion at the end of 2011. And as you have already noted from the cash balance sheet we’ve maintained a high level of liquid reserves, those immediately available come to €160 billion accounting to 85% of short-term wholesale funding.
On top of that, the liquidity buffers increased by €100 billion of additional assets such as reports of deposits with clearing system which are incurred only for very short periods. Having completed our initial program by July we increased it by €8 billion. This is the second part of the mid long-term funding. We thus continued to issue for the crisis with an average maturity in excess of 5 years at 89 basis points of mid swap still quite competitive and we raise these additional loans through private placement and through our retail network.
If we move to solvency now, we’ve presented to the market shortly after last summer a deleveraging plan structured to improve our solvency ratio by 100 basis point by year end 2012. It centered on first reducing risk weighted asset in CIB through more selective origination, asset sales and reduction of specific capital market activities. Second, adapting the business model in retail banking specifically downsizing the mortgage specialized business in personal finance and exiting from leasing non core perimeters and subscale countries.
And lastly rationalizing our investments portfolio. As of year end 2011 we have already achieved one third of the plan of which half of the CIB target. We’ll see later on the current status of these adaptation plans. The combined benefit of deleveraging and profitability led to a significant improvement of our solvency ratio was arrived at 10.1% under Basel 2 and 9.6% under Basel 2.5. After accounting for the sovereign buffer requested by EBA, BNP Paribas achieved an EBA compliant ratio of 9.2% thus exceeding the 9% EBA target six months in advance.
And to conclude this part, you can see that the deleveraging we've implemented in 2011 which continues the trends seen over the previous three years has lowered our level of ratio to 21 times, below the average of our main European competitors for the first time. This is testimony to the significant work done by BNP Paribas to reduce its balance sheet while increasing its solvency and we see the strength continuing for BNP Paribas in 2012.
Now let's have a look at the result achieved by the different business lines. In 2011, we showed good resilience in terms of revenues in all businesses except CIB. Revenues for retail banking reached €24 billion marking an increase of 1.5% with all our retail businesses achieving a positive performance. Investment solutions also showed high revenues which reached 6.3 billion, up 2.8% on 2010, despite an increasingly difficult market environment in the second half of the year.
Lastly, CIB revenues were lower at €9.7 billion due to the impact of adverse market conditions, the losses incurred on the sale of sovereign debt and the effects of the implementation of our deleveraging plan. With net losses on the sale of the sovereign debt, revenue showed a decrease limited to 12.6%.
In the domestic markets, bond volumes confirmed our commitment to actively support our clients. Despite the challenging environment, we have continued to grow our loans, both corporate and retail in all four markets, the average increased of 5%.
Deposit growth was driven by France and BeLux with 8.4% and 7.5% respectively and Italy showed a moderate contraction essentially to competitive pressure, both in terms of pricing by competitors and a result of high government bond yields. Operating efficiency continued to improve in all four markets, as you can see due to the positive yield effect we achieved in each single market.
Looking now at investment solutions, our integrated business model proved resilient, also in a difficult year like 2011 benefiting from the complementary fit between businesses. Asset management suffered a sharp decline in assets under management which impacted revenues. We thus started to implement an adaptation plan of the business in order to improve its operating efficiency.
At the same time, we focused on institutional clients and on emerging countries such as Asia Pacific and the Middle East. On the other hand we showed net inflows in all the other business units with wealth management, insurance and security services.
To conclude in 2001, investment solution has remained a significant contributor to the gross profitability and we have started to implement action to adapt the different businesses. Now let’s turn to CIB, as you can see from the chart and as already I have said CIB revenues were impacted first by adverse market condition in Q3 and Q4.
Secondly by the 29% reduction of our sovereign exposure that I mentioned earlier which resulted in losses for more than €800 million and surged by losses deriving from our adaptation plan. These came to just over €150 million essentially related to loan sales in the financing business. Regarding more CIB financial businesses, the adaptation to the new market environment has already started after last summer.
Essentially we have cut back on origination of long-term US dollar financing while focusing on advisory, structuring and distribution. Cash management also remained a key factor for us through which we continue to expand client resources especially in Europe and Asia. We enjoy leading position in all main businesses areas. We have provided here a few significant example such as Global Trade Finance, where we were the number one Mandated Lead Manager in 2011. EMEA Syndicated Loans, where again, we ranked first in 2011 as Bookrunner and Mandated Lead Arranger. Global Cash Management, where we rank number five worldwide which gives us a good position to collect new client deposits.
Generally speaking, we of course remain committed to this business where we shall continue to leverage on a strong international client base and our powerful origination platform.
Now turning our attention to capital markets. Our equity and advisory franchise represent one-third of capital market revenues. As far as our global equity activity is concerned, it operates mainly in equity derivatives where we rank number three worldwide. Cash equity activity is very limited. And as far as our corporate finance is concerned, BNP Paribas’ strong European franchise, ranking for example number two in equity-linked.
Concerning fixed income, it has virtually no legacy assets and is a leader in the interest rate derivative markets as well in euro capital markets where we rank number one for bond issues. We are now also one of the top 10 players in the US for bond issues in US dollars for the investment grade corporate market. These strong distribution platforms in Europe and in the US will allow us to seize opportunities resulting from future this intermediation.
Finally on CIB, I would like to underline that it has always had one of the best cost income ratio in the business and this remains true for 2011, as shown by the chart, despite the one-off element I mentioned before.
Coming now at risk management; cost of risk came out higher in 2011, but only due to the already mentioned impairment on our Greek debt, which effectively doubled our cost of risk. Net of Greece, the downward trend already seen in 2010 was confirmed in 2011. The broad trend has been one of stabilizing during the year in to different businesses. Overall, this level of about 50 basis points achieved in 2011, excluding Greece, is close to the average of the credit cycle.
Regarding market risk, let’s say first of all that it is diversified across various asset classes as you see in the chart. As far as otherwise concern, it remained at a low level in 2011, with an average of about €45 million and I think it’s important to note that in 2011, we had no day losses exceeding VaR. And if you consider longer period, say of five years, we incurred shows 10 day losses in excess of VaR. And considering the high level of volatilities over this period, these demonstrate the success we’ve had in managing market risk in very tough market conditions.
As a result of our credit and market risk policy, you can see here that we rank amongst the best in terms of risk management on a medium-term period. This chart, which compares average cost of risk to average gross operating income over the past five years, shows BNP Paribas’ great ability to manage these risks.
On top of that, the Group as a diversified business makes with half retail, one-fourth CIB, one-sixth Investment Solution, which has represented a key element of earnings resilience with no year outflows throughout the crisis.
And as you can see here, all this has allowed BNP Paribas to show 8.8% return on equity in 2011 with BNP Paribas as number one Eurozone banks. And when we compare our net result, we emerge the first Eurozone bank with a significant dividend payment which equate to 25% of total earnings, again comparing favorably to our main competitors.
All-in-all, this business model I just mentioned has allowed us to increase year-after-year the book value per share at €58.2 in 2011. Even if we look at just the tangible book value per share at €46.6, this remains well above our current share price. My message to you is therefore that thanks to our business model we have been able to consistently trade value year-after-year for all our shareholders of the cycle which I think is not currently reflected in our share price.
Let’s look finally at our plan for 2012. 2012 as I have already mentioned is a year that will be entirely dedicated to laying the foundation to be well positioned from 2013. Our focal areas of attention remain, Financial Strengths, Operating Efficiency and Business Developments.
Financial Strengths; our number one priority remains the implementation of our de-leveraging plan. We are present in fact well ahead of schedule. In February, we agreed on the disposal of our reserve-based lending business to Wells Fargo. This sale is at a premium and will generate a 5 basis point benefit in terms of target ratio. You can see it on the CIB line.
In March, we closed the sale of 28% of Klépierre to Simon Property retaining a 20% financial stake in the company. This transaction has generated capital gain of €1.5 billion Euros and a 32 basis point benefit in terms of target ratio that you can see on the other activities line. So all-in-all we already achieved 70% of the plan and are therefore confident on its completion by year-end.
With regard to a Medium/Long Term Funding Program, we have continued to issues in the publication of our results and have already funded 12 of the 20 billion of our 2012 program that is to say, 60% of the total in less than a quarter. And we have continued to do most of this funding through private placements and senior unsecured issues at cheaper prices than many of our competitors.
Our second focal area for 2012 is Operating Efficiency. In CIB, we are implementing the adaptation plan, (inaudible) involving 1,400 FTEs. To-date, over 60% of the total plan has already been achieved. In addition, we are implementing several costs saving project in all regions.
In the Investment Solutions beside the asset management adaptation plan which should lead to 10% of our cost in 2012, we have actually launched cost optimization programs in each single business unit.
And finally, in Retail Banking we've launched cost cutting plans to 2014 in BeLux and in Italy. We shall also reap the benefit of €300 million of additional synergy from BNP Paribas Fortis and the TEB integration plan is proceeding at a faster pace than anticipated. Hence, I can say that the implementation of our adaptation plan is well on-track.
Business development, short focal area. Starting with our domestic market, we shall focus our attention on expanding cross-selling and innovation, adapting our product offer and actively supporting our clients in their financing needs.
For individuals, we’ll for example, speed up the release of technological innovations. For corporate and small businesses, we notably complete the rollout of small business centers in France and Italy. And I would like to remind you that these markets remain sound and wealthy markets as shown by the relatively high saving rates especially in Belgium and France and by the relatively low level of household indebtness in France, Italy and Belgium.
For Personal Finance, our plan is mainly to launch specific initiative in France, such as selling savings, protection insurance products. In Italy to roll-out the Cetelem Bank model within domestic and develop cross-selling with BNL and finally to develop new sources of growth such as Germany, JV with Commerzbank and in Russia with Sberbank.
Briefly turning to Investment Solution. In Insurance, we shall continue to expand activity in emerging countries to develop protection and to strengthen our Bancassurance position.
Security Services to expand internationalization and efficiency initiatives while confirming investment to continue to expand in Asia-Pacific and in Latin America.
And for Wealth Management, we shall continue to implement our successful model in our domestic markets, continuing to invest in Asia and in other fast growing markets and seeking to capture synergies with CIB and Retail Banking.
If we move finally to CIB, we shall increasingly seem to develop joint initiative between fixed income and financing businesses in rapidly changing market where we are evolving from an original to all approach towards an original to distribute where we are doing business.
In CIB, we are talking of a structural adaptation of the business to the changing scenario. As I mentioned before, I am confident that we have strong franchises and the ability to serve our client from origination to distribution.
Moving forward, there shall be fewer and fewer banks we will be able to offer this comprehensive type of service to the clients. We think we are one of those banks and are well positioned to fully exploit this competitive advantage.
Now that we are reaching the end of this presentation all that illustrated today centers around our 9% fully loaded Basel 3 objective. Please note, that these ambitious target will place BNP Paribas among the best capitalized banks worldwide. Please note also that the transition to Basel 3 following the full completion of our de-leveraging plan will not significantly change our successful and balance business model confirming as you can see in the pie-chart the current allocation of half retail, one-third CIB and one-sixth investment solution.
And to conclude, I would like to say, first, we delivered a sound performance in 2011 despite the market turmoil and despite the one-off impact of Greece. Second, we have swiftly adapted to the changing environment in 2011 and we are continuing to do so in 2012. And third, we have the ambition of being at 9% fully loaded Basel 3 ratio by 1st January, 2013 and this we expect our solvency ratio to be one of the best among our peers.
Thank you very much for your attention.