Natixis' (NTXFF) CEO Laurent Mignon on Q2 2016 Results - Earnings Call Transcript

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Natixis SA (OTCPK:NTXFF) Q2 2016 Earnings Conference Call July 29, 2016 3:00 AM ET


Laurent Mignon - Chief Executive Officer

Jean Cheval - Finance and Risks


Guillaume Tiberghien - Exane BNPParibas

Maxence Le Gouvello - Jefferies International Ltd

Jacques-Henri Gaulard - Kepler Chevreux

Delphine Lee - J.P. Morgan Cazenove

Jean-Pierre Lambert - Keefe, Bruyette & Woods, Inc.

Laurent Mignon

[Interpreted] Good morning, everybody. And thank you for being here today for this conference call on Natixis’ 2Q 2016 results.

I am with Jean Cheval. And as per normal, we’re going to tell you about the financial results. Jean will talk about the business lines. And I will give you a more general overview. The other members of the Executive Committee are here to answer any questions, or should you have any following.

The first quarter has been a very good - the second quarter has been a very good second quarter. Second quarter - not the first, the second quarter has been a very good second quarter. There has been a very strong rebound in business that compared to the first quarter. And we’ve been therefore to safeguard the profitability of the core businesses. What I would like to say is that I think we are one of the European banks that has proven we are capable of generating the highest core tier 1 ratios out.

And because we don’t use up too much of our own equity, it means that year after year we can issue good dividends. Now, that’s not just per chance; that is the fruit of the work that we have done over many years. In the second quarter, what we see is that for asset management we have €787 billion of assets under management at June 30, 2016, about €10 billion versus end of March.

Now, we will come back other aspects afterwards, but the margins are high and we will continue to operate with this model. And Jean will show you that this multi-boutique model in Europe is working very well. There is a strong restart up again in our inflows.

For insurance, momentum was driven by all segments with overall turnover up 12% into 2Q 2016, excluding the reinsurance agreement with the C&P. The third spectacular thing that happened was what happened in the capital markets. In the first quarter it was somewhat relative improvement, but here in absolute terms, we have FICT that posted excellent performances. Equities continued to growth thanks to the long-lasting relations that we had our customers. We are one of the finest in the market there.

One could also say that CIB has operated very well. We have continued to transform our business model. There has been an increase in all of the CIB activities. We can see it in structured financing with the increased contribution of fees in structured financing revenues brought them to 39% in 2Q 2016 versus 37% at the same time last year.

And although we haven’t quite reached the same activities as the second quarter 2015, we are up in a noteworthy way, particularly for business in the pipeline. For SFS there has been a noteworthy performance with specialized financing. There has been a dynamic new production for leasing and a jump in actual turnover.

So Natixis’ revenues gains 7% in 2Q, it’s 8% of growth in NBI. It is up over last year, year-on-year by 2%. It was basically carried by growth and also the buoyancy of CIB, which comes as no surprise. Excluding IFRIC21, our increase in expenses was kept under control, reaching 3%, an increase of 3% over the first quarter 2016. Earnings capacity for the quarter increased to 5% to €400 million, that’s restated for IFRIC21, which gives us a very good forecast for the coming quarters.

This earnings capacity has reached by €3,400 million. It is higher than it was last year. And the reported net income group share stood at €381 million in 2Q 2016, that was factoring in the goodwill impairment on Coface, which was €75 million. And then afterwards, an impact of minus €31 million, which means that overall we were able to generate 65 basis points of CET1 ratio, since the start of 2016, which is equivalent to €730 million, i.e., €0.24 per share. Of which, €440 million are able the minimum 50% payout for distribution in the absence of external growth.

So we therefore have €440 million of capital that can be distributed, as long as we do not in the meantime carry out any further acquisitions. We however are extremely disciplined in that area. And we only carry out an acquisition if we are certain that we are going to be able to profitable very rapidly. So this gives us an ROTE for 2Q 2016 at 11.7%. A CET1, which after the provisions of 50% has reached 11%.

Leverage is stable at 4.1% and earnings per share €0.17. So it’s slightly down to the generating capacity of what we have. We have been able to continue our growth over several years without needing to go for new capital. That is one of our characteristics.

If we take a quick look at exceptional items, we have €20 million deterioration of the adjustment of our senior debt, despite Brexit. So the borrowing conditions on the market have improved. And you can note that the variation, the spread of variation is different from last year. Last year, it was €125 million of profits, in inverted commas. The economic value that I attribute to this indicator, if you remember one year ago we were right in the middle of the very uncertain period of Grexit, so the bank spread was extremely wide.

We also have a goodwill impairment on Coface of €75 million; that is net of minorities, which gives us €31 million. An actual fact, the non-exceptional items were €84 million on last year, that’s because of the issuing spread, but all of the rest tends to compensate. And there is also a restatement for the exchange rate fluctuations on DSN in currencies, which is €8 million.

I move on now to the ROTE, the ROTE has been - there’s been a very clear recovery in net revenues. They are up 7% versus fiscal 2016, mainly driven by CIB, while operating expenses rose only 3% excluding IFRIC21. The net revenues Natixis and its core business lines, gained 2% year on year. The operating expenses appear to be up by 6%. But there is one exceptional item there, which is - which regards the resolution fund, European resolution fund.

We had underestimated that last year. We thought we are going to have a burden of €79 million. But actually, it is €114 million. We therefore have operating expenses that are higher, because of the Single Resolution Fund; they are higher by €35 million.

Pre-tax profit for core business is €700 million up on last year. If we look at the reason for the changes in our gross operating income, primarily, it is Coface, which amounts to €28 million. If you exclude these minorities, at the end they don’t represent quite so much. But if you will exclude the Single Resolution Fund, then you end up with these two elements we stated, which gives us Natixis’ gross operating income for the quarter, which is positive.

Cost of risk is €88 million, marked by a drop in costs on the first quarter in all of our core business to the extent of 37 basis points as opposed to about 40 basis points in the first quarter, and it is have again been marked by the end of all of the efforts we have been making for reserving the oil and gas sector.

It was also impacted by the implicit country risk represented by Algeria. We have downturned Algeria’s rating, so we have set aside about €50 million reserves this year.

As the net income before tax is €651 million, before tax if you think you take the core business is up 2% over last year, which just shows that profit making capacity has improved from what it was in 2Q 2015. In those results, just show that there is no ambiguity, there is €30 million in capital gains from the disposal of CGC building and I think that we will take a look at that in a little bit to greater detail, when we look at some of the assets, so that we have disposed off.

The published result is up by 4%, it’s just €420 million. Thanks to a tax rate, which last year sold at 38.7%, whereas this year will stand at 33% - around about 33%, it is a little bit lower this year than it is on a recurring basis, which is good news. Structural elements and that drop is - the drop in the exceptional tax in France, but they have also been a lot of very complicated tax reforms that have been done.

So we still have this tax of 33%, which is - that remains at 33%. If you try to book all of these costs, if you decreased by €20 million, the effective profit making capacity is €400 million, it gives us a return on tangible funds of 11.7%, which is significantly up on last year, where it’s stood at 11%.

Maybe one last thing that I can say, in the corporate center the - in the second quarter the corporate center is made up of a certain number of elements the issuing spread that we’ve already mentioned €20 million, which is above €8 million and the additional to Single Resolution Fund of €35 million. And the balance of recurring character of the corporate center, therefore is €44 million in 2Q 2016, whereas the first quarter it was negative issuing spread of $6 million - DSN that was also lower.

And this tells us that in the guidance that we’ve always applied to corporate center, we are absolutely on track. So that was it for the second quarter. If we take a look now at the first semester of 2016, there has been solid resilience from core businesses. We have got net revenues from core businesses that increased 1% year-on-year. Operating expenses have resilient by 3%, which gives us a negative charge effect and that’s where we’re working on transforming our excellent performance plan and we’ll talk about that in greater detail in the third quarter of this year.

Cost of risk of the semester was primarily affected by at the end. By the additional provisioning efforts that we have made on oil and gas sector, that’s why the cost of risk at slightly higher, this is an additional cost of €72 million. But we will - we remain on track with the guidance of €135 million that we have established for the entire year.

And excluding oil and gas, the cost of risk for the semester is actually lower than would have been last year, which is because they have been a basic improvement in loss ratios over the year. It also shows that there is a potentially positive leverage effect that we could take advantage of in the quarters to come.

The net income restated, excluding the impact of IFRIC, is €711 million as opposed to €717 million, with an ROTE which is 10.4% over the first two quarters. You can also see that they have been new elements here, during the semester and in that ROTE. We have the impact of the single resolution front, but we now have - in our ROE for core businesses that’s been improved by 20 basis points, it has therefore reached 13.4%.

If we move on now to the cost of risk for the other core businesses they have been flat on a 12 month rolling basis, the cost of risk, if core businesses improved sharply to 37 bps in 2Q 2016. In the fourth quarter 2015, first quarter 2016 and second quarter 2016 as well have seen considerable efforts made in the oil and gas sector.

Fully in line with guidance that we gain, it’s actually under the maximum figure that we indicated to you should oil had suddenly dropped - durably to levels that will lower than the March 31. But in the entire quarter, it has amounted to €72 million. So excluding that the cost of risk of core business is down 17% to €84 million. The cost of risk therefore could be a good potential lever for us in the second semester.

Following the improvement of Natixis’ business model, the basic what we have done. You can see these results we’ve been able to create wealth, to create development and to organically create core tier 1 ratio, that when can be available for distribution, because we know longer need capital for organic growth. Fundamentally that’s what the asset light model is all about, and when any opportunities to prevent themselves then we have the opportunity to see them, but again our main priority is asset management where our model continues, we believe to be an extremely good one.

The figures that you can see on this slide, a proof of that. These - on a constant basis, so risk weighted assets have dropped. This is largely because of the rollout of the originated distribute model that we have been using since June 2014, whereas and even though the CIB’s NBI have improved. We can see that there has been a constant increase and profitability of RWA from 6.8% to 13.6% in June 2016.

And the other illustration of success of this model is the increasing share that investment savings is - investment solutions is taking, we’ve gone for 32% first quarter 2016 to 39% in the first semester 2016.

Just to finish one or two words on solvency. What gives us capacity to distribute is that we have core tier 1 ratio that have to beginning of the year with 10.6%. We created 16 bps of CET1 ratio during this period, 52% thanks to our results and 13 basis points, because we have not used as much RWA as we did in the past, and of course, we’ve got depreciations as well, which gives us a CET1 ratio at - and before distribution of 11.3%. We take a side what will be used for the minimum distribution that is 50% of net income, which is 26 bps, which receive tier 1 ratio before distribution of a 11%. As I indicated earlier, this gives us additional capacity today of €414 million to distribute. The fully loaded ratio on June 30 has reached 10.2%. We’ve created 13 sautimes [ph] over the quarter and more than 70 sautimes since the beginning of the year.

The leverage ratio is greater than 4%, it is now 4.1% I believe as it stood on the 30th of June.

Jean, would you like to talk about the business lines now.

Jean Cheval

[Interpreted] Yes. Good morning to all. Very rapidly for investment solutions, we have a situation where asset management has proven to be very resilient. And we are continuing to roll out the insurance offering in the Caisses d’Epargne network. The - you can see that net revenue in the first quarter of 2016 has only lost 1%. There are issues of course between the different core businesses, asset management is down 2%, life insurance is up 9% combined with a very small increase in cost 1%. It gives us net revenue - growth revenue that is down by 4%. And it gives us a very low drop as well of 2% in pre-tax profit.

In the insurance, things are been extremely dynamic. The overall turnover in the first-half of 2016 is up 16%. Life insurance is up 19%, P&C up 8% and for Personal Protection and Borrower’s insurance the increase is 9% growth in premium income. For life insurance, the rollout of the Natixis fees insurance product in half of the Caisses d’Epargne network gives us net inflows of €344 million during the first-half of 2016.

Assets under management are up 5% year-on-year and we have also net inflows that are up by 66% over last year. And what we want to do of course is that we have a closure share of the Unit-linked policies that is hovering around 40% and that’s what we wanted to do. We want to diversify our asset management in insurance to generate the impact of the low interest rates.

If I move on now for P&C, I’d just like to point out that the combined ratio has worsened, because of the natural catastrophes that we had in June in France, but nonetheless, it stands at 92.8% which is still a highly satisfactory reserve for personal -

for asset management now on the next slide.

Asset management has been extremely resilient. Assets - asset management has been a little undermined by certain phenomenal, but otherwise we have very good asset management in Europe. There is a drop in 2% in the net revenues because of a profit sharing mechanisms there we don’t have the negative draws effect.

So we have a drop of some 2% we will foresee that if I exclude the performance fees last year and the fifth quarter and then the fourth quarter of the previous year we have a GOI that developed by 2%. If I take a look now at the - at our GOI since the beginning of all of this, since 2015 on the basis of the results of the first analyzed results our GOI is on an - has an average increase of around 1%.

However, there are great differences between Europe and the United States. In Europe, we have a slightly lower inflow is it because of the drop we saw in monetary products. It is not something that we just observed. It is something that we actually wanted. We wanted to discourage people investing in the money markets, because it’s - there is - it doesn’t bring us anything in asset management.

So we have a net inflows that are modest, but that are around €500 million excluding money market products. And the net inflows since the beginning of the - in Europe is greater than €3 billion, it’s about €7 billion. In the U.S., there has been very strong outflow from the first quarter of 2016 €8.4 million. This drop is slowing down. We had an outflow only over a €6 billion in the second quarter. Basically, the Harris stocks, the performance those have been very mediocre.

However, what is much more favorable is the fact that inflows were covered at Loomis Sayles on FI products to the amount of €3.1 billion and the momentum has continued on equities €1.3 billion. So we have an improvement in our margins, excluding the performance fees. Whereas, we can see that in comparative industries most of our asset managers are seeing the contrary.

We are arbitrating. We sold Reich & Tang in the United States. They were a producer of money market products and we on the contrary bought DNCA in Europe. And you see that is the reason for this improvement in our margins. The last thing is that the assets under management are up by €10 billion or €11 billion, basically because of the ForEx impact and the market impact, but noted that net inflows do not have a very negative impact on our asset management activity.

So there are one thing to remember since the beginning of the plan our GOI is up considerably. This quarter we are going to be announcing a diversification in alternative asset management. We would like to do more real estate management. We would like to consolidate in real estate. We’ve completed to the AEW Europe shareholding restructuring. We have done the buyout of the [Caisses d’Epargne Coface] [ph] shareholding to exit 40%. And there has been contribution of Ciloger as well as the activities of AEW Europe. All of this will make us in asset management and real estate the number 10 player in the world. It’s just a proof that with our equity management and bond management we are now developing an alternative asset management.

If I move on now to CIB, as Laurent said, there has been a very strong rebound in capital markets or structured financing activities in 2Q 2016. We have our gross figures up by 13% corrected by CVA/DVA. The real increase is up 8%. In the first two quarter the NBI is up 5% over last year cost is up 5%. So we have a GOI up 6%. Cost of risk is up 13% over last year corresponding to the situation in the Oil & Gas sector Laurent talked about and as a total we have a pre-tax profit which is up 2% over last year.

Our cost income ratio is improving over - compared to the second quarter of last year remained at 55.5%, which is extremely low. Now, we are not including a single resolution fund in that, but corrected for the SFR. The cost income ratio of the CIB is still lower than most of our competitors. And return on equity after tax has reached 13.8% this quarter over the semester it is a 11.4% which is in ROE that is entirely satisfactory.

We’ve continued our O2D strategy which has given us an improvement in RWA profitability with net revenues over RWA ratio of 4.9% in first-half of 2016. This is a 4.5% in the first-half of 2015. If we take a look now at the capital markets in the business lines, as Laurent said earlier, the net revenues with Structured Financing are down over the first semester last year.

But it’s a limited drop to the amount of about 4%. New loan production is down 7% over the second quarter of last year, but it is up over the first quarter of this year. Several sectors of Structured Financing are seeing an improvement. Just for example, global energy and commodities held up very well in 2Q 2016 on the back trade finance. And there has been robust activity for Acquisition and Strategy Finance, ASF, and for the real estate finance in Europe.

The only sector where there has been very modest improvement is that of infrastructure, because simply there are not a lot of infrastructure financing projects. Again, for structured financing we have remind that we wanted the service to be at 35%. We are at 39% this quarter as opposed to 37% last quarter. For commercial banking, the new loan production is down. But we have increases in the bond market and the debt capital market.

This leads us naturally into the FIC activities. Those net revenues soared in the second quarter of 2016, up 35% over 2Q 2015. The first quarter was difficult for the entire industry. But we see that for the first-half 2016, we have that an increase in the FIC net revenues of 10%. That increase is up everywhere, just particularly spectacular for the rates and Forex activities. We reached a level of 64% in 2Q 2016 over 2Q 2015 and up 27% in the first-half of this year compared to last year.

GSCS has remained extremely dynamic. Revenues are up 14% in the second quarter over last year. For equity, there has been an expansion of derivative that continued with net revenues up by 1% which cannot be said for the rest of the industry. With active solutions that are up, there has been strong momentum in M&A driven by Natixis’ partners. And I would finish talking SFS, Specialized Financing.

Specialized Financing has seen very sound performances this half year. There was a slight drop in CGC this year. But excluding that, all of the Specialized Financing are performing well. Cost of risk is kept well under control, because the French economy has improved and you can also see that in the drop in BPCE. Allocated capital is also down 4% year on year, which means that the ROE is up by about 1% and has reached 16.3% in 2Q 2016, excluding the gains on the CGC building disposal that Laurent mentioned.

That was it for the Specialized Financing. For Coface, there is not a lot to be pointed out, compared to what Coface teams have already pointed out. The impact of the loss ratio, on the growth figures that Laurent mentioned earlier. The significant impact on NBI, the contributions, they have been extremely limited. And I’ll let Laurent perhaps conclude.

Laurent Mignon

[Interpreted] Thank you very much, Jean. I think that this quarter therefore has been one where there has been sound resilience from core business lines. We have an ROE of 13.4% first-half 2016. In the difficult context of profitability of banks, it’s just is the proof given that we can include our ROE. It is up over the first-half of 2015, which I think is somewhat singular in our environment.

And the environment is still very difficult. There has been a very clear rebound from CIB. And that has proven to be comparatively resilient. And I believe this is the proof that our model is a model that works. It is a model is robust and that can stand the weathering of any storms. For asset management, it is true as Jean said that there had been years of exceptional growth.

And over the last three quarters, AuM growth is a little lower. That does not in any way call into question the way in which we are doing our asset management. We’re going to continue with our multi-boutique model in Europe. It is something that works.

We have one strong belief here in Natixis. And that is that the market fund models is not going to be a profitable market. And it is one that is highly risky and that is why we are deliberately not trying to collect too much in that business in the first quarter. We had collected from money markets because it was a natural thing for companies to do in this period of low interest rates. They’re looking for safe havens for their money. But we don’t think it’s a good idea. We want to discourage those inflows and we try to do that in the second quarter.

But the rest of the activity is extremely dynamic and the fact that we discouraging the money market products it has nothing to do with the profitability of our asset management. We’ve also seen in the United States what has happened. There have been two quarters, where there were outflows - there were positive inflows. This year it’s a little negative. But this year, it is good, Loomis Sayles equities are doing well and we’ve been able to continue our activities in the United States.

Yes, there is a risk of outflows, but I think that things are slowing down. And I think that the forecast for the States is rosier. So after three quarters, after years of difficulty, we today are capable of being able to rebound in the asset management line of business. I have talked about growth in insurance business. I’ve talked about momentum and synergies with the group’s BPCE network.

All of this is in line with our objective, our ability therefore to meet the ROE target, for the phase out in the New Frontier plan, are still there. Now cost of risk has been kept under control despite the additional provisioning efforts on the oil and gas sector. This sector has forced us to set aside provisions. But we’re still in line with our guidance. The acceleration and the implementation of the asset light model means that we have an RWA under Basel 3 that is down and has been flat since the end of 2015.

And this also means that Natixis’ earning capacity is almost stable over the first-half of 2015. We’ve been able to generate 65 bps core tier 1 ratio for first-half of 2016, which in turn translate to the fact that we have a strong long-lasting capacity to pay out dividends.

So that’s it. Of course, in this environment, which is an extremely volatile environment, a difficult environment, all of the banking sector is struggling with low interest rates and we all must work on our own organization, on our own efficiency. Last quarter, I announced that there would be an operational excellence program that we will be rolling out. We are working on that and we will tell you more about that when we come back for the presentation of the third quarter financial results.

Hopefully, it will allow us to improve our performance by working on digitalization in our processes, so that everything can be more efficient. And not just for efficiency. It is something that’s of prime importance. All of us working in the financial sector today must try to transform, must try to cap our costs.

So I think that this second quarter shows that Natixis’ model is still intact and that we have the capacity to carry out our strategic plan in line with what we laid down from three years ago. Jean and all of the members of the executive committee are more than ready to answer any questions should you have them.

Question-and-Answer Session


We one first question, Guillaume Tiberghien, Exane.

Guillaume Tiberghien

[Interpreted] Yes, good morning. I have three questions. First of all, the first question concerning additional tier 1. You went from €1.3 billion to €1.8 billion. And I would like to know to what level you think you can increase the level of tier 1 in total capital.

Second question, Basel 4, I believe that at one point in time you told that Basel 4 could add maybe €10 billion or 100 basis points in equity or capital. I would like to know, what’s your present expectations and what about the discussions with the European Parliament and Basel Committee?

And my third question concerned to Algeria. I would like to know about the order of magnitude of the risk in this country, I know there is. Do you think it’s a one-off cost of risk? Could you tell us about the book value or the net revenues of RWA in Algeria, some kind of information about this country? Thank you.

Laurent Mignon

[Interpreted] Concerning the additional tier 1, we did not have any additional burden concerning the issuance of additional tier 1, except for the replacement of setting come to maturity. But we did not have any additional plan concerning this tier 1, it’s about 1.5%. It is our goal. This was our goal.

Concerning, Algeria, we have a local footprint with local funding and local loans. We’re just a local player in this country. And we thought it was a prudent you have a position. The amount - a total amount of outstanding loans is about €300 million to give you an order of magnitude.

Concerning Basel 4, I had - we had tried to give you estimate, but it’s very difficult. Discussions are underway as you know. And our technical - there is some kind of technical work to be carried out, as some indications that are more and more clear or signals are given by the various bodies.

Basically, we have to see to that the review of the Basel 4 regulations would not result in significant increase in the capital requirements in the banking industry. I believe that the banking industry as a whole has enough capital. Even the regulators think so and said so.

Now the discussions are very technical indeed. There are some parameters that are changing all the time. It’s impossible to give you an estimate. I have always believed that the banking industry is a Darwinian sector. It adapts, it adjusts to the changing regulations. More and more quickly some players do it better than others. But what is for sure is that we will adjust with the new regulation. And I’m convinced that we have the capability to work on our business lines, in our business lines in order to adjust where we work to the new regulation. And so far as this new regulations do not lead to a multiplication by two of the capital requirement.

But these are moving targets. So I can’t tell you more about that.

Guillaume Tiberghien

[Interpreted] I have another question concerning Coface. In the worst case scenario what could be the impact if things really go, if really the situation is deteriorating or the worst case scenario is that our contribution to income in this time is zero.

Laurent Mignon

[Interpreted] I do not think that Coface is going to suffer a lot in this year. So during this quarter, we had the worst case scenario indeed. The worst case scenario is that will keep the 40% in Coface for a longer time.

It’s not really a worst case, where we would have been better to dispose this 40% earlier, this is what I wanted. But I’ve always managed Coface with an asset based approach.

Probably, we did not anticipate correctly the adverse impact of the emerging countries crisis. This emerging country crisis had a consequences for Coface, and the way to deal where the claims is slower in those emerging countries. So Coface underestimated in 2014, the adverse effect - adverse impact as well as in 2015, the adverse impact these prices.

So in this situation, Coface has to make up for this poor loss ratio. But Coface is a very fine company with earnings capacities that have remained very good on a long-term basis. The management of Coface is doing an outstanding job right now in order to pave the way for the future.

That it so we do have a development capacity in the emerging countries that would be on a stronger basis, with a more organized local structure and a sales approach we would be more targeted. They are strengthening the sales approach in matured countries at France and Germany. And they are reorganizing the company in order to have the cost under control.

The - and in order to deal with the removal of the public guarantee. And so this is going to make it possible to have a good prospects, market prospects on Coface. The Coface is going to organize an investor day by mid-September in order to find new landmarks.


Maxence Le Gouvello would like to ask a question.

Maxence Le Gouvello

[Interpreted] Yes. Good morning gentlemen. So the question is first of all concerning asset management. Can we consider that the repositioning on the added value sort product for instance, overall, you have disposed of €25 million [ph]. Do you think that those disposals have come to an end?

And second question is, as I have listened to you, Laurent, we feel that concerning the in our deferred assets we have reached low points, could you give us explanations about the - what happened in July?

The third question concerned structured finance. We have a loan production of €7.5 billion which is a very high trend unprecedented. Can you consider that the pipeline for the end of the year is very good and this good trend is going to go on?

Third question concerning the RWA, concerning the optimization of this RWA, it’s very surprising you have a cutoff of the RWA quarter after quarter. Do you think there is still something to do about that?

Laurent Mignon

[Interpreted] I’m going to answer your last question and I’ll give the floor to Jean, because he is very confident as structured finance is concerned.

Jean Cheval

[Interpreted] Concerning asset management, it’s very difficult to give you the loss trends in July. I’m not entitled to that. We had tough terms, because there have been major outflows with Harris and Loomis in the United States. The highlight in this quarter is the rebound in Loomis. It’s a rebound that is going to last on a long-term basis and it concerns fixed income product and at equities.

Have we finished with our repositioning, everything concerning low fees of subscale, which concerns Aurora, everything pertaining to this product has been disposed off. Have we ended repositioning assets? No, no, we have other categories of assets similar assets in which we would like to invest.

Jean has mentioned AEW Europe. We are one of the leaders in RTS [ph] in France, with [Banc Portal, Banco Tidam] [ph] and another bank.

So those are assets that are very positive with our customers, because the yield rate on the long-term basis is much better than all the other positive effects and the amount of fees for the asset management in this area is much higher than the fees that we can get in the money market fund.

So our strategy, in an environment for a passive management is or ETF management it is very strong, because it has a better value on the long-term than the core benchmark prudent. So our strategies, I have always said has willing to say move onto focus on the specific prudent, what brings a value and offer on the long term value will not on the low cost. We did not target local products, we target high-end product. On a long term basis, I’m convinced the basic strategy and winning strategy, and we are going to deliberately continue with this strategy.

RWA, we do not - did not cutoff RWA, we have developed business with our leading RWA, it’s not optimization, it’s a model, it’s very different, yes. In the beginning, we optimized our business and we cut off some business areas. But at present, we want to develop our business with less - few RWAs, because our model is an underwriting model, but we did not want to keep part of what we originate, but the share of the fees that which is on the increase. There is not a model of optimization of given structure of our balance sheet.

We want to develop our business without consuming RWA, when the development is lower like during this quarter then, of course, fees are lower. But RWA is stable, when the development increases. We are slightly backwards concerning the development of CIB. However, we are much better concerning RWAs. Setting up this model is in very efficient much more than we thought. And we have reached our profitability target, nobody thought about that we would make it. A few of you thought that we would make it.

Maxence Le Gouvello

[Interpreted] Jean, what about the structured finance and staff?

Jean Cheval

[Interpreted] You’re seeing this new loan production has been lower about 7%. Is it [cost of operating] [ph]? No, not at all. This new loan production does not base on to staff exit activity. So GEC results, we have developed our straight finance business, which is not indicated in new loan production, even though, it has developed strongly during the second quarter and it’s continue, so during the second quarter. But we have decreased the loan business in the GEC structured finance, which is quite larger cost, because we are more selected on risks and demand has been lower.

Outside is very good. I’m quite optimistic. And for each business line, we have managed to strike a good balance. For GEC, we have lowered structured finance that we develop in great finance real estate. Commercial real estates in the United States, we have to be cautious, but you view that very strong growth in Europe, so we have a lot of work to do.

Concerning acquisition and LDO [ph] business, we have developed oppositions in Europe. One of the leaders in Europe, synergy between the M&A business and the LDO business is quite outstanding. And we have been part of large acquisitions, especially more acquisition finance in the next few quarter, because of very low rate, some very optimistic in this area.

I’d like to add that concerning acquisition business and LDO in the United States business is quite modest, which would be developed. We have managed to be leaders in the United States in some transactions. The only area where we have recorded in our growth is infrastructure finance. You see projects and infrastructures very harsh competition. There is a long –very long term finance, this is very long term finance. So we try to see and this is lead to lower margins, but higher fees. So fees have almost reached 40%, 39%, and if you add in each states, it’s almost 60% in concerning net banking income. We are really anticipating our target.

Maxence Le Gouvello

[Interpreted] Thank you very much. Have a nice holiday.


Jacques-Henri Gaulard from Kepler Chevreux.

Jacques-Henri Gaulard

[Interpreted] Yes, good morning. I am not going to beat around the bush. Let’s look at the profitability figures in the first and second quarter. €50 million in income, if you manage to double that income, it’s 35 sautimes of dividend. So the rest of the year should be very good in order for you to keep our dividend at 35 sautimes. Don’t you think it’s over optimistic?

Jean Cheval

[Interpreted] What is important is - for me is how much core tier 1 now can generate. I have generated 65 sautimes in core tier 1, and equivalent of 24 sautimes during the first quarter, I’m not going to give you our guidance over the whole year. But I can tell you, that the first quarter has not been very satisfactory, it’s been one of the toughest for you. Well, it’s up to you then clearly makes your focus. But I can tell you that we have created distributed capacity of 24 sautimes, it is the one quarter.

Jacques-Henri Gaulard

[Interpreted] Thank you.


Next question Delphine Lee, JP Morgan.

Delphine Lee

[Interpreted] Good morning. I have three questions. The first one, concerning the tax rate 33% during this quarter, I want you the year trend. This is going to be lower than before than in the past or could it be around 33%. The second question concerning asset management, and inflows, can you give us some information about the inflow performance for Harris during this quarter. Is there going to be offset by a better performance by - at Loomis or is it still going to be negative during this quarter?

The last question concerns Coface. If you are objective to dispose of the revenue 40% by the end of 2017 or do you want to keep the 40% on the longer term? And do you think that will have a positive impact or not?

Jean Cheval

[Interpreted] The result, where the capitation rate is very low during this quarter that is our average guidance; our average guidance continuing this year is around 36%, 37%, so this is positive. This is a positive item. We are not specialist in physical optimization. Our target is more creating value in our business side rather than avoid taxes. Now, I did not think that this quarter tax guidance for the whole year is presumed to be conservative.

Concerning some information about asset management in the United States, you’ve seen that during this quarter, we have had outflows of about $5 billion at Harris and inflows of about €4.5 billion at Loomis. So we have a negative difference and the brand of margins of this entity is stable, is flat.

Concerning the second quarter is the trend going to change, we don’t know. But there is a momentum of lower outflows at Harris and increase inflows at Loomis. So I cannot, of course, forecast exactly what our customers are going to do during the third quarter. And anything could happen, of course, in spite of our plan. But I think that we have steered the right direction.

Concerning Coface, I think that we have an asset-based approach. And it was I think would be to set a deadline for dispersing under the 40%. I think that, if you want to sell those 40%, when the value of Coface is the right now. I still view that in September 2009 Coface was not a core business for us. And I disposed a part of Coface and when was in IPO in 2014. So I took the time to work with the Coface teams. At the time Coface was in a difficult situation at present it’s not such a difficult situation.

And of course, because the relieved its guarantee and because of the emerging country crisis there are some problems. But I believe that Coface is going to recover much more easily than in the past when there used be very serious problems in the way the company was run, was managed. So I’m very confident concerning our capacity to dispose of those 40% of Coface, but I do not want to have a timescale.

Initially I wanted to dispose of those 40% within four years after the beginning of the plans, but I don’t know what I’ll do. Is that going to have a positive impact? Of course, it will release some capital.


Jean-Pierre Lambert, KBW. You have the mike, sir.

Jean-Pierre Lambert

[Interpreted] Yes, good morning. Three questions, first question is concerning provision in oil and gas, what’s the amount during this quarter? You have mentioned the amount for the first-half. But what about the first quarter and what are the forecasts for the provisions over the rest of the year?

Brexit, second question, what is the short-term impact of Brexit? Is there an impact during this quarter? And on the mid-term basis, is there going to be an impact and a removal of plethora of your business from London to another country?

Concerning the dividend, third question, you have mentioned a minimum, is there a maximum concerning the amount of dividend? Is there a cap for the dividend imposed by the regulatory authorities? And in order to calculate the dividend, why don’t you use the phase-in-ratio [ph]?

Laurent Mignon

[Interpreted] Let me come back to the oil and gas provisions, €26 million for this quarter. We have mentioned that it is light. We think it’s the end of our specific assets to that end. It does mean that sometimes we can have an problem to deal within oil and gas. But the main work has been and it’s been completed. Brexit, short term impact zero, apart from the volatility of the market. We have absolutely no business which is directly related to the United Kingdom as such. We’re not a British bank. We do not have any business with British customers, domestic British business so no short-term impact at all. On the mid-term basis, on the medium term basis, does that mean that our London teams are going to be transferred?

I think that we have a very low footprint in London. I’m not specifically proud of that. It’s just a fact. We have in the past increased footprint in France rather than in the United Kingdom. Recently, the number of staff members had increased in London, not for trading purposes, but because we wanted to close to our customers and many of our customers, banking customers or investors and asset managers are located in London. So wanted to be closer to London and there are lots of sales people or staff members in London, but it’s mainly sales people.

We do not have production in London, we have a securitization team in London, but most of this team is located in the United States and in France. In fact, - and we have not domestic British business and no pound, sterling business.

This is the result of the strategic choice that we’ve made in 2009 to exit the British corporate which are welcome today, of course. The medium term development or trend, we will go where our customers will go. We will go along with our customers. If our customers decided to leave the city to go elsewhere we will go along with them.

Basically, we think that our sales-people should be close to our customers. But it will be a marginal adjustment. There will not be short-term disruptions. Concerning distribution, we know that the EU regulator has set a cap concerning the maximum distributed amount related to the solvency ratio.

Jean-Pierre Lambert

[Interpreted] Thank you.


[Foreign Language]

Unidentified Analyst

Hi, good morning, guys. Just coming back to the asset management unit, I guess, I’m trying to understand the sort of dynamic…


Sorry, we can’t hear the question.

Unidentified Analyst

I’m sorry, can you hear me now?

Laurent Mignon

Yes, yes, it’s okay.

Unidentified Analyst

Perfect, sorry. So, on sort of the outlook for revenue margins on assets management, could you give us some sense of the Harris margins relative to the rest of the books, because clearly the performance is weak? And let’s assume, there could be a continuation on outflows. I’m assuming that’s margin negative. And sequentially, it certainly looks ex-performance fees, as though revenue margins have started to drift down a little.

And then, secondly, can you give us a sense of how much Harris contributed to performance fees for last year, just to get a sense of whether that should be a risk for this year as well. And then, more generally, any sort of data on performance across the broader asset management business. So, Harris, Loomis in particular, but also any pockets in Europe, where performance is very strong where it’s an issue would be helpful.

Laurent Mignon

Sorry, the performance of the - not performance, the fees on the Harris one are highest, because equity, but it’s not highest and everything. Loomis equity sector is similar to the one from Harris. So globally in term of fees, equity fees are around the U.S. - yes, 45 on average, you will have typically on the equity part which is valid for Loomis, as well for Harris around 60 basis points, 50 to 60 depending on the type of products; and on the bond part, between 25 and 30 bps depending also on the type of product in the U.S.

You’ve seen that one of the very dynamic segment that we have since the second quarter is the equity from Loomis which developed very well. Started that less than €5 billion two years ago, and it’s now at €35 billion of asset under management. So this is developing very well and I think it’s - we see a lot of potential to development of that class of assets today.

In term of performance fee, unfortunately the performance of Harris was - and with that reflecting in the flows today were not good at all last year. So it was very small contributor to the perf fees.

Unidentified Analyst

Great, that’s helpful. Thank you.

Laurent Mignon

[Interpreted] Thank you to everybody for having joined us today for this conference call. I would like to wish all of those who as I am will be taking advantage of the next few days to finally leave on holiday. And for those who are still at work, best of luck. I will see you all again on the November 9 for the third quarter Natixis results. Thank you.

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