Natixis's (NTXFF) CEO François Riahi on Q4 and 2018 Results - Earnings Call Transcript

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About: Natixis (NTXFF)
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Earning Call Audio

Natixis (OTCPK:NTXFF) Q4 and 2018 Results Conference Call February 13, 2019 3:00 AM ET

Company Participants

François Riahi – Chief Executive Officer

Nathalie Bricker – Chief Financial Officer

Conference Call Participants

Maxence Le Gouvello – Jefferies International Ltd

Omar Fall – Barclays

Delphine Lee – JPMorgan

Jacques-Henri Gaulard – Kepler Cheuvreux

Jean-Pierre Lambert – KBW

Bruce Hamilton – Morgan Stanley

Kiri Vijayarajah – HSBC

Jean-Francois Neuez – Goldman Sachs

Pierre Chedeville – CIC Market Solutions

François Riahi

Hello, and welcome to this call. It's a little bit too late to wish you a happy New Year, but maybe I can wish you happy Chinese New Year at least. And with Nathalie Bricker, we are going to present to you our 2018 Results and the Fourth Quarter Results for Natixis. The first thing I'd like to highlight is the strength of our business model. In a year where not everything went perfectly, we'll come back to that, we delivered the second best year for Natixis ever after 2017, which is and remains our best year ever, in difficult market conditions and especially at – during the fourth quarter.

So if we look at our raw numbers on the Slide 3, you see that our revenues and net revenues of our businesses are stable, plus 2% at constant FX rate, with operating expenses plus 2% excluding SRF. Our capital position pro forma of the disposal of the retail banking activity to BPCE, above our 2020 targets at 11.1%. And our return on tangible equity at 12%, slightly lower than last year, it was 2.3%, but still very healthy. That's the raw numbers.

If we look through one of the events we had on the Equity Derivatives in Asia and which we have communicated in December, we have actually a 5% increase of the revenues of our businesses, which is exactly in line with our strategic plan, New Dimension; and 13.9% return on tangible equity, which is not too far from our 2020 targets of between 14% and 15.5%. So in fact, these results in 2018 are fully in line with our strategic plan, New Dimension, and that's why we are in the situation of, of course, confirming all our financial target for 2020. At this stage, Nathalie will come back to that a little bit later. I would like to say that this result and the capacity to navigate in troubled waters is not luck. It's the result of our choices, of our unique strategy and business model.

If I take Asset & Wealth Management, again, we'll detail it a little bit later, our strong performance is a result of 2 important strategic choices: the choice of active Asset Management that can overperform significantly in volatile markets and the choice of replicating our multi-boutique model in Europe, which has been done during the past years. And this year, the performance of this multi-boutique model is very strong, and we are ranked #1 and #2, depending on the different rankings in Europe in 2018 in terms of net flows on active Asset Management.

On the CIB side, even with a tough quarter on the market, our model is proving its resilience. Our originate-to-distribute model has been once again performing greatly. We have increased our production by 20%, and we have increased our distribution rate close to 70%. Our multi-boutique model of M&A is delivering great results. We'll come back to that. And we don't need to retool our global market setup, unlike others, as our profitability in global market is intrinsically in line with our other businesses, thanks to all the efforts done during the last years to resize our activity; to focus on our core expertise and client needs; and to manage our RWAs, exiting nonprofitable business like, for example, cash equity.

On Insurance, we are building, year after year, a bank insurance model with the BPC group, combining a high and sustained level of growth and high level of profitability, which provides to Natixis good and stable revenues and profit flow. And on the Payments, it's a growth sector where we had invested, and it's also providing a growth engine for this year and next year. So I think this business model and all the choices we have made during these last years in our New Frontier plan and now in our New Dimension plan are bearing fruits and explains this result that I would qualify of very good.

Let's go to the numbers on Slide 5, the fourth quarter results, where the decline in our net income is explained by the one-off event on the Equity Derivatives in Asia. Without this effect, we would have been with grow – increased by 6% of our net income. If I go to the full year 2018, you see that we are able to absorb this effect on a full year, which is, of course, not the case on the quarter, with net pretax profit stable compared to last year. And again, last year was a very, very good year for us. And net income, just declining by 6% compared to last year. And that's what I said earlier. It's the second highest net income for Natixis.

If I go through exceptional items, it's very simple. We don't have really exceptional items because it's always the same. We have the effect of the exchange rate fluctuation on DSN in currencies and our transformation and business efficiency investment cost. That's all we have on the quarter. It was very limited level of exceptional.

Now if we have more to tell, look at our fourth quarter underlying results. So I will only comment the figures excluding the EUR 259 million non-recurring impact that I mentioned earlier. We have solid growth in revenues of 4% year-on-year in the fourth quarter. I think that's a very strong performance in the environment of the fourth quarter.

The revenue growth comes with a very good cost control since expenses are up less than 1% year-on-year, which leads to recurring gross operating income improvement for the businesses by 11% compared to the fourth quarter. It is also worth noting that we've recorded a EUR 42 million capital gain on the disposals of two affiliates that we flagged before, Selection 1818 and Axeltis.

So all in all, if you look at the profitability of our fourth quarter and if you take into account the impact of the Equity Derivatives in Asia, the ROTE is at a level of 13.4%, a very high level compared to 12.6% last year, which was already good, and reaching 14.4% adjusted return on equity for our businesses, up by almost two points compared to last year. So I think we can say that the fourth quarter had been really good and positive for our businesses.

If I move to the full year, I would like to underline our return on tangible equity at 12%. Again, very close to the one of last year, and last year was a very good year. So the capacity we have to absorb shocks is really illustrated by this number.

But I think we can also see – again, by taking into account the EUR 259 million of the Korean autocalls, that actually, the return on underlying return on tangible equity is improving significantly. And in 2018, it has been very close to our 2020 target of 14%, which is a very strong performance.

If you look at the revenue evolution of our different businesses, clearly, CIB has been, of course, impacted by a very tough fourth quarter on the global market, and Nathalie will come back to that. But all in all and taking into account the one-off effect, we have only a modest 3% decrease year-on-year compared to a very high level in 2017, which, again, is an illustration of the business model and the strength of our business model with diversity of businesses that I mentioned in introduction.

For all the other businesses, the growth is strong, 13% in Asset & Wealth Management, that's a very high level of performance; 8% in insurance, a little bit above our target; and 16% in Payments, which is a growth engine for us.

Let's move to the cost of risk. Well, the level is low, 8 bps at the fourth quarter. It's a very low level. It shows that we remain in a very benign environment for the cost of risk. And as you know, we are following now more the cost of risk on net revenues as we consider that our O2D model is reducing structurally the level of our cost of risk, and it's better illustrated by the cost of risk on net revenues with 1.5% on the year 2018. It's, of course, a very positive year on the cost of risk compared to our maximum guidance of 3% in our strategic plan.

If we move to the capital, we end up the year with a reported 10.8% core Tier 1 ratio, of course, which is consistent with our guidance to be above 10.5%. It's a 0.2% improvement compared to the end of last year. This has been achieved by a strong capital creation of 130 bps that we used to fund acquisition for 19 bps. These acquisitions that we have finalized in 2018 include three M&A boutiques, Fenchurch, Vermilion and Clipperton; one Asset Management boutique, MV Credit; the acquisition of Comitéo in Payments. But it also includes the disposal of the two affiliates I mentioned earlier, Selection 1818 and Axeltis. So we are financing acquisitions, and in the same time, we are financing, of course, an ordinary dividend, I will come back to it in a moment, and improving our solvency ratio organically.

Now I should also have said that throughout the year, RWA have been marginally down compared to last year. We wanted also to have a pro forma approach of our core Tier 1 ratio as we are contemplating to close the disposal of our retail banking activities before the end of the first quarter. The terms and conditions of the operation have been approved by our Board of Directors yesterday. So we are fully in line with our timing. And of course this transaction has a strong impact on our capital, so we thought it would be useful to show it.

The impact in terms of core Tier 1 ratio of the disposal accounts for 236 bps, and the special dividend accounts for 158 bps. So starting with 10.8% and taking into account almost 30 bps of acquisitions that we have already announced or that we are planning, we end up with 11.1% pro forma core Tier 1 ratio, which is slightly above our target in 2020.

When we look at the dividends, we are going – we intend to distribute more than EUR 2.4 billion of dividends in 2018, of course, in cash, which is equivalent to EUR 0.78 per share. So it's double compared to last year because of, of course, of the special dividend linked to the disposal of our retail banking activity. So we intend to distribute EUR 0.30 ordinary dividend, which is 65% payout ratio, in line with our guidance; and EUR 0.48 special dividend, that is the EUR 1.5 billion that we announced in December. We always say that if we didn't have a large acquisition in view when we close the transaction on the retail banking activity disposal, we would send back the excess of capital to our shareholders. It is the case, so we do what we say, as always.

So let's now go into more details on the businesses. And I'll leave the floor to Nathalie for that.

Nathalie Bricker

Thank you, François and good morning to all. And so I propose to go to Page 14 and to start with Asset & Wealth Management.

And here, let's have a look to the bottom line. You can see that in 2018, a year that has been challenging for most asset managers amidst volatile markets, we are delivering an ROE of 16%, in line with our 2020 target. The growth momentum for Asset & Wealth Management remains pretty strong, with revenue growth of 13% over the year at constant exchange rates and plus 12% in the fourth quarter. Even if you were to exclude performance fees, which as an active asset manager, is part of our model, revenue growth would have been plus 9% in 2018 at constant exchange rates, figures that are, as you can see, above our plus 6% revenue growth target.

What can be noticed there? First, talking about our performance, we managed to increase our fee rate over the year at 31 basis points with an improvement both in Europe and in North America. This is partly due to a positive mix shift towards high-margin strategies, which is in line with our strong conviction that truly active asset management will be more relevant to investors in challenging markets. It's also worth highlighting that we've seen further fee rate improvement in North America in the fourth quarter on the back of fee rate increase that happened.

Second driver, we've experienced a strong increase in the level of performance fees, especially in the fourth quarter, at H2O. Performance fees accounted for 13% of our Asset Management revenues in 2018, which is above the average of 7% to 8% since 2013, and illustrates again the strength of our multi-boutique model focused on performance.

On top of the revenue performance, it's also worth, important to highlight the efficiency gains we've made with strong positive jaws effect and a cost-to-income ratio improvement both in the fourth quarter and on a full year view. This translates into a plus 28% increase in our gross operating income compared to 2017 and as I just mentioned, a strong improvement of our profitability.

On Slide 15, we just wanted to take a quick step back in order to show you that we have experienced in 2018 and for the ninth consecutive year some fee rate expansion in Asset Management. Over the last nine years, we have grown our assets under management at plus 5% CAGR and our revenues at plus 10% CAGR, with the fee rate moving up from 22 basis points in 2009 to 31 basis points in 2018.

If we now move to Page 16. Here, we come to the assets under management. And the strong performance of Asset Management this year and this quarter in particular is even more remarkable given the challenging environment for the flow dynamics of the industry and especially in the United States. Nonetheless, it's worth highlighting that our flows are flat for the year, which compares quite favorably, in our opinion, with many of our peers that have experienced net outflows.

The diversification of our model both in terms of geographies, clients and asset classes is a key asset to us since the net outflows we've experienced in the U.S. this year are entirely offset by net inflows of an equivalent amount in Europe, where we actually are the second best-selling active fund house of 2018 for UCITS funds according to Morningstar ranking, and you'll see a few figures on that on the next slide.

And it would have been even better if we were to considerate the Broadridge ranking where we stayed first. Our overall flows are flat for the year, and this is also true for both retail and institutional. So there has been no mix shift there.

Looking at the fourth quarter more specifically. The net outflows we have experienced have offset the net inflows we had gathered at end of September, but I'd like to add a bit more color on that with three things. First, we have been experiencing positive net inflows across the vast majority of our European affiliates in the fourth quarter, with net inflows of about EUR 2 billion on long-term products.

Second, when it come to the outflows in North America in the fourth quarter, this is partly due to a technical element linked to the taxation of some capital gains that has led to some opportunistic selling on the retail side that is coming back. And third, I would like also to highlight EUR 7 billion of low margin money market outflows in November and December.

At the end of December, we now manage close to EUR 810 billion of assets under management globally, which have been impacted by a net negative market effect of EUR 44 billion and a positive FX and perimeter effect of EUR 22 billion. If we consider the end of January, there was not much difference between our assets under management by the end of the period, and our average assets under management over the fourth quarter, driven by positive market effect and flows normalizing after Q4.

Next slide, you can see the few figures I was just talking about concerning the Morningstar ranking, and I'm not going to comment precisely that. And I propose to go to next slide, on Slide 18, to comment also on something which is very important to us and at the heart of our multi-boutique model, which is the cost flexibility.

As we previously indicated, we have about 60% of our assets under management cost base which is flexible, since it is largely made of variable compensation which is defined by contracts with our affiliates and is largely tracking the revenue evolution. You can see on this slide the evolution of our revenues, cost and gross operating income for our European and U.S. asset managers, both in the fourth quarter and for the year 2018.

To be fully transparent, we've given you the figures including and excluding the impact of performance fees since you know that, given we do not own 100% of all our affiliates, part of the performance fees also go to minority. So if you look at the figures excluding performance fees, you can see that despite the decrease in revenues from our European and U.S. asset managers, costs have decreased even further, meaning that we have actually been able to grow our gross operating income despite the top line pressure.

On a full year view, you can also see the expense growth and it has come below revenue, which has allowed us to grow the bottom line strongly while we continue our efforts to improve cost efficiency, and the restructuring at Ostrum is a good example of that. So you have what we believe are key assets for the success of our model: an active style that allow us to protect our margins, be relevant to our investors and offer some help even in down markets and also a flexible model to sustain value creation.

Now that's it for Asset & Wealth Management, and let's go through CIB and on the next page, Page 19. And similar to Asset & Wealth Management, let me start with the bottom line. Here, you can see that we've delivered a double-digit ROE, meaning our CIB has created value in 2018 despite a fourth quarter that has been adversely impacted by EUR 259 million negative revenue impact on our Equity Derivatives business in Asia. Again, the diversification of our CIB is a key asset since the performance of Global Finance & Investment Banking and M&A throughout the year is offsetting the performance of Global Markets.

In the same vein, the revenues coming from our European and U.S. platforms are broadly flat year-on-year, which mitigates the negative evolution we faced in Asia. All in all, excluding the EUR 259 million negative one-off, our revenues ended the year down a modest minus 3% at constant exchange rate, and our ROE is largely flat at 30% – 13% compared to a high basis for comparison in 2017.

This also – this has also been achieved through tight cost control, with expenses down minus 1% year-on-year; with the continuous ramp-up of our O2D model that allows us to structurally decrease our cost of risk through higher distribution rates, as François had mentioned at the beginning; and finally, of course, with disciplined management of capital and risk-weighted assets.

Before having a more detailed look at our revenues, let us say that we maintain our 2020 targets for CIB. Digging into our Global Market activities, before elaborating a bit more on equity, just a few words on fixed income, commodities and treasuries, where our revenues are down by 12% in 2018 with a Q4 that has been particularly challenging in rates and ForEx.

Moving on to Equity now. Let me just take a quick step back to explain what led to the announcements we made in December. We had a book of equity derivatives in Asia mainly driven by trades coming from Korean securities house for local retail end clients. This trade presents the main following characteristics; they are mainly indexed on multi-underlying, more specifically on equity indices through world stuff on baskets; represents short-term structure with less than 18 months duration; and they also present step-down autocall barriers profile and put down and in feature. These products allow the client to benefit from periodic improved coupons depending on the performance of the underlying. And in return, the client incurs a risk of loss in capital with the possibility of a call before maturity.

The market situation of the second part of the year and particularly during the fourth quarter has been characterized by a drop in market parameters, but not enough to trigger a call. The consequence of the step down profile is that the decreasing barriers keep the sensitivities high despite remaining near the next barrier and put the trade in a zone where the management becomes particularly difficult.

Sensitivity to volatility having increased with the market evolution since October, bigger exposure of full-market participants has also grown significantly, leading to a one-way market or participants intending to hedge bigger by selling volatility. As a consequence, it led to a drop of implicit volatility.

And to sum up, the specificities of the product in the region, together with unexpected correlation, has led to imperfect hedging in those market conditions. For us, the situation has resulted in an overall EUR 259 million reduction in Natixis net revenues in the fourth quarter as a result of the negative mark to market and the booking of provision to cover the management of the product book.

Obviously, this event has had negative implications on our Q4 equity print, which at EUR 40 million revenues excluding the Asian one-off is not representative of the strength of our Equity Derivative franchise. Even if Q4 has been impacted by unfavorable market conditions regardless of this event, our performance is also to be put in the context of tighter new business overall, pending the internal review of our books and given the team's full engagement to handle the margin.

If we now move to Global Finance, our focused sectorial approach has led to solid growth in 2018, with a plus 9% increase in revenues at constant exchange rates, driven by both energy and natural resources and real assets.

New loan production is up by 20% year-on-year, and we've enhanced our distribution capabilities with more partners onboarded on our core lending platform and with a distribution rate up from 60% to 70% by the end of the year. Before going a bit more into the strong performance on Investment Banking and M&A, I'd also like to draw your attention on the fact that the proportion of revenues from services has increased from 39% to 43% over the year.

As I just mentioned, we are very pleased with the development we are seeing in the Investment Banking and M&A area with revenue growth of 4% in 2018 and plus 68% in the fourth quarter. As you know, we are replicating in the M&A area what has made the success of our Asset Management franchise with a flexible multi-boutique model. We now have six of them following the three acquisitions François has told you earlier, and they are bearing fruits since they have already contributed EUR 15 million to the top line.

We have generated close to EUR 200 million of revenues from M&A this year, which is up plus 36% year-on-year and coming from less than EUR 10 million in 2014. And we are clearly scaling up with a few landmark transactions that you can see on the next slide. Regarding Investment Banking, it’s the result of our sectorial approach and of our focus on the key – four key sectors, which is not only everything that relates to our global finance activities but a holistic approach we are taking to our overall setup and that generates strong revenue synergies as well as strong recognition, as you can see from the few rankings and awards we show you.

On the next page, I’m not going to comment on each transaction, but you can see here the dynamism of our boutiques in the M&A area for this year. Coming to Insurance, we ended this year with a revenue growth of plus 8%, which compares with a New Dimension target of plus 7%. And again, we end up with an ROE close to our 2020 ambition, above 29%. Despite an increase in regulatory contribution in the first quarter of the year, we also end up 2018 with a positive jaws effect, which translates into a slight improvement of our cost-to-income ratio and a gross operating income expansion of plus 8%.

Also worth noticing that for the fourth quarter, in the associates line of the P&L, we had a growth, and it’s a group contribution coming from BPCE IARD, which, as a reminder, is a 50/50 percent joint venture we have with MAAF for the non-life insurance of Banques Populaires, on which we have the intention to take over all new business by 2020 for private customers to reinforce our fully fledged positioning.

Now if we move to the commercial indicators concerning Insurance on Page 24. So what we can see is that we have experienced a premium growth of plus 2% in 2018. We’ve – we grew both in Life, Personal Protection and P&C. On the life insurance side, we’ve had a good commercial activity within the Caisse d’Epargne networks and a bit less within the Banques Populaires. Life insurance asset under management now stand at around EUR 60 billion compared to EUR 54.7 billion at the beginning of the year. So we are very close to a 10% increase and with a share of unit linked at 23%, stable versus last year.

Unit-linked products had accounted for 33% of gross inflows in 2018, which compares with the market average of 28% at the end of December, with the drop in equity indices and market volatility triggering a bit of a slowdown. On the P&C side, we’ve experienced a very strong development of our combined ratio, which is below 90% in the fourth quarter and stands at 91.2% for the full year, down year-on-year and below our 2020 target of 94%.

Moving now to Specialized Financial Services on Slide 25. Concerning Specialized Financial Services, we have had a very good quarter with a plus 7% revenue growth, of which 18% in the Payments businesses. If we focus on our various business units within Payments, on the Merchant Solutions side, we’ve, for instance, seen a 31% increase in business volumes generated by Dalenys and PayPlug.

On the prepaid and customer solutions side, solid revenue growth also of 45%, thanks to the acquisition of Comitéo. And number of mobile payments multiplied by more than two this year. And finally, when you look at Natixis’ historical payment activities on the processing side, both remains also very solid. Expenses for the Specialized Financial Services are up only by 3% at constant scope in 2018. And the cost of risk remain at very low level, both in the quarter and the full year view, which results in an ROE of 14.3% in 2018, up plus 100 basis points compared to last year.

And to finish with the Corporate Center, and I won’t spend too much time on that since Coface has already published its results. And just a few things on which I would like to draw your attention. First, the fact that the revenues were negatively impacted this quarter by some heavy fair value adjustments given spread moves as well as also a negative mark-to-market effect on listed financial participation after the drop in equity indices we’ve seen in the fourth quarter. And on the expense side, we have booked the fourth quarter costs related to digital and IT projects as well as advisory fees.

And now I leave the floor to François for the conclusion.

François Riahi

Thank you, Nathalie. Well, actually, this slide is very self-explanatory. I think that all what Nathalie has developed shows that our New Dimension plan is very well on track. If you look at the metrics of what we are delivering in 2018, it’s actually a very strong year and very much in line with our – all our 2020 objectives. And again, we are delivering this in an environment where not everything was smooth, not everything was perfect.

So I think it’s showing both the strength of our business model and our capacity to deliver our plan as we conceived it. We are completely convinced that this strategy is the right one, and we are, once again, very much focused – all the company, all the bank, all the Insurance, Asset Management, all the business lines are focusing on delivering this plan and with, I think, very good success in 2018, as this slide is showing.

So we are ready for 2019. It has, of course, already started. Of course, we are cautious on everything that can happen, Brexit and other things. But we are fully committed and engaged in delivering our strategic plan. And again, 2018 is a very, very good first year for that.

Just last word on also a very good news for the BPCE group, which is the announcement of the project of getting 50.1% of Oney Bank. This is, of course, in the same time, a good illustration of what we explained about the disposal of retail banking activities to BPCE, which is to help them to develop retail banking activity in Europe based on specialized financing activity. It’s also good news for Natixis as it will provide us new channels of distribution for our activity, especially in Payments.

So all our targets are confirmed, and I give you the floor for questions, if any or if anyone has listened to us.

Question-and-Answer Session

Operator

We have our first question from Maxence Le Gouvello.

Maxence Le Gouvello

Yes, good morning, everyone. I have a few questions. The first one is regarding the Korean equity portfolio. The press is mentioning that you are potentially in the process of disposing it. Can you give us more clarification on that path? The second is can you give us a bit more color regarding the inflows? You said that is normalizing in January. Can you give us general idea of what’s going on in the U.S. versus Europe? That will be my two main questions.

François Riahi

Thank you. On your first question, you know that, for those who knew us for a bit of time, we are used to manage actively our situations. And of course, we are – one way to manage this thing is also to hedge our positions in the markets, and that’s something we are doing. We have already hedged a significant part of our initial exposure in conditions that are in line and confirm the provision we have defined. On the inflows, maybe, Nathalie, you want to...

Nathalie Bricker

On the flow side, as I’ve just mentioned, there was not much difference between our assets under management at the end of January and at the end of – the average assets under management over the fourth quarter. And it was driven by positive market effect and flows normalizing, is what I’ve just said. And we’ve seen flows normalizing in January, after the Q4, it’s true.

And what we mean by that is that if we look at our mutual funds overall, so leaving aside low-margin institutional mandate, we have seen no net outflows for the first month of the year, and this is true both for Europe and for the United States. And if you’re looking for some more numbers, you can also easily see from public available data the performance of our key funds in January and how they are behaving.

Maxence Le Gouvello

Thank you.

Operator

Next question from Omar Fall from Barclays. Sir, please go ahead.

Omar Fall

Hi, there. I just wanted to come back on the outflows. I guess the Loomis ones are unrelated to the tax effects on retail. So can you give us a sense of the drivers there, in particular, as it relates to the split of outflows between fixed income and equities? And does your guidance or the color around what's happened in January relates also apply specifically to Loomis, if you're allowed to say?

Secondly, could you just discuss the partnerships with insurers in corporate financing for O2D? Have you added any new partners? What's the amount of committed capital to buy loans this year? And do you fear that, maybe in a more challenging environment, these partners decide to pull back on their commitments? And then last question, could you just give some guidance on risk-weighted asset evolution this year, please? And in particular, some of your peers who started to give some guidance on additional regulatory impacts like TRIM. I know you're in a different position, but are there any other potential regulatory impacts that we should be aware of outside of IFRS 16? Thank you.

François Riahi

Thank you for your question. On the – your first question, just I would like just to remind that Loomis is not only a fixed income house, there's also equities in Loomis, where the impact of the market effect can be also the same than what we mentioned globally. On your question about the insurance companies we are partnering with in our originate-to-distribute model. In 2018, we've added four strategic partners. It's a very strong achievement. And the share of distribution that goes to nonbanks has increased significantly in 2018.

It's very important to mention because when we are talking about our originate-to-distribute model, there are two different situations. One is liquid markets like, for example, on LBOs. That's a liquid market. But a large part of what we are doing in our originate-to-distribute model is linked with our sectors' infrastructure, real estate, energy and natural resources, where it's not the same type of market.

We are talking about loans that have all specific features, and you have to go through the projects that are underlying and that's where our strategic partnerships with insurance is particularly important and where their appetite for this type of asset is structural and not market-dependent. So of course, a part of our originate-to-distribute model, especially when it comes to LBOs can be market-dependent. But a large part of what we are doing is a long-term type of distribution model, far less market-dependent.

On your question on RWAs. First, I would like to recall that in our New Dimension plan, we had included an impact – a regulatory impact for the different process, especially for the TRIM process. We had included EUR 1 billion increase of RWAs on the target to 2020 in our trajectory for this type of effect. We have no reason to review these numbers. So there's no change in how we see the evolution of our RWAs for 2019 and 2020. When it comes to market RWAs, I would like to underline that a large part of our business is done with a standard model and not advanced model, internal model. And the impact of the TRIM RWA market for us is rough – limited, and it's a few hundreds of million RWAs.

Operator

Thank you, sir. We have another question from Ms. Delphine Lee from JPMorgan. Madam, please go ahead.

Delphine Lee

Yes. Good morning. Thank you for taking my questions. Just a few on my side. I just wanted to come back on Equity Derivatives and your strategy in Asia. Just to get a bit of color of what has changed and after the losses that you have taken, what's your risk appetite? Have you, in terms of what you had announced initially, I mean, is there any shift in sort of like the orientation of the – or the targets that you aim to achieve in this area?

Secondly, on your M&A budget. So I can see on the slides that I think I can't remember which slide it was, just that you have EUR 3 billion of theoretical dividend capacity. Any change in the budget in the context of like the macro and current environment which is a little bit deteriorating? So I understand you have another EUR 500 million left. I thought it was a little bit bigger. But I mean, any comment on this would be helpful.

And the last question is on CIB. I mean you had positive jaws effect in Asset & Wealth Management. But this is not something we've seen in CIB despite the hedging losses you've seen in the more challenging second half as you seem to be continuing to invest. So I was just wondering, kind of, can we expect better trends in 2019, 2020? Or do you – are you still in the process of IT investments? And if you could comment on that, that would be helpful. Thank you very much.

François Riahi

Thank you. Well, on the Equity Derivatives strategy, the only change linked to what has happened is the fact that we have stopped seeing these specific products, which is only sold in Korea. It's very specific to this market. And as our model was not perfect to do this product, we have stopped. For the rest, we are maintaining all what we do or what we intend to do, and Equity Derivatives remain a core element of our Global Markets strategy. About M&A budget, we're a little bit boring people, we don't change anything. So it's exactly the same. We said that under the New Dimension plan, we had EUR 1 billion maximum envelope for acquisitions. It has been increased to EUR 2.5 billion linked to the disposal of retail banking activities.

And as is the case, we have – we are going to send back the capital. But in case we come into a very good project for us that would require this capital, we would call it back from our shareholders and go for it. Of course, we are taking into account everything in our M&A strategy, but a difficult market or decreasing valuation can also provide good opportunities. And we have a clear strategy if we find the right additions to our existing setups. We'll go for it, if it fits with our envelope. So when we announced the disposal of retail banking, we said that we had EUR 6 billion free capital on the period. We are paying EUR 2.4 billion, and we have made a bit more than the EUR 500 million of acquisition closed and announced. And we can continue with EUR 500 million organically without calling for the capital. But here already no change.

Now when – so about the CIB jaws, again, we stick to our target. In the CIB, we have a lot of projects, especially regulatory projects. In our FRTB, for example, where we have the implementation of Basel IV, we have – so a lot of different project that, of course, are costly. In front of that, we have transformation and efficiency plan that we are working out, and it's moving according to our plan. So as stated in our plan, we are planning to have positive jaws in CIB, but we will continue to invest in CIB, both on the business side, of course, taking into account the macroeconomic context and other things, but also on the regulatory side. And part of what also has happened on the Asian Equity Derivatives shows that part of our processes, organizations, where we need to invest more, both on the risk management and on the risk supervision, and that's something we are going to do. But again, all that in our trajectory.

Delphine Lee

Thank you very much.

Operator

Thank you, Madam. So we have another question from Mr. Jacques-Henri Gaulard from Kepler Cheuvreux.

Jacques-Henri Gaulard

Jacques-Henri Gaulard, I haven't heard that since the upgrade anyway. Good morning, everybody. Three questions. The first one was interesting. You mentioned that you had reviewed the equities business after what happened in Asia. Any lessons you've learned from it, basically? And you were also mentioning the run rate. Obviously, you had a bit of management distraction there. Is the distraction over now? And are you back into normalized, I would say, top of business market condition being equal? The second question is, should we expect now the closing of the retail management services transaction for Q1 for good? And the third question would be on Slide 43. I would like to understand the CET1 you have here, which is at 10.4%, which obviously is based on the fact that you had some delayed regulatory approval. Can you just be a little bit more specific about it? Thank you very much.

François Riahi

Okay. I'll leave the last question for Nathalie. On Equity Derivatives, of course, what we explained is an event like that has had an impact on the rest of our Equity business, first because all the management of Equity Derivatives was fully focused on managing the matter, and also because when we became aware that we had a deficiency in our model on this product, we have been more cautious on the rest of our businesses. There is a time for us to show that it was an isolated event, that's what we have gone through, and it was the case.

So we – that's part of the explanation. That's why also I think if you look at our performance in CIB, I think the ROE of 13%, except the loss on the special product, is a very strong result. Because during the fourth quarter, we had also to manage this situation, and it takes bandwidth of the management.

We don't have targets for Equity alone. Actually also we are moving more and more into a cross-asset distribution. We are merging our sales teams all over the world in cross asset organizations, focusing more on clients and looking at what the client needs and it can be fixed income product, it can be equity product, it can also be cross-asset product. That's why we don't have a specific target for Equity. But clearly, as what we have stopped, which is the specific product is not really significant in terms of revenues in our Equity Derivatives business.

No reason not to expect the same type of revenues structurally that's what we provided in 2016 or 2017. I note also that the announcement of some of our competitors on Global Markets has been focusing more of their fixed income activities rather than their Equity Derivatives businesses. This business of Equity Derivative is structurally profitable, and I am sure the next years will prove it.

On the closing of the disposal of retail banking activities, yes, as I mentioned in my presentation, we expect it to be closed at the end of March. Of course, it's pending regulatory approval, so we cannot commit on that. But we are fully in line on the project with what was planned. And again, the two boards of Natixis and BPCE have approved yesterday settlement conditions. So we are really in the final stage of the disposal, I've have no concern about it, which means that the idea is to have the payment of the special dividend at the same time than the ordinary dividend just after the general assembly of shareholders on the 28th of May. On the Slide 43, I leave the floor to Nathalie.

Nathalie Bricker

Thank you, François. On the regulatory topic, what we present on Slide 43 are the regulatory ratios that before taking into account the current financial year results and before also taking into account the projected dividend for this year. Why? Just because we were at the time where we released the press release and the financial communication, we were waiting for the regulatory approval. But fortunately, we got it last night after the publication of the press release. And so if we were to communicate our regulatory ratio, including the current financial year earnings and accrual dividend, it would be for the CET1 10.9%, very near to the fully loaded ratio as we've got nearly no phased-in effects more.

Jacques-Henri Gaulard

So basically, Nathalie, if you were to report your results today, you wouldn't have to put this slide on, basically? The slide will be obsolete?

Nathalie Bricker

Okay. Yes.

François Riahi

Just to explain. Has – we haven't a fixed payout policy, and we can – we want to keep the flexibility of having the dividend higher than our guidance at 60%, we cannot include our financial year's earning into our regulatory capital before we define the level of dividend. That's why, Nathalie – what Nathalie has explained that we didn't have the authorization of including our earnings of the year in our regulatory capital before yesterday night and that was explaining this discrepancy. But now we have it, so that's what Nathalie explained.

Nathalie Bricker

Yes. Because to get this approval, we need to have the decision of the Board of Directors. That’s why it’s done like that.

Jacques-Henri Gaulard

Okay. Thank you.

Operator

Thank you sir. We have another question from Mr. Jean-Pierre Lambert from KBW. Sir, please go ahead.

Jean-Pierre Lambert

Yes, good morning. Three range of questions. The first one is on the performance fees, which were quite high in the fourth quarter. If you could explain the quarterly distribution, how it is generated? And also, which are the main wakers generating this performance fee? I understand it’s H2O, but perhaps you can explain the other contributors. The second question is the loss in Equity Derivatives. How have you managed your cost base to absorb it? And did the bonus pool shrink in proportion?

And the third question is regarding the change in management at Dalenys, if you could explain what it means and how it could be read? And finally, a general question, sorry, there’s a fourth one. When you see your peers in France restructuring the FIC business, does that mean that it offers opportunities for you in certain niche where you could acquire staff or develop faster? Thank you.

François Riahi

Thank you. About the performance fees, what is taken into account is anniversary date of the funds throughout the year with concentration in Q4. So that’s the answer. And yes, H2O is an overwhelming part of the performance fees in the fourth quarter. On the Equity Derivatives event, surprisingly, yes, it has an impact on our bonus pool. Of course, the bonus pool is not mechanical. But of course, the bonus pool is a way to align the teams with the value creation. So when the value creation is decreasing, the bonus pool is also decreasing. It was the other way around when it was in the other side. So – but of course, it’s not mechanical, but I won’t give you the numbers.

On the change of management in Dalenys, we have reorganized all our setup in the Payments business [indiscernible], as we organize these teams. What has been done is to hire ahead of all our Merchant Solutions business with – in the same time, the head of Dalenys, because Dalenys is a very important part in our merchant business, which is a good way to have more inclusion of Dalenys in our setup. Of course, in our setup with the other parts of the Payment world, but also in our setup with BPCE. And clearly, for us, in 2019, a very important part of what we are going to do is to connect more of the distribution channels of our retail banking networks with the fintechs and the startups we have acquired in order to create more value, and this move in Dalenys is our link to that.

On your fourth question, I’m afraid, no – I’m afraid what our competitors have announced will not give us more opportunities, because I think what they are planning to address is what we have been addressing for the past years, maybe as we were smaller than they are, the pressure on that came to us earlier. I think during the past years, we have reduced significantly our business on flows. Bond trading, for example, we have reduced significantly the volumes or the spot type of businesses because we have – we cannot be in the business of scale, and we have really focused on a more solution business, more tailor-made type of products for our corporate, for our investors and that’s how we have been managing to keep good profitability in 2018 as ROE of the fixed income activities stands above 15% of ROE.

So of course, I’ve said that many times to you, we are not chasing revenues for the sake of revenues. We are selective on the profitability. Our teams are very disciplined. I think we have proven it once again in 2018 with a level of profitability that is, I think, not the same than other institutions. But I don’t expect to get more business from what our competitors have announced, because that’s the type of business we have already stopped.

Jean-Pierre Lambert

Great. Thank you very much.

Operator

Thank you, sir. We have another question from Mr. Bruce Hamilton from Morgan Stanley. Sir, please go ahead.

Bruce Hamilton

Hi, guys. Good morning. Thanks for taking my questions. Just returning to the CIB first, I guess for equities, you’ve given lots of useful color. But just to check, in terms of the contribution from the sort of Asian derivative business that your ex – in effect exiting will be autocall business. How much has that contributed to revenues over the course of last year, say in the first three quarters? Because I assume it might be sort of outsized margin and profitability. And then should we expect any other downdraft just from tighter risk management? I guess I’m trying to calibrate what 2019 could look like versus this EUR 39 million of revenues in equities underlying in Q4 and the EUR 125 million or so run rate in the first two quarters of last year, so that’s on equities. Then on fixed income, I mean obviously, you’re in a much better position than your peers, I understand that. But given the structural sort of pressure from low rate flat curves, how do you think about 2019 set against 2018? Because Q1 2018, obviously, looked pretty good and then it just drifted lower. So should we be thinking more sort of second half as a good run rate going forward? And then third, just on Asset Management, two things; one, could we just get the average AUM for Q4 that was referenced in the sort of January bounce back? And then on the performance fees, is there a way to think about how the H2O contribution in 2018, which sounds kind of exceptional versus say, what it was in the previous two or three years, just to try and get a feel for what performance fees might look like on a go-forward basis?

François Riahi

Okay. On the specific Korean autocall business, it was not a very high number. It’s really in the range of very few tens of millions per annum on revenues, and that’s something that we can compensate quite easily. So it’s a very – it’s not a big part of our business. Now, in terms of Equity, as I said already, I think if you take our past quarters, excluding cash equity, it can give you a good feel of how our Equity business is doing and what is the size of our Equity business, but we are – our plan is also to grow it. In terms of rates, first, I would like to recall that we are not rate-sensitive. Rates has no impact on our revenues, very low. But what you mentioned about flat curves, impacts more the flow trading on fixed income. That is exactly what I mentioned earlier, so type of business we are not really doing or we are doing as less as possible.

On the average AUM in the fourth quarter, you have the starting point and the endpoint. And you can consider that market effects or flows effects are evenly distributed throughout the quarter. It would give you a good proxy. Well, for performance fees, you have all the data in the prospectus. It’s publicly available and so you can have access to it.

Bruce Hamilton

Okay. Thank you.

Operator

Thank you, sir. We have another question from Mr. Kiri Vijayarajah. Sir, please go ahead.

Kiri Vijayarajah

Yes. Good morning everyone. I’d like to come back to the Korean Equity Derivatives thing, if I may. So could you tell us, firstly, how much RWAs are actually tied up in that book? And how quickly, if you left it, say, natural runoff with those RWAs come off your books? I think Nathalie was saying a lot of those trades in Korea were kind of one to one and a half years in duration. And then linked to that, your press release in December, I think you said you took a provision of EUR 160-odd-million to manage the books. And I wondered how much of that have you actually used up to manage the book. I think you’re also saying a lot of the book has now sort of been hedged as well.

So how much of the EUR 160 million has been used up? And if markets are behaving more normally through January and February, is there a scope to maybe see some of that provision be written back? And then just more broadly in CIB and that kind of internal review of the books you've undertaken. Could you just clarify, so as a consequence – that's now done and so there's no other desks or trading books or geography that you would need or would consider maybe exiting. So what's the shape of the business that you've got today or actually kind of continues within the CIB? Thanks.

François Riahi

Yes, thank you. Well, we don't give specific figures on RWAs and as I mentioned how the book behaves naturally. But as I said, we are managing it actively and have already exited a significant part of the risk. I don't have any number to give you, as a provision. What is important for us is that it's enough, and we are convinced it is today. That's the most important thing. If at a point in time we have more precise figures on the situation, we'll give them, we'll give actually more precise figures in the next quarter of our results.

Well, about our books in Global Markets, yes, we have of course gone through all our different books. We have, of course, no concern of all the rest, that's why we have only stopped this product in particular and we are not changing anything else in our strategy. I think that we have a track record of adapting our businesses constantly to the context. We have proven it by exiting some profitable – some non-profitable businesses. And even when these businesses and I'm sure you'd share my comment, are strategically important like cash equity.

We are very much profitability-driven. We are very much challenging ourselves all the time. And also the fact that we are not announcing anything new is because we have reached a situation that the situation can evolve, then we will change our plans, but today, it's not the case. We have reached a situation where all our businesses are profitable, are delivering what we expect them to deliver. So we are very much comfortable and committed to our whole strategy.

Kiri Vijayarajah

Okay, great. Thank you.

Operator

Thank you, sir. We have another question from Mr. Jean-Francois Neuez from Goldman Sachs. Sir, please go ahead.

Jean-Francois Neuez

Hi, good morning, Jean-Francois Neuez from Goldman Sachs. I had one question left on the potential outcome and consequences of Brexit. I know that you don't have so much of a presence maybe versus peers in London. But I just wanted to understand whether you can feel as some other banks have been sharing, some of the pressures coming from relocations that have started and the focus on bigger bulge bracket banks on continental deals, smaller companies, smaller deals, relocation of staff, both on revenues, but also on potentially on wage pressure as and when your relocations or gaps are being filled? Thank you very much.

François Riahi

Thank you. Well, as you said, our exposure to the UK economy is almost nil. We are not working with the UK corporates and the UK our setup is more serving the city than the UK players. So we don't – our exposure to the UK is small. Of course, I think the good news is – the biggest threat for us was about compensation chambers. This has been addressed positively, and I think it's a very important element and a very reassuring element in case of hard Brexit. So I think it's a very positive outcome.

On relocation, for us, it's a very minimal effort. It means that we need to redefine the portfolio for our salespeople to clarify the ones that are covering the European Union clients and the ones that are covering London clients, which is done. It will lead to a very limited number of relocations. Of course, we are a French bank, the heart of our European centerpiece in Paris. So for us, it's not a big deal.

Jean-Francois Neuez

Sorry, Francois, I realized I misspoke. Sorry, I realized that I didn’t make my question very clear. I just wondered whether you feel competitive pressure in France or in other continent?

François Riahi

I was getting to that. So look at the figures, you’d see that we already feel competitive pressure from American banks in Europe. If you look at the last years, clearly, American banks have taken market share in Europe, so have we, but even if we are not American, the pressure – the competitive pressure is high already.

And that’s why we are focusing on our core expertise. That’s why we have a different way of addressing our businesses. If you take – you are thinking about big bracket banks, if you take our M&A setup, it’s a very different model, our boutique value proposition is completely different from a great institution like yours. It’s different value proposition. So we take into account the competitive pressure in what we do. So we’ll take the competitive pressure as it is, focusing on our strengths.

Operator

So we have one last question from Mr. Pierre Chedeville from CIC Market Solutions.

Pierre Chedeville

Two small question left. First, remember your general plan, as you say, you’re a little bit boring for the best thing that you change nothing to your general strategic objective. But just what is your view regarding the downturn in the economic situation and the slowdown of the economy that most economies forecast for 2019 and especially 2020, the last year of your plan.

How do you see that on your business? Because even if you’re not a business model too much sensitive to rate, you’re certainly a business model or business model sensitive to growth. So how do you see that in your general view? And was it conform to your main assumptions when you set up your strategic plan?

That’s my first question. My second question is regarding the Insurance business. Nathalie said in her comment that the development of Insurance was good in Caisse d’Epargne and a little bit less satisfactory in Banque Populaire. Could you elaborate on that? And more globally, could you give us or provide us with figures regarding equipment rate of Insurance product, life and nonlife in these networks? Thank you very much.

François Riahi

Thank you. I’m very happy to have a question on Insurance because there was no question on Insurance, and Jean-François Lequoy was very disappointed. On the economic situation, of course, this economic situation is more uncertain today than it was. If you look at the situation, it’s not a disaster, there’s still growth in every part of the world. The growth has been revived in European Union, but it’s still not so bad. You still have a growth in the U.S. You have kind of question mark on China, but no, I think the authorities are going to sustain and to support the growth also in China. So the situation on economic growth in 2019 is not as bad as that.

After that, again, there are big uncertainties, Brexit, trade war. So we remain very cautious and very wary of what can happen in terms of economic evolution. As you said, our business model is not sensitive to rate, which is I think an important element. Of course, it is sensitive to growth of course. But again, you would need to take into account our market shares. We are a challenger. We have the capacity to play with our different niches.

And what we see in our business model is that our different businesses are not reacting the same way to the different evolutions. First, I would say that I have no worry about the impact of a less positive economic growth on Insurance or Payments, for example, where there is – we have strong, I would say, structural trends that would not be impacted.

And when you take our two global businesses in Asset Management and in CIB, sometimes we are seen as depending on the market evolution because of these two businesses. But look at the fourth quarter and the market evolution, it’s not acting the same way on the different parts of our businesses. Both our Asset Management and CIB are diversified businesses. If you take the oil price, if it goes up, it’s good for our energy and natural resources, it’s more difficult for aviation.

And you have a lot of different indicators like that which doesn’t allow to have a kind of multiple of growth to extrapolate our revenues. It’s far more complex than that. And I think we can deliver our plan in as the growth conditions that we are contemplating today for 2018 which are a little bit less good than we thought a few months back.

If you take back actually the numbers we showed in terms of macro assumption in our plan that we published at the Investor Day, you would see that they were conservative enough. Yes, it’s true that for life insurance, Banque Populaire had been less good in terms of volumes, but also with a good quality of projection with higher unit-linked products. So – and it was a special year, 2018 also because it was the first year of implementation of MiFID II and it’s not easy. It’s not easy.

You’ll have to change all your distribution part – part of the Banque Populaire we’re also merging. There were big mergers in Banque Populaire in 2018, but we have no reason to consider it as structural. In terms of equipment rate, it’s – for Caisse d’Epargne we have a 28% of equipment rate; a little bit less for Banque Populaire.

But I think what – I think it’s very positive because, one, this is improving year-after-year and it was and it is a key priority for, both Natixis but also more importantly, because they are the distributor, Caisse d’Epargne and Banque Populaire to improve this equipment rates. But two, we have our peers and our best peers, Crédit Agricole and Crédit Mutuel in terms of equipment rates, which is a good news because it means that we have upside, an upside to catch.

And I feel a lot of focus from the Caisse d’Epargne and Banque Populaire networks to make it a priority in the next years to improve the equipment rate and to catch up the bank insurance model of these two cooperative banks that are doing very well in this field. So that’s why I see a lot of growth ahead of us on Insurance in our strategy, and that’s why I’m very happy that you asked this question. I was about to say that [indiscernible] (96:47) opportunity not to have had one question about Insurance.

Pierre Chedeville

I am very happy because I have a follow-up question regarding equipment rate. It’s an equipment rate in terms of life Insurance or both life and nonlife? Or it’s only equipment rate regarding life products?

Nathalie Bricker

The nonlife – yes, it’s nonlife insurance equipment rate from Personal Protection, and we’re also taking the opportunity of these questions just to precise that yes, they equipment rate is steadily growing. Yes, I don’t – yes, it works. So I was just saying that it’s nonlife protection. It’s regarding nonlife protection, the equipment rate we just give – gave you a few seconds ago.

And I also take the opportunity just to add that, yes, you’re – the equipment rate is steadily growing. If you remember, last quarter, it was an average 26% for the two networks. So with the equipment trade of an average 28% – 27% to 28% by the end of December, you can see that we are steadily growing in that area.

Pierre Chedeville

Thank you very much.

François Riahi

So I think that was the last question. We are saved by the bell on the Insurance front. So thank you very much to all of you. And we talk to you again next quarter. Thanks a lot.