Credit Agricole SA Q3 2021 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Delphine Lee - JPMorgan Chase & Co, Research Division - Analyst : Jerome, just -- I have 2 questions on my side. The first one is to come back on insurance. I know, I mean, profits have been doing well, and they are up meaningfully year-on-year, whether you look at Q3 or 9 months. Just thinking about the top line to understand a little bit how to forecast the volatility that you can have because of capital gains or other issues. I mean, any comments or color you can give us to just get maybe a bit of a better understanding of what's going on there? Then my second question is on capital. Just wanted to double check. Thanks for the update on what's happening in Q4. Just also wanted to have maybe, if possible, any update on Basel IV impact given the tax is out? And also just to confirm that this quarter did not -- you didn't take any remaining TRIM impact? I recall there's still another EUR 6 billion, EUR 7 billion to go in the next 6 quarters, so just wondering when we should expect these impacts? Jerome Grivet Okay. Thanks. So on insurance, again, I think it already happened in the past, but it's always a little bit perturbating when you want to assess the figures of the insurance performances within the banking accounting standard. So let me try again to explain a little bit what happened this quarter specifically. In the portfolio of assets of Predica, there is a significant asset that was held since a very long time that was completely restructurated and that led to a very significant capital gain. This capital gain has been taxed with a low corporate tax rate because it's a long-term capital gain. So it means that we have been able to generate the level of profit that we deem reasonable for the quarter without, I would say, recognizing a high level of financial margin, which is accounted for in the top line in the banking accounting standard. So you have a set of financial revenues. And as you know, within this financial revenues, there is a part that you allocate to the shareholder and the rest is allocated to the policyholders. And within what is recognized and allocated to the policyholders, then there is a second split that you can do, which is made between the provision for the profit sharing rate of the year and the PPE provision, which is allocated to the policyholders, but which is going to be distributed later on. And so what we did this quarter, thanks to this low corporate tax on the capital gain, we recognized only a very low level of financial margin allocated to the shareholders. And so a high level of revenue is allocated to the policyholders. And within the revenues allocated to the policyholders, we've continued to accrue the level of the profit sharing rate which has to be paid end of this year on more or less on the basis of what has been paid last year. And the rest, which is quite significant this quarter, is put aside in order to continue to boost this PPE provision, which is, first, providing solvency to CrTdit Agricole Assurance. And second, which is going, as I said, to help the transition to IFRS 17. So this is technically what we did this quarter, and it already happened some time in the past. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 10, 2021 / 1:30PM, CAGR.PA - Q3 2021 Credit Agricole SA Earnings Call So I understand that it's a little bit tricky for you to forecast, that's for sure. But really, I think that when it comes to the insurance activities, what is important is not necessarily the top line, but most important is probably the capacity of continuing to generate a level of profitability that is in line with the development of the business. And of course, that is significantly contributing to the net profit of CASA. When it comes to -- yes, sure, sure.

Question: Delphine Lee - JPMorgan Chase & Co, Research Division - Analyst : Okay, that's... Jerome Grivet So now going to your question on capital, Basel IV. The way we read the draft proposal of the commission is that the most biting part of Basel IV is going to be the output flow. And second point, the output flow is going to apply at the highest level of consolidation, at least inside one country. And so it means that it's going to be CrTdit Agricole Group that is going to have to withstand the hardest part of Basel IV. So I'm not able to precise exactly what is going to be the impact on CASA itself, but it's going to be much less -- less important than for the group globally. And of course, when we will update the medium-term plan, we will give a more precise calculation on the impact of Basel IV on the capital consumption at CASA and on the capital trajectory that CASA will have to follow. When it comes to TRIM, it's absolutely true that we still have around EUR 6 billion to EUR 7 billion of additional RWA to integrate up to the end of 2022. And as seen from now, I would guess that it would take place only in 2022, i.e., I don't expect anything to take place before end of this year.

Question: Jonathan Matthew Balfour Clark - Mediobanca - Banca di credito finanziario S.p.A., Research Division - Analyst : A couple of questions from me, please. So firstly, on the PPE reserve in insurance. I just wanted to get your thoughts about when this will be enough. I mean, you've been adding something like EUR 1 billion or EUR 1.5 billion per annum for the last few years. I mean, once you've adopted IFRS 17, is that now enough for that pace? Can you ease off and we can see some of that reserve build start to go to shareholders instead of policyholders? Or is this really something that you, in practical terms, you need to keep building into perpetuity, and we shouldn't really think of it so much as a cushion as being an essential part of your provisioning? So provisioning against, likely, future outlays rather than potential future outlays. And then next question is on the Italian retail banking division. So I guess, firstly, would you say the third quarter revenue base is a reasonable run rate? There weren't any particular positive or negative lumpy items in there. And then secondly, in Italy, could you give some kind of guidance on the outlook for restructuring charges from CreVal? And also, are you able now to talk about synergy potential now that you've signed the agreement with the unions? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 10, 2021 / 1:30PM, CAGR.PA - Q3 2021 Credit Agricole SA Earnings Call Jerome Grivet Okay. The PPE is, as you said, a reserve, but I want to insist on the point. It is allocated at least at the end of the year, on a quarterly basis. On the interim quarters, it's provisionary, and it can be changed by year-end. But on a yearly basis, once it is booked on yearly accounts, it's fully allocated to the policyholders, and it cannot be transferred back to the shareholders. So the question is, when is it going to be used to complement the yearly profit sharing rate which is effectively paid to the policyholders. But it cannot be transferred back to the shareholder. It can help the shareholder to get its share of the financial revenues because if it is used to complement the revenue generated on a running basis by the portfolio of assets, then it can let a higher share of this financial revenues of the year to be allocated to the shareholder. But directly, it cannot be transferred back to the shareholder. Then, the usage of this PPE is, I would say, threefold. The first one, the first benefits that we already get from the existence of the PPE is the fact that it's providing solvency to the life insurance company. So definitely, at the end of the day, it's either helping CrTdit Agricole SA to upstream a higher level of dividend or it's enabling Predica to modify a little bit the breakdown of its assets in order to generate more revenues in the future despite it's more costly in terms of solvency or whatever. But it's first a component of the solvency of the life insurance company and it's, in itself, beneficial to the shareholder. The second point is that, and it's very specific to the present period of time, is that it's going to help accommodate the transition to IFRS 17. The metrics are not very straightforward, very clear to explain, but definitely, having a higher PPE is going to help in this arbitration that we will have to do between the building of the consumer service margin, the initial service margin that we will have to book and the recognition of results going forward. And then the third point, and this is why we haven't been using significantly the PPE up to now, is that it's going to be very useful when the rates are going to increase back. Because clearly, the moment where we will be in a situation where we could lack financial revenues as compared to the expectations of the customers is the moment when long-term rates in the market will be significantly higher than what they are now. And the portfolio of assets is not going to generate enough revenues in order to fulfill the expectations of the policyholders. And the PPEs will be then used in order to complement the yearly revenues and in order to keep as stable as possible, the portfolio of policies. So this is precisely the moment where we can see that having a high PPE is going to be useful. And for the time being -- yes, sure.

Question: Kirishanthan Vijayarajah - HSBC, Research Division - Analyst : Sorry, I think I was on mute. Firstly, coming back to, I guess, indirectly, insurance. Just wanted to get your thoughts on the Banque Postale, CNP deal. Do you see them becoming a stronger, more integrated bancassurance player in the French market going forward? Obviously, not on day 1, but perhaps over time. And then secondly, on the capital, should we expect any impact on your Pillar 2 requirements once the switch is kind of completely disappeared? So could we see some benefit as and when you receive your next SREP letter on the Pillar 2 side of things? Jerome Grivet Your second question is really music to my ears. Kiri. Maybe you should address this question to the ECB. I have no clue on this matter. But definitely, it would be relevant to have that kind of reasoning. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 10, 2021 / 1:30PM, CAGR.PA - Q3 2021 Credit Agricole SA Earnings Call On La Banque Postale and CNP. For me, what is happening is clearly a kind of normalization. La Banque Postale was initially the only retail bank in France not to have its home life insurance company. Then, they became the mother company of CNP but -- with the CNP that was still listed. Now they are going to be in a position which is the one that we have in all other banking groups in France, which is the in-house life insurance company working with the network. So of course, it's going to be probably marginally more efficient. But don't forget 2 things. The first one is that CNP is already, I would say, at par with us, the top player in the life insurance build in France. So it's not going to be a game changer for them. They are already top of the crowd here as we are. And second point, which is important, don't forget. I would say the sociology of the population -- of the customers of La Banque Postale. It's not the wealthiest customer base that we can have in France.

Question: Omar Fall - Barclays Bank PLC, Research Division - Analyst : I'll be quick. Just a couple of questions. Firstly, on costs in CIB, which are up 5% in the quarter and in the first 9 months, actually. Reading some of the text, it seems as if this is more around investments and headcount build instead of just the kind of bonus, variable compensation trends we've seen elsewhere. Can you give some color there? Because I guess this may be bit surprising that you're building out here at this point in the cycle when talent is maybe quite expensive and your model isn't as aggressive as some others in [the industry]. And then the second question is just on SFS and the kind of medium to longer revenue trends in consumer finance because there's quite a few headwinds now. There's the supply chain shortages and who knows how long those last, structural things around buy now, pay later. And finally, we've got all these retail savings sitting in (inaudible) and current accounts, which don't really help consumer releveraging. So just some thoughts on that would be helpful. Jerome Grivet On the cost base of the CIB, if you assess the evolution of the cost base on the first 9 months and not only in the quarter, the proportion of the increase that is correlated to the increase in the provision for the payment of future bonuses represents a significant part of the increase. I have the precise portion in mind, but it should be -- it's quite significant. Let me do a rough calculation, but it should be around 1/4 of the increase. So it's quite significant. And again, it's not a commitment to pay those amounts by the end of the year, it will depend on the full results of the year. But nevertheless, at the same time, I already insisted in the fact that we've been building up a little bit our franchise on certain CIB activities, be it in the financing activities or also in the fixed income market. And so of course, we've been a little bit complementing our teams, be it with staff or with the IT tools in order to be as efficient as possible and as relevant as possible. So it's a mix, and it's not only, but it's partly due to the will of strengthening our position, not across the board. The idea is not to say we've seen a very buoyant quarter in equity derivatives and we want to rebuild immediately a franchise that will generate revenues next quarter. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 10, 2021 / 1:30PM, CAGR.PA - Q3 2021 Credit Agricole SA Earnings Call The idea is to continue to build on our strength steadily, regularly, slowly, but actively in order to be able to continue to generate additional revenues. And then, of course, there is this question of provisioning bonuses, which, for the time being, have not been granted to the beneficiaries, and we are going to wait until January or February to be more precise in that. Then your question was about consumption, if I got it clearly, and the prospects of further consumption on the French market. Because of all the savings that has been accumulated and all the tools that are, I would say, inducing the consumer to act with this pay now -- pay later, buy now devices and so on and so forth. Well, I think that clearly, there is an appetite of consumption in the French population. And clearly, part of this appetite of consumption is for the time being, a little bit precluded by these bottlenecks and disruptions in the supply chain. If you want to buy a new car in France now, it's very, very probable that the date of delivery is going to be somewhere middle of 2022. So really, this is penalizing a little bit the development of the consumption itself, but the will of consuming is really here and so the order books are really very, very active.