Societe Generale SA

PAR:GLE

Earnings Call Transcript

[Frédéric Oudéa, CEO & Director]

William will go through our results and presentation at the shortest possible and then with all our management team, we will answer your questions. Let me just remind you this good guidance, two questions per person so that everybody has time to have his answers or her answers. So with that, immediately with the first page, Slide 4.Just let me highlight that we have posted solid results but beyond the -- just the financial results, I would like to highlight that we are making good progress, consistent with our different strategic objectives. First of all, we are posting a strong net banking income increase, 9%, but 4.4%, excluding Euroclear share revaluation. That is something pretty solid compared with all the European banks in an environment which remains challenging. We have overall a net profit of EUR 1.25 billion and our return on tangible equity of 11%, both for the quarter and the first 9 months of each year.Second, we are pursuing with a lot of determination the refocusing of the portfolio of the group and the optimization of capital allocation that we had announced end of 2017, and this week, we have announced the sale of our retail banking Polish subsidiary, Euro bank, to Bank Millennium. This is again part of our plan. And as you can see, we are acting, and we are selling, we will be able to go into more detail but good assets in good conditions.We are also at -- we are making definitive progress regarding our litigations. We are putting behind us this quarter, the financial cost of our U.S. litigations. The last litigation was regarding the U.S. sanction. We should be able to reach an agreement in the next few days or very few weeks, but the financial impact is 100% covered with the EUR 136 million additional provision.Fourth, we bolster the strengthening of the balance sheet. Our Core Tier 1 ratio is increased by 8 basis points in the quarter, thanks to our results but beyond this, all our key capital ratios are up in the quarter. We have completed our yearly funding program, and we've been put on positive outlook by Standard & Poor's in late October.Let me also highlight that again this quarter, the net cost of risk is very low at 22 basis points, 18 basis points for the first 9 months of the year. It reflects the very good quality of our portfolio and the strict discipline in terms of credit origination and our NPL ratio continues to decrease quarter after quarter and stands now at 3.8%.And last but not least, we've made further progress in our goal to get forefront of positive transformations and be a responsible bank. We are definitely, I think, had in terms of digital transformation but in a responsible way. We have won the first prize at the eCAC40 Award. So it's an award in France, which rewards the top French company in terms of digital maturity. We are also the #1 French bank in the RobecoSAM’s Sustainability Ranking and we are in the Top 10 European banks among 133 of our peers. And regarding gender equality, we are also #1 French bank and 14th among the 3,000 companies in the world. So there's always more progress to be done there and we need to remain humble but the choice -- capacity to make progress.Let me just comment very briefly this disposal program and reallocation of capital, Page 5. We have again announced the disposal. The estimated positive impact on our Core Tier 1 is going to be 8 basis points once the transaction closes. Overall, we have announced for 20 -- for the disposal, which represents plus 23 basis points of Core Tier 1, which are not yet in our 11.2% figure. At the same time in a very selective way, we are investing and for example, we made an acquisition with FinTech called Treezor, which should enable us to develop new businesses. It's a business which provides core banking services to new partners. We are absolutely comfortable in our capacity to complete our disposal plan.Let me just remind you that we aim to have the equivalent at the end of 50 to 60 basis points of positive impact on our Core Tier 1s. You will see further announcements in the coming new quarters. And let me just highlight that guarantee we look at no acquisition. The priority is clearly to increase our capital, Core Tier 1 ratio. The commitment was an exceptional opportunity and fits perfectly with our business and will be very positive in terms of error resolution but at this stage, I see nothing like this, and we are really concentrating on the organic development of our business.Let me just again -- for the sake of the time, let me just say one word on Slide 6. I've already commented on these rankings. I just would like also to illustrate that regarding our objectives in terms of financing the energy transition, we had announced EUR 100 billion commitment of the balance sheet and through significant [ issue of -- ] in green bond origination where we have achieved 58% of our target. I think we are really online in terms of this objective. Let me, for example, highlight that Société Générale but also our subsidiary, ALD, have issued very positively impact bonds, green bonds, and I see a development of this business going forward.Now I will turn the floor to William for him to interpret a little bit more in detail of the figures.

[William Kadouch-Chassaing]

Thank you, Frédéric. Good morning, everyone. So I invite you go to straight to Page 8 with the headline numbers for the quarter.As Frédéric already hinted, the main -- first point I would like to make is on revenue. Revenues are up 9% of year-on-year. They are up 4.4% when adjusted for the impact of Euroclear revaluation. The overall growth is broad-based across businesses. And there's a special dynamics in international retail banking and financial services and CIB. We'll come back on this.Second point in the line net income stands, as Frédéric just mentioned, at EUR 1.25 billion. It is up 16% year-on-year. Group ROTE stands at 11% for the quarter as well as for the first 9 months of the year.And third, EPS for the 9 months of the year stands at EUR 3.62 per share, which is up 21.5% relative to the EPS of the same period of last year. We have a dividend provision equivalent to EUR 1.81 per share. This corresponds to a 50% payout.Turning to next page on the cost of risk. Just would like to stress the cost of risk for the 9 months 2018 at the end of September. The first 9 months cost of risk stands at 18 basis points. Let me remind you that we've revised our guidance in Q2 with regards to the cost of risk for 2018. It was initially forecasted to be between 25 and 30. Now we are -- we have revised the guidance to 20 to 25, and we are at 18 basis points again end of September, which make us confident to be in check, if not better, than the guidance for the year.This is an opportunity for me to comment on Page 10 about the risk profile of the group. It shows that we have a sound and conservative approach to risk, especially on 3 accounts I would like to comment upon. First, we have a well-diversified risk exposure across geographies, sectors and counterparties. And if we focus more particularly on country risk, I think that is case that we are probably more cautious than a lot of peers. Group exposure still mainly emerging markets, [ contributing ] markets are more including Turkey, Argentina or South Africa, as you get the point. It's very limited. We give you on the chart, our exposure to Turkey, which is less than 0.3% of our exposure at default at group level but also our exposure to Italy is very limited.Second, we continue to work consistently on improving asset quality, such as been the case for the past years. This quarter again, we managed to decrease the NPL ratio, which now stands at 3.8%. We have a commitment to continue decreasing that ratio over the next quarters. And last but not least, on market risk, as you can see, our standard metrics measure market risk. The average trading value at risk spent at the very low level, consistent with a slight decrease for -- with the past quarters. Let me highlight that it goes in sync with 2 important elements: One, we have less volatility than many peers in the revenues of -- and results of our CIB activities, including market activities, and we have no legacy books left in our accounts.Going on Page 11. As predicted, we had -- we have mixed result improvements in improving the capital base and the liquidity and the funding structure of the group this quarter. First and foremost, the Core Tier 1 is up 8 basis points organically this quarter and goes up to 11.2 from 11.1 at the end of Q2 2018. This, obviously, translates into an increase -- further increase in the total capital ratio -- Tier 1 ratio of the group.Second, we have the TLAC ratio, which makes further progress for the quarter. You may remember that for the past quarters, it's been consistently above the target -- the SEC requirements expected for 2019, which is 8 -- 19.5%. And also that we are already MREL-compliant. If you look specifically at TLAC ratio at 22.8%, this means that implicitly, we are already meeting the target ahead of schedule only with sub debt. And leverage ratio is stable over the period. The liquidity ratios improved LTR and NSFR are comfortably above 100%. The liquid asset buffer is up from the previous quarter to EUR 176 billion. We've completed our funding program for the year, and we benefited from a revised outlook by S&P. We are now rated A with a positive outlook from October 24, 2018.I will not comment on Page 12, but we are, obviously, happy to take any questions you may have. And now we'll turn to the businesses, starting with the synopsis on Page 14. We've highlighted on this page the 5 key group components across 3 group pillars and the Corporate Centre that make the results of the group. Let me start with the bottom, reiterating the group ROTE for the quarter, which is 11%, as we said, as well as for the first 9 months of the year. How does it split? First, French Retail Banking, the return on equity is very resilient at close to 11% for the quarter. We have the benefit from our growth initiatives that goes against, obviously, a difficult interest rate environment, as you know, and now information -- investment in transformation. International Banking -- Retail banking posted another very strong quarter. The return on equity is just above 17%. Good commercial momentum across all regions and, therefore, big volumes or revenues with positive news for the quarter again. Same story for insurance and financial services to corporate. Very often high single-digit or double-digit growth. The return on normative equity is close to 20% this quarter. In CIB, the return on normative equity is 7%. This is usually weak quarter seasonally. There is Q3, so it's in sync with what we had last year, but I would like to stress, and we'll come back on this, the very strong performance year-on-year in terms of revenue growth. And last, Corporate Centre, we have a positive contribution at the Corporate Centre this quarter of about EUR 37 million net income impact plus EUR 37 million, despite 2 -- 1 negative provision, which is the -- of EUR 136 million and with an exceptional element, which is revaluation of Euroclear shares for about EUR 271 million.Coming on French Retail Banking, let me first comment on the fundamental business dynamics. As Frédéric said, we have, in this business as well, some good vibes commercially. We start stressing the increase in fees and commissions, which you can see are up 3.6% this quarter relative to the same quarter of last year. Let me remind you that fees represent 43% of the total revenues of the French Retail Banking and that we had already in Q2 incurred positive plus 2.5% increase in fees and this is quite differentiated in the marketplace.We also make progress, constant progress, in the client base, starting with the key client base that we can get. Much affluent and wealthy client base is up 5.1% this quarter and this goes together with the further increase in AUM in private banking growing at 3.9% as well as fees in that particular, for this particular client segment. We also have the -- another record quarter for Boursorama with the clients of Boursorama standing now at EUR 1.6 million, up from EUR 1.5 million last quarter, and we also have in our core franchise for professionals and corporate clients, an increase, respectively, of 1% of the client base. This goes in sync with increase in volumes, especially on the loan side, where we have still a strong dynamic for consumer credit production, which is up 11% for the first 9 months relative to the first 9 months of 2017 but also medium-term loans to companies remain solid in an improved economic environment with a 4.2% increase in investment loans outstanding. And last, let me comment on the Insurance business where we still, we continue to post strong performance. In France, the outstanding of life insurance of 2% this quarter. Protection Premium, up 6% and property and casualty premium are up 5% in France this quarter.We would like to draw your attention, particularly this quarter, this is the next page, on the private banking platform that we have created and how we envisage to develop that platform for the mass affluent clients. All together, when we combine the private banking clients, i.e., with clients with AUM above EUR 500,000, what we call patrimonial clients, the French mass affluent clients, we have 500 -- 480,000 clients, AUM close to EUR 130 billion, revenues are above EUR 1 billion and this yields a very accretive ROE. This is a very important thing we wanted to stress because it makes us clearly a leader in that client segment in France. We have, back in 2014, reshaped the private banking infrastructure in France which has yielded positive results, increased number of clients 8% versus 2014, accumulated inflows in excess of EUR 14 billion. We are now in the process of deploying a new coverage, a new product, a new advisory model for the next segment, which is the mass affluent clients segments, and we are confident it should yield positive results as well in the next coming years.So in a nutshell, French Banking -- French Retail banking Results for the quarter, revenues up 2.3% this quarter. Adjusted for the restatings -- restating for the adjustment of hedging cost that we had in Q3 2017, if you remember the amount was EUR 88 million, revenues are down 2% for the quarter as well as for the 9 months. So we have a contrasted combination with commissions up 3.6% for the quarter and net interest income is down 7%, 7.2% exactly for the quarter year-on-year.Operating expenses increased 1.4% year-on-year in French Retail Banking and 2.1% for the 9 months. Let me remind you that we have an objective to keep the cost increase just below 3% of the year, given the investments we're making, so we are well on track to meet the target. Overall, return on normative equity is 11%.Turning on International Retail Banking. As I said, this is another strong quarter. Overall, outstanding loans up 7%. Deposits up 6 -- more than 6% over the last 12 months. The growth is supporting revenues of 10% adjusted for foreign exchange for that division and then also, group to benefit from an operating leverage with a group retail normative equity in excess of 17%. More precisely, I would like to mention that the performance is very broad-based. So in Europe, I take just the net interest income, they have been trending higher over last year on strong loan growth especially in consumer finance, plus 12%. In the Czech Republic, we had a plus 6%. In Romania, plus 20%. That goes, obviously, on the back again, as I said, of strong loan growth but also an improved deposit margin. In Russia, if you adjust for foreign exchange, volumes are -- and projections are doubled -- double-digit growth. Acceleration in retail loan projection is at 21% for the quarter year-on-year and growth in retail deposits of 15%. And last in Africa, revenues grew at 8%, just use the same quarter of last year.Turning on Financial Services and Insurance. Let me highlight first life insurance. The outstandings for life insurance are up 3% year-on-year together with a continued improvement in the unit-linked share outstanding, which is the share of unit-linked is 28% in Q3 2018 versus 26% for the same period of last year. Personal protection insurance premium are up 9% and property and casualty premium are up 12%, so if you combine it with what I said about insurance in France, you can see that we also have a very positive dynamic outside of France in the Insurance business. ALD posted a very good quarter. Fleet growth was 10%. Revenues, 6% growth despite lower residual values and cost income at 50%, which translates, obviously, into still a very good return on equity. Let me mention that S&P was -- as well upgraded -- sorry ALD, was as well upgraded by S&P to BBB+. And finally, final equipment finance loans and leases outstanding were up 6% for the quarter overall, the ROE was about 20%, just short of it -- 19.6%.One area we wanted to highlight, particularly in this is on the next page, Page 20, for the quarter is the Consumer Finance, especially, if I may say so the specialized Consumer Finance model, which is quite distinctive at Société Générale. So altogether, consumer credit represents outstandings of EUR 44 billion for Société Générale, 44% of it will be booked within the retail banks, such as personal loans and more than 50% is booked in specialty finance platform, which are distinctive qualities. There is a strong predominance of B2B2C models, so they work in an open architecture models and partnerships. They are quite focused on leading franchises. Some names are very well-known and very well-positioned in terms of market share in their respective markets. Take the example of Germany, with [ Wuppertal ] and Hanseatic. These are very strong brands, within France [ Crédit du Nord ] also Rusfinance in Russia would be in that case and they're also very innovative. These are areas where the processes are almost fully digitized for almost all geographies. So this is EUR 25 billion outstanding out of which 61% is in the attractive car loan segment. The loans outstanding grew 10% year-on-year, so this is clearly a growth engine for us. And the profitability of these franchises is 17%, so it is equity growth for the group.Overall, for the whole P&L of International Retail Banking and Financial services results, Page 21, revenues are up 8% adjusted for foreign exchange impact. Operating expenses are 5.4%, adjusted for foreign exchange, a positive growth clearly for -- again, this quarter for the division. Cost of risk is in check, and we made further progress on the return of normative equity, which stands at 18.2% versus 17.4% in Q3 2017.Turning on CIB and starting with global markets, let me highlight the strong performance in terms of revenue growth with the global market and investor servicing. Services posting 8% growth year-on-year with strong rebound in equity, plus 19% year-on-year, which as you can see or you may have seen, is probably on top of the pack amongst peers. Same for FICC, revenues are flat year-on-year and probably in advance versus most peers. In terms of regions, we got an improvement in Europe together with still strong dynamics in the U.S. and Asia. I would like to stress, particularly the strengths of our financing and advisory business is a key component of our CIB business is close to 30% of the total revenues in CIB. We have a very strong quarter again, after an already strong quarter in Q2. We had -- we posted in Q2 a growth year-on-year of 6%. We post now a growth of 9%. This is the highest level in 2 years and this is very broad based across all asset classes and franchises, the corporate loan asset-backed projects, asset finance and advisory. I would like also to point you to the good momentum in global transaction banking. As you know, we have announced that we had restructured our global transaction banking steering and the component that is booked within the CIB pillar, gross deposits at close to 20% year-on-year. AUM for Lyxor in private banking were up for the quarter. So in a nutshell, the results for Global Banking and Investor Solutions are up -- revenues up close to 8%, 7.7% with rebound of global market and the good momentum in financing. Positive views for the quarter. The 9 months basic operating increase by 1.6%. The return on normative equity stands for the quarter at 7%. For the first 9 months of the year, it is 9.5%.Last comments on my slide is on the Corporate Centre. As I said before, we have 2 exceptional impacts to consider in the Corporate Centre. One is a positive. This is a revaluation of our shares in Euroclear for a -- yielding a positive NBI of EUR 271 million. The other one is a negative. It's a further allocation to provision for disputes for an amount of EUR 136 million. The bank booked in the transitional statements as of 30th September 2018, the provision for disputes amounting to EUR 1.58 billion, which includes the description that Frédéric referred to, i.e. the U.S. sanctions, amongst others in compliance with IFRS.Let me just stress that for the 9 months of the year, should you adjust for the EUR 336 million provision for discrete that we incurred to date as well as for the positive impact of EUR 271 million, for which is linked to the Euroclear revaluation, the operating income for the Corporate Centre stands at plus EUR 3 million.

[Frédéric Oudéa, CEO & Director]

Thank you very much, William. A very brief world of conclusion. As you know, we have fundamentally high strategic objectives, and I think that this quarter, we are delivering performances consistent with these objectives.First of all, grow the revenues. They are up 4.4%, if I exclude this exceptional capital gain, and we see the positive development of our growth initiatives. Both through the transformation of our businesses, in particular the French Retail Banking, we are in line with our objectives and of course, go through the transformation of our balance sheet risk profile and funding structure.On the cost. We are also in line with our guidance for the French retail business, and we have positive jaws for the 2 other main businesses, International Retail Banking as well as Global Banking and Investments, Investor Solutions. I have already commented on the refocusing. We are moving ahead positively, and as I said, on being at the forefront of responsibility is also part of our strategic goals, and we are making good progress on that.Let me just remind you that we have again this invitation on the 22nd of November, Digital Journey. We would like to go more in detail in the way we adapt our businesses with the new technologies and embrace them in our business models.So now we are ready to answer your questions.

[Operator]

[Operator Instructions] The first question comes from Stefan Stalmann from Autonomous Research.

[Stefan-Michael Stalmann]

I'm surprised I'm #1 on the line, so I'm going to enjoy it. Two questions, please. The first on global markets. If I look at the 9 months performance, not the third quarter, 9 months performance, it seems there's a bit of a problem developing. Your fixed income revenue is down 13%, equities is flat. Your cost income ratio is up from 78% to 84% year-on-year. And I think it's probably fair to assume that your equities business has a lower cost/income ratio than your fixed income business. Does that suggest that your fixed income business year-to-date is running close to breakeven? And if so, what are you intending to do about this business? And the second question relates to IFRS 16, the upcoming accounting change on leases. Could you give us already an indication of how this might impact your fee to earn ratio, please?

[Frédéric Oudéa, CEO & Director]

Stefan, I will let William answering on your second question. But Séverin Cabannes and Frank will weigh on your question on the capital markets.

[Séverin Cabannes, Deputy Chief Executive Officer]

Yes, Stefan, Séverin speaking. It's fair to say that the in our global market, the equity [ side ] has a higher return on equity than the fixed income line, but we cannot say that we are breakeven. We are still profitable in our [ CET 1 activity ] but less than the equity. So the long-term view we have is to continue to invest in some specific niche where we can deliver higher profitability in the fixed income and continue to protect our position in equity.

[Frédéric Oudéa, CEO & Director]

William?

[William Kadouch-Chassaing]

Yes. Of course, our capital trajectory includes our assumptions with regard to IFRS 16. These are not material impacts as far as the group is concerned, so take it at the 12% target includes the implementation of IFRS 16 as far, as we are concerned.

[Operator]

The next question comes from Maxence Le Gouvello from Jefferies.

[Maxence Patrick Patrick Laurent Le Gouvello du Timat, Equity Analyst]

Two questions on my side, the first one, are you confirming your target of Core Tier 1 of 11.5% for the end of 2018? And the second will be on the foreign retail. It's been 3 quarters in a row that we are seeing some great performance. What is the next step in terms of development of the digital, the acceleration on the revenue side? Can you give us a bit of flavor?

[Frédéric Oudéa, CEO & Director]

Maxence, I will leave, in a minute, the floor to Philippe on the international retail, which is as you said, absolutely confirming its capacity to grow in a very profitable manner. Regarding our target for Core Tier 1, we have in mind to be at this target or at least very close. We are generating organic capital as we [ retake ] this quarter. There's an element of uncertainty potentially on the closing of first acquisition -- first disposal, which was announced, we are positive on again the capacity to deliver also on the capital. But Philippe, can you comment on the international retail?

[Philippe Aymerich, Deputy Chief Executive Officer]

Yes, Maxence. Yes, I confirm that across-the-board international banking was a vertical line between Russia, Eastern Europe and Africa is a delivering both growth and profitability and see that the plan moving at the pace of 10%. We continue to deliver profitability of around 17%, net 18%. Having said that, this is of course, a vast group of entities, and we are working closely on this ground to report the efficiency. What I would like especially to highlight is that we are rolling out across the board strategies to implement this type platform in Russia, in Czech Republic and in Africa. And just to give you a few examples, we have under the leadership of Didier Hauguel, we now are implementing a digital store in Russia. Already today, 60% of market origination is done online, so we are moving very fast in Russia. In Czech Republic, the objective is to have by 2020 40% of this quarter being in an agile state mode, so this is also moving fast. In Africa, you know that we have opened SG ABS in target markets, so we are developing through our digital factory, digital strategies for Africa. And we are looking at the expertise, talent, resources in 2 regional headquarters, Abidjan and Angola, and the plan is to capture the growth in these vertical lines. Russia, Eastern Europe and Africa and to deliver the abilities we have at Investor Day.

[Operator]

The next question comes from Jon Peace, Crédit Suisse.

[Karl Jonathan Peace, Managing Director]

So first question is on international retail banking. Your growth rates of revenues this year for the 9 months has been a little bit ahead of your business plan. Do you think that as we go into 2020, you'll be able to sustain this outperformance or perhaps as the interest rate rises come into the base, the revenue growth slows a little? And then my second question is with the 23 basis points of disposals that you're planning, roughly what is the revenue and the net income impact that will leave the bank with those?

[Frédéric Oudéa, CEO & Director]

Jon, I will turn the floor to William, if he's able to make the rough calculation of what has been already announced. Let me just again, really I believe international retail and the financial services are -- is a division, which is a key edge, key advantage for us. When I think strategically, we are, as you mentioned in regions with good economic activities, if I may say, level of interest rates curve, which are more normal or sometime which are normalizing and ahead of the Eurozone and we are very positive, given the quality of the franchises. So I would say after 9 months and having it not even finish the year, it's a bit premature to comment but we are really very positive and confident in our capacity to deliver on plan. Second on the disposals, while William is making the rough calculation, I just would like to highlight one thing, it's really we are have done also I think a good job in the last few years to improve the performances of these assets. They are good assets. They might not correspond in the coming years to our core strategy or do not have enough synergies to justify us to keep them. But I think we are have selected the right moment to sell. We are selling to industrial buyers, which have good synergies, and I think it's really a positive, and that's why we want to do that as smoothly as possible, currently. William, have you been able to make the calculation for Jon?

[William Kadouch-Chassaing]

Yes. There was some degree of strategy in this thing. So let me tell you first, factually, if you add up for the 77 -- 2017, sorry, results for what the entities we've already announced that we were about to sell, it's a 23 basis point equivalent. The net income altogether is a bit less than EUR 50 million.

[Frédéric Oudéa, CEO & Director]

5, 0.

[William Kadouch-Chassaing]

5, 0, and I'd like to stress 2 things that goes with it: One, if you take the EUR 23 billion -- 23 basis points, you're short of EUR 1 billion of capital, so make your own calculation. If you reallocate that capital to your theoretically to our best businesses, which are yielding above 15% then obviously, this is not a bad call. And second, we have not commented so far on the prices and the valuation that we strike these deals at, but in average, they are significantly above 1x book.

[Operator]

The next question comes from Jean-Francois Neuez from Goldman Sachs.

[Jean-Francois Neuez]

I just wanted to ask a quick question on CIB. So this quarter there was, as you said yourself, run rate of revenues where the growth outpaced that of peers, and given that when that was maybe not as good, the cost didn't show the same level of flexibility as you would find in some other investment banks, I was surprised to see today a cost growth in the global market business ahead of that of the revenues, and I just wanted to understand what the drivers of that were or, for example, if you're experiencing wage pressure in France as banks are relocating apparently a lot of staff there. These type of things. And my second question was just the Core Tier 1 target again on -- of 11.5%. I heard your answer before, and I think it would be helpful if we could understand in more detail how you could bridge the 11.2% today to 11.5% in the coming quarter as I think it's a very important driver for the valuation of your shares.

[Frédéric Oudéa, CEO & Director]

I will let Séverin answer the question and again, the positive jaws now for GBIS this quarter. It's important. Again, our fundamental target is 12% Core Tier 1 ratio. We are making progress on this. As I said, we expect potentially organic capital generation. We will see when we will close effectively our acquisition, so there might be, depending on that, something slightly below but fundamentally, the key question is this bank able to generate capital? It's very clear. When I look at 2019, 2020, we will register the benefit of our disposal. We are now providing a lot of visibility on the litigation, which was -- when I look back beginning of this year, one of the -- and we will when we look back at the year, one of the great achievements that it will be that we'll have put behind us the financial cost of the 3 litigation, which we are still pending. So I think we are very confident in our capacity to meet our objective of 12% for 2020. Séverin, on the cost?

[Séverin Cabannes, Deputy Chief Executive Officer]

Yes, to point to your concern, on your -- it's fair to say that on the third quarter, we had a cost price which is nevertheless, we have a positive, Jean, which is higher than we have seen for the previous quarter. The first point is last year we had very low points on the third quarter flow '17 in terms of account base for seasonal nonregular. I would say it's not a structural question. And of the 9 months, it's also to say that we are seeing our cost position, which are -- which is related to the investments we are now doing, globally speaking at GBIS, it is fair to say that we are investing in our market activities. Today, was a growth initiative that we have announced in our Investor Day, and secondly, in our financial and advisory businesses, we are also investing there. So the cost evolution for the time being is related to these investments, and we expect to have better return next year, according to the ID -- at Investor Day presentation we made.

[Operator]

The next question comes from Guillaume Tiberghien from Exane.

[Guillaume Tiberghien]

This is question relates to the comment made by the ECB member following the publication of the European EPS stress test, whereby banks below 9% after the adverse scenario would be scrutinized, particularly. So would it be fair to say that you should have the 9%-plus the 3.6% of adverse scenario impact and, therefore, maybe you should target 12.6% instead of 12%? The second question relates to the recent article in Le Monde with regard to the potential inquiry on CumCum and CumEx dividend arbitrage. Can you give us a feel as to the timing of this inquiry and what would be the next steps in the inquiry? And the final point is not a question, it's a clarification on an earlier question. You said that the target of 12% equity Tier 1 included your expectation of IFRS 16, but can you actually give us the impact of IFRS 16, please?

[Frédéric Oudéa, CEO & Director]

Guillaume, first of all, I think you should not at all over-interpret the comments which was made and on this 9%. I don't think at all it will be a threshold and it should think in the way you have thought. What I mean by this and it was part of our plan before the stress test, to increase our capital ratio at 12%. But I can't help thinking that it is absolutely the right level for us when we look at our risk profile. And when I just compare with U.S. banks, which are fundamentally and the largest bank in the world are managing Core Tier 1 between 11.5% and 12%. Let me also just mention that regarding this stress test, how will I say, probably as the methodology remains -- let's be nice, it's a bit rudimentary for certain elements, and I'm convinced that yes, the same will further refine this methodology. So again, 12% I think is the right target, and we are confident to reach this target, and we are acting on all fronts to do this. Your second question is around CumCum, CumEx. Now let me highlight also you should take some distance from press articles. Today, first of all there is absolutely no internal investigation from external investigation on the CumCum in France. Second, the press article related to, what's the word in English, [ Foreign Language ], which was absolutely not related to that. So it's just a wrong information. And regarding the CumEx. The CumEx in Germany, there is just a very limited litigation and nothing which could distort our P&L. So what I just -- let me just mention from that perspective and take the time to comment again about litigation because it's -- and I'm not -- I'm sure of potential comfort in terms of P&L going forward in the next 2 years and capital generation. As I said, we have put behind us in this quarter the financial impact of our 3 U.S. litigations, and we have no litigation, again, going forward, and I remain very humble. But which again can have a significant impact going forward in our P&L. These issues, go back to the pre-financial crisis and sometimes, as you know, more than 10 years ago, as well as this CumEx issue that you mentioned, clearly, when we will add regarding Société Générale the cost, you will see we have much paid much faster than a lot of our peers. We've also, I would say litigation is more concentrated in a limited number of province. But let's say, we are -- I'm remaining very humble. What I mean by this, we are drawing and we have drawn the lessons and we keep them in mind. Before the financial crisis, it's probably fair to say, it was a period of time where the managements in general of CID activities and on 1 did not pay enough attention to certain businesses. The robustness of control infrastructure, and we probably too short-term approach regarding our profit generation. What I've tried to do in the last years is really to build a stronger bank, a bank with the combination of scale and entrepreneurship spirit mindset but also with a much more longer-term, if I may say, sustainable approach of the business. But it's also fair to say we live in a very different world and a more demanding, a stricter one, with much more diversified requirements of regulators on the different topics, which impose all banks to invest and when I say this is -- my conviction is that the only way is to comply. Nice to have again a robust structure and also the advantage of the new technologies and to invest in information systems. In our strategic plan last year, we have taken into account the cost of these initiatives and investments, and I would like to highlight that I think it's important not to compromise because otherwise it could be then the recipe for future problems. So it's really part of our businesses. As I said, I'm happy to have put this big litigation behind us and, really, our commitment is to avoid future problems, and I'm confident when I look at our existing remaining litigation, which are of much smaller scale, and with the [ clean shot this ] bank where effectively we did not have lots of very diversified investigations, but going forward we will have a clean P&L, in particular in the next 2 years, which are important for the capital development. I was a bit long, but I wanted to make that point on the litigation, and so as you know our litigations are permanently disclosed in our different yearly and half year reports, but be careful with the press, which might have also sometimes not necessarily the right information.

[William Kadouch-Chassaing]

Just on quickly on IFRS 16 just I said I confirm this is taken into account in our 12% target. I confirm as well this is a very manageable number, but I would like to say is that we are not willing to disclose it, otherwise we would have to disclose each and every year impact when or not material.

[Operator]

The next question comes from Bruce Hamilton from Morgan Stanley.

[Bruce Allan Hamilton, Equity Analyst]

One on French retail and 1 on sort of international. I guess on French retail, let's see, the fee growth is pretty encouraging. But I was just trying to get a better sense of how you think about the net interest income line. So in terms of front book, back book replication pressures, when might we expect that could see stabilization because, obviously, then you've got quite a decent top line story, theoretically. And then linked to that, in terms of the Boursorama contribution, can you share anything on the revenue or profit contribution or is that still around sort of breakeven and in investment mode? And then secondly, on the international side, Czech and Romania, obviously, continue to benefit both from a top line growth but also provision releases. How can we think about sort of sustainability of those releases or think about the path to normalizing sort of cost of risk? Is that something that you'd anticipate coming through in 2019 or is there still a sufficiently benign environment that we should be modeling continued reversals?

[Frédéric Oudéa, CEO & Director]

Thank you, Bruce. Philippe Aymerich for the French retail and Philippe Heim for the international retail, more specifically, Czech Republic and cost of risk, Philippe Aymerich.

[Philippe Aymerich, Deputy Chief Executive Officer]

So yes, thank you for your question. Regarding the fees, the momentum was quite good actually on the fourth quarter, notably of the fees related to service here, which is a good for this section because, of course, also related to the increase of the number of clients and more especially of the core clients. Regarding the net interest income, so as you see, it's down by 7% on this quarter compared to last year for 2 reasons: The first one, which is the most important one impacting is the deposit size. It's the impact of the negative rate, which we meant, and we mentioned that during the second quarter also, and so it's basically 2/3 of the decree, and it will continue with the situation on the interest rates. And the second one is related to the lower prepayment penalties, which is going to stop because now you see the situation -- I mean, we have much less prepayments, so we had a big impact quite important compared to last year, which is not going to continue. And regarding the last part of your question, yes, we can say that pro forma is close to breakeven.

[William Kadouch-Chassaing]

You may remember we had made a focus in Q2 on Boursorama and already mentioned, clearly, that we were profitable pre-marketing cost. Marketing costs being 2/3 variable linked to the client acquisition and that also this net income adjusted for marketing costs had grown 2.5x over the past 3 years.

[Frédéric Oudéa, CEO & Director]

Philippe?

[Philippe Heim, Deputy Chief Executive Officer]

Yes, Bruce, just to confirm that the outlook and the sentiment we have on Czech Republic and Romania is still very good. It's positive to see that we -- when in those countries we managed to avoid the situation of overeating, let's say, momentum, so we see Czech Republic edging towards the 3% GDP growth next year and around 4% for Romania. For obvious reasons, the write-backs we have seen in past quarters will stop sooner or later. So what to expect and this is consistent with the local disclosure of KB, so we expect the cost of risk to start to increase in 2019, so what could be, the question was, could be a normalized rate of cost of risk in Czech Republic? It will be around 30 to 40 basis points.

[Operator]

The next question comes from Anke Reingen from RBC.

[Anke Reingen, Analyst]

Not sure if there was an answer outstanding, but I just had some questions on your previous guidance. Can you maybe just on French retail banking obviously you have given some previous comment about the revenue -- expected revenue decline and also your cost growth, which I guess on the comments in the slides would now suggest that you are more looking at potentially plus 2% year-over-year? And then on the impact of disposals, I was -- I remember this had EUR 50 million loss last time and now you obviously sold more assets. Is this because Poland was loss-making? And then I was wondering about the EMC benefit. I think you said EUR 150 million gross operating income benefit but I think looking at the Commerzbank numbers they are, obviously, the performance there has come down, but I'm just wondering if you'd reiterate your expected benefit. And then sorry, lastly, on the Corporate Centre, can you please update on where your guidance is given your -- given where you already are at the 9-month stage?

[Frédéric Oudéa, CEO & Director]

Yes, Anke -- and the line was not perfect so I hope I understood your question. First, on the guidance of the French retail, we don't change this guidance. We've said an evolution of net banking income this year between minus 1 and minus 2. It doesn't withstand that minus 0.6 for the first 9 months where you -- when you exclude the Basel provision. And on the cost, we also stick to the guidance of below 3%, knowing I think we are 2.1% for the first 9 months. Regarding the disposal, again, I would like to come back to what William said that for the overall disposal, the 23 basis points, the plus EUR 50 million, volume was making some profit. It was not -- as I said, now these are good assets but strategically, fundamentally, either too small in their markets with not the capacity to become a leader. And I think strategically, that it makes sense then to make the choice. Or when the level of synergies is not sufficiently -- not sufficient to justify then to have to absorb all the constraints of lower possibilities, so -- but it's businesses which makes profit fundamentally the disposal will be beneficial to the group, either through the reallocation of capital of the increase and is the priority of Core Tier 1. And regarding the E&C business from Commerz, we have already disclosed that nothing changed regarding the benefit and the reduction of the profitability of the CIB. First, on the Corporate Centre, William, because here we could elaborate the [ group. ] Yes, Anke, have a question on the guidance of the Corporate Centre. So perhaps you can elaborate a little bit.

[William Kadouch-Chassaing]

Okay, yes. As you may remember, should we be referring to it, the previous guidance for the guidance for the Corporate Centre that has been given previously, it is minus EUR 400 million GOI underlying GOI for the -- it is true that for the first 9 months, as I said, that the underlying figure is rather positive with the plus EUR 3 million. So let me remind you about what we have in the Corporate Centre fundamentally. In the policy we have generally speaking, and then I'll come back on the guidance. First of all, the policy of Societe Generale has been consistently, in the past years and quarters, to bill everything we can to the businesses. So we don't keep much cost at the Corporate Centre level. For advocating points, restructuring cost of the French retail or the CIB activities are fully brought by -- taken by risk activity and French retail of CIB activities. This is a general policy that also applies to the liquidity cost for the group. Now when you look more into the details, the main reason why we overperformed is linked to the liquidity cost, especially, we had effectively this year a little less cost than we had budgeted in the way we allocate budgetarily the liquidity cost, the businesses. We don't adjust quarterly on a quarterly basis the cost we bill to the businesses. As far as the liquidity, we raise at group level being cost of antitrust formation, the spread and the subordination cost. So there is an element of difference and clearly, we overperformed, if I may say so, in terms of overall cost of liquidity. So overall, if I go back now to the guidance, based on what we know, plus on the liquidity and the cost base of the Corporate Centre, which as I said, is minimal because we keep only around 200, 300 maximum of head of these costs at the Corporate Center level. We can say that this minus EUR 400 million is conservative, i.e., we may be in the position to beat the figure for the full year as you implied in your question.

[Operator]

The next question comes from Flora Benhakoun from Deutsche Bank.

[Flora A. Benhakoun, Research Analyst]

Just one question on my side, going back to capital, I just wanted to ask how you have incorporated potentially some regulatory risk also in your trajectory, especially towards 2020. And I'm thinking especially on the trimming process whether you have any view on either the size, you know the magnitude that it could represent and the timing.

[Frédéric Oudéa, CEO & Director]

Diony Lebot, Deputy CEO.

[Diony Lebot]

Yes, Flora, the trimming process has been ongoing now for almost 2 years. We have taken into account the impact as they came and they have been rather limited, still an ongoing process. We don't expect any significant impact in the coming quarter and then our trajectory of 12% takes into account regulatory adaptations or requirements.

[Frédéric Oudéa, CEO & Director]

And again, I would like to insist, we will be there as we have been complying with our target in the last plan. I'm very confident in our capacity to meet these targets.

[Operator]

The next question comes from Kiri Vijayarajah from HSBC.

[Kirishanthan Vijayarajah, Analyst]

Kiri Vijayarajah, HSBC. Firstly, on French retail and the growth in the business customers, you posted this quarter the -- an uptick there. Can you just give us a bit more color what's driving that and is there any distortion coming in from local authority lending? Because I think in the past, that's been quite lumpy for you. And then on the insurance side, some of your peers have actually posted some pretty strong insurance numbers this quarter, so first of all, are you kind of happy with your kind of commercial performance in insurance? And actually is there anything you can do to close the profit gap in insurance versus some of your other peers in France?

[Frédéric Oudéa, CEO & Director]

I will let Philippe Aymerich again comment on the financial performances. Let me also just mention one thing, which is important always to keep in mind. In the way to monitor the credit origination, let me just mention that we have given the priority to maintaining a good level of return on equity. It is pretty interesting to compare from that perspective of performance when you reintegrate all the costs for certain of our peers in the P&L to compare our return on capital. And I must say, I'm pretty happy in relative terms of the resilience of our profitability. But on the other aspect, insurance and all this, Philippe?

[Philippe Aymerich, Deputy Chief Executive Officer]

Yes, regarding commercial activity, we've faced no specific trend related to lending to the color of policies. The commercial momentum in the last quarter in the overall quite good, quite satisfactory regarding individual, especially on consumer finance. You have seen the number. And also we continue to be very selective in terms of credit origination with corporates and professionals but the quarter was quite good, again focusing on all core clients. So yes, a good quarter. And again, I repeat on the provisions, it was quite satisfactory services on financials.

[Frédéric Oudéa, CEO & Director]

And I think that we have a 4% increase of NBI in the French insurance, and we think -- we tend to think it's a good rhythm in such a -- for the first 9 months, it's a good rhythm. Beyond the quarterly figures, it's a good rhythm, yearly a rhythm for this kind of business.

[Operator]

The next question comes from Delphine Lee from JPMorgan.

[Delphine Lee, Analyst]

So I've got 2 questions as well. Just to follow up on capital. You've had risk-weighted asset growth so far around 3% for this year. Just wondering for next year, if that's kind of the new run rate that we should assume? Or does that include some regulatory impact, which won't be repeated given that seemed to suggest that trim impact won't be that large? And the second question is on French retail. I know it's maybe a little bit early but just wondering sort of in terms of for next year, in terms of the revenue outlook, in terms of the progression because I think that in your business plan, you had something like 4% in the next couple of years. And obviously, this was based on rate assumptions on OAT, which are significantly higher than current levels, so just wondering in terms of the magnitude of what we should expect in terms of progression after this year's decline.

[Frédéric Oudéa, CEO & Director]

Well, Delphine, I think your question relates fundamentally to 2019, so it is a bit premature to comment, and we will do that like we do usually probably at year-end with the yearly figures. Let me just again highlight on the risk-weighted asset that the way we project our risk-weighted asset growth takes into account fundamentally the capital management purposes. We plug the different elements, potential for growth, accumulation of capital allocation in terms of productivity, potential impact of whether what kind of regulatory rules, et cetera, with the idea to comply with the capital levels, so I mean this is the way we are currently actually preparing our budget but the process is not finished. Same thing on the French retail, we will comment a bit early on that perspective for 2019. What I would like to highlight, we are actually in line with our guidance for this year on the NBI.

[Operator]

The next question comes from Nick Davey from Redburn.

[Nick Davey, Research Analyst]

Two, please. The first one perhaps for Séverin on this ongoing debate around cost investment in the markets business. And sorry for the trip down memory lane but if I look down the last 15 years or so, revenues in the markets business, it does seem to average EUR 1.4 billion a quarter pretty much whatever the weather. I mean it's -- it averaged that between 2002 and 2007, it averaged that in 2007 to 2012 with a bit more volatility. And these days, less volatile but still EUR 1.4 billion since 2012. So I'd just like to understand better really what makes this finally be a source of revenue growth for business? I understand we've been through a lot of turmoil in the last decade, but I just struggle to see a sustainable period of markets revenue growth in the last 15 years absent leverage. And then the second question, sorry, if I can just follow-up on the French retail net interest income trend, down 7% year-on-year. I think you ascribed 4.5% or 5% year-on-year decline, excluding renegotiation fees. My question would be what changes that picture given that front book loan rates in France are pretty stable, obviously, a big part of this is the replicating portfolio where swap rates aren't really moving. As we go into 2019, should that be our kind of base run rate for net interest income next year?

[Frédéric Oudéa, CEO & Director]

Nick, I will leave the floor to Séverin and then Philippe.

[Séverin Cabannes, Deputy Chief Executive Officer]

Thank you, Nick, for your question. It's fair to say we have been for a while in this specific environment. Our target in this specific environment is to strengthen our core strengths, and to try and to deliver if we may, market share gains. So we are not bearing the growth, normal growth, on the market in our view. And we are investing today and it's visible in our cost evolution but is for a while to continue to take market share. And we see opportunity -- specific areas of opportunities for growth, specifically, today in Asia, for example. So we are also investing in some, if I may say for us, niche markets today to gain some market share. The simple basis of our strategy, and you mentioned that for me is very important, is to stabilize -- to lower the volatility of our top line in the global market activity. So we are pursuing also diversification. And in our plan, at the Investor Day, we have some growth initiatives, which will lead us to continue to stabilize our client and to progressively continue to take market share.

[Frédéric Oudéa, CEO & Director]

Philippe?

[Philippe Aymerich, Deputy Chief Executive Officer]

Yes, you're right. I think we -- the sensitivity is important, especially regarding the reinvestment of volatile deposit at short-term guarantee at negative rates. Just to give you an indication of the sensitivity, an increase, a policy increase of 10 basis points in the euro interest rate means for French retail banking an increase of EUR 35 million of the net interest income.

[Operator]

We don't have any further questions.

[Frédéric Oudéa, CEO & Director]

Okay. Well, thank you very much for attending this call, and I hope we have answered all your -- no more questions? It's very clear?

[Operator]

No, we don't have any further questions.

[Frédéric Oudéa, CEO & Director]

Okay, well again, thank you for your attention, and have a good afternoon. Thank you.