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Edited Transcript of ACA.PA earnings conference call or presentation 7-Nov-18 1:30pm GMT

Q3 2018 Credit Agricole SA Earnings Call

Paris Nov 9, 2018 (Thomson StreetEvents) -- Edited Transcript of Credit Agricole SA earnings conference call or presentation Wednesday, November 7, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jérôme Grivet

Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division

* Cyril Meuilland

Crédit Agricole S.A. - Head of Investor Relations

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Conference Call Participants

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* Anke Reingen

RBC Capital Markets, LLC, Research Division - Analyst

* Azzurra Guelfi

Citigroup Inc, Research Division - VP

* Bruce Allan Hamilton

Morgan Stanley, Research Division - Equity Analyst

* Delphine Lee

JP Morgan Chase & Co, Research Division - Analyst

* Flora A. Benhakoun

Deutsche Bank AG, Research Division - Research Analyst

* Guillaume Tiberghien

Exane BNP Paribas, Research Division - Head of the European Banks Team & Analyst of Banks

* Jacques-Henri Michel Gaulard

Kepler Cheuvreux, Research Division - Head of Banks Sector Research

* Jean Sassus

ODDO BHF Corporate & Markets, Research Division - Analyst

* Jonathan Matthew Balfour Clark

Mediobanca, Research Division - Director

* Karl Jonathan Peace

Crédit Suisse AG, Research Division - MD

* Kirishanthan Vijayarajah

HSBC, Research Division - Analyst

* Maxence Patrick Patrick Laurent Le Gouvello du Timat

Jefferies LLC, Research Division - Equity Analyst

* Nick Davey

Redburn (Europe) Limited, Research Division - Research Analyst

* Pierre Chedeville

CM-CIC Market Solutions, Research Division - Analyst

* Stefan-Michael Stalmann

Autonomous Research LLP - Partner, Swiss and French Banks

* Thomas Dewasmes

Goldman Sachs Group Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good day, and welcome to the third quarter and first 9 months results 2018 conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jérôme Grivet, Deputy General Manager and Group CFO. Please go ahead, sir.

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [2]

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Good afternoon, everyone. It's my pleasure to start with this third quarter and first 9 months results conference, and I will try to go quite swiftly across the document in order to leave time to your questions.

Let me start with Page 5, on which you have the main figures in terms of results. What you can see on this page is that be it on the third quarter only or on the first 9 months, be it on a stated basis or on an underlying basis, you can see that the net profit at Crédit Agricole S.A. is up. And actually, I think it's more relevant to take a look at the underlying figures considering the fact that in 2017, be it on the third quarter or on the first half of the year, we had quite significant positive one-offs which are not repeated this year, namely: the capital gain on the sale of our stake in BSF in the third quarter or the capital gain on the second quarter in connection with the sale of the stake in Eurazeo.

So on an underlying basis, net profit is up 17% as compared to Q3 '17. And on the first 9 months of the year, net profit is up 9.5%, which is quite significant. In this environment, the return on tangible equity on an annualized basis for the first 9 months of the year is slightly above 13%, return on tangible equity. And last point, and we'll go back on this one too, we have a further increase of the CET1 ratio at CASA level by 10 bps at 11.5%. And at group level, it comes into 14.9%, which is, again, an increase of 10 bps this quarter.

On Page 6, a few additional highlights and key messages on this quarter. I think what is interesting to note is that the good results I was just mentioning are good either you look at them, I would say, horizontally or vertically. Horizontally, meaning line of the P&L -- by line of the P&L; or vertically, business line by business line.

In terms of horizontal or, of across of the board approach, I would say that we have a very positive jaw again this quarter as was the case in the first half of the year. And so the cost/income ratio at CASA level continued to significantly improve. And the second point is that this improvement and the increase of the net profit is something that we see in all business divisions.

2 or 3 additional points. I just want to recall that a few weeks ago, the long-term rating of Crédit Agricole Group was raised by Standard & Poor's to A+. So we are now at A+ or an equivalent grade with each of the 3 main rating agencies.

Second point, as you may have seen, we went through the stress test exercise quite nicely, showing a 10.2% CET1 ratio at the end of the stress and not reaching the MDA level any of the 3 years of the test.

Last point, we had very good news a few days ago also, which was a definitive settlement of the OFAC litigation. All the criminal charges or criminal prosecution against us that was deferred up to now is now definitely dropped.

Let me go now directly to Page 9, where you can see an illustration of what I was just mentioning a few minutes ago. On the third quarter, only what you can see is that all business lines posted a net profit which is increasing, only stable net profit for the SFS business division. But for asset gathering, retail banking and Large Customers, the net profit is up and significantly up for Large Customers division. And for the first 9 months of the year, all the middle the bars are green, showing that the net profit of all business lines is up on the first 9 months of the year.

And as I explained, you can see from Page 10, this result is first due to the fact that the top line is quite significantly up, 5.9% on an underlying basis for the quarter and even 5% on a stated basis and 6.6% for the first 9 months of the year on an underlying basis and 6.4% on a stated basis. So it's a very solid evolution of the top line.

At the same time, the cost line is kept under strict control with an increase in the region of 3.6% on an underlying basis and even 3.3% on a stated basis for the quarter, 4.9% on the first 9 months of the year. And in this context, obviously, the cost/income ratio is improving. The stated cost/income ratio for CASA comes in at 62.4% for the quarter. It's down 1 percentage point. And on an underlying basis, it's even down 1.4 percentage points on the quarter at 61.6%.

In addition to that, the cost of risk is still very low and actually continues to decrease on the perimeter of Crédit Agricole S.A. It's more or less stable on the perimeter of the group. It's due to the fact that within the Regional Banks, in Q3 '17, we had quite significant credit loss provision reversals. So there is, I would say, a base effect.

But on the perimeter of Crédit Agricole S.A., we post a cost of risk which is a little bit below EUR 220 million this quarter. It's down 17% as compared to Q3 '17.

And what you can see is that, on a rolling basis, on the 4-quarter rolling basis, we are now at 26% for Crédit Agricole S.A., 18 bps for the group globally. It's more or less half of the assumption that we made when we published the Medium Term Plan in 2016. And in this context, what is interesting to note also is that the coverage ratio has continued to improve as compared to the previous period, both on the -- at the level of the group and then the level of the S.A., the listed entity.

This very good situation of the cost of risk is also spread across the board. What you can see is that within LCL, it's more or less stable at a very low level. Within Crédit Agricole Italia, it continues to decline quite significantly, and it's now reaching levels which we consider more or less as, I would say, target level. I'll remind you that the target was initially 60 bps. So we are now at 73 bps on a rolling basis, which is close to the target.

For the financing activities of CACIB, actually, we are in a reversal position. So now the cost of risk is slightly negative, which is, obviously, not a sustainable situation, not a sustainable position. And within the consumer credit space, it's a little bit up this quarter. But it's clearly -- I would say some volatility, close to what can be seen as bottom in terms of cost of risk in this business, 110, 120 bps running.

On Page 14, again, the idea that Crédit Agricole S.A. has a scope of businesses which is very diversified and, thus, very resilient. What you can see is that both in terms of revenues and in terms of net income, we have a very good breakdown, very balanced breakdown of results across the different business lines.

Let me go now precisely to the different business lines themselves and starting with the asset gathering activity. On Page 15, maybe just 2 highlights. First, we continued to have positive inflows in the different businesses which are gathered into this business division. And the second element is that the net income group share continues to be globally up, 5.7% on 9 months and 4.5% on the quarter.

If I zoom a little bit in the different businesses within this business division, starting with the insurance business. What you can see on Page 16 is that the activity is very dynamic. Outstandings are up, and inflows are significantly up in savings and retirement activities. What is interesting is that the euro fund is catching up a little bit with a significant positive inflow this quarter but not at the expense of the unit-linked business because the unit-linked inflows are still stable, around a little bit above EUR 1 billion this quarter again. At the same time, nonlife activities continue to be very dynamic, and we are still gaining market share in P&C activities, in individual and group protection policies and also in creditor insurance.

In this context, the results are quite positively oriented, with net profit which is up 7% on the quarter. It's apparently stable on the first 9 months as compared to the first 9 months of 2017. But actually, you may remember that, in 2017, we booked a EUR 30 million profit with the sale of our reinsurance activity in Luxembourg. And excluding this sale in 2017, the net profit is up 3.5%, 9 months on 9 months.

Amundi. Obviously, you know everything about Amundi, which published its results already 10 or 15 days ago. What I just want to mention is that the collect -- the inflows are still positive this quarter again. And not only it's a positive quarter in terms of inflows, but the inflows continued to be of good quality with a skew toward retail assets and towards long-term assets.

Revenues are more or less bottoming this quarter due to the fact that we have had almost no performance fees. The cost base continues to decrease, and all the cost synergies that were expected from the merger with Pioneer are not completely realized yet. So it means that we still have room for further improvement. And in this context, the net income group share is up 5% on the quarter without any scope effect obviously, 29.7% on the first 9 months with a scope effect on the first 6 months of the year.

LCL is another business in which we had a very good quarter this year, with, to put it in a nutshell, a credit demand which continues to be dynamic both coming from corporate, SMEs, self-employed, professionals and household. So credit outstanding -- loans outstanding are up 6.5% as compared to September -- end of September last year. We gained new customers again, 10 -- around 10,000 new customers this quarter net, and these are real customers. We are not opening bank accounts just for the pleasure of opening bank accounts, but these are real customers, which is fully illustrated by the fact that our equipment rate of the customer base of LCL continues to improve, be it in payment card or the different insurance policy products.

In this context, revenues are up 2.3%. Costs continued to be down 2.9%. So the gross operating income is up 15%, and the net income group share is up 14% on the quarter.

Italy -- retail banking activities in Italy. As you know, we managed to complete all the legal mergers in the course of this third quarter. So we have now only 1 single entity. We have no longer the capacity of breaking down the figures between those coming from the, I would say, historical perimeter and those coming from the 3 banks bought end of last year. So I'm going to comment just the global figures.

Loans outstanding are up quite significantly, plus 13.4%. And actually, we have had, especially, a very good momentum in home loans with outstanding up 6% on the current scope as compared to a market which was increasing only by a little bit less than 3%. In this context, revenues are up close to 10%. Costs are up 16.5%. But obviously, we are only starting to realize the cost synergies. Once the legal mergers are completed, we are now able to work on the IT migration and on the staff reduction plan, which is now starting. And the cost of risk is further declining, as I already said, minus 12.4%. So this is fueling a good behavior of the net income group share, which is up 19% on the quarter and still close to 10% on the first 9 months of the year.

Now Crédit Agricole in Italy. I think it's interesting to take a further look at what we now represent in Italy considering the completion of the different acquisitions that we've made in this country in the last 15 or 18 months. I think it's important to note that in the first 9 months of the year -- of this year, we already managed to book a net profit of a little bit above EUR 420 million on 9 months, which compares to the EUR 550 million -- or EUR 545 million for the full year 2017. And the quality of the credit portfolio that we have -- or credit portfolios, I should say, that we have in Italy continues to improve quite sharply with a drop in the level of NPL and a further increase in the coverage ratio.

The rest of the international retail banking activities almost no, I would say, significant element to keep in mind. Just keep in mind that with almost no ForEx effect, no currency effect, we have a sharp increase in the net profit, plus 21% on the quarter and plus 24% on the first 9 months of the year. The profit of the first 9 months is now close to EUR 100 million.

Specialized financial services, again, a very good quarter in terms of activity with a gross managed loan book of CACF which is up close to 7%, with a leasing book which is also up 3.5% and with a very good level of activity in the factoring business. In this context, revenues are up 2.9% when the costs are only up 0.6%. So the gross operating income is up 5%. We have had some volatility in the cost of risk, as I already mentioned. And so actually, the net income group share of the division is almost flat for the quarter and a little bit up for the first 9 months of 2018.

Large Customers division, a good quarter overall with some discrepancies inside this business division. A good quarter overall because, on an underlying basis, the net income group share is up 45%, the revenues are up 5.5% and the costs are up only 4.3%. So positive jaws again in this business division. In addition to that, the RWAs consumed or used by the CIB activities, which were quite significantly up in the second quarter, are now a little bit down. So it shows again what I already said is that we have the ability and the capacity to monitor precisely the level of RWA that we allocate to this business.

In terms of revenues, there is a strong contrast between the financing activities of the CIB, which posted a very sharp increase in the level of revenues, plus 25%; while, at the same time, the capital market and investment banking revenues were down 16% as a result of very good volumes in this division but very thin margins actually. And so we experienced this decrease in the level of revenues.

In the asset servicing business, again, a very good level of revenues, up 11% in connection with the development of the traditional businesses, custody, fund administration and also the development of new businesses like the clearing of derivatives. So all in all, a good level of profitability for this business division.

Coming to the Corporate Centre. Net loss, around EUR 200 million, perfectly in line with actually the guidance for the full year and for next year. Some additional cost this quarter in connection with IT investments or investments in the area of payments, which are accounted for in this business division or Corporate Centre division, and some volatility in the level of revenues but nothing worth to comment in depth.

Coming now to the Regional Banks of Crédit Agricole. It's always interesting to compare the performance of the Regional Banks of Crédit Agricole with the one of LCL because this is giving a good idea of the evolution of the retail market in France. And what is interesting to note is that we have more or less the same trends in terms of development of the business. Strong increase in the loan book, plus 6.5%. Strong dynamic in the capacity of attracting new customers and opening new bank accounts. So 1.2 million new entry into relation on the last 12 months; and net 136,000 additional customers, 114,000 for the Regional Banks in 9 months and 22,000 for BforBank in the same 9-month period.

And what is interesting also is to note that this is progressively translating also for the Regional Banks into an increase in the top line, with revenues up 1% this quarter. So this is clearly a positive sign in terms of our capacity progressively to compensate the pressure on net interest margin, which continues by the development of volumes and by the development of commissions.

Going now to the solvency. I already mentioned that the common equity Tier 1 ratio of Crédit Agricole S.A. improved by a further 10 bps this quarter. It's the result of the strong net profit I was just mentioning minus the distribution. So we retain 16 bps of earnings. Then we used, I would say, almost nothing, 1 bp for the organic growth. This quarter, it was quite stable actually, the level of RWAs, but we consumed 7 bps of solvency due to the decrease in the level of the OCI reserves, which is, again, perfectly in line with all the metric that we have in mind about the evolution of the OCI reserves.

I remind you that we also booked this quarter the employee capital increase beginning of July. So it's another 4 bps of solvency that we added up to our ratio this quarter. And so this is leading to the 11.5% CET1 ratio.

Again, I already mentioned it, but I want to give you the figure. The evolution of RWA between June and September was almost flat at EUR 307 billion. At group level, again, an increase of 10 bps of the CET1 ratio from 14.8% up to 14.9%. Retained earnings, 26 bps. OCI results, minus 4. And organic growth, it is much sharper at group level. The RWA at the group level increased by around EUR 5 billion, so the organic growth consumed 10 bps of solvency.

TLAC ratio, 21.2%. Nothing much to mention. The target of 22% is perfectly, I would say, reachable by the end of next year.

Funding, no specific issues. We managed to book and to complete the funding program of Crédit Agricole S.A. by the end of September. We still have to continue for the rest of the group in the last quarter, but I think they are perfectly on track, and nothing much to mention.

Liquidity. The reserves are still very high, EUR 260 billion of liquidity reserves, and a surplus of stable fund which continues to be steadily above EUR 100 billion. So nothing much to mention.

I am now finished with this presentation. And I think it's better now to give you the floor in order to raise your questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We can now take our first question from Delphine Lee of JPMorgan.

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Delphine Lee, JP Morgan Chase & Co, Research Division - Analyst [2]

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It's just 3 quick ones, if I may. First of all, would you mind just giving a little bit of color on Italy in terms of top line performance just to understand a little bit the trends in terms of margins, CE growth and also reminder of -- do you have any TLTRO amount that you've taken? My second question is on insurance. Performance has been really stellar this quarter. Just trying to understand what we should expect. Is this new -- the new run rate given it's the best quarter so far for a long time? So I'm just wondering if we can extrapolate this number given the items you have mentioned on market share gains. And then nonlife and life seems to be still resilient. And my last question is on capital. When do you expect the 32 basis points regulatory impacts by end of 2019? Shall we see that mostly towards the end of '19? Or do we expect any sort of model adjustments in the coming quarters? And also, if you could remind us in terms of assumptions on the OCI reserves, what rates and assumptions you have taken on the 50 basis points decrease that you had embedded in your business plan.

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [3]

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Okay. Many questions, Delphine. So I'm trying to be swift in my answers. The first one on Italy and on revenues in Italy, we booked EUR 453 million of revenues in Italy this quarter. In the first half of the year, we booked in average -- or I should say, in the first 2 quarters of the year, the average was EUR 473 million. So the third quarter is down EUR 20 million as compared to the average of the first 2 quarters of the year. I think this can be very easily explained by, first, the seasonality. The activity is always a little bit weaker in the third quarter due to the summer vacation. And second, precisely, the legal mergers because this was a period of time when the management not only of the 3 banks but also of Cariparma was completely dedicated to the success of those legal mergers. And so obviously, I would say that the sales kept going but not at the same pace. So clearly, what I can say is that this quarter 2018 was a weak quarter in terms of revenue but a perfectly explainable weakness. And so I expect clearly to see this number going up in the coming quarters even though in Italy, as in France, we have a certain pressure on margin and we have also a certain pressure on the pricing of the different fees and commissions that we take. It's always the case in this -- in the retail businesses in Europe.

Insurance. Insurance, we have had, this quarter, I would say, a more normal level of revenues than in the third quarter of 2017. You may remember that during the conference call I held 1 year ago, I have had to answer to many questions about the level of revenues in the insurance business. So I think the level of revenues that we had this quarter is a much more normal level. Nevertheless, if going forward we have some very significant and exceptional capital gains on the sale of certain assets owned by the insurance company, this may lead to a weaker recognition of financial margins, so a preservation, obviously, of the level of profitability, the bottom line, but this may lead to a weaker level of top line. But clearly, the EUR 600-something million that we had this quarter is a much more normal level than the one we had 1 year ago.

On capital, you mentioned first the question of when are we supposed to have the impact of the remaining 32 bps of regulatory headwinds. First point, 32 is the rest -- the non-used part of the 70 bps we put 2.5 years ago, so it's not as precise as that. It may be 30 or 35 or whatever. So it's not a commitment to use 32 and only 32 bps of solvency up to the end of 2019 for, I would say, regulatory headwinds. It was a rough idea. And for the time being, I see nothing that could modify this rough idea, but it's not a precision at 1 basis point. This being said, I have no precise timetable in mind, but it's possible that in the coming quarters, be it the last quarter of this year or the beginning of 2019, because we are presently discussing with the ECB on the outcome of certain TRIM reviews that they've undertaken with us. So it's possible that once the discussions come to an end, we take into account the conclusion of the discussion. So it's possible fourth quarter of this year or beginning of next year, but again, without any element that could lead to something different or significantly different from what you have in mind.

Then the OCI. We have -- at the end of June, in our CET1 ratio, we had, all in all, around 40 to 45 bps of OCI impact. So it means that after the third quarter, we have narrowed it below 40, probably around 35 or something like that.

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Cyril Meuilland, Crédit Agricole S.A. - Head of Investor Relations [4]

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At the end of September.

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [5]

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Excuse me, end of September. So we have now, end of September, 43, if I'm not mistaken, bps of OCI. So you know that there is no precise date when all the OCIs are going to be completely unwound. You know that 0 is not a level which is an absolute level that cannot be beaten. We can be above or below, but this is just to give you an idea of the type of, I would say, impact of the OCI that we still have in our ratio.

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Operator [6]

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(Operator Instructions) We will now take our next question from Jon Peace of Crédit Suisse.

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Karl Jonathan Peace, Crédit Suisse AG, Research Division - MD [7]

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Could you talk about some of the trends in large corporates, please? So firstly, with fixed income, I know the year-on-year growth was similar to one of your peers. But it looks like, from a market share point of view, you may have slipped a little bit. So do you feel that the run rates on fixed income was a little bit unusually low this quarter? And then on the flip side, how should we think about the sustainability of financing? Were you particularly pleased with what you were able to achieve? And is there any interplay between the 2 of them? And then just another comment please on the cost of risk. I mean, I know write-backs are not sustainable forever, but you've had a little run now. Do you see any change in the outlook for asset quality in large corporates?

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [8]

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Okay. On the CIB and the large corporate, I don't think we've lost significant market share or I don't think we've lost market share at all in the fixed income -- FICC businesses. From one quarter to another, your position in the league tables can vary. But actually, what I am seeing in the last 12, 18 or 24 months is more an improvement of our respective positions than a deterioration. So I think that in terms of market share, we managed more or less to keep our positions.

In terms of revenues, you have to keep in mind 2 elements as far as the capital markets activities are concerned. The first one is that we have no or almost no revenues coming from trading. We are almost exclusively commercially oriented, so the trading revenues are very weak. So on a quarter where trading activities may generate significant profits, we are not going to benefit from that. On a quarter where the trading activities are lossmakers, we are not going to suffer from it, clearly. By far, the biggest part of our capital market revenues are coming from commercial customer activities. The second key point is that we have almost no equities activities in the capital market businesses. We are almost only concentrated and focused on fixed income, currencies and rates, and we have almost no equities activity. And what I can see when I tried to read across the figures of my competitors is that in the FICC field, we see more or less the same kind of figures. But for some competitors, they have a significant catch-up which is coming from equities activities. Then of course, there is also a possible equilibrium to find between capital market activities, especially when we are focused on FICC, and financing activities. And what is true is that actually our customers often can choose their routes to finance their activities. They can take the route of loans or they can take the route of bonds or securitization, and we have the capacity to serve them in those different fields, meaning that we are able to finance them through syndicated loans, through structured loans but also through securitizations of bond issuance. And it's true that in this situation, the level of revenues can marginally switch from one division to the other one, depending on the appetite of the customer. But this being said, again, I'm not seeing any market share reduction for CACIB globally towards its customers.

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Karl Jonathan Peace, Crédit Suisse AG, Research Division - MD [9]

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And of the cost of risk outlook?

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [10]

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Excuse me. Cost of risk, I've forgotten this one. On the cost of risk, especially with CACIB, as you said, credit risk reversals are not a sustainable situation. But at the same time, all these reversals that we have booked this quarter are due to some specific files. I know on which we have had, I would say, a real recovery. So it's not a change in our appreciation of the level of potential risk. It's really the fact that we got the money back somehow. So it means that those reversals are absolutely without any doubt. And going forward, I don't see any specific risk rising. So it doesn't mean that we'll not have some specific [files] coming in the next quarter. But seen from now on, I don't see anything coming, and I don't see any reason why we should have, going forward, a significant increase in the cost of risk. Then the last point as far as the cost of risk is concerned, and this is a subject that is apply-able not only to CACIB but to all businesses, we are progressively learning to live with IFRS 9. And you know that in IFRS 9, we have the specific provisions on the bucket 3, and we have also the collective provisions -- or they are not collective because they are individual, but they are based on models and on assumptions on bucket 1 and bucket 2. So we are learning to live with this new regulation, and this may lead to some volatility because we -- you know that we have to make some scenarios and we have then to apply those scenarios to our different portfolios in order to identify either the expected credit losses with 1 year horizon in the bucket 1 or with a horizon to maturity for the bucket 2. So this is -- this may trigger some volatility going forward but no deterioration that I can identify so far.

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Operator [11]

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We can now take our next question from Jacques-Henri Gaulard from Kepler Cheuvreux.

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Jacques-Henri Michel Gaulard, Kepler Cheuvreux, Research Division - Head of Banks Sector Research [12]

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Two questions please. The first one, you have reported, on a 9-month level, a result of EUR 3.4 billion. Now if I do elementary math, I divide that by 9, multiply that by 12, I end up with EUR 4.5 billion, which tends to make us believe, with only 3 months left in the year, that your EUR 4.2 billion, the net profit target for the whole plan of '19 will -- may well be beaten at this point in Q4 '18 and for the full year. I would like your comment on that. And the second question, more generic. The thing we've heard talking about the Crédit Agricole investment case with investors is the fact that if senior insurance competitors are complaining about your favored capital treatment of the insurance business, which would enable you to make more profit -- be more profitable and write, obviously, more business. And you have that sort of like story that resurfaces every 3, 4 months about the Danish compromise being in jeopardy and all that. Can we have a bit of an update on that and maybe your reaction to what your, no doubt, jealous competitors are saying?

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [13]

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Always easy questions, Jacques-Henri. Thank you for that. The first one, I don't want to make any predictions. So I'm not giving you any guidance on what is going to be our profit for the fourth quarter of the year. Then I learned math when I was a boy. So I understand what you -- we'll see at the end of the year where we stand. But just let me remind you that our 2019 Medium Term Plan didn't have only a single objective. We have some -- a series of objectives and we are dedicated not only to reach the global net profit objective but all the other objectives. So you cannot summarize, I would say, the Medium Term Plan, to only the EUR 4.2 billion of net profit. As far as the Danish compromise is concerned, again, I think I already had the opportunity to explain that. But when you run the insurance business of the group, and I know quite well how it works, you are operating with exactly the same level of capital and the same profitability target than a pure insurer. It means that with exactly the same metrics, Crédit Agricole Assurance is monitoring its solvency with a target which is, I think, between 160% and 200% of solvency. Actually, it's now even a little bit above 200%, and so it has exactly the same solvency requirement as a pure traditional insurer. The fact that once it's integrated within the financial conglomerate, with all the requirements of being managed inside the conglomerates, with the recognition of the ECB that we actually monitor the activity -- insurance activities in a conglomerate manner, I would say, and once it's recognized that our conglomerate ratio is also above the target, then you can be granted the Danish compromise. But it has nothing to do with the way the insurance division is operating and to be even more precise, with the way the insurance operation is pricing its different policies. So I think that nothing can be searched on the field of competition from an insurer to another one.

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Operator [14]

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We can now take our next question from Azzurra Guelfi of Citi.

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Azzurra Guelfi, Citigroup Inc, Research Division - VP [15]

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Two questions. One is on the margin in France. Can you give an outlook on how is the development of the lending margin in France in terms of competition and repricing ability? The other one is the risk-weighted asset of the group. At group level, they were broadly flat. But when I look at the various divisions, it seems that there has been some optimization in the retail business given the strong blending growth that you are still seeing there and some decrease in the market risk-weighted asset, if you can give some color on that.

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [16]

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Okay, Azzurra. On retail margin, unfortunately, the margin is not improving and it's even further deteriorating, meaning that the difference between -- I can illustrate that with 2 figures. Either the difference between the average yield of the asset portfolio and the average cost of the liability portfolio, this is -- this continues to shrink a little bit. And the second indicator, I would say, is the difference between the front book and the back book. The back book, i.e. -- and it's especially the case for home loans. The back book still has a yield, an interest rate which is a little bit below but still close to 2% when we write new business at a level which is at 1.5%. So clearly, we still have pressure on the net interest margin. Fortunately, we are now able to compensate with the development of the volumes on the one hand and the development of the commission and fees on the other hand. But in terms of really net interest margin, we are under pressure and we see that both at LCL and at the Regional banks. In terms of RWA calculation, in retail, I think that -- unless I'm missing something, I think that we didn't modify significantly the way we compute our RWAs. It simply is in connection with the fact that we have a strong development of home loans. And as you know, home loans have only a very low RWA density actually. So this may explain the discrepancy that you are mentioning. More globally, it's true that everywhere we can, we try to optimize the way we calculate the RWAs, and it's probably been the case in the capital market activities this quarter because you have mentioned that we reduced a little bit the RWAs in this business division. So I don't have all the figures in mind. It may be linked to the fact that the VaR continued to decline, which is something that I have perfectly in mind. But we have also some other components of the RWA consumption, of the global RWA consumption in capital market activities. It may be in connection with different credit risks in connection with capital market activities. And so it's clearly another explanation, the last one being possibly some adjustments on the calculation. But again, we try permanently to improve and sometimes to optimize our model. Of course, this is another scrutiny of the ECB, so no doubt that any positive evolution of any model is checked many, many times before being implemented, but this may be in connection with that. As far as the VaR is concerned, it went down from EUR 5.8 million in Q2 down to EUR 4.9 million in Q3. So this may trigger a significant RWA decrease.

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Operator [17]

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We can now take our next question from Maxence Le Gouvello from Jefferies.

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Maxence Patrick Patrick Laurent Le Gouvello du Timat, Jefferies LLC, Research Division - Equity Analyst [18]

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Maxence Le Gouvello at Jefferies. A quick follow-up on the net interest margin at LCL please. Can you give us a breakdown between the commercial margins and the trends on the replication portfolios? Second question will be on the nonlife insurance. Can you give us a little bit more color where you are the more active and where you are able to gain more market share between the car insurance, home insurance, health insurance?

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [19]

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Thank you. Let's start with the second question. So in nonlife insurance policies, we are gaining steadily market share at about the same pace in home and car insurance. These are the main 2 products in which we are very active. We have a long, long history now, a good capacity of pricing rather efficiently, the different policies. So this is an area in which clearly, we have the capacity to gain market share and to continue to gain market share. We have also, to be frank, an edge in terms of being able to propose the product at the right moment because, thanks to our knowledge of the banking life of our customers, we are able to identify the moment when we can propose either the home insurance or the car insurance. In health and protection businesses, the situation is a little bit more complicated actually because actually, we are in a situation where the -- you have different layers of insurance. You have the -- and let me start with the health insurance. You have the Sécurité Sociale, which is representing a compulsory first layer of protection for all customers. Then now all employees have a second layer of protection, which is provided by the employer. And this is why 4, 5 years ago, we decided to launch group health insurance policies in order to propose to our SMEs and corporate customers the capacity to fulfill their legal obligation to propose the second layer of protection. And then some customers may want to have a third layer of protection in order to be sure that there is no charge left to them, even if they go to see expensive doctors and/or they have expensive hospital costs. And so this is where we can propose an individual policy. So it's, I would say, a more specific business, in which actually, we are developing at the same time an offer, group offer in order to cover the second layer of product and a specific individual policy either for employees looking for a third layer or for self-employed person, which -- who obviously don't have any employer to provide the second layer. But -- so we are developing, but it's, I would say, less straightforward than for the car and home insurance. And then we have, of course, the Creditor Insurance, which is a business in which we have a significant market share. And obviously, with the development of the new regulations, we consider at the beginning of the year that we could use a little bit of ground. But actually, we managed to be able to continue to price quite aggressively those policies. And so actually, we continue to grow a little bit the revenues coming from Creditor Insurance again this quarter as compared to third quarter '17.

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Maxence Patrick Patrick Laurent Le Gouvello du Timat, Jefferies LLC, Research Division - Equity Analyst [20]

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Okay. Net interest margin for the...

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [21]

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And in this business, maybe in addition to that, you may remember that the beginning of '18 or even end of '17, we reinternalized fully the contract that was covered by CNP with the regional banks since, I think, 50 years. So this is also representing a booster for us in the development of our Creditor Insurance activities. Going back to LCL, your question was about...

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Maxence Patrick Patrick Laurent Le Gouvello du Timat, Jefferies LLC, Research Division - Equity Analyst [22]

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Can -- I have, on the net interest margin, can we have a split between where the pressure is coming from? Is it coming from operational where clearly the competition seems to accelerate on mortgages? But on the other side, the speed of growing on corporate should help you. And also, can we have a bit more feedback on where are you regarding the replication portfolio?

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [23]

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Yes. Well, clearly, the pressure continues to come from the home loans. They represent the biggest volume of loans that we have in the book of the retail bank. And clearly, this is where the pressure is coming from with 2 aspects. First, it's a fixed rate on a very long maturity. So this is something that we are going to keep on our books for a long time. And the second element is that, as you know, on the French market, this is through a home loan that may attract a new customer. As far as the other categories of loans are concerned, we are in a different environment, and so we manage to keep more or less our margins. Consumer credit, which are booked in the books for LCL, it's typically 2.5%, 2 to 3 years duration. And we see, of course, the strong competition coming not only from other banks but also from consumer credit specialists. But we manage to keep more or less our margin. And for the SMEs and corporate loans, you know that it's mostly variable rate lending policy, 90%, and we manage to keep more or less 100 bps of spread even though the projection is significantly up.

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Operator [24]

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We can now take our next question from Nick Davey of Redburn.

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Nick Davey, Redburn (Europe) Limited, Research Division - Research Analyst [25]

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A couple of questions please. The first one, if we could go back to Italy please, and thank you for your comments about the soft revenues in Q3. But I suppose my question would then focus on the cost line. If you could just give us any more detail on the scale and timing of any synergies that you're aiming to get out, if -- but just step back and look at the 9 months operating trends, revenues, up 12%; cost, up 20%. Just trying to understand when you think you can get this business back to positive jaws, which you're seeing across other parts of the business. Then the second question please on LCL. There's one simple part of the question which is that you've seen 3.5% revenue growth in the quarter year-on-year clean of the renegotiation fees. Can we dream of that level of revenue growth next year? And then maybe just as a follow-up question, sort of following up on Maxence's question on the replicating portfolio. I was interested to hear you say that you thought your back book product margin was 2%. And when I look at your net interest margin, suggests your NII divided by loans is about 1.5%. So does that maybe give us a clue about where you are on your replicating portfolio and your swap division overall, which is that you're paying away this product spread, which seems quite different outcome to your peers? I guess, you won't comment on the last bit. But maybe if you have any other thoughts on that, again, arithmetic, that would be helpful.

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [26]

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Okay. On Italy, as far as the costs are concerned, if I made the same kind of calculation, in average, we had EUR 293 million of costs for the first 2 quarters and EUR 293 million for the third quarter. So we have already started the decline of the cost base. But clearly, we have -- we are targeting, of course, a positive jaw and we are targeting to benefit from an optimization of the branches, networks of the 3 banks that we purchased, a reduction of the number of staff globally and some reductions in the IT cost. So clearly, we expect somewhere in 2019 to go to a more normal situation where the jaw is positive between the evolution of the top line and the evolution of the cost line. But just keep in mind that we purchase banks that initially had a cost/income ratio which was significantly above 100%. Their portfolio of asset was clean and this was a condition on which we were very strict, but their operating parameters were very weak. And this is precisely because we thought that we had the capacity to improve these operational parameters that we were interested in this purchase. But of course, it takes a little time before we completely fine-tune the situation. So just give us a little time. And what we expect is that in the meanwhile, if we can continue to benefit a little bit from the further reduction in the cost of risk, we are going to, I would say, cover the period of time before the moment we are going to see a positive jaw on the upper part of the P&L. As far as LCL is concerned, first, it may be a little bit, I would say, hazardous or dangerous to say so, but I expect indeed and it's before all the internal budget procedures are completed, but I expect LCL to propose to me an increase of the top line for 2019. We'll see exactly how far they can go, but this is something which should be reachable. And then I had forgotten to answer to Maxence's question about the hedge book. But indeed, we are now in a situation -- and I'm not going to comment in depth about that, but we are now in a situation obviously where hedging a book is always costly. And by definition, it's like an insurance premium. If you want to be protected, you have to pay something. So we are paying something in order to protect a little bit our revenues, but we are now in a situation where this cost starts to decline a little bit, which is helping globally the top line.

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Operator [27]

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We can now take our next question from Kiri Vijayarajah of HSBC.

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Kirishanthan Vijayarajah, HSBC, Research Division - Analyst [28]

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A couple of questions on Italy. So firstly, on the Agos side, on the rising cost of risk you show on Slide 20, so based on your earlier comments, am I right to take it that all of that increase you're showing through the course of this year, the cost of risk in Agos is all from IFRS 9 and that actually, in terms of fresh problems emerging this year is actually pretty limited? And then on the other bit of Italy, on the IRB Italy division, just trying to better understand the volume dynamics there because I think your loans and your deposits, both shrinking quarter-on-quarter. It's actually the preceding Slide 19. So is that just a one-off blip as you integrate the acquisitions you did? Or is there something else driving that please?

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [29]

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Okay. On Agos, I'm not pretending that all the volatility is in connection to IFRS 9. What I'm saying is that starting in the beginning of 2017, IFRS 9 had started to become a key component of the way we are provisioning the credit books. So this has increased a little bit the volatility, which is -- in this business, which is, I would say, a statistical relativity rather than a volatility -- linked to an individual specific file, like in -- it is in the CIB. What I can say, in a nutshell, on the cost of risk at Agos is that between 110 and 120 bps, we are on the cost of risk, which may be seen as a normal cost of risk and a low normal cost of risk. In addition to that, we could try to elaborate a little bit around a kind of combined ratio for the consumer credit business like we do in the P&C in French business, which would be to add up the cost of risk and the operating cost and to compare it to the level of revenues. And what we can see is that actually, with CACF globally, I didn't do the math for only Agos, but what we can see is that be it on the quarter or be it on the first 9 months of 2018, we are more or less stable as compared to the same period of 2017. So it means that globally, it's a business in which you can accelerate a little bit the growth by modifying a little bit your pricing and you have -- so a capacity of fine-tuning the business. And so it's more important to look at the global equilibrium rather than only at a single line of the P&L. So clearly, at Agos, I think that in the region where we are now in terms of cost of risk, so around 115, 120, it's a low normal level of cost of risk, and we don't see any significant sign of deterioration. In addition to that, it's probably only a coincidence. But at 118 bps at Agos, we are exactly at the average cost of risk for the whole of CACF this quarter. In terms of balance sheet evolution at the Italian retail activities, as far as the loan book is concerned, we have this quarter a significant sale of NPL for a nominal amount of EUR 700 million. So clearly, this explains the biggest part of the evolution between June and September. And as far as the customer deposits are concerned, it happens that we found in the banks that we purchased some quite expensive deposits from corporates. And of course, we wanted to reduce a little bit the cost of the funding, and so we reduced a little bit our offered pricing, accepting obviously to see some deposits going away. So nothing that would indicate a less dynamic commercial approach within our retail banking activity in Italy.

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Operator [30]

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We can now take our next question from Guillaume Tiberghien of Exane.

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Guillaume Tiberghien, Exane BNP Paribas, Research Division - Head of the European Banks Team & Analyst of Banks [31]

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I have 2 questions. Number one is on cost of risk. So you had a target in the Medium Term Plan to have 50 bps cost of risk, which is about twice the current level. And I heard the comments you made for the various divisions. But when do you think -- or how do you think is the normalized level? At what level is it going to be more normalized? Can you update us on what you think is a normalized level? Sorry, I was not very clear there. And then the other question relates to -- well, a follow-up on what Jacques-Henri asked earlier, which is that in the event where you reach a year in advance your target, when do think it's reasonable to update us on your new strategic plan?

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [32]

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Guillaume, you are raising 2 questions, but you will get only 1 answer, which is no. To be more serious, I think that reassessing what is the normal cost of risk is something which is quite complicated because we have to assess what is the environment, how is that -- it has evolved and so on and so forth. And so I think that the idea is probably to reassess what would be normal or average across the cycle cost of risk for the new or next Medium Term Plan, which is going probably to take place somewhere in 2019. I don't know exactly when, but it's obvious that as we are reaching the end of the present Medium Term Plan, it is going to be important to give some additional and further visibility. And so we are going somehow to update and prolong our objectives. And when we are going to do that, we are going to reassess what is a normal cost of risk.

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Guillaume Tiberghien, Exane BNP Paribas, Research Division - Head of the European Banks Team & Analyst of Banks [33]

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So you think this reassessment will be in H1 or in H2?

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [34]

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Don't know yet.

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Operator [35]

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We can now take our next question from Bruce Hamilton of Morgan Stanley.

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Bruce Allan Hamilton, Morgan Stanley, Research Division - Equity Analyst [36]

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Just a quick follow-up on the insurance business. It's obviously good print in Q3. Just to check the -- I know in Q2, brought us a -- the trend that was in addition to policyholders of -- Q3, I assume you haven't reversed any of that. So that's still something that could happen in Q4, just to check. And then secondly, solvency, you said it's over 200%. Can you give us a precise number? And is there a point at which you'd feel pressured to upstream capital, i.e. you'd want to move some of that excess capital up from insurance?

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [37]

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Well, on insurance, it's true that we are fine-tuning, I would say, the breakdown between what is given immediately to the policyholders and what is kept in our reserves only on Q4 because this is where we know exactly what are the financial products for the full year. And this is the moment where we can have a better idea of the expectations, I would say, of the customers in terms of profit sharing rates. So -- every figure is only provisional between January 1 and the end of the year, but we didn't change significantly the level of the famous PPE provision. in the quarter, the third quarter, I think it was more or less stable. No significant add-up and no reversal, if I remember correctly. In terms of solvency, I don't have the precise figure in mind, but it's is a little bit slightly above 200%, if I remember correctly. Of course, every year, we upstream part of the excess of capital of -- any of our activities, not only the insurance business in the form of dividend because we have an internal rule, which is normally that 95% of the profit of each business division is upstreamed to CASA. And if the development, the organic growth of any of the subsidiaries requires some additional capital, then either this dividend is paid partially or totally under the script form or we make a specific capital increase. But the rule is that, obviously, we don't want to leave unused capital at the level of the subsidiary. This explains a little bit some evolutions of RWA across the year because as time passes by, quarter after quarter, the equity accounted value of the insurance business increases by the retained, even if it's only for a small amount of time, retained earnings. And once a year, when the dividend is paid, then we reduce the equity accounted value of the insurance business. And this is the time where the capital consumption of the business at CASA level reduces a little bit.

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Operator [38]

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We can now take our next question from Matthew Clark of Mediobanca.

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Jonathan Matthew Balfour Clark, Mediobanca, Research Division - Director [39]

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Two questions. So firstly, on the Banque Saudi Fransi dividend, could you just quantify the benefit that's the top line of the financing division? I'm guessing it was a material driver of the strength we've seen in the second and third quarter. But if you could give us a number, that would be helpful. And also, could you update us on your current thinking of plans for that stake? And then the second question is just on the seasonality. In the fourth quarter of 2016 and 2017, there were lots of lumpy charges pushed through in the fourth quarter that depressed the headline profits. Just wondering if you have any visibility on whether we should expect some of the charges to come through this year or whether we should expect a cleaner fourth quarter.

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [40]

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Excuse me. Can you repeat your last question because I think I missed the first phrase? And I don't really understand what you're talking about, the last question.

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Jonathan Matthew Balfour Clark, Mediobanca, Research Division - Director [41]

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Okay. I'm just wondering if there are going to be lots of impairments in the restructuring charges in the fourth quarter that depressed the net profit as there have been in previous fourth quarter '16 and fourth quarter '17. And so whether you have visibility on lumpy items like that, that will depress the headline profits and therefore, affect dividend at the end of the year.

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [42]

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Okay. I'll start with the BSF. In terms of dividends, just maybe to give you some figures. In 2017, we had EUR 175 million -- for the first 9 months of 2017, we had EUR 175 million of equity-accounted contribution coming from BSF, EUR 175 million which were -- so equity accounted. Since it's been deconsolidated in the beginning of Q4 '17. We had twice from dividends that we received from BSF, EUR 16 million in the second quarter of 2018 and EUR 39 million in the third quarter of 2018. So it's not a significant amount. It's a much smaller amount actually than the former equity-accounted contribution, first, because the stake has been divided by 2 or a little bit more than 2; and second, because actually, the dividend is supporting a certain amount of tax when the equity-accounted contribution was only an equity-accounted contribution. So actually...

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Jonathan Matthew Balfour Clark, Mediobanca, Research Division - Director [43]

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Can I just check if that EUR 39 million is a net of tax or a gross of tax?

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [44]

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It's a dividend that is inside the net banking income, net of tax, but net banking income. And then again, you're talking about goodwill impairments, possible goodwill impairments. Is that right?

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Jonathan Matthew Balfour Clark, Mediobanca, Research Division - Director [45]

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Goodwill or any other impairments or restructuring charges or the like.

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [46]

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Well, restructuring charges actually, what we book and what we actually restate is only now a small amount in connection with Italian integration -- or Pioneer Amundi integration, but the amounts are very tiny and actually they are declining very rapidly and we don't expect seeing as of now any other significant one-off in the fourth quarter.

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Operator [47]

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We can now take our next question from Flora Benhakoun of Deutsche Bank.

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Flora A. Benhakoun, Deutsche Bank AG, Research Division - Research Analyst [48]

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I have just 2 questions left please. So the first question is going back to capital. Just general question regarding your order of preference for the usage of any potential excess capital that you will have. What would you prefer, whether it is paying more dividend as a payout, potentially doing some bolt-on acquisitions? And if so, what kind of businesses, what kind of geographies or even potentially partly repaying the Switch 2? The second question is a general question regarding your exposure to Italy. Just to ask you regarding the client activity, how it's changed potentially over the past few weeks and months post the recent events.

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [49]

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Thank you. I'm going to start with the first question. When we set this payout policy, dividend policy, 50% cash payout, we assumed that this 50-50 breakdown of the attributable net profit was on the medium-term a relevant breakdown between the normal remuneration of the shareholders and what is usable either to fuel the organic growth or to finance some acquisitions or, potentially, to finance a regulatory headwind. So we are not going to reassess this overall policy every other year or every other quarter. So for the time being, we stick to this policy. When we will reach the end of the present Medium Term Plan, we will fully reassess our overall performance in terms of capital generation during the plan, and we will see exactly if we change or not our position. But to be frank, we think that globally, a 50-50 breakdown of the net attributable profit between the shareholders and the fueling of the development of the group is quite sensible, I would say. So don't expect too many changes rapidly. In terms of Italy, of course, the situation is moving. I'm talking about the political situation and the state of the discussions between the Italian government and the European Commission. This subject is evolving on a daily or weekly basis. But as of now, this has not really triggered any significant changes in the behavior of our customers. As you know, our retail activities are located in the northern part of Italy where you have the biggest, I would say ecosystem of SMEs and corporates and entrepreneurs. And these people, they continue to invest. They continue to export. They continue to develop their activities. And so for the time being at least, we haven't seen any significant modification in the customer behavior. What we have seen is that in connection with the increase of the Italian spread, financing conditions on the Italian market are going to tighten a little bit probably, but this is more, I would say, a macro financial issue than a real macroeconomic situation evolution. Okay?

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Operator [50]

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We can now take our next question from Anke Reingen of Royal Bank of Canada.

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Anke Reingen, RBC Capital Markets, LLC, Research Division - Analyst [51]

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I just had 2 questions left. One is on the Corporate Centre. I understand it's quite volatile. But I just wondered -- I guess, you reiterated your EUR 700 million net loss for 2019. But in the meantime, are there any reasons why it should be running slightly higher, for example, investments or anything else? And then on the financing business, I guess the capital consumption or the increase in risk-weighted assets and the higher revenues are quite opportunistic. But I was wondering would you think that Q3 is the level at which to assume the division continues to consume in terms of capital or risk-weighted assets?

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [52]

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For the Corporate Centre, I think that there is some volatility because in the revenue line of the Corporate Centre, we book not only the cost of the funding of the group, as I already explained many times but also some punctual revenues, be it some dividends, some results of portfolio of private equity investments or elements like that, all the, for example, the results of the real estate business of the group. So we have some tiny pieces that may generate some volatility on the top line of the Corporate Centre. In terms of cost, the biggest part of the cost of the Corporate Centre is linked to the holding entity. And this part of the cost is declining actually because we are working in order to reduce it as much as we can. But we have also some additional entities that are accounted for within the Corporate Centre, in which we are investing. And namely, we have 2 entities, Crédit Agricole Payment Services, on the one hand; and another one, which is called SILCA, which is an IT entity in which we have pooled some additional investments this quarter which are generating an increase of exactly EUR 27 million of the cost line. So it's exactly the evolution between the Q3 '17 and Q3 '18. It's just a coincidence again, but it's just -- this amount. So this is something which is I would say, more structural actually, with the idea of course that once the investments are up and running, especially the case for the IT tools, then the cost of operating those IT tools is allocated to the different businesses that use these costs; we are in the field of investment.

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [53]

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Then you were talking about the RWAs of the financing activities of the CIB. We have had a significant increase, which I qualified as a little bit, I would say, extraordinary. We took advantage in the second quarter of some good market conditions in order to book assets with a good yield in this financing business. We are now for the CIB at EUR 107 billion of RWA. It's significantly actually below the level we had in the beginning of the Medium Term Plan because I think if I remember correctly, we are close to EUR 120 billion. So we don't intend to go back to this level but we have a certain flexibility. Again, if it's profitable, meaning that if it's yielding to a significant amount, if it's coherent with our overall strategy and if it's also done in a way where either through primary distribution of through secondary sale, we have the capacity to continue in the long run to monitor the overall capital consumption of the division. So clearly, we are flexible but we don't intend to go back to the level where we were a few years ago.

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Operator [54]

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We can now take our next question from Jean Sassus of ODDO.

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Jean Sassus, ODDO BHF Corporate & Markets, Research Division - Analyst [55]

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Just 2 questions. One on LCL to start with. Once again you have done quite well on the cost side. Just wondering whether it can go down further and what would be the leverage? And what -- in other words, what would be the run rate for the cost once you have done all the restructuring you are planning? First thing. On the insurance to come back to the breakdowns of the policyholder allocation, not asking obviously what would be the policy. But how should we think about the way you compute that and the way you manage that? What are the key priorities? How do you decide -- on which basis do you decide policy holder remuneration versus reserve building?

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [56]

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Okay. Let's start with the second question. It's a difficult one because at the end of the year, you have a decision to make, which is to decide precisely the level of remuneration that you are going to allocate to your customers. When you do that, you take into consideration, obviously, the financial parameters of the company, i.e. the level of financial revenues that you managed to generate and the level of profitability that is there for the shareholder. This is leading actually to the breakdown between what is kept by the company and the shareholder and what is allocated to the policy holder. Then among the amount which is allocated to the policyholders, you have a choice that you can make with certain regulatory constraints. But you have a choice which is what you allocate directly, which is attributed immediately in terms of remuneration for the year and what is kept in the reserves. And this is when you have some, I would say, strategic decisions to take, assessing what the competition will do, what are the expectations of the customers, what is prudent to keep in reserves and so on and so forth. So it's an alchemy, I would say, in which you have no -- you have some rule of thumbs and some also internal financial policies and when the decision is made. So it's not very easy to predict and it's a game in which you have to be, as much as possible, aware of what the competition is doing in order not to be a complete outlier in terms of remuneration. And you have also to be coherent among the different product that you have sold to your customers because you don't have a single contract. You have maybe 10 or 20 or 50 contracts, different contracts sold to our customers. And we have to have a grid of remuneration which is coherent, and then we have also to preserve the coherence from 1 year to another one. So it's a complex alchemy in which the decision is taken on the ground of many, many different aspects.

In terms of the evolution of the cost base at LCL, I think that, to be frank, we went a little bit further than what we initially expected when we presented the Medium Term Plan in terms of cost reductions, when we saw that the top line was not going to be where we expected it to be. Because what we are looking at for LCL is the targeted cost/income ratio that we had in mind when we published the Medium Term Plan. It was between 63.5% and 65%, with or without the different investment. And so we targeted to have -- again, it was in the context where we expected the revenue growth to be a little bit more dynamic, but we targeted initially a decline of the cost base of only 1.5% a year. And actually what you can see is we've been between 2% and 3% since the beginning of the Medium Term Plan. We know that we have some potential investments going forward and we are ready to launch them as soon as we see the capacity of the top line to grow significantly. But again, we have been, for example scarce in terms of advertising expenses. We have the capacity if we see that it's meaningful to launch additional advertising expenses. We have some -- of course, we do some IT investments and we continue to be able to be, I would say, top of the class in terms of IT tools dedicated to our customers. But we have also some potential additional investments that we could do if we see that topline is dynamic enough. So it's going to be in connection with the evolution of the top line. And we want to continue to look at this target in terms of cost/income ratio between -- below 65%.

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Operator [57]

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We can now take our next question from Stefan Stalmann of Autonomous Research.

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Stefan-Michael Stalmann, Autonomous Research LLP - Partner, Swiss and French Banks [58]

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Two questions from my side please. The first one on the stress test that you have just gone through. Credit Agricole group has seen about a 30% reduction of its CET1 ratio from the starting point to the trough? Could you maybe roughly indicate how that might have looked like at the CASA level? And the second point coming back to large corporates to the market's activities, you mentioned in your report a margin squeeze. Could you maybe add a bit of color on which clients or products or geographies that relates to?

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [59]

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Okay. Let's start with the first question. It's not possible. It's not -- I don't want, but it's not possible to give you some indication about the impact of the stress test from CASA simply because the way the stress test is organized is that we apply the stress on different portfolios, not on different entities. So it means that we take the portfolios wherever the asset sits and we apply the stress. So we -- and this was clear since the beginning with the ECB, the perimeter that is stressed and tested is the group and they are comfortable with that and we are comfortable with it, too. And we -- from a methodological viewpoint, we apply the stress on different portfolios wherever the asset sits, which means that we have not the possibility to assess the impact of the stress on specific perimeters like the one of CASA. In FICC activities, capital market activities, it's very difficult to precisely tell where the pressure is put. But what we can say is that volume indicator that we can have in mind, for example, for flow products by opposition with structured products is that we had an increase of 10% to 15% this quarter as compared to the same quarter last year. So at the same time, we have a reduction of 15% of the net banking income. So it gives an idea of how important is the pressure on price and on margins.

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Operator [60]

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We can now take our next question from Thomas Dewasmes of Goldman Sachs.

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Thomas Dewasmes, Goldman Sachs Group Inc., Research Division - Associate [61]

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On Italy, please. You mentioned that you expected pressure on funding costs. A competitor of yours, a small one, mentioned this morning that they were not willing to write loans because of the level of margin that would imply and the profitability in terms of that. At the same time, a big Italian bank yesterday let go of corporate deposits because those clients wanted to reprice them. Judging from the activity levels and the environment in Italy, where do you see the opportunity line for CASA versus the plan given your different funding structure? My second question is on Wirecard. Could you give us more detail on what you expect from your partnership with them? How, where and when shall expect any material effect from the partnership in terms of revenues?

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [62]

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So in Italy, I would say that we are not seeing the issue as you expressed it. We are not in a situation where we say, do we have the capacity to take advantage of our situation in order to capture business from other banks. What we try to do in Italy is to improve as much as we can the capacity of the different business lines that are present in Italy to work together in order to develop cross-selling and cross business. And I think that this is the main strategic driver that we have in Italy. As you know, we have all business lines: retail, and the footprint in retail has recently been increased; insurance, life and nonlife; consumer credit; car financing; CIB; leasing, factoring, et cetera; Amundi of course. And what we're trying to do is to create value through the improvement of the capacity of those businesses to work together. This is the first key asset that we want to promote in Italy. Second asset, of course, is the fact that all of these activities are branded or are at least attributable to Crédit Agricole group. Even if they are branded Agos or FCA bank or Amundi, they are identified as belonging to the Crédit Agricole group, and Crédit Agricole has a major strength of robustness, again, reinforced recently with this upgrading from S&P, which is another asset. But the idea of selling of -- we are going to target the customers of certain banks in order to try to beat what they can do because we have some funding specificity or whatever is not exactly the way we conceive things. So clearly, the idea is to develop the same type of business model as in France, i.e. the complete universal bank and, of course, to take advantage of the global strength and robustness and reputation of Crédit Agricole group. Your second question, excuse me, was about Wirecard. The partnership with Wirecard is dedicated to -- you know that in terms of payment services, you have 2 different targets -- 2 different customer segments. Either you're working or --you can do both, but you can work with the household in order to propose to them all the payment means that they need -- cards, but also other payment services. And then you work with the vendors. And then you have different categories of vendors, you have small shops which are the customers of the regional banks or LCL. You have the bigger retail networks like -- the big retailers like Carrefour or Auchan or whatever. And you have also the e-merchants. And this is -- in this second area where we think we can improve our offer. And so with Wirecard, we are going to try to improve the offer -- the quality of the offer, the quality of the reporting services that we provide to our merchants with whom we work. And in terms of development of this partnership and when we can expect some positive effect, I don't have precise elements in mind. It's obviously taking time because the idea is that once the partnership is launched, which is the case, it is signed and completed, now Wirecard is working for us in order to help us to improve our offer. So it's not going to produce a tangible effect very soon, but it's clearly the idea of improving our offer towards merchants in order to develop our market share with either big retailers or e-merchants.

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Operator [63]

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We can now take our next question from Pierre Chedeville of CIC.

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Pierre Chedeville, CM-CIC Market Solutions, Research Division - Analyst [64]

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Two quick questions. First a follow-up regarding your business model in Italy, when you said that cross-selling was core to your strategy. I was very surprised yesterday discovering that AXA in Italy in its partnership with Monte Paschi, had a very huge increase in sales in life products, plus 30%. I was curious to know if you have seen the same trend for your part with Cariparma in terms of life product development. My second question is about the margin. We talked about -- a lot about the margins at LCL, but I was curious also to have a comment regarding margin in what is clearly one of your best engines this quarter, your commercial bank in the CIB. What is the part between volumes and margins there?

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [65]

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Thank you, Pierre. In terms of life insurance in Italy. I think that -- I didn't have in mind this figure for AXA, which is quite impressive indeed. But I think that we are ahead of the curve as compared to them because they have this distribution partnership with Monte Paschi since a long time. But it's not very natural for a traditional insurer to behave like a bank insurer. And I think that actually, the idea that we can sell a large amount -- in large numbers, of life insurance policies through a bank network is an idea that we are used to since many, many years so actually, we probably haven't had an increase of 30% of our outstandings last year. And I think it was much lower. But the starting point is much higher, which means that we are clearly again ahead of the curve as compared to this type of partnership between a bank and a traditional insurer. . .

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Pierre Chedeville, CM-CIC Market Solutions, Research Division - Analyst [66]

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But regarding the global trend, I mean, in Italy...

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [67]

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The global trend in Italy it was not 30% clearly. The business was much weaker than that, even though outstanding -- we are going to find exactly the evolution of the outstandings in Italy. I don't have that in mind precisely but we are going to give it to you in a minute. But clearly, I think that what happened with AXA and Monte Paschi is simply that they are now becoming more experienced and more efficient in their capacity to sell their life insurance policies through a bank network, which is something we do quite good, quite efficiently since now many years. In terms of margin at CACIB, I don't have in mind the level of margins at CACIB. What I can tell you is that -- and we stressed it in the second quarter but it continued again this quarter. The revenues, RWA ratio is up 18 bps between the first 9 months of '17 and the first 9 months of '19. Excuse me, I'm going back to your question about the evolution of life insurance. Within Crédit Agricole Assurance, which has life insurance activities not only in Italy but also in Luxembourg, in Japan and some other areas, the net premium income for the first 9 months of 2018 was up 39% as compared to the first 9 months of 2017. So I'm talking about the premium income, not about the outstanding. I don't know about outstanding. So it's also significantly up, but it's not coming only from Italy.

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Operator [68]

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This concludes today's question-and-answer session. Mr. Grivet, I would like to hand the call back for any additional or closing remarks.

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Jérôme Grivet, Crédit Agricole S.A. - Deputy GM & Head of the Group Finance Division [69]

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No, I just wanted to thank all of you for your questions. Always very relevant of course. And it's my pleasure to see that before the end of the next quarter, I think we are going to have another event to meet with you in December. So see you soon. Bye-bye.

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Operator [70]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.