Executives: Lars Machenil - Chief Financial

Officer
Analysts: Jon Peace - Credit Suisse Delphine Lee - JP Morgan Tarik El Mejjad - Merrill Lynch Flora Benhakoun - Deutsche Bank Jean-Francois Neuez - Goldman Sachs Jean Pierre Lambert - KBW Lorraine Quoirez - UBS Bruce Hamilton - Morgan Stanley Alex Koagne - Oddo Pierre Chedeville - CM-CIC Stefan Stalmann - Autonomous Research Kiri Vijayarajah - HSBC Maxence Le Gouvello - Jefferies Anke Reingen -

RBC
Operator: Good afternoon, ladies and gentlemen. And welcome to the presentation of BNP Paribas Second Quarter 2018 Results. For your information, this presentation is being recorded. Supporting slides are available on BNP Paribas IR website, investor.bnpparibas.com. [Operator Instructions] I would like now to hand the call over to Lars Machenil, Group Chief Financial Officer.

Please go ahead, sir.

Lars Machenil: Thank you, very much. Good afternoon, fine ladies and gentlemen and welcome to BNP Paribas second quarter 2018 results presentation. I hope you've all got a copy of the presentation slides or the press release in front of you. As usual I'll take you through the first two chapters, before handing it back to you for the usual Q&A session.

So looking at our key messages, which you can see on slide three, let me start by saying that BNP Paribas delivered solid results in the second quarter. Business activity continued to progress well in the context of economic growth in Europe, across Europe with a good increase of outstanding loans up 3.7%. If you now look at revenues of the operating divisions, they were up 1%, with strong growth in International Financial Services, essentially stable revenues at Domestic Markets in the context of low interest rates, down in CIB on the back of negative ForEx effect and a less favorable context for FICC activities in Europe compared to the second quarter a year ago. Costs of the operating divisions were 2.8% higher on the back of the continued development of the specialized businesses, but they were down in the retail networks as well as in CIB. Turning to the cost of risk at group level, which was significantly lower making a 14.4 reduction and standing at 29 basis points in terms of customer loans.

All in all the Group's net result clocked in at a solid EUR2.4 billion, stable compared to the same quarter last year and is despite a negative ForEx effect, which I remind you at the current levels would not be there in the second half of 2018. And also this result of 2.4 billion also equates to return on tangible equity of 11.2% for the first part of the year. Beyond the second quarter results, I'd like to mention that as you've probably all seen, we completed at the beginning of the week the sale of an additional stake in First Hawaiian Bank, which reduced our interest to about 33% and at the same time we also relinquished effective control by reducing our representation on FHB's board. This transaction has generated a capital gain in the region of EUR300 million to be booked in the third quarter of course and will have a positive impact of at least 10 basis points on the Group's common equity Tier 1 ratio again in the third quarter. With this you can advance to Slide 5, where you can see the exceptional elements of the quarter, which had a negative impact to the tune of EUR191 million net of tax, which is a tad more than in the corresponding period of last year.

If we now swipe to Slide 6, you can see the performance of the group and of the operating divisions in the second quarter. As you can see the net income is basically in line with last year. Overall, in the first half the Group delivered an annualized return on annualized return on equity of 9.6% or 11.2% as mentioned in terms of return on tangible equity. Now, zooming in on the revenues of the operating divisions by turning to slide number seven, you can see that as I said they progressed by 1% reflecting an unfavorable ForEx effect. They were a tad down at domestic markets due to the still low interest rate environment which was partly offset by good business development in particular in the specialized businesses.

The revenues were up significantly at International Financial Services, so plus 8.7%, driven by the development of these businesses and they were down at CIB 6.8% due to the lackluster market context for FICC in Europe compared to the second quarter of 2017. However, net of products effect and a capital gain realized in the second quarter of 2017 in corporate banking, they were just 1.6 lower. If you could now to Slide 8, you'll see that as I mentioned cost of our operating divisions were up 2.8%. If we look at each of our divisions, first Domestic Markets cost where up in the specialized businesses on the back of continued business development, but down by 0.5% on average in our retail networks. IFS cost evolution reflected business growth while CIB cost market decreased benefiting from the cost saving measures we've implemented.

Still on cost, if you go to the next slide which is nine, you'll see we're progressing well with the implementation of our program of new customer experience, digital transformation and related savings across the Group. By the end of June we've generated EUR858 million of cumulated cost savings and the second quarter they amounted to an additional EUR 149 million. Savings were fairly evenly split among those three operating divisions with a slight bias towards CIB. I'll remind you that we're targeting EUR1.1 billion of cumulated cost savings by the end of this year. Talking about transformation costs, they stood close to 500 million in the first semester bearing in mind our expectations of 1.1 billion for the full year of transformation cost that is.

So as you can see the implementation of the 2020 transformation plan is progressing as foresee. If we now shift to cost of risk, I would kindly ask you to flick through the three specific slides on the topic, which start at slide 10 and where you see the significant decrease in the Group's cost of risk this quarter. If you now take the businesses one at a time, in corporate banking you see that the provisions where more than offset by write-backs this quarter, but to a lesser extent than in Q2 of 2017 when write-backs had been very substantial. If we now turn to Domestic Markets on the next page, we see to the cost of risk was very low in French retail, nil in Belgian retail and continued to decrease at BNL in Italy. If you now go to Slide 12, in the other retail businesses you see that personal finance saw a low cost of risk this quarter Euro-Mid's cost of risk marked a decrease while BancWest was very low.

Looking now to our financial structure, which you can see on slide 13, you can see that our common equity Tier 1 stands at 11.5%. The positive contribution derived from the net income generated after allowing for a 50% dividend payout. This increase was more than offset by the increase in risk weighted assets and by our operational risk weighted assets being brought at the level of the standard method. This explains to slight reduction you see in our community equity Tier 1 this quarter, which however given the additional sale of stake in First Hawaiian Bank that I mentioned earlier is again up 10 basis points in the third quarter. Back to the second quarter our Basel 3 leverage ratio was at 4% and our liquidity coverage ratio stood at 111%.

And to express this in Euros and cents, you see that the Group's immediately available liquidity reserve totaled a massive EUR308 billion at the end of June, so all in all very solid balance sheet. If with this we look at slide 14, where you see the net book value per share, which stood at EUR72.4 at the end of June following of course the dividend payment of EUR3.02 on June 1. Over the last decade the net book value per share has been growing at a compounded annual growth rate of 5%, clearly illustrating BNP Paribas' continued value creation through the cycle. If with this I can ask you to browse the next slides 15 and 16 of this introductory part, which illustrates our ambitious corporate social environmental policy, our commitment for sustainable finance with significant initiatives to promote ethical responsibility social and environmental innovation as well as low carbon economy. Lastly on slide 17, you'll find the slide summarizing the reinforcement of the Group's internal control and compliance systems.

With this I would kindly ask you do advance to the results by division and we start with Domestic Markets on slide 19. As you can see Domestic Markets confirmed good business drive in the second quarter on the back of robust economic growth all across the euro zone. In particular, we continued to see good loan growth in retail networks as well as in the specialized businesses, this alongside increase in deposits across all countries. In particular private banking showed good net asset inflows in the quarter as well as Hello bank which attracts 75,000 new clients in the second quarter. Domestic markets as you know is progressively developing new client experiences and pursuing its digital transformation.

In particular it is swiftly implementing new functionalities online such as accounts aggregation, electronic check deposits and digital invoice payments. Moreover to these digital aspects we're also adapting therefore to different banking uses for example in France with Nickel which has already opened 950,000 accounts and Lyfpay the universal mobile payment solution which has over 820,00 downloads to date. Besides we're deploying robots to automate processes, 115 are already operational in our Domestic Markets and a further 120 will be added by year end. At the same time in our French retail banking we are implementing to delivering of the regional management set up that will also be fully completed by year end. If you now look in terms of P&L, revenues were slightly down at EUR3.9 billion.

As mentioned, we saw good business drive in our Domestic Markets, but as expected we continued to be impacted by the low interest rate environment. Operating costs were somewhat higher with an increase in the specialized businesses, on the back of their continued development, but marked as already mentioned of 0.5% reduction on average in all retail networks. Given a reduction of cost of risk especially had BNL, pretax income dropped EUR1.5 billion marking a significant 7.6% increase compared to the second quarter of last year and so this is a dynamic, I mean which is positive and in line with the plan. Looking at each country and business I can mention in particular for the Domestic Markets. If we take French Retail it showed good business drive and income growth on the back of good cost control and a lower cost of risk this quarter.

In particular renegotiations and early payments reconfirmed the sharp decreases in June 2017. Of course this waves on this quarter as we get less renegotiation and early repayment penalties, but means that the revenues evolutions going forward should improve and particularly in the second part of this year. When we go to Italy, BNL bc's gradual improvement in business activity continued with market share gains in the corporate sector. There was of course the impact of low rates on revenues, but thanks to the continued cost of risk reduction BNL showed a sharp rise in income this quarter. When we turn to Belgian Retail, it continued to show sustained business activity and marked income rise this quarter despite the impact of the low rate environment.

Finally, the specialized business has continued to deliver strong growth. To wrap up, good income growth for our Domestic Markets on the back of the rise in business activity and this despite the headwind of the low interest rate environment. If with this we shift our reissuance to slide 25, where you see International Financial Services, which is a division and a strong engine of growth for BNP Paribas. In particular, loans progressed well at personal finance and in our international retail banking. Assets under management of our insurance and savings business progressed by 2.7% year-on-year and the operating division continued its active implementation of digital transformation as well as new technologies across all the networks and a specialized businesses.

This IFS division is actively implementing its digital transformation and new technologies and this across all the businesses. It has enhanced client experience with for example the rollout of electronic signature at personal finance, which represents 72% of contract in France, Italy and Spain and the implementation of new online features at wealth management such as biometric identification. It also continues to roll out new technologies with already 75 robots used at personal finance. Now in terms of P&L, looking at the revenues, they reached EUR4.3 billion up 8.7% compared to the second quarter 2017 and actually 9.4% higher at constant scope and exchange rate as the division was affected by an unfavorable ForEx effect this quarter with a rise in all the businesses. Cost evolved at a lesser pace than revenues as a result of business development, leading to a pretax income of more than EUR1.5 billion up strongly 9% reflecting the continued growth of this division.

Zooming now into the different businesses one at a time. If you can go to slide 27 on personal finance which continued to show strong business drive in the second quarter. For example outstanding loans were up 12% on a comparable basis, thanks to high demand across Europe and the positive effect of new partnerships. The business also continued to implement successfully the integration of the GM Europe financing business acquired last year. And it continued to implement a digital transformation with the international roll out its CRM system called Visir.

A further illustration of the digital development at personal finance is that already more than 22 million monthly statements are issued in digital format also representing 72% of all statements. Now in terms of results, revenues progressed by more than 13% or 9.3% on a comparable basis in connection with higher volumes and the positioning on better risk product. Cost increased by 16% or 8.3% on a comparable basis as a result of this good business development. Lastly, cost of risk was at the low level this quarter and pretax income reached EUR450 million slightly up on last year. To recap, in a favorable context across all Europe personal finance continued to swirl strong business drive and good operating trends.

If with this you can go to Europe-Med on slide 28, where business activity continued to progress well with good loan growth and deposits increasing in all regions. Our digital banks in the region are continuing to win new clients with for example Cepteteb in Turkey at 560,000 clients and BGZ Optima in Poland at more 200,000. We also continued to strengthen our digital offering, for example in Poland, where we recently launched a Gomobile, which is an app to managed accounts of via smart phone and which is proving to be a success with over 140 downloads in six months. Now talking Euros and cents, so looking at the P&L at constant scope and exchange, rates revenues were up 16% on the back of high volumes and margins alongside a good level of commissions. Costs increased as a result of this good business development, but at the much lesser pace than the revenues, generating a significantly positive jaws effect.

Overall, given a lower cost of risk this quarter Europe-Med's pretax income surged 53% to stand at nearly EUR200 million. Given the unfavorable ForEx effect I mentioned earlier pretax income increased by 31.5%, when we look at historical scope and exchange rates. If we did - we now leap over the ocean and go to the US or you go to slide 29 actually, where you see the results of BancWest, which confirmed good business drive in the second quarter. At constant scope and exchange rates, loans were up 3% and net of securitization that took place in the fourth quarter, while deposits increased by 5.5% compared to the same period a year ago. Private banking assets under management progressed by 6% to clock in at $13.4 billion.

In terms of cross selling with other Group businesses, the number of deals with CIB marked a significant increase and moreover will soon be launching a new car loan offer leveraging personal finance expertise in this domain. Still at constant scope and exchange rate, revenues were up 3.9% on the back of this volume growth, costs were well under control and BancWest generated positive Jaw's effect in the quarter. On the whole, given a very low cost of risk BancWest pretax income increased by 22% on a comparable basis. Given again the unfavorable US dollar euro effect pretax income was up 12% at historical scope and exchange rates, so in a nutshell, very good business drive and strong income growth for BancWest in the second quarter, but an unfavorable ForEx effect. If with this you could kindly swipe to slide 30 to end off International Financial Services with insurance and saving businesses, which saw assets under management progress by 2.7% year-on-year to stand at a EUR1.60 trillion at the end of June.

In the first part of the year we actually saw net inflows of EUR13.4 billion whereas the performance effect was negative. The ForEx effect for the first semester was marginally positive. On the bottom right of this slide you can see to steady increase in our assets under management over the past three and a half years with EUR166 billion increase of which nearly two thirds from net assets inflows. If we stay on the insurance side of the business first, which is on slide 31, it continued to show good business development with strong net assets inflows into unit linked policies, which represent two thirds of net inflows in the first half of the year. Also the launch of our protection and casualty insurance offer in the French Retail, which is a joint venture with Matmut, has got off to a promising start with 30,000 contracts already sold in May and June.

In terms of results insurance revenues where over 18% higher, cost progressed at a lesser pace than revenues on the back of the continued development. And pretax income marked 17% increase to stand at EUR440 million in the second quarter, as you can see good business growth and sharp rise in income for insurance this quarter. Now the last part of IFS and if you can move to slide 32 which is wealth and asset management, it also showed good development. It was awarded the price of best European private bank at WealthBriefing Awards for the second year running. Asset Management continued to broaden and adapted software and real estate confirmed strong business growth and particularly in advisory in Germany and France.

Again and Euros and cents, wealth and asset management revenues showed a good overall performance with 9.8% increase year-on-year. Cost increase on the back of the development of the businesses and pretax income marked an 8.9% reduction, but 1.2% increase when you exclude non-recurring items. Globally, good business development for wealth and asset management in the second quarter. If with this we could go to slide 33, which is a slide on the third division, which is Corporate and Institutional Banking. Revenues stood at close to EUR3 billion down 6.8% compared to the second quarter last year.

However, this reduction was limited to just 1.6% net of the above mentioned unfavorable ForEx effect mostly on the US dollar and of the capital gains booked in corporate banking in the second quarter of 2017. Looking at the costs, they were 0.9% lower, thanks to the cost efficiency measures that have already generated EUR259 million of cumulated recurring cost savings since 2016. And this leveraging digital transformation, CIB has already automated over 80 processes out of 200 identified and is pressing on with the implementation of four end to end projects on credit processing, ForEx cash, clients on boarding and fund administration. All in all CIB generated just under EUR1 billion of pretax income down 26% to a very high comparison basis in the second quarter 2017 that had benefited from capital gains and significant provision drive backs. However, as you can see on the bottom right of the slide, pretax income marked a strong rebound compared to the previous quarters and was actually the second highest quarter bar Q2 2017, since the beginning of two2016.

Taking the first half of the year this translate in a more than respectable pretax return on notional equity of 17.7% for CIB. If you now zoom in on tree parts of our Corporate and Institutional Banking and those are the 34 to 36. We can see that if we started on 34 with global markets whose revenues were down 5% on the back the lackluster context for FICC activity in the European market and this compared to the second quarter last year and this effect was partly offset by good volumes in equity and prime services. FICC revenues were actually down 17% compared to the second quarter 2017 as I said which was characterized by good volumes. Client activity on rates remained weak in Europe and the market context was lackluster for ForEx and credit.

Nevertheless, the business confirmed strong positions in bond issuance in the first semester where the bank ranked number one for all bond issues in Euros and number eight for all international bonds. When we look at equity revenues on the other hand they showed strong growth of 12% on the back of higher client volumes in equity derivatives and a good development of prime services. If now we advanced to slide 35, where we have Corporate Banking revenues, which were down 30.7%, but only 1.7% excluding the ForEx effect and the capital gains that I mentioned already on the second quarter of 2017. This quarter Corporate Banking saw fewer significant transactions in Europe, in particular as some IPO's were postponed, but delivered good performances in the regions Americas and Asia Pacific. Transaction banking continued a good development in cash management and trade finance and the business confront its number one position for syndicated loans in the EMEA region.

At constant scope and exchange rates customer loans were up 4.6% boding well going forward and rolling into the second half of the year. Finally, if you flick to slide 36, security services the third part of our Corporate and Institutional Banking had its revenues increased by 3.9% on the back of a good business drive and a positive effect of new mandates. Indeed security services announced this quarter a major agreement with DWS covering EUR240 billion of assets in Germany, Luxembourg. On the digital front the business has already automated 30 processes and with a further 44 that are being developed. So to wrap up, negative ForEx effect and less favorable market conditions in Europe for FICC businesses compared to the second quarter a year ago, but strong equity, good security services and almost stable corporate banking with a rebound in terms of pretax income versus previous quarters.

This concludes my introductory remarks for the Group's second quarter 2018 results. As a takeaway I would like you to retain that the Group deliver good business growth and higher revenues in the context of economic growth across Europe. We're continuing to actively roll out new customer experiences and we are implementing digital transformation through the Group and into second quarter the group generated a solid net income of Eur2.4 billion which translates into a return on tangible equity of 11.2%. Fine ladies and gentlemen, I thank you for attention and I'm ready to take your questions.

Operator: Thank you, sir.

[Operator Instructions] The first question is from Jon Peace from Credit Suisse. Sir, please go ahead.

Jon Peace: Thank you. Hi Lars, can I ask a question about cost of risk and one on insurance. So on the cost of risk, do you think we will stay at these sort of levels under IFRS 9 absent the divisions where you've actually got right back or do you think IFRS 9 has some inherent volatility and we could see some upward pressure in some quarters going forward? And then on the insurance business what was the level of the capital gain in the current quarter there? I'm just trying to get an idea of where it might normalize during the third quarter and would you be able to disclose how much your policyholder surplus reserves are as a percentage of technical reserves and whether that's some that might need building? Thank you.

Lars Machenil: Jon, thank you for those questions, so first when it comes to the cost of risk, so yes intrinsically the cost of risk came in low. Let's not forget that also in an environment of low rates this is not totally abnormal, it's even a bit linked here, so low interest rates give some pressure on the top line, but give some fuel when it comes to the cost of risk line. When it comes to the impact of IFRS 9, intrinsically yes, IFRS 9 which is forward looking includes when you have to calculate your cost of risk. It digs into account forward looking scenarios. So for the moment those forward looking scenarios are not dramatically different than they were in the first quarter.

Now, it is true that at some point in time they might evolve and that might lead to some additional volatility in the cost of risk. But let's not forget also that is normal, I mean, the cost of risk typically evolves somewhat over the cycle and that will not be different and IFRS except that the cycle will be a little bit different in the positioning of it, so that that's basically all there is to say, so for the moment no additional volatility due to IFRS 9. When it comes to your question on insurance, you're absolutely right; I mean we cast our insurance figures in the accounts of a bank which is not always very representative. So you're right you have to look at the gross written premiums evolutions, which is as you can see there is very well and the second thing is to be very fair, the accounts of the insurance are typically to be seen on a yearly basis, where it basically also includes all the effects when it comes to the insurance holder. Now, you will understand that these things are a little bit also of a marketing aspect of it and versus the other competitors, so I will not - I'm not able to give you more details on this.

Jon Peace: Okay, thank you.

Operator: We now have a question from Mrs. Delphine Lee from JP Morgan. Please go ahead, madam.

Delphine Lee: Good afternoon, thanks for taking my questions.

I just had two questions Lars if you may - in front me. So first of all is it possible to get a bit of color or guidance around the top line trends in Belgium and BNL. The first half did highlight a bit of pressure on revenues with minus 3% in each city and minus 0.6% in Belgium. So just wanted just - just curious a little bit about sort of the margin trends but also did the fees issues that was highlighted around retrocession fees. And the second question is more on global markets and particularly fixed income, if you could comment a little bit about how we should he see the first half performance, I mean, are you seeing anything that is changing or improving around the rate environment in Europe or anything you can comment on will probably be very helpful.

Thanks a lot.

Lars Machenil: Thank you, Delphine for your question. If we first take the retail question, on the top line if you look in Belgium and in Italy, so what we said in Belgium as you know we have been proceeding with a re-pricing of the liabilities. Which we said, at some point in time starts to become much more limited and so we hinted that at some point in time it could be that this would have - will be weighing somewhat on the net interest income line, which is what we see. Nevertheless, as you know we are also working on advanced services, so which is typically stimulating the fee and commission.

So we we've guided that it is not impossible or unlikely that it would turn negative and so that is basically what occurred in Belgium. When it comes to Italy, Italy exhibited the same thing. We said that we expect the top line in Italy to evolve better than what we saw last year and we basically stick to that. And they're also at the same thing. Let's not forget in Italy we are not a dominant player.

Yeah, we have like around 5% market share. We're focusing on the export oriented larger corporate's. We're also providing added value services to the individuals which are generating fees and commissions, so that is basically how you should see the retail top line in those countries. When it comes to the global markets as indeed there is a different trend in Europe when it comes to FICC and equity, when it comes to FICC let's not forget that a year ago at the end of 2017, the demand all of those kind of products where relatively limited all over the world. And then at some point in time, there was some clarification on this US side of what would happening with the deep ring and all the like.

And it basically resulted the fixed income activity that environment is not yet completely hitting on in Europe so I think that is a bit the lackluster environment that we talked about. So it is of course a better than what we saw at the end of 2017, but it's still having some of that impact. So that would be my outlook on FICC, Delphine.

Delphine Lee: Okay. Thanks a lot.

Operator: We now have a question from Tarik El Mejjad from Merrill Lynch. Please go ahead, sir. Tarik

El Mejjad: Hi. Good afternoon. Just I have a couple of questions as well.

The first one is on FICC, I mean I understand the lackluster environment in Europe but when you look at the US banks it's reported all important now I mean they didn't really highlight any pressure when you weakness in Europe and some of them even gave the sort of breakdown. So my question here is the competition from US banks is to two fears are struggling with these two actually gain control to gain market share because you tend to be losing some and also I mean you always said that you're business you a lot of repeat business driven by your retail network. So can you just maybe describe the competition environment there? And second question is on capital, I mean I understand what you've done in terms of model changes and the OP risk and moving into standardized approach. So should we expect this to happen every other quarter-or-quarter as your ongoing implementation of Basel IV, so it's fair to think that capital should be and stay around 11.5% to 12% more actually 11.5% in the next two to three years while you implement the new regulation? Thank you.

Lars Machenil: Tarik, thank you for your questions.

On the first one, when you look at FICC, I mean if we see all that market shares and those evolutions where doing very fine. So I think I mean I cannot comment about the US banks. But when you read what the US banks are saying on their evolution let's not forget that they are reporting in US dollars. And so where I said that I report in Euros and I had a negative effect impacting from the US dollar. It is logical that the US banks would have a positive effect.

So I think that is that would be my color on that read because of the market share and all the other elements we're doing fine. And let's not forget also we can see this when I said about the lackluster environment in Europe we also clearly see that for our platform in the US they had a very good performance so that is how I seem to site this. When it comes to when it comes to capital and no the 11.5% is not something that you should say here to stay. Let's not forget that we mentioned that's part of a plan that we would float first how why and right and so you've seen that we basically don't have to beginning of the week, so it adds another 10 basis points. And moreover, if we will do at some point in time and we know in a rush we take the time but once this will be totally gone that will further lift our common equity Tier 1.

So that's basically what I have to say about it. Tarik

El Mejjad: Okay. Just follow-up on the last one please I mean I understand you have some disposal that's going to help your capital but that's would come to offsets basically the Basel IV that yet some point you have to I mean migrate some of your on the bureaus or add more. So my question was more are you like waiting for the end of the time like until the directives goes into I mean local the regulation comes in European directive or are you intending to do it's time to time implementation. So what I mean what triggered your model changes quarter basically on OP risk?

Lars Machenil: Tarik, no worries on that, for the moment as we said we basically are in the current environment we set forth to each 12% and we will basically do that and we will do that in 2019.

So there is no issue on that. When it comes to next wave of Basel finalization as Basel IV is call now that is something which will be discussed by the European the next European Commission which is something I don't know which will come 2022 or something like that and that will be part of our next plan not of this one. And when it comes to just to provide some color when it comes to this operational risk this is not this is we have to back check every year our models that are in advance and so forth and all of those some of the operations on operational risk side required complimentary analysis that's basically why we took a prudent stance and put it at standard model so there is not nothing else to be said. So we go for the 12% that's basically it will be the next year and that's it. Tarik

El Mejjad: Okay.

Thank you.

Operator: The following question is from Mrs. Flora Benhakoun from Deutsche Bank. Please go ahead, Madam.

Flora Benhakoun: Yes.

Thank you and good afternoon. The first question I have is regarding the leverage has been to talks at the European Parliament that it would consider calculating the leverage on a daily basis so the question is how that could potentially change your ability to be achieving the repo business? And the second question is actually coming back to capital, where we haven't had any capital build that organically for two quarters now, if I only look at the retained earnings this is organic by the way it grows. So the question is whether we should still expect as you had before something like 25 to 30 beats of organic capital generation per year? Thank you.

Lars Machenil: Flora, thank you for your questions. First of all, let's not forget on leverage for the moment there is no rule which is applicable, let's not forget that.

Leverage in Europe has to be part of the next wave of rules which is to come which will probably come at end of the year or the beginning of next year. So that's basically in the meantime as you see we are at the 5% leverage we have the meantime accumulating our capital in our position. So as I said for us 4% yes, this is not a concern so that's be so by the time this will become a binding we will be ample even if they would change their calculation on an average daily or whatever it is so that's basically let's not forget that. For us, the real metric which is the one that we find very representative and a business that we do into common equity Tier 1. But we are structured in such a way that if we respect a 12% common equity Tier 1, we also respect all the older elements like leverage above what will be done to the minimum so that's basically on leverage.

When it comes to capital yes allow me to remind you that at the beginning of the year of course we had the introduction of IFRS 9, we had a clarification on things like IPC which basically lowered our common equity Tier 1. But as I said for the rest we have all the things which were in the wings as foreseen and so we will get to our 12%, there is no concern about that and we will get there at the latest at the end of next year. Now the one thing which is positive you should look at this quarter is as we said there is a pickup in our lending needs from our clients, in particularly across Europe as I said is more than 3% uptick in lending. And this also means that there is this uptick in RWA and as I said when it came to for example the activities in CIB, there has been origination going on but distribution is still ongoing. So actually the fact that the risk weighted assets pick to beat up towards in the second quarter is actually a good news and bodes well for the next periods to come so that will be my answers for it.

Flora Benhakoun: Thank you.

Operator: We now have a question from Jean-Francois Neuez from Goldman Sachs. Please go ahead, sir. Jean-

Francois Neuez: Hi. Good afternoon, so Jean-Francois from Goldman Sachs.

My first question on cost, you've talked a lot about the new initiative digitization, new products et cetera across the presentation. I just want you to do a little check on costs and see how confident you are in reaching your targets which have been laid out in the business plan? Because at the point of trying to make your is just that there is investment in your programs which are progressing as planned. And then when we look to the value of divisions even those really very high revenue growth where we would expect at these levels of revenue growth to see more operating leverage, there is additional investment mentioned as a reason for the digital cost growth are close to 10% for some of them. And I just wanted to understand whether compared to where you thought you would be - where you are and whether there is enough in the plan budgeted for the initiatives you think you need? My second is on capital versus volumes. Right now, for example quarter like this one your growth in weighted asset does not allow you to form capital even if I take away the trends beats of operational risk change.

If you have to choose between building up to 12% or taking the investments in the cost as well as the volume growth of building of the capital which ones would you have to choose would you feel that to reach 12% you would have to maybe be turn down some of the business which is currently coming in as we see every quarter?

Lars Machenil: First of all, thank you for your questions. When it comes to costs yes indeed let me remind you that overall there is pickup in cost because we are investing in digitalizing and so forth. And also of course when the businesses which are a bit under pressure on the top line, we are using to cost and then to want to specialized businesses which are growing we are fueling that growth. Now let's be very fair if you look at that growth, that growth is very strong and so it had means that if you do this growth you have to accompany that in the appropriate way of sales. So if you have in the specialized businesses where you basically do point of sales or way you have other ways of interacting with the customer.

We really have to make sure that we follow that in the right way and so that is why we had discussed pickup now to basically put in place those costs. So we are ramping up these things and it same thing of ramping up what would we are we seeing in the digitalization right as we said, we are ramping up to savings which are gone there, so for example, next year we will have $1.8 billion of savings to be accompanied by this $1 billion of an investment. So that's basically a thing yes we are investing in the transformation and we're also in the fast growth that we see in a specialized businesses and so those costs for the moment outweigh a bit part of the growth but they are putting in place a structure that will generate cost savings and revenues going forward. So that is on the cost and in particular the driver on the specialized business. When it comes to capital versus volumes I mean we already said that I say it again we will we are there to accompany our businesses in their growth, as you can see it there is strong growth across Europe and we are there to basically serve them and we are well positioned just by executing the plans to reach a 12% common equity Tier 1.

So that's basically what we look upon doing. Jean-

Francois Neuez: So just to clarify if you can do both the capital buildup and the volume you are seeing now and you think your endpoint in cost is not different what we counted for the year and half ago. Is that correct?

Lars Machenil: Yes, Sir. Jean-

Francois Neuez: Okay. Thanks.

Operator: The following question is from Jean Pierre Lambert from KBW. Please go ahead, sir. Jean

Pierre Lambert: Hello. Good morning, good afternoon. Three questions if possible.

First one is if you could sort of provide some more information or details about the optimization to the CIB financial resources which had quite the material impact that this quarter. Is that only the set of portfolios or is there any other action? The second question is the cost reduction in French retail network you indicated that is more regional measurement level to be removed by the end of the year. Is that in fact included into the cost cutting related to digitization or is it of some different elements? And the third question is could you give an indication of how much it costs of compliance and control procedures account in your total cost base? Thank you very much.

Lars Machenil: Jean Pierre. Just two questions, where are you as you said good morning and could you just repeat your third question please?
Jean

Pierre Lambert: Yes.

If you could give an indication of how much of the cost of compliance and control procedure is as a percentage of costs roughly and is that booked in the corporate center or spread across divisions?

Lars Machenil: Okay. Jean Pierre, when we look at your first question on the CIB resources and as we said what we basically look at we are fully focused on the creation of value so that basically means that if we have products which were originated before the changes in Basel regulation which at that time where creating value but following the change in rules would have a lower profitability. And those products if there would be buyers which are not necessarily banks which are in a bit of a different situation compared to those then that is basically what we're doing. So that is what we continue to do and we basically almost at the end of that. When it comes to the cost reduction on France which is part of our basic the traditional business that we do in France just as we have it also in a lot of businesses that we're doing and when it comes to your cost on compliance of cost of compliance of course into business, we don't have those costs separated they're into the business and as basically at.

So it's part of the or the total business it's part of doing business it's at several lines so it's not one specific cost, it's just the accompanying that we do into business. Jean

Pierre Lambert: Thank you very much, Lars.

Operator: We have a question from Lorraine Quoirez from UBS Limited. Please go ahead, Madam.

Lorraine Quoirez: Hi.

Good afternoon, Lars. Just one question on Turkey obviously the situation is big concerning there, inflation is high and the central bank doesn't seem to be doing much about it. Could you perhaps give us a little bit of an outlook and how we should think about the Turkish business going forward? And also if you have exposure to Non-Turkish they are didn't take loan in division. The second thing is it would be nice to have a little bit of comment on competitive per share in the domestic retail markets if possible? Thank you.

Lars Machenil: Sure Lorraine, thank you for your questions.

First on Turkey, if we look in our activity which you know I mean we have a relatively small market share in Turkey. We have very good management and of course we are very focused on the products and on the underwriting that we do. And what do we see, we see that as every time when there is a liability switch are being re-priced we of course also work on the asset side, we always takes a bit of time so that is why you see the evolution. Moreover, if you look at the cost of risk of our activities, it's basically stable year-on-year. So that's basically fine.

So that that's Turkey it's of course I'm not saying it's not a point of attention of course it's a point of attention. But as I said, we have very strong management on the floor which are very closely watching the underwriting that we do and evolutions and the re-pricing they are ongoing, so that's Turkey. When we look at and do a competitive environment yeah the competitive environment it's a bit different of course country by country, if you look for example in Italy, there is still banks which are positioning themselves and addressing their situation on their non-performing loans and so forth which is sometimes leading to a competitive environment where maybe the ROE is not as important as it is. So that is some competitive environment and if that is blocking us from growing in the lending business because we cannot necessarily do it at the profitability that we set forth then so be it. If they were a bit of similar things in Belgium way you had a bank which was looking to be floated and which was having also a bit of a transition and some activities so that's basically it and then that's in and retail the main things we would say so Lorraine, that would be my answers.

Lorraine Quoirez: Thank you.

Operator: The following question comes from Mr. Bruce Hamilton from Morgan Stanley. Please go ahead, sir.

Bruce Hamilton: Hi.

Good afternoon. Lars thanks for taking my questions. Maybe if I could just come back on the domestic businesses, so first on France. In terms of the sort of NOI and revenue outlook and it doesn't sound like you've changed your message or the sort of an inflection towards the end of this year and then growth in top line beyond which ones make sure that was still correct given the flattening of and what that might mean for some of the reinvestment pressure in the book. And then secondly, in terms of competitive dynamics in French retail if you have a good success with gross income in Nickel as well as in Hello bank.

Are you seeing any change in the level of competition for new entrants and in terms of all the growth coming in on line clients is there any sort of risk from cannibalization in terms of sort of revenue dynamics per client that versus your branch base in just whether there's a mismatch between revenues from new clients and the cost been coming out of the business? Thank you.

Lars Machenil: Bruce. Thank you for those questions. First of all, while it basically both on France right if you look at France that inflection and we talked about is indeed what we still talking about so that's a point what I said compared to the evolution of last year which did that transition came to an end and therefore that inflection a still what we anticipate. When it comes to the competitors and it is true that what we see of those new digital kind of services also it is important to have a wide range of services that are being offered and that's an important one and as a relationship with the client which is very important.

Now, at the same time, as an illustration if you look at Hello bank, it is generating two thirds of its clients of basically new clients, yes we're not clients of the bank. So from that point of view, it's a different way of offering these kind of products which we will continue to do and so we're very pleased with the way we are able to melt together to pure banking skills that we have like for ages and a new digital kind of scale that we develop ourselves or bring on board all get on board so that would be my two answers. Bruce.

Bruce Hamilton: Thank you.

Operator: We now have a question from Mr.

Alex Koagne from Oddo. Please go ahead, sir.

Alex Koagne: Yes. Hi, Lars. This is Alex from Oddo.

A few questions from my side as well, the first question is on global market. But if we look to the revenue, the evolution since 2012, it is in the range of EUR5.2 billion to EUR5.7 billion meaning that it is the EUR1.4 billion in the average per quarter. You need EUR1.8 billion to meet your target in term of revenue for 2020. It seems pretty difficult to see how you will deliver that target. So what are we missing or very cheering time of business dynamic or in term of market share transforming into revenue growth? Second question is on the cost of risk at BNL.

It seems that they have a kind of acceleration into the decrease of the cost of risk. Can you make any comment over share in time of reaching your target of 2020 I mean is there any reason that think that you can be below the 50 basis point regard for? Second question has to do we've delivered a reunion of corporate center; this seems to be a bit high compared to your guidance and your comment out there? And the last question is basically link to the common as for this morning on retail, I think that you're expecting your specialized service to grow by 5% to 10% on H2 2018 versus H2 2017, was that a true statement if, so can you just give you a bit of color on what other drivers of the growth? Thank you.

Lars Machenil: Alex, thank you for your questions. First when it comes to global markets, the main thing as I said earlier, I mean we of course assume that there is a continuation in the business we can do in the market share that we can grab and so forth. And so this is I said earlier is really what is realizing for the moment, so that's fine.

However, this is of course also on the back of what is happening in the market so put a moment what we do seen in Europe is that the market demand is lower than what you might have seen in the past. So this isn't as I said where we'll have to see or just like in to us this will come back over time, that's it. If not we'll have to see how we adapt to that situation so that is global markets. When it comes to the BNL, yeah I mean cost of risk as we always said would deeper off why we have been getting out of the segments which were not necessarily naturally ours and I said we've been refocusing on the larger corporate's which are export oriented, we are oriented also on the individuals on the ones with the more advanced services needs and so forth. And so that basically means that we always guided that the cost of risk all of that legacy would be profit because that legacy would be to be a profit and we've guided towards a 50 basis point and so that's basically where we see that we would be, so there is no change on that.

And let's not forget also that of cost of risk can evolve a bit on quarter-by-quarter so we stick to overall trending towards 50 basis points in Italy. When we look at the corporate center, when it comes to the top line so there is nothing particular to mention right I mean in the second quarter like this when you have the dividends which are being paid to so that is a bit what is impacting. But there is nothing special to talk about. The other thing is on your fourth question and I think the guidance that have been given an it's an evolution of the second half and it was basically a high single-digit that was being mentioned so I think that would be my answers.

Alex Koagne: Yes.

Sorry to come back on the - if I may on follow-up on the last answer. Is that for international specialized service or is it only for like consumer finance?

Lars Machenil: Alex, it's on what we called specialized businesses so if you look at international finance there's a specialized business a part of that but there are also retail which apart of that.

Alex Koagne: Sure.

Lars Machenil: Okay.

Alex Koagne: Very clear, thank you.

Operator: We now have a question from Mr. Pierre Chedeville from CM-CIC. Please go ahead, sir.

Pierre Chedeville: Yes. Good afternoon.

Two questions from my part. The first one is regarding the CIB and more generally your comments you made regarding cross selling between BancWest and CIB and I want to know if you could give us a little bit color regarding what type of operation do you mean by these cross selling are you selling auto core [ph] for instance this type of products in the network of BancWest or is that IPO is customers of BancWest, if you could give us some example. And more generally regarding the CIB, do you think that it could be an option for you or do you have room to do that. Two, considering the fact that as you said current environment in Europe is not very good, you could allocate more capital to your CIB activities in the US and change a little bit your model there? That is my first question. My second question is regarding the [indiscernible].

I wanted to know if you have any view regarding the potential of cross selling regarding the [indiscernible] because my view is that we've EUR20 of fee back customers at the end of the day even if you grew up a lot of customers at the end of days that a lot of net banking income and so I guess that you wish to develop cross selling and I would like to know if you have observed any positive things on that side? Thank you very much, Lars.

Lars Machenil: Yeah. Pierre, thank you for your questions. So indeed when it comes to the US with the cross selling CIB, BancWest, you don't have to look at for something very particular. It's a bit the activities or what we do in Europe.

In Europe, we are really strengthening when we have clients in individual sector which are also corporate leaders or corporate captains who are really trying to help them in day needs for that, so for example syndicated loans, structured financing and so forth. And so that is a thing we need to do and if you look at our BancWest activity for example. The market share that we have on individuals is both of the market share that we have when it comes to corporate. So for us, we just want to make sure all of that what we have for example in Europe is that when we have that same customer in our individual base that we can really ramp up the corporate financing that need as well so that is basically what we do. And when it comes to capital allocation, of course let's not forget that in the US when it comes to CIB, we want to basically help our customers.

So we want to help European customers going into US, US customers coming into Europe or our BancWest customers that are having their needs and so that evolution is basically what we have planned and that is where we have to capital to support that. So that that when it comes to your question on nickel It is true that intrinsically we always aim to do cross servicing and so that is why indeed when it comes to Nickel. We were also experimenting with added value kind of services and as for a Nickel we basically figured out that that would be things like insurance, it would be consumer finance and so forth. And so that is why for example we have launched a thing called I know it's very spiritual but it's called we Nickel Compete which probably for you English speaking doesn't mean anything but in French it basically means something and so and there is already 25,000 cards and Nickel Compete that have been distributed and let's not forget that our situation is that with Nickel Go is that it is profitable which is not always obvious when you look at order startups but that's the case for us. So Pierre, that those will be my two answers.

Pierre Chedeville: Thank you.

Operator: The following question comes from Stefan Stalmann from Autonomous Research. Sir, please go ahead.

Stefan Stalmann: Good afternoon, Lars. I would like to come back to markets and then balance sheet developments around that please.

I appreciate that market opportunities in the European shake maybe not as good as in the U.S. right now. But at same time you have actually quite massively built your trading balance sheet, your trading inventories year-to-date plus €200 million roughly. Why is that a given that you don't really see so great opportunities with clients. And it's likely related to that you said that what you've said before that you're not too hostile about leverage.

Why have you actually engaged the ECB in this legal battle about the definition of leverage? What is there to win really given that it's not an important race for you and it's not a big impact on your leverage ratio anyhow? Thank you very much.

Lars Machenil: Stefan. Thank you for those questions. Yeah when it comes to tools for example trading in the balance sheet again let us not forget that leverage intrinsically is not the ideal metric to manage a bank when you're focused on risk because if you look at really do risk you can see that those elements in your balance sheet are hedged on the other side of the balance sheet and so therefore the overall risk is much lower than that. So on top of that, the demand of these products to at year-end period is very low.

I'm saying it's a bit jokingly but in the last week of the year basically anything institutional corporate's they all take the Christmas holidays and so there is a lot less demand in those kind of products, so that is why it picks up in basically at the beginning of the year as they always do and it those pickup at the balance sheet but intrinsically really when you look at the risk, this is not really necessary point. And so why do we pick a bit of a battle on the definitive of this leverage ratio is that. It is already a metric and which as I said pushes a big envelope towards a known risk kind of stance, and so if there are elements in there which is for example in France to leave there are that is not necessarily to here and so we've basically wanted to draw the attention to that and to do make the metric more relevant on that point of view so that is why we engaged a bit. As we are a bank brand European, we want to step up and point to distinct to higher and out any fickle elements into regulation so that is basically at.

Stefan Stalmann: Okay.

Thanks, Lars.

Operator: We now have a question from Kiri Vijayarajah from HSBC. Please go ahead.

Kiri Vijayarajah: Yes. Good afternoon, Lars.

I got a couple questions on the European commission, side of the business the first on Italy in your mutual fund assets the you showing them nicely up year-on-year but I wonder if you could comment on how flows were in the second quarter part into the summer was any impact from the political uncertainty in Italy and how the retail investors feeling there in terms of risk appetite right now. And then just going back to the Belgian fee number to quantify specifically the impact of the retrocession sees I'm concern whether that was whether that's a recurring ongoing item or is that was the second quarter really just a blip? Thank you.

Lars Machenil: Kiri, thank you for your questions. The first one is if you look at Italy, there basically has not really been an impact from the situation and the political environment so from that point of view, the flow remains good and that's be a given as you know for us that is an important part of the kind of customers and that we serve the ones that have to those needs and we saw them coming in for those so that's fine. When we look at Belgium, yeah in Belgium on the fees there are indeed several elements right, there was a bit of a high a year ago and there is to do all over evolution on the commissions and then there is the fact that there is this other network that we use and that we shifted from the current network into network into that network which basically moves costs into commissions and that is a bit do retrocession that we saw in the top line.

As I said, I cannot really give you those numbers because it's a bit of the competitive savvy kind of information but intrinsically this is a move where we basically bring the cost down and we take off course than the retrocession so that is basically an ongoing process that we've see in Belgium. That will be my answer Kiri.

Kiri Vijayarajah: Great, thanks.

Operator: We now have a question from Maxence Le Gouvello from Jefferies. Please go ahead, Sir.

Maxence

Le Gouvello: Yeah, good afternoon, Lars. You focusing on Italy, why do personal finance here cost of risking by 50 bibs on the quarter have you change your policy in light of the a particular event recently. This ago can you give us a wrap up of what is your funding position in Italy taking all the business that you have over there which mean retail with BNL consumer credit and well set banking and can we have also the idea of the size of the TLTRO? And last question would be regarding the RWAs, whereas you look at the operational risk that you have taken into account of your calculation for the culture one at the business level, is it included on not because if I remember well you get credits of capital at the beginning of the period? Thank you.

Lars Machenil: Yes. Maxence, thank you for those questions.

When you look indeed at Italy the impact on the cost of risk of personal finance, it's not that material if you look at overall the flow quarter-by-quarter, there is some fluctuations and that that is a bit pushed a bit to more volatile as I said under IFRS 9 because if you see things happening like what you see in Italy you can have a bit of a tilting towards more deteriorating scenario which can accentuate a bit is volatility in the quarter, so that that's basically what I would say there is not much more to be mentioned. When we look at the funding, when we stay on Italy when we look on the funding so yeah there is like a total kind of funding that we have which is around which was around €10 billion which we are basically tapering off we basically as in Italy as the demand for the profitable loan growth is relatively slow whereas the deposits are still picking up very well this is basically something which is now down to around €5 billion, so it's nothing material. When it comes to the steps that we took on the standard model on the open ration of risk so this is something where we basically apply to all of our businesses or we will apply to all of the businesses so that's basically what we said we didn't keep that central we basically allocate that to do businesses, so we assumed you know calculation that it is applicable to all. Maxence

Le Gouvello: Okay. But in the Q2 results is already in the business level or you just at the group level?

Lars Machenil: No, no, it's basically what we've done in the calculation of the businesses we are ready to get into the business.

Maxence

Le Gouvello: Okay. So most of it should be in to the investment bank and you still down so that's been that your level optimization of capital to be neutral?

Lars Machenil: If you look at the operational risk, the operational risk is something which is spread a call all of them and so that means that as I said the evolution is basically linear to what it was everywhere, so it's basically something which is not only not even at corporate and institutional banking and indeed to corporate institutional banking let's not forget they have been reducing by several billion the portfolios which were less yielding in the current environment. Maxence

Le Gouvello: Okay. Have a good break.

Operator: And the last question comes from Anke Reingen from RBC.

Please go ahead.

Anke Reingen: Yeah. Thank you very much for taking my questions. Two questions as well. First coming back on the cost please, can you just confirm that you reiterate 63% of cost income ratio for 2020 as well because understood that you confirm the cost base but what's the binding constrains of the revenues are lower but the cost below than what you said at Investor Day.

And then secondly, coming back on the capital, so that growth in credit with assets in Q2 by about 2% by calculated is all because of business growth and I was wondering should we expect some impacts like on an ongoing basis or do you think we probably wouldn't even see it in the number? Thank you.

Lars Machenil: Thank you for your questions. Yes, we confirmed our outlook for 2020, so the cost income of 63%. When it comes to capital, yeah, indeed as you mention the capital re-growth is on the back of the lending increasing that we have performed and that's basically it. So the elements for example trim that has been done last year didn't have a material impact.

There is a trim to come, as you know the trim intrinsically, we're supportive of it because it's a way to validate the advanced models that we in Europe are using. What will be the outcome of that when they look at credits, honestly that I do not know, but as I said for what we've seen so far that's a positive evolution.

Anke Reingen: Thank you.

Operator: We have no further questions.

Lars Machenil: So ladies and gentlemen I thank you very much for your attention and if it's applicable wishing you a very good August.

Thank you.

Operator: Ladies and gentlemen, this concludes the call on BNP Paribas second quarter 2018 results. Thank you for your participation. You may now disconnect.