Operator: Good afternoon, ladies and gentlemen, and welcome to the presentation of BNP Paribas second quarter 2019 results. For your information, this conference call is being recorded. Supporting slides are available on BNP Paribas website, invest.bnpparibas.com. [Operator Instructions]. I would now hand over to Mr.

Lars Machenil, Group Chief Financial Officer. Sir, please go ahead.

Lars Machenil: Thank you. Fine ladies and gentlemen, I trust you are doing well. And welcome to the BNP Paribas second quarter results presentation.

In the usual way, I'll take you through the first two chapters of the result presentation, which I assume you have under your eyes before handing it over to you for Q&A. So let me start with the key takeaways for this quarter. So first of all, there is good business growth in all three operating divisions on the back of outstanding loans, up 4.7% and a successful development on new digital customer experiences. And secondly, a significant increase in the common equity Tier 1 ratio, which is up 20 basis points standing at 11.9%. And looking more broadly at the first half of the year, the group generated €4.4 billion of net income, up 10.8% year-on-year with positive jaws as you can notice.

So looking in a little more detail at our second quarter results on Slide 3, revenues of the operating divisions were up 2.5% compared to the second quarter 2018. This driven by IFS and CIB with domestic markets revenues roughly stable due to the low rate environment. Costs of the operating divisions evolved 1.8% compared to the second quarter 2018 leading to positive jaws as I mentioned before. The group cost of risk remained low at 30 basis points over outstanding, thanks to the strong discipline at origination, low interest rates and the continuing improvement at BNL. The group net results came in, in the second quarter at €2.5 billion, up 3.1% on the same quarter a year ago.

If you can now turn our slide or whatever to Slide 5, you can see the exceptional items of the second quarter, which had an impact of minus €150 million net of tax, a tad less in the corresponding period of last year. They included the 2020 plan transformation cost, they included restructuring cost of acquisitions and they included an additional adaptation measures in BNL bc and Asset Management, the latter to address the evolution of the economic environment for these businesses. These adaptation costs amount to €51 million and correspond to new departure plans in BNL and Asset Management. Certain additional measures are expected to lead to an above 1.5x recurrent full year cost savings effect and the full year effect should be 2021. And these are additional cost savings to be added.

In addition, quasi offsetting exceptional items included the capital gain from the sale of 2.5% of SBI Life together with the impact of its subsequent deconsolidation as well as a partial impairment of BancWest's goodwill on the back of recent changes in the economic prospects for the U.S. and in particular, the interest rates scenario. If you now move on to Slide 6, you can see the performance of the operating divisions in the second quarter with the top line up 2.5%, as mentioned before, and a positive jaws effect, as such, translating into a 3.9% increase in gross operating income. If we now zoom quickly on the first slide -- half of Slide 7, you can see the positive jaws effects as well as the rise in net income and the annualized return on tangible equity clocking in at 11%. Now moving to the revenues of the operating divisions, which you can see on Slide 8 and those revenues of the operating divisions increased by 2.5%.

They were just 0.3% lower at Domestic Markets due to the low-interest rate environment, which was mostly offset by good business drive and continued growth in the specialized businesses. They were up 3.4% at IFS on the back of good growth, while CIB revenues progressed by 4%, driven, in particular, by Corporate Banking. If we now flick to Slide 9, cost of the operating divisions were up 1.8%. In Domestic Markets, cost were down 0.5% leading to positive jaws with a 1.2% cost reduction in the networks and the rise in the specialized businesses accompanying the growth of that part of the activity. IFS cost evolution reflected continued business growth with a positive jaws effect at constant scope and exchange rates, and CIB's cost increased slightly on the back of the growth of the activity, but benefited from the continued and accelerated implementation of cost savings, which led to positive jaws as well.

To sum up, you can see the impact of the cost-saving measures generated by our transformation plan and the continued focus on delivering positive jaws. Staying on costs, if you go to Slide 10, you have the details on the implementation of our transformation plan. In the second quarter, we generated an additional €199 million of recurring cost savings, taking the cumulated cost saving, since the launch of the program, to €1.5 billion. And I remind you, a target of generating a recurring €3.3 billion recurring cost savings by 2020. Also we booked transformation cost for €222 million this quarter, taking the cumulated spending in the first half to €390 million in line with the target of €0.7 billion for the whole of 2019.

And I remind you that is the last phase of that transformation plan. There will no longer be transformation costs in 2020. So in a nutshell, the implementation of our transformation plan is in line with our road map. If we now look to another part of the profit and loss, which is the cost of risk. So if you could flick through the three dedicated slides, which start with Slide 11, you can see, as I mentioned earlier, that it was at the low level of 30 basis points over outstanding and if we take business one by one, you first see that at Corporate Banking cost of risk was low at 6 basis points, whereas in the corresponding period of 2018, it has seen net write-backs.

If we now turn to Domestic Markets on Slide 12, you see that the cost of risk was still low in French retail, nil in Belgian retail and continued to decrease at BNL. In the other retail businesses on Slide 13, Personal Finance saw low cost of risk this quarter due to nonrecurring provision write-backs. Europe-Med's cost of risk was up compared to a very low base in the second quarter of last year, while BancWest's cost of risk was negligible. If you now swipe to Slide 14, where we look at the balance sheet -- our strong balance sheet and in particularly, we look at the financial structure. You can see that our common equity Tier 1 rose 20 basis points and clocked in at 11.9% at the end of June.

And this due to the combined effect of the second quarter results, excluding exceptional nonoperating items after allowing for a 50% dividend payout, which added 20 basis points. Then also there is the net impact of SBI Life capital gain and the deconsolidation of the residual 5.2% stake as well as the partial goodwill impairment of BancWest. So that leads to another 10 basis points. And then there is the increase in risk-weighted assets, net of Forex, which reduces 10 basis points. So all of this makes for a 20 basis points improvement.

Then our leverage ratio stood at 4.1%, and the group's immediately available liquidity reserve totaled a massive €330 billion at the end of the second quarter. The evolution of these ratios illustrates a very solid financial structure of the group. And with this, if we look at Slide 15, you can see our net book value per share stood at €75.7 at the end of June, after payment of €3.02 dividend per share. Looking at the period starting from year-end 2008, the compounded growth rate stands at 4.9% per annum. And this slide highlights BNP Paribas continued value creation through the cycle.

I'll leave you to peruse the next two slides of this introductory parts, Slide 16, on our ambitious policy of engagement in society and I draw your attention to the Euromoney Award that we just received, naming us as World's Best Bank for Corporate Responsibility, and Slide 17, summarizing the continuous reinforcement of the group's internal control and compliance system. So with this, I would now kindly ask you to advance to the results by division, starting with Domestic Markets from Slide 19 to 25. As you can see, in the second quarter, Domestic Markets showed increased business activity with good loan growth at 4.2% in the retail networks as well as in the specialized businesses, combined with high deposits in all geographies. Besides, private banking saw a good level of net inflows at €2.2 billion in Q2. Domestic Markets has continued to improve its digital offer as illustrated, for instance, by the specialized agency B rating in France, which ranked French Retail Banking as number one among retail banks for its digital offering, progressing strongly at Hello bank! and Nickel.

Moreover, mobile usages have significantly accelerated with over 4 million active mobile users in the networks and a 28% year-on-year increase in connection. Now turning back to the P&L. Revenues were just a tad lower at a little over €3.9 billion on the back of the low rate environment, which was partly offset by the increased business activity and a good drive of the specialized businesses. Operating costs were down 0.5% year-on-year with a significant decrease in the three networks generating a positive jaws effect. The progress we're making on the cost front results from the ongoing implementation of the digital transformation as well as new operational models, illustrates, for example, by the adaptation of the three branch networks which have already been reduced by 333 since the launch of the 2020 plan.

Now turning to cost of risk remained low with the continued decrease at BNL, and pretax income was a tad lower at €1.1 billion. Looking swiftly at each country and business, I like to highlight, in particular, that French Retail Banking continue to show good business drive with revenues slightly up and positive jaws on the back of cost-saving measures. BNL continued to gain market share in the corporate segment. Despite lower revenues, pretax income has increased 11% year-on-year on the back of good cost control and lower cost of risk. Moreover, as I mentioned, BNL is pursuing additional adaptation measures by leveraging on the new quota gender law, which will facilitate early retirements leading to an overall stepped up head count reduction of 1,500 by 2021.

Turning to Belgian Retail, it showed sustained business activities, whereas revenues were impacted by the low rate environment. The business is very active on costs and cost reduction, which were down significantly, thanks to the effect of the transformation plan. Finally, the specialized business has continued to deliver good business drive with positive jaws and significant income growth. To sum up, Domestic Markets showed continuous good business drive and delivered positive operating jaws in a context of low interest rates. With this, we look at the second of our divisions, which is International Financial Services and is from Slide 26 to 33, you'll see that this division confirmed good business growth in the second quarter with loans up 5.6% on a like-for-like basis and net asset inflows of €7.3 billion in our savings business.

IFS businesses have continued to implement their digital transformation, which, for instance, the extensive rollout of e-signature for contracts in all IFS businesses. The development of new self-care features as, for example, in Personal Finance where over 49 million self-care transactions are performed directly by clients and the developments of robotics as well as artificial intelligence, where already 268 robots performing controls reporting and data processing tasks. If we then turn to the P&L, revenues were up 3.4%, clocking in at €4.3 billion and 1.2% on a like-for-like basis. Given effective cost control, operating jaws were positive on a comparable basis, leading to a pretax income of €1.4 billion, just down year-on-year and stable on a comparable basis. Let me now zoom quickly on the main components of IFS.

If we start with Personal Finance on Slide 28, it continued to show good business drive with revenues is up 4.3%, costs evolving at essentially the same pace with the business confirming its target of positive jaws for the full year and the pretax income in the second quarter of €455 million -- €454 million, slightly up on last year. If we now switch to Europe-Med, Slide 29, it showed loan growth on a like-for-like basis with revenues up in all regions, while cost were down, thanks to cost-saving measures and generating largely positive jaws. Cost of risk was higher compared to an especially low base in the second quarter 2018, mostly on the back of an increase in Turkey. Pretax income was up over 9%, but slightly down at historical scope and exchange rate due to the depreciation of the Turkish lira. If we now turn to BancWest on Slide 30, on a like-for-like basis, it showed moderate loan growth compared to last year.

Private Banking assets under management increased 11% year-on-year to reach $14.9 billion. Revenues were down due to lower interest income, despite higher fees, and costs were just that higher, reflecting good overall control at BancWest is continuing to rightsize its head count. On the whole, its pretax income was down 11% year-on-year or 5% at historical scope and exchange rate. Now lastly, if we look at Slide 31 to 33 and I mean, lastly, in IFS, our saving businesses saw net asset inflow in all of its sub-businesses. Assets under management rose to €1.089 trillion at the end of June.

Our insurance business continued to show good business development, growing its international presence through partnerships as illustrated by the recent signing of the long-term partnership with Scotiabank in Latin America, which will provide access to its 9 million clients across four countries. Revenues rose by 6%, which caused progressing at a slightly lower pace and pretax income marking a 4.6% increase our year. Turning to Wealth and Asset Management, revenues were down 4.7% with Wealth Management and Asset Management revenues marking an overall slight increase. On the other hand, real estate showed a drop due to a very high base in the second quarter of last year. Cost decreased by 1.2%., thanks to the effect of cost-saving measures, in particular, in Asset Management.

As I mentioned in the introduction, this business line is implementing additional adaptation measures to streamline its product offering, regional organization and entities, which will result in additional cost reduction. Overall, Wealth and Asset Management pretax income was down 13.8% year-on-year. To wrap up, IFS showed good business growth and confirmed its significant income contribution in the second quarter of the year. If I can now ask you to turn to the third and last division, and we go to Slide 34, which is Corporate and Institutional Banking, which has continued to accelerate the implementation of a transformation plan, along its three main axis, namely the continued streamlining of activities, the intensification of the industrialization and the selective growth on targeted clients. The latter being illustrated by our preliminary agreement with Deutsche Bank to provide service continuity to their prime brokerage and electronic execution with the transfer of the necessary technology and staff.

In Q2, CIB continued to strengthen its leading positions in Europe as evidenced by its number one position for all bonds in euros, syndicated loans and high-yield issues. Besides, Exane confirmed its top spot in Europe in equity, research and brokerage. CIB's revenues stood at €3.1 billion in the second quarter, marking a 4% year-on-year increase. Costs were up a limited 1.3% leading to a 2.7 point positive jaws effect and benefiting from the cost-saving measures as well as from the implementation of end-to-end digitalized processes and the automation of operators. If we look at cost of risk, it remained low and only marginally higher year-on-year.

As a result, CIB generated close to €1.1 billion of pretax income, marking a 6.2% year-on-year increase. If we now look at the business lines of CIB one by one, we start with Global Markets. Revenue showed, again, good performance in a lackluster context, marking just 1.2% decrease year-on-year on a comparable basis. Fixed income revenues were up 11.7% with a good performance in Forex, credit and primary issues, whereas equity revenues were down 14.3% compared to a high base in the second quarter 2018, but with good client activity in equity derivatives. Global Markets is stepping up its market shares and is pleased with the preliminary agreement signed with Deutsche Bank to provide continuity of service to the front manager clients of its global prime finance and electronic equities.

There is very good cooperation with the Deutsche Bank teams and work is advancing faster than expected. Now turning to Corporate Banking. Revenues increased by 7.3% on a comparable basis with very good business development in Europe and continued growth of cash management and trade finance. As you can see, our Centric platform is continuing to develop well with already 10,900 clients and over 17,000 daily connection as at June. Finally, Securities Services saw a sharp rise in assets under custody and under administration on the back, in particular, of the integration of Janus Henderson assets since the end of March and revenues were up 12%.

In a nutshell, CIB delivered a good performance with revenue growth and a positive jaws effect. This concludes my introductory remark of the group's second quarter 2019 results. And the main takeaway from today's presentation are, in the second quarter, we continued to successfully implement new digital customer experiences; the group enjoyed business growth in the three operating divisions; in the first half, we delivered higher income and a positive jaws effect; besides, the group generated an annualized ROTE of the 11%; and our common equity Tier 1 ratio increased further to 11.9%. Finally, ladies and gentlemen, I thank you for your kind attention, and I'll be pleased to take your questions.

Operator: [Operator Instructions].

We have one first question from Mr. Jean-Pierre Lambert from KBW. Jean-

Pierre Lambert: So I have three question, if possible. Can you hear me?

Lars Machenil: Yes, I can. Go ahead.

Jean-

Pierre Lambert: Okay. The first question is the dialogue with Deutsche Bank is progressing well. Can you explain the status of this agreement because it is a preliminary agreement? And what is the size of that business relative to BNP if you could give some metrics so we have an idea of the potential impact on revenues or cost? The second question is regarding TRIM. You indicated previously a potential impact of 20 basis points. Do you have any further insights or updates in terms of timing of the business units exposed? And the third question is about disposals.

You have disposals in the pipeline in West Africa. Are there any more disposals under consideration, which are not strategic or whether returns are insufficient?

Lars Machenil: Jean-Pierre, thank you for your questions. On your first question, so yes, there is a preliminary agreement. So the idea is that BNP Paribas would be the referral bank for clients, for example, in the domains considered and that is the -- that discussion is progressing, so that the interactions between the teams of Deutsche Bank and BNP Paribas are very constructive and very positive and the progress is advancing faster than we anticipated. But overall, this is the process we have to go through.

It's also a process that we have to discuss with the client because it's a transfer eventual of clients. We also have to see the supervisors alignment. So this is going to take some time. So we anticipate that, that phasing of transfer, which can take time, should be, let's say, finalized in entirety by the summer of next year. So that is a bit overall process, which progressing well, and as I said, the interactions with the teams, both at Deutsche Bank and at BNP Paribas, are very well.

And when it comes to impact, let's be fair for -- if you look at the scale for us, this is an activity, which is very collateralized and therefore, is not weighing that much on the prudential capital. So we anticipate that by the time those transfer will have happened, the impact on our common equity Tier 1 will be 5 basis points. So that is a bit the idea, but it's an intrinsically an activity, which is very useful and -- for their clients. So that's a bit where we stand. And so we will continue to update you on the progress, and as I said, the process is advancing faster than expected.

So that's the first thing. The second question is on TRIM. So TRIM, let's not forget, TRIM is not something like a new Basel definition where there is an impact, which is uniform for all. TRIM is an exercise, which -- where the supervisor looks into detail in the models, validates the model, disvalidates the models, and so forth. So for us, it is not something where for -- like a new Basel agreement, you can estimate what the impact is.

So we basically anticipated a ballpark estimate of 20 basis points, but there is not much more I can say. These functions -- and those 20 basis points, as I said, it's an impact, which could fall this year, it could fall that year. So there is not much more I can say. The only thing I will say is that whenever there is an evolving clarity that comes, we will, of course, provide updates. On your third question with respect to disposals, as we said, there is not much I can say.

So there is just -- as you know, there are some reviews that we have said that if there is over time an activity that maybe has not led to us being able to beef up those activities, we will look into that, but there is not a specific list of things to share. So that will be my three answers, Jean-Pierre.

Operator: We have another question from Mr. Stefan Stalmann from Autonomous Research.

Stefan Stalmann: I have also two questions, please.

The first one is, I guess, one quarter away from being at your 12% CET1 target. And the question is, what are you going to do afterwards? In particular, would you maybe willing, again, to look at bolt-on deals? Second question relates to the goodwill impairment at BancWest. There's about, I think, €2.5 billion goodwills left. So the question here is, how should we look at this remaining goodwill? Could there be further impairments looming? And could you give any color on what determined the impairment that you took in the second quarter? What may have triggered this? And also what may have led to the size of €0.5 billion as opposed to more or less?

Lars Machenil: Stefan, thank you. Yes, so you've seen our continuous improvement of common equity Tier 1.

And this is a bit the reminder of what we are positioned. So we create a recurring profit on a yearly basis. 50% of that is being paid in dividend. Of the other 50%, there is like the equivalent of 20 basis point that we need to support growth, and there is an additional generation of 30 basis points. Of that 30 basis points, as it typically falls, there is zero in the first quarter because of taxes, IFRIC and so forth, and then there is like 10 basis points every quarter to come.

And that is what we saw in the second quarter and it was a bit strengthened by the fact of SBI Life and the goodwill impairment that it became 20. So indeed, one could assume and that's what we had an initial plan of being at 12% in 2020, that it will be 2019. So our overall stance with respect to that is that indeed we are not in the business of stacking up capital. However, there is the discussion ongoing to finalize Basel III, which might lead to an increase in capital requirement. So we basically estimate that this could be, in its current form, something around an inflation of 10%, which would mean that we have to accumulate that free capital for the next couple of years to be ready for Basel.

So it all depends. So our intention is to accumulate going forward, to be ready for and then we will see in the end, how the finalization of Basel folds out and what we will do with it. So that is basically our overall stance. And when it comes to bolt-on deals, independent of that, let's be fair, for us, what we are doing is also a lot of client transfers, right? So that is something that we continue to do. We've done that in the past with RBS.

We have a pre-agreement to discuss this with Deutsche Bank. So that is the kind of things that we will continue to do. So that would be on capital. When it comes to the BancWest situation, as you probably have seen and as you might see tonight, will see, the economic environment has slightly evolved recently and particularly, that the economic outlook is maybe a tad below what was initially foreseen and in particularly, the interest rate scenarios are different from what initially was foreseen. So this basically forms -- in the accounting of IFRS forms a trigger for the goodwill to be reviewed.

So we have to look at the goodwill. We looked at it and we basically took a conservative stance, and we impaired it by €500 million. And this €500 million basically doesn't have an impact on the P&L because it's basically -- well, there is the SBI Life gain, which is basically in the same order of magnitude. So that is basically where we stand.

Operator: We have another question from Mr.

Pierre Chedeville from CM-CIC.

Pierre Chedeville: I have two questions. First question regarding the cost of risk. We can see that there are some write-backs in -- particular in the CIB division, and it's been a long time since we can observe some write-backs in this division. And I want wanted to know where do this write-backs come from? What types of file? Are there some, I would say, general provision or provision on specific files? And I wanted to know if these write-backs are either actually rising the cost of risk regarding the pickup rates? And we all know that there are some, I would say, dossier Plus, 1 or 2 dossier plus, as we say in French that are quite worrying? That is my first question.

My second question relates to inflows in the insurance business. I didn't find in your presentations and maybe I missed it, I don't know, the share of unit-linked products in net inflows and in outstanding in the insurance business. I know that this is a part that is decreasing. So if you could give me the number could be useful?

Lars Machenil: All right. Pierre, thank you for your questions.

So first of all, when it comes to the cost of risk, you know that we have a very prudent approach. So when there was a phase, when there are some deteriorations or even sometimes when the supervisor or the regulators ask us to provision because they consider all of the exposure of all the banks similar, which is not the case, we typically take the provisions over and above what we typically need, and that is what we saw. So our prudent approach led to some over-provisioning in the past. And so what we see now is that in the environment of today, those counterparties are doing well, and we can take back those provisions. And so on the other question, it doesn't -- as we are very prudent in our provisioning, it is not that we wouldn't provision other funds.

So overall, it is just a write-back of historic environments where we provisioned and for the rest, there is nothing particular to mention. When it comes to your other question on the insurance, the unit linked, as you know, it is around 1/3 of the activities. So that is basically where we stand. Yes, that would be my two answers.

Operator: We have another question from Madame Quoirez from UBS.

Lorraine Quoirez: Just a few questions from me. You disclosed the impact of the potential agreement with Deutsche Bank as far as CET1 ratio is concerned. Can you give a similar number for the leverage ratio and explain if you are comfortable with that? Second thing would be on Personal Finance. Are we already seeing the benefit of the acquisition of Opel? Or is that something that will come at a later date? And finally, on Security Services. So you integrated the asset of Janus Henderson now.

How should we think about this quarter revenue numbers? Is it sort of a new base? Or when you talk about the specific transaction, is that related to something else?

Lars Machenil: Lorraine, thank you for your questions. And when it comes to the preliminary agreement of the activities where Deutsche Bank would refer clients to us, indeed, the consumption in capital is around 5 basis points. When it comes to leverage, it is around 10 basis points. So -- and as you see, we are above 4% in our leverage. So nor the 5 basis points on common ET1 nor the 10 basis points on leverage are a concern.

And as a reminder, this is a profitable activity. So it would be a very good redeployment of the prudential assets. And when it comes to Personal Finance, while we don't break it down in each of the activities, but the Opel transfer is now part of the activity that we report on. And when it comes to Janus Henderson, yes, we have now included those assets under management and those provide for a lift in activities. However, when we mentioned specific point, it is indeed Q2 run-of-the-mill activity, but it is -- well, we don't specify what it is, but it's a one-off event.

So Lorraine, those would be my three answers.

Lorraine Quoirez: Is it possible to kind of quantify a little bit that one-off transaction?

Lars Machenil: The fact that we didn't specify it much, you can understand that on the bottom line, the impact is not notable of that. So I'll leave it to that.

Operator: We have next question from Mr. Tarik EI Mejjad from Bank of America Merrill Lynch.

Tarik

EI Mejjad: I have two questions. The first one is on the retail and more specifically on the Domestic Markets. I was wondering when or if are you updating your guidance in terms of revenues or NII in 2020 and beyond? Because the last time you gave us a guidance, expectations on rates were bit more optimistic than where we are now. And second question is on the CIB. I mean, the €5 billion RWA exits that you planned to -- you announced in Q4, there were around €200 million to €300 million revenues attached to them.

I mean, when are we seeing the impact of this revenues down because for now we see somehow the RWA is going down, but not the revenues impacted by these? These are my two questions.

Lars Machenil: Tarik, thank you for your questions. So first of all, on Domestic Markets for the outlook and the targets, it's -- and it's wider actually than Domestic Markets. If you look at our targets for 2020, indeed, we are in an environment where there are some uncertainties about growth. Growth will be there and maybe a tad lower.

And so when you look at the overall target, we look at return on equity because the return on equity includes revenues, but also costs, also these elements that you can work on. So what we do -- what you should focus on is indeed on that ROE target, which -- in the instead, we will indeed continue on all the adaptation plans and delivering on the additional cost savings of our transformation plan. So these are the important points and these are the important points to support our return on equity. So that is on Domestic Markets. And when it comes to CIB, as a quick reminder, so we basically said that yes, we would reduce some of the RWA consumption and then basically redeploy it in other activities.

Of course, the activities that we stop were activities that were typically with one product or with one client, and so on. So typically also products, which had a return, which was at that stage not where we wanted to be, and so that is why you see an impact on RWA and you see less of an impact on the elements of the P&L. So Tarik, that would be my two answers. Tarik

EI Mejjad: And if I can follow-up quickly on the first one on the retail. So what you're seeing is let's not focus on NII, don't worry about that, we will actually cut costs if needed and then we'll deliver the ROE we intended to do.

So that mean you're looking at announcing further cost-cuttings? And what about -- are you implementing also provisions going up in that?

Lars Machenil: Tarik, your first part of your synthesis is indeed correct, but we're here to talk about second quarter results and that is basically it. So we'll see how things evolve. And what I'm saying is we are focused on delivering the ROE, and we'll observe how things evolve and how we go. And indeed, as we -- into your example, as we saw in there at BNL, in the overall environment, it was a little bit more lackluster. So we really stepped up the cost reduction exercise in order to warrant the overall bottom line and warrant the ROE.

So that is basically where we stand.

Operator: Next question from Mr. Omar Fall from Barclays.

Omar Fall: Just three questions. So last quarter, you mentioned that you had some securitizations that would be delayed into future quarters and would, therefore, benefit capital later, I think at the time you mentioned 10 bps of CET1 or so.

Is that still to come or is some or all of it's in the Q2 figures? And then the second question is, I know you haven't given this to us in the past, but given the importance of the sector of the increasingly negative rate environment, it would be really helpful for our modeling to know how much of the deposits at the group are reinvested at their effective duration by a replication portfolios or bonds? And what the average duration is? Maybe even if you just gave us the figures of the Domestic Market and retail units that would be very helpful. And then lastly, just coming back to Stefan's earlier question. Just to confirm the 10% increase in RWA is -- that you're guiding for in the Basil IV, that's not fully loaded to the OpEx floor, right? That's just a day 1 impact in 2022.

Lars Machenil: Omar, thank you for your questions. So indeed, in the first quarter, we mentioned that the typical elements of -- when we provide lending is that on one hand, we syndicate, on another hand, we securitize.

And so the syndication has that projection end of the quarter, didn't have in the first quarter, it happened in the second quarter. However, on the securitization, it was a bit delayed because there were some new regulations being crystallized, which weren't fully crystallized. And so that is basically done now, but it was basically too late to really have that securitization going on in the second quarter. So that securitization is, I think, to come in the second half of the year. When it comes to your question on how ALM and other elements are handled in the mismatch, this is -- as you know, we typically what we consider as really elements, which are also important with respect to competition and so forth, so that information we do not share.

When it comes to the Basel IV impact, yes, for the Basel IV, what we anticipate is that the impacts of the form of total and in fully loaded would be a 10% inflation of the RWAs. That is for the moment what we read in the text and what we will position ourselves to have as an impact.

Operator: We have another question from Mr. Nick Davey from Redburn.

Nick Davey: Three questions, please.

The first one, Lars, can I ask, if you'd be happy to make any comments about the absolute levels of costs that we might see next year? I know there are uncertainties about planning an absolute terms, but there does seem to be quite a big gap between what you're saying on Slide 10, which is sort of €2.2 billion or so of cost efficiencies and lower transformation costs next year and consensus, which I think has got about a €600 million decline in costs. So I wonder if there is anything you can do to help us bridge that divide? The second brief question, just could you remind us please on how you'll treat things like the SBI Life gain and the goodwill impairment when it comes to dividend? And then the third question, if I could just invite some comments about French retail net interest income because you've been showing this sequential margin stability for a few quarters now, but obviously, at the backdrop, it seems to be becoming more competitive. And there is -- it does seem quite a striking disconnect that your net interest margin there is above 2% and pretty much every French asset, I can see, is on front book yielding 1-ish percent or less. So any comments you could make about sustainability of French margins, please?

Lars Machenil: Nick, thank you for your questions. When it comes to the question on the costs, the thing is in the end, we have -- being a diversified bank, we have different types of costs.

We have some costs, which are structural; we have some costs, which are variable. And those costs that are variable, they can be in terms of what is happening in CIB, but it can also be in the activities that work through joint ventures or distribution aspects, like, for example, in the car leasing through dealerships. So from that point of view, in the end, we basically manage the return on equity. And so depending on how we see the revenue grow, if there is revenue growth in the specialized business, the cost will go up. So basically, asking me how will the cost go? I honestly -- I cannot have a sensible answer to that.

My sensible answer is, we look at the return on equity, therefore, it is on the revenues and there are costs that accompany those revenues. So that is how you should look into it, and I repeat what I basically said we will have that evolution and intrinsically independent of that, we will have the delivery of the cost reduction. So we already have €1.5 billion and it will go up into 2022 to €3.3 billion. So I know that this is a bit difficult for you to put that into your overall analysis, but it depends on what happens to the revenues. Costs are not fixed, they go in that, it's a dynamic part.

And so the other thing is next to the cost, the savings, let's not forget, that the transformation cost that you see today, they will go to 0. So if you even do it very simple, you basically take the costs, you drop the €700 million transformation cost to 0 and you'll pump up the €1.5 billion savings that you have this year to €3.3 billion. That's the simplest thing you can do if you want to have those numbers in your views. So that's the first one. When it comes to your demand of exceptional elements, when it comes to dividend, our overall guidance is that the dividend is 50% of the bottom line, so that's basically it.

And when it comes to French retail, the dynamics -- let's not forget, French retail and French retail, it's not necessarily that every bank is very comparable. There are some banks which are much more focused in the metropolitan areas, therefore, they are much more focused on corporate and they are more focused on wealth management. So the dynamics that you have between several banks can be different by the kind of activity. So that is basically the color I would give on French Retail. So Nick, that would be my three answers.

Operator: We have next question from Mr. Kiri Vijayarajah from HSBC.

Kirishanthan Vijayarajah: So just a couple of questions from my side. Firstly, on Arval and the car leasing business, rapid growth in volumes there, it picked up slightly 11% year-on-year. So given what you said about weaker economic growth, I just wondered how sustainable that is for the next few quarters? And what's your outlook for kind of residual values or any clouds on the horizon that are sort of popping up for you? And then secondly, on transformation costs, you said you're going to be all done by the end of this year.

So nothing in 2020, but I see this "adaptation costs" have also now in crept in. So could those additional kind of exceptional costs creep in for 2020? So I guess, what I'm asking is, if you sort of just changed the name of your exceptional items to allow you to book some of these exceptional costs into 2020?

Lars Machenil: Kiri, thank you. When it comes to Arval, there is indeed a sustainable growth because basically, through the partnerships that we have, we can capture. So we have new access to clients and distribution, which basically step it up. So that is what we see.

And then when it comes to the revaluation, what we see now in the continuity and in the way we basically handle upfront and later on the redistribution of those cars, we don't see a concern on the revaluation. So that is on Arval business going well. Secondly, on the transformation. So let's not forget the transformation costs that will basically end this year, they were basically in a plan to do a transformation. So the transformation basically digitalizing.

I remind you that's why initially we said those transformation cost would be €2.7 billion over the 3 years, '17, '18, '19. They would digitalize -- sorry, there were €3.3 billion -- €3 billion of costs and that would deliver in the digitalization €2.7 billion of cost savings. And so this is basically a process, which was helping us to change the direction with the clients and as, if I can say "a byproduct" would lead to cost reduction because we optimize the interactions. So what we have done is basically focused a bit at the beginning of the year more on cost savings. And so instead of €3 billion, we do €2.7 billion investments and instead of €2.7 billion recurring savings, we stepped it up to €3.3 billion.

So that is the basically the plan that is ending and that was driven by a transformation digitalization. What we do now in the adaptation that we basically stepped up at BNL and in Asset Management is really saying there is an environment, which is changing. We're changing into a new system in one, there is a new social environment in the other. So we basically step up the cost-reduction measures. So it is something else.

So it is something that generate new savings. So over and above the ones that we have announced and it's really a focus on cost savings. So that basically means that it is relatively rapid in yielding a return and the return is typically at least 1.5x the investments. So it's a different dynamic. It's not just an extension off, it's a different dynamic that we apply to be really well prepared if an environment is a little bit more lackluster.

So Kiri, that would be my two answers.

Operator: We have a next question from Mr. Jean-Francois Neuez from Goldman Sachs. Jean-

Francois Neuez: So I wanted to ask also about the cost base because we can see, as you said, you said that you are adapting this to the environment on revenues and we've seen what the central bank policies were. Now just to put this crudely, I think, your target if you take 64.5% of cost-to-income ratio of the revenues of before, which were updating with the presentation of the fourth quarter of 2008, that would be -- I guess, that could be €29.4 billion of cost for next year.

And I just wanted to understand whether this number, including potential measures, to do new savings or upfront kind of restructuring charges as the €50 million of today? Whether that number is a number that you think you can achieve next year? That was my first question. The second question I wanted to ask was on BancWest. I just wanted to understand whether the -- obviously, beyond the accounting things which have triggered the goodwill impairment, whether using that -- in the performance of BancWest is of a nature of -- at some point making you reconsider that as a part of your portfolio of holdings, just as you have at the time of the First Hawaiian? And lastly, I just wanted to ask on fixed income, which has been very strong compared to peers this quarter and the quarter before. Whether using the run rate of revenues -- essentially whether the last year's run rate of revenues was too low, whether it would have been impacted by maybe one-off losses or bad trading environment, whether that makes the current run rate maybe more, let's say, sustainable or whether you're gaining just -- you're gaining revenues through new clients or anything like that this year? So I was just trying to understand where the difference of the comparison base comes from?

Lars Machenil: Francois, thank you for your questions. So back on the cost.

And as I said, I mean, you have to look at it in the end, we focus on the return on equity. And on the return on equity, that means that there are several levers that we will optimize. So when it comes to net interest income, well, there is the environment that we talked about. So that basically means we want to step up our fee and commission generating businesses, then overhead, we want to reduce the costs. So we already have the full impact.

We will have the full impact of the transformation plan, and we basically step it up if there are environment that are faced with changes that we really step up the cost reductions. So that is what we'll do, and then to top it off, it will also be in a low-interest rate environment, there is the cost of risk, which should be normally milder than anticipated. So that's basically what I say. It's all the levers that we use and the main focus is the return on equity. And that is the one that we focus on.

When you look at BancWest, so indeed, let's not forget, at BancWest, there are a lot of saving measures that are implemented. So there is an FTE reduction, there is also the middle of phase, which is being transferred into other states, like, for example, Arizona and that is what we keep on doing. But it is very important that the plan is to be very focused of the core franchise, strengthening the cooperation with the group. And so these are things like corporate banking, wealth management and therefore, delivering positive jaws. So let's not forget, if you look overall of the U.S., how that has an economic dynamic and therefore, it is a strategic asset for the group.

When it comes to your third question on fixed income, as I said, 2018 is a bit of a period where there was the uncertainty, which was crystallizing around the rates and therefore, the fixed income activities. And therefore, we accelerated really our transformation. So this is a transformation where we went to -- from a kind of averagely bespoke activity that we pushed into or a industrialized approach or a very bespoke approach. So that means that you do have to change things, you have to digitalize, and at the same time, you have to make sure that people can handle that interacted and integrate approach to clients. So that is a lot of the changes that we have done.

And so that is basically that transformation we have it plugged up, plugged in since the beginning of the year. And so that is why we have been able to step up as we talked about market share. We have done better in Forex. And so that is a bit the situation that we face. So it's a tremendous effort that we have done.

It's a tremendous step up through all the changes that I mentioned this year. So Jean-Francois that would be my three answers.

Operator: We have a next question from Mr. Geoff Dawes from Societe Generale.

Geoff Dawes: Two questions from myself.

It's Geoff Dawes, SocGen. And the first question is on the gearing to rates. We've been through a lot of the headwinds that you might face with rates going lower. Are there any business lines where you think the gearing could be the opposite, so you get some positive P&L response if rates go lower? I'm thinking possibly of the Personal Banking, consumer financing division where funding costs are quite sensitive, loan losses get better, and so on would be keen to hear your thoughts about that. Second question is on your online banking brands.

There's just very little color on them in this presentation. Perhaps, if you could give some idea of how they're gearing up in terms of your revenue expectations? And also whether the lack of color on them is a reflection of kind of how you see them developing, whether they're not perhaps developing as quickly as you anticipated? Those would be the 2 questions.

Lars Machenil: Geoff, thank you for your questions. So when we indeed look at it, we are a diversified bank, diversified in activities, diversified in exposure. And so if you indeed look at the interest rate environment, there are activities that basically benefit from, indeed, the overall funding and so on.

And so those examples are -- the logical ones are leasing and consumer finance, to some extent, the same is true for insurance. So that is the kind of businesses that are typically positioned well. And then when you look at the online banking, let's not forget, so we do have a kind of an all integrated approach, so we should take in France, for example. We have the high end of the customers, which are still the ones who have relatively the high touch, then you have the branch network, then you have Hello bank!, which offers the same services as the branch network, but without basically the branch so with the digital aspect, and then you have the last one, which is Nickel, which is the introductory kind of services that we have. So that is basically what we're doing.

And if you look at it -- if you look at the clients, so the Hello bank!, if you look at it for Domestic Markets, has now 3 million customers. And if you look at Nickel, which is a startup, it basically -- it's the third largest retail distribution network in France, just to give you an idea. And that is -- it has -- it's an increase of 61% versus what we saw a year ago. So from that point of view, and this is -- well, this is basically what you can find in -- on Slide 20 on beyond, but so we are having this approach where we serve different customers with different aspects of digitalization. So that means also that they come at a different cost platform to do it.

And so as I said, these are the different ones, but if you look at the Hello bank! and if you look at Nickel, they are really progressing well and even the new ones like LyfPay, which we are introducing, they are all having a good pickup. So Geoff, those would be my 2 answers.

Geoff Dawes: And just to check, can you give us any revenue indications of those 2 brands?

Lars Machenil: As I said, we consider the activities as an integrated approach. And so we don't go into this kind of environments because it then also makes it for a competitive interesting information. So we basically leave at this, Geoff.

Operator: We have another question from Madam Flora Benhakoun from Deutsche Bank.

Flora Benhakoun: I have two questions as well. The first one is regarding the Belgian NII, which, I think is down close to 7% year-on-year despite 5% loan growth and which sounds a bit worse than what we are seeing for peers. So the first question would be really if you could expand a little bit what's going on in Belgium NII, especially considering that some of your competitors in the country have made positive comments regarding the front bookmarking on mortgages year-to-date? The second question is going back to the common equity Tier 1 ratio. Just wanted to check if I understood correctly some of the comments you made on this call, where you basically said that we could expect around 10 basis point of capital build up organically in Q3, same amount in Q4.

And I think you're also saying that the 10 basis point delay that we had in Q1 from the securitization process is still to come in next two. So would that be fair to assume that we can expect 30 basis point of capital generation in H2, excluding any other impact like TRIM?

Lars Machenil: Flora, thank you for your questions. When it comes to the net interest income in Belgium, the best way to look at it because there are some evolutions quarter-by-quarter is to look at the 6 months. So if you take the first half, you see that there is an evolution of minus 3.6%. And so that is the intrinsics on which we guided that we know given the pricing, which is differently in Belgium than it is, for example, in France, this is something we've guided that we would see.

And as I said, if you look at the first half year, that's the trend that you see and that's a trend that is similar to what you see in Belgium. When it comes to the common equity Tier 1, it is -- there is a couple of clarifications. When we talked about the securitization that they were basically postponed in the first quarter that they would come later, let's be very fair that the securitization is part of our overall setup. So when I said that normally you should have like 30 basis point generation, you shouldn't add the securitization part, it is in there. And then, of course, let's not forget, I mean, we said that we cannot exclude that there will be a 20 basis points impact of TRIM.

So that will be the clarifications that I bring, Flora.

Operator: Next question from Mr. Matthew Clark from Mediobanca.

Matthew Clark: Sorry, three questions from me as well. Firstly, on the Deutsche deal, could you clarify whether this gives you any new capabilities that you don't already have? Or is this purely in adding clients to your existing capacities? Next question is on net interest income in France.

Just trying to understand from the lumpiness there, could you clarify when you booked the special dividend that was paid by pretty large amount, I think it was announced at the end of last year, but was that booked in the fourth quarter or first quarter? Or could you clarify specifically on the special dividends there? And then finally, coming back to Belgian retail net interest income, if I understand -- or perhaps you could just give us the decline in net interest income second quarter versus first quarter? It looks to me to be above 8% and you seem to suggest there are some distorting aspects there. So could you clarify what those distorting aspects are, please?

Lars Machenil: Can you just repeat that last question?

Matthew Clark: Sure. In Belgium net interest income, could you tell us what the decline in second quarter versus first quarter was? And you seem to be suggesting there were some distorting items there. So could you clarify what those distorting items were in terms of the quarter-to-quarter progression?

Lars Machenil: All right. So with respect to the discussions we're having under preliminary agreement with Deutsche Bank, so what will -- if we can -- if we conclude what will it bring, it will bring several points.

It will bring people that are very knowledgeable and people-oriented activity. It will bring platforms. So that is all of the things that will be very beneficial. So it's new clients, it's technology. So that's basically what it is.

Then if you look in France, listen, I mean, there are -- we look at -- the evolution that we gave is a bit of the run-of-the-mill. And in the run-of-the-mill, there are indeed some kind of exceptional "elements" there to return and resorb and that's part of that I said the run-of-the-mill is below our threshold, so we basically don't specify it. In this case, it is not part of the Q2 results, and I'll leave it to that. And as I said, in Belgium, what you do have, if you look at it, you should look at the first six months, which basically lead to an evolution of minus 3.6%. That would be the three elements to your question.

Matthew Clark: So why should we look at the first 6 months and not the quarter-to-quarter? I'm just curious why that would be a major distortion in the quarterly numbers?

Lars Machenil: You can have some activities or some elements that for just on the pivotal point between the two and that can have a stock impact on a period, which is basically to be seen over the year and not just over that quarter. So I'll leave it to that.

Operator: We have one last question from [indiscernible] from Morgan Stanley.

Unidentified Analyst: I have a couple left. So the first one is on cost of risk, 30 basis points in the quarter, asset quality continues to be benign, but provisions in Turkey went up 29%.

So I was wondering if there is anything like a trend or something that we should be mindful of in there? So that's my first question. The second one, it's just a follow-up on your previous comments on the Deutsche Bank deal. So I hear it's going to be 5 basis points and 10 basis points and it's going to bring over people and tech. But I was just curious in terms of PBT or P&L impact, how should we think about that?

Lars Machenil: Thank you, Julia, for your questions. So on the cost of risk, yes, if you look at Turkey, yes, Turkey has added a couple of tens of millions on the cost of risk.

So on the overall scale, you should put it that way. We don't expect any further degradation. And on top of that, part of the degradation that we've seen is in IFRS 9 artisan accounts. So under IFRS 9, you have to take into account forward-looking scenarios so that forward-looking scenario is more dire forward scenario which basically leads to that. So that step up that we see is not driven by what you actually see on the floor, but is what is delivered by the IFRS 9 required forward-looking.

So that is basically what you see. As I said, it's a small part of what the bank represents, and we don't expect a further degradation. So that's on the cost of risk. And when it comes to the discussions, the preliminary agreements with Deutsche Bank, it is as you said, so, capitalistically it's 5 basis points common equity Tier 1, 10 on the leverage, and we hope to onboard client, people and tech. And that's basically -- I mean, for the rest it really depends, it's a profitable kind of business, I let you be the judge what the impacts will be, and we'll clarify it once we have advanced in the discussion.

So Julia , those would be my two answers.

Operator: We have no more questions. Back to you for the conclusion.

Lars Machenil: Thank you. As you have seen, we have delivered digital customer experiences, business growth in the 3 divisions in the first half, rising income, positive jaws, ROTE 11%, an increase of common equity Tier 1 clocking in at 11.9%.

I thank you very much for your attention. Have a good day, and if applicable, good holidays. Bye-bye.

Operator: Ladies and gentlemen, this concludes the call of BNP Paribas second quarter 2019 results. Thank you for your participation.

You may now disconnect. This conference call is dedicated to sell-side analysts only. A live webcast is available at bnp.com.