Earnings Call: Q1 2021

May 5, 2021

Good morning to everyone. Welcome to Nicaha Banco First Quarter 2021 Results Presentation. Let me start confirming, as usually, that we have published the quarterly financial report and the same presentation this morning before market opens in the NNV website. Paolo Gonzales, our Chief Financial Officer, will go through the slides, and then We will answer all your questions. This quarter, we have split the presentation in 4 sections. The first one is a quick update of the merger with Liberbank. The second section includes the main highlights of the quarter. The third section includes the quarterly results and details. And as usually, we will finish with an update of our solvency, liquidity and asset quality. Pablo, everyone. Thank you, Jaime. Good morning to everyone. Before in Slide 4, On the top of the slide, you can find the main terms of the transactions presentation. So I won't repeat them this quarter. However, in the bottom of the slide, you have the transaction calendar where you can see the following That following the announcement at the end of December, we held extraordinary general meetings For the merger approval, the 31st March to 75% with 99.9 9% of the shares represented voting for largest banking groups in Spain and more important, a process that, as you all know, will enable the bank to improve in a very material way its profitability and shareholder returns, which are the main targets ahead. We are now waiting for all the formal regulatory authorizations. It doesn't depend beginning of the third one, something that will enable us to report half So if everything evolves as we are currently expecting and there isn't any unexpected delay, we will provide final details and impacts Of the merger next quarter, that will be the Q1 reporting results together with Liberbank as a single bank. If we move now to the quarterly results, I will start the second section in Page 6 with the main highlights of the quarter. Year on year with of balance sheet funds growing almost 9% year on year. Total performing loans were flat in the quarter. New loan production improved significantly and remained positive. Core income, that is net interest income plus fees, Grew almost 3% quarter on quarter. NII was 3.6% above the previous year, owing to the lower cost of deposits among others. Fee income also showed a positive trend, growing 1% compared with Q1 20 20, than the reported trend. Total costs continue to improve and fell an impressive 6.1% compared with 20 With savings amounting to €9,000,000 In terms of impairments, we have anticipated additional €25,000,000 in the quarter, which is €3,000,000 below Q1 2020 despite reporting €14,000,000 lower trading gains. On asset quality, liquidity and solvency, NPAs continued to decrease in the quarter, Falling 1%, in a year on year terms, NPAs fell 8% With NPLs decreasing 11% and gross foreclosed assets by 5%. It is Also worth noting that the NPAs coverage level continue to grow 1 more quarter to a level close To 66%, which is all liquidity point of view, the loan to deposit remained low at 64% and our LCR At 286%. Finally, our SEAD-one fully loaded reached 15.1% With regulatory total capital at 18%. We have started 2021 as we were expecting, confirming the previously Depated performance continued to be conservative, but decreasing compared to the previous quarter. And NPA's balance Continued to decrease while coverage was further reinforced. Quite positive trends ahead of the merger with Liberbank, which will enable us to further improve future returns through the crystallization of synergies. Starting with the quarterly trends. As I already mentioned, both NII and fees reflect deposit guarantee FAD In the Q4 of 2020, leaving gross margin 23.5% above last quarter. Total cost Fell 2% quarter on quarter, more than 20%, leaving net income well above the previous quarter. From An annual point of view, I would highlight that the net interest income and fees improved 3.6% and 1% year on year, respectively, leaving Core income almost 3% above last year. Gross margin fell 5%, mainly owing to the lower trading gains That were quite high in the Q1 of 2020 of the higher contribution from one of our insurance affiliates Included in this P and L line, total costs showed a very positive trend once again, falling almost 6% compared with 2020. And finally, we decided to book additional €25,000,000 of COVID related This quarter leaving total impairments in line with the previous year and net income at €43,000,000 slightly below the 46% of the Q1 of 2020. If we move now to Slide 9, You can see that total customer funds grew 9.6% year on year. This was explained by strong growth In deposits that grew almost 10% year on year, but also an improvement in of asset under management and of balance sheet Funds that have been growing each of the last 4 quarters, almost 9% above last year. In Slide 10, you have credit and loans details, where you can see that these quarters, They were stable. Gross loans were flat in the quarter by segment. Loans To individuals fell 0.3%, while corporate loans grew 0.9%. On the right hand side, We include the performing loans trends that were also pretty stable. As you can see, total performing loans were Flat quarter on quarter. In terms of segments, corporate performing loans grew 0.7% in the quarter, while Consumer loans fell a bit more than 2%. It is worth noting that mortgages showed A small increase in the quarter for the first time in quite some time, something that was supported by a significant improvement of The new mortgage loans productions, as you can see in the next page. In Slide 11, here you can see that private sector new loan production improved Significantly in the As you can see in the bottom left side of the slide, new loans to individuals grew 39% with new mortgages growing at that same rate of 39 quarter on quarter. If we compare with the Q3 of 2020, new loans to individuals grew 72% and mortgages 87%. New mortgage trends is Under my view, one of the positives of the quarter because it has been the Q1 in a long time that new mortgages are above amortizations leading to a quarterly growth, changing a loan trend that started many years ago. New corporate loans also grew 36% compared with the last quarter of 2020. The improvement in private sector the lower public sector production and left total loans pretty flattish in the quarter. In Slide 12, we start with the regular P and L review with net interest income. As you can see, in the top right, interest income from loans and the debt portfolio fell in the quarter, Something that together with the calendar effect explain the quarterly decrease, although partially compensated mainly by lower cost of Deposits because we still have redemptions of costly customer deposits. In the bottom Of the slide, you can see that the front book customer spreads continues to be above the back book that in the Q1 of 2021 was 155 basis points, only 1 basis point below the previous quarter, but still above the second and third quarter of 2020. In Slide 13, you have the debt portfolio details. As you can see, there are very little changes in this quarter. Overall balances reached €22,600,000,000 with an average yield of of 93 basis points and most of the exposure still being sovereign debt classified in the amortized cost portfolio. If we move to Slide 14, you have fee income trends that continue to show a positive trend despite The seasonality of the quarter. Total fees grew almost 1% year on year Including a one off last year from a small deal related to our insurance business, something that explains the decrease in non banking product fees. On the other hand, payments Continued to improve and grew almost 10% year on year. If we move to Slide 15, You have the total expenses evolution that again continued to reflect a positive trend as a result of our cost cutting measures. Total costs fell more than 6% in the Q1 'twenty one compared with the Q1 of 2020, with the personnel expenses falling 5% and general expenses decreasing by almost 15%. Finally, it is worth noting that branches and employees continue to fall, a historical trend that, As you can see on the right hand side of the slide, since 2016 has been decreasing at a run rate of 7% The regular details of our impairments. In Q1 2021, we booked €25,000,000 of additional Provisions for COVID-nineteen potential future impacts. In the right of the slide, you can see increasing to 52 basis points when included all COVID provisions, which is well below The 85 basis points reported in 2020. We can now move to Slide 18, where we have the regular NPL information. As you can see, NPL balances were more stable this quarter, And this was partially explained by the transfer of almost €60,000,000 loans considered unlikely into Stage 3. The NPL ratio remained at 4.2% as we show in the table in the bottom Of the slide, quarterly gross entries were a bit higher this quarter, something explained by the mentioned reclassification Of the €58,000,000 consider unlikely to pay loans that we call subjective NPLs. Following a prudent review formalized in this quarter. In Slide 19, We have update the eco loans and the moratoria balances. In the left Of the slide, you can see that we have granted almost €1,000,000,000 of credit and loans guaranteed by the €6,000,000 in March. This represents 9% of total corporate loans and 2% of total performing loans. In the right hand side of the slide, we showed the moratoria details, which are mainly mortgages. As you can see, out of the 8 €63,000,000 formalized, only €580,000,000 are currently outstanding, meaning that one 3rd of them have already finished with the outstanding balance representing 2% of total performing loans. If we move now to Slide 20, you have our regular credit risk exposure And NPL coverage details. Overall NPL coverage continues to grow 1 more quarter. At the end of quarter, the NPL coverage reached 68.4%, almost 1 percentage points above the previous quarter and 12.5 percentage points above the previous year. This is very conservative coverage level, especially considering that 85% of Our NPL balances are secured. NPLs, as you can see in the right hand side of the slide. In Slide 21, you have the foreclosed assets details. As it happens With NPL coverage, foreclosed assets coverage also continued to increase to 63 point 1% in the Q1 of 2021, one of the highest of the sector. Gross balances fell 2% quarter on quarter and 5% year on year. In net terms, foreclosed assets fell 2 point 5% quarter on quarter from €405,000,000 in Q4 of 2020 to €396,000,000 in the Q1 of 2021. In Slide 22, you can see how overall NPAs continue to decrease 1 more quarter, reaching €1,000,000,000 in gross terms and €769,000,000 net of provisions, representing In Slide 23, we update our liquidity position That as you can see, it remains extremely comfortable with the loan to deposit ratio at 64, The LCR, the liquidity coverage ratio at 2 86% and the NSFR are at 143%. And finally, We include our solvency position in Slide 24. Our regulatory SEAD 1 reached 16.5 percent in March and our total capital was 18%, representing Almost €1,300,000,000 buffer over our SREP requirement. In fully loaded terms, The ratio grew 12 basis points in the quarter, mainly owing to a small decrease in risk weighted assets, Reaching 15.1%. Finally, and until we receive news from the ECB, let me remind That in the very short term. So that was the quarterly summary. Under my view, very positive trends ahead of the merger with Liberbank. Our core income grew compared with last year. Total costs continued to fall and impairments were below the previous quarters. From a balance sheet point of view, very little to add, 1 of the highest coverage of NPAs and one of the highest CET1 ratio of the sector that have enabled us to merge with Liberbank, a merger that will bring us plenty of upside hopefully from next quarter onwards. Thank you, Pablo. We move now to Q and A. Let's start with those ones related with the merger with Liberbank. The first one is Pablo. When it's more or less clarified, it was clarified throughout the presentation, but just case, when do we expect to receive the formal authorizations for the merger? And when we do expect to report for first time results together, Paolo? Yes. Thank you, Chaim. As I explained during the presentation, It has been approved the merger with Liberbanks in their respective shareholders general meetings and teams From both banks are currently working in the integration. We have established different teams to work and they Are in full speed to be ready for the formal approval. And now we need to wait for all formal that we expect to have at the end of the second quarter or beginning of the third one. It doesn't Depend on us, but we need to wait for the formal green light. If the authorizations arrive when we expect, we will We published half year results as a single bank, but as I said before, this is conditioned to The reception and confirmation of all the authorizations. Thank you, Pablo. The next one is also related to the merger. If we can provide an update on the final impairments and final impacts coming from the merger with Liberbank? Yes. As I said before, we're currently working In the integration, we expect to explain the final details of the merger next quarter Once we have received the authorizations and the required formal approvals, we have already anticipated the main details of But as you can imagine, final impact will be explained in detail once we receive the mentioned approvals. One is also related, but probably it's worth mentioning it. Also on the merger, if we can clarify more details regarding the potential capacity adjustment required to meet with the cost synergies that we have announced, Pablo. Well, at this moment, as you can imagine, we cannot provide more details regarding specific measures, Among others, because as we have made in the past in different occasions, we want to discuss the terms and try to reach an agreement with the unions 4. So it is not the moment to provide more details regarding this type of adjustment that we will disclose in a due time. Thank you, Paolo. We got several questions, lots of them, regarding guidance for different P and L lines for both in a stand alone basis, but also for the combined entity going forward. We can provide some color on guidance, Paolo. Well, under a stand alone basis, We already provided an update last quarter on our guidance, And this has been confirmed with this quarter trends. But for the combined entity, it's too soon to be more specific. As I said before, we are expecting to receive all the authorizations of the merger before the summer break With the idea of reporting the Q2 'twenty one results together with Liberbank as a single bank for the first time. As you can imagine, The trends of the combined entity will be affected by the initial adjustments. So we prefer to wait Until the formal integration before updating or providing any further guidance. Thank you, Paolo. A very specific one coming from Mario Ropero from Bestenberg. If we can Update, Unica Javanco, high yield deposits balances that will mature in the coming quarters? Yes. In this Q1, we have around €200,000,000 that has matured, And we still have another €225,000,000 maturing this year. Around €150,000,000 will be in the 2nd quarter and the remaining €75,000,000 will be in the Q3 of this year. So As you know, these deposits have a very high cost of around 4%. So our cost of deposits We'll continue to benefit from these maturities during the next quarters. Thank you, Pablo. Can we provide an update on our debt portfolio ALM strategy? Yes. Going forward, the contribution Our debt portfolio, as we have seen this quarter, will be slightly below the current levels, as I Mentioned in the previous presentation, mainly because of the maturity of close to €3,000,000,000 of Bonds in 2021. As we explained in the past, the contribution of the debt portfolio in 2020 was slightly higher than expected as we bought in advance bonds that were expected to be purchased in 2021. Now we expect its contribution to come back to a more normalized level throughout the year. Regarding the strategy, there are no changes with previous quarters. And the main Objective continues to be invest to be to invest the structural excess liquidity of the bank And mainly in European government bonds with a medium term maturity That will allows us to obtain unstable income contribution. We also manage and hedge the interest rate risk and credit risk of this portfolio On regular basis? And just to give you some color, the unrealized capital Gains in the amortized cost debt portfolio at the end of the first quarter We're very similar to the year end, although we made €40,000,000 of trading Profit, and they are around €800,000,000 So it's a very significant unrealized Capital gains or gains in this portfolio, and we follow closely all the evaluation Of the portfolio and the market conditions and trying to secure part of these current unrealized gains, unlock Some of them for the next 2, 3 years, so we have enough time to Manage the portfolio in advance. Again, as a reminder, it is also worth noting that the big bulk Of the portfolio is a structural bond portfolio that is accounted in amortized cost. So there is no impact on P and L or equity on the volatility of the prices of the bonds. Thanks, Paolo. The next one on TLTRO III, if we can update the situation and the strategy on TLTRO III? Yes. We fulfill As we were expecting the TLTRO3 requirements in March, so we will extend and benefit from the Extra 50 basis points until June 'twenty one. The ECB announced in December Last year, the possibility to benefit with this extra 50 basis point of lower funding cost in the 12 month Period that goes from June 'twenty one to June 'twenty two, and we also expect to comply with that. Having said that, the measure of the this requirement on December 21, we'll Consider Unicaha and Liberbank loan growth together. In December also It's worth mentioning that in December last year, the ECB also announced the possibility of increasing by 10% The TLTRO funding, so in March 'twenty one, we increased our balances of the TLTRO from 5 €1,000,000,000 to €5,500,000,000 Thank you, Pablo. The next one, on funding plans. We're going to update what are our plans regarding issuance ahead. Yes. And all the new issuance to come in the next years will With Liberbank, we included a plan of the potential issuance to comply with MREL and the transactions Included were around €500,000,000 of 81, €300,000,000 of Tier 2 to refinance the Liberbank redemption and around €1,700,000,000 in senior. As you can imagine, this funding plan should be considered as a Base case, that could have some changes depending on the final requirement for the combined entity. And regarding the timing on the issuance plan, we will calendar The different issuance in a prudent approach, but at the same time trying to be opportunistic with the very Good market conditions for the different instruments. Thanks, Paolo. The next one on interest rate sensitivity, if we can update our sensitivity, please. Yes. Considering a constant balance sheet And parallel and instantaneous 10 basis point drop in the rate curve, once the balance sheet If this 10 basis point movement were upwards, the positive impact on NII would be also around 2%. And under these actual current negative short term rates environment Any increase in short term rates will have a positive impact in the net interest margin once the Balance sheet is fully repriced. Thank you, Paolo. Moving to costs no, sorry, To fees, we have some specific questions on what was if we can explain what was the one off that mentioned it in the presentation and the expected trends regarding fees. Yes. As I said before, it's the to To give you guidance on the combined bank, it's hard, but as you can see On in a standalone basis, we continue to expect a very positive trend For fees going forward, and obviously, this will apply for the combined entity as well. But regarding the one off in the Q1 Our insurance unit business that is included in the non banking fees last year that was Included in the Q1 of last year. So this is important because excluding this one off, the non banking fees We'll be growing at high single digit. Well, they are Decreasing, but they will be growing at low single digit in the quarter, something that together With the 10% growth in payment and collection fees, explain the reported trend that make us feel confident with the significant positive Trend expected in the future, as we mentioned in the previous quarter in our standalone guidance. Moving through the P and L on other operating income and expenses, if we can please explain the strength of other operating income in the quarter, Paolo? Yes. As you all know, in our case, there's some volatility In this P and L line, mainly explained by the contribution of our real estate servicer. However, this quarter, the improvement was mainly explained by the higher contribution from Unione del Duero That, as you all know, is an insurance company in runoff that contributed in the quarter with €8,000,000 compared with €5,000,000 of the previous quarter and the previous year. It is also worth noting That this quarter, the trend is also supported by lower foreclosed assets maintenance cost and also a higher income Moving to costs. If we can update the cost trends, we can elaborate a little bit further on the trends regarding expenses. The total cost in the Q1 remained almost 6% below the previous year, With general expenses falling more than 13%, we are not providing specific guidance for the Buying bank because as you can imagine, we will have to update the situation once we formalize the merger with Liberbank. However, the Q1 costs have been booked considering the standalone budget and it is worth noting that in the Q1 Of 2021, annualized personnel expenses are 5% below 2020, something That shows how committed we are with the cost cutting plan. Thank you again, Pablo. Moving to asset quality. We've got several questions on in the cost of risk. So I don't know if we can Pablo, if you can elaborate a little bit further. Yes. As you saw in the presentation, the trend remains positive. Quarterly Loan loss charges included the €25,000,000 of additional COVID related provisions, leaving the total cost of risk at 50 This was partially explained by the transfer of almost €60,000,000 of subjective NPLs into Stage 3, also known as unlikely to pay loans that, as you know, are loans considered NPLs, but that don't have 90 days overdue. And also, Stage 2 loans grew around €100,000,000 in the quarter, something that also partially explained the provisioning effort of the quarter. Such provisioning effort also explained additional improvement Of our NPL coverage, as I mentioned in the presentation. And finally, I think To 16 basis points, very close to last year recurrent cost of risk level. Paolo, also regarding asset quality, if we can explain the NPL trends and NPL balance performance in the quarter? The asset Quality trends remained stable in the quarter with the total NPAs still decreasing, although at slower pace than in previous quarters. As I explained before, this trend is partially explained by The reclassification of unlikely to pay loans into Stage 3 following a very conservative Review of the whole portfolio, and these loans are what we call subjective NPLs. In other words, These are loans that do not have 90 days overdue. But following a prudent analysis, We have found some kind of weakness in such loans and we decided to consider them as NPLs. So they have been reclassified into Stage 3 in the quarter, but the big bulk of these loans are still paying installments. This reclassification into Stage 3 explained that NPL balances in the quarter were almost flat rather than decreasing like in On the other hand, gross foreclosed assets Fell 2% quarter on quarter. And in net terms, they are just representing 0.6 percent of our assets, so less than €400,000,000 So overall NPAs, Despite following a quite prudent approach, fell 1% quarter on quarter and 8% year on year in Q1 2021, a very positive trend, especially considering the economic impact of the pandemic. Also on asset quality, Pablo, a very specific one regarding the staging, Stage 1 and 3 balances, as I mentioned, especially for the Stage 3, were pretty stable in the quarter. In the case of Stage 2, as I said before, it grew for around €100,000,000 in the quarter, Reflecting this conservative and prudent approach that we have in reviewing The portfolio, it is also worth noting that the Stage 2 coverage remained Stable in the quarter at 11%, which is one of the highest coverage for the Stage 2, If not, the highest of the sector. Thank you, Pablo. A final one on asset quality. If we provide more some more details on the moratoria and the icons as the quality trends. Yes. As you saw in the presentation, we have relative small exposure to moratorium and eco loans. And out of the balances, 4% have more than 90 days of review, which represent €17,000,000 So regarding the eco loans, the situation, as you can imagine, is even better with €99,400,000,000 of the balances So I think considering the low exposure and What has happened what is happening with them, we are confident that the evolution will be positive. Pablo, moving to solvency, starting with the IRB models, if we can the situation from the approval expected approval of the IRB models. Yes. We expect To have the ECB approval very soon, probably before formalizing the merger, But it doesn't depend on us. So we need to wait and we cannot confirm when will happen. So however, This is only a matter of time, and hopefully, we will have news shortly and our solvency Will be improved even further and will become more comparable with the one of our peers. An update, Pablo, on dividends and dividend policy, please. Yes. As you probably saw, we approved in our AGM to pay €17,000,000 in cash against 2020 results. Out of these 17, we have already paid €12,000,000 in the As 16 April and the remaining €5,000,000 to be paid after formalizing the merger with Liberbank. The dividend was split in 2 different tranches in order not to not have An impact in the announced exchange ratio of the merger. And going forward, In the combined entity, as we said, our aim is to reach a cash payout Ratio of around 50% as soon as possible and always, obviously, following the ECB recommendations. Thank you, Paolo. One final more also related to the dividend, if We are accruing and what are we accruing in terms of dividend in the quarter? Yes, yes. As we usually do, we only consider around half of net income in solvency. In other words, retained earnings in terms of solvency reached in this quarter 22 €1,000,000 compared with the €43,000,000 reported net income. Okay. That's all. The Investor Relations team will continue answering your questions offline. Thank you very much for attending one more quarter our results. Thank you very much. Bye. Bye.