Earnings Call: Q3 2020

Nov 3, 2020

Hi. Good morning and welcome to Unica JAVANCO 3rd Quarter 2020 Results. As I usually do, let me start confirming that we have published the quarterly financial report and this presentation this morning before market opens in the the NNV website. As usually, Pablo Montaleth, our Chief Financial Officer, will explain the quarterly results results. I also turn core income trend, both net interest income and fee income showed a very positive positive trend, COVID provisions continue to increase our relative higher coverage. Solvency also improved and in the recommendation of the ECB, we weren't able to pay dividend against 2019 results. We also installed the share buyback program that we had in place, however, our AGM approved last a usual plan, but it's still very positive. As we have said in different occasions, we will resume cash dividends and share buybacks as soon as possible. All in all, Unicaha Banca financial position has been significantly reinforced use one includes a summary of the quarter, the second one, the results and the third one detailed details on our asset quality, liquidity and solvency. If we move to Slide 4, I will start review the regular summary. Regarding the business, customer funds grew 5.1% Funds also growing 2.4% in the quarter. Private sector performing loans fell 0.8% year to date, while corporate loans grew 6.3%, loans to individuals fell 3.7% year, private sector new loans were still 25% below 2019. From a P and L point of view, as we will see in a few minutes, trends are quite positive. On one hand, NII grew more than 9% quarter on because of the improvement of payments and collections. Regarding expenses, total costs fell an enable us to go back to recurrent impairment levels going forward that as you saw remain relatively low. All As I mentioned, COVID provision net income was $194,000,000 almost 22% above the previous On asset quality, liquidity and solvency, I would highlight that both NPLs and foreclosed assets SAILs decreasing 18% and foreclosed assets almost 2%. Year to date NPLs fell 2.6% With non performing loans decreasing 4.5, it is also worth noting that the UPS drop took place while coverage levels were further reinforced 8% points in the last 12 months, achieved 64% in September, from a liquidity point of view, the trend was the same as Finally, our solvency continued to improve. We see I noted, growing 27 basis points to 14.7%, mainly owing to the lower Regulatory total capital also improved to 17.8% implying a 1,300,000,000 buffer over our SREP requirement. I will move now a year, equity method was pretty stable compared with the previous quarter and slightly above Q3 2019. Trade And on the positive side, it includes $3,000,000 from real estate rentals, dollars 4,000,000 From the real estate servicer and other $9,000,000 from the insurance company, Uniente del Duerobida. All This led to a gross margin of $232,000,000 in the quarter. In terms of cost, this quarter has been a charge for performing our Stage 1 loans, as I mentioned, as you can see in the slide, we booked 76,000,000 gain of provision of which $65,000,000 were loan loss charges including $63,000,000 of what We call COVID-nineteen provision. As a result, the net income reached $60,000,000 in the Q3 2020. Looking the 1st 9 months 2020 cumulative results, I would highlight that we are on track to achieve this year guidance, owing to the core income improvement, total revenues year to date reached 760,000,000 I mentioned, 5%, leaving the provision profit of the 1st 9 months of the year at the same level as in 20 Finally, as you can see, in the 1st 9 months of 2020, we have booked $166,000,000 of extraordinary move now to Slide 7, you can see that total customer funds grew 5.1% year on year. This we have also seen an improvement of asset under management and of balance sheet funds. In the quarter, total funds grew A bit more than 1% with our balance sheet funds growing more than 2% to $12,600,000,000 In Slide 8, you can see credit and loans trends. Gross loans fell 1.1% in the 1st 9 EBIT sector loans 0.8 percent. By segments, loans to individual fell close to 4%, large As a U. S. Corporate grew by 13% and SMEs show a very stable trend increasing 0.1 In September 2020, corporate performing loans grew 6.3% year to date, while Assaiages and Consumer and Others fell 3.8 indirectly impacted by COVID-nineteen, in the Q2 2020, the impact was mainly related to individual While corporate loans benefited from state guarantees, however, the trend in the I review with net interest income. As you can see, in the top left, net interest income Assai U. S. Was the main contributor to the quarterly increase. Bear in mind that the cost of I was mainly explained by the mix of new loans with the weight of loans to individuals compared with previous quarters much higher said, you have the regular details of our debt portfolio where you can see that overall balances continue to grow a bit As you can see in the slide, most of the exposure remains sovereign debt I year to date, total fees fell 0.8%. However, considering the lower activity and the impact from the COVID-nineteen, this is a very positive underlying trend that we expect to continue to In terms of cost, as you can see see in Slide 13, total operating expenses fell 7.8% compared with 2018 and 5 point 5% compared with 2019. In other words, total costs in the 1st 9 months of the year were of $25,000,000 below the previous year, this is a very positive trend as a result of the restructuring in this impairment, the requirement cost of risk represented only 13 basis points, increasing to 90 year following the provision effort made in the 1st 9 months of the year, we expect to book lower move to Slide 16, where we start the regular asset quality review. In this same slide, I show in the table, in the bottom of the slide, quarterly gross entries fell from 58,000,000 In Slide 17, we have updated the eco I have approved 11,500 loans and credit lines guaranteed by the representing $510,000,000 at the end of September. In the right hand side of the slide, we show the moratorium details. In mortgages, we have formalized $610,000,000 of legal As a you can see that the balance are much lower with $30,000,000 of the legal and note, there are $359,000,000 of mortgages and other $17,000,000 of consumer loans that reached $874,000,000 of which 96% were mortgages and only 4% consumer loans. As at the end of October, 265,000,000 have already expired leaving current total In the Q3 2020, NPL coverage reached 66%, which is 5 ago and 54% at the end of last year. As you can see, it is an In Slide Leaving total gross balances at $1,100,000,000 although in net terms, they In Slide 20, you can see how overall NPAs have reached to a gross balance of $2,400,000,000 and a net balance of $855,000,000 representing only 1 Let me remind you that in the bottom of the slide, you have the Texas ratio, which is a consequence of all the previously mentioned trends. As you can see, continuing to fall 1 more quarter below In Slide 21, we have the details of our liquidity position that as you can imagine, they continue to be extremely comfortable. Our loan to deposit ratio fell to 67% with I UCR was at 311 and NSFR at 141, so nothing can see in Slide 22, our regulatory CET1 reached 16.3% in September, a I did in full under the standard approach, so this means that is considering very conservative I 13 basis point of recurrent credit charges, other $77,000,000 of net income. This has enabled us to increase the NPL coverage by 12 Our NPAs and generated additional capital with our seed 1 fully loaded growing by 65 basis point year to date. In summary, Unicaha Banco is under a very strong financial position that has further reinforced during the last quarters, leaving us in a relative good position going Thank you, Paolo. We will now answer the questions. Let's start with top line, there are a few questions, Pablo, regarding the high yield deposits, if we can clarify the pending benefit from the maturity of these high yield deposits ahead? Sure. Let me remind you that we used to have $1,200,000,000 of retail deposits At a close slightly higher than 4%. And these deposits started to mature this summer. At the end of This quarter around €600,000,000 have already matured, of which €500,000,000 has been in this Q3. We have another $200,000,000 maturing in the Q4 of 2020, and 400 in 2021. 200 Thank you, Pablo. Also regarding NII, I, if we can update the guidance that we expect ahead. We can reiterate our guidance. I mentioned, we believe NII in 2020 will be similar to the one reached in 2019, it is true that in the first half of twenty twenty, the trend was weaker. But as you saw from 3rd year Q3 2020, we are benefiting from lower interest expenses that make us feel confident, Although the LIBOR has come down to maintain our guidance. As always, there are some positive and some negative, but we expect to compensate the second ones among others due to the maturity Moving parts, however, at this moment and with the current information, NII should be pretty stable again, but we will provide formal guidance in the coming quarters. Thank you, Paolo. Regarding loan growth, you can update our views, please, Karl? Yes. As you saw In this quarter, corporate loans following the increase in the Q2 explained, as I said, by the government we used to have before the COVID-nineteen and probably in some segments, it will take some time to reach those levels again. That I said, the COVID has also other indirect impacts. On one hand, we have the That reduced the speed of amortization of loans and on the other hand, the voluntary early repayments of our clients are slowing down So net net, we expect loan volumes to remain pretty stable going forward, at least until we have more Moving, Pablo, to the debt portfolio. What I expected contribution from this portfolio going forward, we can explain the quarterly increase and update the strategy I the market trends evolve, obviously, the potential lower contribution in the coming quarter is explained some of the disposals of part of the portfolio, but mainly due to the maturity of Around $3,000,000,000 in the 2021. As we explained in the past, in 2020, we bought in use the contribution of the portfolio going forward could be also driven by the liquidity position and the expected liquidity projections of the bank for the next years and because we use the portfolio to balance As we have previously explained in 2020, we have An increase in the liquidity coming from the larger TLTRO and also and I Something that could also increase the contribution and offset the negative on the contribution to NII that I mentioned. Regarding the size and the Regarding the size and the strategy, the increase in the bond portfolio that we saw around EUR 1,600,000,000 said, the quarter is related, as I said, to the $1,700,000,000 of funding coming On the TLTRO III compared to TLTRO II plus the commercial GAAP trends Following the increase in customized deposits, as we explained in the Q2 presentation, we invested this extra liquidity in fixed income debt in order to avoid the negative cost of liquidity Due to the very high liquidity position of the bank, these purchases were accounted in the amortized cost portfolio With no impact in P and L or equity apart from the NII obviously and the duration is similar The duration of the portfolio is similar to the one at the end of Q1. Regarding io has the role to invest the structural excess liquidity and the portfolio is mainly invested in sovereign debt around Gains in the amortized cost debt portfolio, which is not in the capital position of the bank at the end of this quarter, We are following is to try to secure part of the current unrealized gains to avoid any potential decrease of this Thank you, Pablo. Moving to the funding plans, if we can what are our plans and the potential issuance of MREL liabilities? Yes. Following The 3 year funding from the TLTR-three and as long as we continue to have a very strong liquidity, our funding plan for the didn't plan for the next years, as you can imagine, should not have any significant changes. Obviously, There will be only NREL related issuance. So regarding the NREL, considering our current risk weighted assets, the requirement Eligible liabilities remain around $1,000,000,000 and this shortfall is expected to Before January 2024, giving us enough time and flexibility to comply with this ability strengths, we could finally issue senior preferred in the larger amount of what we were initially expecting. And this That will be good news in terms of the expected cost of the MREL requirement Thank you, Paolo. We have already clarified the debt portfolio, but there is one specific question said on the overall ALM strategy, so probably you're going to elaborate a little bit further on the overall ALM strategy. Yes. Well, the ALM strategy Of the bank is closely related to our bond portfolio strategy. The past quarter strategy Our market views has been to try to protect NII of further decreasing in the arrival rates and hedging To avoid an excess risk from the mark to market of this position, if rates What we have is although all the bonds are accounted in amortized cost portfolio, we hedge it through interest rate swaps. Thank you, Thank you, Pablo. Related to this one too, there are some questions, actually Several questions regarding the interest rate sensitivity and the impact of U. S. Drops. Yes. The sensitivity 10 basis point drop in the rate curves once the balance sheet is fully repriced could have an impact on NII a year of around 2%, minus 2.2%. If the 10 basis point movements the 2nd quarters, just to give you some color how we have improved this, were around minus 3% and plus 3.1% Under the current negative short term rates environment, the negative impact of additional decreases in the short term rate Decrease in interest income from the loan book and almost no impact in reducing the cost of the deposit We have increased the customers with negative rates, it's mainly in the corporate and know, part of the portfolio and not in the retail one. On the opposite, an increase in short term rates will say view on the increase of customer funds of last quarters, the strategy adopted since 2019 has been to reduce the risk of any potential decrease in NII in the scenario of rates going Increasing what we have done is trying to increase the duration of the balance sheet mainly through the fixed income Purchases that we mentioned, the recent drops in arrival rates is not really good news used for NII, but as I explained before, we have been hedging that risk during last quarters. And so the negative impact is not going to be as relevant as it could be without those hedges executed. Thank you. Moving to fees, Pablo, if we can provide some guidance and some color on the improvement. Yes. Fee income was affected, very affected by In the Q2 by the lower activity and the decisions that we took of not Charging some fees to our customers during the lockdowns. Such a negative impact was concentrated in the Q2 and as you saw in the Q3, it was reverted. In cumulative terms, the 1st 9 months of the year fee income decreased less than 1% compared to the previous year, something that is quite positive considering what has happened we were expecting an improvement in fees for the second half of this year to levels some between the Q1 and the Q2, something that has been confirmed with the numbers This Q3 and such improvement will probably enable us to maintain the level of 2020 Final year fees very close to the level of 2019, something that under My view will be a significant success and a proof of the underlying positive trends in Bear in mind that we are guiding for 2020 final year in core income. So NII plus fees to reach levels very close to the ones reported in 2019, a very positive trend if we look into account what has happened this year. Thank you, Pablo. Moving to costs now. If we can update our cost cutting plans and if there is some additional cost cutting measures ahead, we can provide some color on expenses. And there let me Under my view, together with the confirmation of our core income improvement that I mentioned in the previous question, the Reported expense trends is one of the most positive news of the quarter. As you all know, during I To reduce total cost with a plan that lasts from 2020 to 2022. Following The COVID-nineteen, we took additional measures to anticipate and to save us and Even to make significant effort in cost, something that was And offset any recovery on general expenses. So all all in all, for 2020, what we can say is that our initial low guidance of mid single digit savings confirming that cost cutting remains an important part of the bank going forward to improve profitability. And I think this say for 2020, but let me even for 2021, we will maintain explained, our effort in cost cutting with new measures on top of the already approved that will imply even lower cost than Thank you, Paolo. Now changing to one of the topics, we got lots of questions regarding the cost of risk, if we can elaborate a little bit on the trends and what we expect for this year and next year, Cristiano. And as we have discussed in the past, Our conservative loan mix and higher coverage of the NPLs leaves us in a relative good position to absorb potential deterioration of asset quality When it finally happens, as you saw during the presentation, our asset quality trends continue to improve 1 We have decided to keep on booking what we call COVID provisions that reached €166,000,000 to date, representing 83% of total loan loss charges. These provisions are mainly stage 1 mentioned, in other words, they have been booked for a potential future deterioration that has not happened yet. Therefore, we expect We have increased our NPL coverage by almost 14% points in the last 12 months from 52% in the Q3 of 2019 to the current 66%. This coverage level together with our loan mix and the level of collateralization of our announced and following the provisions already booked, now we expect for 2020 a better Level is extremely high for a long book like ours, something that say, too soon to be more specific on the cost of risk for 2021, and we have to follow closely The health situation and the economic situation and on top of that, the government and European and ECB can say, it's that we expect to go back to more normalized cost of risk for the Thank you, Paolo. Although we you have explained it somehow in the throughout the presentation, we got some questions regarding the moratoria and the AICA loans as a quality trends. You want to add something to that? Yes. I think the overall NPLs continue to fall this quarter. I think this is important to remember. So the expected deterioration It hasn't happened yet. The measures that we have in place, including the moratoria and the ecolon, among of the provisions booked so far for COVID-nineteen are provisions made after considering higher expected losses from worse macroeconomic trends, but not owing to a specific deterioration of our portfolio. In our case, far from suffering As a what we internally call watchlist loans from €400,000,000 to around 270,000,000 In September, the previous number was at the end of 2019. So a significant have more color and visibility in the coming quarters, until then what we are doing is reinforce the coverage As you saw and booking provisions following this more conservative assumption in our models, but we haven't seen any special deteriorations in loans with monatoria and corporate loans with the state guarantees or overall loans so far. Regarding the monatoria Asaijulias and Ycolons, as we explained during the presentation, they haven't deteriorated so far. And in the case of Yes, 2.8% of the balances that have finished the legal payment holidays are 90 days overdue. So it's only 2 And I think that what we have is a lower percentage of moratorium and a lower That we think is a proof of the quality of our loan book compared to Okay. Moving to solvency, if we can update, Pablo, know the situation with IRB models with advanced models. Yes. We are very close. We are at the very end of the process, but we we continue to apply the standardized approach in full, as you all know. As I said in previous occasions, we have continued working with the supervisor in the process despite the COVID-nineteen and it's still performing As we were expecting under our calendar. But as you all know, we prefer to be prudent And we've not consider the potential benefits in our solvency plans and forecast. So we will disclose more details when we receive formal news. Thank you, Pablo. Still on solvency, if we can please update on the dividends and the accrual of dividend in 2020? You all know that our aim is to pay cash dividends as soon as possible. And we understand that considering our solvency and financial position, Unicajabanko will be among those banks receiving dividends and buybacks as soon In the meantime, in 2020, we continue to accrue dividends. So in our solvency ratios, only 34 $4,000,000 out of the $77,000,000 reported net income is included in our solvency. Thank you, Paolo. Something related to this one is we've got a question regarding the I said, when do we expect to monetize the 2% shares hedging to share stock and what would be the impact from that? As you probably know and as I said in at the beginning of the presentation, we have just approved in our recent AGM The amortization of 30,500,000 shares, representing 1.9% of total share count. The process of the formal amortization will last slightly less than a month, around a month. So the number of issued shares will be adjusted probably by the end of this month, we will confirm it in due course. It won't have any impact in solvency because we were already deducting those shares, the remaining impacts are positive because financial metrics will Paolo. Finally, to finish, as you probably can imagine, we have some questions regarding the views on M and A understand the situation with Liberbank, we can elaborate a bit or something on this. Yes. And as our President Our Chairman said in the AGM, we published on the 5th October return, the 8th October, we announced that the Board of Directors agreed to appoint advisors for this potential a usual deal and since then, we have been working in the regular process and analysis of this type of deals, including can't decision yet and we expect to keep on with the progress in the coming weeks. Okay. Thank you, Pablo. And thank you all for listening to our results presentation. Please, if you need further information, do not