Good morning to everyone, and welcome to Unicaja Banco second quarter 2019 results presentation. As we usually do, let me start confirming that we have published the quarterly financial report and this presentation this morning before market opens in the CNMV website. Our Chief Financial Officer, Pablo González, will explain the main trends of the quarter. As always, following the presentation, we will answer the questions received from the webcast and in the IR inbox. That said, I leave the floor to Pablo.
Thank you, Jaime. Good morning to everyone. I will start on page 4 with the regular summary of the quarter. On the business trends, let me start highlighting that performing loans grew 3.5% year to date, or 2% if we exclude the seasonal advances that we have every second quarter. This was possible owing to the positive new loan production trends, which grew 19% in individuals and 12% in SMEs. Off-balance-sheet funds grew almost 3% in the first six months of the year. Regarding results, as we will see later, net interest margin grew 2 basis points in second quarter 2019, reaching 105 basis points. Fee income also continues to grow slightly above 5% compared with 2018. Total costs fell almost 3% compared with 2018, something that, together with the stable and low impairments, explain that net income grew 11% compared with the previous year.
On asset quality, liquidity, and solvency, NPAs continued to fall by almost 19% year on year. However, if we consider the portfolio disposals announced last Friday, the annual decrease represents 39%, or a EUR 1.6 billion gross balances drop. It is also important to highlight that such disposals will have a positive contribution to the P&L, and overall positive impact will represent 40 basis points on CET1. Regarding liquidity, our position remains very comfortable with the loan-to-deposit ratio at 76% and liquidity coverage ratio at 336%. Finally, from a solvency point of view, I could highlight that our CET1 was 13.2% in fully loaded terms, maintaining a significant buffer over our SREP requirements. In slide 5, we have summarized the impact from recent portfolio disposals.
As we announced a few days ago, we have formalized the disposals of EUR 530 million gross NPAs, of which EUR 372 million are non-performing loans, meaning that our non-performing loan ratio will decrease to 4.7%, well below the sector that had a 5.6% ratio in May. The disposals also include EUR 458 million of gross foreclosed assets, meaning that balances in gross terms will decrease from EUR 1.6 billion to EUR 1.1 billion. All in all, gross NPAs will decrease from EUR 3.3 billion to EUR 2.5 billion, while NPAs ratio will decrease from 10.7% to 8.3%. As you can see in the bottom right, the disposals will have a gross P&L positive impact of around EUR 17 million. In terms of solvency, it will represent a positive impact on CET1 of 40 basis point.
As you can see, such disposals will have a very positive impact and will leave the problematic exposure of the group at very low levels. I will continue with the results and business section in slide 7, where you can see the P&L details. Starting with the quarterly trends, it is important to see that core income trends were very positive. NII grew almost at 2% in the quarter, while fee income improved by 5%. As you all know, this quarter, we booked the contribution to the resolution fund, something that, together with the lower trading income, explains the gross margin quarterly trend.
Expenses grew 1%, and provision remained very similar, something that, together with the lower taxes, left to a quarterly net income of EUR 53 million, which is well above the EUR 47 million at the same quarter of 2018 or the EUR 34 million of second quarter 2017. Regarding the results of the first six months of the year, core income fell 1%, with NII decreasing 3% and fees growing slightly more than 5%. Dividend income trend was positive while associates were in line with 2018, and the decrease in trading was compensated by other revenues, leaving gross margin slightly above the previous year. Total costs drop and impairments, which remain at a low level, explain the 4% growth of profit before taxes and the 11% improvement in net income.
If we move to customer funds in slide 7, you can see that total customer funds fell 3% year on year, although they were more stable year to date. On-balance sheet funds fell in the first six months of the year, although sight accounts grew, improving further the mix, as you can see in the bottom right. Other positive news is the change in off-balance-sheet funds trends that year to date were growing almost 3%. In slide 9, we show the credit and loans details. As you can see in the slide, gross loans grew 2.6% in the first six months of 2019, with public sector growing 15%, non-performing loans decreasing by 10%, and private sector growing almost 3%. On the right-hand side of the slide, you have the details on performing loans. As you can see, they grew 3.5% in the first half of the year.
This includes close to EUR 377 million of seasonal advances to clients in the second quarter 2019. Excluding such advances, the performing loan book grew 2%, which is a very positive trend. In the bubbles on top of the chart in the bottom right, we show the year on year trends of private sector performing loans, where you can see that the trend, despite the decrease in mortgages, continues to improve, with two quarters in a row with performing balances above the previous year. In slide 10, we show the regular details of the new loan production by segment. Overall, new production grew by 30% in the first six months of the year, mainly in loans to individuals, where the growth reached 19%, with its yield improving 39 basis points to 3.37%. In slide number 11, we start with P&L review with NII details.
As you can see in the top right, the better interest income from loans, together with lower cost of wholesale funding, among others, owing to some measure trying to optimize our liquidity position, more than compensated the lower income from mortgages floors and NPLs. Something that, together with the calendar effect, explained the quarterly improvement. Something that is also reflected in the net interest margin performance that grew from 103 basis point to 105 basis points. Regarding the customer spread, in the bottom of the slide, you can see that front book remains above the back book that, by the way, was impacted this quarter by the seasonal advances at zero cost. In slide 12, you have an update on our debt portfolio. It is worth noting that it has decreased a little bit throughout the quarter, although its contribution to NII was stable at EUR 54 million.
As usually, just to highlight that the big bulk of the exposure remains sovereign debt classified in the amortised cost portfolio, and that the yield was also very stable at 125 basis points in second quarter 2019, compared with 126 basis point in the first quarter. If we move to slide 13, you have the fee income trends that were very positive compared with last year, but also with the previous quarter. In both cases, net fees grew a bit more than 5%, which is very positive. In the first six months of the year, the improvement was supported by payments and collections. However, the quarterly improvement was explained by higher fees from non-banking products. Moving to cost, as you can see in slide 14, operating expenses fell almost 3% in 2019 compared with 2018, and almost 6% compared with 2017.
This trend, as we have explained in different occasions, will remain until 2021 owing to our cost-cutting plan. In slide 15, we show the total impairments continued at low levels year to date, a trend that we expect to remain in the following quarters, among others, owing to our comfortable coverage position, which recent disposals of NPLs confirms that is at the right level. If we move now to the asset quality, in slide 17, we have the details on the evolution of our NPLs. Bear in mind that these are second quarter 2019 figures, so they do not include the recent disposals announced last Friday. Excluding such disposals, NPLs fell close to EUR 200 million year to date, leaving the NPL ratio below 6% in second quarter 2019. As we show in the bottom, gross entries remain low, similar to previous quarters, explaining the 6% quarterly drop.
As we usually do, in slide 18, we have updated our NPL coverage details. Overall NPL coverage was 52% in second quarter 2019, with 82% of our NPL balances being secured and 77% cured by finished buildings. In slide 19, you have an update on the foreclosed assets trends. As in previous slides, these figures don't include the portfolios sold in July. In the left side of the slide, we have the coverage details. Overall coverage was stable at around 62% in June. On the right, you can see the provision released and outflows details that continue to improve in first half of 2019. Quite positive trends as a result of the coverage levels that are confirmed with the disposals announced last week. In slide 20, you can see how NPLs and foreclosed assets have decreased further.
During the first half of 2019, the trend continues to improve, with total gross balances decreasing 7% year to date. If we take into account recent portfolios disposals, you can realize that gross figures will be EUR 1 billion below 2020 target and EUR 1.6 billion below June 2018 figures. In net terms, NPAs representing 2.7% of total assets with coverage stable at 57%. Finally, let me only highlight that our Texas ratio continues to decrease quarter after quarter, reaching 58% in June. In slide 21, we have summary of our liquidity position. As you can see, there are very little changes this quarter. Our LTD ratio has grown from 73% in March to the current 76%, and the liquidity ratios continue to be among the highest of the sector.
In terms of wholesale maturities, as I usually do, let me remind you, we had some maturities throughout the second quarter, but they were very cheap in terms of costs with the big bulk of savings coming at the end of this year. We show in slide 22 the solvency of the bank. As you can see in the top left, current regulatory capital ratios remain well above the SREP requirements with a EUR 1.4 billion buffer over our CET1. In fully loaded terms, quarterly retained earnings and higher valuation adjustments almost compensated the higher risk-weighted assets, leaving CET1 fully loaded at 13.2%. Bear in mind that this ratio do not include the deduction of the authorized and unused treasury stock that represents around 25 basis points.
In the second half of 2019, we will have some positive impact in solvency, mainly from the disposals of NPAs and the capital gains from our Ausol stake, something that will more than compensate the treasury stock deduction. Thanks.
Thank you, Pablo. We will now start with the Q&A. We got plenty of questions regarding NII. Let's start with this topic, Pablo. The first one on net interest income, if we can confirm the guidance for the short and the long term.
Okay, Jaime. The recent changes in interest rate expectations has already been reflected in a lower Euribor, which is one of the main sector reference for loans, and in our case. The Euribor drop is not really good news, and it will have a negative impact mainly in the medium to long term, because it takes time to reprice the full balance sheet. In the short term, mainly for the rest of 2019, we don't expect a significant impact. As we said in previous occasions, there will be some positive and negatives. Regarding the negatives, the contribution from the debt portfolio will be below last year, and we will continue to reduce our balances with mortgage floors. Also, the repricing effect that has been slightly positive in the first six months of this year will become negative again.
On the positive side, the loan mix and volumes will help, and the cost of liabilities will decrease further. All in all, we reiterate our previous guidance that net interest income in 2019 should be close to 2018, with the deviation depending on the size of the increase of the loan book and the final level of the Euribor. All in all, NII should remain stable in the next 12, 18 months, among others, helped by the maturity of some expensive liabilities in the coming quarters.
Thank you, Pablo. The next one is on the ALM strategy, the debt portfolio strategy going forward.
Regarding the debt portfolio, net of the forward sales, it fell by EUR 0.3 billion in the second quarter 2019. During this period, the fair value OCI portfolio decreased EUR 800 million quarter on quarter, ending in EUR 300 million net of forward sales. Following some sales as yields in the Spanish sovereign debt tightened. On the other hand, we increased our structural amortised cost portfolio at the beginning of the quarter. For the next quarters, additional purchases could be possible, but it will depend on market conditions. In terms of exposure, senior financial increased its share during the quarter, up to 7.4% of the total portfolio, being almost all the bonds accounted in the amortised cost portfolio with no impact, as you know, in capital or P&L. In contrast, European government bonds decreased its exposure during the quarter.
Regarding the duration of the portfolio, there has been a slight increase of these metrics in amortised cost portfolio from 4.7 years to 5.7 years as a consequence of some fixing income bonds purchases, as well as some hedging of floating positions to fix, with the objective of increase the duration of the balance sheet in the current environments of low rates. Regarding to NII, as we have guided in the past, we expect the bond portfolio contribution to NII to be in line with the current levels at around EUR 50 million per quarter.
Thank you, Pablo. We got also some questions on the interest rate sensitivity, mainly regarding the sensitivity to a decrease of 10 basis points.
Following new market conditions, as I mentioned, and the statements coming from central banks, the interest rate exposure of the balance sheet has been hedged with derivatives and additional purchases of fixed income bonds. Compared to previous quarters, we have reduced the negative impact in NII from lower rates, at the same time, we have reduced the positive impact in NII from higher rates, as these are the two sides of the same coin. Considering a parallel decrease of the curve of 10 basis points, the impact on NII should be around 2%. Obviously, it depends on a lot of factors, we think taking cost and balance sheet and so on, this should be around almost 2%. The highest impact on NII, obviously, this impact is considering after two years of the changes.
Thank you, Pablo. Moving now to volumes, if we can provide an update on loan growth and which evolution we are expecting for the rest of the year?
The trend, as you have seen, is improving further. In the first quarter 2019, private sector performing loans were growing 0.3% year on year. This has improved to almost 1% in the second quarter. By segments, only mortgages continued to decrease, but a lower decrease level. As we confirmed last quarter, we expect this trend to continue to improve in the second half of this year. We are expecting low single-digit growth, and we'll remain expecting this for performing loans for the first time this year.
Thank you, Pablo. One more very specific on NII regarding mortgage floors and IRPH exposure, if we can update the situation, please.
Well, the balances with active floors continue to fall this quarter, from EUR 1.6 billion at the end of March to EUR 1.4 billion at the end of June. Regarding our IRPH exposure, confirm that we have less than EUR 200 million mortgages linked to this reference. In terms of provisions, we continue to have around EUR 250 million for all legal issues.
Thanks, Pablo. Now, moving to MREL, if we can confirm MREL targets and our funding plan.
As we explained last quarter, we will need to have eligible liabilities representing 20.6% of our risk-weighted assets by January 2022. Our initial aim is to meet the requirement, issuing around EUR 1 billion, mainly senior non-preferred debt. Final decision on instruments and timing will be taken considering the evolution of our solvency position and obviously, the market conditions, in order to optimize the cost of liabilities for the b ank.
Thank you, Pablo. Another one very specific on mortgages. What is the percentage of new mortgage formalized with fixed and floating rates?
We continue to formalize mortgages at fixed rate. For the first half of the year, it was EUR 520 million of new mortgages at fixed rate, representing around 40% of the total new mortgages production, with the remaining formalized with variable rates.
Okay, moving through the P&L. There are a couple of analysts asking us on the fee income trends. They were positive in the quarter. If we can provide some color of what we expect going forward in fees.
Okay. I think this is one of the positives. Yes, the fee income trends has been quite positive this quarter again. The 5% quarterly growth was partially explained by EUR 1.5 million of seasonal fees. However, if we look at the year on year growth, it was also slightly above 5%. As we said in the past, if non-banking products fees continues to improve, helped by market trends, we expect to see a similar trend with close to mid-single digit increases at the end of 2019.
Thank you, Pablo. Now, moving to trading income. If we can explain the level of the quarter and what we do expect going forward too.
Regarding trading income, this quarter has been low. As we anticipated in the first quarter 2019 results presentation, we did not expect to report such a strong trading as in the previous quarter. Bear in mind that in the second half of 2019, we will book the capital gains from our stake at Ausol. There is no need to generate much more trading gains this year. All in all, we don't use to provide guidance for trading income because it obviously depends on market trends. However, this will probably be lower than last year.
Thank you, Pablo. Moving to costs. If we can provide an expenses update and the pending restructuring cost intentions.
As you all know, following the measures taken in the past, we expect to further reduce costs every year until 2021. By the end of 2018, we announced a cost-cutting plan that required around EUR 180 million of restructuring costs, of which EUR 140 million were booked last year. It hasn't been formally decided yet, it makes sense to take advantage of the capital gains from our Ausol to anticipate the pending restructuring costs. We will provide more color once we book the gains in the second half of this year.
Thank you, Pablo. Now, moving to impairments. If we can provide an update on our guidance for the cost of risk and impairments.
On impairments, we can see impairments remain low, and we feel comfortable with our coverage levels. A good example of this is the results from the NPAs disposals that we just announced. Something that makes us feel very comfortable, and that should enable us to maintain the level of impairments low in the coming quarters.
Okay, there is another one very specific on the tax rate. It was lower than in previous quarters, if we can explain the reasons?
This low tax rate is due to the nature of part of our revenues that are booked net of taxes. Our income from associates is an example. Those quarters with relative higher income from associates is usually translated in a lower effective tax rate. On top of this, in the second quarter this year, we also had some other small gains in other results that were accounted net of taxes, explaining the relative lower effective tax paid in the quarter. Going forward, the easier way to estimate our tax rate is to deduct affiliates' income from the profit before taxes and then applying around 30% rate to the results.
Thanks, Pablo. Moving to some questions regarding asset quality. If we can provide more color regarding the portfolios sold in July that we announced last Friday.
We have provided specific information in the result presentation and the relevant fact published last Friday. Final details will be disclosed in the second half of this year with the regular breakdown of our NPAs. Under my view, the most important thing related to this announcement is that we will reduce significantly the problematic exposure, and we will have a positive impact in the P&L, something that confirms us that our coverage levels are the right ones. Following such disposals, the problematic exposure becomes not really relevant, something that we understand that the market, analysts, and investors will consider a very positive news.
There is another one related to this one. If we do expect additional disposals similar to the ones announced last Friday, and what is the strategy now that the balances are relatively low?
As we said in the past, we always analyze different options. We go ahead with those ones that we believe that are in the best interest for our shareholders. Some quarters, we reduce more NPLs. Some others, it's more foreclosed assets focus. Every year, we reach some agreements to sell some portfolios on top of the day-to-day sale process. This strategy implies that we don't reduce our problematic exposure in a linear and regular quarterly basis. As we have demonstrated, we have been able to reduce the big bulk of our problematic exposure with a positive impact in P&L.
Thanks, Pablo. Moving to solvency. If we can provide more details on the quarterly solvency impacts that we have mentioned in the presentation, please.
Yeah, sure. We have split into two buckets the impact. On one side, we have the 31 basis points positive impact, of which half comes from retained earnings, and the other half from valuation adjustments. On the negative side, we have 36 basis points coming from higher risk-weighted assets, of which, again, around half are related to the seasonal advances that we mentioned, and the other half mainly to higher risk weights of developers and the quarterly loan growth.
Thank you, Pablo. There's one on Ausol capital gains. What we will do with such a capital gains, Pablo?
I think such gains confirm our balancing strength and our prudent approach to accounting. As we anticipated, gross gains are EUR 122 million, and net gains will be EUR 112 million. This will enable us to book, among others, pending restructuring costs that we mentioned, something that will be positive for the future results. Also, these gains will enable us to reinforce our 2019 results and the solvency of the group, leaving us in a very comfortable position going forward.
Thank you, Pablo. There is another one, very specific, that asks us if the authorization to buy treasury stock is deducted from the 13.2% CET1 fully loaded.
No, that's not included. If you want to adjust the impact in the CET1 fully loaded ratio, this authorization, you will need to deduct an additional 25 basis point from the CET1 ratio.
What are our solvency expectations for the future? There is one analyst also asking what is the plan for our current excess of capital going forward.
I think we can confirm that we will continue to run the bank with one of the highest CET1 ratio of the sector. Bear in mind that we have significant positive impact in the second half of this year, like the Ausol gains and the NPAs disposal that we mentioned. We expect to continue to improve our solvency position, something that will leave us in a very comfortable position.
There is another one asking us if we can explain the quarterly improvement in the valuation adjustments.
Yes. The big bulk of the improvement is coming from the improvement in the market condition, and therefore, the mark to market of our debt portfolio classified in the fair value OCI. However, the big bulk of our debt portfolio, as you know, is classified in the amortised cost, where we also have significant capital gains that currently, at June levels, were above the EUR 500 million.
Thank you, Pablo. The following one, also regarding solvency, is if we can provide an update on IRB models.
Yes. As we confirmed a couple of quarters ago, we continue to work with the idea of having the mortgage portfolio approval by the end of next year. Risk-weighted assets optimization from IRB models is welcome, but it is not considered in our solvency plan, in our capital plan. It's just because we are taking a prudent approach, and until we have the approval, we won't consider that in our capital planning. However, our solvency position, even without that, is very comfortable because we don't expect any negative impacts coming from either a TRIM, Basel IV, and we have positive levers, as we mentioned, ahead, like the Ausol gains or the disposals of the NPAs that we announced. As you can imagine, we do have capital, and now the focus for the management is to put such capital to work in order to improve our shareholder value.
Thank you, Pablo. The next one, also very related to the previous comment, if we can update on dividends and potential buybacks.
Yes. We have just paid, last 10th of May, EUR 0.038 of cash dividend per share, which at current market prices represents close to 5% dividend yield. As you can imagine, we are in a comfortable solvency position, so there is room to further improve the dividend. Last year, dividend implies a 40% cash payout. Going forward, such a payout is a good reference, but bear in mind that we do not have a formal dividend policy, and our board of directors will propose each year the dividend, considering, among others, our solvency position and the results of the year. Regarding the other part of the question, the share buybacks, we consider it very positive, especially considering our current market multiples. From a financial point of view, it makes sense, and we do believe that could be used as a good strategy to generate shareholder value.
We haven't taken formal and specific decisions to announce so far, but this is an option that we are studying.
On the treasury stock, we also have questions, if we can please confirm if we are currently buying treasury stock or what is the current size of our treasury stock.
I will answer first the last one. Our treasury stock now represents 0.14% of total shares. It has been pretty stable year to date. Regarding the first question, no, we are not buying treasury stock at the moment, and we currently have an operational limitation that's set the minimum price at one euro, and so we cannot buy treasury stock below such price. However, we expect that to change tomorrow in the extraordinary general shareholder meeting that we will have. Regarding the future intentions, I cannot provide you much more information. Whatever we do in the future will be made public in due course.
Thank you, Pablo. The next one is on a potential new business plan, if we are working, if we can confirm if we are working in a new business plan, and what will be the timing for announcing it and providing details.
Yes. During the next months, we will be working on a new business plan. Obviously, we need to adjust our plan to the current environment and to identify the strategies and business that could enable us to improve returns and generate value for our shareholders at the right level of risk.
Thank you, Pablo. There is one on a specific also, that ask us why we have decided to change now the CEO.
I think Ángel Rodríguez, our new CEO, has been working in the bank for many years, and so he has been part of the senior management that has brought the bank to where it is today. Among others, the one leading the recent NPAs disposal, recently announced with very good numbers, as you have seen. He has been working and managing, among others, control, the business network, finance function. We expect this change to be translated in renewed motivation for the whole bank. As I said, always with the right level of risk.
Thank you, Pablo. One final one, more regarding the sector consolidation, if we can update our views regarding the consolidation of the sector.
As I said before, our target is to generate value for our shareholders. We need to analyze all options that could be positive for them. We will continue to do so, as we have done in the past.
Thank you very much, Pablo. That was the last one. If you got further questions, do not hesitate to contact the IR for further questions. We wish you, if you can, we wish you a long and a quiet summer season, and see you next quarter.
Thank you. Bye now.