Earnings Call: Q2 2019

Jul 29, 2019

Good morning to everyone, and welcome to Unica Javanco 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 Gonzalez, 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 Paolo. Thank you, Jaime. Good morning to everyone. I will start in 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 2nd quarter. This was possible owing to the positive new loan production trends, which grew 19% in individuals and 12% in SMEs. Also, our balance sheet funds grew almost 3% in the 1st 6 months of the year. Regarding results, as we will see later, net interest margin grew 2 basis points in Q2 'nineteen, 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 explained that net income grew 11% compared with the previous year. On asset quality, liquidity and solvency, NPAs continue 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 €1,600,000,000 gross balances drop. It is also important to highlight that such disposals will have a positive contribution to the P and L, an overall positive impact will represent 40 basis points on Seed 1. Regarding liquidity, our position remains very comfortable with the loan to deposit ratio at 76% our liquidity coverage ratio of 336%. Finally, from a solvency point of view, I would highlight that our CET1 was 13.2% in fully loaded terms, maintaining a significant buffer over our SREP requirements. In Slide 6, we have summarized the impact sorry, 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 8 €30,000,000 gross NPAs, of which €372,000,000 are nonperforming loans, meaning that our nonperforming loan ratio will decrease to 4.7%, well below the sector that had a 5.6% ratio in May. The disposals also include €458,000,000 of gross foreclosed assets, meaning that balances in gross terms we'll decrease from €1,600,000,000 to €1,100,000,000 All in all, gross NPAs will decrease from €3,300,000,000 to €2,500,000,000 while NPA's ratio will decrease from 10.7% to 8.3%. As you can see in the bottom right, the disposals will have a gross P and L positive impact of around €17,000,000 in terms of solvency, it will represent a positive impact on CET1 of 40 basis points. So 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 and L details. Starting with the quarterly trends, it is important to see that core income trends were very positive. NII grew almost 2% in the quarter, while fee income improved by 5%. As you all know, this quarter, we booked a contribution 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 €53,000,000 which is well above the €47,000,000 at the same quarter of 2018 or the €34,000,000 of Q2 'seventeen. Regarding the results of the 1st 6 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 1st 6 months of the year, all the site 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 1st 6 months of 2019, with public sector growing 15%, nonperforming 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 €377,000,000 of seasonal advances to clients in the Q2 'nineteen. 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, what you can see that the trend despite the decrease in mortgages continues to improve with 2 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 1st 6 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 11, we start with P and 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 explain the quarterly improvement, something that is also reflected in the net interest margin performance that grew from 103 basis points 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 0 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 €54,000,000 As usually, just to highlight that the big bulk of the exposure remains sovereign debt classified in the amortized cost portfolio and that the yield was also very stable at 125 basis points in Q2 'nineteen compared with 126 basis points in the Q1. 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 1st 6 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 costs. 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, we'll 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 Q2 'nineteen figures, so they do not include the recent disposals announced last Friday. Excluding such disposals, NPLs fell close to €200,000,000 year to date, leaving the NPL ratio below 6% in Q2 'nineteen. 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 Q2 'nineteen with 82% of our NPL balances being secured and 77% cured by Finnish 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 release and outflows details that continue to improve in first half of twenty nineteen, 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 twenty nineteen, the trend continues to improve with total gross balances decreasing 7% year to date. But if we take into account recent portfolios disposals, you can realize that gross figures we'll be €1,000,000,000 below 2020 target and €1,600,000,000 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. Finally, 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 €1,400,000,000 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 unused treasury stock that represents around 25 basis points. However, in the second half of twenty nineteen, we will have some positive impact in solvency, mainly from the disposals of NPAs and the capital gains from our household stake, something that will more than compensate the treasury stock deduction. Thank you, Paolo. We will now start with the Q and A. We've got plenty of questions regarding NII. So 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 it's 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 and also the repricing effect that has been slightly positive in the 1st 6 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 2019 with the deviation depending on the size of the increase of the loan book and the final level of the year over. So 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 €300,000,000 in the Q2 'nineteen. During this period, the fair value to OCI portfolio decreased €800,000,000 quarter on quarter ending in €300,000,000 net of forward sales, following some sales as yields in the Spanish sovereign debt tighten. On the other hand, we increased our structural amortized 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 amortized cost portfolio, with no impact, as you know, in capital or P and L. In contrast, European government bonds decreased its exposure during the quarter. Regard the duration of the portfolio, there has been a slight increase of these metrics in amortized cost portfolio from 4.7 years to 5.7 years as a consequence of some fixing income bonds purchases as well as some hedging our 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 €50,000,000 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. Yes. Following new market conditions, as I mentioned on the statements coming from Central Banks, the interest rate exposure the balance sheet has been hedged with derivatives and additional purchases of fixed income bonds. Per to previous quarters, we have reduced the negative impact in NII from lower rates, but at the same time, we have reduced the positive impact if 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, but we think taking cost and balance sheet and so on, this should be around almost 2%. The highest impact on NII, obviously, and this impact is considering after 2 years of the changes. Thank you, Paolo. 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 Q1 2019, private sector performing loans were growing 0.3% year on year. This has improved to almost 1% in the 2nd quarter. By segments, only mortgages continue to decrease, but a lower decreased level. As we confirmed last quarter, we expect this trend to continue to improve in the second half of this year, so we are expecting low single digit growth and we remain expecting this for performing loans for the first time this year. Thank you, Paolo. One more very specific on NII regarding mortgage clause and IRBH Sposor, if we can update the situation, please. Well, in the balances on with active floors continue to fall this quarter from €1,600,000,000 at the end of March to €1,400,000,000 at the end of June. Regarding our IRPH exposure, confirm that we have less than €200,000,000 mortgages linked to this reference and in terms of provisions, we continue to have around €250,000,000 for all legal issues. Thanks, Paolo. Now moving to MREL, if we can confirm MREL targets it's on our funding plan. Okay. 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 €1,000,000,000 mainly senior debt, senior nonpreferred debt mainly. But 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 bank. Thank you, Paolo. 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 €520,000,000 of new mortgages at fixed rate, around 40% of the total new mortgages production with the remaining formalized with variable rates. Okay. Moving through the P and L. There are a couple of analysts asking us the fee income trends that 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 positive news, the fee income trends has been quite positive this quarter again. The 5% quarterly growth was partially explained by €1,500,000 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 to. Regarding trading income, this quarter has been low. As we anticipated in the Q1 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 twenty nineteen, we will book the capital gains from our stake at Ausol, so 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 dependent restructuring cost intentions. As you all know, following the measures taken in the past, we expect to further reduce cost every year until 2021. By the end of 2018, we announced a cost cutting plan that required around €180,000,000 of restructuring costs, of which EUR140 million were booked last year. It hasn't been formally decided yet, but it makes sense to take advantage of the capital gains from our household to anticipate the pending restructuring costs. However, we will provide more color once that 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. Okay. On impairments, we can see impairments remain low, and we feel comfortable with our coverage levels. And a good example of this is the results from the NPAs disposals that we just announced. So something that makes us feel very comfortable and that should enable us to maintain the level of impairment is 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 the our revenues our book 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 Q2 this year, we also had some other small gains in other results that were accounted net of taxes, explaining the relative lower effective tax we expect to be 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. Now moving to some questions regarding asset quality, if you can provide more color regarding the portfolios sold in July that we announced last Friday. We have provided specific information in the result presentation under 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 and 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. 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, and we go ahead with those ones that we believe that are in the best interest for our shareholders. Some quarters we reduce more NPLs and some others it's more foreclosed assets focus. And every year, we reach some agreements to sell some portfolios on top of the day to day sale process. The strategy this strategy implies that we don't reduce our problematic exposure in a linear and regular quarterly basis. But as we have demonstrated, we have been able reduce the big bulk of our problematic exposure with a positive impact in P and L. Thanks, Pablo. Moving to solvency. If we can provide more details on the quarterly solvency impacts that we have mentioned it in the presentation, please. Yes, sure. We have split the into 2 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 on the quarterly loan growth. Thank you, Paolo. There is one on our SOL capital gains. What we will do with such capital gains? Paolo? I think such gains confirm our balance sheet strength and our prudent approach to accounting. As we anticipated, gross gains are €122,000,000 and net gains will be €112,000,000 So this will enable us to book, among others, depending 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 says or that asks us if the authorization to buy Tresili stock is deducted from the 13.2% CET1 fully loaded. No, 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 analysts are 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 1 of the highest CET1 ratio of the sector, bear in mind that we have significant the impact in the second half of this year like the household gains and the NPAs disposal that we mentioned. So we expect to continue to improve our solvency position, something that will leave us in a very comfortable position. There is another one on the 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 in market condition and therefore, the mark to market of our debt portfolio classified in the fair value of OCI. However, the big bulk of our debt portfolio, as you know, is classified in the amortized cost, where we also have significant capital gains that currently at June levels, we're above the €500,000,000 thank you, Pablo the following one also regarding Insolnesi 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 asset in our capital plan, it's just because we are taking prudent approach and until we have the approval, we won't consider that in our capital planning. However, our solvency position, even without that, it's 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 outsold gains or the disposals of the NPAs that we announced. So as you can imagine, we do have capital. And now the focus for the management is to put that such capital to work in order to improve our shareholder value. Thank you, Paolo. 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 10 May, on an euro of cash dividend per share, which at current market prices represents plus to 5 percent 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. So regarding the other part of the question, the share buybacks, we consider it a very positive especially consider 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. However, we haven't taken a 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 restock or what is the size of our treasury the current size of our treasury stock? I will answer first the last one. Our treasury stock now represents 0.14 percent of total shares, it has being pretty stable year to date. And regarding the first question, no, we are not buying treasury stock at the moment, we currently have an operational limitation that set the minimum price at €1 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. And 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 in 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 specific also that ask us why we have decided to change now the CEO. I think Angel Rodriguez, our new CEO, has been working in the bank for many years. And so he has being part of the senior management that has brought the bank to where it is today and among others, the one leading the recent NPA's 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. So we expect this change to be translated in renewed motivation for the whole bank. And as I said, always with the right level of risk. Thank you, Paolo. One final more regarding the Zettler consolidation, if we can update our views update our views regarding the consolidation of the sector. As I said before, our target is to generate value for our shareholders. So we need to analyze all options that could be positive for them. So 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've got further questions, do not hesitate to contact the IR to 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.