Earnings Call: Q1 2019

Apr 30, 2019

Good morning to everyone, and welcome to Unica Javanco First Quarter 2019 Results Presentation. As always, let me start confirming that we have published the quarterly financial report and this presentation this morning before market opens in the same MB website. It's a busy day of results, so our Chief Financial Officer, Pablo Montaves, will go straight forward to summarize the main trends of the quarter. Following the presentation, we will answer the questions received. Pablo, whenever you want. Thank you, Jaime. Good morning to everyone. We will start in Page 4 that includes a summary of the quarterly results. Starting with the business trends, I want to highlight that performing loans grew 1.2% quarter on quarter, which is a very positive news. The trend was helped by the strong growth in new production as we will see later. Total customer funds also grew almost 2%, supported in a positive change in the recent trends of assets under management that grew 1.5% in the quarter. Regarding results, Net interest margin was stable at 103 basis points. Fee income grew Slightly above 5% compared with last year, something that together with the 3.4% decrease in costs explain the 10% increase in net income compared with the previous year. On asset quality, liquidity and solvency, NPAs continue to fall by 20% year on year In Q1 of 2019, on liquidity, our position remains very comfortable with the loan to deposit ratio at 73% and the liquidity coverage ratio at 3 53%. Finally, regarding our solvency, Seed 1 was 13.3% in fully loaded terms, maintaining a significant buffer over the spread requirements. I will continue with the results and business section in Slide 6, where you can see the P and L details. Starting with the quarterly trends. NII fell almost 3% in the quarter, mainly owing to the calendar effect. Fees, despite the seasonality of the previous quarter, remain almost flat. Gross margin fell 2% quarter on quarter with much lower trading gains compensating the deposit Currently funding contribution booked in the 4th quarter. Total costs decreased 2% compared with 4th quarter 2018 and impairments were much lower owing to the significant restructuring costs booked in the previous quarter. All these together left at BRL85 1,000,000 the profit before taxes and net income at $63,000,000 If you look at the last three columns, You have the year on year comparison. Gross margin grew 3% with positive trends in fees, Dividends and trading compensating the lower net interest income. Total expenses decreased by 3.4% compared with 2018. Finally, impairments remain quite low, leaving net Attributable income at $63,000,000 that is 9% above the previous year. It is worth noting that the Q1 results grew for 3rd consecutive year. If we move to customers' funds in Slide 7, you can see that total customer funds grew 1.8% year on year and 1.2% quarter on quarter. It is worth noting that off balance Ship funds started to grow again after decreasing in the 2 previous quarters. In Slide 8, We show the credit and loss trends. As you can see in the slide, this was a positive quarter for gross loans Despite the 5% decrease in nonperforming loans, total gross loans grew 0.8% quarter on quarter. On the right hand side of the slide, you have the details on performing loans. As you can see, They grew 1.2% quarter on quarter. By segments, mortgages Onggy fell 0.9% quarter on quarter, well below previous quarters. However, Corporate loans grew by 4.7% and customers and others were almost 2% above the previous quarter. All in all, improving trends, as you can see in the bubbles on the top of the chart that is In the bottom right, as the bubbles show, the year on year trend continues to improve every quarter, showing growth for the first time in a long time. In Slide 9, We show the regular details of the new loan production by segment. Overall new production grew by 26% in the Q1 of 2019 compared with the previous year, mainly in loans to individuals where the growth reached 29% with its Steel improving 44 basis points to 3.49%. In Slide number 10, we start with the P and L review with NII details. As you can see in the top right, the calendar effect explained the big bulk of the quarterly decrease, something That is also reflected in the net interest margin performance that was stable for 3 consecutive quarters. Regarding the customer spread, in the bottom of the slide, you can see that our front book remains well above the back book. In Slide 11, We have an update on our debt portfolio. It is worth noting that we have increased excise Throughout the quarter in around BRL0.5 billion, something that partially explained the quarterly increase in risk weighted assets as we will see later. The peak bulk of the exposure remains sovereign debt classified In the amortized cost portfolio, I will just highlight that the average yield of the portfolio remained stable with a slight improvement of 3 basis points in the quarter. If we move to Slide 12, you have the fee income trends that were very positive compared with last year. Net fees grew by 5.1%, driven by a significant increase in payments and collection that more than compensated the slightly lower contribution from non banking products. Now moving to costs. As you can see in Slide 13, operating expenses fell by 3.4% in 2019 compared with 2018 and almost 6% If we compare with 2017, a trend that, as we have explained in different occasions, We remain until 2021 following the cost cutting plans of the bank. In the Slide 14, we have the impairments details. As you can see, total impairments were very low in the quarter, a trend that we expect to remain in the following quarters, among others, owing to our comfortable coverage position. If we move now to the asset quality. In Slide 16, we have details on the evolution of our nonperforming loans, where you can see that the trends also remain positive. Nonperforming loans fell more than BRL700 1,000,000 year on year, leaving the nonperforming loan ratio at 6.3% in Q1 2019. As we show in the bottom, gross entries remained low, similar to previous quarters, explaining the 5% quarterly drop. As we usually do in Slide 17, we have updated our non performing land coverage details. Overall nonperforming loan coverage was 52% in Q1 2019 with 90% Of the nonperforming loan balances being secured and almost 80% of them in Finnish buildings. If we move now to Slide 18, You will see an update of the foreclosed assets trends. In the left side of the slide, we have the coverage details. Overall coverage was stable and around 62% in March. On the right, you can see the previous the provisions released and outflows details that continue to improve at the beginning of 2019, quite positive trends as a result of our coverage levels. In Slide 19, we show together the NPLs and foreclosed assets trends. During the beginning of this year, the trend continues to improve with total gross balances reaching our 2020 target. In net terms, NPAs represented 2.7% of Total assets with the coverage is stable at 57%. Finally, Let me only highlight that our Texas ratio continues to decrease quarter after quarter. In Slide 20, we update our liquidity position. As you can see, There are very little changes this quarter. Our loan to deposit ratio remained low at 73% The liquidity ratio continued to be among the highest of the sector. In terms of wholesale maturities, As I usually do, let me remind you that until the end of 2019, we won't have any significant maturity. Finally, we show in Slide 21, 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 BRL1.4 billion buffer over Sea 1 and close to EUR0.7 billion buffer in total capital. Let me remind View that our phasing calendar finishes in 2023 rather than in 2019, Like for most banks, in fully loaded terms, the CET1 fell in the quarter 20 basis points to 13.3%. Quarterly retained earnings mitigated the higher deductions explained mainly by the increase in the equity of some of our insurance affiliates. On top of this, the increase In the loan book and some senior bonds acquired in our debt portfolio led to higher risk weighted assets that explain the C1 quarterly drop. It is also worth noting that we have received the formal letter from the Bank of Spain with our NREL requirement that represents 20.59% of our risk weighted assets for January 2022. Thank you, Pablo. We will now answer the questions that we have received in the webcast. As you can imagine, we will start with The situation with Liberbank Pablo, there are several analysts asking us if we can update the situation with Liberbank. As you all know, we're working in a potential deal with Liberbank, And all I can say at this moment is that we hope to reach an agreement soon. Until there is a final decision, we will not do any further comments. Thank you, Paolo. Moving to the P and L and NII. Let's start with the ALCO portfolio. We can clarify The movement is now is contributing to net interest income and the strategy going forward, please. The debt portfolio, as we anticipated, grew BRL0.5 billion in the Q1 of this year, Following some expected purchases in the structural amortized cost portfolio, taking advantage of the good levels in the market. As we explained in the past, this structural portfolio is related to the structural liquidity position of the bank. The purpose of these purchases executed in the last quarter was to invest the excess liquidity. Going forward, We can expect additional purchases in the next months. The weight of government bonds decreased this quarter, representing now 73.5 percent of the total debt portfolio, with most of it being Spanish. On the other hand, the exposure on financial senior increased to 6.2% of total debt portfolio, with almost all the bonds accounted in amortized cost portfolio. Regarding NII, As we said in previous occasions, the bond portfolio contribution will remain at levels close to $55,000,000 per quarter. Thank you, Pablo. The next one Regarding litigation, if we can update the mortgage flows and the IFRS exposure. Balances with active floors fell to BRL1.6 billion in March. Regarding IRPH, we have around BRL200 1,000,000 mortgages linked to this reference. In terms of our provisions, we continue to have around BRL260,000,000 for all legal issues, mainly for the mortgage floor. The trend is improving. In the Q1 2019, we saw almost 1% quarter on quarter increase in private sector performing loans. In year on year, they were also growing at 0.3%, something which is quite positive. By segments, the year on year growth in corporate and consumer loans was above 8% and 5%, respectively. However, mortgages continue to fall. We Expect this trend to continue to improve throughout the year. We are expecting low single digit growth in performing loans for the first time this year. As you can see, the trend is positive in all segments except In mortgages, where the natural amortization and early repayments continue above the new production. However, we also expect to improve the trends in this segment throughout the year. Okay. Pablo, moving remaining in net interest income, if we can Update our guidance for this P and L 9, please. As you saw in the presentation, the big bulk of the quarterly decrease is explained by the calendar effect. For the rest of the year, we will continue to have some positives and negatives. Regarding the negatives, the contribution from our debt portfolio will be below the 2018, and we will continue to reduce our balances with mortgage floors. On the positive side, The loan mix and volumes should help and although less than initially expected, the repricing effect will also be positive. All in all, depending on the size of the increase Of the loan book and your write off trends, net interest income in 2019 should be similar to the 2018. Okay. Regarding liquidity, we've got a specific question on the balance of deposits currently held in ECB. And if we expect something kind of impact from our potential tailings? Yes. The liquidity held in the ECB was Slightly below BRL2 1,000,000,000 at the end of the quarter, this excess fleet of liquidity should continue to decrease In the future, as the commercial gap narrows and some expected bond purchases are executing. In regards of A potential clearing, as you can imagine, not too much to say as there is no official statement on it. However, we will continue to improve our liquidity management throughout the year. Thank you, Paolo. Moving to the P and L. We got a couple of questions on fees. So he will give an update how is the business regarding fee income for the rest of the year. Okay. In fees, fee income was very stable in the quarter. It went from BRL 55,500,000 in the Q4 last year to BRL 55,300,000 in the Q1 of this year, so almost flat. The year on year trend is positive, mainly driven by higher payments and collections. As we said in the previous quarter, if non banking product fees continue to improve, helped by market trends, we expect to see around mid single digit improvement in this year. There is one question on dividend income, Pablo. It was a strong quarter. What do we expect going forward? Yes. This increase in the quarter is mainly explained because Some of the stakes that we hold have already announced their dividends for the full year, and we book the dividends when they are announced. All in all, I think we expect this dividend income to be slightly above the previous year. So moving to trading income, that was also strong in the quarter. You can explain what we expect for this period in line. The trading income this quarter was Trond, we don't expect to realize such a trond trading every quarter. But for the full year, it is difficult to provide the guidance because it will depend on market trends and activity on Friday. Thank you, Pablo. Rudolf, in other revenues and And Francisco can provide the breakdown of the quarter. This quarter, we have BRL 9,000,000 coming from our real estate servicer, another BRL3 1,000,000 from real estate rentals And around €10,000,000 from Unions del Duero Vida Pensiones, which is the company that we own 100% that is in runoff. On the negative side, we have BRL 1,000,000 of maintenance costs for real estate assets and $4,000,000 related to the DTA levy and another $1,000,000 that includes the rest of the results. This P and L has some seasonality, mainly owing to the contribution to the resolution fund in the second quarter and the deposit guarantee fund contribution in the 4th quarter, as you all know. On top of that, the rest of the results are mainly explained by the real estate servicer contribution, which is not linear and some quarter could be above others. Thank you, Paolo. Moving to costs, we can elaborate a little bit on what do we expect in terms of costs and the trend. Regarding as you all know, we have this plan that we announced last quarter. And regarding this voluntary exit plan, what I can say is that The number of employees that have asked to join the plan is in line with what we were expecting, even slightly above. So this is a positive new that will allow us to accomplish in this area. So we are now organizing the process On the restructuring costs, as we said in the previous quarter, there are around BRL 40,000,000 pending that will probably be booked throughout the horizon of the plan. This plan will enable the group to continue reducing our personnel costs until 2021. Finally, regarding general expenses, As you probably saw, amortization grew by $2,000,000 while general expenses decreased by the same amount. This is explained by IFRS 16. All in all, What we expect is to reach further savings until 2021, mainly due to these cost cutting measures that we have implemented. Moving to asset quality, if we can elaborate a little bit on the cost of risk and what we expect for the future. Yes, Jaime. We believe that the cost of risk will remain low in the coming quarters. We feel comfortable with our current coverage and asset quality trends, which are quite positive. And we expect to see loan loss charges very low for the rest of the year. Thank you, Paolo. Just one specific question on nonperforming assets That is to say that according to the press, we are planning to sell a big portfolio of nonperforming assets if we can confirm it. As you all know, we are continuously analyzing different options regarding our NPAs portfolio. So the price and conditions of potential disposals change depending on different variables like size on the timing of the different assets. So we analyze every opportunity trying to optimize the potential results. We don't discard a large deal, but no decision has been taken so far. If we finally go ahead with the large disposals, we will provide details in the course. However, in the Q1 of this year, we haven't formalized any material portfolio disposal. Okay. Finally, also on general provisions, if we can explain what will be EUR60 1,000,000 include in the quarter. Yes, as you know, this is the slide is a mix of different issues. We have some provisions for litigation risks as most of the quarters, but we also have some of balance sheet risk impairments and small impairment related to the Zarev exposure and some provisions for restructuring costs. As we said in previous quarters, this P and L line will continue to include some of these impairments going forward, but in line what we saw in the past. Thank you, Pablo. Moving to solvency, if we can what do we expect in terms of payout if We expect to maintain the 40% level or considering as we see what are the plans? We have just approved in our AGM last year dividend. We will pay next 10th May, dollars 3.08 per share, which implies at current Prices and almost 4% dividend yield. This dividend implies a 40% cash payout. Going forward, you have to bear in mind that We do not have a formal dividend policy, and our Board of Directors will propose each year dividend considering the solvency position and the results of the bank that year. Thank you, Pablo. An update on IAB Motors, please. Yes. And there's no news in this front. As we said in the 2018 annual results, we have already taken the first steps towards formal application. And if things evolve as we expect, we believe that we can have the approval by the end of next year for the markets portfolio, but it will depend obviously on the supervisor decision. Thank you, Paolo. The next one is Tim, if we can confirm what was the impact regarding this? Yes. The impact has not been material because we own most of our branches. So in terms of P and L, we expect around BRL8 1,000,000 of lower General expenses and higher amortizations per annum, something that has already been reflected in these first quarter results. The remaining impacts are very small. Thank Sure. We have received the formal authorization from the ECB to increase Our treasury stock up to 3% of total shares. We haven't decided yet The timing and the format of the potential acquisition of such firstly stock, as you can imagine, However, it will have an impact of around 20 basis points in our CET1 fully loaded That is not included in the SCENE-one fully loaded ratio of the 13.3% reported today. Okay. We also have several questions regarding the solvency drop of the quarter. You can explain more detail the trend. Okay. This quarter, we have 2 different drivers. On one side, and the major driver has been the risk weighted assets That has grew owing to the increase in the loan book, but also owing to the higher bond portfolio Wade, because we have acquired some senior debt throughout the quarter. On the other side, the quarterly results generation was mitigated by higher deductions related to the higher valuation of some of our insurance companies. That explains the close to 20 basis point quarterly drop. In other words, We have generated 16 basis points through retained earnings. This was motivated by higher deductions. In addition, the higher risk weighted assets explain a 24 basis point drop in CET1. So on top of these two issues, as I just explained, it is worth noting that we have received the authorization from the ECB to buy up to 3% of treasury stock, which is which has an additional impact of around 20 basis points That is not considered in the SEK1 fully loaded of 13.3% that we show in the presentation. Thank you, Pablo. Moving to NREL. Do we expect an increase in the wholesale funding Regarding the NREL issuance. Yes. As we Plained in the presentation, we have received the formal letter from Bank of Spain confirming that we will need to have eligible liabilities representing around 20.59% of our risk weighted assets by January 2022. This requirement is in line with the one that we were expecting and we mentioned in the last result presentation and is considering and it has been considered in our funding and solvency plan for the period 2019, 2021. Our current regulatory total capital ratio leave us in a comfortable position and with enough time to complete This requirement, bear in mind that our phase in deduction calendar finished in 4 years, so in 2023, something relevant considering the relative higher facing solvency. Our initial aim is to meet The requirement issuing both Tier 2 and senior debt, but final decision on the instruments and timing will be taken considering the evolution of our solvency position and the market conditions In order to minimize the cost and preserve our P and L, it is also worth Noting that if we consider the approval of the IRB models, the insurance needs will be lower. Regarding the potential additional costs of these liabilities, I'd like to highlight, as I did in the past, that we have expensive liabilities maturing in the coming quarters that will help us to mitigate the cost of the new ENDRA liabilities. As a reminder, we have close to BRL1 1,000,000,000 of copper bonds at 2.5% cost, around BRL2.5 maturing at the end of this year and beginning of next year And also another BRL1.3 billion of expensive client deposits at around 4.3%, maturing by the end of 2020 and the beginning of 2021. So these maturities will more than compensate Effective issuance and real instruments cost, helping to improve our profitability and P and L. Thank you, Paolo. There is only one final question, very specific final question regarding our stake So in Casera and Azul, which is the percentage that we currently hold and what is the value and if we do expect to generate capital gains a potential disposal of such stakes. Just given the last few weeks, you probably saw in the press that there is interest for a potential acquisition of these 2 states. We haven't taken a formal decision If the interest is confirmed and the circumstances and the conditions are the right ones, we will analyze If it makes financial sense for us, so far, all that I can say is that we have A 10% stake in Caser with a book value of BRL61 1,000,000 and around and a 20% stake in AUSO with a book value of 22,000,000 Okay. Thank you very much, Pablo. Thank you, everyone. We will now finish the webcast. Please do not hesitate to contact the IR team for further details. See you next quarter. Thank you. This concludes today's call. Thank you for joining. You may now disconnect your lines. Have a lovely day.