Earnings Call: Q2 2018

Jul 30, 2018

Good morning to everyone, and welcome to Unica Habanko Second Quarter 2018 Results Presentation. First of all, as well as do, let me confirm you that we have published the quarterly results, including the financial report and this presentation. The profit before taxes at BRL62 1,000,000 in this quarter, reaching BRL140 1,000,000 in the first half of the year, which is almost twice the previous year. Attributable net income also grew from BRL 86,000,000 in 20 17 to current €105,000,000 representing a significant improvement of 23%. If we move to customer funds in Slide 8, you can see that total customer funds grew 4% year on year. On balance sheet funds grew €1,000,000,000 or 3% year on year And off balance sheet funds grew by 7% in the same period. Regarding on balance sheet funds, As you can see in the right hand side of the slide, site deposits showed a strong growth And the mix between site and term deposits continue a steady improvement. Site deposits In the Q2, this year represents 77% of total private sector deposits, which compare with 70% 1 year before. In Slide 9, we have the credit and loans trends, which for 2nd consecutive quarter were quite positive. In the left part of the slide, We show the gross loans and in the right hand, the performing loans. As you can see in the left side, Total gross loans were stable this quarter, even increasing a little bit year to date. Total private sector loans grew 1.4% year to date and public sector gross loans increased by 8% in the same period, compensating the 14% decrease in nonperforming loans. This Left, as you can see in the right side of the slide, total performing loans growing close to 2% year to date. In the right bottom of the slide, we show the private sector performing loans by segment. Consumer loans Grew a significant 18% quarter on quarter owing to the EUR367 1,000,000 of seasonal advances that we have every 2nd quarter. Excluding such advances, consumer loans grew 2.3% quarter on quarter or 4% when excluding employee loans and mortgage classified in this segment. Corporate loans Also grew close to 1 per share quarter on quarter, compensating the decrease in mortgages. It is worth noting that every quarter, The mortgages trends looks more positive. And despite still decreasing, as you can see in the chart, Every quarter, the decrease is slower, something that confirms the expected positive trend that is explained by the continued improvement of the new production as you see in the next slide. In this slide, you can see the new loan production grew 42% in the first half of 2018 compared with the previous semester reaching €1,800,000,000 New loans to individuals in the bottom left grew 36% to €645,000,000 year to date, and the average yield was 4 basis points Above, the second half of last year, mainly due to a significant increase in non mortgage lending, which grew 43 basis points to 5.64 percent. Regarding corporates, the increase remain high. The €1,100,000,000 of new loans was 45% above the previous semester. Regarding corporate yields, new corporate and SMEs loans were formalized at an average yield that was 8 basis points above the previous While corporate yield was stable at 161 basis points, SME Yield grew almost 20 basis points during the 1st 6 months of the year. In Slide Number 11, we start to review the P and L. As you can see, net interest income Fell 1% quarter on quarter and the net interest margin decreased 4 basis points. The lower income from the performing loans Was close to €3,000,000 partially compensated by a small improvement in the debt portfolio and the cost of liabilities. If we look to the customer spread in the bottoms of the slide, this quarter, we have 2 different trends. On one side, the back book decrease in the quarter owing to the lower performing loan yield, which was impacted by the seasonal advances at 0 cost and the lower balances of mortgages with floors. On the other hand, the front book customer spread grew 25 basis points, owing to the improvement of the new production yields, but also because we exclude from the front book performance the seasonal advances at 0 cost. In Slide 12, we have the regular info regarding our debt portfolio. Total balance fell almost €1,000,000,000 to €15,100,000,000 mainly owing to additional forward sales. The big bulk of the portfolios are sovereign bonds. And if we include desired bonds, Almost 84% is classified in the amortized cost portfolio, something that is explained by our structural excess of retail funding. Regarding its contribution to net interest income, It was pretty stable this quarter at €59,000,000 However, as we explained in the previous quarter, The contribution will remain at this level until we realize the Latin capital gains of the fair value to other comprehensive income, the former available for sale by the end of the year. Once the gains are realized, the contribution will go back to levels closer to the ones we had during 2017, between €50,000,000 €55,000,000 per quarter. If we move to Slide 13, You can see the fee income evolution in the quarter. Total fee income grew 5% quarter on quarter, helped by seasonal factors, but also owing to close to €3,000,000 of non recurrent fees booked this quarter. On top of this, as we explained last quarter, following the full acquisition of Unions del Duero in the Q1 'eighteen, There are some fees that are not considered in this P and L line anymore, representing more than €3,000,000 year to date. Reported fee income in the first half of twenty eighteen fell 1% compared to 2017. But if we adjust this Uniendo del Duero impact, fees grew more than 2% year to date. Moving to costs. As you can see in Slide 14, operating expenses fell 3% In the 1st 6 months of 2018 compared with 2017 and almost 6% compared with 20 Tim, driven mainly by lower personnel expenses. As we said in previous occasions, We expect to continue to reduce personnel costs, although this will be probably compensated by higher general expenses. Also, as you all know, we are reviewing the potential synergies coming from the legal integration of Espana Duero and analyzing additional potential cost savings. We will give you the details in the coming quarters, probably 2018 final year results. So far, we can just confirm that our idea is to mitigate The restructuring costs with the realization of gains from our debt portfolio. In Slide 15, We have included the details of the impairments. As you can see, Total impairments improved significantly compared to with 2017. In the 1st 6 months Of 2017, we booked BRL165 1,000,000 of provision, including the ones related to the reorganization of the life insurance business of the group. This has fallen to just €41,000,000 in 2018. It is worth noting that in this second quarter, we released some provision related to both Loans and foreclosed assets, such a positive trend has enabled us to further reinforce Other type of provision during the quarter, mainly the legal provisions. On costs of risk, For 3rd consecutive quarter, we released some credit provisions. This was partially explained As it happened in the previous quarter, by the disposal of a small written off portfolio, in the 1st 6 months of 2018, We have released EUR 18,000,000 following these written off disposals. As you can see in the right hand side Of the slide, the annualized cost of risk year to date excluding such disposals was just 2 basis points, well below the 15 basis points booked in 2017 and the 25 basis points of 2016. Such a positive trend is a result, among others, to the relative higher coverage level, but also to the continued improvement of the asset quality of the sector that is translated in higher recoveries. Finally, regarding foreclosed assets, we have also released EUR7 1,000,000 of provision this quarter, which is a very positive number. As we discussed in previous occasions and confirmed in previous quarters, in 2017, Foreclosed assets provisions were higher, owing to the impact of updating foreclosed assets appraisals, but we don't expect these provisions to become material again in the coming quarters. If we move now to asset quality. In Slide 17, we have details on the evolution of our nonperforming loans. The trends remain positive, even more positive than in previous quarters. On the top of the slide, you can see the steady Reduction of NPL balances and the NPL ratio. In the 2nd quarter, NPLs fell 9% Quarter on quarter or 14% year to date or an impressive 20% year on year. In the bottom of The slide, you have the details of the quarterly NPL variation, where you can see that the pace of reduction has accelerated further this quarter. Gross entries continued to decrease 1 more quarter, something that together with higher Recoveries explained the positive trend of the quarter. In Slide 18, We updated our NPL coverage position that remained pretty stable at 55% in the quarter. However, In some segment, coverage is even much higher, like in developer loans, which is almost 78% or in other individual loans, which is 72%. It is worth noting that In this segment, called other individual loans, 94% of the €490,000,000 of nonperforming loans are mortgages that are classified in this segment and not in mortgages because we apply a prudent accounting approach. This also explains, as you can see in the right of the slide, that 92% of our nonperforming loans Balances are secured, of which 80% are secured by finished building, something that leave us in a very comfortable coverage position. It is also worth noting that the regional appraisal of collaterals represents 2 times current non NPL balances. Again, something that summarizes pretty well The strong coverage levels of the group and the flexibility that this situation gives us. If we move now to foreclosed assets in Slide 19, you will see an update of its situation and the main trends. In the left side of the slide, we have an update of the coverage ratio of our foreclosed assets by type. Overall coverage remains at 64%, with land having the highest coverage above 80%, although land Now only represents €129,000,000 On the right side, we have included the trend and results of the real estate asset disposals. In the 1st semester, we have released EUR 46,000,000 of provisions from disposals, representing 32% of the net book value of the assets sold. In the bottom right, We showed the outflows. In the second half in the second quarter, we haven't sold any portfolio, but outflows represented almost €100,000,000 In Slide 20, we summarize the nonperforming asset Friends, as you can see, we have reduced by 10% year to date the non performing assets, gross balances to €4,100,000,000 gross. NPA coverage remains stable at 59% And in net term, foreclosed and NPL balances represents only 3% of total assets. As Enrique explained before, A figure that summarize pretty well the progression of the asset quality of the group is the PEXAS ratio. Such ratio, As you can see in the bottom of the slide, has decreased 1 more quarter to 66%, among the lowest of the domestic listed Spanish banks. In terms of liquidity, we update the details in Slide 21. Our LTD Ratio remains low at 75%, and the net stable funding ratio and the liquidity coverage ratio continued We will be well above the requirements and among the highest of the sector. In terms of wholesale maturities, We don't have significant or expensive maturities this year. However, as you can see in the slide between 2019 2020, almost EUR 1,000,000,000 of covered bonds at an average cost of 2.5% will mature. Finally, regarding the amount of liquid assets, as you can see in the bottom left, they continue to represent more than 25% of total assets. Finally, moving to solvency in Slide 22, you can find our capital ratios position. As you can see, in the top left, carbon regulatory capital ratios are well above the FREP requirements, with €1,700,000,000 buffer over the SEAD 1 and slightly above SEAD 900,000,000 buffer in total capital. Seed 1 phasing reached 15.3% in June 2018, While total capital was 15.5%, it is worth noting that we are not including As Tier 2 normal risk provisions anymore. Bear in mind that for us, The regulatory solvency is very relevant because the phasing calendar that we apply finish In the 2023 rather than the regular 2019 deadline. In other words, Our regulatory capital ratios will not meet the fully loaded ones until 2023. In fully loaded terms, The CET1 reaches 13.5%. However, if we deduct The unrealized capital gains from our debt portfolio, something that will probably happen in the coming quarters, The ratio remains quite high at 13%. Finally, as we used to do, we have included our Credit risk weights in the bottom left of the slide. As you all know, we continue to apply a standard approach. Thank you. Thank you, Pablo. As we surely do, let me finish the Presentation with some final comments that you have in Page 25. These remarks remain the same Last quarter, but for us, it's quite important that they remain the same because it means that we are going in the right direction. We have been able to show resilient results generation capacity 1 more quarter, with the bottom line growing to 100 and €5,000,000 almost 23% above the previous year. This has been possible Owing to the improvement in the top line, cost control and lower provisions. The commercial activity continues to improve With credit and loans starting to stabilize owing to the higher new loan production and more stable mortgage trends. And something very important, such an improvement is taking place with the right pricing. It's Also worth noting that NPAs continue to decrease, this quarter with a very relevant decrease of NPLs. On top of the pace of decrease, it's also important to realize that we are doing it with a positive contribution to the P and L, partially explained by a best in class coverage of the problematic exposure. And finally, As we have been doing since we became listed, we are generating capital and keeping an Thank you very much. Thank you, Enrique. Thank you, Pablo. We will now start with the Q and A. There There are some questions, Enrique. This one probably is for you. Maripas Ojeda from Banco Sabadell, but also Carlos Peixoto at BPI. They're asking us if we can provide the expected impact and our views on the potential new tax action for the sector. Well, it's really very difficult to estimate the potential impact of something that has not happened And that has not been confirmed yet. It's true that during the last weeks, there have been a lot of Different alternatives analyzed in research reports and in the press. All we can say is that, of course, if Spanish Bank's Taxes finally increased, it won't be good news. However, if it happens, we are analyzing different measures To adapt to this situation, that's all I can say. Thank you, Enrique. Pablo, we got one regarding the debt portfolio, the decrease in the quarter, if we want They're asking us that it is not reflected in the balance sheet, if we can elaborate a little bit. Thank you. In the balance sheet and in the NII breakdown, the balances include the forward sales that we don't include in the presentation. That is why there are some difference between the balance sheet Regarding this quarter changes, the debt portfolio, in particular, The fair value to OCI portfolio decreased in 2nd quarter because of the forward sales, While the structural portfolio increased its size slightly, as core rates moved lower during the Q2 and we had Message from the ECB related to the end of the QE and the potential rate hikes in the second half of twenty nineteen. We decided to reduce the risk of this portfolio, switching some interest rate swaps into forward sales. So the number of the size of the forward sales has increased. In terms of size and depending on market conditions, we can expect To increase the exposure to our Spanish sovereign debt in the structural portfolio, to replace part of the forward sales already executed and to invest the excess liquidity of our balance sheet. For the fair value to OCI portfolio, as we mentioned previous times, the size will not be linked to our liquidity position As this is an opportunistic portfolio to obtain additional gains, so the size and risk sensitivity of this portfolio will depend on our view of the evolution of the financial markets. Thank you, Pablo. Yalan Liu from Aurogo Paracion is asking as on the contribution from the debt portfolio to net interest income and expected trends. As we explained in previous quarters and already mentioned in the presentation, as soon as the forward sales that are currently yielding in the NII reached the settlement date. The contribution from the debt portfolio to NII will decrease. The final timing is not decided yet, And we cannot confirm it, but it will be done throughout this year. The potential new purchases Of bonds for the amortized cost portfolio to invest the excess liquidity and to replace some of those forward sales should smooth The decrease of the contribution to NII, timing and yield of the new purchases will determine The final impact, but we have already explained the normalized contribution to NII is more close to the last year levels than to the one achieved in the first half of this year. Thank you, Pablo. There is another one for you, Pablo, on the interest rate sensitivity and the expected impact from the recent flatter in Jirko. We remain, as last quarter, positively positioned toward an increase in interest rates, specifically for the 2020, 2021 and not in the short term, close to our view on rates. The impact in NII of a parallel increase of 100 basis points of the rates curve from the month 12 to the 24 months, so the 2nd year after the rate hikes, remains similar as the Q1 at around 13% of NII. Let me remind you that this is using obviously, using a lot of assumption, but we I think it's a conservative number, but realistic assumption. For example, we consider changes in the mix between term and site deposits, and we consider in this a constant balance sheet. We can face Impact in the coming quarters in NII versus our projections, The current implied curve remains for the next few quarters, but we remain comfortable with the consensus Of some potential increases of the refi rates from the ECB in the second half of twenty nineteen, which should push indices up and so helping the NII in that sense. This One question coming from Paco Riquel at Alantra. He's asking us if we can explain the decrease The customer spread in the quarter and the difference why the trend is so different between the back and the front book? The net interest margin fell in the quarter owing to the lower loan yield, mainly in mortgages. And that, as you know, continued to decrease due to the lower balances of mortgage with floors. The different trend between the back and the front book is mainly explained by the mix of the new production, but also because the new production in the new production customer spread, we didn't include the seasonal advances that we have every 2nd quarter, and this explains some basis point of the customer spread decrease. On top of that, as I said, The back book reflects the lower balances with mortgage floors. Thank you, Paolo. There is a couple of questions coming from Naturli from Deutsche Bank and Carlos Peixoto at BPI CaixaBank on the net interest income guidance for this year, an update. As we said in previous occasion, we reiterated our expectation that the NII will grow this year. Once we realize the gains from the fair value to OCI Portfolio, the interest income from such portfolio will be lower. However, despite such an impact, we continue to expect NII of 2018 to be above the 2017. Thank you, Pablo. Mario Ropero From Fidentis, Paco Riquela from Alantra, Naturale Arvi from Deutsche and Carlos Peixoto from BPI are asking us on an update on mortgage flows. The balance of mortgages with floors continued to decrease One more quarter, but every quarter, the decrease is lower. Balances with The floors were €2,800,000,000 at the end of last year. These fell to €2,500,000,000 in the first quarter, and they have decreased Some more in the second quarter to around €2,300,000,000 Bear in mind that the decrease is not only Explained by removal of floors, it is also explained by the natural amortization of the portfolio. However, As we explained in the presentation, the lower contribution from these mortgages explained around BRL 2,000,000 of lower interest Income in the second quarter compared to the Q1, while it represented almost EUR3 1,000,000 in the previous quarter. This means that trends are starting to stabilize a bit further, although it will continue to be a headwind in the coming quarters. Thank you, Pablo. Probably, Enrique, you can take this one. Paco Riquel from Alantra, Naturalevi from Deutsche and Jose Abad from Goldman Sachs Are asking us on the guidance for loan growth, when do we expect to see clear lending growth ahead? Yes. Okay. We expect to see the inflection point this year. As we explained in the presentation, new production continued to improve In the Q2 of 'eighteen, new mortgage production is growing every quarter, but it's still not enough to compensate the natural amortization. Every quarter, the decrease is lower. In the Q2 of 'eighteen, Performing mortgages fell less than 1% quarter on quarter. This compares with quarterly decreases Close or even above 2% during the last couple of years. So little by little, the mortgage book is starting to stabilize, something that is required to report clear overall loan growth. In corporate loans, we grew 1% quarter on quarter and 2.5% year on year. In consumer loans, excluding the seasonal advances and the run off Mortgage portfolio classified in this segment, the growth was 4% quarter on quarter and above 5% year to date. It's also worth noting that the trend in new production yields remain Very positive. We continue to focus in quality lending growth with right pricing policies. So far, the trend continues to improve every quarter, so we reiterate our guidance for an inflection point this year. And if this trend is confirmed in the coming 2 or 3 quarters, the balances should start growing at least at low single Thank you, Enrique. Pablo, Natura Guia, Deutsche and Carlos Bisotto from BPI ask you an update on fees. Sure. First of all, it is important to remember that from Q1 2018 onwards, fee income does not include Some fees related to the insurance company, Union del Duero Vida Pensiones. Such fees in 2017 represented around €8,000,000 This quarter, there are also close to €3,000,000 of nonrecurring fees related to the insurance business. However, despite the mentioned impact, fee income in the first half of twenty eighteen grew 2% year to date excluding the impact of Uniente del Duero. During the first half of twenty eighteen, The market volatility hasn't helped really the asset under management. And even with that, asset under management grew 7% and non banking fees more than 6%. For the second half of the year, If we have more positive market conditions, the trend should also be positive in terms of of fees gathering. Thank you, Pablo. There is one coming from Paco Rykel, Talantra, Asking us if you can explain the breakdown of other income and expenses. Yes. On the positive side, We have EUR 3,000,000 from real estate rentals plus EUR 8,000,000 from our real estate business, From sales of the real estate business, plus €5,000,000 from Unient del Duero And some other small contribution that represents around €2,000,000 All these positive impacts Mitigated in full the negative of this quarter that were close to EUR17 1,000,000 From the contribution to the Resolution Fund and the DTA levy at around 1,000,000 And around €1,000,000 of real estate maintenance cost. Thank you, Pablo. Enrique, Mario Ropero from Finentes is asking us if we can update the expected cost synergies and savings from the for the coming years. Well, as Pablo said in the presentation, we are currently reviewing the potential savings and the related and needed Restructuring costs, this cost will be mitigated by the these unrealized gains in our portfolio, fixed income portfolio. Well, Enrique. Another one for you on the Espana Duro. When we do expect to fully integrate Espana Duro? Well, as you all know, this was approved in our Annual General Meeting. And what I can say is that we are now completely ready and just waiting for the final authorizations and formal and required approvals. We will execute the final integration once we receive them, probably after the summer. Thank you, Enrique. Pablo, we got several questions on the provisions, starting with probably the loan IBPI and Jalan Atauro are asking us what can they expect on the cost of risk going forward in loan loss charges? And if it's Still the 3 basis points Costa Rica of risk a good reference? Okay. As we explained in the presentation, in the first half of the year, we sold some small written off portfolios that explained around €18,000,000 of provision released. Excluding such disposals, the cost of risk was very close to 0, but we were not releasing provision as the reported figures So that is why despite such low charges, we don't expect to report continuing releases in the future. We have a relative high coverage level and asset quality trends are positive. In the short term, cost of risk could remain low, which is very positive for our P and L trends, but we prefer to be prudent and net net The overall provisioning effort, including credit for closed assets and other provision, should remain close to our 30 basis point guidance, excluding any extraordinary restructuring cost, as we mentioned. We can move to the Pablo, now to forecast provisions guidance. Okay. As I said during the presentation, the big bulk of provision for foreclosed assets Book in 2017 were consequence of the reappraisal of the assets. Once the appraisals are updated And considering the level of coverage that we currently have, foreclosed assets provision should be below previous year. As I said in the previous question, we look at an overall provisioning effort as a reference. So some quarters, one type of provision could be better or worse than others. But at least for this year, we expect to reduce The overall P and L provision. And Pablo, finally, on impairments. At Alantra, Juan Tuesta from JV Capital and Carlos Peserto from BPI are asking us what did Other provisions include and what we expect for these type of provisions going forward? In other provision, we book Impairments related to off balance sheet guarantees, legal risks and other type of provisions such as the restructuring cost. In the Q2, provisions were mainly related to legal risks. Following the positive trends in loan losses and foreclosed assets impairment in this quarter, we have decided to see there an even more prudent approach for this type of risks, in line with the conservative management culture of the group. As we have said in the past, we will probably continue booking these types of provision on a regular basis going forward. However, Going forward, as I said before, total impairments of around 30 basis points of gross loans, Excluding the extraordinary restructuring cost should remain a good reference. Thank you, Pablo. Enrique, we got also several analysts like Carlos Peixoto, BPI, Maria Asking us on our NPA disposal policies, if we can elaborate Have you seen on our strategy? Okay. Well, our strategy regarding NPAs Is to continue reducing balances while preserving our shareholders' value. In the Q2 of 'eighteen, we sold a small portfolio of NPLs. Going forward, we will continue to analyze alternatives, including disposals, that we have done so far. We do not expect to change this strategy among others because it has been very positive so far. This quarter, the big bulk of the decrease came in the form of NPLs, while, for example, last year, we reduced more foreclosed assets than NPLs. We always analyze different options, and we formalize those deals that we believe make more economic sense. Thank you, Enrique. There is another one for you coming from Mario on solvency on our core equity Tier 1 fully loaded, that excluding the capital gains from the portfolio continues to increase. And what will be the question is, what will be the level at which we will start analyzing a higher payout? Yes. Well, We have a CET1 fully loaded target of 12%, and our current CET1 fully loaded It's 13.5%, which is 150 basis points above such a target. However, excluding the unrealized gains of our debt portfolio, the CET1 fully loaded is 13%, leaving the buffer with our target at 100 basis points. We do expect to realize a significant part of our current unrealized gains, As we have said, so we focus in the ratio without such gains because it's the medium term reference. As we explained Last quarter, we continued to generate organic capital significantly, among others, because our NPA balances are decreasing at a good pace. However, there are no changes to our dividend target so far. That is to pay in cash dividends of 40% of the net income by 2020. Thank you, Enrique. Jose Abad from Goldman Sachs It's asking us on our views on M and A and sector consolidation. Well, really nothing new in this matter. We continue to See a lot of comments and reports related to sector consolidation. As we said in the past, we understand that It's a sector topic, but for us, really nothing has changed. We still have synergies to crystallize from the acquisition of Espana Duero, which is one of our priorities. We work every day to improve shareholders' returns, taking conservative and prudent risk With the idea of generating as much value as we can, and we believe that we can do it in an external loan basis without acquiring or merging any other bank. However, as we did in the past and as everybody everyone does, We will analyze whatever opportunities appear. But at this moment, our priority is to deliver on our business plan. Thank you, Enrique. One final question for you, Pablo. They're asking us if we can update our exposure to the Sarep, Please. Yes. We initially had an exposure of €61,000,000 of which $43,000,000 was equity and the remaining $18,000,000 was subordinated debt. In June 2018, we have Fully provisioned the equity. And for the subordinated debt, we currently have €10,000,000 of provision. So the remaining total potential exposure to this has been reduced to only €8,000,000 Okay. Thank you, Enrique. Thank you, Pablo. We will now finish the webcast. If you need further details Or you want to discuss some other issues, please do not hesitate to contact the IR team. We wish you all a deserved and a great summer break holidays. See you next quarter. Thank you. Thank you.