Earnings Call: Q1 2019

May 10, 2019

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Millennium BCP 3 Months 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must also advise you that this conference is being recorded today, Friday 10th May, 2019. And I would now like to hand the conference over to your speaker today, Mr. Miguel Maia, Millennium's BCP's CEO. Please go ahead. Good afternoon. Miguel Maier speaking. I welcome you all to BCP earnings conference call. I'm going to present to you the earnings and highlights. And then as usual, my colleagues, Miguel Vargas and Bernard Clas, our new Investor Relations, will provide additional information and detail. The evolution of the bank and the net earnings of the Q1 of 2019 clearly show our options that the affirmation trajectory that we have been following in the several geographies where we operate. I would like to highlight that we have made significant progress in incorporation digital in our business model through careful choices that will enable significant improvements, both in the quality of the service provided to customers and in the reduction of operational costs. Good examples, we have the launch in this quarter of a more complete app, which provides customers with a superior level of interaction as well as the introduction of highly productive robots and machine learning into our operations. I would also like to mention the proposals that will be presented at the shareholder general meeting, namely the dividend payment, which is indeed a very conservative proposal and the one related to the employees' compensation. These are two clear signs of the renewal determination, a reaffirmation of how BCP is facing the future and is serving the customer as a commercial bank of reference across the markets where we are presented. Slide 4. Entering now into the earnings presentation, I will go through the Q1 major performance achievements. We improved in profitability, reaching net earnings of almost €154,000,000 80% more than last year's 1st quarter. In this Q1, I would like to highlight the relevant improvement of the contribution from the activity in Portugal, which more than doubled compared to last year's Q1, having reached €94,000,000 Slide 5. MillennialWCP continues firmly committed to improving the assets quality with a consistent trajectory of reduction of NPE stock, which decreased to €5,200,000,000 Since March 2018, NPE has been reduced by €900,000,000 mainly in Portugal. This last quarter, we have reduced an additional BRL400 1,000,000 mainly by recovering NPL in arrears, which also reflects the improvement of the Portuguese public accounts and the macroeconomic business environment. This trajectory has been made while reinforcing the NPE coverage by impairment, which has increased 55% and also increasing the total coverage, which rose to 110%. The NPE ratio, including securities and off balance according to the EBITDA definition, decreased from 10% to 7%. The improvement in this asset quality together with the growth of performing loans portfolio are driving the reduction in the cost of risk, which has achieved 68 basis points on a consolidated level and 73 basis points in Portugal. Slide 6. In this quarter, we have organically generated capital of 87 basis points in terms of the common equity Tier 1, reaching a ratio of 12.7%. The total capital ratio stood at 15.2%, incorporating the additional Tier 1 issue of €400,000,000 which was performed as you know in the first in January. Milan UBCP capital position is there for well above the SREP requirements in both ratios counting with a total capital buffer above €880,000,000 The business volumes growth pace increased throughout this quarter, confirming the quality and efficiency of the bank's franchise. Excluding the NPE portfolio, the increase in the business volumes achieved ERL2 1,000,000,000 during this quarter, of which EUR700 1,000,000 was an increase in the performing loans portfolio. Slide 7. Newenu BCP continues to be successful in attracting new customers, expanding its customer base, both in Portugal and in international operations. Since March 2018, the number of active customers has increased by 326,000 overall. In Portugal, the number of active customers increased by 134,000, which confirms the good evolution evaluation that customers make of our value propositions and also of our capacity to reinforce the relationship with them. I would also like to highlight that in 2019, once again, we have been awarded with the Consumer Choice distinction in Portugal. Also, the bank's innovative digital commercial offer has been very relevant in the customer's attraction, enabling an increase of 32% in mobile customers. Slide 8, confirming in digital innovation and excellence in customer service, Milenio Westibe has recently launched 2 new apps in Portugal that will strengthen the commercial relationship of the bank with the customers. The new Millennio apps is easier, quicker and provides a new range of options and services, namely in personal loans, auto loans, alerts and notifications. It's a breakthrough in customers' experience with millennials' CP. We have also launched a new mTrader app that allows customers to trade in the financial markets while having access to news and research through a simple and intuitive interface that provides quick trading facility and real time streaming from the Mango Vault Stock Exchange. Slide 9. The progression and performance that the Miovenu BCP has been consistently achieving is translated in the of our credit profile as recently confirmed by Moody's upgrade of our rating. Since 2013, our credit ratings have been upgraded 5 notch by Moody's and 4 notch by Standard and Poor's. I will now give the floor to my colleague, Miguel Braganca. I'm sorry. Good afternoon, ladies and gentlemen. As usual, I will present the general view in terms of the evolution of the group's profitability business activity and capital. And then our new Investor Relations will elaborate in terms of the specific evolution of the Portuguese and international operations. As you may see in page 11, our net income grew by around 80% on a very solid footing with banking income. So the top line growing 11.1% to with a strong contribution from other income, mainly securities gains and with a very controlled costs where the recurrent costs evolves 4.5%. So, clearly positive jaws. The impairments in their progressive normalization trend, albeit still high when you compare with other banks in our geography, but clearly aligned with our targets. The net interest income as you may see in page 12 evolving well, 5.2% growth compares well with our competitors in this low interest rate environment. You see we have been able to maintain a stable NIM in consolidated terms and in Portugal with some slight NIM compression in the international operations that is to a large extent due to the fact that we are preparing the bank in Poland for the acquisition of Eurobank and there has been some investments in legal securities to prepare for the integration. Fees and commissions. This is a story of 2 titles, so to say. In terms of banking fees, we keep progressing, growing 2.5% in consolidated terms to a large extent driven by our strong franchise in Portugal, which grew 5%. However, the market related fees and commissions, including asset management fees, for reasons that you well understand in terms of the dynamics of the market have not grown compared to last year. This is something that we expect to reverse once the markets improve and the clients feel more comfortable with investing in asset management products. Other income expense significantly to a large extent through trading gain. We are not a trading house, so we don't involve regularly in terms of trading. But we do have a securities portfolio that we use to hedge to a large extent our short term deposits and our balance sheet. We sold a part of our long term bonds, both the Portuguese government bonds and Portuguese government guaranteed bonds that explain this growth in net trading income. In terms of other operating income, as we explained last year, we had some one offs last year that explained the negative of minus $29,000,000 So this $11,000,000 is the new normal. Operating costs. Operating costs, we are present in several geographies as you may see. So in terms of Portugal, what you see is a very disciplined evolution of the recurring costs that evolved 2.7%, broadly aligned slightly above inflation. And what we see is that we are also in the process of transformation of the bank. And in this process of digital transformation, there is a period where there is also some additional cost to enable exactly this transformation, which benefits we will get further down the road. In terms of the international operations, we have here a different factor. This is mostly explained by Poland. Poland is having a very high top line growth. But as you may know from other banks in Poland and from the presentation of our bank in Poland, Right now, salaries in Poland are growing quite fast. And we have, of course, to compete in the market. Having said that, the bank in Poland, as most of you have seen, has presented very healthy sets of results and a very healthy top line growth. This evolution of cost together with evolution of income still allow us to be the very positive effect of the trading gains is not considered, as you know. In terms of cost to core income comparing with our European peers, we also compare in February which review the robustness of our model. When you compare it with the cost to income, which is the most usual but also the most volatile measure, we see that we are already below the 44%, reaching a 43% cost to income. In terms of the impairment, you see a reduction of 20% in terms of the impairment and provision charges to a large extent explained by the evolution of our activity in Portugal. This is aligned with what we have been telling you that we expect as time goes by to normalize our cost of risk. This is happening. You see that we are with the cost of risk of 73 basis points. It's still above our long term trend of around 50 basis points that we have presented to you. We expect to continue in this trend. This has been this is particularly notable because this has been achieved together with an increasing coverage, both in terms of the total coverage that includes the value of the collateral and the total coverage is already at 110%. And in the coverage that excludes the collateral, that is already at 55%. In terms of the key ratios, the NPL 90 days, so the really loans in default with more than 90 days in default, we are at 5.5%, decreasing more than 40% ratio since March of last year. In terms of the NPE ratio, including securities and off balance sheet items as defined by the EBA, we are at 7 percent. And in terms of the NPE ratio only with loans, we have also decreased around 30%. This strong set of results has been achieved with a very strong evolution of our franchise, as you may see in Page 20. So we have been growing the customer front 5 point 1% and this has been mostly explained by the evolution of the evolution of by the individual customer funds, which have grown more than the total customer funds, 5.2% in consolidated terms. This impact is even more evident in Portugal, where the individual funds have grown 6.1% when compared with the total growth of 5%. We expect, as time goes by, that these strong value of customers that customer or funds that customer has trusted us may get transformed into more value added products and this is clearly one of the areas where the bank expects to evolve over the next years. In the international area, we also have grown more than 5% and this is the strong set of results is visible both in Mozambique and in Poland. Loans to customers. Here, we are already seeing a growth in terms of loan to customer in spite of the very strong reduction of the NPEs. You see that the performing portfolio has grown €2,400,000,000 that compares very favorably with the €1,900,000,000 And this is not only in consolidated terms, but also when you look at only the Portuguese activity with that has, as you know, more higher ratio of NPEs, we also see that the growth in the performing assets is more important than the decrease in the NPEs. The net loan to deposit ratio is clearly very comfortable. So you see that in terms of liquidity, we are a higher liquid drag. That is an opportunity, so to say, in terms of an evolution of the profitability and keeps evolving positively. In terms of capital, as it was commented, we have we are comfortably above our requirement. There was a very strong evolution of our ComNegative 1 that is basically explained by 3 effects. The first effect, of course, is the net income, okay? The second effect is when the net income is positive, we benefit also from the DTAs because a part of the tax, so to say, of the net income benefited from the DTAs. That's why they are an asset. And a third impact that we also have was an evolution in terms of the mark to market of our government portfolio. So the impacts of these 3 the CIs are more or less $150,000,000 as you've seen the net income, dollars 100,000,000 around the DTAs and around $40,000,000 to $50,000,000 the evolution of the mark to market of the securities portfolio. The leverage ratio evolving very well to very much explained by the same factors as capital ratio, but also by the fact that we have issued Tier 1 in the beginning of the year. So and as you know, the leverage ratio includes the Tier 1. And our RWA density still at a high level, which points to a relatively conservativeness of our model. I will now pass the floor here to Bernardo, our new Investor Relations Head. Okay. Good afternoon, everybody. Let's start from Portugal. And starting from net income, as mentioned, there was an important and relevant increase from the last year. There was an increase of €50,000,000 that means we doubled from the previous year the net income. In terms of banking income, also there's an increase of 15%. And regarding operated costs, it has been Sorry. Okay. In terms of operating costs, there's a small increase. But as mentioned as well, there are some restructuring processing that we are taking in. So there are $6,000,000 that are related to restructuring costs. Going deeper and have a look on the NII in Portugal, the different effects. Once again, there are some positive and some negative effects that it's worth to mentioning. And on the positive effects, there are $2,900,000 coming from the credit volume. There are 3,200,000 coming from the reduction of the costs of the deposits and at the same time, the effect of a lower wholesale cost that accounts for 6,600,000 euros On the other side, the credit rate effect in the macro environment pushed a little bit down the credit rate. And also from lower yields coming from the security portfolios, there's a decrease of almost €500,000 So in this, although on the NII, we have seen an increase of almost 5% year on year. Going to Page 29. As you can see, we are still pushing on the reduction of the cost of deposits and spread is now at minus 50 basis points. That comes from minus 60 basis points. And if you remember, on December 17, it was at minus 70 basis points. It also means that we have still a difference of around 10 basis points from the front book to the back book. So there is some improvement here as well-to-do. Regarding on the front on the loan book, we'll say that it's stable. As you can see, the spread is still at 2.7 percent. And in terms of NIM, the same. We had a stable NIM in Portugal at 1.8 Going to Page number 30, we see overall the growing in commissions, but it's important to reflect that the commissions increased almost or most increase in the commissions are coming from banking fees and not from market related fees, which means that it shows that the increase on volumes and our capacity to open new accounts and to have a closer relationship with the Portuguese customers. So banking fees increased 5.1% due mainly to loans and agreements, loans and guarantees coming from volumes, from bank assurance and from customer current accounts. On the other side, with a substantial decrease year on year of 22%, As I said, it was mostly related with securities and asset management. Looking at the other income, and as it was mentioned, there's an improvement of 135%, which means about $38,000,000 other income year on year. And mainly, as we referred, it was coming from line. Moving to Page 31 and looking at operating costs. There's as I said, there's relatively stable with a small increase of 2.7, but there are some nonrecurring impacts that we are considering in this quarter takes about €6,000,000 due to restructuring process that we taking on. Looking at the number of employees, there's a slight increase on the net number of employees, and it's mainly related with people that we are recruiting for digital areas as well as internalizing some outsourcers. In terms of branches, we are still closing some branches, but there's nothing it's just on a case by case. Moving to Page 32, and I think it's one of the main points. As you have seen, there was a decrease of 1 point €8,000,000,000 year on year on NPEs. That means roughly 30%. And if you look at the decrease of this $1,800,000,000 came through a combination of net exits, write offs and sales. And from quarter on quarter, as mentioned as well, we have seen a decrease of BRL360 1,000,000, which also a nice figure from the Q1. In terms of impairments, cost of risk decreased to 73 basis points. In December, it was at 105 basis points. And we are looking to going on the way for the achievement or the KPIs that we set for 2021. Moving to Page 33, looking at coverage. As you can see, total coverage are now at 52%. It comes from December from 50 percent. I mean, it means in terms of loan loss reserves. But overall, the total coverage is above 100 percent. It now stands at 111%, where it was at 109% in December 2018. On the 90 days past due, looking at companies, you can see the mix that we have the level of coverage is really high. It's 68%. It comes from 67%. So it shows our focus in terms of increasing coverage on companies. Moving to Slide 34 and here regarding the foreclosed assets and restructuring funds. On foreclosed assets, we have seen a decrease of 21%. That means roughly BRL 350,000,000 year on year. And from as you can see on the left down chart, there was some sales about more than 1,000,000 properties and we have then a profit of around €25,000,000 That compares with €16,000,000 on the Q1. In terms of restructuring funds, still quite stable, although we have seen we are starting to see a decreasing trend on this side. Moving to Page 35 and regarding volumes. It shows the strong business dynamics that we have already in Portugal. So customer funds increased 5% And in terms of loans, apart from a decrease of €1,800,000,000 it's important to mention that the performing loan book has it was it was €1,200,000,000 and then the NPEs, as mentioned before, it was that was a deduction of €1,800,000,000 for the same period. Quarter on quarter, it's also important to mention that the NPE reduction was €400,000,000 around €400,000,000 And in terms of performing, there was €500,000,000 new loans coming in. So it means that we have a net of €100,000,000 performing loans. Moving to Page 37. Now in terms of international operations, a positive contribution for the P and L of 46 million that means an increase of 12.1 percent quarter on quarter. On Page 38 and moving to Poland, net income increased 3%, and we have a return on equity at 10.3%. Also banking income, there's an increase of 13% and operating costs, we have also an increase of 16.4% due to the strong economy that as you all know, we have the fall and there's some pressure on wages. Moving to Page 39 and looking at NII. NII comes up goes up 14%. NIM has been stable at 2.5%, and this is driven by this is driven mostly because of the increase on volumes. Commissions and other income. If we look at the size of commissions, there was a decrease of 5 0.4% and mainly related with investment products. And on the other hand, we have an increase of €7,100,000 in terms of other income. Operating costs are mainly related with, as I said, some increase and some growth on the economy, although the cost of income still at a low level of 40 less than 45 percent. Looking at the asset quality in Poland, still with strong ratios, The NPL 90 days past due ratio stands now at 2.4%. The NPE book is on March 2019 below €600,000,000 which compares with more than €644,000,000 in March 2018. Looking at the coverage ratio, once again, in Poland, we have really comfortable ratios above 130 5%. So and we probably still improve that. Looking at the cost of risk in Poland. There's an increase from 46 basis points to 55 basis points, but we think that this between this level is a normal level for the operation. And so we think that everything is correct. Looking at volumes on Page 41, we increased 9.3%, and it's important also to mention that we have a market share of about 5.4%. Looking on the other side, we have launched customers, increased once again at a very higher level of 12%. And if we exclude the FX mortgage loan, it was almost 17%. Also important to mention that the weight of the mortgage in foreign exchange now represents a lower level on the total portfolio, so it comes down from 28 percent to 25%. Moving to Mozambique. We have net income come up 5.5% with a return on equity of 23.3 percent and banking income comes goes up about 8.7%. We in terms of operating costs, slightly increase of 7%, but in terms of euros is not really relevant. Going to Page 43. NII goes down 8.8 decrease on the credit side. As you know, the Mozambique economy is still some with some changes. And if we look then on the commissions and other income, we have seen an increase of almost 96%. Moving to asset quality in terms of the operation in Mozambique. Also credit ratios high with 16.1%. The NPE, slightly lower. We have 183 March 2018 and now we have 150,000,000 in March 2019. And as an economy really as this type of economy, the cost of risk still high at a level of 283 basis points. Coverage ratio, also important to mention that it has been increased from 66% to 73%. Moving to Slide 45. In terms of volumes, customer volumes of customer funds increased 6.6%, mainly on the demand deposits, and we have a market share of around 26% on customer funds. On the other side, looking at the loan customers, we have market share of around 22% and we have seen a decrease on loans of about 17% due to our repayments and some due to our repayment of same customers and this mainly related to high interest rates in the country. So I will move to Mr. Barranca again that will do some final words. Okay. As you see in this final graph, our you is to present exactly our progress with the plan that we have presented to the market. We have a very strong set of objectives until 2021, where we really want to be a reference bank in the European sector. This is based on several pillars. And a very important pillar is our customer franchise. You see that we keep progressing towards the 6,000,000 of active customers and with a very strong penetration of digital and mobile that are two levers that will enable us to service clients better and at a lower cost. This is clearly a trend where we are. So we're outperforming, let's say, our position. And then a very important part of our strategy is the normalization of our legacy stock. We have committed to you to reduce the stock by 60% from 2017. We are clearly on track and really outperforming on this area. And this together with a reasonable evolution of the cost of risk to the trend of 50 basis points. These two bases of our strategy will translate, of course, in lower and improving from a very good level cost to income. That will also enable us to present a recurring ROE of around 10% by 2021. The key message that I would like to leave here is that it is clear that there are some points in the income statement in this quarter that are, I would say, better than the recurrence profitability, namely the trading guidance, as you see. But in terms of everything that is recurrent, that everything that has to do with the transformation of the bank, everything that is that has to do with the growth and improvement of the franchise of the bank, that is underlying value creation for our shareholders, we are clearly on track for the objectives that we have set. Thank you very much. And we are now open to questions and answers. Thank you. And your first question comes from the line of Ignacio Ulargui from Deutsche Bank. Please ask your question. Your line is now open. Hi, good afternoon, gentlemen. Just have two questions. On one side on the loan growth and the expectations that you have in terms of loan book in Portugal? What should we expect? I have been probably a bit softer this quarter, whether there has been any particular issue that you could just give some color on. And the second one is on provisions and cost of risk. If I just look to the other Portuguese banks, they are delivering a materially lower cost of risk than the 50 basis points that you are targeting on a standstill level in 2021. I mean, do you think provided that NPE is declining the right going in the right direction declining fast, do you think that that 50 basis points could be lower, that your standstill level over the cycle could be a bit below that 50 basis points? Thank you. Thank you very much for your questions. Starting with the last question. As you may know, over the short term, there is a trade off between cost of risk and NPE reduction. Because if we want to reduce large amounts of NPEs, of course, this influences our recovery strategy. So if we want to do it fast, if we want to do it fast, the cost of risk tends to be higher than if we want to do it with time. Of course, once we reach the level that we think it's a more normal level when we compare ourselves with our competition, then the cost of risk becomes lower. So to answer your question briefly, do I think that across the cycle, the cost of risk could be lower than 50 basis points in Portugal. Yes, I think that across the cycle, it may be lower. But by 2020 I think that's more or less where we'll be. Probably there will still be some room to decrease the cost of risk, mainly if this positive cycle continues. In terms of so and also to answer your question, in terms of this trade off between accelerating the reduction of cost of risk, accelerating the reduction of NPE, probably if we have some slack there, we probably will devote it more to accelerating the NPEs than to reduce further the cost of risk. So in terms of this trade off, that's how we see it. In terms of loan growth, we are I mean, we are this is more a bottom up than a top down view. What we have here right now is a positive loan growth before NPE. So in terms of the performing assets, the loan growth that you see in Portugal is, I would say, a reasonably loan growth for the years to come, as you may see. We are not expecting loan growth in Portugal to rise very fast, neither in the market nor in our specific case because we want to be very disciplined here. So we will keep seeing a positive growth in terms of the performing portfolio, but we will be always very disciplined in terms of pricing. And we do not expect, I would say, high single digit growth. The growth of the performing portfolio will be in Portugal, a low single digit growth. Thank you very much. Thank you. And your next question comes from the line of Jose Abad from Goldman Sachs. Please ask your question. Your line is open. Hello, good afternoon. Thank you very much for the presentation. I have two questions. The first one is on capital. You delivered a very healthy 12.7% according to the 1 in Q1. I think it would be useful actually to get a bit your views on how you see the evolution of your capital position into year end and where do you see by Q4 of the year? And the second question is related to this. Once you've already announced things on the dividend side, Would you be open also to continue or to explore inorganic growth in Portugal? There could be, I mean, some assets for sale and there's been some rumors in the local Portuguese press about this. So is this something that you would explore? And if so, what would be the criteria or the triggers that would help in the interaction? Thank you very much. Okay. Thank you very much for your questions. To begin starting with the last question. 1st, inorganic growth in Portugal, it is not in our plan. So what we have right now in our plan is to keep transforming the bank and to keep developing the franchise of the bank. We are very much focused on this. So we are not analyzing anything, and it's not in our plan. In terms of the capital going forward, there is an important impact, as we have disclosed to the market, that is the acquisition of Eurobank. We have disclosed at the time that the net impact in terms of acquisition of Eurobank after some measures that will be taken would be around 40 basis points. Now that these measures that were more or less responsible for 10 basis points were taken, the marginal impact will be around 50 basis points. So we think that you have to incorporate this in terms of our in terms of the capital projection. Going forward, as you see a part of our profitability this year, this quarter had to do with trading gains. So if you want to project the next quarters, you have to assume a more normal trading pattern because it is not normal to have this de trading pattern going forward. And of course, there will be a capital accumulation linked to the net income generation. And I think that basically going forward, most of the capital accumulation will come from these net income and there will be a slight consumption, as I said, in terms of the increase of RWAs linked to the business. But as I just commented to Ignacio, we are not expecting very strong growth of credit and so neither of RWAs. So this is the guidance that we are giving. In any case, we are expecting to keep a healthy slack above the 12%. Thank you. And your next My first question is a clarification on the capital comment that Miguel made. Did you say that the impact on capital from Eurobank is going to be 40, 50 basis points? Because I mean, if I remember well, I think it was about to it should have been 30 basis points, at least when it was announced. Then the other question is, if I recall correctly, your NPA reduction plan was going to be equally driven by recoveries, write offs and sales. But this quarter, we saw a very big jump in recoveries. So was there an extraordinary in this line that should lead to some reduction in the pace of declines of NPEs going forward? And then if I may, you mentioned before that you did some sales of Sovereign during the quarter. Could you please tell us what is the negative contribution to NII that you expect from this sale going forward? Thank you very much. So when we presented the impact of Eurobank, we did this presentation based on the pro form a latest available numbers. And these pro form a latest available numbers were based on the RWAs of the time. And of course, the impact in basis points and in percentage points depends also on the basis, on the other way basis of the time. We presented this, if I'm not mistaken, based on the other ways of September that were the latest available data with this pro form a based on September. Of course, as time goes by and the capital increases, the same impact in euros has a different impact in terms of basis points. And this is basically what explains the difference. We presented it also net in terms of total capital, net of the measures taken locally. As you may know, there was already a subordinated debt issue in local terms. So right now, the impact that we expect because I mean, a part of the mitigation measures have already been taken and because the basis is also different. Because in the meantime, more than 6 months have taken place, The impact that we now expect vis a vis our present ratio is between 40 50 basis points. And in terms of the entries, There is nothing special going on in terms of the evolution of this quarter. What I can say is the following. What we present because a part of the recoveries in Portugal is of short term credit, we present it in net terms. And as you may see in Page 32 of the portfolio, we see a better composition, so to say, with less net exit. This reduced level of net exits has, to a large extent, due to less entries than what we had in the past. So less NPEs coming in, less short term, I would say, current accounts becoming NPEs. And this means that the next exits are better. There was nothing particularly special going on in this quarter. Let's see how it will evolve going forward. Thank you. And your next question comes from the line of Amit Adhatia from Citi. Please ask your question. Your line is open. Hi, this is Sameer Dacha from Citibank. So we've got a few questions. Firstly, back on capital. Can you give some guidance on regulatory headwinds, in particular TRIM this year? And a bit more direction on where you think your endpoint fully loaded C21 will be at year end? And secondly, in light of the cash coverage going up on NPAs, NPLs and foreclosed assets, do you envision any large disposals? As I understand, originally this wasn't part of the plan and especially in light of many of your peers in Portugal now doing large NPA disposals. And finally on issuance, I noticed a week or so ago, Fitch gave you a rating at the nonpreferred senior level even though you haven't issued this part of the capital stack. Is this part of the plan this year to issue a nonpreferred senior bond? Okay. Starting with TRIM impacts, models, regulatory headwinds, what we think is that we have robust models. We have been engaging, of course, with the supervisor always in the discussion of the models. As you know, the supervisors always do some cherry picking and they try to get the best or to say, the most conservative dimensions on each models and they do comparisons and so on. But we feel very comfortable with our models. In terms of the impact for this year of TRIM, if any, I mean, we are expecting to be minor impacts. If to give you a number between 5 15 basis points back, so if any. So but this is the level of magnitude that we are expecting in terms of any type of impact that could occur this year based on TRIM. In terms of the disposals and the sales of NPEs, we probably have been one of the most active banks in the market in terms of the disposals of NPEs. But typically what we do is smaller targeted transactions, so that we make sure that we don't leave money on the table and that we make that we really develop and segment the market so that the portfolio makes sense for the buyer and the discounting is not too large. We think up until now what we have been seeing is that this is the strategy that better protects your interests as shareholders and the interest of the institutions. Having said that, I mean, if we are approached at the price level for a large sale that has the same price level as the small sales, I mean, we will always consider. We have no prejudice against it. It's just something that we want to do to defend your interest. Having said that, we don't expect it. So we expect to continue exactly the same strategy that we have done until now. In terms of issuances, we as we have commented you, we don't need to issue right now. So we are very comfortable, as I have commented here, in terms of the levels of MREL issue that we need to do until June of 2022. We see that the bank is improving. We expect that the market reflects this in our spreads. So this is always, I would say, a trade off between maintaining a relationship with market participants and maintaining a relationship with investors when you are still improving your financial performance. Visavis, I mean, issuing probably at a more expensive rate than what you would issue further down the road. This is a decision that we'll take, I would say, on a case by case basis. We may issue or we may not issue. We don't need to issue. So that's basically and the decision on whether to issue or not to issue will depend to a large extent on the price and on the trade off that we see between issuing now at a more expensive price vis a vis issuing lighter once the bank reflects the positive evolution that we expect. It's fair to. Thank you. Thank you. And your next question comes from the line of Hugo Cruz from KBW. Please ask your question. Your line is open. Hi, thank you. A couple of questions. So on capital, can you give guidance on you had all these benefits from DTIs in Q1. Can you give guidance on what could be the impact for the rest of the year? Obviously, I can understand that depends on your guidance also on NPE kind of progression. And then also once you have a target at the end of the plan of 40% payout for your dividend, but you're already I think you have a decent buffer above 12% already. Okay, you'll have the impact of the acquisition this year. But how fast can you get to a 40 percent payout? Do we have to wait until the end of the plan or could you get say next year? And finally, could you give a bit more granular guidance on your cost base for Portugal, I. E. How much of one offs do you expect this year and the next? And kind of what kind of underlying or structural cost inflation do you expect for Portugal? And net of those one offs and also kind of investment, if you could split between kind of one off restructuring charges and investment, it would be helpful. Thank you. First, in terms of capital, as I would say, I mean, most of the impact will come here from 3 sources, the exact three sources that happened in this quarter. The net income, as I commented, the impact because we have net income, we benefit from the DTAs because by having a positive income, I mean, we benefit from the DTAs also because the threshold, as you know, for the DTA deduction also goes up. And the evolution of the mark to market of the government debt portfolio, this in terms of the numerator. And then in terms of the denominator, the RWA increase. In terms of the net income, I mean, what we have told you, I think I cannot elaborate much more than what I've told you. This quarter was a good quarter. It clearly is in the we're actually on the track of the year. We have here some extraordinary link to trading gains. I think corrected for this and for the other accretion going forward will come from this. And in terms of the cost base for Portugal, we are in a transformation phase. Commented, we need to have different types of skills for a bank that is a digital and a more mobile bank and a less branch based bank. This, of course, we are trying to do this without sacrificing too much our recurrent cost base. So what we are trying to do is to try to maintain the recurrent cost base, but at the same time, reinventing the bank having the type of skills that we need for the future. So I would say, it was give or take, so to say. In terms of our plan, what we would like to see is a reduction in real terms of our cost base, but a sort of maintenance in nominal terms of our cost base, but with the reinvention of the bank and while serving many more customers with many more products. In terms of the non recurrent part, we are still analyzing it. There will be a non recurring part that has already been announced to the AGM that is €12,000,000 that will be distributed on Q2 to the employees, which salaries were reduced during the crisis, so to say. So this is a nonrecurrent part. There will be other nonrecurring part that we still have to refine basically in terms of headcount in terms of this transformation and in terms of the headcount reduction that we still have to see exactly how many people we will have we can reconvert and how many people we have to let go in this process of transformation of the bank. But the main message that I would like to give to you because it's the most important one in terms of valuation is in terms of the perpetuity, in terms of what is recurrent and so on. We do expect a stability. In terms of the dividend, the dividend is a decision of the shareholders. As you know and I have commented, we will have the impact of our of the Eurobank. This is an important impact that we will have in our capital base. We are growing low single digits in Portugal. We are still with an NPE ratio above with the NPE ratio where we want to get it by the end of 2021. So having all of these considers and while we have these NPE ratio, in terms of our recommendation to the shareholders, we will tend to be conservative until we reach the type of NPE ratios that we think that the market values most. And we generally think that this is what protects best your interest. For us, it was very important to distribute these dividend this year, not because of the cash that it means, but because it sends the right signal that we have enough capital for our business model. The fact that we are distributing is basically a signaling effect as we have enough capital for our business model and that the people that have to participate in the dividend decision and of course the supervisors also are consulted in the dividend decision feel comfortable that our business model and our capital generation is consistent with what we are doing. Okay. Thank you very much. Thank you. Your next question comes from the line of Carlos Peixoto from Caixabank BPI. Please ask your question. Your line is now open. Hello, good afternoon. A couple of questions here as well. The first one would be on capital still. A bit of more detailed question, which is you mentioned the net income of the quarter as accruing to the CET1 performance. My question is, is there any accrual of any sort of payout policy embedded in the ratio? Or for the time being, you're considering no payout for regulatory purposes? Also related with FIM, the 1st Q core Tier 1 ratio already is already adjusted by the dividend payment that was announced, if you could just confirm that. Then on the second theme, on cost of risk this quarter cost of risk came down in a significant way and a strong improvement visavis the last quarter and as well the full year 2018. I was wondering whether you see this sustainable or should we expect it to pick up a bit throughout the year as it happened during last year as you speed that up a bit more on NPE sale? And then the first question, if I may, would be on MREL requirements. Last quarter, you mentioned a shortfall of EUR 1,400,000,000 or basically the need to issue €1,400,000,000 of MREL instrument until June 2022. Is that still the figure we should be looking at? Or how high have this evolved in the meantime? Thank you. Okay. Starting with the last question, yes. I mean, we have not reasoned the calculations of MREL. This is there is nothing to point out that the number should be different. And since we spoke last time, we have not issued any MREL eligible instruments. So what we will need to issue and this is nothing special as you may acknowledge is a difference of $1,400,000,000 to 2022. This is the net gap that we have to fill. It's very comfortable, as you know, for a bank such as us. The only reason here and the timing will depend exactly on the questions that have already elaborated before. In terms of cost of risk, I would say the trend is this one. We think our business model is consistent with cost of risk across the cycle even below 50 basis points, and we expect to get to 50 basis points by 2021. This is where we want to get it. But the cost of risk is a little bit like has a component of volatility, as you know. So and we do not smooth our accounts. So we may have a quarter that are better, quarters that are worse. But I would say the quarter that we just had was a normal quarter. So to say, there could be quarters that are better than this one this year. There could be quarters that are worse than this one this year. I cannot promise you exactly what the next weeks will be or the next months will be because it will reflect the reality of the accounts. The reality is intrinsically volatile. But what I would like to say is that we are not expecting it to grow, needed to come down. It's actually, we are expecting it to come down over the trend to the 50 basis points, but there is nothing special in terms of the cost risk of this year. In terms of the capital ratio, the answer is yes. I mean, we advise to the normal rules in terms of capital ratio calculation. The present capital ratio, of course, already incorporates the 10 percent or the one for the year end, the 10% of payout for the year end. And of course, as time goes by, we will assume a conservative value in terms of the accrual of a payout that then may be equal or different from the real payout decided by the shareholders, but we are not accruing 100% of the net income. And for the same reason that I don't want to condition exactly the decision of the shareholders and the decision of the Board of what will the possible payout be this year. We are not disclosing it. Of course, I will not disclose exactly what is the percentage that I'm accruing because it will be tantamount to say exactly what will how this would condition the shareholders. But yes, we are not accruing the total of the net income because this is what the rules say. Thank you. And your next question comes from the line of Ignacio Ulargui from Deutsche Bank. Please ask your question. Your line is now open. Sorry, I thought I'd pull out my questions. But just one follow-up on the fee income trends and what you were commenting in Poland particularly. I mean, do you think that what we have seen this quarter is a bit of a trend that we should expect for the coming quarters? Or there might be a bit of a change in trend on the market related and asset management products? Thanks. Ignacio, as you probably have seen, this quarter when you compare with previous quarter, there was already an inflection in terms of bank insurance and market related fees in Poland. So when you compare this quarter with the same period of last year, it goes down. When you compare this quarter with exactly the last quarter, you already see some picking up of the market related fees. As you may also know, there was an issue, a reputational issue in the market, not with us, in the market in terms of asset management products in Poland. So as the markets evolve better and as this reputational issue fades away, we do expect the market related fees and the bank insurance fees in Poland to start improving as they did this quarter vis a vis the one of us the last one. 4th quarter. Okay. Thank you. Thank you. And your next question comes from the line of Benjie Krieland Fanford from Jefferies. Please ask your question. Your line is open. Hi, good afternoon. Two quick ones for me, please. First of all, can you just confirm what the average yield on the Portuguese sovereign bond portfolio was at the end of the quarter? And then secondly, on Mozambique, on the sovereign exposure, it looks to be down about €400,000,000 quarter on quarter. So I just wanted to check is that related to a maturity? And if so, how has the cash been reinvested in the country? And should we expect any impact on net interest income going forward? Thank you. I'm sorry. What there was here a problem in terms of sound. Sorry. I will start again. In terms of the reduction of the bond portfolio, I can confirm that we have reduced the bond portfolio between December and March of this year, the amount that you have referred around €300,000,000 as you may see in the annexes to the presentation. But as we have generated cash, what we see also is that our treasury bill portfolio, our short term government securities have increased somewhat. This is more an effect, so to say, of cash accumulation than a decision by itself. What we are now doing is exactly to use this as an opportunity to improve our profitability further going in the next quarters, either by being either more conservative in terms of the pricing of the largest deposits or by using these excess liquidity in more profitable ways. But the bond portfolio came down, the treasury portfolio to a large extent because of the high component of treasury bills was in the quarter 0.6 percent of the Portuguese government debt portfolio. Thank you. Okay. I'm sorry. In terms of Mozambique, basically, what was is a mix in terms of the portfolio in Mozambique. We had securities that were short term government paper. And basically, we have exchanged the short term government paper by Central Bank paper. So it's very similar products, mainly in a country where the Central Bank issues its own currency. Thank you. And we will now take your next It comes from the line of Noemi Terouch from Mediobanca. Please ask your question. Your line is now open. Good afternoon. I have two questions on NII. What is the contribution to NII from NPE in Q1? And could you please give us some color on the evolution of yields in Portugal, mortgages and corporate since we see some pressure on mortgage front book rates on aggregate level as the corporate bond yield decreases? Thank you. Yes. The contribution of NPEs, mainly of the unlikely to pay part to the margin is not very material. Of course, it's not very material. If to give you a broad figure, more or less, it should be for every EUR 100,000,000 of reduction, more or as you know, according to IFRS 9, you only account for the part that you really expect to recover and after the impairment. So because this is a part that is already impaired and is already covered, the part that really impacts the margin is not that large. It's broadly, if you want, a ballpark number around 1% value. That means that probably the value before the impairment would be around 2% of interest rate, give or take. So in terms of the pressure on spreads, as the country normalizes, it is normal, of course. So by the same token, as we have benefited and we are benefiting, as it was shown to you, from a reduction in spreads that some of the corporates also benefit from some of the from the reduction in spreads. And effectively, we are seeing some margin compression in terms of spreads that we have been able to compensate through volume growth. And we expect this volume growth, as you've seen the volume growth in Portugal, it's low single digits, but it's still relevant by being low single digits. And also, if you take a look at the whole portfolio, by the composition of the portfolio with a weather weight of the unsecured cash loans visavis the mortgage loans. So we do expect our NIM in Portugal to continue at present levels. We don't expect, let's say, a reduction in the NIM. But this reduction in the NIM is through the fact that the mix effect compensates a potential compression when you look at it on a client by client basis. Next question, please. Thank you. Your next question comes from the line of Hugo Cruz from KBW. Please ask your question. Your line is open. Hi, thanks. Just a quick one. In Mozambique, the recent natural disasters, do you expect any material impact out of that in the local business? Thank you. Thank you for asking this question. So the immediate I mean, effectively, it was a big disaster and a big catastrophe for the country. And of course, we feel our social responsibility with the country. But the immediate impact that it may have in our accounts is negligible. So we do not expect any immediate impact in our accounts neither in terms of credit risk nor in terms of destruction of collateral, so to say. So we are not expecting anything in this regard. Of course, our business model in Mozambique is very much a liability based model, where we have liabilities, where we have client deposits and where we invest these client deposits to a large extent in government debt and in deposits in the Central Bank. So it is a very much a transactional based model, a very low risk model. So it's not so much exposed to these and other types of risks. Thank you. Thank you. And your next question comes from the line of Carlos Peixoto from CaixaBank BPI. Please ask your question. Your line is open. Open. Hi, again. Two specific questions again on costs. Basically, the first one would be regarding the distribution of profits that was announced for this year, the €12,000,000 that you referred to previously. Is this something that we should incorporate into our numbers going forward? I mean, will there be additional distributions of net profits? And should we think on it as a sort of a payout ratio as well in the percentage that was paid this year or that will be paid this year versus the profit of last year? Or should we look more at the broad figure, the €12,000,000 Then also related with this, I've noticed that there was an increase in the work force in Portugal in the quarter, if I'm not mistaken. Should we think on this as being something that temporarily in the sense that you're renewing a bit the workforce, hiring people more related with IT while restructuring the retail force? Or so was this is this a temporary effect? Or is this something more structural and should we expect it to continue growing? Thank you. Okay. So starting with the last question. So the total amount that the workers in the bank, so to say, have accepted to reduce their salaries during the period of the plan was around €36,000,000 That this was the total amount that they have accepted to reduce their salaries as a commitment with the project of improvement of the business model of the bank. And the commitment at the time of that. If we were if we all were successful, that we would present to the general shareholders' moment to the general shareholders' meetings decisions, as it was said at the time, to compensate the workers in aggregate terms for this sacrifice that we have that if we were successful as we have been. So this was an additional motivation to repay the corpus and so on. So this was the decision of the Board present this year EUR 12,000,000 of this EUR 36,000,000. This is a decision that the Board will take every year. But one thing I can tell you is that once the $36,000,000 are distributed to the workers. That's it. Exactly the pace that will be distributed will depend on the decision of the Board where there are some non executives and that the final decision will be taken by the AGM. So this is not something that you should include in your perpetuities. I would not include these in the perpetuities. But if I were doing the calculations, I would compute the EUR 36,000,000, so to say, in terms before tax, by the way, in terms of value to be distributed to the workers over the next years. So to say, that's something that I will do, but I would not include it in the perpetuity in any case. In terms of the dynamics in Portugal, what we want to become taking a long term view is a bank with that is a bank with less people, with more digital skilled mobile skilled people that serve our clients in a way that is prone to what they need in this new mobile and digital world. So of course, there is a moment in which we have to hire people for the digital, and we still keep some people for the old servicing model. So the people that we have hired, they are here to stay, so to say. But what we do expect as time goes by is that the total amount of people in the bank, as in other distribution models, will go down. But it is a substitution. It's a part of the rules of the transformation of the economy. Having said that, this in terms of number of people, I would not fix too much in terms of number of people. What I think is more important is the recurrent cost. What we do expect is to have a maintenance of the recurrent cost, but with the bank much more able to be scalable. So we expect an increase in revenues and to be able to increase revenues with stability in recurrent costs. That's basically the key message behind our plan. And if you use the numbers, you reach more or less the same types of values that you are getting to. And these recurring costs will be with less people, so to say. I think these are the general numbers. Thank you. Thank you. We do not have any further questions at this point. I will hand back to you, Mr. Miguel Braganza, for some final remarks. Sorry, we do have one last question. Would you like to take it now? Your last question comes from the line of Jonas Floriani. Please ask your question. Your line is now open. Hi, gentlemen. Jonas Floriani here from Axia. Just a question on your Slide 29. Just wondering now that we're seeing quite consistent improvement in the spread of the portfolio on deposits. So what do you see as a trend 2019? How much lower these spreads will go? So any color on that will be very helpful. We still have a difference between our front book and our back book. So as the back book matures, we will improve, so to say, still the cost of deposits. We still also have some deposits that are corporate deposits that are not so important for our franchise that we can also let go. And just by the fact that we let them go, this may still improve somewhat the cost of deposits. But what but as you point out, I mean, the marginal benefit of the reduction of the cost of deposits will not be very large, I would say, in the next quarters. Will be decreasing vis a vis the €3,000,000 that we have seen in this quarter. We still expect in the next quarters to have some benefit from it, but we are speaking about these type of numbers. What we expect to be, so to say, a driver of the NII is as our effort to reduce the NPEs become smaller, so to say, and our increase in the volume of credit starts to grow, we expect this to contribute positively to the NII in Portugal so that we achieve low single digit numbers in Portugal. That's the type of targets that we have in Portugal. As you have seen this quarter vis Poland, as I was commenting, a strong top line growth in Poland that will then translate in a very interesting also bottom line growth. We are expecting top line growth in Poland cumulatively over the next year as a cumulative annual growth around 10% that then will translate, of course, in the bottom line growth that is substantially mid double digits. This is the business model in Poland. The business model in Portugal, what we would expect is some top line growth, but low single digit top line growth, contained costs and a normalization of the cost of credit, where most of the benefit will come from the reduction of the cost of credit and in terms of shareholder value creation from the reduction of the NPEs. Got it. Thank you. Thank you. And we do not have any further questions. I will hand back to Mr. Miguel Braganca for some final remarks. Okay. So thank you very much, ladies and gentlemen, for your interest in our equity story. This has been, as I commented, a strong set of results. We would like you to reaffirm our commitment to the strategy that we have clearly on track to achieve the numbers that we have presented you. Thank you very much and until next quarter, please. That does conclude your conference for today. Thank you for participating. You may now disconnect.