Earnings Call: Q3 2018

Nov 9, 2018

Good day, and welcome to the Millennium BCP 9M 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Miguel Mea, Chief Executive Officer of Millennium BCP. Please go ahead, sir. Good afternoon. My name is speaking. I would like to start welcoming you to this conference call regarding BCP's 3rd quarter earnings. I will present to you the earnings and highlights, and then my colleague, Miguel Barraganza, will follow, providing additional information and details. I would like to emphasize that during the 1st 9 months of this year, we improved in profitability, reaching net earnings of €257,500,000 improved in credit quality, having decreased NPEs by EUR 1,800,000,000 from September last year have increased the business volumes, namely in the 3rd quarter, in which total loans increased nearly €700,000,000 and the the performing loans increased €1,000,000,000 We have additional 294,000 active customers since September 2017 and seen rating agencies recognizing the bank improvement over the last years Had a good performance on the stress test when compared to the average for the banks tested and also a special mention for the agreement signed this week for the acquisition of Eurobank, which will strengthen Millennial Bank's market position in Poland and provides an opportunity for relevant value creation. What I just mentioned is graphically illustrated on Slide 5. There was an improvement in the group's profitability with an increase of 93% to EUR 257,500,000. I must also mention the relevant contribution of the activity in Portugal for the overall increase of the group's profitability, Coming from a marginal positive contribution on the 1st 9 months of 2017, the contribution from Portugal as this year already surpassed €100,000,000 In terms of assets quality, the reduction in NPEs from 8 point €1,000,000,000 to €6,300,000,000 represents less €1,800,000,000 at group level since September 2017. The reduction in Portugal was of €1,600,000,000 from €7,200,000,000 to €5,500,000,000 Last quarter reduction of NPEs in Portugal was €367,000,000 which by itself is a strong evidence of the consistency of the work undergone in this front. At the group level, it should be highlighted that the coverage by impairment has surpassed the 50% result and that the total coverage, including collaterals, is now 107%. I must underline that being our business model, a relationship centric model focused in retail and corporate, the coverage by collateral value has also a great relevance. In spite of the reduction of NPEs, the business volumes increased €4,200,000,000 in the 1st 9 months of 2018 compared to the same period last year. The increase was of €3,800,000,000 in customer funds and €400,000,000 in loans to customers. Just in the last quarter, there was an increase of $700,000,000 in loans to customers. The customer base has continued to be reinforced with 294,000 active customers acquired in the last year, of which 120,000 in Portugal. This customer acquisition dynamic is particularly important considering the changing context of the financial sector being very relevant to the growth in terms of digital clients, which already account for 41% of the active customer base. Both Standard and Poor's and Moody's upgraded in October, well notched the long term BCP ratings, confirming the significant improvement of the bank risk profile, namely in terms of assets quality as a consequence of NPA's reduction and in terms of profitability improvement in the domestic activity. As we expected, BCP have a good outcome in the stress tests conducted by EVA and ECB, which, on the adverse scenario, have resulted on a common equity Tier 1 fully loaded impact of 300 basis points. I highlight that BCP results compare favorably with the average impact of the 48 banks tested, whose impact in fully loaded was 395 basis points. Regarding Eurobank's acquisition by our subsidiary in Poland, which was announced this week, I wish to highlight some aspects. It is an opportunity to strengthen our market position in Poland, which is an high potential market where we have proven to be able to grow in a profitable manner, while gaining market and customer trust. After carrying out a comprehensive and conservative analysis, we concluded that this was a relevant opportunity that fully justified the proposal we have presented. I emphasize that the capital management is a matter of extreme relevance for the group. So I want to be very clear affirming that we do not envisage any further acquisition until the end of this board term. The growth embedded in the strategic plan that we announced to the market in July will be achieved 100% organically. The estimate price for Eurobank acquisition of EUR 428,000,000 sets the transaction at a price to book value multiple of 1.2. This acquisition will be paid in cash and exclusively financed by Bank Millenial on funds. Currently, Bank Millenial is trading in Poland at the market average price to book value of 1.3 at the date of the transaction, and several banks even trade in Poland at higher multiples. This acquisition will enable Bank Millenio network of branches to have the reach we consider desirable. Currently, Bank Millenio has 3 56 branches, of which 60% are located in bigger cities, while around 70% of Eurobank branches are spread through all other cities, where we are unpleasant or don't have the presence that we think we should have. Eurobank has five and 1 branches, half of which are franchises, which is a flexible and agile model in this new digital environment. I would also like to highlight the relevant reinforcement of the market share of non mortgage retail loans, in which we will turn into one of the major six operators. I also point out that no Swiss francs loans risk will be assumed with this transaction. We estimate to extract relevant synergies from the transaction, nearly EUR 40,000,000 after Eurobank's integration and completion of the restructuring. As a consequence, we project a significant improvement of the Bank's Millennium's earnings per share, with an additional 26% estimated on a steady state stage. We also estimate that on completion of the transaction by the end of the Q2 of 2019, the group common equity Tier 1 will be reduced by 40 basis points and the total capital ratio impact will be lower than 30 basis points. These impacts will be offset by additional optimization measures in the capital at the group level that we are currently undergoing, of course, without any capital increase, something that is completely out of the question. Finally, I would like to stress in relation to the dividends payment that I what I told to the markets was that we should start paying dividends as soon as possible, but always taking in consideration that it is also very important for the bank to achieve a common equity Tier 1 of 12% as it was projected in our strategic plan. Now I will pass to my colleague Miguel Borgans to provide you a more detailed explanation of the earnings presentation. Good afternoon, ladies and gentlemen. It's Miguel Bragas speaking right now. So entering now into the profitability main highlights. As you see that our consolidated earnings have improved by 93% and this was achieved with 2 main levers, a very sharp increase in the Portuguese domestic activity as it normalizes with the more normal cost of risk. And as the net earnings also from international operations show high resilience in spite of the macro challenges that we all know. In Page 10, we may see the income statement. As you may see that our core income in spite of this prolonged period of low interest rate has shown growth of 3%. Our costs our recurring costs have grown by 3.3%. Included in these recurrent costs are is the question of the salary normalization in Portugal. As you know, up until the Q1 of last year, there was a salary cut associated to the restructuring plan that was reversed last year. This is basically what explains. So our operating net income remains broadly stable and the recurring operating net income shows growth of around 2% in spite of this prolonged period of low interest rates. Our impairments decreased to very high still very high level with the cost of risk in Portugal still overall to 100 basis points, which shows still some degree for further normalization. And this is basically what explains to a large extent the increase in the net income of 93% in Portugal in consolidated terms, I'm sorry. Going line after line, the net interest income shows a very important increase of 3% in this environment. And I would highlight here the stability of the NIM, both in consolidated terms and in the several geographies. We see that our consolidated NIM is 2.2%. In Portugal, which is, as you know, a quite mature market, we are able to show NIM of 1.8% in spite of these very low Euribor rates and the international operations have been able to maintain a high level of NIM in the last year. Commissions, they are going up in spite of the also challenges in the market as you see. When we compare this quarter to the previous quarter, we see an issue of comparison in terms of commission that is to a large extent explained by market deals. But when you compare with last year, we see here an improvement of 4.4% of commissions in Portugal. And international operations, we show a stability mainly linked to investments, asset management and bank assurance, which we expect gradually to reverse. The other income, as you may see in Page 13, is to some extent, influenced by the mandatory contributions. As you see, the mandatory contributions have increased around $10,000,000 from 2017 to 2018, which influences the net operating income and also the losses that we had in terms of credit sales. This year, we have had around $21,600,000 on credit losses that have been very important and I think also value accretive because they are an important part of our NPE reduction strategy. We see in Portugal here that the this other income has reduced 10,000,000 dollars but in a very difficult market years, as you know, all the market gains and so on are in this line. We are still we have still been able to show an accumulated other income line of €39,000,000 in Portugal. In international operations, you see some growth in spite of the small increase in mandatory contributions. In terms of cost, there is an increase in cost. A part of it has to do with nonrecurrent positives that we have last year. So that when we compare the nonrecurring positives last year with the nonrecurring net negative, so this year by nonrecurring, I mean, mainly headcount reduction costs and the pension funds special costs or special income as we had last year. We see here a variation of around $30,000,000 and there has also been the reversal of the salary cuts that have explained that is responsible for a growth of $7,500,000 Going forward, we feel very confident that our business model supports these very interesting cost to core income numbers, both in recurrent terms and excluding non usual items. Page 15 once again, we remind you how our costs to core income compares with our competitors in Portugal and with averages of systems in other European markets, showing our capability to generate pre provisioning profit on a sustainable basis. The cost of risk, albeit high, was at the level of 88 basis points in consolidated terms and 100 basis points in Portugal is showing a progressive normalization trend, which we think is important. As you know, we have an objective of reaching 50 basis points by 2021. We are on track. And we of course, this is a line that has always on the mayhem, always some volatility, but we are really on the long term track of achieving our long term objective. Credit quality, as Miguel May commented, we were able to reduce year on year around 22% of NPEs, almost EUR 2,000,000,000 and achieving very already interesting ratios from an NPL and NPE perspective. So our NPE ratio, the official ratio including securities, the official EBIT ratio including securities and on balance sheet items is already below 10%, is at 8.8%. Our more normal ratio that only considers credit is at 12.3%. And if we consider only the NPL 90 days ratio, we are at 7 0.4%. This sharp drop in the ratio has been achieved, maintaining a very high level of coverage, mainly when you consider the collateral. In terms of business activity, I would synthesizing it, I would say that it reflects our commercial capabilities. So we our commercial capabilities and our customer attraction remain very healthy. The total customer funds have increased by 5.5% in consolidated terms, of which 5.8% in Portugal, which will be very interesting value and almost 5% in the international operations. The loans showing already a significant gain in the performance in the performing area. As you see here, we are growing here $400,000,000 which is not a lot, but this $400,000,000 reflect the reduction of $1,800,000,000 of NPEs, so that the performing portfolio effectively increased by $2,200,000,000 which is already an important reversal of the trend that we had until now. The net loans to deposit ratio continuing to improve and the liquidity situation also very healthy both in terms of ECB funding and in terms of liquidity ratios. Capital position, as we see when we compare with the last year, the total capital ratio improved from 12.7 to 13.4 basically to a large extent explained by the sub debt issue that we did at the end of last year. The Combinator Tier 1 achieved 11.8% with some growth vis a vis last year and comfortable above our SREP requirement ratio of 8.8%. If you do the numbers, this is the result of both the impact in terms of net income, in terms of our capital position and the fact that we are increasing risk weighted assets. Leverage ratio, very healthy growth and comparing very favorably with other markets. And the other way density, which is a ballpark approximation to the conservativeness of our models, also compares favorably, if you want, with other demand. I will pass it now to Luca Imra going deeper detail in terms of Portugal. So on Page 26, the net income of in Portugal of $115,000,000 an important increase from last year, driven mainly by lower impairment and provisions. On Page 27, the dynamics of the NII since last year, an increase of 1%. And this evolution is driven by the positive effect from still the COCO repayment, the continuous decrease on the costs of funding and here both retail funding, I. E. Deposits and as well some retail bonds, but also funding as well and in particular due to the replacement and the issuance of the covered bond with lower rates that we did last year. On the negative side, the effect of still lower volumes when we compare the 9 months and the average 9 months of this year versus previous year, lower contribution from securities and as well a slight decrease on the average spreads on loans. Quarter on quarter, the NII increase is mainly the higher credit volumes that we were not seeing for quite some time and affecting in a positive way the NII this quarter as well a higher contribution from securities when we compare with the previous quarter and the lower funding costs as well, in particular retail funding costs. So here, both time deposits, but as well the kind of time deposits that more on the debt line that we can see type of retail points. When we look to the spreads and the spread of time deposits, the back book at 60 basis points, an improvement of 10 basis points from last year. And regarding front book, still a relevant difference from the current one, the front and the back book, that's still with space to continue to decrease the average cost here. Regarding loans, the spread is very much stable at 2.7% as well as NIM that is relatively stable at 1.8%. Looking to commissions now, up by 4.4% with market commissions up by 10% and banking commissions by 3.5%. And regarding other income, the decrease as already explained is mainly due to the credit sales and the higher mandatory contributions. Regarding costs, you remember previous year the one off gain in costs related to the agreement with the unions regarding retirement age. And if we take back together with the one offs restructuring costs on both years, the operating costs increased 2.1% and again very much related with the impact of the reversal of the salary cuts. Moving to NPEs, we continue this trend of an average of 1.5 €1,000,000,000 a year reducing the NPE and increasing the cash cover. And these two elements at the same time led the net NPE from a very high number to $2,900,000,000 now. Regarding the last 12 months, the decrease of $1,600,000,000 happened through a combination of $700,000,000 of net exits, dollars 400,000,000 write offs and $500,000,000 of sales. Quarter on quarter, the performance again very positive, a decrease of 367,000,000 dollars again with a balanced combination between exit sales and write offs. Cost of risk at 102 basis points, down from 137% last year. Regarding the NPE coverage, total coverage, coverage above 100% for both individuals and companies and even for both NPE categories 90 days past due and the other NPE. Coverage by provisions at 48% for the whole NPE book, but stronger for loans to companies and in particular for the 90 days past due segment within the loans to companies. Regarding foreclosed assets, an important decrease of 20% from last year in spite of a large amount of entries. We increased sales, as you can see, by more than 80%, and we continue still with those sales to register register profits on those sales. Regarding restructuring funds, the amount of $1,000,000,000 represents a decrease of 4% versus the previous year. Looking to volumes now, percent versus previous year. Looking to volumes now, customer funds up by 5.8% and the loans relatively or almost stable, but with the combination of a 23% decrease in NPEs and the 4 percent increase in the performing book and in particular, dollars 300,000,000 increase in this quarter. Looking now to the performing book, this increase of 4.2% mentioned already is mainly explained by the strong performance we had of loans to companies that represent 65 percent of this annual growth. In terms of customers, just a note on the important increase of 120,000 in terms of active customers and 144,000 in terms of 1,000 in digital customers. Moving to the international contribution at $141,000,000 this year, an increase of 7% versus last year. We exclude on top of this the effect of the application of the IAS 29 for Angola and excluding the FX effect as well, their contribution registered an increase of 13% from previous year. If we look to Poland now the numbers, the net income of $129,000,000 an increase of 9% due to mainly the increase of the NII. Page 41, this increase of NII over 6.7% is due to higher volumes, but as well higher NIM. Commissions up by 1% and higher trading as well when we compare these 9 months of this year versus the previous one. Costs increased 5.6 percent and but the cost to income relatively stable at the level of 46%, forty 7%. In terms of credit quality, stable NPL ratio at 2.7% with an increased coverage that is now at 132%. Cost of risk at 47 basis points, a decrease from last year. Regarding volumes, customer funds up by 5.6% with an important increase in demand deposits of 2017 and loans 7% 7.5% up, reflecting a decrease of 7% on the FX mortgage and an increase of 40% for other loans. Now regarding Mozambique, net income up by 20% with a return on equity above 20% as well. Income grew 8% above the increase on the costs that was at 4%. Looking to income now, the NII up by 6 percent, mainly due to the increased contribution from the securities portfolio, but as well from lower deposit costs. Commissions down 4% with less contribution from loans and the operating costs up by 4% and the cost to income still at the levels at the low levels at 37%. NPL, the stock is down from last year, and the cost of risk at a high level of 338 basis points, which generates a coverage of 60%, but more than 100% when we include Comatros. Regarding volumes, relatively stable deposits, but 21% decrease in loans that reflects the conservative approach under the current challenging environment. Moving to just the key figures and comparing this year with the previous year, good performance in terms of customer growth, slight deterioration on efficiency ratios due to the reversal of salary cuts, as we referred already, improved profitability with the return on equity at 6% now improved capital and liquidity position and improved asset quality with NPEs now at $6,300,000,000 and with lower cost of risk. Now let's move to Q and A. We will now take our first question from Ignacio Ulargui from Deutsche Bank. Please go ahead, sir. Hi. Good morning. Good afternoon, gentlemen. I just have two questions. One on NII. So after the strong Q on Q growth that we have seen in Portugal, from the messages that I've seen in the presentation, we should see some sort of stabilization going forward? What's a bit your view for NII over the coming quarters? And also, if I just look to the performance of equity accounted revenues in the international operations was very strong, Whether you could give us some color on the sustainability of that €60,000,000 that we had in the quarter? Thanks. Okay. Thank you very much for your questions, Ignacio. Effectively in terms of NII, what we see here are different trends. In this quarter, as Rui commented, there was there were a couple of positive trends and a couple of negative trends. Going forward, the main factors that we will see some continuation in terms of the reduction of the average cost of deposits as the front book approaches the back book. So this is positive. But we also expect to see some slight deterioration in the assets margin as the situation in Portugal normalizes. But on the other hand, we are seeing here some volume growth. Until the moment where the arrival picks up, I would say that the margin will be quite stable. So once the rubber picks up, it's a different story. We are a commercial bank, so we should benefit from it. But until the moment where the rubber picks up, the resulting of all these factors should be quite stable going forward. In terms of the equity account impact, as you know, our only international accounting equity account participation is in Angola. So this small impact that you see in terms of the total accounts of the bank is explained basically by the contribution of our participation in the EMEA, okay? Okay. So that shouldn't be sort of I mean, it was strong this quarter, but shouldn't we forecast those and this has something like this quarter or it was a bit of a one off? In terms of you're seeing see the margin or in terms of the No, no, no, in terms of the Angolan business. That was a bit slower than No. There is also an impact in terms of the currency movements. I would expect that what we had this quarter should be more or less aligned with what's going on in the next quarters. But this will be aligned with more volatility than the domestic equity participation. Perfect. Thanks. We will now take our next question from Sophie Petersen from JPMorgan. Please go ahead, ma'am. Yes. Hi. Hi, Yuri, Sophie from JPMorgan. You briefly mentioned in the beginning of the presentation more details and color around how we should could give a little bit more details and color around how we should think about these capital optimization measures that you're thinking of? And my second question would be on Eurobank, Poland. You guide for 26% EPS upside, but could you just give us a little bit more guidance on how we should think about net interest income contribution, fee contribution, total revenue contribution, cost contribution and kind of normalized cost of risk for the business that you are acquiring? Thank you. Okay. In terms of the additional liquid additional capital optimization, I would say this is BAU as we normally do. We always take a look back at synthetic securitizations. We always take a look at our minor participations on what we do with them, dividends of equity accounting participations. So, I would say this is mostly BAU. It's nothing out of line with what has been done in the past. It's something that's part of our job that we continuously do and that bring a normal benefit to our capital ratio, okay? So more of the same of what we have been doing in the past. In terms of Eurobank and Bank Millenium, as you know Bank Millenium in Poland is a listed bank with around 50% of the free floating market or of the capital in the market. And Bank Millennium is effectively giving the information on the transaction. And I would not like to have here a second point of entry if you want for all this information. Having said that, most of the benefits in terms of the synergies, and this is what I can say, most of the benefit in terms of the synergies will come from cost cutting. So, we expect so in terms of the value that will be generated through synergies, most of it we expect to be through cost cutting. That is, so to say, a comfort in terms of execution, because it depends mostly from ourselves. Approximately, what you can do is to sum the 2 banks and together to and then to apply an important cost cutting factor to this to the cost base of Eurobank. Okay? Okay. That's clear. And just a final follow-up question on the capital side. You had your fully loaded leverage ratio was very strong and increased quite significantly this quarter. How should we think about that going forward? And what actually drove that? Effectively, we should probably have highlighted this better in the presentation. In our former fully loaded leverage ratio that we had presented to the market, we were applying very conservative criteria and not the official EVA criteria. To give an example, so we were using all the assets and not excluding the assets that's from the official EBITA ratio, EBITA recommends to take out. So I would expect this ratio to evolve in line with the capital ratio as we are not expecting I mean, the dramatic changes in terms of this weighted asset density. So going forward, I would expect this ratio to move broadly in line with the capital ratio because we are not expecting changes in terms of equated asset density. Thank you very much. We will now take our next question from Ms. Naomi Peruch from Mediobanca. Please go ahead, ma'am. Good morning. I have three questions, if I may. The first one is on capital and dividend. Do you feel comfortable start paying dividends with our common equity Tier one ratio below 12%? The second is, are you planning to issue subordinated or senior bonds in 2019? And the third one is on Angola. So we have seen on the press that the Central Bank of Angola has asked several banks for higher capital ratios. Do you know whether Banco your the bank you have a stake in Angola is among these banks? In case of higher capital requirements for M and A, would you be willing to deploy more capital in the country? Thank you. First, in terms of dividends. We have presented to you a plan where everything makes sense and everything is interconnected. In this plan, we intend to reach an ROE of 10% with a common equity of 1% of 12% and with a very sharp reduction in terms of NPEs, which I mean has also is also linked in some way to the cost of risk and to and consequently to the return on equity. So we do think that based on our business model, the appropriate ratio for us right now in relative terms is a core negative one ratio of 12%. So this is our view and this is what we think. This need not be, I mean, something that has to be matched on the sense in every quarter. This is, I would say, a threshold. This is a level of an indicative level, but this is what we think makes sense. Will we pay dividends below 12% or not? So this is a discussion that as you may see has always pros and cons. What we can tell you is the following. If we were convinced that our ratio would remain below 12%, we would not probably or at least I can speak for myself, I would not recommend to pay dividends. However, we have to keep this in mind together with the situation that the bank intrinsically also generates capital. So we have here to this is not a yes or no question. This is not a simple question. It also depends a lot from our view on what the market values most, whether the market values most the commitment of starting to normalize the bank or whether the market values most the capital accumulation. I mean, we are almost at 12%, so it is not 10 basis points more or 20 basis points less that makes the difference. But this is something to be decided by the General Shareholders Meeting that I would like very much you to be represented and also you to participate in the discussion. In terms of senior and sub debt, I would say that BAU, it is part of our job and particularly of my job as CFO to be constantly in connection with the market. Being constantly in connection with the market means here and there, based on the view that we have around the bank about the bank to test the opportunities of issuing. Of course, keeping in mind what it means for the different stakeholders, including the equity investors. So we would not issue if we thought that this would be against the equity investors' best interest, so to say, because of the price. We are we will also not try to issue in opportunistic terms just because the price is very, very low and wait until the price is the lowest possible. We have here long term view in terms of our relationship with investors. I would say this is BAU. We don't have any specific pressure. But of course, it's BAU. We have issued some debt last year. We have issued senior debt last year also. So maybe we will issue depending on the market circumstances, if we think that it's in the best interest of the bank. Okay. In terms of the ratio of Angola, as you know, we are not the majority shareholders of the bank in Angola. We don't have any indication that the so the our participation is only 22.5% in the bank. I mean, the ratio of the bank is 12.7%. We understand that the bank that is in which you participate there is one of the most solid banks in Angola and probably is not so much on the spotlight as the banks about whom I don't want to speak right now for obvious reasons. So we don't have any indication in terms of pressure to increase the capital there. I mean, if so it is not in our scenario any type of capital call in Angola right now. Thank We will now take our next question from Benjie Crierlein Fanford from Jefferies. Please go ahead. Yes. Good afternoon, everyone. Just a couple of questions from my side. First of all, going back to the NII in Portugal and particularly the funding cost move because interest expenses have gone down sharply in Portugal quarter on quarter. So I was just wondering what the drivers of that were and perhaps if you could tell us what the quarter on quarter move in the average retail bond cost and term deposit cost was, that would be helpful. The second question is just on the NPL sales. They've picked up again this quarter. I was just wondering whether you could give any guidance in terms of the average ticket size of your disposals and the typical type of counterpart that is buying those and whether you're seeing any change in terms of demand or behavior for NPLs recently? And perhaps if I just had one final question as well, just on the Polish acquisition. Could you just break out perhaps the moving parts of the minus 40 basis point impact in capital coming from the acquisition? Because based on the stated RWAs in the presentation and the implied goodwill creation, I wasn't quite able to reconcile, but perhaps there's some other consolidation effects I'm not taking into account. So anything there would be useful. Thanks. Okay. So first, in terms of NII, the contribution from the time deposits on one hand and from debt on the other hand. So the contribution from time deposits when you compare 1 quarter with the other quarter was $3,000,000 The other debt when you compare it is around $4,000,000 positive. So this explains most of the impact in terms of the liabilities. There were also some gains linked to the hedging of these liabilities that also contributed and helped explain the whole liability savings cost. In terms of NPL sales, what we had was year to date a total sales of 320,000,000 dollars And in this quarter, we had sales in terms of around $90,000,000 So this was the sales of NPL that we have this quarter. In terms of the question about the 40 basis points, let me just one second. So, it is an increase the 40 basis points. It is an increase of $2,000,000,000 of RWAs, but an increase as well positive on the common equity Tier 1. And the reason is that on one side, in a way, you deduct the 20% of the goodwill, the fact that you are paying above book. But on the other hand, the excess capital belonging to the minorities that we were deducting from denominator from on the common equity Tier 1, there is a part of this around 150,000,000 dollars that now is a lower deduction. So it is actually these three movements at the same time that gives them the around 40 basis points. Great. Thank you. We will now take our next question from Carlos Peixoto from CaixaBank BPI. Please go ahead, sir. Hello, good afternoon. It's Carlos Prescotte from Caixabank VPI. Speaking back again on the question on dividends, my question would be on whether the 11.8% fully below CET1 ratio reported is already adjusted for some sort of payout ratio or whether or basically what are the assumptions in terms of dividend payout that are embedded in the ratio? And the second question would be on your expectations for the evolution of cost of risk for the rest of the year and also into 2019. And finally, I was wondering if you could shed some light on what are your expectations on the evolution of tax rates both for the Q4 and also for the medium term? Thank you. Okay. So in terms of dividend payouts, I understand this question is very so even so what we have been saying is that we want to start to pay dividends as possible. What we also have been saying is that we have a target payout ratio structurally in terms of long term trends to be hit by 2021 of around 40%. We have not yet taken any decision and I want to stress this, we have not taken any decision in terms of the dividend of this year. So this is very important to say. So and even if a decision is taken, so the issue is more as a statement of normalization of the bank is not in principle to distribute 40% immediately this year. We have never said it, the 40% that dividends imply necessarily 40% pay out. I want to clarify this point because there is no implication in terms of saying that our long term dividend policy should be 40% for a bank such as ours on one hand and saying that we want to normalize the bank as soon as possible to saying necessarily that we will hit the 40% immediately. So I don't want to get too much messed up in the discussion, but because this is not a discussion of the this is a discussion of the shareholders, it's not a discussion of the executive management. But what I can tell you is that even if we suggest to pay dividends next year, it will not be the 40%. And it will be something that is a statement to the market that we have enough capital and that we are becoming normal. So with this into consideration, because nothing has been decided yet, we are not projecting any payout in our present capital ratio, okay? So this is something to be decided next year. In terms of cost of risk, as you know, we are with 88 basis points of cost of risk. We have said and we continue to say that we want to get to the 50 basis points of cost of risk by 2021. And of course, the cost of risk as well as the trading gain is a line that is more volatile because it depends sometimes on some big cases and we have a long term trend, but of course, there is some variability around this trend that you cannot project on a month by month basis with total precision. But I would say as a long term trend and as a trend not necessary, I would say that we would expect a path to the 50 basis points. It is a normal path, a linear path from the 88 basis points to the 50 basis points in the next years. In this last quarter, I would expect in the absence of anything strange happening, but I would expect to have a 3rd quarter more or less aligned a 4th quarter more or less aligned with the 3rd quarter. So this is my basic expectations. But as well as with trading gains, and I want to stress this, I mean, the reality here is intrinsically volatile. That's how things are, okay? The tax rate, the tax rate, I mean, it's a normal tax rate. So we are expecting the tax rate between 24%, 25%, which has been quite normal in the last years. We will now take our next question from Cristobal Adorno from Goldman Sachs. Please go ahead, sir. Hi. First of all, thank you for the presentation. Just one question from my side on capital, the stress test specifically. So will you provide a 300 basis points of revision for the pre implemented approach? Could you also be a measure of providing us the landing point in terms of CET1 ratio please? Our lending ratio that's relevant from the stress for the stress test in terms of CET1 phasing is 9.1% in the other scenario. We will now take our next question from Gabri Kemini from Autonomous Research. Please go ahead. Hi. Thanks for taking my questions. Firstly, on the stress test, decent performance apparently. Do you expect any potential changes in your capital requirements, especially on the Pillar 2 gs on the back of the test test? And then secondly, you mentioned in the presentation that the factoring business has been performing strongly in Portugal. Can you elaborate on a bit on what sort of factoring business are you doing? And then finally, just in terms of the timing of the dividend, can we assume that you would make a decision on the 2018 dividend before the closing of the Polish deal and that you wanted to be above a 12% ratio including the CET1 impact from the Polish deal? So starting with the last question, because I think it's particularly easy. We are expecting the Polish deal to close by the end of the second quarter. So necessarily the dividend decision will be taken before this. Okay? In terms of the dividend decision, I think I have been clear, I don't have much more to say. So it is a decision of the shareholders. The 12% is a long term anchor, I would say. 10 basis points more, 10 basis points less, I don't think it's a critical point. So we have to factor this with we have to take a lot of factors into consideration. And please keep in mind that one of the key anchors for us is both the strength of the bank, but also what it means for the shareholders and for the trust of the shareholders in us. So the decision will be taken decision by the Board will be taken beginning of the second quarter when we present the proposal to the general shareholders meeting and the decision of the general shareholders meeting will occur during the second quarter. In terms of the factoring business, we are not a product bank. So we are a relationship bank. Being a relationship bank, it means that we don't have a mono liner in terms of effecting. So basically what we do is that we serve our corporate clients as well as our retail clients in all their needs, so to say. So it's not a product standalone product strategy, it is a relationship strategy And we serve our corporate in the factoring needs that they have. So it is not particularly specialized because we are the largest private sector bank in Portugal. So we serve all the factoring needs as long as the clients are our clients and they have a good credit risk. So this is basically more a penetration of the in our clients and the relationship involvement than anything else. In terms of the stress test, we share the opinion also that these stress test shows the resilience of our business model. So the fact that our capital depletion is only 300 basis points in a fully loaded basis when the capital conservation buffer is 2 50 basis points is clearly a good sign. So this means that the capital conservation buffer is almost enough to cope with the capital depletion. So we think this is very good news. We expect the P2G to be reduced, but we have not have any we have not have the number yet. As you know, the DCB is strongly recommending the banks not to disclose the P2G. Sure. Just a couple of follow ups. So would you take into account a potential reduction or would you reflect a potential reduction in your Pillar TG in the 12% CET1 target? And the other follow-up on the factoring business, I understand this is a relationship business and you are not a mono liner. Does this do the deals recently include NPL financing? I mean, just given the fact the Portuguese NPL market has been picking up quite significantly. Starting with the last question, The factoring business is a business where we lend money to clients and where we acquire risks is not the business where we divest risks, so to say. So and we are not acquiring NPLs. We are not acquiring the bare loans. So we are on the sell side in this Sure, sure. On the buy side. So do you finance NPLs? So the factoring business is a pure relationship business with commercial clients in their normal trade finance, local and international trade finance relationship. Is it pure plain vanilla financing of working capital, okay, as normal. In terms of P2G, a very short answer to you is no. So the evaluation that we did of the 12% ratio is based on our view of the capital that we should have for our business model when we compare ourselves with other banks. So it is not our intention to reflect any increase I'm sorry, any decrease of the P2G in a reduction of the benchmark ratio. What could lead us to reduce these 12%. If we see which and delivering in every milestone is very, very, very important. Please count on our utmost commitment on assuring the delivery going forward. Thank you very much. Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.