Unicaja Banco SA

MAD:UNI

Earnings Call Transcript 2019-Q1

[Jaime Hernández Marcos, Head of Investor Relations]

Good morning to everyone, and welcome to Unicaja Banco First Quarter 2019 Results Presentation. As always, let me start confirming that we have published the quarterly financial report and this presentation this morning before market opens in the CNMV website. It's weekly day of results, so our Chief Financial Officer, Pablo González, will go straightforward to summarize the main trends of the quarter. Following the presentation, we will answer the questions received. Pablo, whenever you want.

[Pablo González Martín, Director General of Finance]

Thank you, Jaime. Good morning to everyone. We will start in Page 4 that includes a summary of the quarterly results. Starting with the business trends, I want to highlight that the performing loans grew 1.2% quarter-on-quarter, which is a very positive news. The trend was helped by the strong growth in new production as we will see later. Total customer funds also grew almost 2%, supported in a positive change in the recent trends of assets under management that grew 1.5% in the quarter. Regarding results. Net interest margin was stable at 103 basis points. Fee income grew slightly above 5% compared with last year, something that together with the 3.4% decrease in costs, explained the 10% increase in net income compared with the previous year.On asset quality, liquidity and solvency. NPAs continued to fall by 20% year-on-year in first quarter of 2019. On liquidity, our position remains very comfortable with the loan-to-deposit ratio at 73% and the liquidity coverage ratio at 353%. Finally, regarding our solvency. CET1 was 13.3% in fully loaded terms, maintaining a significant buffer over SREP requirements. I will continue with the results and business section in Slide 6, where you can see the P&L details. Starting with the quarterly trends. NII fell almost 3% in the quarter, mainly owing to the calendar effect. Fees, despite the seasonality of the previous quarter, remain almost flat. Gross margin fell 2% quarter-on-quarter with much lower trading gains, compensating the deposit guarantee fund contribution booked in the fourth quarter. Total costs decreased 2% compared with fourth quarter '18. And impairments were much lower owing to the significant restructuring costs booked in the previous quarter. All these together led at EUR 85 million, the profit before taxes and net income at EUR 63 million.If you look at the last 3 columns, you have the year-on-year comparison. Gross margin grew 3% with positive trends in fees, dividends and trading, compensating the lower net interest income. Total expenses decreased by 3.4% compared with 2018. Finally, impairments remain quite low, leaving net attributable income at EUR 63 million that is 9% above the previous year. It is worth noting that the first quarter results grew for third consecutive year. If we move to customers' funds in Slide 7, you can see that total customer funds grew 1.8% year-on-year and 1.2% quarter-on-quarter. It is worth noting that off-balance sheet funds started to grow again after decreasing in the 2 previous quarters. In Slide 8, we show the credit and loss trends. As you can see in the slide, this was a positive quarter for gross loans. Despite the 5% decrease in nonperforming loans, total gross loans grew 0.8% quarter-on-quarter. On the right-hand side of the slide, you have the details on performing loans. As you can see they grew 1.2% quarter-on-quarter. By segments, mortgages only fell 0.9% quarter-on-quarter, well below previous quarters. However, corporate loans grew by 4.7% and customers and others were almost 2% above the previous quarter. All in all, improving trends, as you can see in the bubbles on the top of the chart that is in the bottom right. As the bubbles show, the year-on-year trend continues to improve every quarter, showing growth for the first time in a long time. In Slide 9, we show the regular details of the new loan production by segment. Overall new production grew by 26% in the first quarter of 2019 compared with the previous year, mainly in loans to individuals where the growth reached 29% with its yield improving 44 basis points to 3.49%In Slide #10, we start with the P&L review with NII details. As you can see in the top right, the calendar effect explained the big bulk of the quarterly decrease, something that is also reflected in the net interest margin performance that was stable for 3 consecutive quarters. Regarding the customer spread in the bottom of the slide, you can see that our front book remains well above the back book. In Slide 11, we have an update on our debt portfolio. It is worth noting that we have increased its size for the quarter in around EUR 0.5 billion, something that partially explained the quarterly increase in risk-weighted assets as we will see later. The big bulk of exposure remains sovereign debt classified in the amortized cost portfolio. I will just highlight that the average yield of the portfolio remained stable with a slight improvement of 3 basis points in the quarter.If we move to Slide 12, you have the fee income trends that were very positive compared with last year. Net fees grew by 5.1%, driven by a significant increase in payments and collection that more than compensating the slightly lower contribution from nonbanking products. Now moving to costs. As you can see in Slide 13, operating expenses fell by 3.4% in 2019 compared with 2018 and almost 6% if we compare with 2017, a trend that, as we have explained in different occasions, will remain until 2021, following the cost-cutting plans of the bank.In Slide 14, we have the impairment details. As you can see, total impairments were very low in the quarter, a trend that we expect to remain in the following quarters among others, owing to our comfortable coverage position.If we move now to the asset quality in Slide 16, we have details on the evolution of our nonperforming loans where you can see that the trends also remain positive. Nonperforming loans fell more than EUR 700 million year-on-year, leaving the nonperforming loan ratio at 6.3% in first quarter '19. As we show in the bottom, gross entries remained low similar to previous quarters, explaining the 5% quarterly drop. As we usually do, in Slide 17, we have updated our nonperforming loan coverage details. Overall nonperforming loan coverage was 52% in first quarter '19, with 90% of the nonperforming loan balances being secured and almost 80% of them in finished goods -- in finished buildings. If we move now to Slide 18, you will see an update of the foreclosed assets' trends. In the left side of the slide, we have the coverage details. Overall coverage was stable and around 62% in March.On the right, you can see the previous -- the provisions released and outflows details that continued to improve at the beginning of 2019, quite positive trends as a result of our coverage levels. In Slide 19, we show together the NPLs and foreclosed assets' trends. During the beginning of this year, the trend continues to improve with total gross balances reaching our 2020 target. In net terms, NPAs represented 2.7% of total assets with a coverage stable at 57%. Finally, let me only highlight that our Texas ratio continues to decrease quarter-after-quarter.In Slide 20, we update our liquidity position. As you can see, there are very little changes this quarter. Our loan-to-deposit ratio remain low at 73%, and the liquidity ratio continue to be among the highest of the sector.In terms of wholesale maturities, as I usually do, let me remind you that until the end of 2019, we won't have any significant maturities.Finally, we show, in Slide 21, the solvency of the bank. As you can see in the top left, current regulatory capital ratios remain well above the SREP requirements, with EUR 1.4 billion buffer over CET1, and close to EUR 0.7 billion buffer in total capital.Let me remain -- remind you that our phase-in calendar finishes in 2023 rather than the -- than in 2019, like for most banks. In fully loaded terms, the CET1 fell in the quarter 20 basis points to 13.3. Quarterly retained earnings mitigated the higher deductions explained mainly by the increase in the equity of some of our insurance affiliates.On top of this, the increase in the loan book and some senior bonds acquired in our debt portfolio led to higher risk-weighted assets that explain the CET1 quarterly drop. It is also worth noting that we have received the formal letter from the Bank of Spain with our MREL requirement that represents 20.59% of our risk-weighted assets for January 2022.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. We will now answer the questions that we have received in the webcast. As you can imagine, we will start with the situation with the Liberbank. Pablo, there are several analysts asking us if we can update the situation with Liberbank.

[Pablo González Martín, Director General of Finance]

As you all know, we are working in a potential deal with Liberbank, and all I can say at this moment is that we hope to reach an agreement soon. Until there is a final decision, we will not do any further comments.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Moving to P&L and NII, let's just start with the ALCO portfolio, we can clarify the movement and size contribution to net interest income and strategy going forward, please?

[Pablo González Martín, Director General of Finance]

The debt portfolio, as we anticipated, grew EUR 0.5 billion in the first quarter of this year, following some expected purchases in the structural amortized cost portfolio, taking advantage of the good levels in the market. As we explained in the past, this structural portfolio is related to the structural liquidity position of the bank. The purpose of these purchases executed in the last quarter was to invest the excess liquidity. Going forward, we can expect additional purchases in the next months. The weight of government bonds decreased this quarter, representing now 73.5% of the total debt portfolio, with most of it being Spanish.On the other hand, the exposure on financial senior increased to 6.2% of total debt portfolio, with almost all the bonds accounted in amortized cost portfolio. Regarding NII, as we said in previous occasion, the bond portfolio contribution will remain at levels close to EUR 55 million per quarter.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. The next one regarding litigation, if we can update the mortgage floors and the IRPH exposure.

[Pablo González Martín, Director General of Finance]

Balances with active floors fell to EUR 1.6 billion in March. Regarding IRPH, we have around EUR 200 million mortgages linked to this reference. In terms of our provisions, we continue to have around EUR 260 million for all legal issues, mainly for the mortgage floor.[Audio Gap]Okay, thanks. And the trend is improving. In the first quarter '19, we saw almost 1% quarter-on-quarter increase in private sector performing loans. In year-on-year, they were also growing at 0.3%, something which is quite positive news. By segments, the year-on-year growth in corporate and consumer loans was above 8% and 5%, respectively. However, mortgages continued to fall. We expect this trend to continue to improve throughout the year. We are expecting low single-digit growth in performing loans for the first time this year. As you can see, the trend is positive in all segments, except in mortgages where the natural amortization and early repayments continuing above the new production. However, we also expect to improve the trends in this segment throughout the year.

[Jaime Hernández Marcos, Head of Investor Relations]

Okay, Pablo. Moving -- remaining in net interest income, if we can update our guidance for this P&L line, please?

[Pablo González Martín, Director General of Finance]

As you saw in the presentation, the big bulk of the quarterly decrease is explained by the calendar effect. For the rest of the year, we will continue to have some positive and negatives. Regarding the negatives, the contribution from our debt portfolio will be below the 2018 and we will continue to reduce our balances with mortgage floors.On the positive side, the loan mix and volumes should help and although less than initially expected, the repricing effect will also be positive. All in all, depending on the size of the increase of the loan book and Euribor trends, net interest income in 2019 should be similar to the 2018.

[Jaime Hernández Marcos, Head of Investor Relations]

Okay. Regarding liquidity, we got a specific question on the balance of deposits currently held in the ECB and if we expect something kind of impact from our potential [ hearing ], Pablo.

[Pablo González Martín, Director General of Finance]

Yes. The liquidity held in the ECB was slightly below EUR 2 billion at the end of the quarter. This excess of liquidity should continue to decrease in the future as the commercial gap narrows and some expected bond purchases are executed. And in regards of a potential [ hearing ], as you can imagine, not too much to say as there is no official statement on it. However, we will continue to improve our liquidity management throughout the year.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Moving to the P&L, we got a couple of questions on fees. You'll -- if we can update our expectations regarding the fee income for the rest of the year.

[Pablo González Martín, Director General of Finance]

Okay. In fees, fee income was very stable in the quarter. It went from EUR 55.5 million in the fourth quarter last year to EUR 55.3 million in the first quarter of this year. So almost flat. The year-on-year trend is positive, mainly driven by higher payments and collections. As we said in the previous quarter, if nonbanking product fees continue to improve, helped by market trends, we expect to see around mid-single-digit improvement in this year.

[Jaime Hernández Marcos, Head of Investor Relations]

There is one question on the dividend income, Pablo. It was strong in the quarter, what do we expect going forward?

[Pablo González Martín, Director General of Finance]

Yes. This increase in the quarter is mainly explained because some of the stakes that we hold have already announced their dividends for the full year, and we book the dividends when they are announced. All in all, I think we expect this dividend income to be slightly above the previous year.

[Jaime Hernández Marcos, Head of Investor Relations]

Also moving to trading income. That was also strong in the quarter. If we can explain what we expect for this P&L line?

[Pablo González Martín, Director General of Finance]

The trading income this quarter was strong. We don't expect to realize such a strong trade in every quarter. But for the full year, it is difficult to provide a guidance because it will depend on market trends and the activity on trading.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Regarding other revenues and expenses, if we can provide the breakdown of the quarter.

[Pablo González Martín, Director General of Finance]

This quarter, we have EUR 9 million coming from our real estate servicer, another EUR 3 million from real estate rentals and around EUR 10 million from Union del Duero, [indiscernible], which is the insurance company that we own 100% that is in runoff.On the negative side, we have EUR 1 million of maintenance costs for real estate assets and EUR 4 million related to the DTA levy and another EUR 1 million that includes the rest of the results. This P&L has some seasonality, mainly owing to the contribution to the resolution fund in the second quarter and the deposit guarantee currently fund contribution in the fourth quarter, as you all know. On top of that, the rest of the results are mainly explained by the real estate servicer contribution, which is not linear and some quarter could be above others.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Moving to costs. If we can elaborate a little bit on what do we expect in terms of costs and the trend.

[Pablo González Martín, Director General of Finance]

Regarding -- as you all know, we have this plan that we announced last quarter. And regarding this voluntary exit plan, what I can say is that the number of employees that have asked to join the plan is in line with what we were expecting, even slightly above. So this is a positive news that will allow us to accomplish in this area. So we are now organizing the process on -- the restructuring costs. As we said in the previous quarter, there are around EUR 40 million pending that will probably be booked throughout the horizon of the plan. This plan will enable the group to continue reducing our personnel costs until 2021. Finally, regarding general expenses, as you probably saw, amortization grew by EUR 2 million while general expenses decreased by the same amount. This is explained by IFRS 16. All in all, what we expect is to reach further savings until 2021 mainly due to these cost-cutting measures that we have implemented.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Moving to asset quality. If we can elaborate a little bit on the cost of risk and what we expect for the future?

[Pablo González Martín, Director General of Finance]

Yes, Jaime. And we believe that the cost of risk will remain low in the coming quarters. We feel comfortable with our current coverage and asset quality trends, which are quite positive, and we expect to see loan loss charges very low for the rest of the year.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. There's one specific question on the nonperforming assets. That is, say, that according to the press, we are planning to sell a big portfolio of nonperforming assets, if we can confirm it.

[Pablo González Martín, Director General of Finance]

As you all know, we are continuously analyzing different options regarding our NPAs portfolio. So the price and conditions of the potential disposals change depending on different variables, like size and the timing of the different assets. So we analyze every opportunity trying to optimize the potential results. We don't discard a large deal, but no decision has been taken so far. If we finally go ahead with the large disposals, we will provide details in due course. However, in the first quarter of this year, we haven't formalized any material portfolio disposal.

[Jaime Hernández Marcos, Head of Investor Relations]

Okay. Finally, also on general provisions, if we can explain what do these EUR 16 million include in the quarter?

[Pablo González Martín, Director General of Finance]

Yes. As you know, this is -- this line is a mix of different issues, and we have some provisions for litigation risks as most of the quarters, but we also have some off-balance sheet risk impairments and a small impairment related to the SREP exposure and some provisions for restructuring costs. As we said in previous quarters, this P&L line will continue to include some of these impairments going forward but in line with what we saw in the past.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Moving to solvency. If we can -- what do we expect in terms of payout if -- with the demand in the 40% level [indiscernible] solvency? What are the plans?

[Pablo González Martín, Director General of Finance]

We [Audio Gap]yes, we have just approved in our AGM last year dividend. We will pay next 10th of May EUR 0.380 per share, which implies at current prices an almost 4% dividend yield. This dividend implies a 40% cash payout. Going forward, you have to bear in mind that we do not have a formal dividend policy and our Board of Directors will propose each year the dividend considering the solvency position and the results of the bank that year.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. An update on IRB models, please?

[Pablo González Martín, Director General of Finance]

Yes. There's no news in this front. As we said the in 2018 annual results, we have already taken the first steps towards a formal application. And if things evolve as we expect, we believe that we can have the approval by the end of next year for the mortgage portfolio, but it will depend obviously on the supervisory decision.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. The next one is regarding IFRS 16, if we can confirm what was the impact regarding this?

[Pablo González Martín, Director General of Finance]

Yes. The impact has no -- not been material because we own most of our branches. So in terms of P&L, we expect around EUR 8 million of lower general expenses and higher amortizations per annum, something that has already been reflected in this first quarter's results. The remaining impacts are very small.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Regarding our treasury stock, if we can provide a little bit more information on our plans regarding the treasury stock.

[Pablo González Martín, Director General of Finance]

Sure. We have received the formal authorization from the ECB to increase our treasury stock up to 3% of total shares. We haven't decided yet the timing on the formal -- of the potential acquisition of such treasury stock, as you can imagine. However, it will have an impact of around 20 basis point in our CET1 fully loaded that is not included in the CET1 fully loaded ratio of the 13.3 reported today.

[Jaime Hernández Marcos, Head of Investor Relations]

Okay. We also have similar questions regarding the solvency drop of the quarter. If we can explain more detailed -- the trend.

[Pablo González Martín, Director General of Finance]

Okay. This quarter, we have 2 different drivers. On one side and the major driver has been the risk-weighted assets that has grew owing to the increase in the loan book but also owing to the higher bond portfolio weight because we have acquired some senior debt throughout the quarter. And on the other side, the quarterly results generation was mitigated by higher deductions related to the higher valuation of some of our insurance companies. That explains the close to 20 basis point quarterly drop. In other words, we have generated 16 basis points through retained earnings. This was mitigated by higher deductions. In addition, the higher risk-weighted assets explain a 24 basis point drop in CET1. So on top of these 2 issues I just explained, it is worth noting that we have received the authorization from the ECB to buy up to 3% of treasury stock, which is -- which has an additional impact of around 20 basis point that is not considered in the CET1 fully loaded of 13.3% that we show in the presentation.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Moving to MREL. Do we expect an increase in the wholesale funding regarding the MREL issuance?

[Pablo González Martín, Director General of Finance]

Yes. And as we explained in the presentation, we have received the formal letter from Bank of Spain confirming us that we will need to have eligible liabilities representing around 20.59% of our risk-weighted assets by January 2022. This requirement is in line with the one that we were expecting, and we mentioned in the last result presentation and is considering -- and it has been considered in our funding and solvency plan for the period 2019, 2021.Our current regulatory total capital ratio leaves us in a comfortable position and with enough time to complete this requirement. Bear in mind that our phase-in deduction calendar finish in 4 years, so in 2023, something relevant considering the relative higher phase-in solvency. Our initial aim is to meet the requirement issuing both Tier 2 and senior debt. But final decision on the instruments on timing will be taken considering the evolution of our solvency position and the market conditions in order to minimize the cost and preserve our P&L.It is also worth noting that if we consider the approval of the IRB models, the issuance needs will be lower. Regarding the potential additional costs of these liabilities, I'd like to highlight, as I did in the past, that we have expensive liabilities maturing in the coming quarters that will help us to mitigate the cost of the new MREL liabilities. As a reminder, we have close to EUR 1 billion of corporate bonds at 2.5% cost, around 2.5% maturing at the end of this year and at beginning of next year. And also another EUR 1.3 billion of expensive client deposits at around 4.3% maturing by the end of 2020 and the beginning of 2021. So these maturities will more than compensate the expected issuance MREL instrument's cost, helping to improve our profitability and P&L.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. There is only one final question -- very specific final question regarding our stakes on -- in [indiscernible] which is the presenters that we currently hold. And what is the value? And if we -- do we expect to generate capital gains from a potential disposal of such stakes?

[Pablo González Martín, Director General of Finance]

Yes, even in the last few weeks, you can probably saw in the press that there is interest for a potential acquisition of these 2 stakes. We haven't taken a formal decision. If the interest is confirmed and the circumstances and the conditions are the right ones, we will analyze if it makes financial sense for us to sold. So far all that I can say is that we have a 10% stake in [indiscernible] with a book value of EUR 61 million and around -- and a 20% stake in household with a book value of EUR 22 million.

[Jaime Hernández Marcos, Head of Investor Relations]

Okay. Thank you very much, Pablo. Thank you, everyone. We will now finish the webcast. Please do not hesitate to contact the IR team for further details. See you next quarter.

[Pablo González Martín, Director General of Finance]

Thank you.

[Operator]

This concludes today's call. Thank you for joining. You may now disconnect your lines. Have a lovely day.