Unicaja Banco SA

MAD:UNI

Earnings Call Transcript 2021-Q2

[Jaime Hernández Marcos, Head of Investor Relations]

Welcome to Unicaja Banco Second Quarter 2021 Results Presentation. Let me start, as always, confirming that we have published the quarterly financial report and this same presentation this morning before market opens in the CNMV website. This quarter, we have Pablo González, Chief Financial Officer of Unicaja Banco; Jesús Ruano, Chief Financial Officer of Liberbank; and Juan Pablo Lopez, Deputy Chief Financial Officer of Liberbank. As you can see on Slide 2, we will present the quarterly results in 5 different sections. Pablo will start with a brief update of the merger and we'll then continue with the regular quarterly review of Unicaja Banco including the main highlights, results, asset quality, liquidity and solvency. Then Jesús and Juan Pablo will summarize the main trends of Liberbank in the quarter. And afterwards, as always, we will answer your questions. So that said, Pablo, the floor is yours.

[Pablo González Martín, CFO & General Director of Finance]

Thank you, Jaime. Good morning to everyone. Before reviewing Unicaja Banco quarterly results, let me give you a quick update on the merger process in Slide 4. Considering that the legal merger has not been formalized yet, we report for the last time the quarterly results on a stand-alone basis. The second quarter of 2021 is the last quarter in which we will be 2 different banks. We expect to formalize the legal merger at the end of this week on July 30, and July 31 will be the date of the merger from an accounting point of view. So the third quarter results will be the first ones being a single bank. And in that moment, we will update all the details regarding the financial position of the combined entity. The latest pro forma consolidated financial information regarding the merger by absorption of Liberbank by Unicaja Banco is the one prepared by the Board of Directors of Unicaja Banco in February 2021 with December 2020 as a reference date. The final figures of the PPA adjustments will have as referenced the 31st of July 2021. In any case, as the accounting date of the merger is after June 30, 2021, the deal does not have direct accounting effects in the second quarter 2021 consolidated financial statements. In the first part of the presentation, I will be explaining the main quarterly trends of Unicaja Banco. And afterwards, Jesús and Juan Pablo will update Liberbank trends. That said, as you can see in the Slide 4, I am glad to confirm you that we have received the merger authorization from the Competition Authority and the government in July. So as I said before, we expect to close the legal merger next Friday. That same day will be the exchange date and the last trading date of Liberbank shares. The record date will be the 3rd of August. And the previous day, the 2nd of August, will be the ex-date of the exchange when the new shares of Unicaja Banco will start trading. So at the very beginning of August, the exchange of shares will be formalized and also we will be legally, and from an accounting point of view, a single bank. If we move now to the quarterly results. I will start in Page 6 with the Unicaja Banco stand-alone main highlights of the quarter. Regarding the business, total performing loans grew 2.2%, both quarter-on-quarter and year-to-date. However, as you know, we have some seasonal loans every second quarter. Excluding such loans, the growth was 0.6% year-to-date. As we will see later, such growth was explained by a positive trend in corporate loans and also owing to mortgages, which balances grew for second quarter in a row. Total customer funds grew 2.1% quarter-on-quarter with off-balance sheet funds growing above 3% in the quarter. New loan production continued with its recent positive trends with individual new loans of the first half of the year 55% above the previous semester and corporate loans up 149% in that same period. From a P&L point of view, core income, that includes net interest income plus fees, grew slightly above 5% year-on-year. NII was 2.8% above the previous year, owing to the lower cost of retail and wholesale funding. Fee income grew 3.5% quarter-on-quarter and more than 10% year-on-year, supported by higher payments and collection fees, but also helped by better nonbanking products fees. Total cost continued to improve and fell 2.7% compared with 2020 with savings amounting to EUR 8 million. In terms of impairments, we have anticipated additional EUR 11 million of COVID provision in the quarter and EUR 36 million year-to-date leaving cost of risk at 54 basis points. However, cost of risk excluding COVID provisions and the negative results of a portfolio disposal decreased to 19 basis points. Finally, net income reached EUR 70 million in the first half of the year, which is 15% above last year. On asset quality, liquidity and solvency, this quarter has been very positive. NPAs continued to decrease almost 15% year-on-year with NPLs decreasing an impressive 19.8% and gross foreclosed assets by almost 9%. NPA's coverage continued to grow one more quarter to 66%. From a liquidity point of view, the loan-to-deposit remained stable at a low of 64% and our LCR at 310%. Finally, the improvement in solvency is probably one of the most positive of the quarter. Our CET1 fully loaded reached best-in-class 17.7% with regulatory total capital at 21%, boosted by the approval of IRB models, something that leaves our solvency with an impressive EUR 1.7 billion buffer over our SREP. All in all, this quarter, we have very positive trends. Volumes continued to improve. Results were supported by core income. Our coverage levels remain best-in-class. And the approval of IRB models leave us with one of the highest solvency buffers among the Spanish and European banks. All of them are very positive trends ahead of the merger with Liberbank that, as you all know, will enable us to further improve future returns, among others, through the crystallization of synergies. In Slide 7, we have included information regarding our commitment with sustainable and our ESG strategy. In the interest of time, I won't enter into much details but this is something that is becoming more and more important, and we wanted to share with you some of the initiatives taken. Among others, we have recently updated our Action Plan on Sustainable Finance that was initially approved in 2020. We have also approved a sustainable policy, two examples of recent achievements. But we want to keep pushing sustainable measures, providing more details regarding our environmental risk alignment, aligning our lending with sustainable development goals. As an example, let me highlight that we are members of the Spanish Global Compact. We have joined the National Financial Education Plan. We have contributed with 375 houses to the social housing fund. And finally, we are also working in specific products, like our green loans for the acquisition of electric vehicles or specific saving products like our sustainable pension and mutual funds. This is becoming very important to us, and we believe that this is a one-way street. I will move now to Slide 9, where you have the P&L details. As I usually do, I will start with the quarterly trends. NII fell EUR 100 million -- to EUR 140 million in the quarter, mainly owing to lower contribution from NPLs as we will see later. Fees grew 3.5% quarter-on-quarter to EUR 64 million, which is the highest quarterly fee income of the last 6 years. Regarding the rest of revenues, I would highlight the recovery of dividend income as we anticipated last quarter. Trading income and equity method were almost flat in the quarter. Also, it is worth noting that other operating charges include EUR 16 million of the contribution to the resolution fund. Total costs were EUR 142 million, leaving preprovision profit at EUR 89 million. Impairments included the EUR 11 million of COVID provision and other small impacts from the disposal of an NPL portfolio explaining the quarterly increase of the quarter but also the positive reduction of our NPLs. All in all, quarterly net income reached EUR 28 million. Regarding the year-on-year figures, NII was 2.8% above 2020, while fees grew above 10%. Dividend income also improved after a weak 2020 owing to the pandemic. Regarding the rest of revenues, I would highlight that trading was not as strong as the previous year, that it was unusually high to partially compensate higher impairments. Total cost in the first half of the year continued to fall by 2.7% and in total impairments -- and total impairments also fell by 36%, leaving net income at EUR 70 million, which is 15% above the previous year. If we move now to Slide 10, you can see that total customer funds grew 7.5% year-on-year and 2.1% quarter-on-quarter. Such a growth was one more quarter explained by a strong increase of 7% in deposits, but also by an improvement of asset under management and of balance sheet funds that grew 9.5% during the last 12 months to EUR 13.4 billion. In Slide 11, you have credit and loans details. Gross loans grew 1.6% both year-to-date and quarter-on-quarter. Private sector loans -- gross loans grew 2.3% year-to-date and public sector gross loans were almost flat. However, NPLs fell more than 10% in the first 6 months of the year, which is a very positive news. By segments, loans to individuals grew 1.6% and corporate loans grew 2%. As usually, we have included performing loan trends in the right-hand side of the slide. As you can see, total performing loans grew a little bit more than 2% quarter-on-quarter. In terms of segments, corporate performing loans grew 1.4% in the quarter and consumer loans a significant 17%, owing to the seasonal advances that we have every second quarter. Finally, mortgages are one of the positives of these results because for a second consecutive quarter we managed to increase our balance, thanks to the positive trends in new production, which details are included in the next slide. As you can see in the top left-hand side of Slide 12, new loan production improved significantly when compared with the last 2 semesters. Private sector new loan production grew by 96% in the first half of 2021. By segment, we have some very positive trends, too. Starting with mortgages, as you can see in the bottom left, in the first half of 2020, we formalized EUR 339 million, growing to EUR 477 million in the second half of 2020 and now reaching EUR 768 million in the first 6 months of 2021, a significant improvement that explained the growth in mortgage balances during the last 2 quarters. Regarding corporate loans in the bottom right, it has also been very positive with new production in the first 6 months of the year, growing by 149%, and what is more important, with stable yields in SMEs and improving in large corporates. Something very positive considering current strong competition environment. In Slide 13, we have included the regular net interest income details. As you can see in the top right, the big bulk of the quarterly drop was explained by lower contribution from NPL balances and the debt portfolio, although partially compensated by lower funding costs. Regarding the debt portfolios we anticipated in the past, this is explained by the maturity of some bonds that were initially funded with TLTRO II. The lower income from NPLs is explained, among others, by the significant decrease in NPL balances, which in second quarter '21 were 20% below the second quarter of 2020. In the bottom of the slide, you can see that front book customer spread improved 6 basis points in the quarter, leaving front book customer spread above the back book for one more quarter. In Slide 14, you have the regular update of our debt portfolio. As you can see, the balances have decreased to -- from EUR 22.6 billion in the first quarter of 2021 to the current EUR 21 billion with the big bulk of the decrease concentrated in what we call the TLTRO portfolio, which was an opportunistic portfolio that we funded with the TLTRO II funds 3 years ago, and has decreased from EUR 2.7 billion in March this year to EUR 0.9 billion in June and that will mature in the coming months. Overall yield of our debt portfolio was 88 basis points. And as usually, most of the exposure is in sovereign debt classified in amortized cost. In Slide 15, you have fee income trends, which is, again, one of the most positive of the quarter. Total net fees in second quarter 2021 reached EUR 63.9 million, which is 22% above the same quarter of last year. Year-on-year, the growth reached 10.6%, supported by payments and collection and nonbanking products fees. As I said before, the almost EUR 64 million reach this quarter does not include extraordinary fees and is the highest amount of the last 6 years, something that makes us feel confident with our guidance of growing fees in this year by high single digit. In Slide 16, you have total expenses evolution. As you can check, total costs fell almost 7% in the first half of the year compared with 2019 and almost 3% compared with 2020. Savings are explained, among others, by the charts that you have in the right-hand side of the slide where you can see the evolution of branches and full-time equivalents. In Slide 17, you have the regular details on impairments. In the left, you have total impairments in euros; and in the right, the cost of risk. Bear in mind that the second quarter of 2021, we have booked other EUR 11 million of provision for COVID-19 potential future impacts, which, together with the EUR 25 million booked in the first quarter of this year and the EUR 200 million in 2020, amount to a total EUR 236 million. On top of this, we have other small impact in loan loss charges this quarter that is explained by the disposal of an NPL portfolio of around EUR 100 million. In the right of the slide, you can see the cost of risk with and without the COVID provisions, but also adjusted by the different portfolios disposals formalized during the last years. As you can see, recurrent cost of risk remained below 20 basis points during the last 4 years. We can now move to Slide 19, where we have the regular NPL information, which, under my view, is other of the most positive trends of the quarter. As you can see, NPL balances fell at a compound annual growth rate of almost 20% during the last 5 years. NPLs fell 11% quarter-on-quarter in the second quarter of 2021 and almost 20% year-on-year. The NPL ratio improved to 3.7% in June. As we show in the table in the bottom of the slide, quarterly gross entries were at similar level as the previous quarter. However, recoveries improved significantly to EUR 188 million supported, among others, by the disposal of a portfolio of around EUR 100 million, leading to a net reduction of EUR 126 million, which implies a quarterly drop in NPL balances of 11%. In Slide 20, we have updated the ICO loans and moratoria balances. In the left of the slide, you can see that we have granted almost EUR 1 billion of credit and loans guaranteed by the state of which the drawdown balance was only EUR 668 million in June, representing 2% of total performing loans. In the right-hand side of the slide, we show the moratoria details of which 90% have already expired in June, leaving the outstanding balance at only EUR 84 million. In Slide 21, you have our regular credit risk exposure and NPL coverage details. Overall NPL coverage grew one more quarter to 68.5%, which is 7.7 percentage points above the previous year. This is a very conservative level when considering that around 80% of our NPLs are secure. In Slide 22, you have the foreclosed assets details. As it happens with the NPL coverage, foreclosed assets coverage also increased up to 63.4% in the second quarter of '21, one of the highest of the sector. Gross balances fell 2.9% quarter-on-quarter and 8.8% year-on-year. In net terms, foreclosed assets fell almost 4% quarter-on-quarter to EUR 381 million, representing only 0.6% of our assets. In Slide 23, you can see how overall NPAs continued to decrease one more quarter, reaching EUR 2.1 billion in gross terms and EUR 714 million net of provision, representing only 1.1% of total assets with coverage at 66%, one of the highest of the sector. In Slide 24, you have the details on our liquidity position that, as you can see, it remains similar to the previous quarter with the loan-to-deposit ratio stable at 64% and our LCR at 310% and NSFR at 147%. And finally, we include our solvency position in Slide 25. As you can see, this is probably the most positive news of the quarter. As you all know, we received the final approval to apply our advanced models to part of our portfolios, something that together with the quarterly solvency generation has boosted our CET1 fully loaded from 15.1% to an impressive 17.7%. As you can see in the top right of the slide, the big bulk of the improvement is explained by the approval of the IRB models. However, we have also generated additional solvency among others, owing to the drop in the NPLs and retained earnings. From a regulatory point of view, our CET1 reached 19.2% and our total capital, 21%, which implies a significant EUR 1.7 billion buffer over our SREP requirement. All in all, this is a unique solvency position ahead of the merger with Liberbank, a deal that will generate tons of value and will significantly improve our future profitability and shareholders' return. So that was the quarterly summary of Unicaja Banco. And now I will leave the floor to Jesús and Juan Pablo to explain the Liberbank numbers.

[Jesús Ruano Mochales]

Thank you, Pablo. Good morning, everyone. Regarding Liberbank Q2 results, we have a short presentation today, starting with commercial activity in Slide 27. You can see the customer funds increased more than 9% during the last 12 months. Let me highlight the performance of the mutual fund segment, where AUMs are up 37% year-on-year. Net inflows during the quarter were more than EUR 400 million. This is a new record after a strong first quarter. Actually, net inflows during the first half were more than EUR 700 million and we are already above 2020 net inflows for the entire year. Therefore, we are very happy with this performance that is supporting our outstanding fee income growth, which is up 37% year-on-year in mutual funds. Moving to lending, Slide 28. Performing loans are more than 10% up year-on-year on the back of strong growth in the low-risk portfolios. Mortgages stock increased almost 11% year-on-year, while our market share in new production is close to 7%. You can see on the bottom right, some risk metrics with one of the lowest NPL ratios in the sector. The volume under moratoria outstanding represents only 1.59% of the stock. Another portfolio where we are being very active and where we also feel very comfortable from a risk point of view is public sector. Here, we have good municipalities and regional governments with pricing above those of the Spanish treasury. SMEs and corporates new production is recovering after accumulating last year's significant volumes guaranteed by ICO. We are confident that this recovery will help us meet the TLTRO III benchmark at the end of the year, and we are in line with this target. And lastly, consumer book recovery is accelerating. As you know, we are growing basically with our existing clients that we know well, and we have also had a record quarter here with more than EUR 90 million of new lending. Therefore, it is remarkable that despite the merger process, there are no distractions and the commercial teams keep working at full speed, showing volume growth in the most relevant lines like AUMs, insurance or mortgage lending. Moving now to asset quality, Slide 29, and starting by NPLs. Entries remained low, EUR 50 million in the quarter, which is below previous quarters. While outflows are as high as EUR 123 million, allowing a reduction of the NPL stock. Part of the outflows come from the write-off of a single-name NPL, what also explains the lower coverage ratio comparing to Q1. If we exclude this write-off, coverage would have been slightly higher. Underlying cost of risk remains low, but we continue building provisions in this environment in line with our stand-alone guidance. Foreclosed asset disposal were EUR 40 million in the quarter, close to EUR 90 million during the year, and stock increased slightly due to a one-off inflow. Total NPAs continued to reduce. And both NPAs and NPL ratios keep improving. In Slide 30, we have the Q2 and first half of the year P&L. Before entering into the details, let me highlight that in Q2 we have some relevant one-offs, most significant ones associated to the transaction. So the accounts should be analyzed in this context. Q2 NII goes down by EUR 5 million comparing to Q1, mainly due to lower revenues from the fixed income portfolio as we have reduced size and duration in order to eliminate capital volatility in the merger given that positions at amortized costs are mark-to-market. But retail banking NII remains quite stable, thanks to the good performance in volumes and despite lower reference rates. First half of the year, total NII is flattish comparing to last year. Recurrent fees amounted EUR 57 million in the quarter and EUR 117 million in the first half of the year, going up by around 20%, doubling our guidance. Thus, we are much pleased with this outstanding performance in a line that is key for improving recurring profitability despite low interest rates. Growth in insurance and mutual fund fees is around 30%. Dividends come mainly from our stake in Caser in the quarter. Results from equity method stakes is EUR 14 million, below last year's figure, as we have had a negative one-off in one of our nonlisted exposures, offsetting part of EDP's contribution through Oppidum. In trading, we have minus EUR 9 million, which are extraordinary as they come from some sales associated to the restructuring of the portfolio in the context of the merger and also from the mark-to-market of some derivatives. Regarding other operating revenues and expenses, the higher cost compared to previous year is mainly explained by increasing contribution to the resolution fund. Operating expenses are 7% below Q2 last year, and amortizations are in line with Q1. Below preprovision profit, apart from cost of risk that I have already commented, we have minus EUR 166 million in general provisions of which EUR 143 million is the full provisioning of our EPC program, which involves around 730 employees. Please note that this EUR 143 million charge is part of the restructuring cost announced for the merger. Savings expected from this measure are EUR 40 million per year starting from July this year, equivalent to almost 25% of the announced transaction cost synergies, excluding Unicaja's stand-alone plan. Regarding the rest of the provisions, most of them are also nonrecurrent associated to other personnel and litigation issues. In Slide 31, we just want to show, as we did in the previous quarter, that the evolution of the recurrent business continues to be good. Retail banking NII is being resilient. And in fees, we are achieving outstanding growth, as commented, while we maintain cost control before benefiting from the merger cost synergies. Now I pass the word to Juan Pablo to close the presentation.

[Juan Pablo Lopez Cobo]

Thank you, Jesús. Now moving to solvency. The bridge explains the quarterly evolution, and the 2 main impacts are extraordinaries and will support higher profitability in the future. The first one comes from the full provisioning of the early retired employees already explained by Jesús. And the second one is the new accounting treatment for the EUR 43 million cash consideration fully received last year when Helvetia took control of Caser. This fee is not at risk, no condition to any specific quantitative obligation. Let me remind you that we booked EUR 38 million of the EUR 43 million in our P&L last year. However, the CNMV has required us to account it through the P&L during 10 years. On one hand, there is a negative 20 basis points capital impact as we reversed the EUR 38 million booked. On the other hand, this accounting treatment implies higher fees from now on as we accrue more than EUR 4 million per year. Excluding these one-offs, the bank continues to generate capital through net income close to 20 basis points, that is offset by increasing risk-weighted assets coming from the loan book growth that will also imply higher revenues going forward. Lastly, valuation adjustments come mainly from our indirect stake in EDP. And moving to the next slide, wholesale funding fell by around EUR 600 million of which half is due to cover bonds and senior debt maturities and the other half is lower money market funding. Regarding the fixed income portfolio, we reduced both duration and size by around EUR 800 million. And the reason for this was to minimize the volatility of the fixed income portfolio as all the bonds, including the ones at amortized cost, will be mark-to-market in the merger. And that's all from my side. Jaime?

[Pablo González Martín, CFO & General Director of Finance]

Thank you. Let me now finish reiterating that we expect to formally close the legal merger by the end of this week and finish the execution of the exchange at the beginning of the next one. Next quarter will be the first one reporting as a single bank. We believe that the starting point of the combined entity is very positive. We will focus now on the execution of the integration. And this deal, supported in the crystallization of synergies and its balance sheet strength, will enable us to improve significantly our profitability and future returns, which is the main target ahead, and we are excited about the future of the bank. Thank you.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo, Jesús and Juan Pablo. Let's move to the Q&A. I will start with some general questions and some specifics on Unicaja. And I'll leave the floor then to Juan Pablo to ask some questions on -- specific questions if they come from Liberbank. Starting on the more general ones. Pablo, can we provide an update on the final impairments, the synergies and what are the impacts from the merger?

[Pablo González Martín, CFO & General Director of Finance]

Yes. As we have said in the presentation and given that the date of accounting effects will be July 31, the update of the fair value adjustments will have to refer to that date. And therefore, and as I said before, we will update the final details of the merger in our presentation of the third quarter '21 results, which will be the first quarter in which our financial statements will include Liberbank. It will be then when we will update and publish the final details on the fair value adjustments, impairment, synergies and solvency of the combined bank.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. We also have questions regarding the -- if we can update our guidance for the P&L lines in stand-alone but also for the combined entity.

[Pablo González Martín, CFO & General Director of Finance]

Well, under stand-alone basis, we gave guidance at the beginning of the year. What I can say now is the underlying business trends are positive. But as you can imagine, we cannot be very specific at this moment. However, we expect to provide some guidance next quarter.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you. Starting with NII-related questions, if we can update our views starting with loan volumes going forward, Pablo.

[Pablo González Martín, CFO & General Director of Finance]

Yes. It is worth noting that every second quarter in Unicaja, we have the seasonal advances that represents around EUR 390 million in the second quarter of 2021. This balance always decreases, again, in the third quarter. However, excluding these seasonal loans, as you probably saw, new production keeps improving, something that has been reflected in the stock of the loans. There are probably 2 things that I would like to highlight. On one hand, corporate loans performance has been positive both in terms of balances and new production yields, which is quite positive for the TLTRO III benchmark. On the other hand, for second consecutive quarter, our stock of mortgages is growing following the significant improvement in new production. As an example, since 2017, the average new mortgage loans per quarter was around EUR 200 million, but that has doubled to close to EUR 400 million in the last 2 quarters. These 2 factors make us feel confident with our previous guidance of a stable balance ahead. We could see even some low single-digit increase for loans in a stand-alone basis this year. For the combined bank, we will update our view next quarter. But as you saw, trends remain very positive.

[Jaime Hernández Marcos, Head of Investor Relations]

Okay, Pablo. Continuing with NII, if we can elaborate a bit further on NII guidance in stand-alone, but also any color for the combined bank. And also why the income from NPLs decreased in the quarter.

[Pablo González Martín, CFO & General Director of Finance]

As I said before, we will update our guidance for the combined entity next quarter once we fully merge and consider all the impacts of the merger. In the first half of the year, it has been 3% above 2020. But it is going to be difficult to maintain such growth for the full year because we expect some decrease in the contribution from the debt portfolio and some additional negative repricing in the second half of the year. In stand-alone, we have more than EUR 3 billion maturities in our debt portfolio this year, of which close to EUR 2 billion have already matured. Considering the recent volatility of the debt markets, we have decided not to be in a hurry to reinvest such as structural liquidity trying to buy at higher yields even if we have to do it in a later stage. This strategy could decrease the contribution from the debt portfolio further in the short term, but will help us to keep higher income in the medium term. This same strategy could be also implemented for the combined bank, but we will provide more details in the coming quarters. On top of this, as I explained in the presentation, the contribution from NPLs has also decreased, among others, owing to the significant reduction in its balances. Bear in mind that despite transferring an increasing unlikely to pay loans, overall NPLs fell a significant 20% year-on-year. However, it is also worth noting that in the first quarter of '21, it was too high. Finally, volumes are improving in 2021 and that will help us in the coming year. And also the TLTRO III for the whole period also will be the positive for NII.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. You have mentioned it, but we have 2 questions on -- specific 2 questions on the expected contribution from the portfolio and the strategy of the portfolio going forward.

[Pablo González Martín, CFO & General Director of Finance]

Okay. The main objective and strategy of the portfolio hasn't changed. Probably the only changes worth mentioning is the size, that has decreased in the quarter by EUR 1.6 billion following the redemption that I already mentioned. And also we have executed some hedges to reduce interest rate risk together with some forward sales that were executed to secure capital gains. The activity regarding the fair value OCI portfolio not material one more quarter. And regarding the strategy of the bond portfolio of the combined bank, there will be no major changes compared to last year's strategy. The main target will continue to be to invest in the structural liquidity of the bank, mainly in European government bonds to obtain a stable income. So after the legal merger, we will analyze what will be the appropriate size of the portfolio considering the expected evolution of the balance sheet and we will try to be opportunistic in order to build the portfolio at the right time to obtain an attractive yield. At the same time, depending on market condition, NII trends and the evolution of unrealized gains, we will continue to monitor closely the markets and manage through hedges, if it's necessary, the interest rate risk and the credit risk of the portfolio. Just to update you, the unrealized gains in the amortized cost debt portfolio at the end of this quarter were around EUR 650 million which gives us room to manage actively the portfolio. So we follow closely this level of unrealized capital gains to secure part -- and also secure part of them and unlock some capital gains for the next 2, 3 years.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Moving to fees. If you can update our views on fees going forward. Again, in a stand-alone, and if we can provide some color for the combined bank entity.

[Pablo González Martín, CFO & General Director of Finance]

As I said before, it's too soon to provide guidance for the combined bank. However, as you probably saw, the trend is very positive for both banks. In a stand-alone basis, we continue to expect a positive trend. This quarter, the growth has improved further, partially explained by the base effect because we compare with 2020 that was a weak quarter. But as I said before, we continue to see 2021 fees well above 2020, and we reiterate that we expect to increase fees at a high single digit this year.

[Jaime Hernández Marcos, Head of Investor Relations]

Moving to costs. If we can update cost-cutting trends and cost cutting -- Unicaja Banco stand-alone saving plans.

[Pablo González Martín, CFO & General Director of Finance]

Yes. Total cost in the first 6 months of the year continued to decrease by almost 3% in the stand-alone. We will update cost-cutting targets for the combined bank once we update the merger financials. The priority now is to formalize the legal merger and then reach an agreement that would enable the bank to crystallize cost synergies. This process will start once we legally merge. The trend and focus remain the same. Cost cutting is the main driver and rationale of the merger, and there are plenty of synergies. And the focus will turn now on the execution then to execute these synergies as soon as we can. So all in all, at this moment, all I can say that cost cutting remains one of the main drivers to improve our future profitability for the combined bank.

[Jaime Hernández Marcos, Head of Investor Relations]

Okay. One more on cost related to what has happened in similar -- other processes -- or similar processes in other banks and the position of the government or the unions if this situation leaves initial cost synergies for the combined entity at risk. Pablo?

[Pablo González Martín, CFO & General Director of Finance]

Well, as you can imagine, it's not always easy to reach an agreement, but we have experience in the past, and we will try to find the measures that make such an agreement available. We already did in the past, and we have to do it again. We haven't published specific details regarding the capacity adjustments. However, we believe that the synergies that we have announced are good reference. It won't be easy, but nothing new, we already knew that. Bear in mind that cost synergies are the main rationale of the merger and we believe that we can execute such savings ahead.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Moving to asset quality. If we can update our views on the cost of risk going forward.

[Pablo González Martín, CFO & General Director of Finance]

As you saw in the presentation, the trend remains positive. Quarterly loan loss charges included EUR 11 million of additional COVID-related provisions, leaving the total cost of risk at 0.54, a level that is in line with our guidance. However, as we explained before, if excluding the COVID provision, the results -- and also the result for the -- from the portfolio disposal, the recurrent cost of risk for the first half of the year decreases to 19 basis points, which is well below the guidance. And we will update, obviously, the guidance once we complete the merger.

[Jaime Hernández Marcos, Head of Investor Relations]

One more on asset quality regarding the trends in moratoria and ICO loans, Pablo.

[Pablo González Martín, CFO & General Director of Finance]

I think as you saw in the presentation, we have a relative small exposure to moratoria and ICO loans. Out of the moratoria loans that have matured that are EUR 750 million or 90% of the initial balances, we have around 2% that are currently classified as NPL and another 6% currently classified as unlikely to pay. So regarding the ICO loans, out of the EUR 1 billion of the limit approved, there are less than EUR 3 million classified as NPL and another EUR 47 million as unlikely to pay. In other words, if you put together both cases, the NPLs and the unlikely to pay of both schemes have around EUR 100 million. That represent less than 0.4% of our gross loans. So therefore, the loans identified with some type of potential weakness are relatively low.

[Jaime Hernández Marcos, Head of Investor Relations]

Okay. Moving to capital and solvency. If we can update our views on dividends and the dividend policy going forward.

[Pablo González Martín, CFO & General Director of Finance]

Well, as we explained in the past, we approved to pay EUR 17 million in cash against 2020 results. Out of the EUR 17 million, we have already paid EUR 12 million in April and the remaining EUR 5 million to be paid after the formalization of the merger with Liberbank. Going forward, the only thing that we can confirm so far is what we have said in the past, which is that the combined entity aim is to reach a cash payout of around 50% as soon as possible and always following the ECB recommendation. However, the combined bank has not a formal dividend policy approved by the Board. As usual, we will need to propose to our AGM the future dividends.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. On IRB models, we got several questions, so I'll put them all together. So what will be the additional impact from the approval of IRB in the pending portfolios on SMEs and corporate loans? And also, what will be the benefit for Liberbank portfolios? And what would be the timing for applying Unicaja models to Liberbank portfolio. So more or less, that summarized it.

[Pablo González Martín, CFO & General Director of Finance]

Okay. I will start with the last one. And at the moment, we prefer not to be very specific on the timing and impact of moving Liberbank portfolios into Unicaja advanced models, at least until we have more visibility. The request to use Unicaja models in Liberbank portfolios is a new process. So now we need to formalize the legal merger and then we will be able to start this process. Timing and impact will be disclosed as soon as possible. But as you can imagine, this takes some time. However, as it happened with Unicaja advanced models, under my view, what is really important that we will continue to have some solvency tailwinds ahead, which is positive, but it's too soon to be more specific with the timing and potential impact. Regarding the pending portfolios, what I can say is that it will be a small benefit. The big bulk of the benefit was the one coming from the mortgages that has been part of the recent approval. For SMEs and corporate loans, we don't expect a material impact.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. On buybacks, if we're planning to do some buybacks ahead?

[Pablo González Martín, CFO & General Director of Finance]

Okay. Buybacks makes a lot of sense when you have excess capital and you're trading at relative low valuation. As you all know, both banks, Liberbank and Unicaja, have been among the few Spanish banks that before the pandemic were executing share buybacks programs, meaning that the Board of Directors of both banks are aware of the benefits of these programs. However, no decision has been taken so far. But going forward, we will continue to consider buybacks as a potential alternative.

[Jaime Hernández Marcos, Head of Investor Relations]

One final more, I think it has been already answered. So that's all. Juan Pablo?

[Juan Pablo Lopez Cobo]

Okay. Thank you, Jaime, Pablo. Maybe now we can move to some Liberbank questions. The first one is regarding Caser, if we could explain the accounting treatment of the EUR 43 million of fee income.

[Jesús Ruano Mochales]

Okay. We have explained, I think, in the section on capital, but let me elaborate a little bit more. In an ordinary review, CNMV has expressed a different criterion to the one we had maintained with a positive opinion of our auditor regarding the EUR 43 million consideration received from Caser -- selling Caser back last year. Of this amount, we accounted a one-off fee income of EUR 38 million after a detailed analysis under IFRS 15 based on several aspects like the fact that Liberbank's main obligation was to waive its right to leave the distribution contract by applying the change of control clause at the moment at which 70% of this company was being acquired by Helvetia. And as can be seen in our response published to the CNMV, the scenarios in which Liberbank could return this fee to Caser are very remote and under scenarios related to serious and repeated breaches of the distribution contract. It should also be noted that there are not specific quantitative targets to be met by us. Furthermore, main terms of the distribution contract were improved for us at the time of the change of control. Expiration was reduced from 99 to 30 years. Home insurance distribution fees were also improved. And we anticipated the 50% profit share in the insurance business, ensuring it will start to be accrued in 2023. Remember, this will mean around EUR 7 million in yearly revenues for us. For all these reasons, we were also defending -- we were not anticipating future revenues either. In any case, we have obviously adopted CNMV's criterion with a negative impact on capital of around 20 bps. And in return, an annual fee in excess of EUR 4 million will accrue for 10 years.

[Juan Pablo Lopez Cobo]

Okay. Thank you, Jesús. One more question, if we could provide more detail regarding the EPC provision and potential savings. If you want, I can take that one. Regarding the EPC scheme provision, we already explained, but let me remind you the Board of Liberbank has approved in June a provision of EUR 143 million corresponding to the full cost until retirement age of 726 employees under our EPC scheme, which is an agreed program by which the employees involved may have their contracts on hold, not working for the bank but still getting a pay. As in the context of the merger, the likelihood of these employees coming back to work is 0. We decided to provide for the entire cost until retirement age of this group of employees, and these are the EUR 143 million. These provisions will generate savings of around EUR 40 million per year and will be visible already in the next quarter. 90% of these employees are already out of the bank. So from an organizational point of view, there will be no impact. It should also be recalled that this EUR 143 million were already included in the restructuring cost announced for the merger with Unicaja and we have simply anticipated the achievements of these synergies even before the merger is closed. We have received some additional detailed questions. However, in the interest of time, the Investor Relations team is available to answer them.

[Jaime Hernández Marcos, Head of Investor Relations]

So thank you very much, everyone. We know that you have a busy morning, so we'll leave it there. Thank you very much. Have a good summer.

[Pablo González Martín, CFO & General Director of Finance]

Thank you.

[Juan Pablo Lopez Cobo]

Thank you. Bye-bye.

[Jesús Ruano Mochales]

Thank you. Bye-Bye.