Unicaja Banco SA

MAD:UNI

Earnings Call Transcript 2020-Q3

[Jaime Hernández Marcos, Head of Investor Relations]

Hi. Good morning, and welcome to Unicaja Banco Third Quarter 2020 Results. As I usually do, let me start confirming that we have published the quarterly financial report and this presentation this morning before market opens in the CNMV website. As usually, Pablo Gonzalez, our Chief Financial Officer, will explain the quarterly results, and afterwards, we will answer all the questions received. Pablo, whenever you want.

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

Thank you, Jaime. Good morning to everyone. Before entering into the quarterly details, let me highlight that this is the third quarterly results published since COVID-19 pandemic starting. During third quarter '20, we have continued to book additional provisions to further increase the buffers of the bank. As you will see, we have also turned core income trend. Both net interest income and fee income showed a very positive quarterly improvement as we anticipated. Also, operating costs confirmed its positive trend. COVID provisions continue to increase our relative higher coverage. Solvency also improved and remained one of the highest among the Spanish banks. It is also worth noting that following the recommendation of the ECB, we weren't able to pay dividend against 2019 results. We also canceled the share buyback program that we had in place. However, our AGM approved last week to amortize 30.5 million shares that are held as treasury stock, representing 1.9% of total shares. This is below the 5% that was the initial plan, but it's still very positive. As we have said in different occasions, we will resume cash dividends and share buybacks as soon as possible. All in all, Unicaja Banco financial position has been significantly reinforced one more quarter as we will explain you through the regular 3 sections of the presentation. The first one includes a summary of the quarter; the second one, the results; and the third one, details on our asset quality, liquidity and solvency. If we move to Slide 4, I will start with the regular summary. Regarding the business, customer funds grew 5.1% year-on-year and 1.3% quarter-on-quarter, with off-balance sheet funds also growing 2.4% in the quarter. Private sector performing loans fell 0.8% year-to-date, while corporate loans grew 6.3%. Loans to individuals fell 3.7% in the first 9 months of the year. New loans to individuals improved significantly in third quarter '20, up 90% above the second quarter '20. However, in the first 9 months of the year, private sector new loans were still 25% below 2019. From a P&L point of view, as we will see in a few minutes, trends are quite positive. On one hand, NII grew more than 9% quarter-on-quarter, owing, among others, to the lower cost of funding supported by the TLTRO III and the maturity of expensive deposits. Fee income also showed a significant improvement, growing more than 8% quarter-on-quarter, owing to the increase of nonbanking fees mainly from asset under management and insurance but also because of the improvement of payments and collections. Regarding expenses, total costs fell an impressive 5.5% compared with the previous year. In terms of impairments, we have anticipated another EUR 63 million of COVID provisions in the third quarter '20, totaling EUR 166 million year-to-date, which we believe should be enough to mitigate the potential future impact in asset quality from COVID-19 and will enable us to go back to recurrent impairment levels going forward that, as you saw, remain relatively low. All in all, net income fell 51% in September compared to last year. However, excluding the mentioned COVID provision, net income was EUR 194 million, almost 22% above the previous year. On asset quality, liquidity and solvency, I would highlight that both NPLs and foreclosed assets, balances fell in the quarter. NPAs fell by 11.2% year-on-year, with NPLs decreasing 18% and foreclosed assets, almost 2%. Year-to-date, NPLs fell 2.6%, with nonperforming loans decreasing 4.5%. It is also worth noting that the NPAs drop took place while coverage levels were further reinforced 8% points in the last 12 months, reaching 64% in September. From a liquidity point of view, the trend was the same as last quarter, with loan-to-deposit falling further to 67%, and our LCR reaching 311%. Finally, our solvency continued to improve, with CET1 fully loaded growing 27 basis points to 14.7%, mainly owing to the lower risk-weighted assets. Regulatory total capital also improved to 17.8%, implying a EUR 1.3 billion buffer over our SREP requirement. I will move now to Slide 6, where you have the P&L details. Starting with the quarterly trends, both NII and fees show a significant improvement. Core income grew 9% quarter-on-quarter, following a 9% increase in NII and an 8% improvement of fees, as you will see later. Regarding the rest of revenues, dividend income continues to be affected by COVID-19. However, equity method was pretty stable compared with the previous quarter and slightly above third quarter '19. Trading income was below previous quarter, owing to the strong gains realized in the previous quarters. Finally, other operating income and expenses reached EUR 7 million, of which the expenses include EUR 1.5 million of real estate maintenance costs, EUR 4 million of DTA levy and other EUR 3 million from different and small other expenses. And on the positive side, it include EUR 3 million from real estate rentals, EUR 4 million from the real estate servicer and other EUR 9 million from the insurance company, Union Del Duero Vida. All this led to a gross margin of EUR 232 million in the quarter. In terms of cost, this quarter has been very positive again, with total cost repeating second quarter 2020, excellent level, supported by stable general expenses and an additional improvement in personnel expenses, which compensated a small increase in amortization. Pre-provision profit was EUR 92 million and enable to compensate an additional charge for performing our stage 1 loans. As I mentioned, as you can see, in the slide, we booked EUR 76 million of provision, of which EUR 65 million were loan loss charges, including EUR 63 million of what we call COVID-19 provision. As a result, the net income reached EUR 60 million in the third quarter '20. Looking at the first 9 months 2020 cumulative results. I would highlight that we are on track to achieve this year guidance, owing to the core income improvement. Total revenues year-to-date reached EUR 760 million, 3% below the previous year, despite the impacts from the pandemic. Total costs decreased by 5.5%, leaving the pre-provision profit of the first 9 months of the year at the same level as in 2019. Finally, as you can see, in the first 9 months of 2020, we have booked EUR 166 million of extraordinary provision for COVID-19, leaving net income at EUR 77 million, that is half of the one reported 1 year ago. However, if we exclude the extraordinary provision, net income improved to EUR 194 million. If we move now to Slide 7, you can see that total customer funds grew 5.1% year-on-year. This trend is explained by a strong growth in deposits. But for a second quarter in a row, we have also seen an improvement of asset under management and off-balance sheet funds. In the quarter, total funds grew a bit more than 1%, with our balance sheet funds growing more than 2% to EUR 12.6 billion. In Slide 8, you can see credit and loans trends. Gross loans fell 1.1% in the first 9 months of the year, with public sector decreasing 2.4%; NPL balances, almost 5%; and private sector loans, 0.8%. By segments, loans to individuals fell close to 4%; large corporates grew by 13%; and SMEs show a very stable trend, increasing 0.1%. On the right-hand side, as usually, we include performing loans' quarterly trends. Let me remind you that the quarterly evolution was affected by the EUR 400 million of seasonal advances, including in what we call consumer & others that we usually have in the second quarter, and they disappear in the third quarter. In terms of segments, in September 2020, corporate performing loans grew 6.3% year-to-date, while mortgages and consumer & others fell 3.8% and 2.8%, respectively. In Slide 9, we show the new loan production by segment. Overall, new production has been directly impacted by COVID-19. In the second quarter 2020, the impact was mainly related to individual loans, while corporate loans benefited from state guarantees. However, the trend in the third quarter was the deposit, with individual new loans growing 90% quarter-on-quarter. On the other hand, corporate new loans activity in third quarter was below the previous quarter. This change in the mix of new lending had a positive impact in the front book loan yield, as you will see later. Net-net, private sector new loan production fell 25% compared with last year. In Slide 10, we start with the P&L review with net interest income. As you can see in the top left, net interest income and net interest margin improved significantly in third quarter. In the top right, you have the quarterly bridge, where you can see that income from assets, including loans and fixed income portfolio, was quite stable in the quarter and that the lower cost of deposits was the main contributor to the quarterly increase. Bear in mind that the cost of liabilities benefited from the maturity of around EUR 500 million of high-yield deposits with a 4.3% cost and better cost terms of the TLTRO III. As a result, net interest income grew almost EUR 50 million quarter-on-quarter to EUR 149.6 million. In the bottom of the slide, you can see that back book customer spread grew by 3 basis points to a total of 152 basis points, following the mentioned lower cost of deposits. On the bottom right of the slide, you have the quarterly front book customer spread that was boosted by the higher loan yields. Such an improvement was mainly explained by the mix of new loans, with the weight of loans to individuals compared with previous quarters much higher than corporate loans, which, as you all know, are loans with tighter yields. In Slide 11, you have the regular details of our debt portfolio, where you can see that overall balances continue to grow a bit more this quarter as a consequence of the higher liquidity position of the bank also reflected in higher structural portfolio. As you can see in the slide, most of the exposure remains sovereign debt classified in the amortized cost portfolio. If we move to Slide 12, you have the fee income trends. Total fees grew more than 8% in the quarter, owing to the improvement of our transactional business, but also and mainly because of significant increase in brokerage and nonbanking fees in the third quarter '20, boosted by asset under management and the insurance business. Year-to-date, total fees fell 0.8%. However, considering the lower activity and the impact from the COVID-19, this is a very positive underlying trend that we expect to continue to improve in the coming quarters. In terms of cost, as you can see in Slide 13, total operating expenses fell 7.8% compared with 2018 and 5.5% compared with 2019. In other words, total costs in the first 9 months of the year were EUR 25 million below the previous year. This is a very positive trend as a result of the restructuring costs booked in the past and the actively management of our cost base, confirming that cost-cutting is part of Unicaja Banco strategy to improve profitability. In Slide 14, you can see the impairment details. As I explained before, we decided to book in third quarter 2020 another EUR 63 million of provision for COVID-19 potential future impacts, totaling EUR 166 million year-to-date. In the right of the slide, you can see that excluding these impairments, the recurrent cost of risk represented only 13 basis points, increasing to 91 basis points when including all covered provisions, which is in the upper cost of risk range guided for this year. However, following the provision effort made in the first 9 months of the year, we expect to book lower provisions in the next following quarters. We can now move to Slide 16, where we start the regular asset quality review. In this same slide, we have the details on the evolution of our NPLs. As you can see, NPL balances continue to fall one more quarter. The NPL ratio was 4.6%, but more important is that balances continues its downward trend, decreasing in 2% quarter-on-quarter. As we show in the table, in the bottom of the slide, quarterly gross entries fell from EUR 58 million in the second quarter to EUR 35 million in the third quarter of this year, which is a very positive trend. Recoveries reached EUR 37 million; foreclosure, EUR 17 million; and write-off, another EUR 11 million, leaving NPLs EUR 30 million below the previous quarter. So gross entries fell significantly and one more quarter. NPL balances continued to decrease despite the COVID-19 crisis. In Slide 17, we have updated the ICO loans and moratoria balances. In the left of the slide, you can see that we have approved 11,500 loans and credit lines guaranteed by the state for EUR 850 million. However, such amount is the limit, with the balance drawn representing EUR 510 million at the end of September. In the right-hand side of the slide, we show the moratoria details. In mortgages, we have formalized EUR 610 million of legal moratoria and EUR 585 million of sector moratoria. Regarding the consumer loans moratoria, you can see that the balance are much lower, with EUR 30 million of the legal and another EUR 25 million of sector moratoria. However, as you can see in the footnote, there are EUR 359 million of mortgages and other EUR 17 million of consumer loans that asked for both legal and sector moratoria. All in all, total moratoria balances approved reached EUR 874 million, of which 96% were mortgages and only 4% consumer loans. As at the end of October, EUR 265 million have already expired, leaving current total moratoria balance at EUR 609 million, representing only 2.4% of total performing loans. Finally, it is worth noting that out of the EUR 265 million that have already matured, only 2.8% have more than 90-day overdue. In Slide 18, we have updated our credit risk exposure and NPL coverage details. Overall NPL coverage continued to grow 1 more quarter. In the third quarter 2020, NPL coverage reached 66%, which is 5 points -- percentage points above the previous quarter. This compares with 52% 1 year ago and 54% at the end of last year. As you can see, it is an extremely high level of coverage when considering our loan mix, and that 87% of our NPL balances are secured. In Slide 19, you have the regular details of the foreclosed assets. Coverage remained one of the highest of the sector at 63%, while gross balances fell by EUR 25 million quarter-on-quarter, leaving total gross balances at EUR 1.1 billion, although in net terms, they represented only EUR 450 million or 0.7% of total assets, with 52% of balances being finished buildings.Regarding disposals, as you can see in the right-hand side of the slide, we continue to sell assets at a very good prices at almost 35% above book value. In Slide 20, you can see how overall NPAs have decreased to a gross balance of EUR 2.4 billion and a net balance of EUR 855 million, representing only 1.4% of total assets with a coverage at 64%, one of the highest of the sector. Before I finish with asset quality, let me remind you that in the bottom of the slide, you have the Texas ratio, which is a consequence of all the previously mentioned trends. As you can see, continued to fall one more quarter below 44%. In Slide 21, we have the details of our liquidity position that, as you can imagine, they continue to be extremely comfortable. Our loan-to-deposit ratio fell to 67%, with LCR was at 311% and NSFR at 141%, so nothing else to be added here. Finally, we updated our solvency in Slide 22. Our regulatory CET1 one reached 16.3% in September, 44 basis points above the previous quarter; and our total capital ratio was 17.8%, representing almost EUR 1.3 billion buffer over our SREP requirement. In fully loaded terms, the ratio improved 27 basis points in the quarter to 14.7%, with the big bulk of the improvement coming from lower risk-weighted assets. Let me also remind you that these solvency ratios are calculated in full under the standard approach. So this means that it's considering very conservative assumptions, as you can see at the bottom left of the slide. Finally, before we move to the Q&A, let me finish reiterating that in the first 9 months of the year, Unicaja Banco has been able to book on top of the 13 basis point of recurrent credit charges other EUR 166 million of COVID-19 provisions, representing an extraordinary cost of risk of 78 basis point while still reporting EUR 77 million of net income. This has enabled us to increase the NPL coverage by 12%. At the same time, in this same period, we have also reduced further our NPAs and generated additional capital, with our CET1 fully loaded growing by 65 basis point year-to-date. In summary, Unicaja Banco is under a very strong financial position that has been further reinforced during the last quarters, leaving us in a relative good position going forward.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. We will now answer the questions. Let's start with the top line. There are a few questions, Pablo, regarding the higher deposits. If we can clarify the pending benefits from the maturity of these high-yield deposits ahead.

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

Sure. Let me remind you that we used to have EUR 1.2 billion of retail deposits at a close, slightly higher than 4%, and these deposits started to mature this summer. At the end of this quarter, around EUR 600 million have already matured, of which EUR 500 million has been in this third quarter. We have another EUR 200 million maturing in the fourth quarter of 2020 and EUR 400 million in 2021. EUR 200 million of them will be in the first quarter, EUR 175 million in the second quarter and the remaining EUR 75 million in the third quarter of 2021.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Also regarding NII, if we can update the guidance that we expect ahead.

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

We can reiterate our guidance. We believe NII in 2020 will be similar to the one reached in 2019. It is true that in the first half of 2020, the trend was weaker. But as you saw from third quarter 2020, we are benefiting from lower interest expenses that make us feel confident, although the Euribor has come down to maintain our guidance. As always, there are some positives and some negatives, but we expect to compensate the second ones, among others, due to the maturity of the previously mentioned costly deposits. And for 2021, I think it's too soon, and there are a lot of moving parts. However, at this moment, and with the current information, NII should be pretty stable again. But we will provide a formal guidance in the coming quarters.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Regarding loan growth, if we can update our views, please, Pablo.

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

Yes. As you saw in this quarter, corporate loans, following the increase in the second quarter explained, as I said, by the government guarantees, are now more stable. Total new loan production is still below the levels we used to have before the COVID-19. And probably, in some segments, it will take some time to reach those levels again. That said, the COVID has also other indirect impacts. On one hand, we have the moratoria that reduced the speed of amortization of loans; and on the other hand, the voluntary early repayments of our clients are slowing down, mainly in the first months of the year. These 2 effects are partially mitigating the weaker new production but probably not enough to be translated into a clear loan growth. So net-net, we expect loan volumes to remain pretty stable going forward, at least until we have more visibility on the health situation.

[Jaime Hernández Marcos, Head of Investor Relations]

Moving, Pablo, to the debt portfolio. What is the expected contribution from this portfolio going forward? If we can explain the quarterly increase and update the strategy regarding this portfolio.

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

Yes. Going forward, the contribution of the debt portfolio could be slightly below current levels, depending on how the fixed income market trends evolve, obviously. The potential lower contribution in the coming quarter is explained by some of the disposals of part of the portfolio, but mainly due to the maturity of around EUR 3 billion in the 2021. As we explained in the past, in 2020, we bought in advance bonds that were expected to be purchased in 2021. So in addition to this, the contribution of the portfolio going forward could be also driven by the liquidity position and the expected liquidity projections of the bank for the next years because we use the portfolio to balance the balance sheet. As we have previously explained in 2020, we had an increase in the liquidity coming from the larger TLTRO and also and mainly to the consumer deposit increase that we have in the current financing position. If this current financing position remains stable and consolidate, we will continue managing the liquidity as we have done in the past. And one of the options is to further increase the debt portfolio, something that could also increase the contribution and offset the negative on the contribution to NII that I mentioned. Regarding the size and the strategy, the increase in the bond portfolio that we saw around EUR 1.6 billion in the quarter, it's related, as I said, to the EUR 1.7 billion of funding coming from the TLTRO III compared to TLTRO II, plus the commercial gap trends following the increasing customer deposits. As we explained in the second quarter presentation, we invested this extra liquidity in fixed income debt in order to avoid the negative cost of liquidity due to the very high liquidity position of the bank. These purchases were accounted in the amortized cost portfolio with no impact in P&L or equity, apart from the NII, obviously. And the duration is similar -- the duration of the portfolio, it's similar to the one at the end of first quarter. Regarding the fair value OCI, no significant changes in the quarter, although the portfolio has been managed actively to obtain some capital gains. Regarding the different portfolios strategy, it remains similar as in the past. The structural amortized cost portfolio has the role to invest the structural excess liquidity. And the portfolio is mainly invested in sovereign debt, around 9%, with medium-term financial duration to hedge the interest rate risk of the bank. And just to give you some color on the situation of the portfolio. The unrealized gains in the amortized cost debt portfolio, which is not in the capital position of the bank at the end of this quarter, was close to EUR 600 million. It is also worth to mention that the strategy we are following is to try to secure part of the current unrealized gains to avoid any potential decrease of this amount in the future and still allow us to have some capital gains for the next 2, 3 years.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Moving to the funding plans. If we can update what are our plans and the potential issuance of MREL liabilities.

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

Yes. Following the 3-year funding from the TLTRO III and as long as we continue to have a very strong liquidity, our funding plan for the next years, as you can imagine, should not have any significant changes. Obviously, there will be only unrelated issuance. So regarding the MREL, considering our current risk-weighted assets, the requirement of eligible liabilities remain around EUR 1 billion. And this shortfall is expected to be covered before January 2024, giving us enough time and flexibility to comply with this requirement as well as the possibility to choose the right moment to issue. We still haven't decided on how much will be covered with senior preferred and senior non preferred. But considering liabilities' trends, we could finally issue senior preferred in the larger amount of what we were initially expecting, and this will be good news in terms of the expected cost of the MREL requirement issuance.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. We have already clarified the debt portfolio, but there is one specific question on the overall ALM strategy. So probably you're going to elaborate a little bit further on the overall ALM strategy.

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

Yes. Well, the ALM strategy of the bank is closely related to our bond portfolio strategy. The past quarter's strategy, considering our market views, has been to try to protect NII of further decrease in Euribor rates and hedging the balance sheet by adding duration in this portfolio mainly through the acquisition of medium- and long-term bonds to avoid an excess risk from the mark-to-market of this position if rates increase. What we have is all the bonds are accounted in amortized cost portfolio. We hedge it through interest rate swaps.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Related to this one too, there are some questions -- actually, several questions regarding the interest rate sensitivity and the impact of Euribor drops.

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

Yes. Well, the sensitivity of the NII to interest rate, as I said in the ALM strategy, has decreased compared to previous quarters, considering a constant balance sheet, a parallel and instantaneous 10 basis point drop in the rate curves. Once the balance sheet is fully repriced could have an impact on NII of around 2%, minus 2.2%. If the 10 basis point movements were upwards, the positive impact on NII would be around 2.5% positive. At the end of the second quarter, just to give you some color how we have improved this, we're around minus 3% and plus 3.1%, respectively. Under the current negative short-term rates environment, the negative impact of additional decreases in the short-term rate reference is relevant to the NII because of the asymmetric impact, as you all know, on customer assets and liabilities, decrease in interest income from the loan book and almost no impact in reducing the cost of the deposit base because of the 0% cost floor in most of customer funds. Although we have increased the customers with negative rates, it's mainly in the corporate and institutional part of the portfolio and not in the retail one. On the opposite, an increase in short-term rates will have a very positive impact on interest rate margin on the short term. Considering our market view and the increase of customer funds of the last quarters, the strategy adopted since 2019 has been to reduce the risk of any potential decrease in NII in the scenario of rates going down further. Increasing what we have done is trying to increase the duration of the balance sheet, mainly through the fixed income purchases that we mentioned. The recent drops in Euribor rates is not really good news for NIIs. But as I explained before, we have been hedging that risk during last quarters, and so the negative impact is not going to be as relevant as it could be without those hedges executed.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you. Moving to fees. Pablo, if we can provide some guidance and some color on the improvement.

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

Yes. Fee income was affected, very affected by -- in the second quarter by the lower activity and the decisions that we took of not charging some fees to our customers during the lockdowns. Such a negative impact was concentrated in the second quarter. And as you saw in the third quarter, it was reverted. In cumulative terms, the first 9 months of the year, fee income decreased less than 1% compared to the previous year, something that is quite positive considering what has happened this year. We expect to continue to improve fee income trends in the future. And as I -- as we said 3 months ago, we were expecting to -- an improvement in fees for the second half of this year to levels somewhere between the first quarter and the second quarter, something that has been confirmed with the numbers of this third quarter. And such improvement will probably enable us to maintain the level of 2020 final year fees very close to the level of 2019, something that, under my view, will be a significant success and a proof of the underlying positive trends in fees. Bear in mind that we are guiding for 2020 final year in core income. So NII plus fees to reach levels very close to the ones reported in 2019, a very positive trend, if we take into account what has happened this year.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Moving to costs now. If we can update our cost-cutting plans, and if there are some additional cost-cutting measures ahead, we can provide some color on expenses.

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

There -- let me -- under my view, together with the confirmation of our core income improvement that I mentioned in the previous question, the reported expenses trends is one of the most positive news of the quarter. As you all know, during 2018 and 2019, we were -- we booked restructuring costs with the aim to reduce total cost with a plan that last from 2020 to 2022. Following the COVID-19, we took additional measures to anticipate and to save and even to make a significant effort in cost, something that was reflected in the second quarter 2020 and that we have confirmed again in this quarter. Mainly, the effort was on general expenses. As we said last quarter, one part of such savings won't be structural savings, but we are doing our best to try to maintain as much as possible as structural and offset any recovery on general expenses. So all in all, for 2020, the -- what we can say is that our initial low to mid-single-digit decrease in costs can be improved to a new guidance of mid-single-digit savings, confirming that cost-cutting remains an important part of the strategy of the bank going forward to improve profitability. And I think this is for 2020, but let me -- even for 2021, we will maintain our effort in cost-cutting with new measures on top of the already approved. That will imply even lower cost down the following years.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Now changing to one of the topics, we got lots of questions regarding the cost of risk. If we can elaborate a little bit on the trends and what we expect for this year and next year, please, Pablo.

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

As we have discussed in the past, our conservative loan mix and higher coverage of the NPLs leaves us in a relative good position to absorb a potential deterioration of asset quality when it finally happens. As you saw during the presentation, our asset quality trends continue to improve one more quarter, with foreclosed assets and NPL balances decreasing both in the third quarter. That said, we have decided to keep on booking what we call COVID provisions that reached EUR 166 million year-to-date, representing 83% of total loan loss charges. These provisions are mainly stage 1 provision. In other words, they have been booked for a potential future deterioration that has not happened yet. Therefore, we expect to book lower credit provisions in the future starting in the next quarter. Bear in mind that we have increased our NPL coverage by almost 14% points in the last 12 months from 52% in the third quarter of '19 to the current 66%. This coverage level, together with our loan mix and the level of collateralization of our book, leaves us in a very -- in a relative good position and will enable us to reduce future impairments. So regarding the guidance and following the provisions already booked, now we expect for 2020 a better than initially expected cost of risk, narrowing the initial 50 to 90 basis point range to a level between 60 to 80 basis points. This means that loan loss charges will improve in the following quarters. Bear in mind that despite narrowing and improving the guidance for 2020, this impairment level is extremely high for a loan book like ours, something that will also enable us further to improve the cost of risk in 2021. It is probably too soon to be more specific on the cost of risk for 2021, and we have to follow closely the health situation and the economic situation, and on top of that, the government and European and ECB measures to offset the negative impact of the health situation. But what we can say is that we expect to go back to more normalized cost of risk for the coming quarters.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Although we -- you have explained it somehow in the -- throughout the presentation, we got some questions regarding the moratoria and the ICO loans, asset quality trends. If you want to add something to that.

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

Yes. I think the overall NPLs continue to fall this quarter. I think this is important to remember. So the expected deterioration hasn't happened yet. The measures that we have in place, including the moratoria and the ICO loans, among others, will probably explain the expected lag effect. As I explained before, the big bulk of the provisions booked so far for COVID-19 are provisions made after considering higher expected losses from worse macroeconomic trends but not owing to a specific deterioration of our portfolio. In our case, far from suffering a deterioration, we are improving our asset quality metrics. As an example, let me confirm you that we have reduced by 35% year-to-date what we internally call watch list loans, from EUR 400 million to around EUR 270 million in September. The previous number was at the end of 2019. So a significant and a very positive trend that make us feel confident that the NPL balances won't grow this year. We will probably have more color and visibility in the coming quarters. Until then, what we are doing is reinforce the coverage, as you saw, and booking provisions following this more conservative assumption in our models. But we haven't seen any special deteriorations in loans with moratoria and corporate loans, with state guarantees or overall loans so far. Regarding the moratorias and ICO loans, as we explained during the presentation, they haven't deteriorated so far. And in the case of moratorias, 2.8% of the balances that have finished the legal payment holidays are 90 days over the year. So it's only 2.8%. And I think that what we have is a lower percentage of moratorias and a lower percentage of ICO that we think is a proof of the quality of our loan book compared to the sector levels.

[Jaime Hernández Marcos, Head of Investor Relations]

Okay. Moving to solvency. If we can update, Pablo, the situation with IRB models, with advanced models.

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

Yes. We are very close. We are -- sorry, we are at the very end of the process, but we continue to apply the standardized approach in full, as you all know. As I said in previous occasions, we have continued working with the supervisor in the process despite the COVID-19, and it's still performing as we were expecting under our calendar. But as you all know, we prefer to be prudent and would not consider the potential benefits in our solvency plans and forecast. So we will disclose more details when we receive formal news.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Still on solvency. If we can please update on the dividends and the accrual of dividend in 2020.

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

You all know that our aim is to pay cash dividends as soon as possible. And we understand that considering our solvency and financial position, Unicaja Banco will be among those banks receiving dividends and buybacks as soon as possible. In the meantime, in 2020, we continue to accrue dividends. So in our solvency ratios, only EUR 34 million out of the EUR 77 million reported net income is included in our solvency.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Something related to this one is -- we got a question regarding the amortization of shares. When do we expect to amortize 2% shares in treasury stock? And what would be the impact from that?

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

As you all probably know, and as I said at the beginning of the presentation, we have just approved in our recent AGM the amortization of 30.5 million shares representing 1.9% of total share count. The process of the formal amortization will last slightly less than a month, around a month. So the number of issued shares will be adjusted probably by the end of this month. We will confirm it in due course. It won't have any impact in solvency because we were already deducting those shares. The remaining impacts are positive because financial metrics will -- metrics per share will improve accordingly to this reduction.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Finally, to finish, as you probably can imagine, we have some questions regarding the views on M&A and the situation with Liberbank. We can elaborate a bit or something on this.

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

Yes. As our President said and our Chairman said in the AGM, we published on the 5th of October an inside information in the CNMV confirming the preliminary contacts with Liberbank as part of the regular analysis of investment and opportunities that may be of interest to our shareholders. A few days later, the 8th of October, we announced that the Board of Directors agreed to appoint advisers for this potential deal. And since then, we have been working in the regular process and analysis of this type of deals, including contacts with the different authorities. At this moment, we continue to work in the process, but the Board of Directors has not taken a decision yet, and we expect to keep on with the progress in the coming weeks.

[Jaime Hernández Marcos, Head of Investor Relations]

Okay. Thank you, Pablo, and thank you all for listening to our results presentation. Please, if you need further information, do not hesitate to contact the Investor Relations department. Thank you very much.

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

Thank you very much, and stay safe. Bye.

[Jaime Hernández Marcos, Head of Investor Relations]

Bye.