Unicaja Banco SA

MAD:UNI

Earnings Call Transcript 2018-Q4

[Jaime Hernández Marcos, Head of Investor Relations]

Good morning, and welcome to Unicaja Banco Final Year Results Presentation. We have published the quarterly financial report and this presentation this morning before market opens. Today, our Chief Executive Officer, Enrique Sánchez del Villar; and our Chief Financial Officer, Pablo González, will explain 2018 annual results and the main trends of the fourth quarter. As usually, following the presentation, we will answer the questions received through the webcast and in the IR inbox. I will leave the floor to Enrique now.

[Enrique Sánchez del Villar Boceta, CEO & Executive Director]

Thank you, Jaime. Good morning, and thank you all for attending the presentation. I will start in Page 4 with a summary of the results. Starting with the business trends. Performing loans grew 0.2% quarter-on-quarter, confirming the gradual improvement in loan volumes. This trend was supported in the continued improvement of new loan production, mainly in SMEs and individual segments where we grew 21% compared with 2017. On the other hand, in corporate and public sector segments, the new production slowed down due to a present pricing policy, as we will see later. Total customer funds remained almost flat due to our conservative pricing policy with corporate clients, while off-balance sheet funds were negatively affected by market trends, mainly in the second part of the year. Regarding the results, net interest income in 2018 was 3% above 2017. Fee income, adjusted by the acquisition of Union del Duero, also grew by 2%. Total costs fell by 2%, mainly driven by a 3% drop in personal expenses. As we will explain later, we have taken some measures that should enable us to further decrease personal expenses until 2021. Regarding impairments, it's worth noting that we released close to EUR 10 million in loan loss charges and foreclosed assets, among others, owing to our relative high coverage levels. All these led to an attributable net income of EUR 153 million, which is 7% above 2017. On asset quality liquidity and solvency. NPAs fell by 22% in 2018, almost reaching the target that was set for 2020 when we executed the IPO, so 2 years ahead. Also, our solvency position allowed us to anticipate 2 years the payout target of 40% because this was another target expected for 2020. On liquidity, as you all know, we continue to have a very comfortable position with the loan-to-deposit ratio at 73% and the liquidity coverage ratio at 468%. Finally, regarding our solvency CET1 phase-in was 15.4% and 13.5% in fully loaded terms, maintaining a significant buffer over SREP requirements. In Slide 5, we show the details of the dividend that we left for approval in our annual general meeting, which is significantly above the previous years. As you can see in the presentation, our CET1 fully loaded per share ratio and the tangible book value per share ratio both are at around 2x the stock price. Both ratios were stable in 2018 despite having much lower realized capital gains. This was possible owing to the positive capital generation through results. So taking into account our solvency position, we decided to anticipate 2 years of cash dividend payout target of 40%, which was initially expected for 2020. The 7% increase in net attributable income and the higher payout will be translated in a much higher dividend yield, almost 2x the one of last year, representing almost a 4% dividend yield when considering Friday closing prices. This improvement is explained by the 76% increase in the dividend per share, which in absolute terms means that we will increase the dividend from EUR 35 million to EUR 61 million. If we move to Slide 6, you will see something that we believe is quite relevant for the coming years. We have reached an agreement with the unions to implement a voluntary exit scheme. The main target of this plan is to significantly reduce personal expenses until 2021, something that will enable us, among others to increase IT investments while still reducing overall costs. As you probably know, we are going to crystallize almost all previous synergies from the acquisition of EspañaDuero by the end of 2019, so we decided to work in a new plan to lengthen and increase the savings until 2021. During previous 4 years, we managed to reduce our personnel expenses by 12%, mainly owing to an 11% reduction in the number of employees. The new plan will go from 2018 to 2021. And in those 4 year, we want to further reduce the number of employees of the group to a level close to 6,000 full time equivalents, something that we expect to generate gross personnel cost savings of around EUR 55 million in these 4 years. The restructuring costs associated to this plan will be around EUR 180 million. At the end of 2018, we have already booked 78% of such costs, with the remaining provisions, around EUR 40 million, to be booked through the horizon of the plan. Now Pablo will continue explaining the rest of the details of the quarter. Please, Pablo.

[Pablo González Martín, Director General of Finance]

Thank you, Enrique. I will continue with the results and business section in Slide 8. Starting with the quarterly trends. As you can see, the fourth quarter '18 results were in line with previous quarters although with higher trading gains that we have used to mitigate the restructuring costs that Enrique just mentioned. Both net interest income and fees were a bit higher compared with the previous quarter. On net interest income, it is worth noting that the higher income from loans compensated the lower contribution from the debt portfolio, as we will see later. Regarding the rest of the revenues, it is worth to highlight the usual seasonality from the contribution to the deposit guarantee fund this quarter. Total costs decrease 1% compared with third quarter '18, mainly due to the lower general expenses. On impairments, as it had happened in the first half of the year, loan loss charges and foreclosed assets provisions where positive. As you can see, credit alongst impairments were close to 0, and we released EUR 8 million from foreclosed assets. On the other hand, other provisions were high, owing to the EUR 100 million provision booked for restructuring costs. All these together explained the EUR 14 million before taxes and the EUR 10 million of net income in the quarter. Now looking at the annual P&L. Core income trends were positive. Net interest income grew 3% year-on-year. Fees were flat in the year, although growing at about 2% when excluding the impact from Union del Duero. Income from associates fell 24%, explained by the change in the accounting of Union del Duero that contributed with EUR 11 million in this line of the P&L last year. Trading income was as strong over the last 2 years, which in 2017 helped to mitigate the impact from the reorganization of the life insurance business, while in this year, it has been used to compensate the restructuring costs. In other operating income expenses, the contribution to gross margin in 2018 was below the previous year, mainly owing to 2 different reasons. On one hand, in 2017, we had a positive EUR 25 million impact from an insurance earn-out, and on the other hand, owing to the lower income from our real estate servicer, which contribution to this P&L line fell from EUR 62 million in 2017 to EUR 24 million in 2018. Now moving to costs. Total expenses decrease by 2% compared with 2017. On one side, personnel expenses on amortization fell by 3% and 12%, respectively. However, this was partially compensated with 1% higher general expenses. Finally despite the extraordinary restructuring costs booked in 2018, impairments fell significantly, owing to a very positive trend in loan loss charges and foreclosed assets provisions, leaving the net attributable income at EUR 153 million. That is 7% above the previous year. If we move to customer funds in Slide 9. You can see that total customer funds, both off- and on-balance sheet funds, were stable in 2018. It is worth noting that off-balance sheet funds fell in the quarter to levels very close to 2017, mainly owing to market trends. On the other hand, the on-balance sheet mix continues to improve, with sight accounts representing 79% of the total on-balance sheet funds by year-end. In the Slide 10, we show the credit and loans trends. Total gross loans fell 3.8% in 2018. As in previous quarters, the big bulk of the decrease was explained by lower nonperforming loans. On the right-hand side of the slide, you have the details on performing loans. As you can see, they grew 0.2% quarter-on-quarter, although still 1.1% below the previous year, with private sector loans falling only by 0.5% in 2018. By segments, as you can see in the bottom right, mortgages fell 3.8% year-on-year. However, corporate loans grew by 6.7%, and consumer and others were almost 3% above 2017. All in all, similar trends as in the previous quarters, with performing loans pretty stable although showing steady growth in some segments. As you can see in the bubbles on the top of the chart, the year-on-year decrease continues to improve every quarter. In the Slide 11, we show the new loan production details. New production in individuals and SMEs grew 21% in 2018. However, in public sector and corporate loans, the new production was below the previous year, among others, as we have explained in previous occasions, owing to the significant new production in corporates formalized in 2017, but also due to the prudent and conservative commercial strategy focused in pricing. This strategy is reflected in the loan yields. As you can see in the bottom of the slide, the yield of new loans grew by 19 basis points in individuals, by 13 basis points in SMEs and by 11 basis points in corporate loans compared with 2017. This is a very positive trend. In the Slide #12 as we usually do, we'll start to review the P&L in more detail. As you can see in the top right, the lower contribution from the debt portfolio, following the realization of capital gains, was mainly compensated by higher interest income from net loans, including nonperforming loan recoveries, but also owing to a slightly lower cost of deposits, leaving net interest income and net interest margin pretty stable in this quarter. Regarding the customer spread, in the bottom of the slide, you can see that front book remains well above the back book, owing to the prudent pricing policy followed by the bank. In Slide 13, you have an update on our debt portfolio. The size, excluding forward sales, showed a small decline in the quarter similar to the drop in the year. The big bulk of the exposure remains sovereign and is classified in the amortized cost portfolio. Most of the forward sales that we used to have in the past were realized this quarter, explaining that the contribution from this portfolio to net interest income went down from EUR 59 million in the previous quarter to the EUR 55 million in this fourth quarter, a contribution level that is more normalized. If we move to Slide 14. You can see fee income trends that were pretty stable this quarter, something positive because assets under management fees were weak this quarter, although compensated by higher payment on collection fees, usually strong in the fourth quarter. In year-on-year basis, fee income fell 0.6%, however, when adjusted by the full acquisition of Union del Duero in the first quarter 2018, they grew slightly above 2% in the year. Now moving to costs, as you can see in Slide 15, operating expenses fell 2.2% in 2018 compared with 2017 and 5.6% compared with 2016, driven mainly by lower personnel expenses, a trend that following the new personnel cost plan previously explained by Enrique, will remain during the next 3 years. However, as it happened in 2018, one part of these savings will be mitigated by higher general expenses owing to IT investments and the automation of processes. In Slide 16. We have included impairment details. As you can see, total impairments, despite the significant restructuring costs booked in 2018, improved significantly compared with 2017 from EUR 224 million to EUR 174 million. Such positive trend was mainly explained by the release of provision related to loans and foreclosed assets, something that has been possible owing to the strong coverage levels and the market improvement for this type of assets. As you can see in the right-hand side of the slide, the annualized cost of risk year-to-date excluding disposals was just 5 basis points. If we move now to the asset quality section in the Slide 18, we have details on the evolution of our nonperforming loans, where you can see that the trends were very positive in the fourth quarter. Nonperforming loans fell by 13% quarter-on-quarter and almost 30% year-on-year in the fourth quarter this year. The annual drop went from EUR 300 million in 2016 to EUR 500 million in 2017 to the almost EUR 800 million in 2018, quite a positive trend. In the bottom of this slide, you have quarterly nonperforming loan variation. Gross entries were stable and similar to other quarters of 2018 but slightly below the ones in 2017. Cash recoveries, including disposals, were strong in the fourth quarter '18, leading to one of the highest quarterly drops in nonperforming loans of last year. As we usually do, in the Slide 19, we have updated our nonperforming loan coverage details. Overall, the coverage was 53% by year-end, with 89% of our nonperforming loan balances been secured and with an almost 80% of the nonperforming loan balances secured by finished buildings, which gave us the quality of the coverage that we have. If we move now to Slide 20. 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 62% in December 2018. And on the right of the slide, you can see the provisions released and the outflows details. In 2018 we have released EUR 64 million of provision from disposals, representing 29% of the net book value of the assets sold. In the bottom, we show that we had EUR 85 million outflows in the quarter. All in all, positive trends as a result of the coverage levels. In the Slide 21, we show together the nonperforming loans and foreclosed assets trends. As you can see, in 2018 we have reduced by a significant 22% or by close to EUR 1 billion the gross nonperforming assets balances to EUR 3.6 billion, at a level very close to the 2020 level -- that is very close to the level -- to the target that we have for 2020, so almost 2 years ahead of the initial plan. NPA coverage remains at 57%. In net terms, foreclosed assets and nonperforming loans balances now represents 2.7% of total assets by year-end. In the bottom of the slide you can see that the Texas ratio continues to decrease quarter after quarter, reaching 61% in December. In terms of liquidity, you have the details in Slide 22, where you can see very little changes one more quarter. Our loan-to-deposit ratio remains very low at 73%. On the top right, you have the liquidity ratios that continue to be among the highest of the sector. Regarding the amount of liquid assets, as you can see in the bottom left, that represents 24% of our total assets. So there are very little changes in this front. In terms of wholesale maturities as I usually do, let me remind you that until the end of 2019, we want half significant maturities. However, at the end of this year and the beginning of 2020, we have around EUR 1 billion at an average cost close to 2.5% maturing, something that we'll be quite positive in 2020. Finally, moving to solvency. In the Slide 23, you have all the details. As you can see in the top left, current regulatory capital ratios are well above the SREP requirements, with EUR 1.5 billion buffer over CET1, close to EUR 1 billion buffer in total capital. CET1 phase-in was 15.4% in December, while total capital was 15.7%.As we have explained in previous conference calls for us, the regulatory solvency is very relevant because the phase-in calendar that we apply finish in 2023 rather than 2019. In fully loaded terms and excluding the unrealized gains, the CET1 fully loaded grew 10 basis points quarter-on-quarter to 13.5%, which is 70 basis points above the previous year. Now I will leave Enrique with the usual final remarks.

[Enrique Sánchez del Villar Boceta, CEO & Executive Director]

Thank you, Pablo. Let me finish, as we usually do, with some final remarks. In 2018 we have been able one more time to report resilient results generation capacity. We have managed to compensate significant extraordinary charges in P&L. In 2018, despite booking the restructuring costs, we have been able to increase our attributable net income by 7%., something that, together with our strong solvency position, has allowed us to anticipate 2020 payout target of 40%. As we also saw in the presentation, the commercial activity continues to improve quarter after quarter, with performing loans stable following a significant increase in new loan production. And most important, we did it following a prudent pricing approach. Also, it is worth noting that NPAs, nonperforming assets, continued to decrease at a significant pace during 2018. The EUR 1 billion decrease in gross NPA has left the problematic exposure close to our 2020 target. Such positive trend was possible and explained, among others, owing to a best-in-class coverage. And finally, as we have been doing since we became listed, we have been able to keep an extraordinary, comfortable solvency and liquidity position. Thank you very much. We will now answer your questions.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Enrique and Pablo. We will start with the Q&A now. The first one, Enrique, is for you. We got several questions regarding the potential deal with Liberbank. If we can provide an update on the situation, please.

[Enrique Sánchez del Villar Boceta, CEO & Executive Director]

Yes. Okay, as you know, on December 12, we published a relevant fact confirming that we are maintaining contacts about the potential integration with Liberbank. At the moment, these contacts keep on going and we have nothing new relevant to communicate to the market. Therefore, we will not comment or answer questions regarding this potential integration.

[Jaime Hernández Marcos, Head of Investor Relations]

Another one for you, regarding the new cost-cutting plan. If we can clarify the timing for booking the pending EUR 40 million of restructuring provisions.

[Enrique Sánchez del Villar Boceta, CEO & Executive Director]

First of all, bear in mind that this is a voluntary exit plan that is still in progress, so we cannot be much more specific. However, we understood that it was helpful for you to have some details on the plan. Among them, as we show in the presentation, we estimate that the plan will require close to EUR 180 million of restructuring costs. We already had EUR 40 million in the third quarter of 2018, and we have booked another EUR 100 million this last quarter of 2018. So under our estimates, there is still around EUR 40 million to be booked in the horizon of the plan. The timing and the final amount will depend on the final outcome of the plan that, as I said before, is still under progress.

[Jaime Hernández Marcos, Head of Investor Relations]

Another one, also related to the cost-cutting plan. They're asking us that we have explained in the presentation the expected trend for personnel expenses. But if we can provide more details on what we expect for general expenses.

[Enrique Sánchez del Villar Boceta, CEO & Executive Director]

It is true. We have provided personnel cost details because the savings will come in this line and the provisions booked this quarter are related to such savings. The plan has 2 targets. One side, it will be implemented to lengthen the cost savings from 2019 to 2021, which we believe is very positive. On the other hand, one part of the personnel cost savings will mitigate additional investments in IT and processes. Take into account that we want to run the bank with fewer employees, as well as we need additional investment in order to increase the automation of processes. Regarding the amount of these investments needed, all I can say is that they will be below the personnel cost savings, enabling the bank to continue reducing total cost until 2021.

[Jaime Hernández Marcos, Head of Investor Relations]

One more regarding on this plan, too. If you can please clarify the horizon for the EUR 55 million of savings. How much -- how many of these savings were related to you.

[Enrique Sánchez del Villar Boceta, CEO & Executive Director]

In 2018, we have already started to benefit from the savings. Around EUR 55 million savings are for the period 2018-2021, and they are gross of wages, inflation and new hiring that we estimate at around 1% to 1.5% per year. This means that the net savings will be below the mentioned net gross savings.

[Jaime Hernández Marcos, Head of Investor Relations]

Moving to P&L now. Pablo, there is a question on -- they are asking us if we can update the situation on mortgage floors, please.

[Pablo González Martín, Director General of Finance]

Balances with active floors fell in the quarter to a number close to EUR 200 million to a final amount of around EUR 1.8 billion at year-end. As it already happened in the third quarter, lower balances with floors didn't have a significant impact in net interest income this quarter. In terms of provision, the situation is also very similar to the previous quarter. We continue to have around EUR 300 million for legal issues, with around 2/3 of that related to mortgages floors.

[Jaime Hernández Marcos, Head of Investor Relations]

There is now one on the [ ALM ], on the ALCO portfolio. If we can update the size, the strategy, contribution and sovereign exposure of the portfolio going forward.

[Pablo González Martín, Director General of Finance]

Yes. The size of the debt portfolio net of forward sales decreased at the end of 2018 as we executed some sales in the fair value to OCI portfolio as part of the regular management of this portfolio. The amortized cost portfolio size and duration remained pretty stable during last quarter. As we explained in the past, there is a structural sub-portfolio in the amortized cost portfolio, which is much in terms of size with the structural liquidity position of the bank. We can expect additional medium, short-term purchases in the next few months on this portfolio to invest the transitory excess of liquidity that we have at the moment. European government bond exposures remain in fourth quarter very similar to previous quarters. And sovereign debt represents 77% of the total debt portfolio, with most of it being Spanish debt. Regarding the holdings on BTPs and BGBs, remained also stable during the quarter, been almost all the bonds accounted in amortized cost portfolio, with no impact in capital or P&L. Regarding to NII, as we explained in previous quarters, once the forward sales have been executed at this last quarter of 2018, the bond portfolio will normalize its contribution to NII to levels close to the EUR 55 million per quarter, which is close to the ones that we have in 2017.

[Jaime Hernández Marcos, Head of Investor Relations]

The next one, probably for Enrique. If we can please update our loan growth guidance or expectation.

[Enrique Sánchez del Villar Boceta, CEO & Executive Director]

As we said in the presentation, the trend continued to improve. In the fourth quarter of 2018, the performing loan book grew 0.2% quarter-on-quarter. In fact, in 2018, 3 of 4 quarters showed a quarterly increase in performing loans confirming the improving trend. However, mortgages continued to decline, although new production improved significantly. We expect to maintain this positive trend in the coming quarters, and this should enable us to reach a low single-digit growth in 2019.

[Jaime Hernández Marcos, Head of Investor Relations]

The next one is related to this one. If we can update the net interest income guidance for 2019. Pablo, probably you can answer.

[Pablo González Martín, Director General of Finance]

Okay. This is always a hard question. On one side, we expect to have a positive impact from the mix of loans. And also, you saw during the presentation our front book yields remain well above the back book, something that, together with higher volumes, will continue to help the NII projection. On top of this, we expect the repricing effect to become positive this year, although the rates curve has flattened further this quarter. On the headwinds, the contribution from the debt portfolio will be lower and mortgages with floors will continue to decrease. Also, we don't expect a significant improvement in the cost of liabilities until the end of 2019 when some expensive cover bonds mature. So net-net, depending on the size of the increase of the loan book and if rates evolve as we expect, net interest income into 2019 should be very similar to 2018.

[Jaime Hernández Marcos, Head of Investor Relations]

The next question is if we can update our interest rate sensitivity, please.

[Pablo González Martín, Director General of Finance]

Okay. The balance sheet remains positively positioned towards an increase in interest rates, especially for the period of 2019 to 2021. And under a parallel increase of the curve of 50 basis point, the NII in the second year will be 12% above the last year level. As we have mentioned in previous quarters, this calculation is considering a constant balance sheet and conservative but realistic assumptions, like for example, changes in the mix between term and sight deposits in a rising rates environment.

[Jaime Hernández Marcos, Head of Investor Relations]

The following one is on the TLTRO. If we can update the situation on the date of maturity of such funding.

[Pablo González Martín, Director General of Finance]

As we all know, our ECB funding is all currently related to the TLTRO II facility. We went in full to the last auction, so our TLTRO funding matures in March 2021. In terms of liquidity, this won't be an issue because the funding was invested in sovereign bonds with the same maturity and with the same amount that we obtained from the ECB.

[Jaime Hernández Marcos, Head of Investor Relations]

The next one is also for you. It's regarding the Embrel levels. Are we expecting to see an increase in the wholesale funding cost next year because of Embrel issuance? If we can elaborate a little bit on Embrel, please?

[Pablo González Martín, Director General of Finance]

Regarding Embrel, we haven't received the final formal details. However, as you probably know, considering our size and the type of bank that we are, we won't follow the bail-in approach. This means that we will need to meet relative lower requirements, probably in the range of 20% to 21% of risk-weighted assets, although this hasn't been formally confirmed so far. That said, our current regulatory total capital ratio of 15.7% leaves us in a comfortable position and with enough time to meet the future requirements. Bear in mind that I said the phase-in ratio, not the fully loaded, and this is important because our are phase-in deduction calendar finishes in 4 years, in 2023. Our initial aim is to meet the requirement, issuing senior nonpreferred on Tier 2, but final decision will be taken considering the evolution of our solvency position on minimizing the cost. It is also worth noting that if we consider the approval of IRB models, the insurance be much lower, enabling us to meet all the pending requirements issuing much less eligible liabilities. However, we haven't decided the timing and the final type of instruments that we will use. So we will do it depending on market conditions and in the best way to preserve our P&L. In this sense, it is very important to highlight that we have expensive liabilities maturing in the coming quarters that will help to mitigate the cost of new Embrel liabilities. As a reminder, we have close to EUR 1 billion of covered bonds at 2.5% cost maturing by the end of this year, the 2019, and another EUR 1.3 billion of expensive client deposit at 4.3%, cost maturing at the end of 2020 and the beginning of 2021. These maturities will more than compensate the issuance of Embrel instruments helping to improve our profitability and results.

[Jaime Hernández Marcos, Head of Investor Relations]

Moving on to the P&L. The next one is on fee income. If we can provide some kind of guidance for this year.

[Pablo González Martín, Director General of Finance]

Net fees remained almost flat in 2018. However, excluding the accounting reclassification of Union del Duero, they grew 2.4% year-on-year. In 2019, we wound half of this reclassification impact, so we expect to continue improving fees. In the fourth quarter, fees from nonbanking products fell EUR 4 million, owing to market conditions, but this effect was compensated by strong payments and collection fees. Going forward, if market conditions improve, we could expect overall net fees to grow close to mid-single digit.

[Jaime Hernández Marcos, Head of Investor Relations]

The next one is regarding associates. If we can explain the low level in the fourth quarter and what should be the quarterly contribution in this line going forward.

[Pablo González Martín, Director General of Finance]

Associates income was below previous quarters in the fourth quarter mainly because of seasonal factors and some nonrecurring and positive results last quarter. However, we believe that 2018 levels should be a good reference going forward, even improving from those levels in 2020 and 2021.

[Jaime Hernández Marcos, Head of Investor Relations]

The next one, similar to this one, is for the details on -- if we can provide the breakdown of other revenues and expenses. Please, Pablo.

[Pablo González Martín, Director General of Finance]

Yes. This line includes several issues. Let me explain you the main ones. On one side, we include here the income from our real estate rentals that compensates in full the maintenance cost of such assets that are also included. Other relevant impact this quarter is the deposit guarantee fund. Such contribution, together with the DTA levy, represented EUR 51 million this quarter. The remaining results are explained by the real estate servicer on Union del Duero, which together, amounted to EUR 7 million in the fourth quarter. Finally, there were other smaller results that all together represented a negative EUR 2.6 million. So all together explained the EUR 46 million charge in this quarter.

[Jaime Hernández Marcos, Head of Investor Relations]

Moving to asset quality. We got some few questions regarding the cost of risk. What is the expected cost of risk for this year and what would be the more normalized level?

[Pablo González Martín, Director General of Finance]

As you saw, the loan loss charges in 2018 were very positive. We released EUR 4 million in the year, which is really good news and consequence of our coverage levels and secure position of the nonperforming loans. So going forward, we expect the cost of risk to remain very low in the coming years.

[Jaime Hernández Marcos, Head of Investor Relations]

And also regarding the nonperforming assets, we got a question asking us or telling us that they fell significantly in the quarter, mainly NPLs. If we can provide details regarding that decrease, the quarterly decrease of nonperforming assets and specifically nonperforming loans.

[Pablo González Martín, Director General of Finance]

Yes. In this quarter, we sold some small portfolios, including 2 small NPLs portfolios that together represented close to EUR 200 million. This is why the NPL balance has accelerated its pace of decrease in the quarter. This is part of the ongoing disposals strategy. These portfolios, together with the regular management of NPAs, explained the continued decrease of NPAs that this quarter was more balanced towards the NPLs.

[Jaime Hernández Marcos, Head of Investor Relations]

Also on the problematic exposure. They're asking us that once that we have almost reached 2020 target, what will be the new target going forward? What they can expect for these balances going forward?

[Pablo González Martín, Director General of Finance]

We will continue to reduce our NPAs. As you saw, our strategy is to continue selling small portfolios, although if we see interesting to sell a bigger portfolio, we will do it. We analyze all alternatives, and we go ahead with those that we believe add more value, trying to balance the pace of decrease with the results of the disposals. This strategy implies that some quarters, the nonperforming loans fell more than the foreclosed assets and the opposite. It is not a regular decrease because it depends on the characteristics of each quarter disposals. Following this strategy, we have managed to reduce by 22% or close to EUR 1 billion our gross nonperforming assets in this year. Bear in mind that in the last 4 years, we have reduced our gross nonperforming assets by almost EUR 4 billion, half of the balances we used to have in 2014. It is also important to realize that owing to our coverage levels in terms, NPAs represent only 2.7% of total assets, meaning that the book value of these assets is EUR 1.5 billion, of which only EUR 0.6 billion are foreclosed assets and EUR 0.9 billion are nonperforming loans. The pace of decrease has been very positive, and we expect this trend to continue next year.

[Jaime Hernández Marcos, Head of Investor Relations]

Although it's somehow already answered, there is a specific question on this matter asking us if we are considering carrying out a big deal as our competitors have already done.

[Pablo González Martín, Director General of Finance]

I think I already mentioned. We analyze all opportunities, and we will execute those ones that we believe add more value considering the 2 priorities that I mentioned: on one side, to continue decreasing the problematic exposure; and on the other side, the results of those disposal.

[Jaime Hernández Marcos, Head of Investor Relations]

The next one is for Enrique. If we can update the dividend policy going forward.

[Enrique Sánchez del Villar Boceta, CEO & Executive Director]

Okay. We don't have a formal dividend policy. The dividend is proposed in the annual general meeting every year considering the solvency position and the results. As I mentioned during the presentation, we will propose a 40% payout this year. This was the payout target for 2020. But we have generated more capital than we expected, and in our view this is a good way of improving shareholders' return. Going forward, this could be a good reference, but it will be decided every year.

[Jaime Hernández Marcos, Head of Investor Relations]

There are some other questions on solvency issues, Pablo. Regarding TRIM or IFRS 16, if we're going to expect some impacts from this or other issues ahead.

[Pablo González Martín, Director General of Finance]

TRIM is related to the review of the IRB models, so we still apply standard models to all of our portfolios so we won't have any impact from TRIM. Regarding IFRS 16, we own most of our branches and offices, so we don't expect any material impact from IFRS 16, either. So it is worth noting that most of the sector headwinds in capital, like the mentioned, TRIM, or Basel IV, in our case are more a tailwind rather than a headwind. So we have, as you know, very high risk weights. So all these changes will be even positive for us.

[Jaime Hernández Marcos, Head of Investor Relations]

There is one question on the situation on -- if we can update the situation regarding the migration to IRB models.

[Enrique Sánchez del Villar Boceta, CEO & Executive Director]

We have been working and developing our IRB models for some years. We have a calendar that, for the time being, we are accomplished. We already used the models for monitoring purposes, and we have already taken the first steps towards formal application. If things evolve as we expect, we don't face any obstacles. We believe that we might have the approval next year, although this always depends on the supervisor reviews.

[Jaime Hernández Marcos, Head of Investor Relations]

One final question, Pablo, maybe for you, regarding the SREP levels. If we expect any changes or an update on the SREP requirement.

[Pablo González Martín, Director General of Finance]

We have not received the formal letter yet, so we cannot be more specific regarding this. But under our view, there shouldn't be changes. But we will need to wait for the official confirmation in the coming weeks before we can confirm that.

[Jaime Hernández Marcos, Head of Investor Relations]

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