Unicaja Banco SA

MAD:UNI

Earnings Call Transcript 2019-Q4

[Jaime Hernández Marcos, Head of Investor Relations]

Good morning. Please be welcome to the yearly results of 2019 of Unicaja Banco. I'm Jaime Hernández from Investor Relations. And first of all, as we usually do every quarter, please allow me by beginning confirming that this morning, before opening the market, we have proceeded to publish on the website of the Spanish Securities and Exchange Commission the quarterly financial information and these results.This quarter, besides the quarterly results, we'll share with you the main lines of our 2020/2022 strategic plan. The presentation will be given by Ángel Rodríguez de Gracia, our CEO; and Pablo González, General Finance Director. As you will see on Page 2 of the presentation, we'll have a split this presentation in 4 sections. Ángel will begin with key elements of the quarter. Pablo will continue with the detail of the results and the business evolution, to continue later with evolution of the asset quality, the liquidity position and solvency. Finally, Ángel will take the floor again to show you the main axis of the strategic plan and the objectives that we have set ahead of us.So having said that, and without further ado, I'll give the floor to our CEO, Ángel. You have the floor.

[Ángel Rodríguez de Gracia, CEO, Director General of Recovery of Asset & Non]

Thank you, Jaime. Thank you very much. Good morning, everyone. Thank you for participating, and I'm available to clarify any doubts you may have. I'll begin the presentation, talk about the global results of 2019. In that regard, I should highlight that regarding the business, the most remarkable thing is the growth of undoubtful receivables, the Brexit trend given of the last few years, even though in the private sector, balances have gone down due to more early amortizations, and the total of normal loans has grown up by 0.7% in 2019 compared with the higher drop of 1% last year. That has been possible, thanks to the new operations. In the year, development of operations has grown by 28%. And if we exclude the public sector operations, the growth has been 18%, so focusing mainly on the individuals sector and the corporates sector. Regarding off-balance sheet funds, this year, they grew by 2.2%. And on-balance sheet funds have also grown by 0.9%, highlighting the demand deposits that go up by 7%. Regarding the results, the global result of the year has been EUR 172 million, which is an increase of 13% from the former year. And I'd like to highlight, even though Pablo will detail and assess the behavior that took place in the last few quarters, but I'd like to highlight the following: the interest margin has gone down, is being offset pretty much by the increase of fees and dividends, and to a lower extent, by the increase in the results of the equity method companies. Regarding the rest of income, ROF has gone down by 3%, but that drop has been offset by the line of other products and charges, marked mainly by the results of the real estate business that in this line represent per year about EUR 55 million. Due to all this, gross margin also goes up slightly. And together, with a drop of 2% in the total operating costs, the operating margin growing about 6%, and the operating costs have gone down this year by 0.2%. And we also have the early retirement plan that -- at the closing of the year. It have been implemented by 40%. We plan the remaining 60% will be implemented in 2021, 2022. Plus you should highlight credit risk cost, which is pretty much at 0 -- below 0.05% and last year was also around 0, even though we have sold portfolios of doubtful loans for about EUR 400 million. On the other hand, we should highlight that availing of the surplus of the sale of Ausol, the results of financial operations, we have nonrecurring significant provisions for about EUR 230 million. These provisions, mainly for restructuring costs, will allow us to reduce the cost basis until 2022 and improve the future profitability. Corporate tax has also favored the evolution of the P&L accounting is virtually 0 since already in taxation of the results by the equity method and the nontaxation of the sale of the business equities.From a perspective of credit quality, liquidity and solvency. I'd like to highlight the significant reduction of the problematic assets during the year has been higher than 30%, representing now a net of provisions of 1.8% of the total assets of the group reduction, but besides, take place at the same time as we improve slightly its coverage from 57% to 58%. It's also remarkable that the default ratio has decreased during the year from 6.7% in December to 4.8% currently. In the last 2 years, that ratio has improved by 4 points. Regarding liquidity, we continue having a very comfortable position with a LCR higher than 300%. On solvency, we have managed to finish the year with a CET1 ratio of 15.6% (sic) [ 15.5% ] and 14% fully loaded. These ratios do not include any positive additional impact that is the [indiscernible] of the canceled operation. And as we confirmed last year through relevant facts, we will present insolvency about 35 additional basis points insolvency besides is calculated with the same methodology by applying weighting of assets that are relatively high.Last, I'd like to highlight, as we'll see next, that these results have come from position of the -- of solvency have allowed us to improve the percentage of results that we will suggest give out as dividends in the next shareholders' meeting from 40% last year to 45% this year. It's the biggest dividend payout in the history of the bank, and it represents a dividend increase, together with increase of the results, of about 25% from the former year. Compared with the average surplus of the bank in 2019, it represents a profit of 5.6% per year, as we'll see next. Our official objective will be to continue growing and improving the remuneration to our shareholders. Pablo, if you agree, please continue with the review with a bit more details on the results of this quarter, and then I'll take back the floor to mention the hints of our strategic plan.

[Pablo González Martín, Director General of Finance]

Well, thank you very much, Ángel. So I will continue on Page 7. Here, we show our P&L account for the quarter and for the year. This quarter, I'm going to focus on this slide in order to elaborate on some nonrecurring developments that occurred during quarter 4.Starting out with our quarterly profit and loss account. Even though there was a 1.6% fall in income, fees went up by 2%, a bit more. Afterwards, we're going to elaborate further on this. As for other income, I would like to highlight trading income, which was quite high as in the previous quarter. This has enabled us, together with other extraordinary income, especially Ausol capital gains, to allocate provisions in order to increase future profitability. As for the other products -- or other revenues and expenses, this compares quite well with the previous quarter in the same period, mainly due to good results in the real estate business. As for costs, the quarter reported similar figures. However, in the case of impairment, another result, perhaps we have more comments to make.As for credit provisions, the quarter reported very good results. We allocated some provisions, thanks to the results obtained from transactions carried out. As for foreclosures, we allocated EUR 8 million, mainly due to some seasonality that is normally typical of Q4. And as for other provisions and other items, we have a charge of EUR 113 million. Here, we have -- including EUR 110 million on account of Ausol capital gains and other provisions, especially restructuring costs. All in all, they account for EUR 190 million, and the purpose of that figure is to improve future profitability. A significant part of such provisions will translate into future savings that we will discuss further when talking about the strategic plan. Ángel will describe that. As you may remember, virtually all of Ausol capital gains are net figures and that somehow accounts for the fiscal impact reported during the quarter. In annual terms, you will see that the interest income came down slightly. However, fees continued to show a positive trend with an increase of 5.5% over the fiscal period. As for other income, in addition to a positive evolution of the dividend payout and the equity method, I would like to highlight the traded income as a result of which we have been able to allocate significant provisions, particularly restructuring costs, which, as we have explained before, will enable us to extend cost savings coming from the previous plan, as we shall explain when describing the new plan. So the total cost comes down again during this fiscal period at 2% with an accrued reduction of 8% over the past 3 years. Thanks to an effort made in provisions and cost-cutting plans, we believe that this trend will remain over the next 3 fiscal periods.Finally, the fiscal period provisions have been affected by specific positive and negative impacts. In the case of credit and foreclosure provisions, we have allocated low amounts over the year, partly aided by the positive impact of the sale of some portfolios and the income arising therefrom. However, in the case of other provisions and results, we have included -- or we have made a special provision effort, particularly mitigated by some capital gains from Ausol, which will enable us to enhance efficiency and our P&L account in the future.If we now move on to Page 8, like in previous quarters, we show the breakdown of our customers' funds. As you can see, total funds continued to grow, reaching virtually to EUR 51 billion, reporting a 1% year-on-year and quarter-on-quarter increase. As for balance sheet funds, we should highlight an increased number of demand deposits, which go beyond EUR 29 million in December 2019 after reporting an increase of 7% during the fiscal period. Off-balance sheet funds also went up slightly, about 2% in 2019. Now on Page 9, you can see the evolution of loans. Both graphs on the left usually reflect the evolution of loans in gross terms. They came down slightly, mainly due to a drop in nonperforming loans, which came down by 30% during the fiscal period. On the right-hand side, you can see information without nonperforming balances, that's to say, loans and normal conditions. They went up by 0.7% in 2019, reporting growth for the first time after a long time. On the right-hand side of the bar, you can see this information broken down by segments. You can see that there was a drop in Corporate and in mortgage loans in the -- during the quarter, whereas the balances remained steady in the so-called consumption segment. So this quarterly evolution can be accounted for due to a higher increase of early amortizations for both corporates and mortgage loans. All in all, we can see that in the mortgage segment, we continue to fall, mainly because of the same reason due to the volume of early amortization since the front book continues to be positive, as you can see on the following page.So on top, on the left on Page or Slide 10, you can see how the new credit transactions improved in 2019 by 28%, reporting growth across segments. In the case of individuals, growth was 9% and at very stable interest rates. As for corporates growth was even greater, as you can see from the front book, surpassed EUR 2 billion, reporting an 11% growth compared to the previous fiscal period.If we now go to Slide 11, you can see interest income, which has come down by 1.6% during the quarter, mainly due to a lower yield of loans affected during the quarter by the appreciation of loans at a lower interest rate and a lower yield coming from nonperforming loans after some sales since part of them were nonperforming loans that were actually up-to-date payments. This impact has been offset with an increase in the portfolio and lower liabilities, including the tiering of the ECB. As for customers' income, at the bottom of this slide, you can see the stock and the front book, and you can see how the average interest rate of new transactions continues to be above the profitability of the current stock.Slide 12, shows the current debt portfolio position at the closing of the year. In Q4 2019, there was a slight growth in portfolio balances, mainly due to some purchases carried out in the structured portfolio. As you can see, the characteristics of the portfolio went from 1.23% in the previous quarter up to 1.28%, which is quite a highlight because we have attained this while we earned capital gains over the fiscal period. As you can see, we have additional liquidity. And therefore, we see -- if we see opportunities to buy some -- more portions of portfolio, we can do so. However, this will depend on how the debt markets evolve.On Slide 13, we show a breakdown of fees which reported a very positive behavior over the quarter and during the year. Fees earned increased virtually 6%, vis-à-vis 2018, mainly boosted by collection and payment fees that went up by virtually 12%. Net interest improved by 5.5% during the year. And during the quarter, we are talking about an increase of 6.7% compared to the previous quarter in the same period. This is a very positive growth. And as we will explain, when talking about the strategic plan, we expect to keep this in the future.With regards to costs or expenses on Page 14, once again, we have been able to cut down on costs across the group, which is quite a positive trend, taking into account the current context of the industry. Savings went up to 4% vis-à-vis 2017 and 8% compared to 2016. This is a trend that, as we mentioned before, we intend to keep over time into the future. Ángel will explain the savings that we expect to attain during the execution of our plan. This is justified by the structure adjustments we have cut it out over the past years because you can see that there has been a change in the number of staff members and branch offices.And in closing, with the sectional results on Page 15, we provide you an update on the impairments and provisions that have been made. As I mentioned before, it should be mentioned that all in all, we allocated EUR 230 million during the fiscal period in order to increase future profitability, out of which EUR 40 million were allocated in Q3 2019 and EUR 190 million during Q4 2019. All such provisions, mainly restructuring costs, will enable us to render additional savings in the strategic plan time line, as Ángel will explain later on. This is an effort made in provisions that has not affected our dividend payout or net income because this has been mitigated in the P&L account through extraordinary trading income and outsource profits.At any rate, I would like to highlight that in 2019, credit-specific rate costs adjusted by the portfolio results was just 2 basis points vis-à-vis 5 basis points the previous period. This is quite an uptrend that can be explained, as we mentioned before, by the bank's hedging levels. We are not going to talk about the quality of assets.On Slide '17, you can see the evolution of nonperforming assets, or NPAs, the balance of which has been reduced quite significantly over the past 2 quarters. Such a reduction has been supported by the sale of portfolios announced in July last year, out of which approximately 50% was recorded in the third quarter and the remnant in this quarter, leaving this balance of NPAs stand at EUR 1.35 million and the default ratio at EUR 4.8 billion. Such figures are quite far away from this reported 5 years ago when we reported EUR 4.8 billion in nonperforming loans. Since then, we have been able to reduce such a balance by EUR 3 billion. On the other hand, at the bottom of the slide, you can see the quarterly evolution of gross entries and recoveries by type. Here, you can see the significant fall reported this quarter since the execution of sales was coupled by some growth entries that were relatively low compared to previous quarters that's reducing the NPL balance by 14% during this quarter. On Page 18, you can see the breakdown of NPL hedging by segment. Overall, hedging was reinforced over the quarter up to 54%. This is very important, taking into account that the bulk of the quarter's reduction was due to the sale of the portfolio. This means that we have not sold those balances that were better provisioned. It should be highlighted that such a hedging level is highly conservative. If we take into account that 87% of delinquent balances have mortgage security and that the appraisal value of such securities virtually twice as much as the current, delinquent or nonperforming balance. On Page 19, you can see a breakdown of foreclosed assets at the end of the fiscal period. After the strong reduction in the -- in Q3 as a result of the reclassification of foreclosed assets reclassification and subsequent sales, we continued to decrease them down to EUR 1.120 billion with a book value of just EUR 400 million. Despite these significant reduction, the hedging level was -- stood at 63%. And as it normally happens with nonperforming balances, this means that we are not selling just assets with the highest hedges. But also, we continue to allocate provisions in such that you can see on the graph on the top of the slide, on the right. So bearing in mind that we have mentioned on Slide 20, you can see that this translates into a reduction of the regular assets that continues to speed up. In 2019, the total number of nonperforming assets totaled EUR 2.5 billion, reporting a reduction of EUR 1.1 billion over the past year. In net terms, this implies a ratio of 1.8% over total assets. Total hedging of these NPAs goes up to 58%. This evolution is also reflected in the so-called Texas ratio shown at the bottom, which, as you can see, continued to slide down for an additional quarter, standing at 46.7%.As for our liquidity position, as shown on Page 21, the situation continues to be quite comfortable and similar to previous quarters. The loan-to-deposit ratio stands at 71%, LCR above 300% and SFR above 140%. As for wholesale maturities in November, we had some securities in the amount of EUR 468 million maturing with a cost of 3.4%. Such maturity translated into savings that were used to mitigate the cost of the emission of Tier 2. Remember that, in November, we issued subordinated debt in the amount of EUR 300 million that was quite demanding, and that was done at a cost of 2.875%.And in closing, on Page 22, you can see the group solvency situation where ratios have continued to improve over the quarter, supported by the formalization of outstanding portfolio sales, placing ratios quite above regulatory requirements, as you can see on top, on the left. Here, we compare them with the regulator's requirement. So as you can see, we have an excess average amount over the total capital of EUR 1.121 billion, capital ratio going significantly up over the quarter, approximately 150 basis points. And this is justified by the mission of Tier 2 in the amount of EUR 300 million at the beginning of November.On the right, on top, you can see the evolution of CET1 fully loaded ratio that reported a growth of 20 basis points for the quarter, mainly due to risk-weighted assets as a result of selling nonperforming loans portfolios. At contrast, there was a slight fall as a result of lower capital gains at reasonable -- at fair value that was mitigated by the overall quarterly results. All in all, therefore, the CET fully loaded stands at 14%, this being one of the highest in the industry and the highest among listed banks in Spain, showing, on the other hand, an increase of about 50 basis points over the quarter.So now Ángel will resume the presentation in order to share with you the highlights of the new strategic plan.

[Ángel Rodríguez de Gracia, CEO, Director General of Recovery of Asset & Non]

Thank you very much, Paulo. Before I deal with the new plan and its details, please, let's go back to Slide 24 to look back and explain how Unicaja Banco has improves as a bank in the last few years. [indiscernible], keeping the main provinces a market share in deposits of around 30% for levels insolvency around the lease entities with a CET1 ratio of about 14%. We have continued with a strong discipline of cost reduction, managing to reduce costs by 8% after the successful integration with Banco EspañaDuero. The commercial activity in the last few years has increased regarding credit production of about 20%, and we have much reduced level of NPAs from 4.9% (sic) [ 4.5% ] at the end of 2016 to 1.8% at the end of 2019. In June 2017, we had an IPO, and that allows us to generate a good trust with the investing markets as reflecting the last issuances made that allowed us to increase our commitment with shareholder payouts that has been multiplied times 4.5 since 2016. All that has been done in a context environment that has been quite complex for the sector with negative interest rates. Sectoral leverage that still continues in some segments, just the mortgage segment, in our specific case, in regions with unemployment rates that are 10% higher than the national average, where default ratios, still in March 2019, some provinces are above 10%. Even though we have managed to achieve these milestones, it shows that we have evolved as a bank. But now we're a better institution than we were in the past. If we go to Slide 25, you see the new strategic plan is supporting our values. Reinforcing them is something we aspire to in our institution to become the leading financial institution in our original markets, a reference point in quality, proximity and trust to customer service, committed to sustainability, value creation and sustainable finance. On Slide 2016 (sic) [ 26 ] regarding sustainable finance, we show different agreements that have been assigned in this area such as the UN Global Compact. We have also creation of the sustainability together with CSR and our management instruments, and we are preparing within the axis of the strategic plan an action plan on sustainable finance. And here, we want to put in order the modular aspects of the bank's transition to as a management that includes the aspects related to sustainability. On Slide 27, we show the 5 axes of the strategic plan that will guide the strategy of the institution for the next 3 years. The first axis has to do with the business. First, we want to grow and diversify the business model, taking -- mainly focused on the client and profitability. Secondly, we want to improve efficiency of processes and systems, supporting ourselves on digitalization. Thirdly, the third axis has to do with risks, to manage risks in a cautious and agile way. Fourth, the fourth axis has to do with technology, empowering data and analytics as a key element in business efficiency. And the fifth axis has to do with the human level, adopting new ways of working and cultural evolution.On Slide 28, we show the main lines of work of the business axis. This focuses on high-value customers, specialized business and transformation of the distribution model to meet the customer's needs. We want to improve by increasing customer engagement, and we have set as an objective to source 10% more payrolls, increase the profitization per client to 20%. As a result, we're going to develop advanced customer segmentation to better help us know their needs and will also develop [ value ] proposals and differential distribution models for corporate and personal banking segments. On the other hand, to empower specialized business, we'll consider commercial agreements that help us improve the product offer and empower the generation of customer margin. All this translates into specific objectives with growth for credit investment higher than 2% in undoubtful credit, 4% in off-balance funds, and 6% in insurance premiums, and 10% in means of payment turnover. We'll also transform our distribution model. We'll empower a multichannel model and will evolve with an urban areas model with larger offices. We'll also promote the creation of a remote care unit for customers with high-value and high potential, aiming to get 65% of our customers operating in our digital channels in 2022. That rate is currently 48%. On Slide 29, on efficiency axis. We focus on improving productivity and digitalization of internal processes to achieve cost reduction that would be currently around 3% and by the end of 2022 will represent a comparable savings of EUR 70 million compared to 2019. The net effect will be about EUR 50 million after the CPI. And that will allow us to improve productivity per branch around 40% to 45%; and average profitability of the branches as well; as well as channeling through 300 financial agents, right now, we have about 150; reducing administrative burden about 50%; and doing 50% of transactions through mobile devices. On Slide 30, we see the priorities of the risk management axis for the institution. And mainly, it tries to compatibilize the growth with a low-risk cost. We're going to do that with solid irregular assets and delinquency or default management, in line with what we've done in the last few years. At the end of 2016, we had EUR 5.7 billion. And we have reduced that figure of irregular loans by EUR 1.1 billion per year. We want to improve the response times for credit, improve analytics regarding risks and go towards IRB models that we hope to complete by the end of 2022. We have objectives. In this case, the default ratio will be below 2.5%. The net NPAs will be lower than EUR 600 million. The risk cost, we estimated as 30 basis points. We think that is cautious, taking into account the current situation of default ratios. In all default ratios, 95% has mortgage warranties or collateral. And subjective doubtful are about 30%, but they are not in arrears. The coverage, we want to keep it in 50% of default regarding our customers who want to develop analytic capabilities of our risk teams. On Slide 31. We see analytics and data axis that aims to improve availability and exploitation of data in the whole organization. There are 2 elements there, one to devote EUR 190 million to continue with technology and analytical transformation. And we proceed to train new skills for more development and advanced capabilities for exploitation. On Slide 32 related to the axis of talent and culture. We have the following actions. First, specialization of new sales figures affecting about 500 roles and new technical capabilities for institution that has a market for talent sourcing of about 70 to 100 people as well as promoting an agile working culture, affecting about 100 employees in conception of projects; and launching an incentive and career development plan linked to achieving the plan that will affect 100% of the bank's units. On Slide 33, we have a macroeconomic hypothesis of the plan, which stem from the basis of a moderate growth, decrease of 1.6%, 1.8% of the growth by 2022 with unemployment evolution of 12.3% (sic) [ 13.3% ] to 12%. There's a slight decrease. And our CPI, from 1.5% to 1.6%; and the other way will go from 0.30% to 0.11%. Slide 34 sums up the plan's results. What do we foresee in the plan? Well, we want to have profit growth of -- with 10% per year for the next 3 years, having an efficiency target below 60% in '22 and a recurring profitability higher than 5% for the next 3 years. And if we had to do it regarding the CET of 12%, that will be higher than 6%. Regarding the balance sheet and solvency targets, as I said earlier, the aim is to continue strongly management credit quality and keeping the default ratio below 2.5% by 2022, having a CET1 ratio above 13%. Currently, we're around about 14%; complying with our MREL targets of 20.6%, representing eligible liabilities issuance of around EUR 1 billion with a considerable favorable impact of the IRB if appropriate. And on the other hand, we want to improve dividend to our shareholders in each of the following years where we expect to give dividend payout more than half of the results [indiscernible]. Last, I'd like to quickly go over with you on our priorities. First of all, we have proven that Unicaja Banco has the ability of generating results and that's quite remarkable. That allowed us to make an important provisions without the net result or our solvency being affected. Thanks to this provision method, possible due to financial position and the cautious management we've had in the past, we're able to continue yet some of the year reducing our cost base and confirming that in the future, we'll be able to keep this trend. Therefore, we think that the structural profitability in the future will keep improving. And we will do so by keeping a very cautious balance sheet position with solvency, liquidity and coverage comfort positions. So just like in the past few years, we think we'll continue improving dividends and shareholders' payouts. And as a conclusion, I'd like to finish by saying that to achieve all these targets that we just mentioned, the bank has a very advantageous position. We have made the necessary provisions to carry out the plan, and we have lightened surplusing of portfolios that are quite significant, in that we have a regular assets coverage that is quite high in the sector, and our solvency is quite comfortable and high among the solvency in the market in Spain. Thank you very much, everyone.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you very much, Angel and Pablo. If you agree, we will now address the questions that we have received through the webcast.

[Jaime Hernández Marcos, Head of Investor Relations]

As you can imagine, this quarter, we have plenty of questions, perhaps more than often with regards to the strategic plans, so we will try to group such questions in order to answer as many questions as possible. So starting with the income statement of the P&L account and talking specifically about the income. Michael from Berenberg asked about the drop in terms of interest income over the quarter. Pablo, would you like to address that?

[Pablo González Martín, Director General of Finance]

Yes. Well, during the presentation, we mentioned that interest income went down by 1.6% during the quarter, the main reason being lower -- low interest accrual. This is somehow justified by the repricing effect and, to a lesser extent, by a reduction in mortgage loans with floor interest rate and also due to a lower accrual in NPAs that we have cut it out at the closing of the previous fiscal period.

[Jaime Hernández Marcos, Head of Investor Relations]

Pablo, with regards to, again, interest income, some analysts, such as Jose Coll from Santander and Daragh from Keefe, ask us about our guidance for fiscal 2020 within the strategic plan horizon.

[Pablo González Martín, Director General of Finance]

Well, as you imagine, it's very difficult to provide an interest income guidance because, as you know, this is affected by external factors outside of our control that will have a direct impact on such guidance. For example, future evolution of interest rates, the evolution of debt markets, appetite and quality credit demand. These are just some factors that will affect the evolution of interest income significantly in the forthcoming months. However, there are certain things that are within our control and taking into account a conservative approach, we expect that interest income should remain stable in 2020. That is to say, should there be any variations whether positive or negative, we do not expect them to be too significant. If by 2020, it's difficult to hit the hypothesis for 2021 and 2022, there's not much we can say since there are external factors that will have greater volatility. However, I can say that our business plan profitability improvements are not supported by improved interest income because, actually, we have considered very prudent hypothesis, which were also realistic and conservative because we understand the current interest rate scenario we are in. What's more, the interest rate curve that we have used up-to-date is slightly higher, even though it went back a little bit lately. So in summary, and as I have explained, Unicaja Banco is in a very comfortable balance sheet position in terms of both solvency, credit quality and liquidity. And therefore, as Angel explained, the plan is mainly focused on recurrent profitability, which we expect to improve gradually by earning more on account of fees and by cutting down on costs. We do not expect this actually to increase mainly as a result of better interest income figures.

[Jaime Hernández Marcos, Head of Investor Relations]

Javier Alonso from BBVA and also [ Jo Lan Corporacion ] have questions about volumes and the drop of credit over the quarter.

[Ángel Rodríguez de Gracia, CEO, Director General of Recovery of Asset & Non]

Well, this was a specific drop over the quarter, which was quite extraordinary compared to previous fiscal years and this happened mainly with regards to corporate credit. Over the past 15 days, this drop was virtually 1%. We have also observed that during the first 20 days of January, there was quite a significant recovery, more or less tantamount to the previous fall. So mortgage loans came down by a similar figure, and we cannot say actually that this is extraordinary.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you very much, Angel. This one -- there are similar questions concerning volumes foreseen in the future. Jose Coll from Santander and [ Echaveria ] from Exane asked us about segments and when we expect credit to resume growth in the future?

[Ángel Rodríguez de Gracia, CEO, Director General of Recovery of Asset & Non]

Well, we expect credit to start growing, and we believe that such growth will be seen in consumer loans and corporates, where our market share is lower than our overall market share. On the other hand, our experience in the consumer loan market, regardless of our share, is quite positive. Defaults in these transactions virtually -- reached virtually 1.5% or even less.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you very much, Angel, Pablo. Let us continue. Talking about income, Marisa Mazo from GVC asked us about the portfolio strategy and our unrealized gains strategy.

[Pablo González Martín, Director General of Finance]

Well, the debt portfolio strategy has not been changed compared to previous quarters. We continue to keep portfolio carried at amortized cost, the purpose of which is to invest excess structural liquidity in order to generate additional income through interest income. This portfolio is mainly invested in European sovereign debt, especially Spanish debt with medium-term and long-term duration periods. The average financial duration is 6.4 years in order to cover the balance sheet interest rate risk, which is a result of having some funds at fixed interest rate and private equity at variable interest rates. On the other hand, and taking into account the interest rate situation, we could have some hedges over interest rate and credit with regards to portfolios. In the third quarter or in the -- at the beginning of the fourth quarter, we tried to realize some unrealized gains in a scenario of low long-term interest rates, and those sales were reversed through acquisitions at the closing of the year in view of an increased liquidity and a rebound in interest rates reported at year-end. As for the portfolio carried at fair value, with some changes in the shareholders' equity, the strategy remained unaltered. This is an opportunistic portfolio still. The purpose is to earn capital gains in the fixed income market. And in a quarter -- in Q4, this portfolio did not vary much in terms of the risk undertaken. So this is at the bottom of the range, we could say, given the spreads and interest rates in the credit market. As for unrealized gains, you asked me about that, well, at year-end, they were slightly above. Actually, these gains are carried at amortized costs. So these gains were slightly above EUR 500 million. If we take a look at their evolution during early 2020, prices continued to go up.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you very much, Pablo. In connection with this question, and we got another question. As for the contribution of these portfolios in the future, how do we expect them to behave?

[Pablo González Martín, Director General of Finance]

Well, we believe that in the forthcoming quarters, these portfolios contributions will be slightly above EUR 50 million quarter-on-quarter, along the lines of what we reported. In 2019, we expect that the interest income contribution will be similar to that of 2019 during this fiscal period.

[Jaime Hernández Marcos, Head of Investor Relations]

[ Jo Lan from Auto Corporacion ] and Marisa from GVC ask us about the tiering impact.

[Pablo González Martín, Director General of Finance]

Well, tiering has already had a positive impact during Q4 because it enables us to apply a 0% interest rate to excess liquidity up to 7x our minimum reserves, which translates into more than EUR 1 million. If we compare this with a minus 0.50, that would be the cost of liquidity as per the ECB prior to tiering. If we talk about EUR 2 billion, we are talking about EUR 10 million annually, approximately.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Andrea Unzueta from Crédit Suisse, she asks whether we can clarify our view as to sensitivity to interest rate.

[Pablo González Martín, Director General of Finance]

Let me answer that. Well, as we already described during this presentation and in previous presentations, one of our strategies has been to reduce, in the medium term, the potential negative effect on interest income in a low interest rate scenarios. So this change affected the evolution of interest rate evolution since February last year. And gradually, we have been implementing actions in order to adjust such figures. As for the short term, the negative impact of drop in interest rates was quite significant on our interest income because we are going to report lower income in our credit portfolio and we have a floor of 0 among retail customers. Therefore, this increase can have a positive impact because it will be reflected on profit and not on costs. If we take into account minus 10% basis points on this curve, once we allocate this to the balance sheet or once we post this to the balance sheet, we are talking about a level similar to the previous quarter of 2.5%.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Angel, maybe this question is for you. From Jose from Santander asks us about our position with regards to fees and commissions.

[Ángel Rodríguez de Gracia, CEO, Director General of Recovery of Asset & Non]

Well, during 2019, fees and commissions went up by 5.5%, mainly supported by transactional services and insurance. Our target for the strategic plan is to increase fees and commissions about such a percentage. We are talking about 20% to 25% in cumulative terms to be fulfilled in the next 3 years. There are certain initiatives such as insurance, means of payment and some of the balance sheet funds where we believe that we still have some room for maneuvering.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you very much, Angel. We have several other questions about income regarding trading income and other income. Pablo, should we start with trading income because, again, it was quite high during Q4? So what should we expect as to trading income?

[Pablo González Martín, Director General of Finance]

Now, well, once again, this year's trading income was relatively high. We insist it was just as high as in the previous fiscal period. And as in previous fiscal periods, we used unrealized gains in order to mitigate negative impacts on the statement that were not recurrent. So partly, these impacts were offset but realizing some capital gains from the portfolio, especially the fixed income portfolio. One of the advantages of such a low interest rate scenario is that our capital gains are high. Besides that, the market volatility offers a number of opportunities that we're trying to harness as much as possible.As you very well know, the debt market reported some highs, and we try to realize a portion of our gains because we believe that by managing them actively, we can somehow offset margins. Recurring trading income in the future should be expected to be slightly lower compared to previous fiscal periods because, among other reasons, we do not expect to carry out significant allocations or extraordinary allocations. In 2018 and in 2019, we allocated EUR 380 million in order to implement actions to become more efficient and in order to increase our recurring business profitability in the future. For that reason, we will continue to reduce our cost structure all the way through 2022. So going back the question. The -- trading income for the previous fiscal period is not a reference to be taken for the future. However, we also stated the same last year. So I cannot be too categorical in my statement as to the final trading income. This will depend on the opportunities provided by the market.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you very much, Pablo. As for other income, do you have any general comments that you would like to make with regards to future forecasts?

[Pablo González Martín, Director General of Finance]

Well, you are talking about other revenue and expenses. In Q4, we have -- well lease revenues slightly above maintenance costs. In the past, this was already offset. Now it's slightly higher. We also have contribution to the deposit guarantee fund in the amount of EUR 45 million, the DTA rate, standing at EUR 45 million. That's a contribution to the guarantee fund and DTA rate, and EUR 10 million corresponds to income from the real estate business. Especially from [ Lihir ], our servicer, and then there is an additional EUR 10 million coming from other entries or captions. These are income from Duero Vida. It is true that the profit was better than last year, mainly due to the real estate reported profit, which shows a positive trend of the sale of real estate. In Q4, some additional adjustments were made that were not carried out this year. And together with the contribution to the deposit guarantee fund, which was slightly lower, that accounts for the difference. Regarding income, different from the margin and fees and commissions, in the future, we should expect a trading income that perhaps will not be as high for the reasons we have just explained. Other income from the equity method and other will be quite steady and may be divided into 2. We should add the score, once again, that profitability will increase through the plan as a result of increased fees and commissions. As for other income, we believe that they will be more stable. We should expect that positive results from the real estate business will actually slide down gradually, even though they continue to increase as happens with trading income. So if we combine this with a reduced cost, we will be able to attain our increased profitability target.

[Jaime Hernández Marcos, Head of Investor Relations]

We have several other questions about costs. Jose Coll from Santander, Fernando from Barclays, Michael from Berenberg, from Mario from Fidentiis have several questions, Daragh from Keefe, [ Jerome ]. All have questions about our expected savings arising from the strategic plan compared to the -- our previous plan.

[Pablo González Martín, Director General of Finance]

As we said before in the presentation and now we're announcing, the total of the savings or the costs, we expect to materialize in the plan's horizon, will be around EUR 7 million, that's gross. That's in 2022 in the last year of the plan. And in net terms, taking into account the impact of the summation of increase of salaries, because in that team [indiscernible] it is always much more difficult to calculate. It doesn't -- it depends how much on our actions is conditioned by the other variables, as you may know. But by making some reasonable hypothesis regarding the evolution of the salary inflation and other concepts, we may understand there will be around EUR 50 million -- EUR 45 million, EUR 50 million. That is in net terms, which could be relevant. And regarding this EUR 70 million, what we've done was to update the formal plan. We're not going to keep 2 plans. We have updated the estimates of award spending from the former plan and we've added no additional effort that we think can be taken in the measures that we're going to take. So the EUR 70 million gross savings that we mentioned here do include the ones that were pending from the former plan.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. Regarding costs. I'm going to just ask some other more specific questions that may not -- not have been answered, just in case. And they're asking us to clarify where savings will come from and how will they materialize in the P&L and whether we can give a bit more details on the EUR 190 million that we've shown, that we're saying that we're going to use for transformation. Could you please just give us a few more details?

[Pablo González Martín, Director General of Finance]

So I think that here, the important bit is the ability of a bank and the ability to generate resources to take these measures. The plan is a 3-year plan. And as we take the specific measures and we can communicate them, mainly the most relevant ones, we'll inform you about them. So right now, the most important date is that we have carried out the regional effort in provisions, mainly, as you may imagine, regarding restructuring costs and efficiency improvements. And that will allow us to extend and increase savings of the institution in the terms that are -- that I've already mentioned. Angel also mentioned them. Having said that, we can advance that savings will not materialize linearly as they take place or as we carry out the different plan -- action plans that we have within the plan. These savings will materialize. But the commitment and the ability to carry them out has been clearly detailed by Angel.

[Jaime Hernández Marcos, Head of Investor Relations]

There's one more question and then maybe you could keep talking about other things, but here's more question about costs. Can you give a bit more detail regarding the EUR 190 million provision in the quarter that is nonrecurrent?

[Pablo González Martín, Director General of Finance]

Well, I've already mentioned it, but most of it, most of that provision will be for restructuring. We've also done provisions of other sorts. But in other hands, there are provisions that will allow us to reduce costs and improve efficiency of the situation, forward-looking. And we need to take into account that to this EUR 190 million, we need to add EUR 40 million provision in the provision fall in the former quarter. Take into account that we have provisioned EUR 140 million a year before. So all that's been accumulating. And that's such significant volume of provisions has been done without the evolution of the net profit because, as you know, it goes up significantly the easier and there was no effect there. So there is a clear proof of the ability to generate results of a bank and the focus of the business plan and management is to improve the future recurring profitability of the bank.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. So Angel, maybe this question is a bit more for you. Maria Paz Ojeda from Banco de Sabadell, Jose Coll from Banco Santander and also Marisa Mazo from GVC are asking whether we could clarify what's been the cause of recurring risks and expectations for the future risk cost?

[Ángel Rodríguez de Gracia, CEO, Director General of Recovery of Asset & Non]

Well, the cost of recurring risk this year has been around EUR 12 million, representing about 0.04%. Last year, that was nearly nil. And 2 years ago, that was about 0.15%. So the cost of risk is extremely low. However, in the strategic plan, we're considering a cost of about 0.30%. And somehow, as you were saying earlier, that's based on the makeup of the doubtful portfolio, mainly mortgages and the high component of subjective doubtful that are up to late payments.

[Jaime Hernández Marcos, Head of Investor Relations]

Okay. Thank you, Angel. Maybe the next question could also be for you. It comes from Jose Coll from Santander, Ignacio Ulargui from Exane asking about whether we consider selling more NPA portfolios and nonperforming assets and whether we have already formalized all the sales announced in July.

[Ángel Rodríguez de Gracia, CEO, Director General of Recovery of Asset & Non]

Yes, all those have been finalized. The last ones were done in December. And regarding the portfolio sales, we cannot say anything right now, as you may imagine, due to confidentiality. However, with the provision levels we have in our past experience, the alternative of portfolio sales for us will represent an additional cost to the provisions that we've already made.Regarding the strategic plan, on the other hand, the net amount that we have are provisions for EUR 1 billion. And it is to reach a balance of about EUR 600 million in doubtful that is not taking into account in the last 3 years. The level of NPA reduction has been EUR 1.1 billion. The figures are quite cautious here.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Angel. Daragh Quinn from Keefe, Maksym from JB, and [ Jo Lan ] from -- are asking about the capital in the quarter and expectations in the year regarding capital.

[Pablo González Martín, Director General of Finance]

Well, in the quarter, the capital ratio, CET1 fully loaded, as you may have seen, has increased 20 basis points. And here, we have the positive of the lower APRs, mainly as we announced due to the NPA portfolio sales in the third quarter, already got out of half of the doubtful ones that we sold, EUR 190 million, but we still had pending the other half as well as half of the sale for closed assets for EUR 160 million, to remind you that were reclassified at the time to restate investments, and they come out of the item of NPAs, but not the total amount regarding capital. In the fourth quarter, we've already taken out the total of the portfolio of sales, both for NPLs and foreclosed assets. And together with the drop of volumes in the last quarter, that explains the lower APRs. On the other hand, we have the impact regarding the mark-to-market of the debt portfolio in the third quarter. The figures were around 50 basis points. And after the recent evolution of the market it has gone to 40 basis points. All in all, the CET1 fully loaded stays at 14%. As you may know, it's one of the highest -- actually the highest in the listed entities. In terms of total capital, besides the evolution of the CET1, we take into account this volume in debt issuance. So altogether, the total capital fully loaded is 15.5% and the greater one in our case is significantly higher, up to 17.2%. Besides, as we announced last week, the Caser operation could generate around 35 basis points of additional capital. Therefore, forward looking, we do expect to keep the CET1 fully loaded at comfortable levels. And as we've shown on the plan, now is above 13%. And as usual, we like to remind you that given the high densities we have in our credit risk, Basel IV will not affect negatively. Since we are in the standard model, we do not have impact from TRIM. Besides, we continue having some positive levers such as the approval of the advanced models. And here, I'd also like to highlight that a commitment of the plan and the management is to pay the shareholders, either through dividends and dividend increase. And also -- we're also assessing our other alternatives that we understand are favorable for shareholders such as share repurchase -- share buyback.

[Jaime Hernández Marcos, Head of Investor Relations]

Well, thank you, Pablo. Related to this, Daragh Quinn from KBW and Carlos Peixoto from Caixabank, and Mario Ropero from Fidentiis are asking about the possible update about the situation of possible approval of IRB models, advanced models.

[Pablo González Martín, Director General of Finance]

Well, regarding what we've said in other quarters, we can reconfirm that we continue IRB. We continue using our IRB internal models in executive management and the operational management, and we keep developing new processes to increase our usage.Regarding the approval, as we've said in the past, this is something that does not depend on us. We'd rather be cautious. And we'd rather not give specific deadlines but all times. But when we have more details and whenever we can confirm this, we will. What I can say, though, is that once again, we're complying again with the milestones we had in our [ renewal ] plan. And if everything goes according to plan, we do expect that by the end of the year, we'll have the first internal models. And also related to solvency.

[Jaime Hernández Marcos, Head of Investor Relations]

[ Pablo Pacorica ] is asking from [ Alanta ] and [ Yolanda ] Corporation is asking us to give an update on the sales treasury stock and the amortization plans for shares in the future.

[Pablo González Martín, Director General of Finance]

Well, as you know, we currently have authorization to buy up to 3% of the treasury stock. But we do not have authorization to amortize those shares. At the end of the year, as you may appreciate in the financial information of the institution when it gets published, in the details, treasury stock represented about 0.9% of the total shares circulation. So we're now opening on potential amortization of shares makes a lot of financial sense for entities with strong capital ratios such as ours. And the commitment of the bank is to improve how come on the remuneration to shareholders, our capital position is allowing us to do so. And we like to do it as efficiently as possible. As you know, we are assessing alternatives and when we have news, we will communicate them.

[Jaime Hernández Marcos, Head of Investor Relations]

Pablo, another question for you from Daragh of Keefe, Maria Paz Ojeda from Sabadell, Carlos Peixoto from Caixabank. The ROE target, is it adjusted to CET1 fully loaded, that is lower than the CET1 fully loaded target? Could you please explain that and confirm that the intention is to improve 10% of the net yearly result?

[Pablo González Martín, Director General of Finance]

Well, here, you already know the bank's philosophy. We think that it's appropriate to manage the bank with a comfortable solvency position. But this is something that kind of penalizes the reported profitability. The ROE target was adjusted to a CET1 fully loaded of 12% because it's a reference point in the market and a level that is a bit lower for some, where some consumer banks operate. So we do it only for profitability to be more comparable. However, regarding solvency, we're maybe a bit more cautious since we prefer to manage the business with a CET1 fully loaded higher than 15%.To sum up, we do have some room. We're at 14% in the business plan and precision rating the organic capital. And I link also the second part of the question here, the guidance is to improve the net profit in double digits, around double digits year-on-year, not at the end of the period. And obviously, that entails an additional generation of organic capital that will allow us to improve shareholders' remuneration.

[Jaime Hernández Marcos, Head of Investor Relations]

Thank you, Pablo. So I'm going to group these questions due to lack of time regarding consolidation, M&A, news that appear on the press, regarding some proximity with Liberbank, has the bank's story changed after the decision of the bank foundation when Unicaja had to constitute the reserve fund. Could we talk about that regarding M&A?

[Pablo González Martín, Director General of Finance]

Regarding the foundation decision that is the decision of a shareholder, we cannot comment on it. We do perceive it as something positive under any shareholder. They want to increase their stake in the bank. Seems to be a recognition of the value in the ability to generate value for the shareholders. Having said that, as where a potential operation, I can confirm that there is no contact with any other institution. And we're actually focused on implementing our plan. Having said that, as we've said in the past, we're always open to assess any operation that maybe bring value to our shareholders.

[Jaime Hernández Marcos, Head of Investor Relations]

Well, very well. Angel, Pablo, thank you very much. Due to the lack of time, we'll leave it here. But if there were any other additional questions, so if you need additional information, please do get in touch with the Investor Relations team. And we thank you for your time. Thank you very much and see you next quarter. Thank you very much. Thank you.