Earnings Call Transcript - BBVA Q2 2023

Operator, Operator

Good morning. And welcome to BBVA Second Quarter 2023 Results Presentation. As in previous quarters, I am joined today by Just as a reminder, both the results report and the presentation we will be following today are available to you on our website. I'm joined here today by Onur Genc, our CEO, and Rafael Salinas, CFO. They will discuss quarterly figures and then we will open the lines to receive your questions. Thank you very much for your participation. And now I turn it over to Onur.

Onur Genc, CEO

Thank you, Patricia. Good morning, everyone. Welcome and thank you for joining our second quarter 2023 results audio webcast. Before going into the presentation as you already know, yesterday, we announced that Rafa, who's sitting next to me here after more than three decades, is going to be leaving his CFO position and executive responsibilities as of September the first. Rafa has been clearly one of the very important contributors to the success of BBVA. He will continue to be connected with the bank in non-executive responsibilities. But before we start, I want to extend my heartfelt congratulations to Rafa on his last results presentation. So that's a positive note, Rafa. In terms of the results, let me start with Slide 3. On the left-hand side of the slide, you can see our net attributable profit reaching EUR 2,032 million. I would like to highlight that we are posting another record of quarterly results, surpassing for the first time the EUR 2 billion mark, which is also 11% above the same quarter of last year. These results bring our earnings per share up to EUR 0.33, a 13% year-over-year increase. This growth rate is higher than that of net attributable profit due to the share buyback programs that we have been executing. The graph on the right side of the slide shows our capital ratio at 12.99%, above our target range and well above our regulatory requirements. Moving to Slide 4, our tangible book value per share plus dividends continues its outstanding evolution, showing a 15% year-over-year growth and 2.3% growth in the quarter alone. Regarding profitability on the right side, we continue to improve our excellent profitability metrics, reaching 16.9% in ROTE and 16.2% in ROE in the first half of the year. These figures are the highest over the last ten years. We remain one of the most profitable European banks and we keep advancing on this front every quarter. Moving to slide five and focusing on the second quarter results, this is the summarized P&L and you can see the year-over-year comparisons here, especially the second column from the left in the table. What stands out is the impressive 38.8% year-over-year increase in gross income and 54.6% growth in operating income, which explains the net attributable profit growth of 35.3% in constant euros, excluding nonrecurring impacts. In terms of the quarterly evolution in the rightmost columns on the table, the net attributable profit increased both in constant and current terms, by 30.5% and 10% respectively, when compared to the first quarter of this year. Moving on to slide 6, comparing the first half of the year, 2023 versus the same period of last year. Once again, I would highlight the positive gross income evolution, with a 35.2% growth in constant euros, led by a 39% increase in NII. We also observed great performance in fee income, growing 13%. Overall, this strong-income growth, coupled with positive jaws and solid underlying risk metrics, led to an outstanding recurrent net attributable profit of EUR 3.9 billion, which implies 35% growth in constant euros and 23% in current euros. This is for the first six months. Slide 7 sheds light on the revenue breakdown and quarterly evolution. We are pleased with the trends here; we call them ‘chimenea’ in Spanish, which translates to good trends. Net interest income is growing strongly by 38% year-over-year and 9.4% compared to last quarter. Additionally, we see solid activity growth, driven largely by improvements in customer spreads. The positive evolution of net fees and commissions is also noteworthy, increasing by 11% year-on-year and 7.9% compared to last quarter. Net trading income is being driven by developments in global markets and the hedged effects we implement. Excellent growth in gross income is evident, showing a 39% year-over-year increase and 15.6% quarter-over-quarter growth. Shifting to slide 8, let me focus on Spain and Mexico. I want to highlight our conviction for continued revenue growth in these core geographies. On the left side of the slide, you can see strong loan growth in the most profitable segments in both Spain and Mexico. We observe very healthy growth in the key portfolios we hold. In the second block from the left, customer spreads for both countries are improving. In Spain, it has increased during the last year to 3.12%, while in Mexico, the customer spreads continue to increase in a gradual but consistent manner, reaching 11.93% this last quarter. Consequently, you can see strong NII growth year-over-year in both countries, showing 51% growth in Spain and 24% growth in Mexico in constant euros. The quarter-over-quarter NII decline in Mexico reflects a very deliberate strategy. We are promoting off-balance sheet customer funds as an alternative to time deposits, thereby boosting fee income while managing deposit costs. Additionally, we have a larger ALCO book in Mexico, locking in higher rates for longer in anticipation of lower rate scenarios. This strategy implies higher wholesale funding costs in the quarter, but we believe it has added significant value to us moving forward. It is also worth mentioning the sound underlying trends in core drivers for Mexico's NII activity and customer spread. We expect to continue growing NII and our core revenues in the coming quarters in Mexico. On slide 9, we continue showing positive jaws at the group level, good performance in gross income is helping, with a 35.2% increase while costs are growing by 21.6%, primarily due to the impact of high inflation countries. On the right side of the slide, you can see our efficiency ratio, which shows an outstanding improvement to 42% from 46.7% last year. We clearly remain one of the most efficient European banks. Slide 10 highlights that our asset quality metrics remain within guidance and show stability amid sound activity growth and higher interest rates. Our cost of risk marginally decreased to 104 basis points and remains in line with our expectations of a cost of risk around 100 points in 2023. The NPL ratio stands at 3.4% and the coverage ratio remains stable at 80%. Slide 11 explains our capital position. Our CET1 as of June remains sound and well above our SREP requirements. The main impacts of the quarter are outlined, such as 58 basis points from results generation, 31 basis points from dividends accrual and AT1 coupons, and 26 basis points due to RWA growth, primarily in Mexico. Overall, we expect even more capital generation in the coming quarters, despite challenges faced such as the Turkish Lira devaluation impact. On page 12, we showcase strategic progress regarding new customer acquisition. We acquired 5.4 million customers in the first half of 2023, doubling the client acquisition we achieved five years ago. Furthermore, 65% of customers acquired during this period were through digital channels, significantly up from 11% in 2018. Moving to slide 13, we reaffirm our commitment to sustainability, having channeled EUR 19 billion in sustainable business this quarter. This brings our cumulative total to EUR 169 billion since 2018. We remain committed to channeling a cumulative EUR 300 billion towards sustainability by 2025. On the right, you can see the strong results from our sustainability efforts across various customer segments. On slide 14, we talk about our positive impact on society through our primary lending activity. Over the last year, we increased our loan book by 8.4%. We assisted over 70,000 families in buying their homes and financed the growth of over 263,000 SMEs and self-employed individuals. We also mobilized EUR 7.4 billion for inclusive growth initiatives. Finally, on slide 15 regarding our long-term targets announced on Investor Day, we are on track to realize them. We expect cost-to-income improvements from the original goal of 42%. For ROTE, we anticipate reaching high teens compared to our original goal of 14% in 2024. Our expectations for tangible book value per share plus dividends are mid-teens growth versus our original target of 9% average annual growth from 2021 to 2024. We expect customer targets to be 40% to 50% above the original goal and for sustainable business targets to align with our latest upgraded goals. Overall, we expect to comfortably beat all original goals.

Rafael Salinas, CFO

Thank you, Onur. Good morning, everyone. As Onur anticipated, we are very pleased to share with you a strong set of results, showcasing solid operating trends across the board. Our organic profitable growth strategy remains well on track across all geographies. Starting with Spain on slide 17, we see very positive dynamics in activity. Loan growth continues to be driven by sound dynamics in the most profitable segments, consumer and SMEs where we are consistently gaining market share. In the mortgage portfolio, payments remain high, deleveraging the portfolio despite sound new lending inflows. We are showing a strong pre-provision profit growth, with core revenues driving our P&L. NII growth stepped up in Q2, leveraging improving customer spreads. The loan portfolio repricing continues while the deposit pass-through into retail spending remains non-material, keeping deposit costs well-contained. We confidently upgrade our NII guidance for 2023 to 40% to 45%. Positive underlying dynamics on fees are also noteworthy due to the solid contributions from asset management and higher credit card fees. Our efficiency ratio is improving to 41.8% as of June, reflecting positive jaws in the geography. Lastly, asset quality trends have remained stable and in line with expectations, with costs raised at a standard 27 basis points. Moving to Mexico on slide 18, the economy is performing better than expected, with strong employment momentum supporting activity growth and asset quality metrics. Loan portfolios show positive evolution, particularly a 5% quarter-on-quarter growth in the most profitable segments like consumer loans, credit cards, and SMEs. Net attributable profit at record levels exceeds EUR 1.3 billion, with core revenue achieving a plus 26% year-on-year growth. NII trends remain solid with connectivity growth above 11% year-on-year. We are more confident about our NII guidance, expecting high teens growth in 2023. Fees are growing above 20% year-on-year, particularly from credit cards and asset management and insurance business. Our efficiency ratio stands at very low levels of 30.4%, with asset quality trends in line with expectations, having a cost of risk stable at 286 basis points and NPL ratio at low levels of 2.5%. Overall, Mexico continues delivering extraordinary results. On slide 19 regarding Turkey, following the election in May, we see steps toward more orthodox economic policies with rates hiked by 900 basis points. We have noticed easing of regulatory measures in the banking sector, while currency interventions have decreased. In anticipation of these policy changes, we have reduced the duration gap of our balance sheet in Turkish Lira to only 61 days. In the first half of the year, net income in Turkey reached EUR 525 million but showed a 10% decline in the quarter, driven by currency depreciation since March. Despite this, asset quality continues to improve with strong recoveries in the commercial segment and limited NPL entries in retail. Overall, Turkey demonstrates the potential for favorable trends moving forward.

Onur Genc, CEO

Thank you, Rafa. We aim to finish the presentation soon and move to Q&A. We are very pleased with the quarterly results and confident about our path forward. So let’s transition to the Q&A session. Patricia?

Operator, Operator

Yes, sir. Thank you, Onur. We are now ready to start the Q&A session. The first question please.

Operator, Operator

Yes, we have our first question from Maks Mishyn from JB Capital.

Maks Mishyn, Analyst

Is about net interest income in Spain. I was wondering when you expect the customer spread to top out and what kind of customer spread should we think about when the repricing is done for loans and deposits? The second question is on the loan book; corporate loans and CIB product growth have actually slowed, and the loan book declined quarter-on-quarter. Is this due to more competition, less demand, or simply seasonality? Lastly, regarding capital, could you update us on the expectations for headwinds and tailwinds in the second half of the year? With the 70 basis points of excess capital after the buyback, why haven’t you executed more?

Onur Genc, CEO

Very good. Let me take them very quickly. The spread topping depends obviously on the beta. We guided you in previous calls that the beta would be around 20% to 25% by year-end. We believe it will be better than that. Our latest expectation is that it will be around 20%, so topping will not happen until at least the first quarter of 2024. Two-thirds of our mortgage book reprices every six months, and one-third does so annually. Therefore, rate adjustments take two months before you are rebought. For the corporate CIB aspect, it is more about less demand than increased competition. Concerning the 70 basis points of excess, we are committed to profitable growth and attractive distributions to shareholders. We are seeing this as a continuous process, where we deliver, invest, and reward shareholders. We believe we are a 17% ROTE business and will continue to create value for shareholders as valuations remain where they are. We don’t feel rushed, and it’s a continuous process.

Francisco Riquel, Analyst

Thank you for taking my questions and congratulations to Rafa. My first question is about Mexico. Despite NII and customer spread being strong, we saw a slight decline in net interest income. Can you explain the non-customer NII impacts in the second quarter? You mentioned ALCO and wholesale funding, how does that work? And do you think the first quarter was the peak of the NII cycle in Mexico, or can we expect growth in NII in the coming quarters? My second question relates to capital generation, which has been limited this quarter with retained earnings offset by growth in risk-weighted assets. Why aren’t you generating capital organically with record earnings and a 17% ROE? Lastly, in terms of the currency impact you mentioned in the second quarter, can you elaborate on the hedging strategy, costs incurred today, and how you see the trade-off?

Onur Genc, CEO

Let's start with Mexico's NII. The slight decline is due to two aspects. First, there was a EUR 3 billion move towards off-balance sheet funds, which boosts fee income while keeping our cost of funding limited. Second, we increased our ALCO book by EUR 3 billion in Mexico, which necessitated higher wholesale funding costs, which impacted NII. However, despite these two factors, we anticipate higher NII in both the third and fourth quarters and are guiding you to expect high teens for the year overall. Regarding organic capital, our situation was affected by an extraordinary quarter, primarily due to Turkish Lira devaluation. Despite this situation, our hedging strategy effectively saved capital. Consequently, our sensitivity is now back to normal levels, and we still anticipate significant organic capital generation moving forward.

Benjamin Toms, Analyst

You've upgraded your 2024 ROTE guidance from 14% to high teens. Can you elaborate on what high teens entails? Also, is there potential for further growth in ROTE after 2024? Finally, with your current ownership in Garantia at 86%, can you rule out increasing your share in the short to medium term?

Onur Genc, CEO

Regarding your first question about ROTE, we believe high teens translates to roughly 17% to 19%. We are working hard to achieve the highest possible ROTE within that range. On the topic of increasing ownership in Garantia, we are comfortable with our current stake and do not have plans for further increases.

Marta Romero, Analyst

Thank you. Two questions for me. Firstly, on the Mexico ALCO, how do we measure your interest rate risk appetite and what is the end game for the ALCO book in that region? Secondly, how can we understand the strong resilience in Spain’s fee income compared to peers? Do we expect prices to go down or are we simply gaining customers? Lastly, can we get guidance on expected earnings next year?

Onur Genc, CEO

The yield we have on the ALCO book is a primary driver for its growth. Currently, we intend to continue managing our sensitivity and have seen a decrease from 3.4% to 2.5% for a 100 basis points change in rates. While there’s potential for further ALCO growth, significant increases are not expected at this point. Regarding Spain's fee income, we’ve witnessed solid growth across multiple segments, especially in asset management and credit cards. Our margins remain strong, and we do not anticipate pricing reductions. I encourage everyone to look at both ROTE and our guidance on tangible book value for overall valuation insights. Regarding earnings guidance, we are aiming to exceed 2023's figures, but specific numbers will be determined in early 2024.

Ignacio Cerezo, Analyst

Thank you for the updates. I have three questions. The first is regarding the buyback authorization process with the ECB. Will the timeline differ this time around? Secondly, can you clarify the recent performance of the NII in Turkey despite margin compressions? Thirdly, do you foresee a normalization of the cost of risk across the group in 2024 compared to 2023?

Onur Genc, CEO

The timeline remains standard; we expect a four-month review process for the ECB. As for Turkey's NII, it can be impacted by CPIs, where favorable trends from the local currency have helped maintain its performance. And yes, we anticipate a lift in the overall cost of risk in 2024, reflecting our growth strategies across various sectors.

Operator, Operator

Thank you for all your questions. We'll conclude the call here. Our entire team remains available for any further inquiries. Thank you very much, and Onur, do you wish to close the session?

Onur Genc, CEO

Thank you all for joining today. I appreciate your interest and questions. Have a wonderful day and summer. See you next time.

Rafael Salinas, CFO

Thank you for the kind wishes and thank you for your engagement.