Earnings Call Transcript
BANCO BILBAO VIZCAYA ARGENTARIA, S.A. (BBVA)
Earnings Call Transcript - BBVA Q2 2024
Operator, Operator
Good morning and welcome to BBVA's Second Quarter Results Conference Call. I'm joined today by Onur Genc, our CEO, and Luisa Gomez Bravo, the Group CFO. As in previous quarters, Onur will start reviewing the group figures, followed by Luisa, who will go through the business areas results. Then, Onur will give a brief update on the offer to Sabadell shareholders, and finally, we will open the line to receive your questions. Thank you very much for participating, and now I turn the call over to Onur.
Onur Genc, CEO
Thank you, Patricia. Good morning to everyone. Welcome and thank you for joining BBVA's second quarter 2024 earnings webcast. Let's jump into the presentation as always, starting with Slide number 3. On the left-hand side of this page, you can see our net attributable profit in the quarter reaching EUR 2,794 million showing obviously another quarter of record results. This figure is 38% above the results of the same quarter of last year and 27% above last quarter results. Our results represent EUR 0.47 earnings per share, 28% quarter-over-quarter, and 42% year-over-year growth, both higher growth rates than the ones of the net attributable profit due to the positive impact of the share buyback programs that we executed. The graph on the right-hand side of the slide shows the excellent tangible book value per share plus dividends growth. We had a 20% increase year-over-year and a 2.4% growth in the quarter. We always highlight the importance of this figure to all of you. We are very happy to see a solid number in the quarter, the 2.4%, despite all the market impacts, especially the upward movement of the interest rate curves and the Mexican peso depreciation in the quarter. On Page number 4, our CET1 capital ratio at 12.75%, reflecting a 7 basis points decrease in the quarter, impacted by market factors, as I just mentioned, but also due to a very positive development in our view of very strong lending growth in our core markets, leading to market share gains. I'm sure we can discuss that in the Q&A as well. The 12.75% CET1 ratio is much above our target range and regulatory requirements. Regarding profitability, on the right-hand side of the page, we continue to improve our metrics, reaching an outstanding 20% in return on tangible equity and 19.1% in return on equity in the first six months of 2024. We have been eagerly looking forward to this day of reaching the 20% threshold on return on tangible equity for so many years, and it makes us truly happy getting to 20%. On Page number 5, more important than in our view the 20%, is the consistency of how we got there and the comparison with our competitors, which is, to us, the most important measure of success. I do think we are doing really well. On the left-hand side, you see the evolution of our first half profits in current euros. We achieved almost the mark of EUR 5 billion of net attributable profit in the first six months of this year, managing to do it by increasing our six-month profits by nearly EUR 1 billion consistently every year. And then on the right side of the page, we wanted to compare our return on tangible equity evolution to that of our European and Spanish peers. As you can see, our 20% ROTE and its positive evolution clearly stand out. We are clearly one of the most profitable banks out there. Moving to Slide number 6, this page is a summary of the pages to follow where I will talk to you about the activity, the P&L, the revenue growth, costs, and asset quality. Allow me to directly move to the next slide to discuss details in the respective pages. So Slide 7, as always, the summarized P&L of the quarter. You can find the year-over-year quarterly evolution in the second column from the left in constant terms, and right next to it, in current terms, the third column from the left. Basically, the P&L continues its impressive evolution, thanks to the strong revenue growth, with an increase in gross income of 31% in constant and 28% in current euros, obviously maintaining positive jaws. As a result of all of this, net attributable profit at the last line item grows 37% in constant and 38% in current euros. Slide number 8 shows the summarized P&L of the first half. I would once again highlight the very positive gross income evolution, which increases 31% in constant euros and 23% in current euros. The strong gross income growth, coupled with the positive jaws, as is true for the quarter, led to an outstanding recurrent net attributable profit of almost EUR 5 billion, implying 37% growth in constant and 29% in current terms. Slide number 9 provides insight into the revenue breakdown and the quarterly evolution. The excellent trend in revenues continues, showing the strength of our revenue generation capacity quarter after quarter. First, our net interest income continues to increase, driven by strong activity growth, especially in the last part of the quarter, and good customer spread management. Second, we see outstanding evolution of net fees and commissions, increasing 35% year-on-year and 4.4% versus last quarter, mainly on payments and asset management. Third, we experienced a very strong quarter in the net trading income, benefiting from a good quarter in the global markets unit and from the positive mark-to-market of the FX hedges of the Mexican peso in the corporate center. All in all, excellent growth in gross income, again, 31% year-over-year and 13.9% quarter-over-quarter. Moving to Slide number 10, we provide the breakdown of that gross income by geography in current euros. Importantly, gross income is growing year-over-year at double digits in all of our markets: 29% growth in Spain, 14% growth in Mexico, 47% growth in Turkey, and 16% growth in South America. Despite a relatively large depreciation in the Mexican peso, 8% depreciation in the quarter, we managed to keep revenues stable in current euros thanks to robust activity growth that came towards the end of the quarter. You also see recovery trends in Turkey and South America, both now posting their best quarterly figures in current euros of the last few quarters, which implies better prospects looking into the future. Moving to Slide number 11, let me focus on activity and growth in loans, which has increased at group level to 10.7% year-over-year in June. So we see great activity this quarter. This is very good news for the coming quarters, also considering that we deliver this growth in a profitable manner. In Spain, we have been anticipating mid-single-digit growth for the loan book, and in Mexico, loan growth has accelerated to 12.6% year-over-year. Moving to Slide number 12, on the left-hand side of the slide, we continue showing positive jaws at the group level, thanks to the good performance of gross income, and costs are growing 19.5% below the group's average inflation. On the right side of the slide, you can see our efficiency ratio, which shows an outstanding improvement to 39.3%, breaking the 40% barrier. This is the most efficient European bank. Slide number 13 states that asset quality remains in line with our expectations and shows relative stability in a context of strong activity growth in the most profitable segments. Our cost of risk slightly increased quarter-over-quarter to 142 basis points. The increase is mainly explained by the aforementioned activity growth in highly profitable but high cost of risk retail segments and emerging market geographies. NPL ratio improved slightly to 3.3%, and our coverage ratio is also broadly stable at 75%, affected partially by some portfolio sales. On capital, the CET1 ratio remains well above our target range despite decreasing by 7 basis points quarter-over-quarter in a quarter, largely constrained by a significant market-related impact, and positively marked by very strong growth in lending activity. Main drivers of the quarterly evolution, first, strong results generation, 73 basis points; second, dividend accrual and AT1 coupons, minus 39 basis points; third, minus 40 basis points due to the RWAs growth. The Basel IV impact reduces from our previously guided level from below 40 basis points to below 15 basis points, still preliminary. In conclusion, our ability to keep generating capital and continue reinvesting in growth at very attractive return on tangible equity levels remains intact. We clearly maintain our 40% to 50% payout distribution policy. Moving on to customer acquisition, we acquired 5.6 million new customers in the first half of this year, with 67% being digital acquisitions. Another pillar of our strategy, sustainability, is delivering above expectation. In the first six months of 2024, we channeled EUR 46 billion in sustainable business and a total of EUR 252 billion since 2018. This quarter, we set decarbonization targets for 2030 in two new sectors, adding to the other 8 sectors with existing targets. We also have helped 75,000 families buy homes and awarded more than 340,000 new loans to SMEs and self-employed individuals. Overall, we promote employment and welfare in society. And finally, let me summarize the key takeaways: a quarter with record results and key milestones reached. Now for the business areas update, I turn it to Luisa.
Luisa Gomez Bravo, CFO
Thank you very much, Onur, and good morning, everyone. We're starting with Spain on Slide number 20. Spain has delivered outstanding record results in the second quarter of 2024, exceeding EUR 1 billion in the quarter, which is an amazing milestone driven by an outstanding performance in all P&L headings on the back of strong commercial momentum. The sound activity trends already observed in the first quarter of the year have been confirmed in the second quarter. New loan production has increased by 12% in the first six months of the year, leading to a 2.4% loan book growth above the system average. We are reviewing upwards our loan growth expectations for 2024. We now expect low single-digit growth for the loan book in 2024 and to continue gaining market share. This is clearly reflected in the P&L, which shows impressive year-on-year and quarter-on-quarter growth driven by strong core revenue increases. NII continues to grow on a quarterly basis, leveraged on activity growth and effective price management. Fees have also shown a positive performance this quarter, mainly from asset management and credit cards. Expenses remained flat quarter-on-quarter, and efficiency continues to improve with an outstanding 35.4% cost-to-income ratio in the first half of the year. Cost of risk at 38 basis points, fairly in line with our guidance. All in, these solid underlying trends have led us to improve our P&L guidance for the year. We now expect NII to grow at low teens. Remember, we had previously mentioned double-digit growth. Now expecting NII to grow at low teens on the back of strong activity growth and higher expectations for rates by the end of the year. We are extremely happy with the results of Spain this quarter and the half-year improved outlook for P&L. Moving on to Mexico in Slide 21, we see very strong earnings from Mexico reaching EUR 2.9 billion in the first half of the year backed by strong activity dynamics and effective price management. In the quarter, I would like to highlight the strong business dynamics in terms of new lending flows. New flows have grown by 13% quarter-on-quarter with very favorable trends across the board. Loan growth has accelerated in wholesale portfolios, while positive performance in retail lending has remained strong. This led to a balanced growth between segments, leading to a total loan growth of close to 13% year-on-year, while NII growth is close to 7% year-on-year, with the customer spread relatively stable in the quarter. Managing the cost of deposits remains a key priority for BBVA Mexico, considering our large deposit base. We have relied more on market financing to fund activity growth, leading to higher wholesale funding costs. There are sound underlying trends in core drivers for Mexico NII, supported by strong activity and wide customer spread. We expect NII to continue growing over the coming quarters. Fees remain at very high levels supported by robust activity and transactionality. Expense growth has decelerated in the quarter. In summary, strong revenue growth drives efficiency ratios to a remarkable 30.4%, lower than the last quarter and an outstanding mark for the first half of the year. Asset quality reflects an increase in impairments consistent with the economic cycle and our growth strategy focused on retail segments. We expect the cost of risk to stand at around current levels in 2024. Now going to Slide 22 for Turkey, the franchise has reported a net profit of EUR 351 million in the first half of the year, supported by higher NII benefiting from nominal activity growth and improved customer spread in Turkish lira, favored by higher lending yields. Higher fees mainly from payment services, brokerage, and asset management have strengthened performance. Very significant lower hyperinflation adjustment has been seen, thanks to the deceleration of the quarterly inflation, which went down to 8.4% in the second quarter versus 15.1% in the first quarter. We see a normalization in cost of risk due to ongoing macro rebalancing, which is expected to be manageable within our guidance. Expectations for net income in the second half of 2024 are in line with slightly higher expectations than the first half under continued normalization of regulatory and macroeconomic conditions. Slide 23 for South America indicates sound earnings contributions in the first half of 2024, achieving a net profit of EUR 317 million, paving the way for gradual recovery. During the first half of the year, revenues showed positive trends; sound NII performance driven by loan growth focused on the most profitable segments and improved customer spread across the countries, alongside strong evolution of fees and higher NTI. These trends were somewhat offset by higher hyperinflation adjustment in Argentina, but with a positive quarterly trend as inflation has come down significantly. Expense growth has continued to be pressured by inflation, but quarterly cost growth has slowed down, mainly in Peru and Colombia. Cost of risk remains stable at 312 basis points, in line with macroeconomic expectations for the region. We expect the cost of risk for the year to stand below current levels but slightly above our previous guidance of around 280 basis points. Now back to Onur for final remarks.
Onur Genc, CEO
Thank you, Luisa. The main takeaways from the presentation of the results on Page 24, let me not take time repeating the messages, but in our view, it was a quarter that made us really happy, as Luisa was also saying, reaching elusive milestones that we thought were unreachable some years ago. Delivering 20% in ROTE, Return on Tangible Equity, a growth of 20% in tangible book value per share, plus dividends, and breaking the 40% barrier in efficiency. Amazing numbers in that sense. I know many of my colleagues from BBVA are listening to this call. A shout-out to our people of BBVA. You are doing an amazing job. You should be very proud of yourselves.
Operator, Operator
We are ready now to start with the live Q&A session. So first question, please.
Operator, Operator
Our first question is from Maksym Mishyn from JB Capital. Please go ahead.
Maksym Mishyn, Analyst
Hi, good morning. Thank you very much for the presentation and taking our question. So my one question would be on the cost of deposits in Spain. I was wondering why they declined and how were you able to move part of term deposits back into sight because their weight has reduced in the quarter as well. Thank you.
Onur Genc, CEO
Maks, thank you for the question. It's coming down because the curve is coming down a little bit. Some of the large corporate and even public sector clients that we have are more or less automatically linked to the curve. Given that, large segment clients reduce the cost of deposits for that segment, the reflection of the weighted average is in that 91 basis points coming down to 87 basis points.
Operator, Operator
Thank you, Maks. Next question please.
Operator, Operator
The next question is from Francisco Riquel from Alantra. Please go ahead.
Francisco Riquel, Analyst
Yes, thank you. My first question is on Mexico. The NII is flattish in the quarter despite the 6% growth in loans. You mentioned that you have resorted more to wholesale funding. I wonder what the profitability of the new lending is now that the loan-to-deposit is above 100%, and if you are front-loading these issuances or not. If you can please elaborate on what's the NII trajectory going forward now that the loan-to-deposit is above 100%. On the Sabadell bit, I wonder if you can comment on the condition that you set regarding the antitrust approval. Will you go ahead with the tender offer regardless of any outcome that may come from the antitrust authorities, or will you agree if the CNMV were to wait for the antitrust approval before authorizing the tender offer?
Onur Genc, CEO
Do you want to take the Mexico one, Luisa?
Luisa Gomez Bravo, CFO
Yes. In the quarter, we managed the deposit base in Mexico in terms of wholesale deposits and wholesale funding, depending on where the pricing is. Sometimes we rely more on more costly deposits, which feed through the spread, and sometimes we rely more on wholesale funding. What happened this quarter is, as you mentioned, activity growth has increased significantly, especially on the wholesale side. We've gone to the wholesale financing, but at the same time managing the cost of deposits, decreasing some of the more expensive deposits as well. Going forward, we're comfortable with the profitability that we have, and we'll continue to manage the funding gap. However, for the second half of the year, we do expect the customer deposit base to grow because of seasonality. The first half of the year in terms of retail and customer funds is typically slower in terms of growth than the second half, and we expect that the credit gap in the coming months will be maintained at current levels, finishing with an LCR ratio similar to today. We expect customer deposits to increase and to continue managing the pricing of the deposits and the funding on the wholesale side accordingly.
Onur Genc, CEO
Maybe just a quick addition on this, Paco. You were asking about the marginal profitability and marginal return on capital. Every single loan given at the marginal level, meaning the additional funding needed for that loan, is justified with the loan prices that we have. That's how we function. At a high level, the yield on loans in Mexico is 14.4%. Our return on equity in Mexico is 27%. So with wholesale funding at the marginal level, I guarantee you that it is very profitable, otherwise, we wouldn't have been lending that number. Your second question is on the antitrust topic for the Sabadell transaction. You asked about the content and the process. On both of them, the CNMC, the authority here for competition matters. As you all know, it's a highly regarded independent institution. It's up to them, and we have full respect for their decisions, and we have to wait for their decisions for sure. But we have been relatively confident on the competition-related aspects of this transaction for a few reasons. First, there is a clear methodology and precedents. Second, even if you look at regional levels, after this transaction, BBVA will not be the largest player in Spain. Lastly, I reiterate we do not trigger the thresholds for further scrutiny. Competition remains fierce in Spain, and loan prices for mortgages and SMEs are lower than the European average.
Operator, Operator
Thank you, Paco. Next question please.
Operator, Operator
Thank you. The next question is from Antonio Reale from Bank of America. Please go ahead.
Antonio Reale, Analyst
Good morning. Could you tell us directionally how you would expect NII to perform in Spain in 2025, especially in light of your commentary on better loan growth?
Onur Genc, CEO
Let's discuss activity growth in Spain. The spreads will indeed be coming down because the rate curve is expected to decline as ECB reduces rates. We've said that such decline will be compensated through activity growth and asset quality. BBVA Research foresees that the market will grow by around 1.5% in lending volumes in 2025, which would allow us to compensate for the spread decline. We're positive about the growth in 2025. The only detailed guidance will be provided at the beginning of next year during the end-of-year results presentation.
Operator, Operator
Thank you, Antonio. Next question please.
Operator, Operator
Thank you. The next question is from Ignacio Ulargui from BNP Paribas Exane. Please go ahead.
Ignacio Ulargui, Analyst
Hi, good morning. I have one question. How do you see lending and deposit growth evolving in Mexico?
Onur Genc, CEO
In Mexico, we see a small decline in the cost of deposits in the quarter. We noted that 75% of our deposits are retail and SME, and 85% of our deposits are demand deposits. We defend our cost of deposits and remain competitive below larger players. We're quite positive about NII for the coming quarters due to strong lending activity.
Luisa Gomez Bravo, CFO
We've been actively managing lending and deposit strategies, competing directly with new entrants. We remain the largest player in credit cards with a market share above 31%. Our deposit rates are 2.88% compared to above 5% in the market, maintaining a substantial competitive advantage.
Operator, Operator
Thank you. Next question please.
Operator, Operator
The next question is from Carlos Peixoto from CaixaBank. Please go ahead.
Carlos Peixoto, Analyst
One of my questions would actually be on deposit costs in Spain. Should we expect the cost of deposits to move in tandem with market rates? And on the overall group outlook, do you see this within the guidance for the group as a whole?
Onur Genc, CEO
Yes, the cost will continue to follow the curve. The spread is expected to remain slightly below what we currently have. Regarding the guidance for the group, we have confirmed our guidance for Spain, Mexico, and upgraded Turkey. The group will showcase positive outcomes overall.
Operator, Operator
Thank you, Carlos. Next question please.
Operator, Operator
The next question is from Sofie Peterzens from JPMorgan. Please go ahead.
Sofie Peterzens, Analyst
Could you remind us of your hedging policy? Also, how much of profits and capital are hedged? And are there any FX adjustments expected in Argentina?
Onur Genc, CEO
We hedge capital and P&L. We hedge 50% to 70% of excess capital and typically hedge profits by 40% to 50%. Currently, we have 54% of the excess capital for the Mexican peso hedged, and 52% of P&L hedged. Regarding Argentina, we do not apply a different exchange rate other than the official one. We are monitoring the situation for any necessary adjustments.
Luisa Gomez Bravo, CFO
In Argentina, we're using the official rate and have been monitoring the depreciation. Until now, we do not expect any immediate adjustments, and we will adhere to the official guidelines.
Onur Genc, CEO
As for our digital bank expansions, in Italy, we've surpassed 500,000 customers and are approaching EUR 5 billion in deposits. We plan to launch in Germany next year.
Operator, Operator
Thank you, Sofie. Next question please.
Operator, Operator
The next question is from Pablo de la Torre from RBC. Please go ahead.
Pablo de la Torre, Analyst
Could you elaborate on the timing of capital distribution? And regarding ROTE guidance, where do you see the biggest upside to consensus?
Onur Genc, CEO
It's too early to give specific numbers for next year, but we're positive on growth trends in Mexico, Spain, Turkey, and South America. Regarding distributions, after the OPA, we will immediately reinstate share buyback programs if we are in the current position.
Operator, Operator
Thank you, Pablo. Next question please.
Operator, Operator
The next question is from Cecilia Romero Reyes from Barclays. Please go ahead.
Cecilia Romero Reyes, Analyst
Do you see any catalysts that could improve sentiment on Mexico? Also, what rate assumptions impact your guidance? Lastly, regarding the antitrust approval for Sabadell, do you mean total loans or per segment?
Onur Genc, CEO
Positive messaging from the government is contributing to improving sentiment. On guidance, if rates are high in Mexico, it will benefit us due to asset sensitivity. Regarding antitrust, we don’t trigger the scrutiny thresholds as a combined entity.
Operator, Operator
Thank you, Cecilia. Next question please.
Operator, Operator
The next question is from Marta Sanchez Romero from Citi. Please go ahead.
Marta Sanchez Romero, Analyst
You are only closing about a third of the overlapping branch network. Why are you not being more ambitious compared to other transactions? Can you also reiterate your high single-digit NII guidance for Mexico?
Onur Genc, CEO
The 300 overlapping branches are lower than usual due to recent restructurings in both networks. Yes, we are reiterating the high single-digit NII guidance for Mexico.
Operator, Operator
Thank you, Marta. Next question please.
Operator, Operator
The next question is from Britta Schmidt from Autonomous Research. Please go ahead.
Britta Schmidt, Analyst
GDP growth in Mexico has disappointed. What impact do you think this will have on loan growth and cost of risk? Also, can double-digit earnings growth be achieved in 2025?
Onur Genc, CEO
Loan growth in Mexico remains comfortable. We averaged double-digit growth in the banking sector despite relatively low GDP growth. Regarding currency devaluation, we remain positive due to Mexico's fundamentals, including labor costs and potential nearshoring trends.
Operator, Operator
Thank you, Britta. Next question please.
Operator, Operator
The next question is from Ignacio Cerezo from UBS. Please go ahead.
Ignacio Cerezo, Analyst
Could you discuss Turkey regarding potential upside without discussing hyperinflation? Is there potential risks against margin expansion through items like trading income or cost of risk?
Onur Genc, CEO
The upside will come primarily from net interest income. The only potential negative factor could be cost of risk if we don't see rates action moving forward. The NII margins will likely improve, supporting strong performance ahead.
Luisa Gomez Bravo, CFO
For Basel IV, the reduced guidance is mainly based on changes in criteria regarding trade finance guarantees and operational risks. We will provide a fully loaded number once we have more clarity.
Operator, Operator
Thank you very much. This was the last question. Thank you very much for participating. The IR team will be available to answer any questions you might have. I hope you have a very nice summer. Thank you.