Earnings Call Transcript - BBVA Q1 2020

Gloria Couceiro, Head of Investor Relations

Good morning, everyone and welcome to BBVA First Quarter ‘20 Results Presentation. I hope all of you are healthy and safe. I’m Gloria Couceiro, Head of Investor Relations and we have also Onur Genc, Chief Executive Officer of the Group and Jaime Saenz de Tejada, BBVA Group CFO participating in this webcast. This time we’re doing it remotely. As in previous quarters, Onur will begin with the presentation of Group’s results and then Jaime will review the business areas. We will move straight to the live Q&A session after that. And now, I will turn it over to Onur to start with the presentation.

Onur Genc, CEO

Thank you, Gloria. Gracias. Good morning, everyone. Welcome and thank you for joining BBVA’s first quarter 2020 results. We are doing this through the webcast obviously. So thank you for your flexibility and availability. I really hope also that you and your families and friends are all healthy and safe; let me also express my condolences to the relatives and friends of those who passed away during these hard days. So moving to our presentation. On Slide number 3, let me start with BBVA’s response to this exceptional environment. I have to say that I’m very proud of our organization. We are rising up to the challenge, in my view. Our purpose of creating opportunities has become more important than ever in this environment. We have established very clear priorities in our response to the crisis. First, and you can see that on the left-hand side of the page, to protect the health and safety of our employees, clients, and the community in general from the very beginning before the official government measures were put in place. We implemented plans for our employees to work from home. As of today, more than 86,000 employees of BBVA, 95% of our central services, and 71% of our network are working remotely. We have a strong commitment to save lives. BBVA has donated EUR 35 million globally for the fight against COVID. We also launched several initiatives internally for our employees to contribute directly to the effort; more than EUR 1 million in contributions from our employees, which is matched one-for-one by BBVA, is also another tool that we have put in place to fight against COVID. Lastly, a clear commitment was also shown by our 300 members of our BBVA top management team globally. We have all given up our bonuses voluntarily for this year. The second priority on the middle – at the middle of the page, we want to continue to provide essential services to the economies that we operate in. It's obviously very important as a bank to provide these services. Over half of our physical network is open and all of our critical functions, including call centers and operational centers, are fully operational. In this sense, we have also leveraged our competitive advantage in the digital front, facilitating access to the bank through digital channels. Our digital and mobile customers reached maximum penetration rates of 59% and 54%, respectively. Records showed that 63% of our units sold in March ‘20 were sold digitally. The third priority on the right-hand side of the page has been to provide financial support to our longstanding clients. During this time of crisis, we stayed very close to our clients, helping them navigate through the crisis. We believe that banks, including BBVA, are a powerful part of the solution to this crisis and we will continue to finance the economy. In the sense, BBVA’s total loans have increased by EUR 17 billion in constant euros in the first quarter, and we have implemented many programs to help and support our clients. Moving to Slide number 4, as highlighted in the previous slide, I would like to emphasize that our leadership in digital has been a huge advantage in this context. We kept talking about it for many quarters, tirelessly in all these calls, but our focus on technology has helped us tremendously during this period. For example, in Spain, the weekly average of digital transactions increased by 32% compared to pre-COVID figures. The number of visits through “My Conversations” has increased by 35%. So we are using digital to enable physical interaction remotely with our people. This is significant; additionally, the digital sales in the Group in March reached 63.4%. Moving to Slide number 5, I would like to emphasize here that we are delivering a very strong, in our view, pre-provision profit. If you look into the left-hand side of the page, operating income has increased 14.1% versus the same quarter last year, supported by robust revenue growth alongside a reduction in expenses. However, my pure bottom-line perspective shows that the reported net attributable profit has dropped this quarter to a loss of EUR 1.792 billion, negatively affected by two extraordinary items. The first being the BBVA USA goodwill impairment of EUR 2.1 billion. As you know, this goodwill relates back to our acquisitions of multiple banks primarily from the 2004-2009 period. Given the current situation in the USA due to COVID, with low GDP growth expectations leading to the necessary impairment provisioning. The second extraordinary item relates to the front-loaded provisions to cover the expected impact from COVID-19 for a gross amount of EUR 1,460 million after taxes and non-controlling interests, which leads to an impact of close to EUR 1 billion in net attributable profit. We have chosen to be conservative on the front-loading of these provisions. Despite high uncertainty, we expect provisioning efforts for the rest of the quarters to be significantly lower. Excluding BBVA USA goodness impairment; the net attributable profit including this extraordinary provisioning for the first quarter was EUR 292 million. If you exclude both impacts, the net attributable profit of EUR 1,258 million, represents a strong underlying performance with an increase of 6.4% versus the same quarter in 2019. Moving to Slide number 6, you see the strong operating income with very low volatility. This has been proven; our operating income has shown its resilience, thanks to our diversified business model, in that our average pre-provision profit over RWAs since 2008 has been notably above our European peer group. Our operating income performance for 2020 has started even better than these numbers. Turning to capital, the net attributable profit has been affected due to this additional COVID-related impairments of EUR 1,460 million, but overall, the results for the quarter are consistent with our expectations given the unprecedented environment we find ourselves in. Our leadership in digital has been a huge advantage in this context. We kept talking about it for many quarters, tirelessly in all these calls, but our focus on technology and the effort BBVA has been doing over the past many years in building end-to-end digital products and processes, it has helped us tremendously at this period. In Spain, for example, the weekly average of digital transactions has increased 32% weekly averages of pre-COVID and post-COVID. The number of visits through “My Conversations” increased by 35%. So we are using digital to enable physical interaction remotely with our people. The digital sales in March reached an impressive 63.4%. Looking at Slide number 5, I would like to emphasize that in this unprecedented environment, we are delivering a very strong pre-provision profit. If you check the left-hand side of the page, operating income has increased 14.1% versus the same quarter last year, supported by robust core revenue growth and a reduction in expenses. However, the reported net attributable profit has dropped this quarter to a loss of EUR 1.792 billion due to two extraordinary items. First, the BBVA USA goodwill impairment of EUR 2.1 billion, which goes back to previous acquisitions made in 2004-2009. The situation in the USA due to COVID has created low GDP growth expectations that led to the impairment test indicating a non-cash impairment that we must provision. The second extraordinary item is the front-loaded provisions to cover the expected impact from COVID-19 totaling EUR 1,460 million impacting net attributable profits post-tax by nearly EUR 1 billion. We have chosen to be conservative regarding front-loading COVID related provisions. Despite uncertainty, we believe provisioning effort in subsequent quarters will significantly drop. Excluding BBVA USA goodwill impairment, the net attributable profit, including these extraordinary provision impacts for the first quarter, was EUR 292 million. Moving to Slide number 6, I would like to highlight the strength demonstrated by our bank to navigate this crisis. Our operating income has shown remarkable resilience, thanks to our diversified business model, proven ability to generate capital. Our CET fully loaded ratio currently stands at 10.84%, exceeding our regulatory requirements.

Jaime Saenz de Tejada, CFO

Thank you very much, Onur, and good morning, everybody. I hope you’re all well as also your family and friends. Let me start with Spain. BBVA research is expecting a GDP contraction of around minus 5.5% to minus 10.5% in 2020, followed by a V-shaped recovery between 4.2% and 7.2% for 2021. In terms of activity, loans increased by 1% over the quarter, driven by corporate and CIB, which were up by 7% in Q1 due to short-term operations and credit lines drawn at the end of the quarter. BBVA Spain showed a strong pre-provision profit by 10.3% year-on-year thanks to the good performance of core revenues and a higher than expected reduction in operating expenses. Despite the significant decrease in net trading income, which fell by 44%, overall, the revenues were up by over 5% year-on-year due to strong growth in fees over 13%. Operating expenses went down by approximately 4.4%, exceeding expectations. We expect this strength to continue.

Onur Genc, CEO

Thank you, Jaime. I would like to address that we have seen digital transactions surge, leading to a strong increase in digital sales. Specifically, we have seen 63% of our units sold in March being sold via digital channels.

Gloria Couceiro, Head of Investor Relations

Thank you for your questions. We are now ready to move into the live Q&A session. So first question, please.

Operator, Operator

The first question today comes from Carlos Cobo of Societe Generale. Carlos, your line is now open.

Carlos Cobo, Analyst

Hello, good morning. Thank you for the presentation, and I hope you're all fine and your families as well. A quick question on capital. It’s clear your guidance on the target, but is there any plan to rebuild back to where you were before? When do you plan to review post-crisis capital targets of the bank, if it still will be 12%? Also, could you explain if there's any regulatory headwinds left during the year? Lastly, what are your expectations for volumes in Mexico and Spain moving forward? Thank you very much.

Onur Genc, CEO

Thank you, Carlos. On capital, as you've seen in the presentation, our new target methodology is 225 bps to 275 bps. We are currently at 225 bps, and we intend to move up in that range. Yes, we experienced capital realization, but our goal is to be towards the upper end of the range. Regarding regulatory headwinds, we guided previously in the end of the year presentation that we are expecting 15 bps TRIMs for low default portfolios and 5 bps from PD LGD definitions. However, given the latest guidance from ECB, these TRIMs would be delayed by at least six months. Volumes in Spain and Mexico were significantly affected, and we expect some deleveraging in the coming quarters. The expectation is that we are going to significantly grow in both Spain and Mexico in the long-term as we adapt to new circumstances and regain stability. For Mexico, I would also like to emphasize that we believe strong clients are conditioned to weather the crisis with relative resilience.

Gloria Couceiro, Head of Investor Relations

Thank you for your answers, Onur. Next question, please.

Operator, Operator

The next question comes from Benjamin Toms of RBC. Benjamin, your line is now open.

Benjamin Toms, Analyst

Hello, thank you for taking my question. Firstly, can you say how you think the shape of impairments will look in the coming quarters? If I use your guidance for 2020, it implies about a 30% increase in future quarters compared to the 2019 run rate. Is that a fair view? Also, will most of this come in the next quarter or do you expect it to be evenly distributed? Secondly, you noted a lower standard deviation and volatility of earnings versus peers; do you expect the bank to outperform peers in this global downturn?

Onur Genc, CEO

Thank you, Benjamin. Our guidance explains that we have front-loaded all COVID-related provisioning. We typically see provisions around EUR 1 billion to EUR 1.1 billion each quarter. For this quarter, we did EUR 1.4 billion, projecting that if the macro scenarios hold, we wouldn’t be doing much more provisioning. Our goal is to have lower provisioning in the subsequent quarters. Volatility measures will continue to be monitored closely. We see that, due to our diversified business model, BBVA is well-positioned to navigate through this more turbulent environment. Our historical performance indicates that we can expect some resilience amidst these operations, but we will need to adapt to varying pressures.

Gloria Couceiro, Head of Investor Relations

Thank you very much for your insights; next question, please.

Operator, Operator

The next question comes from Alvaro Serrano from Morgan Stanley. Alvaro, your line is now open.

Alvaro Serrano, Analyst

Thank you very much. Can you hear me properly? Thanks for the detail on the provisions. Just curious on assumptions on unemployment rate, particularly in Spain. What would be the sensitivity if 19% of the workforce is currently on temporary leaves? Can you color around that? On payment holidays, can you give us details of how many of your mortgage and consumer books are on payment holidays and what is the underlying assumption of defaults? Lastly, regarding the pro-cyclicality in the draw of lines in the US with an 8% increase, could you reassure us on how you're sure that demand is healthy? Thank you.

Onur Genc, CEO

Alvaro, I’ll take the unemployment and demand questions. On unemployment, our projections for Spain show expectations of around 20% unemployment for 2020, which factors into our provisioning models across the board. As for the demand in the US, especially Texas, it's essential to consider that the economy is more diversified now than it was; the healthcare and tech industries are quite significant. Although we've seen increases in credit lines, we believe that some segments will stabilize due to projections of recovery ahead.

Jaime Saenz de Tejada, CFO

Yes, regarding payment holidays, we have established a support framework based on guidelines from the government to assist clients who need it most. We are still assessing the ongoing impact, but the provision plans take these structures into account. Observations will continue to be conducted as we adapt to further changes in the current environment.

Gloria Couceiro, Head of Investor Relations

Thank you, Alvaro for your questions. Next question, please.

Operator, Operator

The next question comes from Jose Abad from Goldman Sachs. Jose, your line is now open.

Jose Abad, Analyst

Hello, good morning. Thank you for the presentation. So I have three questions. First is about your expected losses over the years; should we assume a similar number for next year? Second, are you factoring in any potential positive impacts stemming from guarantees, particularly in Spain? Lastly, could you elaborate on your expectation for Opex going forward?

Onur Genc, CEO

Thank you, Jose. We are being conservative about future provisioning. We expect there might be smoother tactics, but it’s too early to quantify exact expectations for next year. Regarding your second question about guarantees, we are indeed incorporating those scenarios in our models as we assess the potential impacts. On Opex, our target is negative growth. Although we expect inflation in some areas, we aim to reduce operating costs aggressively as we move forward.

Gloria Couceiro, Head of Investor Relations

Thank you, Jose for your questions. Next question, please.

Operator, Operator

The next question comes from Mario Ropero of Fidentiis. Mario, your line is now open.

Mario Ropero, Analyst

Hi, good morning. So my first question is, you said you’re expecting 6 bps from the sale of Paraguay. I’m assuming that this should happen in the short-term. And given that you should have taken most of the COVID-19 impact, are you expecting the CET1 ratio to be close to 11% in the second quarter? My second question is around TLTRO III funds—how much you plan to take? And finally, what are your expectations for NII in Spain?

Onur Genc, CEO

Regarding the CET1 ratio, we expect to grow in that range, but it’s difficult to predict which point we will land at. However, we are optimistic about our progress with the sales that will enhance our capital position. About the TLTRO III funds, we can now borrow 50% of the outstanding eligible loans, which increases our capacity significantly. We expect to draw an additional EUR 14 billion in June, enhancing our position further.

Gloria Couceiro, Head of Investor Relations

Thank you, Mario. Next question, please.

Operator, Operator

The next question comes from Ignacio Ulargui of Exane BNP. Ignacio, your line is now open.

Ignacio Ulargui, Analyst

Yeah, hi, good morning, everyone. Thanks for the presentation. Just a couple of questions surrounding Mexico and Turkey. First, Mexico’s growth looks the weakest of all in your geography. What are your thoughts for operating trends there? Secondly, with changes from the European Commission in IT intangible deductions, do you plan to adjust your strategy regarding CapEx and OpEx?

Onur Genc, CEO

On operating trends in Mexico, we continue to maintain our presence and are leveraging our franchising capabilities. We are closely monitoring the situation. There are some worries about a potential drop in growth, but we believe in our capacity to navigate through it effectively. Regarding CapEx and OpEx, we will adjust our strategies once the regulations are finalized. Having already significant standards established, we’re looking at opportunities to ensure efficiency while maintaining growth.

Gloria Couceiro, Head of Investor Relations

Thank you, Ignacio. Next question, please.

Operator, Operator

The next question comes from Andrea Filtri of Mediobanca. Andrea, your line is now open.

Andrea Filtri, Analyst

Yes, good morning, and thank you for taking my questions. I have one on capital and another on emerging markets. Regarding capital, what is the lowest level you would be prepared to report if the evolution of the crisis worsens? Can you quantify the benefits from regulatory relaxation? Secondly, on emerging markets, your provisions seem largely focused on developed markets; how do you envision your emerging markets approaching the COVID-19 crisis, and why are provisions low in Mexico with such a downturn?

Onur Genc, CEO

On the capital levels, our focus remains on maintaining our target buffer to ensure flexibility while navigating any changes in regulation. We have taken a conservative approach during this crisis. Regarding emerging markets, while we understand the challenges they are facing, we believe that many of our markets, particularly in Mexico and Turkey, have sound fundamentals to offset some of the adverse impacts. Our provisioning strategies remain robust across our portfolios to mitigate risks appropriately.

Gloria Couceiro, Head of Investor Relations

Thank you, Andrea. Next question, please.

Operator, Operator

The next question comes from Sofie Peterzens of JPMorgan. Sofie, your line is now open.

Sofie Peterzens, Analyst

Yeah, hi. It’s Sofie from JPMorgan. I was wondering if you could give us an update on your FX sensitivity and hedging policy. If you could also comment on the Spanish government guaranteed lending, how much ICO lending have you taken up? Finally, what level of payment holidays do you see in the US, Mexico, Turkey, and South America?

Jaime Saenz de Tejada, CFO

We currently have hedged approximately 100% of the expected results from Mexico for 2020. In terms of payments holidays, we are observing a national initiative based on client needs, and the situation varies between regions. The ICO lending is managed cautiously, while we maintain excellent standards across the lending spectrum globally.

Onur Genc, CEO

The payment holidays program has also been established globally to assist client needs, as we adapt our strategies to accommodate various markets and conditions effectively.

Gloria Couceiro, Head of Investor Relations

Thank you, Sofie. We are running out of time. So we need to end it here. Thank you very much for participating in this call. Let me remind you that of course, the entire IR team will remain available to answer any questions you might have.

Onur Genc, CEO

Thank you to everyone. Stay safe, stay healthy. See you next quarter. Thank you to everyone. Bye-bye.