Earnings Call Transcript - BBVA Q4 2024

Operator, Operator

Good morning. Welcome everyone and thank you for joining BBVA's Fourth Quarter Results Presentation. I'm joined today by our CEO, Onur Genç; and Luisa Gómez Bravo, the Group CFO. As in previous quarters, Onur will start discussing the group figures and then Luisa will go through the business areas. 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 Genç, CEO

Thank you, Patricia. Good morning to everyone. Welcome and thank you for joining BBVA's 2024 full year results audio webcast. We have a relatively long presentation today because it's the annual presentation, but we do have a commitment to all of you that we will start the Q&A, which is the most interesting part of this session. So I'm going to do some of the pages very quickly. I'll start directly with Page 3. This is the summary for the coming pages. I'll spend a little bit more time on this one, but last year our focus was on accelerating profitable growth and I'm very happy to say that in 2024 we continued delivering on this profitable growth, obtaining the best figures over the last decade in growth, profitability, strategic metrics, and also in the shareholders distribution. First, I want to highlight the outstanding value creation and profitability metrics achieved: 17.2% growth of tangible book value per share plus dividends, even in a context of market headwinds, and a return on tangible equity at 19.7%. We have also continued with a very positive trend in net attributable profit, passing for the first time the €10 billion threshold and growing our earnings per share by 28% in the last year. Secondly, one of the best ways that we can contribute to our stakeholders and society is through our activity of lending and beyond, by growing our business in a way that is profitable. That's why you see we are delivering on the profitability metrics, but also creating value in this process. In that sense, we have increased our loan portfolio by an exceptional 14.3% and we have acquired a record of 11.4 million new customers. Third, the financial results today derive from the progress in executing our strategy on the strategic metrics. 2024 was also an exceptional year. 75% of our clients interacted with us through our award-winning mobile app, and we also continue benefiting from being pioneers in sustainability. In 2024, we channeled almost €100 billion in sustainable business. And finally, all of this allows us to significantly increase distributions to our shareholders for a total amount of €5 billion, while our CET1 ratio remains comfortably above our target. The payout of €5 billion is equivalent to €0.87 per share, divided into two parts: the total cash dividend will be €0.70 per share, and the rest amounting to €993 million will be executed in a new share buyback program. We have some positive news to share here that the CNMV, the Markets Authority of Spain, lifted the restriction on our share buybacks going forward, as they see no impediment in the context of several transactions. So we will get going on this program as soon as possible. Moving to Page number 4, our tangible details now that I have highlighted to you in the cover page, but important details. Our tangible book value per share plus dividends continues showing an outstanding evolution despite relatively high currency depreciation. We delivered 17.2% growth in tangible book value. Beyond that, since 2021, our tangible book value per share plus dividends has increased nicely with an average compounded annual growth rate of 18.1% in that period of four years. Regarding profitability, we continue to improve our excellent profitability metrics, reaching again 19.7% in return on tangible equity and 18.9% in return on equity. The best figures over the past decade. Going to Slide number 5, the best measure of our performance is when we compare ourselves to competitors. In all key financial metrics, we have done better than our competitors. One more year, we remain one of the most value-creating, profitable, and efficient European banks. Going to Slide number 6, as we wanted to put our profile into the picture. On Chart 6, on the X-axis you see the return on tangible equity as a profitability metric, and on the Y-axis, you see the 2024 loan growth rate in current euros, and we stand out in terms of growth and profitability with a clear intention to continue on this path. Slide number 7 shows the very positive trend in our net attributable profit surpassing the €10 billion threshold, doubling our results in three years and growing 25% from the previous year. These results bring our earnings per share up to €1.68, an increase of 28% year-over-year, higher than the growth of the net attributable profit thanks to the share buyback program executed in 2024. On slide number 8, we created a positive impact on society. We increased our loan book significantly by 14.3%. During 2024, we helped more than 160,000 families buy their homes and supported more than 715,000 SMEs and self-employed individuals, establishing new businesses in the process. As we grow our activity, we promote investment, employment, and welfare in society. Moving to Page number 9, talking about our strategic metrics, new customer acquisition. Expanding our customer base will allow us to continue growing our business in a healthy and profitable way. In 2024, we set a new all-time record of new customer acquisition with 11.4 million gross new customers. Our digital strategy has been key in maintaining this velocity year after year, despite the fact that we are already one of the largest banks in the countries we operate in. It is important to follow the depth of the relationship with these new customers, focusing on cross-selling. We now have more than 77 million active customers as of end of 2024, compared to 52.6 million customers at the end of 2018, a franchise increase of 47%. Our mobile penetration rate has increased from 51% to a record high of 75% and our clients are much more active digitally. Investing in our people, coupled with our industry-leading digital capabilities, translated into higher client satisfaction. Customer satisfaction measured by the net promoter score improved by 10 percentage points over the last five years. We see clear leadership positions in our core countries. Turning to Sustainability on Slide 11, it is a cornerstone of our strategy; sustainability is an incredible business opportunity, and we are trendsetters in this area. We mobilized more than €99 billion in sustainable business in 2024, allowing us to beat our cumulative 2018-2025 goal of €300 billion one year earlier. On Slide 12, I will walk you through the financials quickly. The annual P&L highlights the excellent evolution of gross and operating income, growing 20% and 24% respectively. Moving to Slide 13, the fourth quarter P&L shows net attributable profit above the €2.4 billion mark driven by good performance in core revenues. Great NII performance, and stronger fee income evolution. Moving to Slide Number 15, we have strong loan growth in both Spain and especially in Mexico. In Spain, loan growth has improved to an excellent 4.1%. In Mexico, loan growth accelerated to 15.8% year-over-year with high-margin consumer and credit cards growing 15.6%. Again, these figures are good news for the coming quarters as the positive dynamics in activity are present. Regarding costs, we aim for positive jaws as our gross income grows clearly more than costs. Our efficiency ratio remains one of the best among European peers, improving again this year’s 226 basis points to 40%. On the topic of asset quality, it remains in line with expectations, cost of risk stable at 143 basis points. The NPL entries are decelerating in most geographies, and the coverage ratio improves to 80%. On capital, we generated four basis points CET1 ratio in the quarter, leading to a CET1 ratio of 12.88%. Growth in our lending book and management actions enabled us to optimize our capital structure. Continuing to the distribution of shareholders, a total amount of €5 billion for 2024 is proposed, equivalent to 50% payout at the maximum end of our distribution policy. This is a 25% increase compared to last year. Alongside cash dividends, we will propose a new share buyback program of €993 million. Moving to the new strategic plan covering 2025-2029, we will continue focusing on profitable growth through customer service enhancements and leveraging sustainability as a business opportunity. We see strong, positive numbers in our long-term planning, and we expect tangible book value per share plus dividends to show strong figures around mid-teens.

Luisa Gómez Bravo, CFO

Thank you very much, Onur, and good morning, everyone. Starting with Spain on Slide 24, I’m pleased to report that Spain has delivered consistently, achieving €3.8 billion of net profit for the year. The activity levels remain robust, driving solid loan growth of 4.1% for the year with a growth of 2.3% quarter-on-quarter. 2025 is expected to maintain this positive momentum supported by sound economic growth and lower rates. In terms of the P&L, quarterly results stand at €918 million, beating market expectations. NII in the quarter has proven resilient, falling roughly 1% quarter-on-quarter, supported by robust activity growth and effective price management. The efficiency ratio stands at an impressive 35.3%, and asset quality metrics remained benign, with the NPL ratio declining and cost of risk stable at 38 basis points. Now let me share our guidance for Spain in 2025, expecting loan growth at low to mid-single-digit growth. We anticipate a slight decline in NII supported by continued activity growth. For fees, we foresee low-single-digit growth following an exceptional 2024 performance, while we expect expenses to grow slightly below average inflation, maintaining our efficiency ratio around 36%. Cost of risk is anticipated to remain stable at or slightly below 38 basis points. Overall, it has been an excellent year for BBVA in Spain with confidence in maintaining attractive profitability levels. Moving to Mexico on Slide 26, I am pleased to report exceptional results driven by robust core revenues growth, leading to earnings of €5.4 billion in 2024, growing close to 6% year-over-year. Lending growth accelerated in the fourth quarter with total loans increasing by 16% and notable market share gains reinforcing our leadership position. Net profits approached €1.4 billion in the fourth quarter, supported by core revenues growing about 3% on a quarterly basis. As for guidance, we expect solid lending momentum to continue, leading to high single-digit loan growth in 2025. Turning to Turkey on Slide 27, Garanti BBVA achieved a net profit of €611 million, a 16% increase year-over-year. The cost of risk increased to 127 basis points, mainly due to higher provisioning needs in retail. Looking ahead, we anticipate net profit close to €1 billion in 2025 with a better second half of the year. In South America, we delivered over €600 million in net profit in 2024, with earnings supported by strong NII performance and loan growth, despite challenges in inflation and costs.

Onur Genç, CEO

We are running slightly late, and will not fully cover the last two pages. The takeaway is that 2024 was an exceptional year. For 2025, based on guidance we are quite positive, expecting to maintain our return on tangible equity in the high teens and around 40% efficiency.

Operator, Operator

Thank you very much, Onur. We are ready now to start with the Q&A session. So the first question, please.

Operator, Operator

The Q&A session starts now. Our first question comes from Benjamin Toms of RBC. Your line is now open.

Benjamin Toms, Analyst

Morning, everyone. Thank you for taking my question. A good set of results. I'm just wrestling with BBVA's CET1 ratio. It's 12.88% versus a soft target of 12%. The Sabadell transactions are worth about 30 basis points, and you generate more than enough capital to fund RWA growth. Why are you holding on to 60 basis points or €2 billion of excess capital? And what do you plan to use this for?

Onur Genç, CEO

To the point question, Benjamin. We are committed to profitable growth and want to grow our business in a very profitable way. Whatever the excess is, we will distribute it back. We do have the excess, but we were restricted since May to do share buybacks, and that restriction has just recently lifted. We will start this €993 million share buyback as soon as possible with commitments to return to the upper end of our target of 12%.

Operator, Operator

Thank you very much, Benjamin. Next question, please.

Operator, Operator

The next question is from Francisco Riquel from Alantra. Please go ahead.

Francisco Riquel, Analyst

Yes, thank you. The first question is on Mexico. I have seen growth in demand deposits slowing down from 10% in Q3 to 4% in Q4. So I wonder if you have seen more competition from no banks or open banks this Q4. And how do you see the cost of deposits in 2025? And also, with the rising loan-to-deposit ratio north of 100% in Mexico, do you see this limiting loan growth or the migration of customer funds off the balance sheet, which AUMs are growing faster above 20%?

Onur Genç, CEO

Luisa, do you want to start on the first one about Mexico's cost of deposits?

Luisa Gómez Bravo, CFO

Thank you, Paco. We’ve seen the quarter-on-quarter evolution of deposits in Mexico improve. Demand deposits accelerated due to our high payroll market share. We have controlled the cost of deposits well in Q4, maintaining our competitive advantage. We believe the current loan-to-deposit ratio will remain stable in 2025 around 104%, allowing us to fulfill our guidance.

Onur Genç, CEO

Adding on the loan-to-deposit ratio in Mexico, the 104% is not concerning for us. Even when it was higher in the past, our focus remains on the transactional deposit base which remains strong. Regarding the hedges, we also have mortgage hedges on top of the ALCO that help us in 2025, protecting our NII effectively.

Operator, Operator

Thank you very much, Francisco. Next question please.

Operator, Operator

The next question is from Antonio Reale from Bank of America. Your line is now open.

Antonio Reale, Analyst

Hi, good morning. Thanks for taking my questions. I have two, if I may. The first one is on Mexico and you’ve guided for further cost control at the group level. Can you give us a bit more sense of flexibility regarding managing the cost base in Mexico, particularly should revenues disappoint? Last year you’ve been investing in IT and SME bankers. Can you provide color for what percentage of your cost base in Mexico is fixed and where is there flexibility?

Onur Genç, CEO

Luisa, do you want to take the Mexican cost question?

Luisa Gómez Bravo, CFO

Expenses in Mexico have grown 8.8%, with personal expenses driven by activity momentum. We've implemented efficiency gains, leading to a solid cost base. If we do not see activity growth, we have flexibility in headcount and personnel to manage expenses.

Onur Genç, CEO

Regarding Turkey, interest rates and inflation will be key drivers for net interest margin growth in 2025. Our duration gap is currently around five months and extends as interest rates decline.

Operator, Operator

Thank you very much, Antonio. Next question please.

Operator, Operator

The next question is from Maksym Mishyn from JB Capital. Your line is now open.

Maksym Mishyn, Analyst

Hi, good morning. Thank you very much for the presentation. My first question is on the loan book in Spain. Your guidance is to outperform the market. Could you just remind us the reason why you are outperforming your peers and which segments you see as more attractive for 2025?

Onur Genç, CEO

In Spain, we expect loan growth driven by segments like consumer credit and corporate lending. Our strategy focuses on expanding market share in these areas, which we believe will continue to grow robustly. In capital, expect more management actions in the coming quarters to reduce RWA consumption.

Operator, Operator

Thank you very much, Max. Next question please.

Operator, Operator

The next question is from Alvaro Serrano from Morgan Stanley. Your line is now open.

Alvaro Serrano, Analyst

Can I squeeze two questions? One is on Mexico. You’ve guided to high single-digit loan growth. Can you walk us through a range going forward? If things don’t go as well as forecasted, what would it look like?

Onur Genç, CEO

Our guidance for high single-digit growth in Mexico is based on favorable internal and external dynamics. Despite uncertainties, we maintain confidence in this forecast. Regarding Basel IV, we do not expect any negative impacts in 2025. Remaining impacts will be marginal, with our RWA density significantly above the average, insulating us from output floor issues.

Operator, Operator

Thank you very much, Alvaro. Next question please.

Operator, Operator

The next question is from Ignacio Ulargui from BNP Paribas. Please go ahead.

Ignacio Ulargui, Analyst

Thanks very much for the presentation. I have one. Looking at the outlook for growth in Spain, what segments do you think will be the most competitive?

Onur Genç, CEO

Key competition is present in the mortgage segment, as it is highly price-sensitive. We are cautious in this area but expect strong growth in consumer and enterprise segments.

Operator, Operator

Thank you, Ignacio. Next question please.

Operator, Operator

The next question is from Carlos Peixoto from CaixaBank. Your line is now open.

Carlos Peixoto, Analyst

Two questions from my side. On capital, what's the expectation on how much capital could you free up from SRTs or other management actions during 2025?

Onur Genç, CEO

We generated 15 basis points through SRTs in 2024, expecting to achieve a higher number in 2025. Regarding the hyperinflation impacts, in the fourth quarter it was 11 basis points, while for the total year 2024 it was 76 basis points. As inflation decreases, this will improve our P&L. On the banking tax, it does not affect the strategic rationale of the Sabadell transaction.

Operator, Operator

Thank you very much, Carlos. Next question please.

Operator, Operator

The next question is from Britta Schmidt from Autonomous Research. Your line is now open.

Britta Schmidt, Analyst

Just a couple of follow-ups on the Mexican loan growth. Your numbers imply strong loan growth deceleration. Is that consistent with the current GDP outlook?

Onur Genç, CEO

Our forecasts are based on the expectation for 1% growth in GDP, but we remain confident in delivering high single-digit loan growth in Mexico, supported by strong internal dynamics. In regard to capital generation for 2025, it will vary based on growth, but we expect to reach around 50 to 60 basis points of capital generation on top of regular payouts.

Operator, Operator

Thank you very much, Britta. Next question please.

Operator, Operator

The next question is from Andrea Filtri from Mediobanca. Your line is now open.

Andrea Filtri, Analyst

Just detailed questions on your assumptions behind your guidance, please. Can you please share your assumptions on the NII guidance regarding interest rates?

Luisa Gómez Bravo, CFO

Our rate scenario in Spain anticipates terminal rates at 2% by June. For Turkey, we expect inflation to retrench with rates declining down to 31%. Regarding Argentina, we estimate a currency devaluation of around 28%.

Onur Genç, CEO

The CPI linker portfolio provides a natural hedge against the net monetary position. The impact from Argentina is relatively marginal at present and will not be a significant factor for this year.

Operator, Operator

Thank you very much, Andrea. Next question please.

Operator, Operator

The next question is from Hugo Cruz from KBW. Your line is now open.

Hugo Cruz, Analyst

I just had a question around the cost of risk guidance for Mexico. Is it due to mix, or you're seeing some deterioration due to external factors?

Onur Genç, CEO

It's mainly due to mix as we are growing more in retail than otherwise. Overall confidence remains high.

Operator, Operator

Thank you, Hugo. Next question please.

Operator, Operator

The next question is from Cecilia Romero from Barclays. Your line is now open.

Cecilia Romero, Analyst

I have two questions. Could you remind us of your latest FX hedging strategy? Any updates on how you're managing your currencies?

Luisa Gómez Bravo, CFO

We hedge around 62% of excess capital in Mexico, with an NII sensitivity of 9 basis points for a 10% depreciation. In Turkey, we are reducing our excess capital hedge.

Onur Genç, CEO

Regarding HSBC's potential exit from Mexico, we will continue to compete and strengthen our position regardless of any market changes.

Operator, Operator

Thank you very much, Cecilia. Next question please.

Operator, Operator

The next question is from Ignacio Cerezo from UBS. Your line is now open.

Ignacio Cerezo, Analyst

Thank you for taking my question on customer spread in Mexico, which has seen a reduction. Assuming rates go down to around 8%, where do you think the spread will land under this rate environment?

Onur Genç, CEO

We do not guide quarterly spreads directly, but we expect the NII sensitivity of 1.3% should provide a strong buffer. As I conclude, we continue to experience positive dynamics across key metrics and maintain our focus on delivering sustainable growth. Thank you for your attention.

Operator, Operator

Thank you everyone for participating. Let me remind you that the entire IR team is available for any further questions you may have.