Earnings Call Transcript - BBVA Q1 2023

Operator, Operator

Good morning, and welcome everyone to BBVA's Conference Call to Discuss the First Quarter 2023 Results. I'm joined today by Onur Genc, our CEO; and Rafael Salinas, BBVA's CFO. They will discuss quarterly figures, and then, we will open the line to receive your questions. Thank you very much for your participation. Now, I hand it over to Onur.

Onur Genc, CEO

Thank you. Thank you, Patricia. Good morning to everyone. Welcome, and thank you for joining our first quarter 2023 results audio webcast. I'm going to run you through, as I always do, the presentation by indicating the page numbers. So, let me start with Slide Number 3. On the left-hand side of the slide, you see our net attributable profit reaching €1.846 billion. We are posting very strong results, 39% above the results of the same quarter of last year. I should remind you that these numbers already include the €225 million of extraordinary tax in Spain. If the extraordinary tax was not there, we would have passed the €2 billion mark. These results bring our earnings per share, at the bottom of the page on the left-hand side again, earnings per share up to €0.29, a 53% year-over-year growth, a higher growth rate than the net attributable profit due to the share buyback program that we have been executing. The graph on the right-hand side of the slide shows our capital ratio, 13.13%, above our target range and well above our regulatory requirements, 52 basis points higher than our December 2022 reported capital ratio. Moving to Slide Number 4. Our tangible book value per share plus dividends continued outstanding evolution of previous quarters, a 22% increase year-over-year and 7.1% in the quarter. This number is one that we treasure a lot, that we pay a lot of attention to and it's one of the most impressive figures in my view in this presentation. Regarding profitability, we continue to improve our excellent profitability metrics, reaching this quarter 16.3% in return on tangible equity and 15.5% in ROE, being the highest figures over the last 10 years. We remain clearly one of the most profitable European banks. In fact, we were the first bank among the 15 largest European peers at the end of the fourth quarter, and we keep advancing on this. Moving to Slide Number 5. What stands out in terms of the key messages for the first quarter? First, outstanding core revenues evolution, 36.7% growth year-over-year, supported by strong loan growth, 9.8% at the group level and, obviously, by the clear improvement of customer spreads in our core geographies. Second, our leading efficiency ratio improved to 43.3% in the first quarter of the year with positive jaws. Third, asset quality metrics remain stable and within guidance, with a cost of risk at 105 basis points year-to-date. Fourth, our capital position is comfortably above our targets as I mentioned. And last, the continued great progress in key areas of our strategy, with 2.6 million new customers acquired in the first quarter and €14 billion sustainable business channeled in the first quarter also. Slide Number 6. Focusing on the first quarter results, this is a simplified P&L and the year-over-year comparisons. The second column from the left, what stands out is the impressive 38.6% year-on-year increase in operating income, driven by the strong core revenues growth and positive jaws, which explain the net attributable profit growth of 40.5% in constant euros. In terms of quarterly evolution, net attributable profit increased both in constant and current terms 4.6% and 18.1%, respectively, versus the fourth quarter, despite being negatively affected again by the €225 million of extraordinary banking tax in Spain. Some light into the revenues breakdown and the evolution on Slide Number 7. First, our net interest income increased strongly by 43% versus last year, driven by solid activity growth and customer spreads improvements, as I mentioned. The quarter-over-quarter evolution is negatively affected by Turkey. Excluding Turkey, the group's net interest income grows 3% versus the last quarter with very strong readings, especially in Spain and Mexico. Second, the positive evolution of net fees and commissions increased 16% year-over-year and consolidating the high figures over the last quarters basically, mainly because of payments and the transactional businesses. Third, the performance of net trading income is driven by global markets and hedges. Slide Number 8, a deep dive on the net interest income evolution of Spain and Mexico, which shows impressive growth in our view, in the first quarter of the year. The same page also talks about our underlying optimism regarding the following quarters to come, because the spreads especially, they keep going up. In the case of Spain, it has strongly increased during the first quarter to 2.75%, in a context of higher interest rates. But in Mexico, the interest rates have been higher for more quarters, lending yield and the customer spreads continue to increase, reaching 11.72% in the quarter. As a result of all of this, you can see the strong NII growth both quarter-over-quarter and year-over-year in both countries. Year-over-year, 38% growth in Spain and 29% growth in Mexico. Slide Number 9, we wanted to give you a sense of our highly diversified and transactional deposit base, very important phenomenon in these times, as well as our ample liquidity metrics with a deep dive especially in our two core geographies of Spain and Mexico. First, in terms of the evolution of our deposits in the first quarter of the year, the slight decrease quarter-over-quarter is explained by seasonality and also by a higher preference for off-balance sheet products in a context of higher interest rates. Moving to Slide Number 10, we continue showing positive jaws at the group level, thanks for the good performance of gross income, growing 32.7% in the first quarter, and the costs are growing 25.7%, mainly due to the impact of high inflation in hyperinflation countries. Excluding the extraordinary banking tax, the efficiency ratio would have improved to 42%. Slide Number 11. In this page, you see the asset quality metrics remain stable and within guidance in an environment of high market volatility. Overall, a very strong quarter for Spain, slightly overshadowed by the reduction of the new banking tax. In the coming quarters, we are committed to maintaining the robust performances across our business segments. Finally, moving to Slide Number 12, our CET1 as of March stands at an extraordinary level of 13.13%, well above our SREP requirement. This capital level allows us to continue investing in growth opportunities while ensuring sound returns for our shareholders.

Rafael Salinas, CFO

Thank you, Onur. Good morning, everyone. As Onur anticipated, we are pleased to share with you a very good start of the year, with very solid operating trends across the board in activity, spreads, efficiency, results and capital. Therefore, in a volatile quarter, we can say that the strength of our franchises and the soundness of our business model have been confirmed once again. Going to Page 18, let's start with Spain, representing an outstanding quarterly set of results. In loans, the total portfolio remains flat, affected by the deleverage of the mortgage book due to early repayments. However, positive growth trend continued in consumer and commercial segments despite quarterly seasonality. Moving to the P&L, we have seen very solid dynamics in core revenues leading to an outstanding recurrent pre-provision profit figure close to €1.2 billion after excluding the new banking tax in Spain. Given this performance, we feel confident and raise our NII growth forecast guidance for 2023 to around 30%. On the asset quality side, underlying trends remain within our expectations. The cost of risk stands at 27 basis points in the quarter, which I would say reflects properly the underlying credit performance of our portfolios. Overall, a very strong quarter for Spain and looking forward, we expect continued improvements.

Onur Genc, CEO

Maybe just to save time for the Q&A, which is the most interesting part of this, rather than me leading you through these messages. Basically, we do think that we had a wonderful quarter. What is even more critical for us is looking forward, we do have a clear optimism and positive perspectives moving ahead, despite the market environment of high volatility. That’s why we are upgrading our NII guidance in Spain and Mexico, which reflects in the Group results. We are looking forward and as I mentioned, hopefully, in the second quarter call, we are in the process of revising our long-term goals.

Operator, Operator

Yes, thank you very much, Onur. And we are ready now to start with the Q&A session. So, the first question please.

Operator, Operator

And our first question today comes from Maks Mishyn from JB Capital. Maks, your line is open. Please go ahead.

Maks Mishyn, Analyst

Hi, good morning. Thanks for the presentation and taking our questions. I have two, if I may. The first one is on customer spreads. In Spain, they have been expanding significantly and seem to continue expanding in the coming quarters. However, I was wondering what kind of customer spread should we think of when the repricing is done? And also, does the increase in spreads in Mexico relate to higher growth in consumer and corporate loans than mortgages? And the other question is on capital. Onur, you mentioned that you now have €4 billion of excess. How should we think of its deployment? And what would trigger you to give us more color on how you plan to deploy it? Thanks.

Onur Genc, CEO

On the customer spread, as you see the Spain number is 2.75% now, but this is the quarterly average, and the trend of going up still continues. The March figure is actually 2.84%. The same goes for Mexico; the quarterly average is 11.72%, but the March number in Mexico is 11.87%. So the trend is there and continues because we are still repricing some of those loans. Regarding capital, we have been very clear on this, we don’t want to operate with excess capital. Our target capital range is 11.5% to 12%. We do not want to see excess capital, and we believe in investing it back into our business. We are very committed to distribute excess capital back to our shareholders. In the last 18 months, we returned €8.2 billion to our shareholders.

Operator, Operator

Thank you, Maks. Next question, please.

Operator, Operator

The next question comes from Francisco Riquel from Alantra. Francisco, your line is open. Please go ahead.

Francisco Riquel, Analyst

Yes, Thank you. Two questions on Mexico. The NII guidance that you have upgraded to high teens, if I were to extrapolate run rate in the first quarter, I get to 17% growth already even if you are increasing the ALCO bank portfolio there in Mexico.

Onur Genc, CEO

On the NII stabilizing, there is some conservatism in the number, as you highlighted. You wanted to upgrade the figure for sure, because we are not seeing actually any headwinds at the moment on fundamentals. But we wanted to be a bit conservative, so that we can clearly deliver on our promise. Regarding the loan to deposit ratio, we are at 96%. Our LCR is 188%. So we do not have any liquidity challenge whatsoever. Regarding the betas, we are able to maintain that number due to our transactional deposits.

Operator, Operator

Thank you, Paco. Next question please.

Operator, Operator

The next question comes from Benjamin Toms from RBC. Ben, your line is open. Please go ahead.

Benjamin Toms, Analyst

Good morning, both, and thank you for taking my questions. First on costs. Your operating expenses were up 26% in constant currency terms, that's running ahead of weighted average inflation at 20%. Can you clarify if there is some lumpiness to costs here?

Onur Genc, CEO

The 20% growth in inflation versus the 26% growth in costs is specific to the first quarter. In the coming quarters, we expect this gap to soften. Commercial real estate exposure is €9 billion, 50% in Mexico, 50% in Spain, with an average LTV of around 50%. We don’t see any risk in that portfolio for us.

Operator, Operator

Okay, thank you very much, Benjamin. Next question, please.

Operator, Operator

The next question comes from Ignacio Ulargui from BNP Paribas Exane. Ignacio, your line is open. Please go ahead.

Ignacio Ulargui, Analyst

So, thanks for taking my questions. I have just two questions. One on the competitive landscape in Spain in terms of deposit and how do you see deposit betas evolving so far? And the second question is linked to the SME lending growth.

Onur Genc, CEO

In Spain, our deposit beta is less than 5%. We expect still that the deposit betas will average at 20% to 25% by the end of the year.

Rafael Salinas, CFO

In Mexico, regarding SMEs, we have been growing market share in SMEs in the last year, close to 100 basis points due to the nearshoring effects and our investments in the segment.

Onur Genc, CEO

In terms of moving to standardized models, there is no impact in our numbers yet as it is an ongoing process.

Operator, Operator

Thank you, Ignacio. Next question, please.

Operator, Operator

The next question comes from Alvaro Serrano from Morgan Stanley. Alvaro, your line is open. Please go ahead.

Alvaro Serrano, Analyst

I have two follow-up questions. Specifically about Spain, you've already addressed the decline in deposit balances; could you provide your insights on the expected deposit balances for the remainder of the year?

Onur Genc, CEO

The decline we’ve seen is tied to early payments and a move to off-balance sheet products. We anticipate stability in our deposit balances moving forward. Regarding capital distributions, you can expect an interim payout, but it’s a process.

Operator, Operator

Thank you, Alvaro. Next question, please.

Operator, Operator

The next question comes from Carlos Peixoto from CaixaBank. Carlos, your line is open. Please go ahead.

Carlos Peixoto, Analyst

Good morning. Thanks for taking my call. On capital, could you break down the 20 basis point negative impact from regulatory items and what triggered the mark-to-market impacts?

Onur Genc, CEO

The breakdown is 8 basis points from minority interests, 27 basis points from hyperinflation, and minus 20 basis points from the regulatory impact.

Rafael Salinas, CFO

We have a positive mark-to-market effect from FX and our portfolio of around 10 basis points.

Onur Genc, CEO

The NII improvement in the corporate center is primarily driven by the funding costs for equity participations.

Operator, Operator

So, thank you very much, Carlos. Next question, please.

Operator, Operator

The next question comes from Ignacio Cerezo from UBS. Ignacio, your line is open. Please go ahead.

Ignacio Cerezo, Analyst

Yes, hi, good morning. I have two questions. One in Mexico going back to the loan loss number. And the second one is a bit of color on the scenarios you can see out of the Turkish elections.

Onur Genc, CEO

The average cost of risk was 340 basis points. We guided all of you it's going to be less than €300 million, and we are sticking to it. There’s no deterioration in the vintages we are monitoring. As for the Turkish elections, we are prepared for any scenario. The developments post-election will depend significantly on monetary and fiscal policy adjustments.

Operator, Operator

Thank you, Ignacio. Next question, please.

Operator, Operator

The next question comes from Sofie Peterzens from J.P. Morgan. Sofie, your line is open. Please go ahead.

Sofie Peterzens, Analyst

Yes. First, could you add a little bit of color on the core equity Tier 1? Could you confirm that the full 20 basis points of regulatory capital headwinds have been taken?

Onur Genc, CEO

There will be no additional capital headwinds going forward. Our strong organic capital generation capacity supports our position. Regarding M&A opportunities, we remain focused on organic growth as our primary strategy.

Operator, Operator

Thank you, Sofie. Next question, please.

Operator, Operator

The next question comes from Britta Schmidt from Autonomous Research. Britta, your line is open. Please go ahead.

Britta Schmidt, Analyst

Could you add a little bit of color on the loan growth outlook in Spain by segment, and at what sort of level of rates would you become a little bit more nervous around the asset quality?

Onur Genc, CEO

The decline in asset quality related to EURIBOR rates is mitigated by the fact that most variable loans originated pre-2012, which caps installment increases.

Rafael Salinas, CFO

In Spain, we are experiencing positive growth in commercial loans while monitoring mortgage prepayments closely.

Onur Genc, CEO

Excluding tax impacts, the outlook for Turkey is sensitive to future regulatory adjustments depending on the election outcomes.

Operator, Operator

So, thank you very much, Britta. Next question, please.

Operator, Operator

The last question comes from Fernando Gil de Santivanes from Bestinver. Fernando, your line is open. Please go ahead.

Fernando Gil de Santivanes, Analyst

Hi, thank you very much for taking my questions. NII in Spain, what is the deposit mix that you expect?

Onur Genc, CEO

The expectation for deposit mix in Spain includes a beta at 20%, achieving 25% by year-end. Our staff operates under an assumption of 4% EURIBOR.

Rafael Salinas, CFO

The cost of hedging in Turkey has significantly improved, and we are managing well above average market levels.

Operator, Operator

So, thank you very much, Fernando. This was the last question. Thank you very much for your questions, for participating in this call. The entire IR team will be available to answer any questions you may have. Thank you very much.