Earnings Call Transcript
BANCO BILBAO VIZCAYA ARGENTARIA, S.A. (BBVA)
Earnings Call Transcript - BBVA Q1 2024
Operator, Operator
Good morning. Welcome, and thank you for joining BBVA's First Quarter Earnings Conference Call. I'm joined today by Onur Genç, our CEO; and Luisa Gómez Bravo, the Group’s CFO. As in previous quarters, Onur and Luisa will firstly discuss quarterly figures and then we will open the line to receive your questions. Thank you very much for your participation. Now, I’ll turn the call over to Onur.
Onur Genç, CEO
Thank you, Patricia. Good morning to everyone. Welcome and thank you for joining BBVA's first quarter 2024 earnings webcast. Let's jump into it, starting with slide number three. On the left-hand side, you can see our net attributable profit reaching EUR 2.200 billion, showing another quarter of record results, obviously continuing the positive trend that we have been having for the past years. This figure is 19% above the results of the same quarter of last year and almost 7% above last quarter. I should remind you that this quarter's number already includes the EUR 285 million of extraordinary tax in Spain. If the extraordinary tax was not there, the net attributable profit would have been obviously close to EUR 2.5 billion. Our results represent EUR 0.36 earnings per share, a 23% year-over-year growth, a higher growth rate than that of the net attributable profit due to the share buyback programs we have been executing. The graph on the right-hand side of the slide shows our CET1 ratio, which is at 12.82%, reflecting a 15 basis points increase in the quarter and standing clearly above our target range and also the regulatory requirements. Moving to page number four, behind the excellent results we have been announcing lies, in our view, the strength of our franchises and our performance at the core operating income level. In that sense, and acknowledging here some inherent seasonality between the quarters of the year and so on, we are showing very consistent growth in our operating income, with more than EUR 4.8 billion reported this quarter, very close now to the EUR 5 billion operating income line. Page number five shows our tangible book value per share plus dividends continuing the outstanding evolution of previous quarters with a 20% increase year-over-year and a 6.5% growth in the quarter. Regarding profitability, we continue to improve on our profitability metrics, reaching 17.7% in return on tangible equity and 16.9% in return on equity. These numbers, in my view, are some of the most impressive figures of this presentation. On page number six, we talk about the truly unique profile of BBVA within the European banking sector, combining growth and profitability. On this map, in the x-axis, we use return on tangible equity as a profitability metric, and in the y-axis, we show the loan growth in current Euros for comparability purposes during 2023. BBVA stands out, being in the top right corner, with one of the best profitability metrics and the highest loan growth among European peers. When we update the slide with BBVA's first quarter 2024 figures, our positioning moves even further to the top right corner of the chart, as we continue to increase our profitability and our growth has also improved in the quarter year-over-year growth. We are very much committed to maintaining this differential value creation profile, and some of this optimism is related to the potential evolution of our core markets. With that, I move to page number seven, where we would like to show the positive prospects that we see in Spain going forward. On the left-hand side of the slide, you can see the GDP growth evolution in Spain versus the Eurozone in the last decade. Despite a stronger hit during COVID, there is a positive growth gap for Spain that we expect to widen during 2024 and 2025. Additionally, Spain shows, after a long period of deleveraging, debt levels lower than the Eurozone, indicating a potential recovery as rates come down in Europe. We want to highlight that we are one of the main banks in the country, where we have seen a very good track record of increasing market share in recent years, especially in the most profitable segments, placing us in an excellent position to benefit from Spain's positive prospects. Moving to Mexico, on page number eight, we see similar GDP evolution with a positive growth gap. The demographic dividend and proximity to the U.S. create favorable conditions for growth, driven by nearshoring and increasing commercial flows. In a positive macro environment, we also claim to achieve double-digit loan growth, a trend observed over the past decade, even amid GDP growth around 2%. This guidance is based on consistent growth patterns we've demonstrated in recent years. Moving to page number nine, I summarize the subsequent pages, where I will discuss the P&L, revenue growth, costs, asset quality and capital, and execution of our strategy. On slide number 10, you will find the summarized P&L focusing on first-quarter results and quarterly comparisons. We see impressive revenue growth primarily due to core revenue increases, with gross income rising 31% in constant terms. Consequently, net attributable profit grew by 38% in constant terms. Slide number 11 highlights our continued improvement in revenue generation capacity quarter after quarter. Our net interest income is increasing, driven by solid activity growth and effective customer spread management. Our net fees and commissions show an outstanding 37% year-over-year growth, mainly supported by payments and asset management. Lastly, gross income has seen excellent growth; however, we noted a quarter-over-quarter reduction primarily due to hyperinflation impacts and the extraordinary banking tax in Spain. Page number 12 reflects our cost performance, showing positive jaws at the group level, with costs growing slightly below inflation figures. The efficiency ratio has improved to 41.2%, reinforcing our status as one of the most efficient European banks. Turning to slide number 13, our asset quality metrics remain aligned with our expectations in the context of robust activity growth, particularly in profitable segments, despite the challenges of higher interest rates. On the left, the cost of risk has slightly increased quarter-over-quarter but remains within our guidance, mainly influenced by activity growth in high-risk retail segments and Turkey’s gradual uptick in costs. The MPL ratio remains stable at 3.4%, with a coverage ratio broadly stable at 76%. On slide number 14, our CET1 ratio increased by 15 basis points in the quarter, now at a strong 12.82%, comfortably above our target range. This includes contributions from our strong results generation and the growth of risk-weighted assets due to our expanding business. On slide number 15, we recap our strategic progress. In Q1 2024, we acquired 2.8 million new customers, marking a record compared to prior first quarters, with a notable share (67%) acquired through digital channels. Moving to slide 16, we have also made significant strides in sustainability, channeling EUR 20 billion in sustainable business during the quarter. We remain committed to increasing our target of channeling a cumulative EUR 300 billion to sustainability by 2025. On slide 17, we emphasize our positive impact on society, having increased our loan book by 9.5% over the past year, and specifically, we’ve assisted 35,000 families in purchasing homes. We awarded over 155,000 new loans to SMEs and self-employed individuals and financed approximately 70,000 larger corporates. We also mobilized EUR 4.9 billion in financing for inclusive growth initiatives. Finally, on slide 18, we revisit our 2021-2024 goals established during Investor Day. While I won't delve into specifics for time, I can confirm that we are well on track to exceed our updated expectations for all metrics. Now, I’ll turn it over to Luisa for the business areas update.
Luisa Gómez Bravo, CFO
Thank you very much, Onur, and good morning to all. Starting on slide 20 with Spain, we have begun the year with strong numbers and a promising outlook due to better-than-expected activity dynamics. Our loan book has grown 0.8% year-on-year, driven by robust new lending flows, especially in consumer lending and mortgages. In mortgages, we have maintained our market leadership with strong new loan production and lower prepayments. The shift from demand to time deposits in the retail segment has been less pronounced than expected, keeping deposit costs well contained. We're also witnessing growth in off-balance sheet funds exceeding 10% year-on-year. Supported by these favorable trends, we achieved outstanding results in the first quarter, with a bottom line of EUR 725 million, which would have exceeded EUR 1 billion without the banking tax. Core revenues continue to drive earnings growth in Spain, with NII posting impressive year-over-year growth. As mentioned, we are improving our guidance for NII to grow at double digits in 2024 due to excellent price management and increased commercial activity. Moving on to Mexico and slide 21, we also delivered exceptional results, reaching EUR 1.4 billion net profit, supported by our undisputed leadership and structural strengths. Core revenue growth is at 9% year-on-year, driven by sound activity dynamics and strong loan growth, which remains focused on the most profitable portfolios. While asset quality is performing in line with expectations, we anticipate continued growth of our loan book going forward. Regarding Turkey on slide 22, the environment remains challenging but stable. Guarantee BBVA achieved EUR 144 million of net profits in the first quarter, with strong gross income supported by good performance in fees and net trading income. Assets quality indicators remain contained despite rate hikes, with cost of risk rising slightly but still within our guidance for the year. Finally, in South America, we've noted a net profit of EUR 119 million for the quarter, supported by strong revenue management, despite higher provisioning needs amid a challenging macro environment.
Onur Genç, CEO
For the summary of the first quarter on page 24, I won't repeat key messages already underscored. Instead, I'd highlight two key points regarding our outlook for the year. First, we are raising our 2024 core revenue outlook for the Group on the back of the upgraded Spain NII guidance to double-digit growth. Consequently, our outlook for the 2024 net attributable profit for the Group has further improved to reflect double-digit growth as well. Now, back to Patricia for the Q&A.
Operator, Operator
Thank you, Onur. We are ready to start with the Q&A. So the first question, please.
Operator, Operator
Thank you. And the first question goes to Maks Mishyn of JB Capital. Maks, please go ahead. Your line is open.
Maks Mishyn, Analyst
Hi, good morning. Thank you very much for the presentation and taking our questions. I have three. The first one is on the outlook for loan book growth in Spain. You have been gaining market share in the last quarters, and I was wondering if you could tell us what's the reason for your gain in market share and what outlook do you see for the coming quarters? The second question is on the number of employees in Spain. You keep on increasing headcount, and it would be very helpful if you could explain why and what we should expect for the future. Finally, the question on capital; you keep on accumulating capital. When can we expect an update on how you plan to deploy this? This would be very helpful. Thanks.
Onur Genç, CEO
Thank you, Maks. On the three questions, regarding the outlook for loan growth in Spain, at the beginning of the year, we anticipated loan growth would be flat. However, we now have a positive bias on this due to first quarter numbers. We have observed quarter-over-quarter increases in our loan book, and we expect to maintain this trend throughout the year. As to why we are gaining market share, we're focusing heavily on segments we value, particularly in the mid-sized company segment, which is not only profitable but also supported by loans digitally distributed to payroll clients. The new customer acquisition grew by 9% in the first quarter. With regard to the number of employees, we are internalizing our technology staff as a strategic move. This internalization leads to an increase in the number of full-time employees (FTE), but overall costs are optimized. Regarding capital, we envision using our generated capital for growth and rewarding shareholders. We aim to generate an organic capital increase of 50 to 60 basis points annually over the next three years, alongside regular payouts.
Luisa Gómez Bravo, CFO
No, I think that was very clear.
Onur Genç, CEO
Very good.
Operator, Operator
Thank you, Maks. Next question, please.
Operator, Operator
Thank you. The next question goes to Francisco Riquel of Alantra. Francisco, please go ahead. Your line is open.
Francisco Riquel, Analyst
Yes. Hello. Thank you. My first question is about Mexico. The stock of deposits fell by over 5% quarter-on-quarter, which is a bigger decline than last year with a similar seasonality. The cost of deposits in Mexico is also trending up, whereas it is starting to fall for some local peers now that interest rates have started to decrease. I also see the migration of the balance sheet has accelerated. So, I wonder if this is all your way of reacting to the aggressive deposit offerings launched by Nubank. If you can give guidance on the cost of deposits and what you expect in Mexico for the upcoming quarters would be appreciated. Then my second question is a follow-up on capital allocation. Is your appetite for continuing to buy back your own shares versus the appetite for M&A, for example, in the context in which Scotiabank might be looking to sell some assets in South America? Thank you.
Onur Genç, CEO
Do you want to take the first one, Luisa, on Mexico?
Luisa Gómez Bravo, CFO
Yes, sure. Okay. In Mexico, we indeed saw demand deposits specifically drop quarter-on-quarter. However, this is also due to typical seasonal trends. In Mexico, we often see a spike in demand deposits at year-end. Year-on-year, demand deposits still show growth of 4.9%. We're maintaining a solid competitive edge regarding our cost of deposits. As for the increased deposit costs, we’re focusing on providing our clients with favorable investment options. Hence, we see strong growth in assets under management and off-balance sheet funds.
Onur Genç, CEO
Paco, one quick addition here. It's a shift between wholesale funding from the market versus wholesale deposits. This reflects our funding strategy, influenced by the market conditions. We also completed wholesale issuances in Mexican pesos. In terms of market data, we've gained market share in retail demand deposits, which contradicts the competition narrative. Regarding the share buyback versus M&A, our focus remains on organic growth. We analyze opportunities but continue prioritizing our established growth strategy.
Operator, Operator
Thank you, Paco. Next question, please.
Operator, Operator
Thank you. The next question goes to Benjamin Toms of RBC. Benjamin, please go ahead. Your line is open.
Benjamin Toms, Analyst
Morning, both. Thank you for taking my question. I'll keep it to one. It's a high-level conceptual question. You printed an ROTE this quarter of 17.7%. Global rates will likely come down from here. I'm just interested in your degree of confidence that 2024 isn't as good as it gets, and you expect in the next couple of years that profits and returns will keep growing from 2024 levels. Thank you.
Onur Genç, CEO
Benjamin, very straightforward answer. We don't think we have reached the peak. As I mentioned, 17.7% includes the extraordinary Spanish tax impact. Moving forward, we expect 2024 to show continued growth due to positive dynamics in Mexico and Spain. The return on tangible equity will remain strong as loan growth continues and inflation is managed effectively. We're positive about upcoming quarters and the long-term trajectory.
Operator, Operator
Thank you, Benjamin. Next question, please.
Operator, Operator
Thank you. The next question goes to Marta Sanchez Romero of Citi. Marta, please go ahead. Your line is open.
Marta Sanchez Romero, Analyst
Thank you very much. My first question is regarding South America. Its contribution to the group remains subpar. Just 5% of earnings this quarter, but it consumes 14% of capital. What are you doing to close that gap, which keeps widening? Related to this, what is the rationale of sticking around in Argentina? My second question is on Mexico. The net NPL entries keep going up. When do you see a change in trend? Lastly, what is your expectation for the Mexican peso and how much of your P&L have you covered? Thank you.
Luisa Gómez Bravo, CFO
In South America, we’re seeing a slower contribution, but this is primarily due to the economic cycle we're currently in. The macro context still poses challenges, affecting our earnings growth. Regarding Argentina, we believe that the new government's measures are moving in the right direction. Despite the challenges, we're well-prepared and strategically positioned in Argentina, focusing on profitable segments and gradually improving our position. In Colombia and Peru, we're observing various dynamics impacting our performance, yet we remain confident in our strategies to enhance profitability.
Onur Genç, CEO
I would emphasize that in South America, particularly in Colombia, we are making strategic enhancements, gaining market share and navigating challenging economic conditions effectively. As for Mexico, we anticipate changes in trends for NPL entries and coverage improvements as economic dynamics stabilize. The macroeconomic shifts should positively influence our risk metrics in the upcoming quarters. We're also managing our exposure to the peso effectively.
Operator, Operator
Thank you, Marta. Next question, please.
Operator, Operator
Thank you. The next question goes to Antonio Reale of Bank of America. Antonio, please go ahead. Your line is open.
Antonio Reale, Analyst
Good morning. It's Antonio from Bank of America. I have two questions. The first is a follow-up on your outlook for NII growth in Spain. You've guided double-digit growth in 2024, which is remarkable. Can you direct how you expect NII in Spain to perform in 2025? The second question is about efficiency. The efficiency ratio remains within your guided range for the year, below 42%. You've a strong track record in maintaining positive jaws, while you continue to invest in your IT digital infrastructure. Now, the market, at least looking at consensus numbers, doesn't believe you can sustain this in 2025. Can you talk about your expectations for operating jaws next year and remind us of the mitigates should growth be slower than you expect? Thank you.
Onur Genç, CEO
Thank you, Antonio. It's important to clarify that we typically do not provide detailed guidance this far in advance. For 2025, we maintain a positive outlook for net attributable profit and are confident in continued loan growth in Spain. While we anticipate flat or slight declines in bottom line metrics due to rate reductions, we will employ various management levers to support our revenue streams. Managing our costs effectively to exceed market expectations continues to remain a part of our strategic plan.
Operator, Operator
Thank you, Antonio. Next question, please.
Operator, Operator
Thank you. The next question goes to Sofie Peterzens of J.P. Morgan. Sofie, please go ahead. Your line is open.
Sofie Peterzens, Analyst
Yes, hi. Here is Sofie from J.P. Morgan. Thanks for taking my question. Regarding your guidance for double-digit net interest income growth in Spain, could you elaborate on your underlying assumptions regarding rates and deposit beta? Also, what are your thoughts on the countercyclical buffer in Spain? Thank you.
Luisa Gómez Bravo, CFO
For double-digit NII growth in Spain, activity dynamics remain positive, and we're adjusting our beta projections. We're now anticipating a beta below 25%, stemming from stronger deposit cost control. Our guidance reflects this positive pricing management and keeping costs stable as interest rates fluctuate, mainly due to enhanced loan origination efforts. As for the countercyclical buffer, technically, there should be no increase, given that we are still deleveraging overall.
Onur Genç, CEO
In Spain, given the current economic environment, we foresee minimal impact from a potential increase in the countercyclical buffer, which we've been able to sustain due to our solid capital position and effective risk management strategies.
Operator, Operator
Thank you, Sofie. Next question, please.
Operator, Operator
Thank you. The next question goes to Alvaro Serrano of Morgan Stanley. Alvaro, please go ahead. Your line is open.
Alvaro Serrano, Analyst
Good morning. I've got a couple of follow-up questions on NII. In Mexico, first, your guidance, if I remember correctly, was high single-digit NII growth, which implies a significant acceleration in the next few quarters. Is that correct? Can you elaborate on what you expect? In Spain, just to follow up, the detail you've given shows loan yields up 7 basis points in the quarter. How much more repricing from the mortgage book is left? Is this increase driven more by business mix? Just a bit of color on that. Thank you.
Onur Genç, CEO
In Mexico, our guidance was for high single-digit NII growth. However, we anticipate more significant acceleration. Despite quarter-over-quarter fluctuations, we're looking at a substantial pipeline in loan growth. In Spain, we don't expect substantial further repricing, seeing that our mortgage mix remains consistent and competitive. We're focusing on controlling costs effectively while optimizing our revenues.
Luisa Gómez Bravo, CFO
We don't expect major repricing from our loan books as we approach peak rates. However, continued focus on mix effects will support our outlook. The significant amounts in our portfolios have shown a consistent demand while delivering effective yields to sustain profitability.
Operator, Operator
Thank you, Alvaro. Next question, please.
Operator, Operator
Thank you. The next question goes to Ignacio Ulargui of BNP Paribas Exane. Ignacio, please go ahead. Your line is open.
Ignacio Ulargui, Analyst
Thanks very much. I just have one question. Looking to Turkey, if you could provide a bit of color on the evolution of its NII and customer spread? How do we expect these to evolve? Also, could you help us understand the outlook on fees given the strong performance we observed? Thank you.
Onur Genç, CEO
We still expect spreads to be negative in the second quarter, but positive in the latter half of the year as the economic environment stabilizes. Fee income in Turkey remains robust, primarily driven by the customer franchise. The strong performance in fees and trading income indicates a solid outlook for future revenues.
Operator, Operator
Thank you, Ignacio. Next question, please.
Operator, Operator
Thank you. The next question goes to Britta Schmidt of Autonomous Research. Britta, please go ahead. Your line is open.
Britta Schmidt, Analyst
Could you comment on the Mexican rate outlook? What have you included for 2024? What do you expect for 2025? Also, regarding your profit guidance, you're guiding double-digit growth year-on-year after what would have been EUR 2.5 billion Q1 with the banking tax. How will the run rate change in the second half? What are the main drivers for that change? Thank you.
Onur Genç, CEO
For 2024, we're assuming a 10% average rate. BBVA Research estimates the Central Bank rate will reach 9.25% by the end of the year, with lower expected rates for 2025. We're guiding double-digit growth in net attributable profit based on improving trends. The drivers for these changes are positive loan growth and profitability across major markets. We remain focused on achieving sustainable growth.
Operator, Operator
Thank you, Britta. Next question, please.
Operator, Operator
Thank you. The next question goes to Andrea Filtri of Mediobanca. Andrea, please go ahead, your line is open.
Andrea Filtri, Analyst
Thank you. First question on trading results in Q1. Could you specify the contribution from the FX hedges? Second question is on your expectations regarding risk-weighted asset growth, given the high print this quarter and your increased loan growth guidance. Lastly, can you elaborate on your expectations for the NII trajectory in Spain in 2025?
Onur Genç, CEO
For Q1, we recorded a negative NTI of EUR 265 million due to Mexican peso appreciation impacting our hedges. Regarding risk-weighted assets, we expect continued growth, mainly aligned with our loan growth. While the 43 basis points raised this quarter is high, it's associated with profitable growth dynamics.
Luisa Gómez Bravo, CFO
We maintain a strong capital position and continue optimizing our balance sheet, balancing risk and growth strategically. As for NII in 2025, we aim to optimize costs and employ management strategies to counter the anticipated rate changes.
Operator, Operator
Thank you, Andrea. Next question, please.
Operator, Operator
Thank you. The next question goes to Carlos Peixoto of CaixaBank. Carlos, please go ahead. Your line is open.
Carlos Peixoto, Analyst
Hi, good morning. Thank you for taking my call, my question. Most of them have already been answered, but I wanted to discuss a bit on the fee income outlook, particularly in Spain and Mexico. In Spain, you had guidance towards slight growth in 2024, but you actually had up 6% year-on-year. Should this level be considered a one-off, or are you expecting recurrent growth? How do you see fees evolving in Mexico? That would be great. Thank you.
Onur Genç, CEO
Thank you, Carlos. Fee income indeed showed strong growth this quarter, particularly in Spain. We believe the positive trends in asset management and payments indicate that this can be a solid foundation for future growth in fees as well. Our focus on serving affluent clients through mutual funds and other investment products supports our expectations going forward in both Spain and Mexico.
Operator, Operator
Thank you, Carlos. Next question, please.
Operator, Operator
Thank you. The next question goes to Chris Hallam of Goldman Sachs. Chris, please go ahead, your line is open.
Chris Hallam, Analyst
Thank you for taking my question. Just two on Mexico. Is there a sort of flaw in the loan to deposit ratio regarding how far below 100% you would be comfortable operating? Is there any risk that we're approaching a point where some opportunities on the asset side won't be fully realizable due to funding constraints? Secondly, regarding the peso, does the recent movement impact your hedging strategies? Are you currently around 60% hedged on Euro-Mex? Any updates on this would be helpful.
Onur Genç, CEO
Currently, our loan-to-deposit ratio in Mexico is 99%. We choose to fund ourselves through the wholesale market. We're comfortable operating below 100% given our strong market presence. On the hedges, we're at 60% coverage currently and will adjust that gradually based on market conditions. This level ensures our risk exposure is managed effectively.
Operator, Operator
Thank you, Chris. Next question, please.
Operator, Operator
Thank you. The next question goes to Ignacio Cerezo of UBS. Ignacio, please go ahead, your line is open.
Ignacio Cerezo, Analyst
Hi, good morning. I've got two quick follow-ups. One on deposit competition in Mexico. Can you provide color on the overlap between the Fintechs and your customer base? Is there significant overlap? Second question on your profit outlook; is it logical to expect that hyperinflation and FX headwinds in Turkey will ease quickly for the next year? Is this considered in your guidance?
Onur Genç, CEO
In terms of deposits, while competition from Fintechs exists, we've still managed to gain market share in retail demand deposits, evidencing our performance. Our strategy remains robust. Regarding Turkey, we are optimistic about the easing of inflation and FX challenges in the future as long as the government's policies remain effective.
Operator, Operator
Thank you, Ignacio. Next question, please.
Operator, Operator
Thank you. The next question goes to Fernando Gil of Bestinver. Fernando, please go ahead, your line is open.
Fernando Gil, Analyst
Hi, thank you for taking my question. Just two quick ones. One on tax rates; I see Latin America tax rates being very low this quarter. Could you comment on the group divisions and units during 2024? Secondly, could you comment on NPL coverage? I see figures declining quarter-on-quarter. Can you discuss overlays and the outlook going forward? Thank you very much.
Onur Genç, CEO
Regarding NPL coverage, we've seen changes due to portfolio sales and transitional definitions of defaults. Although the overall figures might reflect a decline, this aligns with our strategic focus. Concerning tax rates, we expect them to stabilize around 33% for the year, consistent with last year's performance. Adjustments might occur in specific regions based on local dynamics, but overall, we anticipate stability.
Operator, Operator
Thank you, Fernando. This concludes our Q&A session. Thank you all for your questions and for joining this first quarter earnings call. The entire IR team will be available to address further inquiries. Thank you very much.