Earnings Call Transcript - BBVA Q4 2022

Operator, Operator

Good morning. Thank you very much for your interest. I'm joined today by Onur Genc, our CEO, and Rafael Salinas, BBVA CFO. As in previous quarters, Onur will start reviewing the group figures and then Rafael will go through the business units. Then we will move to the live Q&A session. And now, I will turn it over to Onur.

Onur Genc, CEO

Thank you, Patricia. Good morning to everyone. Welcome and thank you for joining our 2022 results audio webcast. I hope you have had a great start to the year. So let me just jump into it. Slide number three. So I'll start with that page by highlighting the outstanding results of the year. First, in going through the lines on the page, we have made significant progress in the execution of our strategy focused on profitable growth. We are accelerating our profitable growth. At the same time, we are leading in the digital and sustainability space. We ended the year having acquired more than 11 million gross new active clients, a new all-time record; 78% of our unit sales have been done digitally, another all-time high. We are also at the forefront of the industry in terms of sustainability. In 2022, we channeled €50 billion in sustainable business; again, another record. Second line, we have achieved the highest annual net attributable profit ever €6.6 billion, an increase of 31% versus 2021, which represents also a 48% increase in our earnings per share. Third, we continue delivering on our commitment to profitable growth and value creation for our shareholders with ROTE, return on tangible equity of 15.3% and an exceptional 19.5% increase of tangible book value per share plus dividends. All of this obviously is allowing us to significantly increase distributions to our shareholders for a total amount of €3 billion, which is equivalent to €0.50 per share. While at the same time our CET1 ratio continues comfortably above our target of 11.5% to 12%, as you know, our target. These highlights are what I would be expanding upon in the coming pages, but just to reiterate, the common theme of all the numbers in this page is that we are growing and we are growing profitably. Moving to Slide number four; new customer acquisition, our relentless focus on this, growing our franchise, is the healthiest way to grow our business. Our focus on this has allowed us to acquire 11.2 million gross new active clients in 2022, more than doubling the client acquisition that we had five years ago and this has also allowed us to reach more than 67 million active clients in stock in 2022. Additionally, the share of those acquired through digital channels has also increased from 7% in 2017 to 55% in 2022. This 55% we believe is a clear differentiator versus most of our competitors. Moving to Slide number five, our leadership in digital has also proven to be essential and differential again in serving our customer base. Let me again put some figures to this on the page. On the left-hand side of the page, you see that we have almost 50 million mobile customers, a figure almost three times higher than in 2017 and a record 70% penetration rate on mobile. At the same time, our digital sales, as I mentioned, have reached 78% in terms of units and 61% in terms of value. This leadership in digital obviously translates into higher client satisfaction. As you can see on the right-hand side of the slide, the Net Promoter Score is continuously improving in the group, clear leadership positions across the main countries or our footprint as you can again see on the page, and in the last year, we have improved our customer satisfaction by five percentage points, which is very strong. Slide number six; another piece of our strategy that we put a lot of energy and efforts into is sustainability. We see ourselves as trendsetters in sustainability. We maintain our top-ranked European bank position in the Dow Jones Sustainability Index for the third year in a row. As you can see on the left-hand side of the page, we have set clear targets in our goal of achieving net zero by setting decarbonization targets in key CO2-intensive industries. We are very serious about achieving these goals by accompanying our clients in the process and supporting them with investments for decarbonization. Sustainability is also a great business opportunity. In 2022, we channeled more than €50 billion in sustainable business, totaling €136 billion cumulative since 2018, and we remain aligned with our increased target of channeling €300 billion to sustainability by 2025. Then page number seven, I'm going to walk you through the financials. 2022 has been a great year. We delivered the highest annual recurrent and reported profits in our history. I'm very happy with that result. In the bars at the center of the slide, you can see the upward evolution of our annual results. Beyond the fact that it's the highest; the trend you see in this page, in my view, is impressive. In 2020, we had €6.6 billion of recurrent profits, 31% higher than the €5.1 billion recorded in 2021, which was already at an exceptional level. This result brings our earnings per share to €1.05 with an increase of 48% year-over-year, significantly higher than the growth of profit, thanks to the share buyback executed in 2022. Lastly, let me note that for comparison purposes, all figures exclude the non-recurring impacts reported on those respective years. Even those reported figures show our best-ever profit. Slide number eight, our tangible book value per share plus dividends continues its outstanding evolution, closing at 7.79%, a 19.5% increase year-over-year. I believe in this presentation, we have a lot of impressive figures, but this 19.5% growth in tangible book value per share plus dividends is one of the most notable in my view. In terms of profitability, on the right-hand side of the page, we continue to improve our excellent profitability metrics, reaching 14.6% return on equity and 15.3% in ROTE. With these numbers, we believe, at the end of the nine months, we have compared it, we are still one of the most profitable European banks, in fact, the highest ROE bank among the 15 largest European banks at the end of the third quarter, and we keep advancing on these metrics. Slide number nine, I think it's important; we always compare ourselves in every single geography to competition. Competitive success is what we're after. How do our numbers at the group level compare with competition? On slide number nine, we want to highlight again our exceptional comparative performance in profitability and efficiency metrics. On the left-hand side of the slide, our tangible book value per share plus dividends growth of 19.5% compares with the 3.8% for the average of the peer group, and in the center of the slide, our mid-teens ROTE of 15.3%, compares very favorably with the 7.4% for the peer group. Lastly, on the right-hand side, a key element of our success is our strong efficiency levels, standing at 43.2% versus 62.8% of our peers. So comparatively, we are creating a very good picture as you can see on this page. Slide number 10, in terms of the details of the financials, I will quickly summarize: First, outstanding core revenues and activity growth; Second, our improving and industry-leading efficiency ratio; Third, highest annual operating income ever; Fourth, very solid asset quality metrics, with the cost of risk clearly aligned with our guidance; and lastly, our strong capital position, comfortably above our target range. Let’s jump into slide number 11. Looking at the summarized P&L for the year. Again, many numbers on this page, but I would like to highlight the excellent evolution of gross and operating income, improving 22.9% and 29.2% respectively, driven by strong core revenues and positive jaws in the case of operating income. Also, note the evolution of impairments, where asset quality remains solid in this profitable growth context. Slide number 12 shows the quarterly P&L year-over-year comparisons. The standout is the impressive 47.5% increase in operating income, again driven by strong core revenues and positive jaws, resulting in excellent net attributable profit growth of 29.8%. In terms of quarterly evolution, gross income and operating income increased 6.6% and 4.2% respectively, versus the third quarter despite being negatively affected by the once-a-year deposit guarantee fund contribution in Spain. We do it in the fourth quarter, as you know, and given that the quarterly comparisons at revenue numbers can be misleading, even with that, we have grown our revenues. The overall fourth quarter of 2022 reported net attributable profit stood at €1.578 million as you see on the page. Slide number 13; there are many numbers on this one, but one of the clear highlights has been revenue. I don’t want to dwell too much on the page's details, but please register the excellent trend in revenues, particularly net interest income, which is increasing each quarter. Page number 14; let me do a quick deep dive on net interest income growth in Spain and Mexico, so that you can see why we remain optimistic for the quarters to come in 2023. The strong loan growth for the group has accelerated since last year; 13.3% versus the 5.6% of 2021. In the center of the slide, you see improvement in customer spreads for Spain and Mexico, our two core geographies. In Spain, spreads have strongly picked up in the fourth quarter to 221, following the recent increase in interest rates. It takes a bit longer in Spain to reflect higher rates in spreads, and that is clearly happening now. For Mexico, interest rates have been increasing for several quarters. Lending yields and customer spreads have a longer track record of consistent improvement. On the right-hand side of the slide, you see strong NII growth, both quarter-over-quarter and year-over-year; 26% in Spain, 35% in Mexico in constant Euros, with quarter-over-quarter numbers at 17% in Spain and 8.5% in Mexico, very positive figures. Slide 15 discusses costs and jaws. We ended the year with positive jaws, with gross income growing more than costs. Costs are growing 15.5%, well below the blended inflation rate in our footprint, improving our efficiency ratio, the best among our European peers, further to 43.2% from 46% last year. Slide 16 shows that asset quality remains solid in this growing context. Our NPL ratio continues to improve, including the effect of a debt sale in Spain. As we do every quarter, we update the macro conditions and set additional provisions in vulnerable portfolios, leading to a quarterly increase, but still resulting in a cost of risk of 91 basis points, within guidance and below pre-COVID levels. Our coverage ratio slightly decreased to 81%, partially due to the sale mentioned. Slide 17 reaffirms our commitment to value creation for our shareholders. In line with this and in accordance with our payout policy, I am pleased to announce that the proposal for the next Annual General Meeting seeks the distribution of a total amount of €3 billion for 2022. This payout totals €0.50 per share, including a cash dividend of €0.43, 39% higher than last year, which will be paid in April 2023, subject to approval, alongside a previously distributed €0.12 per share in October. We propose a new share buyback program of €422 million, equivalent to 1.1% of BBVA's market cap. We have been growing profitably, generating capital organically, and remain dedicated to sharing this profitable growth with shareholders in terms of higher remuneration. Slide 18; our CET1 fully loaded as of December 22, remains strong at €12.61, comfortably above our target range. The changes in the quarter include: a strong results generation which contributed 47 basis points to the ratio; dividend payments detracting 20 basis points; a relatively contained RWAs growth contributing 25 basis points; and a positive impact of 14 basis points due to market-related fluctuations, particularly hyperinflation credits. The positives outpaced around 20 basis points of regulatory impacts and model updates for the year. We have already incorporated these impacts into our capital figures. In January 2023, we saw a relevant positive one-off from the reversal of the NPL backstop deduction, increasing our CET1 ratio to a pro forma 12.80%. This showcases our impressive ability to generate organic capital while also allowing for profitable growth to finance. Page 19 summarizes our long-term targets announced at the Investor Day in November 2021, which we are on track to meet. Rafa, let’s move to the business update, I turn it to you.

Rafael Salinas, CFO

Thank you, Onur. Good morning, everyone. As Onur said, we are very happy to present outstanding results for the year '22. I would like to highlight asset management and the positive contributions from all franchises, focusing on delivering on our commitments and exceeding the objectives set at the beginning of the year. I will now comment on the performance of our main franchises and provide guidance for 2023. Let me begin with Spain. Slide number 21. Some business trends show strong result evolution, continuing the fourth quarter and closing an excellent year. A positive loan growth with significant market share gains throughout the year, both in consumer lending at 140 basis points, and in commercial at 76 basis points enable us to shape a more profitable lending mix. This translates into solid dynamics in terms of P&L. Pre-provision profit hits double-digit growth in '22, above 13%. The main driver here is the NII, which clearly accelerated in the fourth quarter, achieving high single-digit growth year-on-year above expectations. Despite positive growth in banking services and insurance fees, total commissions are affected by lower asset management fees due to market evolution. Our expenses decreased by 4.1% year-on-year, showcasing our cost control commitment amidst higher inflation and growth in activity. Overall, we've seen a significant improvement in our efficiency ratio to 47.5% in '22, down from 51.7% last year. In terms of asset quality, the cost of risk improved to 28 basis points in '22, driven by solid underlying asset quality trends throughout the year. Higher impairments in the last quarter, as Onur mentioned, are mainly related to macro scenario updates and additional adjustments in certain portfolios, following an increase in our conservatism in the models. To sum up, we achieved very strong results, reaching close to €1.9 billion on a recurrent basis. For '23, we expect similar positive dynamics. The NII trend should accelerate further, as a higher percentage of the portfolio resets to rates as seen in our guidance. Expectations for expenses will slightly rise in the mid-single digits in '23, while efficiency will continue to improve. Our outlook for the cost of risk in Spain is around 35 basis points in 2023, slightly higher in the new economic scenario, but manageable in consideration of strong provisioning during the pandemic and new loan origination policies. Slide 22, turning now to Mexico. Once again, we are happy to share an outstanding set of results. We achieved strong loan growth in the year, with balance maintained amongst retail and wholesale segments. Despite the inflationary environment, we are benefiting from positive economic momentum in retail and hybrid working capital needs in commercial segments. In terms of P&L, it was a fantastic year in Mexico, as net profit reached a record figure of €4 billion due to impressive revenue growth close to 26% year-on-year. NII growth is supported by strong loans and customer experience that has increased 71 basis points during the year, benefiting from effective asset repricing while the cost of deposits remains well-contained. We’ve seen robust performance in fees, growing based on our higher volumes in credit cards, transaction IDs, and payment services. Moreover, efficiency improved to an outstanding 31.7%. We maintained solid risk metrics with a cost of risk improving to 247 basis points for the full year, while the NPL ratio continues to decline, and the coverage level rises to almost 130%. For 2023, we expect activity dynamism to continue, with the loan book growing at double digits. We see clear opportunities for growth in the country, and we are well-prepared to take advantage of these. Slide 23, regarding Turkey, I would like to point out the significant de-dollarization of the balance sheet during the year. The leverage of foreign currency loan continuum where targets led deposit grew strongly, favored by the conversion of foreign currency deposits above the growth of the TL loans book. The net profit for the full-year '22 stood at €509 million driven by good underlying business trends and better than expected FX evolution. On a quarterly basis, net profit continued to improve in constant terms in the fourth quarter, driven by increases in gross income, thanks to higher core revenues, NII supported by activity growth in Turkey and growth primarily from payment services and brokerage, alongside a lower quarterly high proliferation adjustment impacted by the depreciation of the Turkish lira in the last month of the quarter. Financial impairments increased this quarter due to macro updates, while the underlying trend remains sound. The cost of risk stands at 94 basis points for the full year and is contained. Lastly, for '23, we remain positive on what can be achieved going forward. Our priority will continue to preserve the value of the franchise and its fundamentals, both from capital and liquidity perspectives. With elections mid-May, we expect BBVA Turkey to contribute similarly to its 2022 contributions. In South America, Slide 24 shows the regions maintain solid revenue performance. NII growth is the main driver of the P&L in '22, with consistent support from sound loan growth and higher rates. Strong performance in fees has been supported by activity developments across the board, and despite inflationary pressure and increased costs, efficiency continues to improve to a 46.4% ratio by year-end. NPL indicators remain sound, with NPL coverage improving across the year, while the cost of risk remains broadly flat at 170 basis points. In total, net profits in the region exceeded €700 million in '22, more than 80% compared with last year's results. Our guidance for 2023 anticipates costs of risk below 200 basis points in the region, with expectations of efficiency improvements aligning with our long-term targets. Now back to you, Onur, for the highlights and takeaways.

Onur Genc, CEO

Thank you, Rafa. We are a very performance-oriented organization based on numbers and metrics. We always aim to wrap up in half an hour. I have two more minutes; hence I will skip Page 26. The summary I have for you is that, on behalf of the really wonderful teammates at BBVA, we feel very, very happy with what we have delivered in 2022. We have had our best year ever on multiple dimensions, including profits, and the team is motivated and energetic to do even more. That brings me to page number 27, the guidance. Looking to the coming year, as we've seen the first numbers coming along early in the year, we are positive on what we observe and this is reflected in our guidance. On the right-hand side of the slide, Rafa covered key fundamentals which are performing well. We must remain cautious; some uncertainty in the macro environment will affect our business. However, overall, the sentiments are largely positive about our outlook.

Operator, Operator

Thank you, Onur. We are ready for the Q&A session. So the first question, please.

Operator, Operator

Thank you. The first question today is from Benjamin Toms from RBC. Benjamin, please go ahead. Your line is open.

Benjamin Toms, Analyst

Good morning, and thank you for taking my questions. Firstly, on your group cost guidance, which is to grow around average inflation based on the footprint weighted by operating expenses, can I just confirm that the number you expect this to be then is around 16% your weighted average inflation across your geographies? And then on ROTE, the print this year was 15.3%. Your target for 2024 is 14%. That's looking a little redundant at this stage. I think that the net of all your new guidance implies that ROTE in 2023 will be higher than in 2022. Can you confirm that's the case and can I push you to give any guidance that's firmer than that? If not, can you guide when you're next likely to hear an update on your 2024 ambitions? Thank you.

Onur Genc, CEO

Thank you, Benjamin. On maybe the costs, you can elaborate on ROTE. You are right; our original goal was 14%, as we have said, since November 2021. When set, there were comments about whether it was too aggressive. We are already above that. So our three-year plan was set, and we are not even halfway through it yet. The only thing I will say is we are not revising those figures. But as you can see from those pages, in multiple metrics, not only return on tangible equity but also customer growth and tangible book value per share plus dividends, we have clear positive upside potential. Hopefully, we will beat the goals that we have. In short, we're not revising our figures because this is a three-year plan, and we are only in the first year. Furthermore, we have clear positive upside on all metrics. Regarding costs, the 16% inflation we are guiding lies around that. Rafa, do you want to comment?

Rafael Salinas, CFO

No. You are right, Benjamin. The weighted average inflation we project our research department for next year is slightly above 15%. Hence the 16% you mentioned.

Onur Genc, CEO

Benjamin, one addition on these costs; you will see this in the upcoming months and quarters. As you have seen in 2022, in Mexico, we are above inflation in terms of costs. There is still an opportunity to further grow in Mexico. We have been gaining market share consistently, and in 2022 there's continuity in the market, as one of our competitors is being sold. We think further investment into Mexico, which might lead us to remain above inflation in costs, is justified. This is one of the drivers behind the inflation trend. However, for the group, we will aim to be around average inflation, except in Mexico where we may see higher figures than the average.

Operator, Operator

Thank you, Ben. Next question, please.

Operator, Operator

Thank you. Our next question is from Francisco Riquel from Alantra. Francisco, please go ahead. Your line is open.

Francisco Riquel, Analyst

Yes. Thank you for taking my questions and congratulations on the results. First, I want to ask about the deposit beta. In Mexico, 25% in the fourth quarter, while local peers are closer to 35% to 40%. I wonder if you think that you will be able to maintain the gap and what beta do you expect in '23? In Spain, could you comment on the terminal deposit beta you pay for '23 to '24 and whether BBVA will be above or below sector average. Any color you provide on the deposit mix would be great. And second, on capital, can you update on the regulatory headwinds left for '23 please? Thank you.

Onur Genc, CEO

Very good. On the Mexican situation, as mentioned, Francisco, the policy rate currently is 10.5%. Our blended cost of deposits is 2.07%, as you see on the page for the fourth quarter average. How is that possible? Because many of the deposits are demand deposits, which are transactional deposits. I mentioned in previous calls that 40% of salaries in the country go through BBVA regarding the amount. Our transactional nature and acquiring functions for SMEs help us maintain this. As a result, we have a positive difference of 100 basis points in funding cost versus our competitors. While there may be some further increases, the deposit betas will not change much. In Spain, our assumption is that a percentage of demand deposits will move to time. So the percentage yielding to interest rates is key, alongside how much we pay to this fraction and the timing. Given the high liquidity in the system and even after the payment of TLTRO, there will still be ample liquidity remaining. Thus, our expected combined beta is around 20% to 25%. We anticipate that pressure will not be prevalent now, pushing costs very likely to be additional in the latter parts of the year. Ultimately, we will closely watch competition as we do not see competitive pressure at this moment. To summarize, our dynamics are positive because of the high liquidity, even after TLTRO exits from bank balance sheets, and our combined beta for guidance is set at 20% to 25%. Regarding regulatory impacts, I guided you on the regulatory impacts for 2022, estimating less than 35%. It's not very clear in the presentation; however, this year, we've managed a 30 basis point impact from regulation and other model updates.

Rafael Salinas, CFO

No worries, we just listed figures for the sector, among them, you indicated where the weighted average inflation is projected to be slightly above 15%, implying the extent of the beta you described.

Onur Genc, CEO

Regarding Spain, the average beta you’re looking at will be focused on demand deposits. The specifics depend on competition, and overall pressures correlated with interest rates and if any shift will present itself throughout the quarters. We anticipate having adequate systems to manage any changes.

Operator, Operator

Thank you, Francisco. Next question, please.

Operator, Operator

Thank you. Our next question is from Benjie Creelan-Sandford from Jefferies. Benji, please go ahead. Your line is open.

Benjie Creelan-Sandford, Analyst

I'm back on Mexico and perhaps a little more around fee momentum which is still very strong this quarter. If you could talk in more detail about the dynamics there on the card side and your expectations in 2023, should we expect that to remain as strong as it has been? Equally, on net interest income, which guidance is that NII will grow above loan growth. I know you've already touched on the beta; however, in terms of the margin side, is this driven by a change in mix on the loan book side toward higher margin products? Also, are the rates in Mexico anticipated to follow your guidance? Thanks.

Onur Genc, CEO

The first question was on fees, but I'm having an issue with the line today. Let me start with NII, which I think is the second one. If the first question was on fees, let us discuss that as well. NII has two main contributors. When looking at the Mexican loan evolution for the year, higher growth areas include stronger margins. Consumer loans increased by 16% year-over-year; stock credit cards experienced 20.7% growth, and SMEs expanded by 20%. The mix towards higher-spread products is helping. Furthermore, about 40% of our loans, especially on the corporate side, are tied to interest rates, which have risen from 5.5% at the beginning of the year to 10.5% at the end, contributing to this impact. Some of the recent increases were done very recently and we expect another 25-50 basis points. Our BBVA research estimates that another 25 basis points may come in Mexico's next meeting. Hence, the mix effect is crucial and we plan to maintain this for the coming year as well. We will focus on growing in the commercial, SME, and credit card sectors.

Rafael Salinas, CFO

On fee income in Mexico, I believe we will have good performance. While we don’t provide a growth rate guidance, we anticipate double-digit growth thanks to the strength of payment services and brokerage, based on our transaction levels.

Operator, Operator

Thank you, Benjamin. Next question, please.

Operator, Operator

Thank you. Our next question is from Max Mishyn from JB Capital. Please go ahead. Your line is open.

Maksym Mishyn, Analyst

Hi, good morning. Thanks for the presentation and taking our questions. I have two questions. The first one is an outlook for loan growth in Spain. You've seen an increase in new production in mortgages from Q3. Do you see the market improving? How do you expect growth in adjusting new production in early 2023? The second question on shareholder remuneration. Can we assume that buybacks will now be part of shareholder remuneration in coming years? What was the reason to opt for buybacks this time? Lastly, with your strong capital generation and excess, could you consider increasing payouts in the coming years?

Onur Genc, CEO

You've asked three questions, Max, but they're all good ones. To summarize, our loan growth in Spain for 2023 remains flat, with the expectation that mortgage production may see a slight decline. The increase in production you noticed in Q4 was mainly due to baseline impacts. In Q3, we opted out due to pricing dynamics and only returned in the fourth quarter when rates were raised. In the new production front, we anticipate a continued softening in mortgage growth, but consumer loans and corporate loans are expected to show a positive growth trend driven by inflation-driven working capital needs. Regarding buybacks, will they continue as part of shareholder payout going forward? In our Investor Day in 2021, we committed to increased payout policy, and going forward, we have the flexibility to allocate part of our payout to share buybacks. It's already incorporated into our payout strategy, which reflects our commitment to provide attractive returns. Again, I will emphasize a commitment of 40% to 50% of annual payments will be dedicated to cash dividends, aligning with shareholder expectations. We intend to fairly balance with share buybacks as we seek to maximize shareholder value while continuing this ongoing practice of financial prudence, ensuring a consistent and possible increase in cash dividends year-over-year.

Operator, Operator

Thank you, Max. Next question, please.

Operator, Operator

Thank you. Our next question is from Alvaro Serrano from Morgan Stanley. Please go ahead. Your line is open.

Alvaro Serrano, Analyst

Can I have two quick follow-ups and then a question? You said the 20%, 25% deposit beta in Spain; is that the average this year or at the year-end? In Mexico, I missed if you gave your rate assumption, I apologize for that. Now the question is regarding Turkey; while the trends in Spain and Mexico are strong, you've indicated flat profits for this year, which is encouraging. Considering the hyperinflation aspects at the beginning of this year, you mentioned breakeven, but now you expect profits of €500 million. With mid-May elections creating uncertainties, could you reassure us why you’re confident in achieving that profit and what the potential effects of a currency adjustment are? What are you factoring in?

Onur Genc, CEO

Regarding the 20% to 25%; we do not project it as the annual average. We expect this combined beta to kick in around the second half of the year around May or June. However, if conditions improve, it could exceed this expectation; conversely, it may decrease if we witness adverse scenarios. On the rate assumptions for Mexico, we are guiding for mid-teens NII growth. As for Turkey, our contribution could mirror the previous year’s results, as implied by our cautious but informed expectations. The nurturing environment we observe gives us confidence that we can achieve stability. We reassess continuously, especially post-elections, regarding how they may affect the banking market. We believe a stable yet cautious approach will guide us through uncertainty while maintaining our strong principles as one of Turkey's key banking players.

Operator, Operator

Thank you, Alvaro. Next question, please.

Operator, Operator

Thank you. Our next question is from Sofie Peterzens from JPMorgan. Your line is open. Please go ahead.

Sofie Peterzens, Analyst

Here is Sofie from JPMorgan. I have a clarification question and then two questions. First clarification would be when you said that gross revenues adjusting for FX are mid-teens growth or imply roughly mid-teen growth; what FX are you using? Are you using your estimated FX rate for 2023, or the current kind of end of 2022 FX rate? My first question would be, when looking at the free float of guarantee and where its share price currently trades, given that it is no longer part of the benchmark, I understand that this is hurting guarantee somewhat in Turkey; have you considered optimizing free float for guarantee in Turkey by reducing your stake from the current 86% level? Lastly, regarding the elections in Turkey, there are expectations that interest rates could rise substantially from the current levels. You have around €8.5 billion of bonds in Turkey. What capital impact would you expect from every 10% increase in interest rates in Turkey?

Onur Genc, CEO

Sofie, regarding the first question, we use the forward curve for pricing. By observing both Mexico and Spain as key components of our NII, we feed guidance through constant euros. So it is based on the market forward curves as we plan. The second question concerning optimizing the free float, we just bought it and have had prior discussions about whether it was a good deal. Current share price may suggest otherwise, with a buy at 15% marking today at around 25%. Hence, opinions differ, making it hard to measure what was a good deal versus negative perception. However, we are strategic long-term investors, and the anticipated value over time validates our approach.

Rafael Salinas, CFO

With regard to the bond portfolio in Turkey, we aim to maintain resilience regardless of market shifts, and potential capital impacts would be manageable revealing sound risk controls in our base model.

Operator, Operator

Thank you, Sofie. Next question, please.

Operator, Operator

Thank you. Our next question is from Pamela Zuluaga from Credit Suisse. Your line is open. Please go ahead.

Pamela Zuluaga, Analyst

One of my questions was already addressed regarding capital distribution. However, my second one is on asset quality. Is there any upside to your cost of risk guidance of 100 basis points? If asset quality remains as resilient as you have indicated, could we see some release in provisions as tailwinds to earnings? Alternatively, do you foresee any downside risk? I’ve noted that the proportion of exposures classified under Stage 2 has remained unchanged around 8% of gross exposures in special vigilance. But is there any downside risk to your guidance due to potential procyclical headwinds, or have you already factored that in?

Onur Genc, CEO

Pamela, I appreciate the question. It is factored into our projections that we remain dynamic in our approach. As for provisions, we are maintaining a strong buffer informed by our preparatory understanding of economic headwinds. Therefore, existing provisions are adequately placed, allowing a potential upward performance in earnings, while simultaneously mitigating downside risk.

Operator, Operator

Our last question today is from Chris Hallam from Goldman Sachs. Chris?

Chris Hallam, Analyst

It’s a quick one to finish off. On efficiency improvements, should we focus on positive jaws within the guidance; i.e., a sort of stable to slightly improved income ratio rather than solving for the cost growth in current euros? Given that applying the same FX adjustments on costs as on core revenue guidance yields around a 300 basis points improvement in the cost-to-income ratio, which seems substantial, and recognizes the geographic differences in FX impact on costs and revenues.

Onur Genc, CEO

Yes, Chris, absolutely focusing on positive jaws is key, which emphasizes our commitment to maintaining an efficiency profile that holds expenses in check against improving income. Although costs in constant terms aim to grow around average inflation, sticking to our messaging towards positive performance remains a core discipline at BBVA.

Operator, Operator

Thank you, Chris. Thank you, Onur, Rafa, and everyone for your questions and interest. We finish here. Let me remind you that the entire IR team is available to answer further questions you may have. Thank you very much.