Earnings Call Transcript - BBVA Q2 2025

Patricia Bueno, Moderator

Good morning, and welcome, everyone, to BBVA's quarterly audio webcast. As in previous quarters, I'm joined today by our CEO, Onur Genc; and the Group CFO, Luisa Gomez Bravo. Today, along with the second quarter results, we are also announcing the group's midterm goals. Accordingly, we will dedicate the first part of the call to reviewing the quarterly figures and then move on to our strategic objectives. Finally, we will open the line for your questions. So without further delay, I turn over to Onur.

Onur Genc, CEO

Thank you, Patricia. Good morning, everyone. Welcome to BBVA's second quarter 2025 earnings webcast. As Patricia mentioned, we have two main topics today: the second quarter results and our medium-term objectives at the end of the presentation. Let’s start with the second quarter results, focusing on the strong growth of tangible book value per share, which rose 14.6% year-over-year and 2.9% quarter-over-quarter, despite significant currency depreciations. Our profitability improved, achieving a return on tangible equity of 20.4% and a return on equity of 19.5% in the first six months of 2025. In the second quarter, our net attributable profit was EUR 2.749 billion, maintaining strong performance despite falling rates in our core markets and currency headwinds. There are two extraordinary items affecting this figure: first, we closed a tax audit in Spain covering fiscal years 2017 to 2020, which positively impacted our tax rate due to released fiscal provisions. Second, we had a negative impact from U.S. dollar hedges due to currency depreciation. Starting in the third quarter of 2025, these hedges will be accounted for under capital instead of P&L. Together, these items had a positive impact of approximately EUR 150 million on our net attributable profit. Our CET1 capital ratio improved significantly by 25 basis points this quarter, reaching 13.34%. Our first half profits reached EUR 5.447 billion, a 9.1% increase year-over-year, marking a new record. Our return on tangible equity of 20.4% stands out among peers, establishing us as one of the most profitable banks in the industry. Turning to activity and revenue growth on Slide #7, our core revenues grew significantly, with net interest income and fees increasing by 11% and 18% year-over-year, respectively. On Slide #8, our gross income also grew 20% year-over-year, contributing to an outstanding net attributable profit. On Slide #9, the revenue breakdown shows consistent quarterly improvements in net interest income and fees, even amidst macro challenges. The only decline this quarter was in net trading income due to negative impacts from foreign exchange hedges. Lastly, on Slide #10, our loan growth at the group level increased impressively by 16% year-over-year. In Spain, loan growth was strong at 6.3%, and Mexico showed double-digit growth at 11.7%. This robust growth allows us to revise our activity guidance positively for both countries. Despite being rate sensitive, our strong activity growth has compensated for spread compression, leading to increases in core revenues of 2.2% in Spain and 9.6% in Mexico.

Maria Luisa Gomez Bravo, Group CFO

Thank you very much, Onur, and good morning, everyone. Starting with Spain, and on Slide 17, it has continued its impressive momentum in the second quarter, delivering outstanding results in the first half of the year. Net profit reached EUR 1.1 billion in the quarter, supported by ongoing positive dynamics in NII, even in a lower rate environment, sound fees, and lower operating expenses. NII continued to grow by 1% quarter-on-quarter, even in the context of declining rates. This was mainly supported by strong loan growth, up to 2% quarter-on-quarter, particularly in consumer lending and SMEs, the areas that we've been focusing on in the past as well. We also benefited from an improved deposit mix and a higher contribution from the ALCO portfolio. On expenses, as Onur mentioned, we had a positive one-off impact coming from the revision of our VAT payment calculations. Excluding this effect, expenses remained well contained, growing by just 1.3% year-on-year in the first half of the year. Efficiency continued to improve, supported by sound gross income growth and lower costs. Our cost-to-income ratio stands at 31.3% in the first half of the year, or 33% if we exclude the above-mentioned one-offs. Risk metrics also remained solid. Cost of risk came in at 32 basis points for the first half, better than expected. Finally, given the very strong results and positive future projections of the Spanish business unit, we have activated some DTAs, some deferred tax assets this quarter. It is worth highlighting that if the Spanish business unit delivers in line with our expectations in the coming years, more DTA activations can be executed beyond this year. Based on this solid performance, we are pleased to announce that we are improving our full-year guidance across all key lines. We now expect loan growth to accelerate to mid-single digits, NII to show slight growth, fees to increase by low to mid-single digits, and expenses to decline by low single digits. As a result, we are targeting a 33% cost-to-income ratio for the full year. On the asset quality side, we expect cumulative cost of risk to remain below 35 basis points for the year. In conclusion, an exceptional performance of BBVA Spain in the first half of this year.

Onur Genc, CEO

Moving on now to Mexico on Slide 18. Once again, BBVA Mexico delivered a strong set of results in a still uncertain macro environment. Net profit reached nearly EUR 1.3 billion, supported by a solid operating income growth of over 2% quarter-on-quarter, driven by NII growing by more than 2% quarter-over-quarter, primarily supported by strong lending activity across both retail and commercial segments. In addition to the solid lending momentum, we also observed more favorable deposit trends with an improved deposit mix and lower deposit costs, which further contributed to the positive NII performance this quarter. The customer spread remained stable, which is particularly noteworthy in a declining interest rate environment. Recall the Banxico cut rates by 200 basis point since the beginning of the year. On the cost front, we recorded a slight quarterly decrease, reflecting the early impact of efficiency initiatives launched earlier this year. All in, our efficiency ratio remains at an exceptional 30.6%. On the asset quality side, we saw an increase in impairments this quarter, mainly driven by the IFRS 9 macro adjustment following the updated macroeconomic scenario. That said, underlying trends remained solid with cost of risk standing at 324 basis points for the first half of the year. All in all, the solid dynamics observed so far in BBVA Mexico have led us to revise the full-year guidance upwards for both activity growth and cost of risk. We now expect loan growth to be close to 10% by year-end and cost of risk to come below 350 basis points.

Maria Luisa Gomez Bravo, Group CFO

Moving now to Turkey on Slide 19. Garanti BBVA reported a net profit of EUR 412 million, increasing by more than 17% year-over-year. This solid performance was driven by higher core revenues and lower impact from the hyperinflationary adjustment, which more than offset the expected increase in impairments. NII growth was strongly driven by a significant improvement in the Turkish lira customer spread, up by more than 150 basis points in the first half of the year as compared to the same period in 2024. This was driven by both higher yield on loans and lower deposit costs. At the same time, loan growth continued across both Turkish lira and foreign currency portfolios. Fees remain a strong contributor to revenue growth, driven by higher commissions from payment systems as well as positive performance in both asset management and the insurance businesses. The impact of hyperinflation continued to decline in line with the continued disinflationary trend in the country. Impairments increased year-on-year, reflecting a normalization in the cost of risk amid the ongoing macro rebalancing. For the first half of the year, the cumulative cost of risk stands at 164 basis points ahead of expectations. Going forward, we expect it to close at around 180 basis points, as provisioning needs in the retail portfolios remain high. All in all, positive underlying trends, combined with the resumption of the monitoring easing cycle by the CBRT reinforce our confidence in the full-year net profit guidance, which we expect to close somewhat below EUR 1 billion in 2025. Let me remind you that Garanti BBVA's balance sheet shows negative sensitivity to lower rates. And finally, let's turn to South America. The region continued to deliver a strong earnings contribution to the group, achieving a net profit of EUR 421 million in the first half of the year, representing a 33% year-on-year increase. This quarter's solid performance across geographies was further supported by sound lending trends and improved deposit mix and disciplined price management. Despite a lower interest environment, it is noteworthy that the customer spread improved in the quarter in Colombia, while it remains stable in Peru. On the asset quality side, the cost of risk remains well under control in both Peru and Colombia, reflecting improving asset quality trends within what we had anticipated, supported by a more favorable economic environment and the adjustment to our risk appetite in the most vulnerable retail portfolios. These positive dynamics in the risk metrics have led us to review downwards our full-year cost of risk guidance for the region, which we now expect to stand below 250 basis points. Finally, in Argentina, we continue to observe a reduced impact from the hyperinflationary adjustment, driven by easing inflationary pressures. And now back to Onur for the final remarks in the quarter.

Onur Genc, CEO

Thank you, Luisa. So regarding 2025 and the guidance on this Page #21, you have the full list of metrics we have provided you guidance for at the beginning of the year. And as Luisa has just explained, today, we are upgrading our guidance for the full year in the majority of the metrics, as you can see on the page, including the group metrics. And you also see at the bottom of the page, it's worth highlighting here that including the nearly EUR 1 billion of share buyback pending to be executed, potentially more than EUR 5 billion as regular payout from 2025 results. And given the expected end of year 2025 excess capital to be accumulated in total, around EUR 13 billion are expected to be available for distribution in the short term. And lastly, for the main takeaways of the quarterly results, we are all excited to go to the second chapter. So I'd not take time repeating the key messages here. But in short, we are very happy with the performance in the quarter. Now the second chapter in the document is about medium-term strategic objectives. As you know, at last, we are at the final meters of the voluntary tender offer process with Banco Sabadell. For investors to better understand BBVA's intrinsic stand-alone value, we wanted to disclose our objectives for 2025, 2028 associated with the strategic plan that we have launched at the beginning of this year.

Maria Luisa Gomez Bravo, Group CFO

We expect that return on tangible equity to be around 22% on average in the 2025, 2028 period, with a tangible book value growth, including dividends, to be at mid-teens compounded annual growth rate. Our efficiency ratio is expected to further improve and be around 35% in 2028. The cumulative net attributable profit target is EUR 48 billion in this 4-year period.

Onur Genc, CEO

In summary, profitability is expected to increase in Lat Am and particularly in Argentina as macro conditions normalize. As for the rest of the business, let me remind you that this area includes the CIB business in the U.S., Europe, and Asia as well as the digital banks in Europe, Italy, and Germany. For this area, prospects are also very positive, driven by our CIB operations, which is one of our key priorities in the new strategic plan. We project a compound annual growth rate in the high teens and a revenue growth close to 20% through 2028, driven by fees and NTI, making it a significant growth engine for the group.

Patricia Bueno, Moderator

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

Operator, Operator

Our first question today comes from Benjamin Toms from RBC.

Benjamin Toms, Analyst

You outlined your strategic objectives on slides 27 and 29, emphasizing growth, sustainable returns, and strong shareholder distributions. How would your ROTE and CET1 available for distribution appear if calculated using current forward FX rates instead of a constant currency basis? This could significantly impact the difference between your goals and what analysts typically project. Additionally, regarding the benefit of 40 to 50 basis points from simplifying models, further details would be helpful. Can you confirm whether the regulator has approved this figure, or is there a possibility they might adjust it downward? It currently seems a bit too optimistic.

Onur Genc, CEO

Very good. Thank you, Benjamin. On the first question, we are actually using forward rates in every single country, except Turkey, because in the case of Turkey, the forward rates for the next 5 years, they are not really readily available. Turkey is a relatively complicated country. As such, that is why I pointed you to the appendix of this presentation, you will see every single country, the depreciation of the currencies. You will see that in every single country, we are following the forward. In the case of Turkey, given the uncertainty, we actually put a range, a range of different depreciations, one quite aggressive. And what we are seeing is even in that aggressive depreciation scenario, these are the numbers that we commit. But I encourage you to look into the appendix.

Maria Luisa Gomez Bravo, Group CFO

I would add, Onur, that Argentina as well, it doesn't have forwards because the hyper countries... hyper countries. And there, you know that we've always been using our research estimates, which include quite a strong depreciation as it's pointed in the annex as well as in the presentation.

Onur Genc, CEO

We have been discussing the implications of 40 to 50 basis points and whether they can be reversed. If reversal had been possible, it wouldn’t have been included in the presentation, as we have received clear formal approval from the ECB. To provide further detail, our Risk-Weighted Asset (RWA) density at the end of the second quarter was 50%, compared to an average of 29% among European peers. This variance is due to our diverse portfolios across different geographies. Some of these portfolios were using advanced models that resulted in higher risk-weighted assets. Specifically, we conducted a comprehensive review of all our models in collaboration with the supervisor. We received approval to simplify our approach in two areas. The first is with Mexico credit cards, where we will revert to using standard models instead of advanced ones. The second area involves wholesale portfolios in Spain and Mexico; while we will maintain advanced models, we will adopt a foundational approach, using the models for Probability of Default (PD) but not for Loss Given Default (LGD) and Credit Conversion Factor (CCF). Consequently, the positive impact of 40 to 50 basis points will be roughly evenly divided between these two portfolios: Mexico credit cards and wholesale portfolios in Spain and Mexico.

Carlos Peixoto, Analyst

I have a couple of questions as well. The first question is regarding the second quarter, specifically the one-off items. Can you help us quantify the VAT gross impacts in both Spain and at the Corporate Center? Additionally, you mentioned recognizing some deferred tax assets. Could you clarify how much this impacted the P&L and whether it is divided between the Corporate Center and the Spanish unit? My second question concerns the capital distribution related to the EUR 36 billion figure you mentioned. Firstly, is there an intention to distribute the entire amount, or could part of the EUR 12 billion excess capital be retained? To clarify, this distribution excludes the capital impacts from the Sabadell integration. How do you anticipate that amount will change once we consider both the CET1 impact from the Sabadell integration and the additional earnings expected from the deal?

Onur Genc, CEO

Very good. Thank you, Carlos, for the questions. On the first one, and maybe you take the DTAs one, Luisa. On the first one, the one-offs that you mentioned, I think it was Page 4, on the profits for the quarter, basically, 2 things. Again, VAT and tax rate adjustment based on the results of the tax audit. Why not provide some transparency on the whole thing? These 2 impacts were basically around EUR 250 million, both of them. And I can give you the rule of basically half. Half of this is VAT. The other half is tax rate impact. And half of each one of them is basically, roughly speaking, in Spain and the Corporate Center. So you can divide the number of EUR 250 million along these line items and along these business units. The EUR 250 million, I mentioned to you, EUR 150 million, the negative impact coming from U.S. dollar hedges was at a profit level, at the bottom line profit level was minus EUR 100 million. That is why in the presentation, I mentioned to you that the extraordinary impact was EUR 150 million. EUR 250 million from the tax and minus EUR 100 million from the U.S. dollar hedges. I mentioned it in the presentation, but I'm not sure that it was registered. The reason that we also categorize dollar hedges as extraordinary in this quarter is starting from this quarter, starting from the third quarter 2025, we will be accounting that item because it was for CET1 hedges to manage the volatility of the CET1, we will be accounting for this under capital rather than P&L as of this quarter.

Maria Luisa Gomez Bravo, Group CFO

Yes. We estimate the tax rate for the end of the year, which includes the activation of EUR 150 million of deferred tax assets. With the improved visibility we have regarding profitability in Spain, we plan to continue activating deferred tax assets. We currently have close to EUR 1 billion of deferred tax assets that can be activated depending on our future visibility of profits in Spain. That's what I would like to add.

Onur Genc, CEO

Carlos, this refers back to the 2014 and 2015 acquisition of CatalunyaCaixa and Unnim. We acquired some tax assets, but we reported them off-balance sheet because we didn't expect our Spanish business unit to perform as well as it currently is. As Luisa mentioned, we anticipate that over the next five years, the EUR 900 million to EUR 1 billion in DTA assets will begin to flow into our P&L. Regarding capital distribution, you inquired about the EUR 36 billion. While there is a significant footnote in the presentation, that amount is available capital. Our capital deployment priorities are clear. As shown on Page 29, we will generate a total of EUR 49 billion in CET1 capital, with EUR 13 billion allocated for growth and EUR 36 billion earmarked for distribution. I wish the EUR 13 billion for growth were higher because it signifies profitable growth that generates more capital. As you've noted in our plan, we are already gaining market share. We believe EUR 13 billion is the maximum we can allocate for growth, with the remainder, EUR 36 billion, available for distribution. Of that, EUR 24 billion is for regular payouts, amounting to 50% of our EUR 48 billion net attributable profit goal. This leaves us with an additional EUR 12 billion in excess capital for additional distributions. In short, we are slightly over our usual time commitment, but I believe it was warranted. Overall, we are very optimistic about both our current situation and our future. We believe we are uniquely positioned as a bank that achieves exceptional growth and profitability simultaneously. As a result, we have consistently exceeded the targets of our previous strategic plan, and we are confident in our ability to achieve the same in this new strategic cycle.

Patricia Bueno, Moderator

Yes. Thank you. Thank you very much, Onur. We are ready now for the Q&A. So operator, please, the first question.