Edited Transcript of LBK.MC earnings conference call or presentation 4-May-20 8:30am GMT

Madrid May 8, 2020 (Thomson StreetEvents) — Edited Transcript of Liberbank SA earnings conference call or presentation Monday, May 4, 2020 at 8:30:00am GMT

Liberbank, S.A. – Chief Corporate & Financial Officer

Liberbank, S.A. – Head of Corporate Development and IR

Liberbank, S.A. – CEO & Director

Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [1]

Hello. Good morning, everyone. This is Juan Pablo López from Liberbank. I’m here today with our CFO, Jesús Ruano; and our CEO, Manuel Menendez.

As in previous quarters, we’ll go through the presentation, and then we’ll answer the questions.

Manuel Menendez Menendez, Liberbank, S.A. – CEO & Director [2]

Thank you, Juan Pablo.

Good morning, everyone, and thank you for attending our first quarter results presentation. These are extraordinary times, and our thoughts and prayers are with all of those who have lost loved ones. I would also like to thank the entire Liberbank staff and family, especially those in the front line, who have continued to work and are playing a crucial role of making sure our clients suffer the least disruption possible during these very difficult times.

Banks like ours play a fundamental role acting as part of the solution for both families and corporates by ensuring that the monetary transmission mechanism remains fluid. Unlike past crisis, strongly capitalized banks should be part of the solution. We see recent decisions made by authorities, both in the fiscal and the monetary side, as a recognition that this is the case.

The following slides aim to give investors confidence that our bank is in very good shape to deal with the challenges ahead. I take great confidence that the transformation that the bank has undergone over the last years will allow us to navigate the crisis in the right direction.

And now let me start with Slide #3. The commercial dynamics during the quarter continued to be sound, and this reflects on our P&L account. Our core revenues, both net interest income and fee income, performed well. At the same time, we continue to maintain costs under control. This reflects on the continued improvement of our cost-to-income ratio now at 58%.

From an asset quality point of view, we continue to reduce the stock of NPAs during the quarter, and we believe we stand in a good position to face this crisis compared with the previous one.

Let me comment some important differences. Firstly, our credit risk policies are based on the best practices of the savings banks integrated in the bank since some of them were among the most conservative savings banks and with one of the best metrics in the past, namely in mortgage portfolio. Obviously, we have improved those risk policies over the time, and we continue doing that with the methodologies of the IRB models.

Based on information about our mortgage portfolio, we feel comfortable with the new production of the last years and some of its key metrics such as loan-to-value levels, affordability ratio, proportion of borrowers with permanent job and mortgages with at least 2 borrowers.

Secondly, and very important, we are not allocating management’s time to the integration of the savings banks, which now are fully integrated. We are and have been fully focused on the business during the last years.

Thirdly, we are based in regions and exposed to sectors less sensitive to the COVID-19 period crisis. An example is Extremadura, where the public sector and agriculture represents almost 40% of this region’s GDP. [That is a lot of Spain.]

Another important example is our exposure to tourism, restaurants, airlines and oil and gas, which, combined, only represents 1.5% of our total loan book.

Lastly, we also believe that residential mortgages that represent close to 60% of our book will perform well during the crisis since the recovery might be in a short period of time than the previous one.

We do not want to sound too optimistic. We are fully aware of the fact that the economic crisis will be severe and that there is a higher degree of uncertainty. This is the reason why we booked EUR 23 million precautionary provision related to COVID-19. We believe that the cost of risk we saw in this first quarter are set as a good indication of what we expect in the coming few quarters.

The crisis will, however, also be an opportunity to further deepen relationships with our customers, and we are already seeing those openings to establish relationships with new clients.

Regarding solvency, the bank stands in a very strong position, and we expect capital ratios to keep growing during this crisis. We would benefit from tailwinds in the next quarters, such as risk-weighted assets relief, thanks to the ICO granted loans; the positive impact from the cash transaction; or the approval of the IRB models. We also expect lower capital deductions from software intangibles in line with the recent European Commission’s announcement.

Moving now to the next slide. I’m being a bit more specific about some of the main topics of this quarterly results. Let me start with the evolution of the bank’s commercial activity.

Loan growth has been very solid at almost 7% year-on-year driven by residential mortgages but the commercial — the corporate book has decreased a bit. As you know, we recovered part of our market share in corporates during 2017, 2018. But during the last few quarters, we have been more cautious as the risk return was not attractive enough for us. Customer resources continued to perform well.

And I would like to highlight the performance of mutual funds. We saw very few reinvestments in the quarter. And actually, the net subscriptions were up 56% compared with first quarter ’19, which is remarkable and is one of the reasons why the evolution of our assets under management or performance of the sector by 6 percentage points.

I am very pleased with the evolution of assets under management during the month of April, which also benefited from net inflows. We believe that this data are a reflection of our strategy of long-term savings planning for our customers.

Regarding profitability, we commented before that we have been able to grow our core revenues in a challenging environment while reducing the bank’s OpEx base and keeping the cost of risk under control. We keep gaining market share in our key products, like mortgages or mutual funds, and this is having a reflection in the P&L.

Moving now to asset quality. The stock of NPAs is down 26% year-on-year and 5% quarter-on-quarter. This was a good quarter that allowed us to keep reducing the NPA ratio from 8.6% to 8.2%.

The NPL ratio decreased slightly and stands well below the sector, while NPL entries continue to remain low as a result of our more defensive loan book.

Gross real estate asset outflows amounted to EUR 100 million, of which 61% was land. We are very pleased with this level of activity in a difficult environment, and we expect to continue to sell assets through the year.

And lastly, the Texas ratio dropped to 52%. We have already touched on solvency. But let me emphasize again that we stand in a strong position and expect to continue to grow our capital ratios in the following quarters.

We already commented in the previous quarter, but let’s not forget the cash transaction, which will add 17 basis points and 37 basis points to CET1 and total capital fully loaded ratios, respectively. In addition, we will receive EUR 43 million payment with no impact on future fees.

We continue to improve our shareholders’ value creation. The best example is the increase of the tangible book value per share, plus 7% year-on-year, including share buybacks. In this regard, we are planning to cancel the shares we bought in the context of our share buyback program.

Moving now to Slide 7. I just want to highlight that the bank has been and continues to be fully operational during this period, with 60% of our branches open and 20% partially open. Our systems are robust, and we are well prepared to change the way we work. We believe that this crisis is also an opportunity to rethink the business model that will follow a change of our customers’ behavior as they are increasingly using remote channels.

In the next slide, we show some relevant KPIs. First, on the top left, is the use of the credit lines by our customers. As you can see, liquidity draws were relatively stable during the first quarter, with a slight increase that more than reverted in April. We believe that this could reflect that our customers are managing their cash stress in a reasonable way so far. Another reason is that some of our customers are also using the State guaranteed lines. So far, our take-up from the first 2 tranches amounted EUR 719 million. The equivalent is finally amounted to EUR 100 billion. State guaranteed loans would represent close to 40% of our corporate book.

Moving to the box on the top right. We want to highlight that, even during the crisis, our teams are working close to customers.

Regarding our 2 key products. New mortgage production amounted to EUR 114 million during the month of April. And mutual funds are recovering, up 3% versus the end of March, thanks to the better market performance and positive net inflows. Production levels have obviously slowed down, but there is still some activity, and we are being able to capture it. Lastly, regarding the mortgage moratoriums, both public and sector led, Liberbank is helping and supporting the households.

As of the 30th of April, mortgage moratorium requests amounted to close to 2% of our loan book. Requests for consumer moratorium were almost negligible, also reflecting our very small exposure to consumer loans, which had negligible exposure to products such as revolving credit.

And now I pass the presentation to Jesús. Thank you.


Jesús Ruano Mochales, Liberbank, S.A. – Chief Corporate & Financial Officer [3]


Okay. Thank you very much, Manuel, and good morning, everyone.

So we start the block of commercial activity first. The positive trend of previous quarters is maintained, as you can see. Customer funds on balance sheet go up by 1.4% in the quarter, while we are paying almost 0.

In mutual funds growth, we continue to outperform our peers. They increased by 11% in the last 12 months, and they go down by only 4.6% since December last year, while sector volume has gone down by 6 percentage points more.

Mutual funds fees are EUR 9 million in the quarter, going up by EUR 2 million comparing to the previous quarter, and they already represent 18% of total fees after having increased their weight by 7% in the last 3 years.

Insurance premiums are up 5% year-on-year, led by strong performance in life and home insurance, which are up 12% and 3.4%, respectively. Therefore, our balance sheet and our capital consumption businesses continue growing in line with our strategy. In mutual funds, despite adverse market conditions, we are growing again. In April, we have seen more subscriptions than redemptions. So we are very confident in recovering the good trend we were following before the COVID outbreak.

In lending, we also saw a good commercial momentum, leading to a 6.8% yearly growth or 2.6%, excluding public institutions. Mortgage book maintains a good pace with an increase of 4.5% in the last 12 months, while consumer and other grows at 6.6%. Corporate book falls in the quarter, mainly due to the amortization of large tickets.

Total new originations, excluding public sector, goes up by 3% comparing to the first quarter last year, mainly thanks to the good performance in residential mortgages. Right now, new production is coming down, although it is not 0, as shown by the EUR 114 million we have done in April, which is a pretty good number, taking into account the current conditions which represents 67% of the monthly average during the first quarter. We are foreseeing a recovery in new production associated to the recovery in the macro that is expected from the last part of this year onwards in this particular book mortgages.

Regarding corporates, in the first quarter, we still not see the growth associated to the ICO guarantees, and we were being quite conservative as it was difficult to find attractive, reasonable opportunities. But as you can see, in April, we have signed EUR 750 billion (sic) [EUR 750 million] by making use of ICO guarantees. We are estimating a high single-digit growth this year in this book, assuming the government completes the EUR 100 billion program announced.

In consumer lending, new production goes down by 8% year-on-year, as we have been very prudent here in the past as well, and we are expecting this group to get slightly down in 2020.

Continuing with the mortgage portfolio. We have been achieving growth while preserving asset quality, as can be seen in this slide. Just to give you some references, average LTV of the portfolio is 51%, while only 4% of the portfolio has LTV above 80%. Average affordability ratio is 27%. And most of the portfolio is funded by domestic residents, first home and the 15% are civil servants. Current NPL ratio in this book is also well below the average of the sector, as you can see, 2.4% comparing to 3.5%.

In recent years, new production have been as strict as always, as shown by the levels of affordability and LTV at the bottom of this slide. Almost all contracts have been signed by permanent workers. And in 69% of the cases, there are 2 borrowers or more. Affordability ratio is even lower comparing to the back book.

So in summary, we are very comfortable with this book, which represents 59% of the total. Residential mortgages have always been a core product for us. And we have a very good track record and experience with best-in-class risk management tools, including IRB methodologies.

Continuing with other loan books. At the right, you can see consumer finance represents only a 2.5% of the portfolio and a 1.15% national market share, half of what we have in retail banking. But apart from a much lower way comparing to peers, let me highlight that it is a very low-risk one. We have not developed open market agreements for direct lending. We have a negligible revolving credit, only EUR 23 million. Average yield is 6.5%, below the average of the industry, as our portfolio is formed by preapproved loans to existing clients of whom we have good information on their behavior. Our current NPL ratio is 4.5%, well below the average in the industry.

We are also very confident in the low-risk of our corporate book. You can see in the left. It has a 23% weight. Thus, quite low, comparing to other peers as mortgages’ weight is 59% in our case.

We have a negligible exposure to oil and gas or to the airlines industry, while hotels, restaurants and tourism represent only 1.4% of the total loan book, while they are collateralized in 80%. Therefore, the non-collateralized exposure to these segments is as low as 28 bps. This is quite differential comparing to the average of the sector as these segments have a much higher weight in the Spanish economy, as you know.

One of the reasons explaining this differential mix in our corporate book is our geographical presence, more relevant in regions with higher weighting sectors like industry, agro-food or services. We have very little presence in the most significant tourist regions in the Mediterranean Coast or in the islands. Our portfolio is quite balanced in terms of average size, with large and medium-sized corporates representing almost 2/3 of the stock. Most of our clients have a long track record, having passed several crises. Performing restructured loans represent only 0.5% of the total loan book, and another differential element is the collateralization. The total book has 45%, which is higher than in peers.

Moving to our digital plan. It continues to evolve very well. Today, we have 43% of active digital clients coming from 38% a year ago. Only in the first quarter this year, we have captured more than 10,000 new clients, and we have sold 20% of the consumer loans and 7% of the residential mortgages to the digital channels. Complementing the digital plan, we have also developed during the last months our remote manager team, discovering around 190,000 clients. And we are seeing, in general, that the efforts are worth it, and this is being differential now that we are having lockdowns or mobility restrictions. Our clients are also increasing their knowledge and use of our digital platform, and there’s no doubt this situation will bring further efficiencies we were expecting later on time.

Okay. We’ll move now to the block on the P&L. Recurring NII went up by an 8% comparing to the first quarter last year, supported by loan book and lower wholesale and retail funding costs. During this quarter, we have also benefited from a EUR 14 million one-off corresponding to default interest of a legal claim we have won and already collected in cash. And regarding our estimates for the year, we are expecting a growth of 2% to 3% based on the good commercial activity in the first quarter, leading to a stable loan book in the year, increasing Euribor and lower cost of funding. Considering the said one-off, growth should be above 5% in the year, therefore, a quite positive performance expected.

On margins, customer spread in the quarter goes down by 3 bps, while net interest margin, excluding the one-off, goes up by 1 bp. As can be seen in these charts, we have been able to maintain margins quite flattish in this year despite the drop in reference rates. Now we have the 12-month driver at minus 12 bps, as you know, while our portfolio floating is at minus 28 bps on average. So we have a gap of 16 bps to be closed supporting the NII positive trend.

On asset yields, excluding public institutions, front book yields stand 46 bps above back book. In general, prices are very much in line with the fourth quarter last year, although we have started to see an improvement, as shown by the 8 bps higher new production price in residential mortgages during March comparing to the average of the quarter. And we expect this trend to continue not only in mortgages but in the rest of the books, given the current more difficult context. Prices progressively tend to improve.

Cost of funding in the first quarter, EUR 1.7 billion of term deposits matured at 8 bps, while new production in the quarter has been done at 1 bp. In the case of site deposits, we have also eliminated the special remuneration we had in certain groups of employees, and they are currently at 0. So we shall see a — so we anticipated a very significant reduction in interest cost of client deposits in almost the cost half of what we had last year. And regarding wholesale financing, in the first quarter, we have amortized EUR 88 million in covered bonds that had a cost of 118 bps.

Recurrent fees increased by 10% in the first quarter this year comparing to the first quarter last year. Nonbanking fees go up by 14%, supported by mutual funds that go up 26%. Banking fees also saw a positive trend, mainly explained by the higher activity.

Therefore, the beginning of the year has been quite positive as we are almost doubling our mid- single-digit growth target. And given this strong first quarter, we are expecting positive growth for the year in recurrent fees in spite of the lower activity in the context of COVID-19. And on the top of this positive recurring growth, we are expecting to close the cash transaction in the short term, receiving a EUR 43 million payment without changing our current distribution fees. Therefore, this is not, as we commented in the previous results presentation, this is not at the expense of future revenues. And apart from this positive one-off, we may have some minor other ones at similar levels comparing to previous years.

OpEx, including amortization, falls by 4.5% year-on-year, supported mainly by administrative expenses and also, to a lower extent, by personnel costs also go down. Our intention is to be this year as close as possible to last year OpEx, including amortization. And this first quarter has been very satisfactory in this sense as we have achieved — more than achieved our target at the same time at which we continue with our digital plan and branch restructuring.

Underlying loan loss provisions amount EUR 14 million in the quarter, representing a 23 bps annualized cost of risk in line with our guidance. But on the top of that, we have booked a EUR 16 million generic provision, bringing up annualized cost of risk to 49 bps in line with the level we are foreseeing now for 2020 full year, taking into account the impact from the COVID.

And lastly, in the P&L. The full account, the good trends in the core lines, as I have commented, together with the one-off in the NII, are reflected in a strong growth at all the levels down to the pre-provision profit, which goes up in more than 60% comparing to the first quarter last year. Other operating revenues and expenses are minus EUR 15 million. As in this quarter, we concentrate a significant part of the taxes associated to the real estate portfolio. Comparing to the last year, the net cost is EUR 6 million lower as the payment to the resolution fund will be accounted in the second quarter in line with our peers.

Below the pre-provision profit, we have booked EUR 4 million in provisions associated to restructuring measures and litigation costs. In the other profit and losses line, we have a negative impact of EUR 17 million, including a generic provision of EUR 7 million and some other specific provisions for foreclosed assets and success fees for our services on the sales in the quarter, which have been quite significant as we will see in a minute. This EUR 17 million in 1 quarter could be a reference for next quarters this year as the COVID impact, we have some influence in the foreclosed asset portfolio.

Below this line, pre-provision — sorry, profit before taxes is EUR 27 million in the quarter, slightly below last year, and profit after taxes is EUR 19 million.

Okay. Now I’m going to pass the word — no, sorry, we have a section now on asset quality, and then we move to solvency that is going to be covered by Juan Pablo today.

NPL’s stock is in line with the previous quarter, with NPL ratio going slightly down, standing around 160 bps below the average for the sector. We have been affected in our recovery process in the last weeks of March, as most legal and administrative processes have been paralyzed. Otherwise, the ratio would have improved more. Coverage stands at 49% while taking into account collateral value. The net book value of the stock is more than fully covered.

The stock of foreclosed assets goes down by EUR 105 million in the quarter. Interest from NPAs are only EUR 28 million, while we have sold EUR 100 million and rented EUR 33 million. Of the EUR 100 million outflows, 61% is land. So this is very remarkable. We consider that this has been a quite good quarter in spite of the difficulties in March, on the second half of March. And our intention is to continue reducing the stock in forthcoming quarters. The second quarter is going to be more difficult. But progressively, we shall recover momentum, together with the economic recovery expected, and the portfolio should continue going down.

Well, I’m finally on asset quality. We continue to improve our ratios. Only in this first quarter, despite the lockdowns at the end of March, we have been able to reduce the NPL ratio from 8.6% to 8.2%. NPL ratio is at 3.2%, quite normalized already and well below the average of the industry, as you can — as we have already seen. According to our preliminary estimates, it should stand below 3.75%, even in the most adverse scenarios that we are managing now.

The majority of the NPA’s stock is real estate where we continue reducing the stock, probably at a lower — at a slower pace than before, especially in these first months, but improving from the last part of the year as the expected recovery takes place. Texas ratio is 52% after having dropped 14% in the last 12 months.

And now we’ll move to solvency that is going to be covered today by Juan Pablo, and then I will finalize later the presentation. Thank you.


Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [4]


Thank you, Jesús.

Now moving to the next topic, solvency. In the chart on the left, you can see the CET1 fully loaded has remained flattish quarter-on-quarter as the market impact on lending growth are offset by the first Q net income, the NPA’s reduction and the 2019 cash dividend that we added back to the capital following the ECB recommendation.

On the right, we find very interesting this table. Here, we summarize the main drivers for our capital ratios in the short term. First one is the Caser transaction. Everything is progressing as anticipated, and we plan to close in the following months. We expect a positive impact of 17 basis points and 37 basis points in CET1 and total capital fully loaded. Additionally, we will receive a EUR 43 million cash payment that we plan to use to reinforce our coverage ratios due to the COVID uncertainty.

Second, at the end of April, there was already a reversal of the market impact on our EDP stake and our fixed income portfolio. This is another 12 basis points positive.

Third bullet point. Regarding the package recently announced by the European Commission, it seems clear to us they want to accelerate and get the approval for some initiatives as soon as June. It’s true that we are still missing some details, but we can tell you that right now, we did that 71 basis points from our CET1 fully loaded due to software intangible assets. And our first — and this is preliminary expectation is that we could reduce this deduction by close to 80%. This is another 57 basis points positive impact. But as I said, this is still preliminary, so please take it with all the disclaimers.

Next one, SMEs factor. This could mean another 3 basis points due to lower risk-weighted assets. As you can see, and with the disclaimer and assumption on software assets, the sum of the first 3 bullet points could be close to 90 basis points positive impact on CET1 fully loaded and more than 100 basis points on total capital.

The fourth point is the organic capital we expect to generate during the year. Let me come back here to the state guarantees. As Manuel mentioned, our take-up so far has been almost EUR 720 million, and the average guarantee is around 75%. We’ll update you in the future and see what is new credit. But in any case, you could expect a reduction of risk-weighted assets in the coming quarters because, as you know, the guarantee part risk-weighted is 0%.

Then the IRB models approval, starting with the mortgage book. As you know, all our portfolios are under standard models.

And the last point is IFRS 9. We are including the full impact from the first application in 2018 in our fully loaded ratios. This is a 28 basis points impact. For the time being, we are not applying any transition relief. We hope this is clear. But as you can see, there are significant organic and regulatory tailwinds. Some of them are specific for Liberbank in the short term.

Moving now to the next slide. On the left, let me just clarify, we are comparing our capital requirements to our current capital ratios. We are not including any pro forma or any of the tailwinds that we just covered in the previous slide. This is as of March. Even in that case, you can see our excess capital over the CET1 fully loaded requirement is more than 450 basis points, around EUR 800 million, a comfortable management buffer. It’s also comfortable in terms of MDA.

On the right, very quickly, we have been able to increase our tangible book value, thanks to organic generation and the 62 million shares that we bought back and we plan to cancel in the next weeks.

Lastly, regarding the dividend and following the ECB recommendation, we added back the 2019 cash dividend to capital. Having said that, the Board could eventually, and after reevaluating the impact of the COVID crisis, decide to propose a shareholder distribution, probably not before October this year.

That’s all from my side, and I pass to you, Jesús.


Jesús Ruano Mochales, Liberbank, S.A. – Chief Corporate & Financial Officer [5]


Okay. Thank you very much, Juan Pablo.

And we have the final section, on wholesale positions, very briefly, and then we’ll go to the Q&A.

As always, we maintain a strong liquidity, strong equity ratios. As you can see, LCR goes up from 221% to 248% in the quarter. NSFR is at 112%, in line with the previous quarter; and loan-to-deposit ratio goes down from 100% to 99% in the quarter.

In wholesale funding, the main change is that we have amortized the EUR 1.1 billion of the EUR 9.2 billion TLTRO II that we have, and that we are making use of ECB’s bridge finance while reducing repo with the intention of fully taking the amount of the TLTRO III in June, which is EUR 4.5 billion for us. With the new conditions set, starting at minus 100 bps, we will be able to make close to EUR 45 million in the first 12 months and half that amount per year beyond. In addition to this, as you know, we have the carry-on adhering. So average cost keeps reducing, as you see, 9 bps in the quarter, and we expect it to go down much further with the TLTRO III from June.

Well, finally, fixed income portfolio has not changed much from the previous quarter. Here, just to highlight that, with the larger size of the TLTRO III in around EUR 1.8 billion for us, we have much room to increase the size of the portfolio, apart from the quite strong liquidity position and balance sheet structure that we have.

So this is all on the presentation. Thank you very much. So I’ll pass the word back to Juan Pablo, and we move to the Q&A. Thank you.


Questions and Answers


Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [1]


Okay. Thank you, Jesús.

Now moving to Q&A. We can start with the first topic, P&L. There are some questions regarding NII guidance and credit evolution guidance.


Jesús Ruano Mochales, Liberbank, S.A. – Chief Corporate & Financial Officer [2]


Okay. Thank you. Well, on NII, we are estimating 2% to 3% recurring growth based on a higher average yielding loan book, also supported by a higher Euribor, lower retail funding costs and better TLTRO conditions. And on the top of that, please note again the already mentioned EUR 14 million one-off interest payment commented on that we have already collected in the first quarter.

Well, the second part of the question, lending volumes. What we see is the loan book flattish this year instead of experiencing a mid-single-digit growth. That was our previous guidance. In corporates and SMEs, we estimate an 8% growth in the performing book, assuming the government completes the EUR 100 billion ICO program, and we make full use of it. Depending the split between the different types of corporates, we could be receiving more than EUR 1.5 billion in guarantees, and you have to multiply by at least 1.2 in order to see the total lending. So it could be around EUR 2 billion. And this compares to a total corporate and SME book of EUR 5.6 billion. So this is very material. And as Juan Pablo has explained, and also very material in risk-weighted assets and around capital. In the public sector book, we are estimating a reduction of the stock, but not too significant. And in retail, we expect stability, a slight decrease in the consumer and mortgage books.

So this is portfolio by portfolio what we are expecting from the fourth quarter this year onwards. We estimate recovery together with a macro recovery that is expected. This could mean growing again at mid-single-digit levels, with mortgages being a core product again next year in new production.


Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [3]


Okay. Maybe one clarification on the NII guidance. The — if we — the recurrent NII, we expect to grow around 2%, 3%. This is excluding the EUR 14 million.


Jesús Ruano Mochales, Liberbank, S.A. – Chief Corporate & Financial Officer [4]


Yes. Sorry if I was not clear. I think I also explained it in the presentation. 2% to 3% is the recurrent NII growth expected, and on the top of that, we have the EUR 14 million. So adding those EUR 14 million, the growth — total growth expected in the year will be above 5%.


Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [5]


Okay. Now moving to the fee income growth guidance.


Manuel Menendez Menendez, Liberbank, S.A. – CEO & Director [6]


Yes. The beginning of the year was, again, very strong increase due to the dynamic activity in assets under management, as we said in the presentation, insurance and the increased activity back in phase 2.

Regarding assets under management, I would like to emphasize again that in April we have had EUR 14 million in net mutual [inflows].

So growth is almost 10% without any nonrecurrent fees in the quarter. And given this good first quarter, we are forecasting a minor growth in the full year in recurrent fees in spite of lower commercial activity that we expect for the next quarters.

This year, as we mentioned, we will benefit again by some recurring positive impacts, namely the payment from Helvetia related to Caser’s agreement, which amounts to EUR 43 million. And for the next year, we maintain our mid-single-digit growth target in recurrent fees, continue with the positive trend that we were following until the COVID.


Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [7]


And maybe next one, probably for you as well, regarding OpEx guidance.


Manuel Menendez Menendez, Liberbank, S.A. – CEO & Director [8]


Yes. Regarding OpEx, as you know, our target is to maintain operating expenses, including amortization, below EUR 400 million per year. Last year, we closed with EUR 383 million. And in 2020, we expect to be very close to this number as we will benefit from the different measures we took last year and as we maintain our pressure on costs permanently, looking for further efficiencies.


Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [9]


Okay. Now maybe we can move to asset quality, and we can cover there the cost of risk guidance. But probably, we can start with NPL’s guidance target.


Jesús Ruano Mochales, Liberbank, S.A. – Chief Corporate & Financial Officer [10]


Okay. Our NPL ratio goes slightly down in the quarter, as we have seen, standing now at 3.2%. So it’s almost normalized position and well below the average of the sector. As you know, our target for year-end was to reduce it to 2.5%, but we need to review this target, taking into account the current situation with the COVID. In any case, we see the NPL ratio below 3.75%, even in the most adverse scenarios we have analyzed.

Going book by book and starting with the residential mortgages one, which represents 59% of the total, its quality is very solid, shown by the 51% average LTV, 27% average affordability ratio, 93% weight of first residence or 15% weight of civil servants we have seen in the presentation. When looking at the new production generated over the last 2 years, 99% has at least 1 borrower with a permanent job and 69% have at least 2 or more borrowers. LTV at inception is low at 69%, and affordability is even below that of the stock at 26%.

We are a mortgage specialist, and this has a reflection in asset quality. We barely have any refinance mortgages outperforming. And so far, the claims that have requested payment moratoria only represent 2% of the book. Well, this is likely to grow. This loan number is already reflecting asset quality in our view.

As you know, residential mortgages was the most resilient book in Spain during the previous crisis in spite of the fact that it mainly came from the collapse of the real estate residential market, something totally different from today’s situation in which there’s not a babel in residential real estate prices and in which families have a much more normalized level of debt.

In our case, going back to the origins of Liberbank and to Cajastur, we had, at those times of the previous crisis, the best-in-class NPL ratio in this segment in Spain, with a peak slightly above 2% in our home market, while the sector’s average NPL ratio peaked at 6.3%.

In corporates and SMEs, as we have seen in the presentation, our geographical footprint and also areas of lending expertise have kept us away from certain sectors that will be the most affected by this crisis. Exposure to hotels, restaurants and tourists in general represents only around 1.4% of our total loan book, and it’s collateralized, as I have commented, in 80%. We have conducted a comprehensive work and we have talked to all our corporate and SME clients since the COVID-19 outbreak, in some cases, 2, 3x or even more in order to check what their situation is and what their liquidity needs are. So a bottom-up approach. And we have then cross-checked this analysis with our top-down view. And we are pleased with the fact that the use of existing credit and liquidity lines has been contained and is now even below the end ’19 levels. Besides, I would like also to stress that the ICO guaranteed loans are proving to be a very good tool to deal with our clients’ needs.

Lastly, as I explained during the presentation, our exposure to consumer finance is very small, with almost a negligible exposure to the most problematic segments, such as revolving credit or direct lending.

So to conclude, the COVID-19 crisis is obviously of great magnitude, and we don’t deny the high degree of uncertainty that lies ahead. But we feel that the composition of our loan book should help us to navigate this environment with certain comfort.


Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [11]


Okay. Now moving to foreclosed asset strategy, how do we see the next quarters?


Jesús Ruano Mochales, Liberbank, S.A. – Chief Corporate & Financial Officer [12]


Okay. Well, on foreclosed asset strategy in general, in sales, disposal plan, the first quarter has been very good, as we have seen, in spite of the difficult situation from mid-March, where it was difficult physically to sign the transactions. But in spite of that, we have done EUR 100 million. Right now, the commercial activity is low, although this is to — we’re starting to recover in the last days. We are taking advantage of the current impasse in order to improve product availability for final buyers once things normalize, something that we expect to happen in the fourth quarter this year. Our intention is to continue selling assets, mainly based on retail channels, continuing with this plan and reducing the stock progressively.


Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [13]


Okay. Next one is regarding NPA’s target, if we can give any color on that.


Jesús Ruano Mochales, Liberbank, S.A. – Chief Corporate & Financial Officer [14]


In spite of the — again, in spite of the difficult situation during the last weeks of the quarter, we have been able to reduce the NPA ratio from 8.6% to 8.2%. So we think this is very remarkable in this first quarter. Our current target is to close 2019 with an NPA ratio around 6%. However, we have to review it, taking into account the current situation. In any case, we will try to reduce the NPA ratio this year versus end March levels. Some increase in the NPA ratio should be more than offset by continued disposals of foreclosed real estate assets, albeit at lower levels versus the plans we had earlier.

This year, we are benefiting in our P&L from the EUR 14 million one-off in the NII we have shown today, and we will also benefit from the EUR 43 million positive one-off coming from the Caser deal, which we expect for the second quarter. So we have flexibility in the P&L to support this continued reduction of NPAs, even in this difficult context. As commented during the presentation, we have already booked EUR 23 million in generic provisions during the first quarter in order also to facilitate continued reduction of NPAs.


Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [15]


Okay. We still stay here in asset quality, but now we move to P&L. First one is cost of risk guidance.


Jesús Ruano Mochales, Liberbank, S.A. – Chief Corporate & Financial Officer [16]


Okay. For many quarters, we have maintained cost of risk below our 25 bps guidance, including this first quarter. And on the top of this, we have taken EUR 60 million COVID-19-related loan loss provisions charge against our performing book, which takes the reported cost of risk in the quarter to around 50 bps. So far, we are not seeing a material deterioration in our portfolios. We have already explained in the presentation, we are not much exposed to the most problematic sectors in this crisis, but we also recognize that the uncertainty is very significant. And in this context, we have followed a top-down analysis, taking into account the macroeconomic forecasts that are being published in recent days actually, and we have complemented this with a very comprehensive bottom-up analysis, which we continue to refine as the situation evolves. And based on all this, our best estimate for the cost of risk for 2020 is around 50 bps. For 2021, it’s too early to say. Our best estimate right now is for a decline in the cost of risk as given the rapid deterioration in the macro. This year, a significant part of the provisions are front-loaded, applying expected loss models, while next year, there should be an improvement.

The way we see it, we run a low-risk loan portfolio that places us in a relatively good starting point to deal with this crisis.


Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [17]


Okay. And last one, regarding asset quality is related to the impairments of the foreclosed assets.


Manuel Menendez Menendez, Liberbank, S.A. – CEO & Director [18]


Well, as you know, this is a legacy real estate portfolio coming mainly from a bank that was integrated into the group. We continue to sell assets in large amounts every single quarter, and we have managed to reduce the stock by 27% in the last 12 months and by 56% over the last 3 years. In a very difficult quarter, we have sold EUR 100 million in gross value terms, 61% being land. And the current crisis will put some pressure on real estate prices, although a rapid recovery is also expected according to all the sources that are publishing estimates. So this will require some extra effort, but we are quite confident that it will not — it should not be more than what we have seen in this first quarter.


Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [19]


Okay. Maybe now one question regarding commercial activity. This is related to the ICO lines. If we could share what are the conditions in terms of yields, risk-weighting that we already mentioned the duration.


Jesús Ruano Mochales, Liberbank, S.A. – Chief Corporate & Financial Officer [20]


Okay. Well, this — as it is published, these guarantees cover from 60% to 80% of the principal, depending on the size of the company and the type of the loan. So in general, we are expecting 75% more or less guarantee, and this will mean a significant relief in risk-weighted assets. There’s a guarantee cost that goes between 20 to 120 bps, depending on the size of the company and depending on the length of the financing, that moves from 3 to 5 years. These are mainly the conditions of these lines. As I said, 2 tranches have already been approved, and it has been announced that a new tranche of EUR 20 billion is coming as soon as probably tomorrow. And then the total program is EUR 100 billion. So there could be 2 more tranches apart from the 1 announced for tomorrow.


Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [21]


Okay. Maybe one comment on this is that our initial take-up was a bit lower. It was EUR 670 million. But the ICO granted us an additional EUR 50 million because the first tranche was not fully used by some banks. And on the other hand, banks like us, we were relatively quick. The commercial teams close to the clients and the IT systems were ready and the recommendation, and that’s the reason why we were able to cover our first tranche, 100%. On top of that, the ICO granted another EUR 50 million to us.

And now moving to capital. There are some questions regarding the capital, what our general thoughts regarding capital. Probably, Manuel, this is for you.


Manuel Menendez Menendez, Liberbank, S.A. – CEO & Director [22]


Yes. Thank you, Juan Pablo. Regarding capital, as we mentioned during the presentation, we have a very strong position already at 13%. And we already mentioned the upside that we expect due to some things like cash transaction, ICO guarantees or positive impact of the IRB models. Our reason is that, even in the most hard scenario, we see the capital going up in — for coming quarters. And I would like to emphasize, to mention too, that our 13% CET1 ratio fully loaded does not include any IFRS benefit, and it does not include any potential benefit from the recent measures announced by the European Commission. In this context, we have to mention that the IP software currently reduced 71 basis points from our CET1 fully loaded ratio, as we mentioned during the presentation. And all in all, we expect, as I said, an increase in our capital ratios in the coming quarters.


Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [23]


Okay. There is one follow-up question on this, it’s regarding if we have or we can share any plans with the excess capital that we have.


Jesús Ruano Mochales, Liberbank, S.A. – Chief Corporate & Financial Officer [24]


Well, it is true that our previous target was 12% CET1 fully loaded. We are at 13%, as we have seen today, and we have very significant levers on the top of that. So we see the capital raising as we have commented. But — well, right now, we have, as you know, ECB recommendations in place, and we are focusing on supporting our clients’ needs. But once we have less uncertainty and a better view, we will decide how to use this excess capital. We have seen already very significant buffers and probably the possibility of accounting with more Tier 1 or more Tier 2. Really the buffers are shown in the presentation, very significant. As you can expect, increasing shareholders’ remuneration reinforce coverage levels if needed and cost-savings initiatives, our main lines of work. But as I said, we need more visibility, and we’ll update you accordingly.


Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [25]


Okay. Now very quickly, a clarification regarding the dividend accrual. We are not accruing any 2020 dividend so far. Maybe one question for you, Manuel, is regarding the dividend policy and share buybacks.


Manuel Menendez Menendez, Liberbank, S.A. – CEO & Director [26]


Regarding dividend policies, as you know, following the ECB recommendation, our Board, we will propose not to pay any dividend against 2019 net profit. So we are adding back the EUR 22 million we were deducting from our capital position, and we will decide later this year whether it makes sense to pay these dividends out to our shareholders against reserves.

Regarding the share buyback program, as of March 31, we have purchased the 61.6 million shares or slightly over EUR 16 million, which represents 2% of the share capital. The execution of this program has been interrupted following the ECB’s recommendations book. We intend to cancel these shares in the short term. So I think it makes sense to calculate our per share ratios like taxable equity per share, excluding those shares already, as we show them in our presentation. Given our strong and increasing capital levels, even in the most other scenarios, as I mentioned before, we expect to be in a good position to restart dividends and share buybacks as soon as there is more visibility of the end of this crisis, always following ECB’s recommendations, of course.


Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [27]


Okay. And last one regarding capital, Manuel. This is regarding IRB models. Any update on that?


Manuel Menendez Menendez, Liberbank, S.A. – CEO & Director [28]


Yes. Regarding IRB models, the outside phase of the internal models investigation finished in January, as we mentioned in the previous presentation. According to our information, the supervisors are preparing their report for decision. So therefore, although there is right now an impasse, the process should be restarted soon.


Juan Pablo López, Liberbank, S.A. – Head of Corporate Development and IR [29]


Okay. Thank you very much, Manuel.

Today’s presentation was a bit longer than previous one, but there were a lot of new topics. We hope to see you in the next one. Thank you.


Jesús Ruano Mochales, Liberbank, S.A. – Chief Corporate & Financial Officer [30]


Okay. Thank you. Take care.

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