Banco Bilbao Vizcaya Argentaria, S.A. (NYSE:BBVA) Q3 2023 Earnings Call Transcript
Banco Bilbao Vizcaya Argentaria, S.A. (NYSE:BBVA) Q3 2023 Earnings Call Transcript October 31, 2023
Patricia Bueno: Good morning and welcome everyone to BBVA’s Third Quarter 2023 Results Presentation. I am joined today by Onur Genc, our CEO; and Luisa Gomez Bravo, BBVA CFO. As in previous quarters, Onur will start discussing the group figures, and then Luisa will go through the business areas. Afterwards, we will open the line to receive your questions. Thank you very much for your participation. And now I turn it over to Onur.
Onur Genc: Thank you, Patricia. Good morning to everyone. Welcome, and thank you for joining our third quarter ‘23 results audio webcast. Before going into the presentation, I want to welcome Luisa to the results presentation in her new role as the CFO of the group, although I believe that most of you have already met here, but welcome Luisa. So results, starting with Slide #3. On the left-hand side of the slide, you can see the net attributable profit reaching €2.83 billion, showing another quarter of record results. Again, over the €2 billion mark, the second quarter that we are passing the €2 billion mark and the 13% above the results of the same quarter of last year. These results, they represent also at the bottom of the page, €0.33 earnings per share, 18% year-over-year growth, a higher growth rate, obviously, than the one on net attributable profit due to the share buyback programs we have been executing.
A well-dressed executive standing in front of a bank of sophisticated finance computers.
The graph on the right-hand side of the slide, it shows our capital ratio at 12.73%, reflecting a 6 basis points increase in the quarter after discounting the 32 basis points impact on the ratio from the €1 billion ongoing share buyback program that we are, at the moment, executing. Our CET position, obviously, as also the page shows, remains very clearly above our target range and above the regulatory requirements. Moving to Page #4 showing the consistent growth in our operating income with a very robust upward trend, in our view, that serves as an indication of our potential going forward. It underscores also the strength of our franchises and the success of our profitable growth strategy. Page #5, our tangible book value per share plus dividends.
It continues the outstanding evolution of previous quarters, 18% increase year-over-year and an exceptional 5.5% quarterly growth in the quarter – in the third quarter. And regarding profitability, on the right-hand side, we continue to improve our excellent profitability metrics, reaching 17%, actually surpassing 17% in ROTE and 16.3% in ROI, these numbers being the highest figures over the last 10 years. We remain – with these numbers, we remain clearly one of the most profitable European banks, and we keep advancing on these numbers, keep advancing. Slide #6, focusing on the quarterly results, the third quarter results and year-on-year comparisons. In the second column from the left, what stands out is the impressive 29.1% year-on-year growth in gross income, 32% growth in operating income, which then explains the year-on-year net attributable profit growth of 29.6% in constant euros and 13.4% in current euros.
Slide #7, regarding the first 9 months, cumulative 9 months of 2023 versus the same period last year. Once again, I would highlight very positive gross income evolution, increasing 31.8% in constant euros, led by the increase in NII of 36.5% and also the great fee income performance in our view, growing 17.5%. All in, the strong gross income growth, coupled with the positive jaws and the sound performance of the risk metrics in the current cycle led to an outstanding recurrent net attributable profit of almost €6 billion, implying 32% growth in constant euros and 19% in current euros, excluding nonrecurring impact, as you see, the second line from the bottom in the table. Then Slide #8, some light, as we always do, into the revenue breakdown and the quarterly evolution.
We very much like the trends that we see in this page, very much like them. As we improve our revenue capacity quarter after quarter, quarter after quarter, our net interest income increasing 36% versus last year and 13.4% compared to last quarter, driven by the solid activity growth and the customer spread improvements. Second, on the page, the positive evolution of net fees and commissions at the top on the right, increasing an outstanding 28% year-on-year and 13.6% versus last quarter. thanks to payments, asset management, transactional businesses and all of our businesses regarding the fee income is doing really well. Third, the strong quarterly performance of net trading income, driven by the evolution, especially in Global Markets. All in all, excellent growth in gross income, 29% year-over-year and 9.5% quarter-over-quarter.
Slide #9, we wanted to focus a bit more on Spain and Mexico so that you can also isolate the mix effect of countries. And in this page, it basically highlights our clear conviction of continued revenue growth for the bank, for the group in the coming quarters. On the left side of the slide, you can see the strong loan growth in the most profitable segments in both Spain and especially in Mexico. In the center of the slide, you can see the evolution of customer spreads. In the case of Spain, the improvement continued in the last quarter with spreads reaching 3.33%. And for Mexico, customer spread is at 11.94% maintaining the high level of last quarter with a strong year-over-year increase. On the right-hand side of the slide, as a result of both activity growth and customer spread improvements, you can see the strong core revenue growth year-over-year in both countries 39% growth in Spain and 19% growth in Mexico in constant and also on a quarterly basis, above 5% quarter-over-quarter growth in both countries.
I mean, in core revenues, maybe a quick comment here. You have been asking about the peak, the time the peak will be reached, when is the peak, when is the peak? As we have been commenting in the past and in our view, as this page also shows due to the continued spread improvement in Spain and the strong lending momentum, the volume growth in Mexico, we believe we will continue to post healthy core revenue growth in the coming quarters. In fact, today, we are further upgrading our NII growth expectations for 2023, both for Spain and Mexico. Slide #10. On the left-hand side of the slide, we continue showing positive jaws at the group level, thanks to the good performance of gross income, as I mentioned before, growing 31.8% in the first 9 months of the year, while the costs are growing at 22.3%, mainly due to the impact of high inflation countries.
On the right-hand side of the slide, you can see our efficiency ratio, which shows an outstanding improvement to 41.8%, 328 basis points lower than last year. With this number, we clearly remain clearly remained as one of the most efficient European banks. Turning to Slide #11. In this page, you can see the evolution of our asset quality metrics in the context of activity growth, as we just discussed in the most profitable segments and also the context of higher interest rates. First, on the left-hand side of the page at the bottom, our accumulated cost of risk, it increases 7 basis points in the quarter, 211 basis points year-to-date, mainly explained by two factors. First, and the majority of the impact is coming from here, the mix effect, where we see more activity growth in highly profitable but high cost of risk retail segments and also more growth in emerging market geographies, especially in Mexico.
And second, the reason for the increase, a gradual deterioration of the macro financial environment in South America with downward divisions, as you know, the economic growth, tight funding conditions and other idiosyncratic risks, especially in Peru. In fact, I mean, looking into these numbers, we still see relatively benign asset quality trends. We stick to our original guidance of cost of risk in all geographies, but South America. But due to the deterioration in parts of South America and mostly due to the aforementioned mix effect, we are anticipating our group cost of risk to be slightly above current levels for 2023 year-end. Our NPL ratio on the same page at 3% on the right, it’s slightly improving quarter-over-quarter and also versus the same period of last year, mainly due to the still positive, as you discuss underlying dynamics, especially in the wholesale portfolios and the specific portfolio sale in Spain that we did in July.
Coverage ratio on the same chart is at 79%, broadly stable versus June. Slide #12, on capital evolution. Turning to the waterfall at the top of the page and beginning at the 1,267 CET1. That is the last quarter ratio after the impact of the share buyback that we are executing, the main impact of the quarter. First, our strong results generation, 60 basis points; second, the dividend accrual and AT1 coupons, minus 33 basis points. Third, minus 39 basis points due to the RWA growth, somewhat higher than a typical quarter, but due to the profitable nature of such growth, this will result in even more organic capital in the coming quarters. And lastly, a bucket of others of plus 18 basis points, mainly due to the credit [Indiscernible] accounting-wise neutralizes the deduction in the P&L bucket due to hyperinflation accounting, partially offset this number partially offset by the negative market impacts in total, 18 basis points.
Finally, at the bottom of the page, our latest shareholder remuneration decisions. At the bottom left, our interim dividend of €0.16 paid this month, 33% increase versus last year interim dividend. Then the €1 billion share buyback program that is being executed. We expect to finish this program before year-end and then amortize the shares by the year-end period, hopefully. As I said last quarter and seen in previous pages, we are already a 17% RotaBank with, as we discussed, 18% year-over-year growth in tangible book value per share. With such metrics, we will continue to create value, and we will continue to share that value with our shareholders. Moving to Page #13. Some of the metrics that talk to our strategic progress. First, new customer acquisition on this page, as I said many times before, we believe that the most healthy way of growing the balance sheet is through growing our franchise of clients.
In the first 9 months of 2023, we acquired 8.3 million customers, more than doubling the client acquisition that we had 5 years ago. And even more impressive in this page is the share of those acquired through digital channels, again, another record this quarter, which increased to 65% in the first 9 months of the year. That is our key difference in our view in this topic versus most of our competitors out there. Turning to Slide #14. Our commitment to sustainability and other strategic lever, as you all know. This quarter, we have channeled €16 billion in sustainable business, the second best figure ever after last quarter’s record and the total of €185 billion since 2018. Therefore, with this number, we remain committed to our increased target of channel in cumulative €300 billion to sustainability by 2025.
On the right side of the page, you can see the results of our efforts to extend the business of sustainability to all of our customer segments, we are starting to see the results of our specialized teams, the expansion in the sustainable products catalog in the strong growth of all segments, especially enterprises and retail segments, as you can see on the page. Moving to Slide 15. I also would like to highlight our positive impact on society. With our primary activity of lending, we continue to help our clients achieve their life and financial goals. We have increased our loan book by 8% in the last year, as you can see in the page. This implies it’s a very high level, one figure, 8%, but this implies, for example, that in the first 9 months of this year, we have granted more than 100,000 mortgages, 12 families by their homes.
We have supported more than 400,000 SMEs and self-employed individuals in financing their growth and also more than 70,000 larger corporates. Through this, we promote employment, we promoting investment, and we promote welfare in the society. And finally, Slide 16, regarding our long-term targets announced on Investor Day, I will choose to not go into each one of them for time purposes, but on all the metrics, all the metrics, we are well on track to realize our upgraded expectations announced last quarter, clearly beating all of our original goals. And now for the business areas update, I am turning to Luisa. Luisa?
Luisa Gomez Bravo: Thank you very much, Onur, and good morning to everyone. As an anticipated, we are very pleased to share with you a very good set of results. Our organic profitable growth strategy remains well on track in all geographies, as you have been seeing throughout the year with some momentum, especially in those products and segments where we see the greatest value. If we move to Slide 18 in Spain, you will see an outstanding set of results in the quarter of the loan book remained broadly flat with uneven developments by portfolios. I would like to highlight the growth in the most profitable segments in consumer and SMEs, where we continue to gain market share in the quarter and year-on-year. I would also like to highlight this quarter the positive evolution of mortgages, supported by new production levels.
However, early repayments, despite starting to show a declining trend, continue to weigh down on the loan stock in the year-on-year numbers. Still, as I mentioned, year-on-year numbers that all slightly better than the ones that we showed last quarter. In terms of P&L, we are posting a very strong pre-provision profit, SCC growing 24.5% in the quarter, 42.6% year-on-year. In line with past quarters, this is driven by NII. NII continues to be supported by the customer spread improvement with which Onur mentioned before, the repricing of the loan portfolio continues, while deposits costs remain well contained. As there is still excess liquidity, and as I mentioned, limited loan growth in the system, our LTD stands at 90%, very much in line with the banking system in Spain.
To date, we are not facing major pressures on the positive remuneration with a deposit mix that remains very solid with a limited shift from demanded time deposits, and this leads us to upgrade our NII growth estimate for 2023. We expect NII to close the year close to 50% versus our previous guidance of 40% to 45% range. NII growth upgraded to – close to 50% this year. Also on the side of fees, the results as you see our mix in the quarter, we have a decline in fees primarily due to seasonality, also driven by lower CIB fees in the quarter. And also throughout the year, we have a lower current account fees that are weighing down on the performance. If we exclude these current account drags, we would see an increase in fees in year-on-year.
Efficiency ratio continues to improve to 39.4% as of September, given the highly positive jaws in the geography. On the asset quality side, impairments and the increase in cost of risk are well in line with our forecast. In the current higher rate cycle, provisioning needs for retail portfolios are unsurprisingly slightly higher. So we maintain our expectation for the cost of risk to stand at around 35 basis points in the year. All in all, another very positive quarter for BBVA Spain with net attributable profit reaching €2.1 billion, 62% above the 9-month figure last year. Moving on to Mexico. As in Spain, we remain in Slide 19, very positive about Mexico. The economy continues to outperform expectations. We’ve upgraded the economy forecasted 3.2% from 2.4% last quarter with a strong labor market and resilient consumer demand.
In this environment, the banking sector is bound to grow at even higher rates. Our loan portfolio is benefiting precisely from this momentum. The most profitable loan portfolio, such as consumer loans, credit cards or SMEs are growing by more than 4% quarter-on-quarter, while commercial lending has shown some acceleration also in this quarter. On the income statement, we continue to deliver on the top line, with core revenues growing by 23% year-on-year, bringing net attributable profit at €1.3 billion this quarter. And this is on the back of very solid NII dynamics, leveraged on the sound activity across the board and very effective price management. Throughout 2023, we have been managing prices very effectively, both on the asset side, but also specifically on the liability side, maintaining the cost of deposits very well contained despite the rates environment and below the average of our peers.
Very robust trends that make us confident on NII evolution, which we are expecting to be growing close to 20% this year. On top of NII, we have also seen outstanding growth across the boarding fees, highlighting credit cards and payments, but also increasing contribution from asset management and our insurance businesses. Jaws evolution remains very positive as revenues continue to grow well above expenses, resulting in a continued improvement in the cost-to-income ratio, which stands at a very low 30.3% in September. Finally, on the asset quality trends, these are in line with expectations and very much in line with our portfolio growth strategy. NPL ratio stands at very low levels, 2.55% as of September, very sound coverage ratio close to 130%.
The increase in impairment has been mainly due to higher provisioning needs in the retail portfolios, which have been growing, as I mentioned before, in a very consistent and very profitable way. All in all, the cumulative cost of risk stands at 294 basis points in the 9 months of the year, very much in line with our expectations, and we maintain our forecast for the cost of risk to end the year below 300 basis points. Mexico continues to deliver extraordinary results quarter-over-quarter. Moving to Turkey on Slide 20. Since the elections we have seen the start of the normalization of monetary policy and continued changes in the regulatory frameworks, which are positive and in line to showing the first steps in what’s going to be a long course of action to return to a North doc’s policy set.
The highlight of the quarter has been very high inflation. Inflation has reached 25% on a quarterly basis. 6.4% was in the second quarter, so significantly above the second quarter numbers. And this has relevantly impacted our results this quarter, which we report a quarterly loss of €158 million. Then also affecting the results in Turkey has been the increase in the corporate tax rate, which in the month of August increased from 25% to 30% with retroactive effect since January 1. Also, the Turkish Lira has remained broadly stable since June in the quarter. But looking at the key operating trends, we can observe NII evolution supported by activity growth in the short-term Turkish Lira loans, higher total customer spread, driven by the foreign currency loans, where we have higher loan yields and lower deposit costs and greater contribution from the securities portfolio.
On the Turkish Lira side, customer spread continued to decline in the third quarter, driven by higher deposit costs in a highly competitive environment, but we have seen a start in the upward trend in July, benefiting from the latest interest rate hikes and also changes in the regulatory landscape. And the lending yield on the new flows in Turkish Lira have increased by the end of the quarter at a much higher pace than the case of the deposit costs. We expect, therefore, the third quarter to be the trough level for the customer spread in Turkish Lira. As for the rest of the P&L, the positive dynamics remain in terms of fees, trading income and the cost of risk continues at a very low level, still in a negative real interest rate environment.
For the full year 2023, in what is still a highly uncertain environment, contribution from Turkey could be similar or somewhat below to that of 2022. Looking ahead in RV Turkey remains a long-term but sizable option for BBVA, and we are seeing some signals that, that option can be realized, although it’s still in the process. Moving on to South America. In Page 21, the region continues showing positive activity trends, mainly in the retail segments with growth in the profitable portfolios aligned with our strategic focus. We have sound pre-provision profit and improving efficiency supported by core revenues, growth and higher costs in the context of still above target inflation levels in the region. On the asset quality front, in South America, we are recording higher provisioning and needs coming from the retail portfolios in the context of higher rates and a more deteriorated macro scenario, especially in Peru.
This leads us to review our cost of risk guidance for the region to around the current figures, which stand at 250 basis points in 2023. All in, net profit in the region reached almost €500 million in the first 9 months of the year, 20% above last year’s. And now back to Onur, for highlighting the main takeaways.
Onur Genc: Perfect. Thank you, Luisa. And let me not literally read what is already on the page. The only thing I would say is that one more quarter, we have reported very strong results. And more importantly, we clearly believe that we have positive prospects going forward. And with that, maybe we open it up to Q&A. Patricia?
Patricia Bueno: Yes, sir. Thank you, Onur. And we are ready now to start with a Q&A session. So the first question, please.
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