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Edited Transcript of BCP.EP earnings conference call or presentation 30-Jul-19 11:00am GMT

Q2 2019 Banco Comercial Portugues SA Earnings Call

Porto Salvo Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Banco Comercial Portugues SA earnings conference call or presentation Tuesday, July 30, 2019 at 11:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Bernardo Roquette de Aragão de Portugal Collaço

Banco Comercial Português, S.A. - Market Relations Representative & Head of the IR Division

* Miguel de Campos Pereira de Braganca

Banco Comercial Português, S.A. - CFO & Director

* Miguel Maya Dias Pinheiro

Banco Comercial Português, S.A. - Vice Chairman, CEO & Member of Board for International Strategy


Conference Call Participants


* Benjie Creelan-Sandford

Jefferies LLC, Research Division - Bank Analyst

* Carlos Peixoto

Banco Português de Investimento, S.A., Research Division - Analyst

* Gabor Zoltan Kemeny

Autonomous Research LLP - Research Analyst

* Hugo Moniz Marques Da Cruz

Keefe, Bruyette & Woods Limited, Research Division - Analyst

* José Maria Abad Hernandez

Goldman Sachs Group Inc., Research Division - Executive Director

* Mario Ropero

Fidentiis Equities S.V.S.A., Research Division - Senior Banking Analyst

* Noemi Peruch

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Analyst

* Sofie Caroline Elisabet Peterzens

JP Morgan Chase & Co, Research Division - Analyst




Miguel Maya Dias Pinheiro, Banco Comercial Português, S.A. - Vice Chairman, CEO & Member of Board for International Strategy [1]


Good afternoon. Welcome to the BCP Millennium Results Conference Call. I will present to you the main highlights followed -- as we provide the details of the presentation by my colleague, Miguel Bragança and our Investor Relations, Bernardo Collaço.

The economic and financial environment remains challenging for the financial sector in various dimensions. I would like to highlight the factor that I consider to be the most prominent to the monetary policy and the recent interest rate developments.

The perspective of an extended period of negative interest rates have had repercussions. It further pressures net interest income and the downward shift in reference, yield curve affects the discount rate increasing liabilities for the pension fund. For this reason and also, because the legal framework in Portugal, regarding the tax treatment of impairment was finally stabilized.

In this quarter, we recognized a significant amount of DTAs, a net value of EUR 33.5 million associated with projected taxable profits over the longer term.

And we also had a lower result via our participation in Millennium, EUR 8.7 million as a result of the application of the liability adequacy test.

BCP's business model remains resilient, continuing to grow and with profitable core activity. As regards to profitability, we have and we will continue to have a sustainable and predictable model.

We continue to focus on improving the quality of the balance sheet and on the legal royalties execution of the strategic plan, we communicated a year ago, which incorporates a deep transformation and digitalization of the bank.

Needless to say, we are highly selective in our options and extremely demanding with the business case of every investment we make, incorporating technology into business processes and customer relationships is a central management priority as we want to ensure that from the point of view of proximity and usability, (technical difficulty) in which BCP presented a favorable trend for net profits with an increase of 12.7% compared to the first half of 2018.

Earnings in Portugal were affected by the financial and economic environment and by specific factors, namely the payment of extraordinary compensation to the employees and the approval of the DTAs low.

Result in Poland, excluding Eurobank, grew 11% and excluding integration costs, increased 16%. In consolidated terms, the improvement in profitability was supported by growth in core income, with an increase of over 7% for net interest income.

And we did this being rigorous in the admission of loans and in the management of the loan book, which led to a decrease of 13% of the impairments compared to the first half of 2018.

We remain strongly committed to improving the quality of the bank's assets, consistently lowering NPEs, especially in Portugal, where we, again, achieved an important reduction of EUR 100 million this half, highlighting the reduction of almost EUR 350 million in the second quarter alone.

Over the last year, we reduced NPEs by EUR 1.7 billion in consolidated terms, reaching a stock of EUR 5 billion in June 2019. These downtrends was achieved alongside the simultaneous reinforcement of impairment coverage to 54%, and total coverage around 110.

The cost of risk continues to convert both consolidated level and in Portugal towards the 63 basis points C, we set ourselves for 2021.

In this half, we confirm the good pace of capital generation, with a common equity Tier 1 ratio standing at 12.2%, accommodating without any disruption, the acquisition of Eurobank, this impact was in line with our forecast as well as the 50 basis points reduction in the pension funds discount rate.

The total capital ratio reached 14.7% in this first half. So we remain above SREP requirements for both rates, having a capital buffer of nearly EUR 700 million.

Business volumes, evidence, the quality and efficiency of the bank's business model, credit increased by EUR 3.7 billion in the half and performing credit increased by $4.2 billion, excluding the reduction of NPEs.

We have a robust franchise, Millennium BCP's track record is recognized by private and corporate customers. Once again, the bank has been distinguished in 2019 as customers' bank of choice in Portugal. This widespread recognition is reflected in the rapid pace at which we have been able to attract new customers in Portugal and Poland.

Excluding the recent Eurobank integration, over the last year, we added 237,000 customers worldwide, of which 121,000 were added in Portugal. The transformation process, we began with the strategic plan is supporting results as shown by customer engagement.

The number of customers interacting with the bank digitally increased by 26% since the beginning of 2018, while there has been an even more significant 54% increase in customers who use our mobile solutions.

As of June 2019, this August represents (technical difficulty), and we have 37% of our customers using the bank's mobile services.

Investments made in Portugal have been effective in accelerating the growth in the number of customers using our mobile application, up by 57% since the beginning of 2018.

Our new app is a visible result of well-planned investments aimed at improving the bank's efficiency and providing customers with the best user experience in Portugal.

In addition to investing in technology and improving skills, we have changed structures and ways of working, creating multi-disciplinary digital labs, in which the main customer journeys and their relationship with the bank are being completely redesigned.

We have also incorporated state-of-the-art technology into our operations, using robotics and the artificial intelligence to increase our efficiency.

We are using machine learning to leverage our knowledge of our customers, profiles and consumption patterns and to refine our propensity models.

Our strategy has been evaluated by credits rating agencies, as shown by the several recent ratings operates. We are investment-grade for senior debt from DBRS since June and Moody's recently issued the same rating on deposits.

I now -- I now give the floor to my colleague, Miguel Bragança.


Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [2]


Thank you very much, ladies and gentlemen. And as you see here in Page 13, our income segment vis-à-vis the same period of last year shows a very positive effect with the NII growing 7.6%.

Total core income growing 5.3%. The operating costs on a recurrent basis, increased 6.7%, both of the core income of the operating costs. We have 1 month of Eurobank incorporation. The core earnings as a difference of this grow 4%. And then we have some nonusual items or non-usual recurrent items, if you want, that are at the level of the staff costs. We have had restructuring costs of around EUR 10 million in the first 6 months of the year. We have had approved by the AGM, a compensation for the workers that had their salary cuts during 3 years of EUR 12.4 million.

And we have also had gains on Portuguese government debt that were then partly compensated by the impact of the reduced interest rates in the insurance business.

The impairment and provisions decreases, albeit that we think operational Eurobank according to the new accounting rules, there is always the first day impairment when we incorporate the bank, as we know, as analysts.

But the impact of all of this is that when you compare with the same period of last year, in consolidated terms, we are growing before tax at 20.5%.

As our CEO was commenting, we have to reassess so to say, the value of our tax loss carryforwards because with a reduced level of interest rates and with the new framework for the impairments, a deduction were in the future, at least in the 5 years from now, which will be mandatory to deduct from taxes, all the impairment and not only the one that is framed within the former impairments regulation. We derecognized 33.5% of tax loss carryforwards, which has no impact on capital because these were already debt from capital.

So after this one-off effect, we present a growth in terms of net income of 12.7%.

In Page 14, you see in graphical terms, in fact, what was commented in the previous graph. The numbers are slightly different because we presented the numbers after tax, so as to reconcile with the net income.

As you see, we have net DTA derecognition as a one-off cost. We have also these extraordinary staff costs that were linked to this workers' compensation.

We've had the mark-to-market of the insurance liabilities and that also had this EUR 9 million impact. We had this first impairment of -- in the acquisition of Eurobank it is really a one-off, in the sense that we -- when we acquired Eurobank, effectively, what happens right now is that the goodwill is reduced because you effectively revert some of the stage 1 provisions, but then you have to recreate again the stage 1 provision. So this has no impact on capital because it reduces the goodwill, but it has an impact on P&L. There is an increase in mandatory contributions in Poland. In Portugal, they have been quite stable. And there was the positive effect also linked to the right movement of around EUR 29 million.

So if we exclude all these movements, the positives and the negatives what we see is a very resilient growth in terms of net income, growing by almost 40%.

As in Page 15, what we see is that the NII growth, with some compression of the NIM but with the volumes more than compensating for it. So the NII grew 7.6%, 3.8% in Portugal, albeit the small compression of the NIM and 12.5% in the international operations. But this, as I was commenting already, reflects 1 month of Eurobank, I will get and determine a bit later on.

The commissions, stable, albeit the strong -- I mean, the situation that we have in the markets. I would also here would like to highlight that the more recurrent commissions, the ones that are more transactional vis-à-vis like the baking fees and commissions are growing at levels of around 4%, both in Portugal and the international operations. The ones that are more market-driven, like the asset management fees, investment banking fees and so on, have shown an important downward trend. But we have been able to compensate with recurrent or less recurrent ones.

In terms of other income. We've had a good half year, as expected, in a scenario of decreasing interest rates in terms of government debt capital gains, so to say. As you see here, in total net revenue income increased from EUR 77 million to EUR 96 million, give or take. The same driver of low interest rates, however, had an impact in terms of the increases of the liabilities in the insurance business.

This is around EUR 9 million. But all in all, the other incomes has grown by EUR 45 million. As you see, this has particularly grown in Portugal by 82%, with the mandatory contributions at the high level, but stable. Okay? In the international operations, you see a basically, it's the resolution from contribution in Poland, that's already reflected in the Polish accounts. There was an increase that was an offset by -- as a movement (inaudible) to next.

Operating costs. As I was commenting, this already reflects 1 month of Eurobank, and it also reflects some non-usual items like the compensation for the 4 years of salary cuts that was approved in the last AGM. There was a EUR 10 million restructuring costs adjusting for these 2 effects. The recurring cost in Portugal have grown by 2.5%. So below the growth of the income, with positive jaws. And in the international operations, there was this growth of 13.5%, basically explained by the incorporation of Eurobank, and also by the salary movement, that one is leading in Poland.

We still compare very favorably with most of the systems. We are able in this low interest rate environment to present the 50% cost to core income scenario. I will -- I stress this core income. So it does not include trading games, and this is what assures the resilience and the sustainability of our business model.

Cost of risk, a good evolution. So from 88 basis points to 74 basis points. Excluding this one-off first day impairment, it is 67 basis points. So this is very positive. In Portugal, 76 basis points and in the international operations also corrected for it around this 48 basis points that I was commenting.

This allowed us to decrease NPEs, while at the same time increasing coverage vis-à-vis last year. We have broadly stable vis-à-vis last quarter, a baseline decrease, but vis-à-vis last year, we increased 4 percentage points in terms of coverage by provisions and 2 percentage points in terms of coverage by provisions and collaterals, which we have been able to sell at higher values than the [book values] this is important.

This, I mean, enabled us to show an NPE ratio based on loans only already at 9%. So this is the first time that we go below the 2 digits. Positive evolution. If we include the off-balance sheet and securities and all the exposures, so to say, the official EBA ratio, we are already at 6.4% and focusing on the 90 days past-due ratio, we are already at 5.2%. So we are decreasing [31%], the NPEs, aligned with the 25% to 30% that I commented in the last call, which has been EUR 1.8 billion when you compare with last year.

Going here to the business activity, a very resilient activity in terms of customer funds, with the [funds] to individuals growing 11%. We are focusing less and less in terms of growth of funds. And client resources from institutions and for purposes because with the new interest rate environment, this is not necessarily profitable.

In Portugal, our funds have grown 5.8%, and the international operations, they have grown by 21%, around half of it is responsibility of the Eurobank acquisition.

Loans to customers, a very positive evolution in terms of the performing loans. I think this is very important to say. So in consolidated terms, a growth of around EUR 6 billion. In Portugal, what we see is performing the loans growth, compensating the very high reduction of NPEs. And in the international operations, the performing loans basically is growing EUR 4 billion, of which EUR 3 billion has been Eurobank acquisition.

Net loans to deposits, again, no issue, a very liquid, ratio may be excess liquidity. But this is another thing. And in terms of capital, what I would like you to highlight is that we have here several movements. We had here the challenges -- 2 challenges. One was the Eurobank acquisition. The other was the impact of the reduction of interest rates in our pension fund liabilities.

The Eurobank acquisition had an impact, as I commented last time of around slightly below the 50 basis points, as I was commenting. The Eurobank -- the pension fund was around 40 basis points, give or take. This is already net of the positive performance of the pension fund because a part of the liabilities were hedged.

So to say, we say, exposure to fixed rates. So effectively, we have decreased the pension fund discount rate from 2.1% to 1.6%. And this is -- this has had -- the sum of these 2 effects is around 90 basis points. So we were able to compensate this with our activity with our earnings and with evolution of the available for service -- the fund level for service.

Leverage ratio is very healthy as you see in Page 28, the RWA density is still high. And here, you see that the numbers in Page 29, you see the numbers of our pension fund. You see very clearly here, the discount rate and the projected rate of return will have to go in tandem -- going down from 2.1% to 1.6%.

And you see also on Page 29, the composition of the pension fund with an exposure to shares, it's around 13%. The conservative profile considering that it is 17-year maturity fund, bonds, 35%, and that's why we have been able to compensate partly the impact of the pension fund liability with the performance of the fund. That was 4.7% comparing with the former discount rate of 2.1%.

And I will pass the floor here to our Investor Relations, Bernardo Collaço.


Bernardo Roquette de Aragão de Portugal Collaço, Banco Comercial Português, S.A. - Market Relations Representative & Head of the IR Division [3]


Good afternoon, everybody. It's nice to be with you again. And let's start from Portugal.

On Page 31, as you can see, in Portugal, net income has increased of 23% to EUR 73 million, and it was mainly driven by the reduction of impairments and a higher net operating revenues.

In terms of net operating revenues, as you can see, there was an increase of 4.6%, mainly driven by an increase on NII and in commissions as well in trading and in the lower income coming from equity earnings.

If you look at the operating costs, there's an increase. But if you look mainly at the recurring costs, you can see that it's quite stable, and we have an increase of 2.5% on a yearly basis.

Moving to NII and look the evolution on the different factors. There are as well some positive and negative impacts that we should worth mentioning. And if we start on the credit volume, there's an expansion, if it was a sale of the credit volume.

And at the same time, the continuous decline on the remuneration of the time deposits. At the same time and the lower cost of funding due to the macro environment.

And on the negative side, some compression on the credit rate effect.

Moving to Page 33. There is in terms of -- there's a continuous effort to reduce the cost of deposits. And as you can see, we decreased in terms of spread to 50 basis points, and there's still a difference between the front book and the back book of 10 basis points to capture.

In terms of the performing loan book, as you can see, it has been stable at 2.7%. And as it was mentioned by Miguel, there's a slight decrease on NIM, but it was compensated by volumes that increased from the coming year.

Moving to Page 34. As you can see, total fees and commissions are quite stable. Although we should highlight that the banking and commission fees related have an increase of 4.3% and still at the previous quarters, the related fees coming from capital markets still below, and that's mainly driven by the last year, bad performance that the markets have.

Other income -- sorry, Page 34, that's where we were. In terms of other income, as you know, it includes trading and other operating income and equity accounting earnings. There's an increase of 82%, and it includes the 8.6% impact of low interest rates from the insurer company.

Moving to Page 35. And as it was mentioned, in terms of recurring costs, quite stable. There's a slight increase of 2.5%. But if we look at the total operating costs, we have to consider this increase of 7%. That's mainly driven by the $12.4 million of the compensation for the temporary salary reductions that's occurred from 2014 and 2017, plus EUR 10 million of restructuring cost that it was -- that's compared with EUR 80 million on the first quarter of -- on the first half of 2018.

In terms of employees, apart for -- we still have these restructuring costs, as I mentioned, but the number of employees slightly increased because, as we know, we are investing with some people more related with this digital era and transformation that the bank is going forward.

In terms of branches, still the trend of some decrease.

And on Page 36, which is quite important, looking at the asset quality, as it was mentioned, we have a decrease of EUR 1.8 billion NPEs. And basically, if we look at the NPE buildup, you can see that we have year-to-date, a decrease of more than EUR 700 million. That basically comes from mainly from dues and write-offs.

In terms of loan impairment, the cost of risk, still with a trend of decreasing and going forward to the level that we have for the strategic plan of being around 50 basis points.

And as you can see, it's mainly driven by the reduction of the loan impairments on the P&L.

Moving to Page 37, the NPE coverage, still above, overall, above 100%. So it stood at 111, the same level of the first quarter. And if we look at the NPE, the 90-day past due total coverage, as you can see in companies, the coverage by loan loss reserves is at the level of 70%. And then you have cash into the collaterals that are blocked at the bank of around 24%, and then 25% is coverage by real estate collaterals.

Moving to Page 38. And if we look at the foreclosed assets and restructuring funds, you can see a decrease of almost 23% year-on-year. That's mainly a reduction of more than EUR 330 million. So it's on a reduction trend as well as on the corporate restructuring funds that it's a slight decrease, but the trend -- the trend of -- is there, and there's a reduction of 3%.

If we look at the sales of foreclosed assets. We -- basically, the number of properties that have been sold, it's close to the first quarter -- the first half of 2018, and the profits that we make on the first half of '19, the difference between the book value and the sale value reached EUR 46 million.

Moving to Page 39. And regarding volumes, it really shows the dynamics of the business model. And as you can see, we have been increasing in terms of total customers of more than EUR 2.6 billion -- more than EUR 2.6 billion, which is 5%, which is really relevant to mention that on individuals, we have an increase of almost 6%.

If we look on the loans to customers in gross value. But I think that the most important thing is to reaffirm that the performing book has grew by EUR 1.7 billion, so -- and that was not compensated totally by the reduction of EUR 1.8 billion of NPEs.

Moving to Page 40, and there is -- here is something that we'd like to highlight is the strong credit activity to companies in Portugal. So if we look at the new production of the credit loss of company -- of the credit loans, you can see that 54% is linked -- 54% is linked to companies, 35% to mortgage and to personal and others are around 11%.

Moving to international operations, on Page 42. There is a contribution of EUR 83.7 million to the consolidated P&L, but if you look line-by-line in Poland, there is a small decrease of 4.1%. But if we exclude the impact of Eurobank, there was an increase of 16%. In Mozambique, also a small decrease, that's mainly driven by lower margins, that's -- but also have a compensation on the reduction of the cost of risk.

So moving in detail to the different international operations. If we start from Poland. The net income from Poland, as I said, there was a slight decrease, but it's mainly driven by the Eurobank acquisition. So if we are not considering that, the net income will increase by 16%. Return on equity still at the level close to 10%, and if we look at the net operating revenues, mainly driven by the NII increase. We have 18% increase in terms of banking income.

Operating costs. There are some points here to mention. We can see an increase of almost 20%, but it's mainly driven by the Eurobank acquisition and the wage inflation that we are seeing in Poland and employment rate is quite low in Poland, and at the same time, we also have to consider the increase on the contributions for the regulatory front, that's increased significantly.

Just some highlights about the Eurobank, as you know, in terms of customer funds, there's an increase of EUR 2 billion and in terms of gross loans, an increase on the balance sheet of EUR 3 billion and some of the synergies and the beauty of this acquisition that fits really well on our business model, it's the increase on consumer loans that affects the main driver from Eurobank. So at the same time, we expect, as it was mentioned by -- in November 2018, when we announced the acquisition, we will be in a much more spread presence in Poland mainly in small cities. And just to highlight that we expect in November -- in November this year to have one single brand operating in Poland.

Moving to Page 45. And it's, as I said before, the NII shows really a very high increase of almost 22%. And NIM, also an increase from 2.5% to 2.7%, and it's mainly driven by the levels of the consumer loans that are reaching some very high levels in Poland.

Commissions increased by 10.7%, although banking commissions still -- commissions and other income increased by 10.7%, but commissions, it's quite stable. So most of the increase are coming from other income.

Looking to operating costs. The cost to income are stable. And as you can see, there are an increase mainly coming from the contribution for the resolution front, that accounts for more 37% than the previous half year of 2018. And in terms of staff costs, as I said, by the integration of Eurobank and some salary inflation, there is also an increase on that.

So just a breakdown of the mandatory contributions, as I mentioned before, there is an increase of 21%. So it's quite significantly to the P&L.

Moving to the credit quality in Poland. We also have to bear in mind -- that's on Page 46. We have to bear in mind that already approved the Eurobank integration. So the credit ratio of 90 days past due loans. All in all, had an increase of -- from 2.7% to 2.4%, and the stock of NPLs, there is an increase because of this integration, as I said.

In terms of loan-loss reserves, quite stable. So in terms of balance sheet and the coverage below -- above 110%.

If you look on the P&L, and as it was mentioned before, the loan impairment increased. So the cost of risks have an increase from 47% to 80%. But if we exclude the first impairment coming from the Eurobank and according to the accounting standards, the cost of risk should stood at 52 basis points.

Moving to volumes, which also an important part of the business story in Poland. As you can see, customer funds increased by 23% and the contribution, as I said before, from Eurobank is EUR 2 billion. And if we look on the loans, there's an increase of almost 34%, where we are including on this EUR 3 billion from Eurobank.

But it's -- let me just highlight that in personal and other customer loans, as you can see, there's a huge increase of more than 100% and mainly driven by the Eurobank acquisition.

Moving to Mozambique. Mozambique, as I mentioned on the previous slide of the international -- of the contribution from the different operations. There is the normalization of the interest rate. So it pushed NIMs, net income, slightly down. So that's why you see almost 10% decrease in terms of net income, but return on equity still at the level of almost 21% with a capital ratio of 41%.

Operating costs in Mozambique, also a slight increase of almost 5% and it's mainly due to some staff costs that have increased on the first half of 2019.

Page 49, the normalization of interest rates. It's reflecting on several issues, mainly on NII, as it was mentioned. So that's the reason why you see NII in Poland, coming from EUR 95 million to almost to below EUR 19 million. So Mozambique -- sorry, I mean, Mozambique. So NIM, also with some pressure. Operating costs, as I said, an increase of 4%, mainly related with staff costs that were paid and relatively with bonus, but the cost-to-income still at the level of between 38%. So there is an increase in Mozambique in terms of commissions and other income for 11.5%.

And in terms of the number of employees, you can see a small decrease and a stable level of the number of branches on the country.

In terms of credit quality in Mozambique. As you can see, also, the stock of NPLs decreased, and that's mainly driven once again by the normalization of the interest rates in Mozambique. So we also increased the leverage, the coverage ratio from 55% to 57%. And the cost of risk is -- and the impairments that goes through P&L on the trend -- under the decreasing trend.

Moving to volumes. On Page 51. As you can see in customer funds, there's an increase of 3.8%, and keeping the trends that we show on the first quarter, the loans to customers decreasing by 17%. And then, Miguel Bragança.


Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [4]


So in Slide 53, what you see here, once again, is the benchmark that we are presenting to you in terms of what is our 2021 plan and how we are progressing towards it. As you know, the main objective of the plan is to grow value and to generate sustainable ROE of around 10%.

We've seen a proper balance sheet structure for our business model, which we deem to be a commodity Tier 1 ratio around 12% and loan-to-deposits below 100%.

We are on track to it because some of the main levers are the reduction of E&P stock. And as you see here, this is going well according to plan, with the consistent also reduction of the cost of risk that we are progressing towards our 50 basis points target.

And with an important enabler that is the progressive enrollment of our customers in this new digital mobile world, so that we will reduce our cost to sell to our cost to serve so as to achieve our 40% cost-to-income target.

This is the area that will take more time because, I mean, it depends on customer behavior, it depends on being able to actually to implement these new models.

But we have no reason, even in this new scenario, to review our targets to be reaffirmed here our 2021 objectives.

Thank you very much. Our -- we wish you happy holidays for the ones that have not gone in holiday yet.


Unidentified Company Representative, [5]




Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [6]


And -- but -- for ones that are listening to me. But right now, I will open to questions and answers. Okay?


Questions and Answers


Operator [1]


(Operator Instructions) Your first question comes from the line of Sofie Peterzens from JPMorgan.


Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [2]


This is Sofie from JPMorgan. I wanted to ask on net interest income. Could you just remind us what your net interest income sensitivities? There are 100 basis points lower rate? And could you also talk a little bit about the NII outlook in Portugal, really expect net interest income on the going -- coming quarters, how fast your loan book reprices downwards, and how we should think about any hedges that you could potentially have in place?

And my second question would be on FX mortgages in Poland. Could you just give an update on what the latest is and how we should think about these mortgages going forward?


Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [3]


Thank you very much for your questions, Sofie, and for the opportunity to answer them. So in terms of a fixed mortgage in Poland, I would just first like to highlight that our bank in Poland is listed, has a lot of attention, deserves a lot of research coverage. So for the ones of you that would like also to do replay on this, there's a lot of information on it. Having said that, what I would like, and, of course, I would like also to highlight all these issues regarding FX mortgages is already reflected in the price of our bank in Poland. So because it deserves a lot of attention, there's a lot of media. So all the information should be reflected in the prices -- in the research documents of our bank in Poland.

Having said that, the latest news in terms of fixed mortgages, I mean, pointing 2 directions, so to say. The first thing that I would like to highlight is that there was a project from the President of the Republic of Poland to have a special funds that would cause the bank some more millions of years per year to accelerate, so to say, the conversion of Swiss franc mortgage debt into zloty mortgage.

This was a little bit, I would say, aggressive reserving the banks that have these mortgage portfolio because it effectively forced the banks to use the pensions to the funds to convert the credits. This was there in the parliament for already in some years. And in the middle of this month, there was a discussion in the parliament, whether this measure should go ahead or not.

Fortunately, it did not go ahead. What went ahead is a measure that treats in a fair way. All the debt holders from both Swiss franc mortgage holders and zloty mortgage holders that will -- I mean, with a clearly marginal cost to the bank and a cost that will be probably paid back because it is fair in the way it is structured that it will really help the ones you need and not necessarily the ones that have a Swiss franc loan originated in 2000 and later 2007. So this is one piece of the equation. So I would say the legal risk has to come down. And this is a piece of good news.

Another piece that is not such a good news, and on which we don't know -- on which we don't have a lot of information is in one specific case regarding another Austrian bank that was present in Poland that still have some FX exposure and the clients. The judge in one specific case, asked the European Court of Justice of -- if he decides that the FX spread clause was abusive, I mean, the FX spreads, so the difference between the bids and the ask and not the FX indexation, what would be the consequences? Basically, what the UP and Court of Justice Attorney General said, so it was not a judge, it was the Attorney General, said is that in this case, this could contaminate also the FX indexation clause. So because all the indexation and all the link to CHF would be broken and effectively, the loan would not be CHF denominated. It becomes zloty denominated at the original rate and with the interest rate in CHF, so which is a little bit strange. We'll use zloty, we'll take this straight in CHF. But he did not say anything in terms of what was his opinion in terms of the clause. What we can tell you is the following is that we don't have the details of this case. We know it is not final because what we know is that a Judge has to decide on it. This is the opinion of the Advocate General that typically is more defending the consumers than anything else. So this is the second piece of news. And what we also know is that in our case, I mean, we have lost less than 7% of the cases up to now. And in the 7% of the cases, so in all the remaining ones, we have won the cases very clearly stating that the clauses were not abusive. So that's what we can tell you.

My personal opinion is that the opinion of the Advocate General, I mean, is a little bit too extreme. I mean, but let's wait and see. I think it's totally disproportionate and extreme, but let's wait and see. And I trust that -- I don't have the details because it's not a case of ours. But I trust that the judge in the European Court of Justice, will make a decision that makes more sense and all gets more proportionate.

And in terms of the NII, our exposure to interest rate movements, as I was commenting, and I have commented, after hedges, I mean, is around -- right now, slightly below EUR 100 million of NII per 100 basis points of movement, less than proportional for the size of movements. So this is -- I mean, the situation which we are. So we are -- we do have a large hedge in terms of interest rate exposure because without hedging the sale, it would be much larger. Right now, the interest rate that is more relevant for us is the short-term interest rates is the arrival rate. What we see here, if you ask my opinion is less than an issue of an immediate impact or negative impact of this lower level of interest rates. If you see, the short-term interest rates have not gone so much down, so -- and it rolls forward in this way. What went down is the longer-term interest rates. I would say, the expectation of the market is that we will become more roughly at the present levels for a longer period of time. So what will impact is not that much that our interest and NII will go down, it's more that it will take longer really to pick up to more sustainable values. That's the way that I look at it.

On the other hand, because we are dragged with the best cost-to-income and even in low interest rate environments, I mean, if they are, therefore, a sufficiently long time, what banks do, what institutions do is that they adapt their business models to it. And I think that a very good cost-to-income is a good way to start in terms of adapting the business model. And we are working on it.


Operator [4]


Next question comes from the line of Carlos Peixoto from Caixabank.


Carlos Peixoto, Banco Português de Investimento, S.A., Research Division - Analyst [5]


My first question would be on the common equity tier I evolution in the quarters, so if you could detail a bit further on the evolution? We already know it impacts from the changes in the pension fund discount rate and also from Everbank integration. But then on the remaining impact, it would be good to have some color. And within this one as well, whether you believe that there could be further adjustments in the pension fund discount rates over the year, given the evolution that deals have been or has in recent times.

On the second question, basically, a bit in line with what you were discussing on NII. But basically, within this interest rates context, what do you see as a reasonable guideline for NII for the rest of the year and potentially for next year? Should we expect some additional margin compression as a result of the store interest rates? Well, do you think that this can be offset by volume? So just trying to understand a bit what do you see from here and with current expectations.


Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [6]


So thank you, Carlos. Thank you very much for your questions. So basically, I mean, I would say there are here 3 effects, to say, in terms of the coming tier 1 evolution. As you know, our current Q1 in March was a tough [0.7%]. So we have the impact of the bank, as I was commenting, below 50 basis points, so slightly below 50 basis points. We have the impact of the pension funds around 40 basis points. So these are 2 negative impacts, the total 90 basis points. Okay. And then what -- we have a positive -- and then we have 2 positive impacts that are roughly of the same size, that is the evolution of the federal reserve in terms of our bond portfolio, broadly 20 basis points. And we have the impact of the net income adjusted for taxes, so effectively, the pretax because as you know, as I was commenting, the write-off of the tax that was paid for us, that does not counts for the income. So this is the more recurrent part of it. It's around 20 basis points. So effectively, the activity was able to generate 20 basis point. The more returns activity was able to generate 20 basis points in the quarter, which I think is good. 20 basis points of recurrence is good. The federal reserve was able to generate 20 basis points, which is also good, but not that recurrent because this depends on the market. And the pension funds and Eurobank, we have exactly as projected.

Going to the pension funds, right. So the pension funds has to be defined based on low-risk securities of the same maturity, okay. Low-risk has been understood. By the way, corporate securities, not bank securities. Corporate senior debt of the same maturity. The maturity of our pension fund is roughly 17 years. Low-risk has been understood as A+, AA-. So basically, what we have to look is that the senior debt between A+ and AA- that has 17 years maturity. There are not many of those securities. Your guess is as good as mine. The present discount rates of the pension funds is justified and, I think, is the appropriate one for 30th of June of this year. If I knew exactly where the interest rates of senior debt of 17 years of corporate will be 3 months from now, 6 months from now, probably, I would be using these insights in the market. So -- but what I can tell you is that this is a totally appropriate to what we have right now. And future evolutions, we will have to do exactly with this benchmark, and it may go up. It may go down. Let's see what happens. So it will depend on the market.

What we also can tell you is that the parts of this movement is hedged because as you know, more than 30% of the pension fund is invested in long-term bonds. And to some extent, it depends, of course, the part that is also invested in equities, to some extent, also varies with the interest rates.

In terms of the NII. The NII, I mean, right now, what we think is that -- in principle, in Portugal -- so in the international, I would say, let's start in Poland and then go back to Portugal. In Poland, our view is that the NII before Eurobank and in general, the income before Eurobank would be growing at high single digits, low double digits, so between 8% and 11%, something like that. So this is clearly what the expectation that we have before Eurobank. With Eurobank, on top of it, we have to send the NII in Eurobank, just roughly as a measure, in the 1-month NII in June was around PLN 58 million, give or take. So we have to divide by 4 to get 2 years. So this is where we stand in Poland, and this will be a positive contribution. So in net terms, the impact in consolidated terms of Poland will more than compensate the other ones.

In terms of Portugal, that is the other large geography. Our view is that the NIM will be broadly stable. If it goes down, it may be a couple of basis points but not much more than that and that our NII will grow with the volumes. I'm not discussing 1 basis point more or 1 basis point less, but we are not working on the assumption of a decrease of NII. It's a small increase based on the volumes.


Operator [7]


Next question comes from the line of Gabor Kemeny from Autonomous Research.


Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [8]


I have another question on the pension liability. So I understand that the capital impact from the pension revaluation was mitigated by an attractive return of the pension fund in the first half. So what should we expect if the return in the second half of the pension fund were to be lower? Let's say, I think, you had something like 5% return in the first half. Let's say, what would happen if the return would be 0, potentially a negative? And another question on provisions. It looks like you are reducing NPEs more quickly than you initially expected this year. And you have front-loaded some of the NPE reductions without a significant P&L impact. What do you think is the likelihood that we will see an obvious [scale] normalization in your provisioning by 2020?


Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [9]


Okay. Starting with the pension fund. I mean, the interest rate sensitivity of our pension fund is disclosed in our annual report. By the way, our annual report will be -- I mean, and it does not change materially. Our annual report will be at your disposal, in principle, at the latest next week, so there will be a lot of information there. And the impact for each 25 basis points of impact of interest rate increase in terms of the pension funds, the impact is -- just check here, is EUR 140 million. So every 25 basis points of increase, and you see this in the pension fund note of the annual reports, if I'm not mistaken, Note 46. You have a lot of information in terms of it. Every impact is -- every 25 basis points of impact is EUR 140 million. And it is a good approximation to think of it as broadly proportional. So if it is 10 basis points is -- or if it is 12.5 basis points, to make my life easier, it's around EUR 70 million of impact. So this is the first issue.

Second issue, in terms of the pension fund return. The way that we manage the pension fund is with a view to hedge, at least, partially the liabilities. So effectively, we hold long-term debt and long-term corporate debt in the pension fund exactly to hedge long-term of this liability. So it does not make sense to say what happens if there is a decrease in the interest rate of the pension funds, but there is not a capital gain in the pension fund because, I mean, it is structured as a way, or in an ALM way. So in any case, what I can tell is the following. The way it works is the following: The return of the pension funds, so the impact of the return of the pension fund is the effective return of the pension fund minus the discount rates. So give or take, the pension funds right now is around EUR 3 billion, if you want. So if the return -- the projected return is 1.6%, so the difference between the actual return and the projected return, so to say, that is 1.6%, is so to say a buffer that then absorbs a part of the impact that we have in terms of the liability. Okay. So this is the pension fund issue. So -- but as I said, there is a -- they go in tandem because we do an ALM management.

In terms of the NPEs, our commitment is to achieve these 50 basis points right by 2021. And over the short-term, I would say, achieve exactly the 50 basis points by 2021 does not put [sell rate] and to decrease the NPE level faster so as to go there and to reach this level. The first impact is not necessarily a reduction in the cost of risk on the contrary. So if we want to accelerate and to get to these levels by 2021, this is not consistent with a sharp reduction of the cost of risk before it. So our view is that we should work based on the assumption that the path to the 50 basis points will be a smooth linear path towards it.


Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [10]


Okay. Just to follow-up quickly on the pensions, it seems that you are actually less exposed than this stated sensitivity on this basis because I think you are guiding EUR 125 million or EUR 140 million impact. And given the positive return you achieved in this environment, your venture capital impact was lower than the states sensitivity as I understood.


Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [11]


Yes. Yes. The sensitivity is only based on the liability part. So these sensitivities in the accounting are then based on each factor by itself. So if we had no hedge -- if the pension funds had no hedge and if we had the impacts only on the liability side, we would have an impact of EUR 140 million. But if we are partly hedged, as we have shown to you, we have in page -- in the page in which we discussed the pension fund. We hold more than 30% in bonds. And also around -- let me just get page -- let me just check here. Page 29, we will claim 35% in bonds and 13% in shares and 8% in real estate. This part also moves in tandem also with the market, okay. So when I speak about EUR 240 million, this is not -- this does not reflect the asset part. It only reflects the liability.


Operator [12]


Your next question comes from the line of Noemi Peruch from Mediobanca.


Noemi Peruch, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Analyst [13]


I have 3 questions from my side. The first one is on costs in Portugal. If we exclude the planned EUR 50 million restructuring costs and EUR 12 million one-off compensation, how do you see costs evolving next year? And do you expect it to be more driven by higher investment or wage inflation?

The second one is on fees. Banking fees in Portugal grew by 4% in H1. And I was wondering if you could give us an idea of the split between the repricing effect and the business growth there. And the last one is on govies. What are the unrealized gains on government bonds left in Q2 at group level?


Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [14]


Okay. So in terms of -- of course, what we would expect for next year is that the returned costs in Portugal would -- the recurrent ones would be broadly constant with some increase, as I was commenting, in the activity. Second on fees. We have -- as I was commenting, the banking fees and the more market fees, which is not necessarily investment banking. A part of this has to do with asset management products. It has to do with placement of bonds in the retail market. So an important part of the fees are retail banking fees also, so to say.

So going forward, what we see is the following. We do not see, I mean, a large space to increase the pace of growth of the traditional banking fees, so I think this is -- the traditional banking fees are growing at the pace that we think is reasonable. But what we see also going forward is that mainly in these lower interest rate scenario. So one is that there is some space to increase the fees linked to investments in the asset management products to clients. So this is -- the market is not there yet. But if you ask me, on a long-term view, this is an area where -- I mean, this year has been particularly difficult because of the market movements, but I think it is only normal that even the private individuals start investing more and more in investment products and asset management products and bancassurance products, and this is the area of growth.

Then the Portuguese government debt, the realized gains, as we were commenting in the year-to-date number was around -- in the year-to-date number, in terms of securities, was around EUR 53 million. The realized ones. In the year-to-date of the 2 quarters, broadly equal in the first quarter and in the second quarter. In terms of the unrealized gains, we are not disclosing this number right now.


Operator [15]


Your next question comes from the line of José Abad from Goldman Sachs.


José Maria Abad Hernandez, Goldman Sachs Group Inc., Research Division - Executive Director [16]


Yes. I have 3 questions. The first one is a follow-up on the FX mortgages in Poland. Just to clarify here because obviously, given that this is a case on the abusive potential, the abusive nature of a close in mortgage contract of which, actually, we've seen a number of cases actually across Southern Europe. I mean, here there are 2 potential sort of consequences. One is actually -- I mean, legally, actually, the natural consequence of this will be actually 14 banks to repay customers, all the interest related payments associated to the mortgage contract without actually canceling the mortgage contract itself. That's obviously the extreme scenario. The other scenario would actually just forcing the conversion from actually FX, actually, to local currency. So the question here is under which assumption are you currently operating? And sorry if you explained that before. I just didn't get it.

And second question is a follow-up to your previous comment on actually changing the business model and all this. Here is -- to what extent, actually, you could translate actually, increasingly negative, actually, rate to your depositors in the forms with negative rates to your corporate deposits or even retail deposit [exhibition] and household. Is that actually possible? I believe the way to implement this is obviously through fees. But is this something that you are doing, you are trying to do?

And the third question, if I may, is that given that, I mean, the world has changed, actually, since you announced your targets. It's not that long ago, but actually, the world has changed a bit, whether you still reiterate your 10% return on equity target by 2021? Or I think as a number of actually, other banks in Iberia over the last few days have done, you are planning to revise the target downwards.


Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [17]


So first, I mean, just to make it clear, in terms of the FX mortgage opinion of the Advocate General. It is an opinion on one case, and we don't have access to all the information because we're not part in this case. But the clause that is being decided or what the Polish judge asked whether it is abusive or not, is not the indexation clause. It's where the banks can make money on the bid/ask of the currency movement, of the FX movement, okay? So each time there is a CHF mortgage, typically, the customer has to buy CHF to repay the mortgage. And what is being -- what -- the question was very specific on the judge is the clause whereby the customer buys CHF or may buy CHF from the bank and then may pay with this bought CHF, the loan to the bank, is this clause, these specific bid/ask spread on the FX abusive or not. It's not where the loans in CHF are abusive. So it is very specifically on this, okay?

And our view is the following. Let me just be clear. First, the clause is not abusive because the customer could pay in CHF getting the money elsewhere. So if he decides to buy CHF in the bank and not elsewhere, I mean, it's his choice. And because he has this choice, the clause is not abusive and should not be deemed as abusive. So this is the first view.

Second view, even if it was deemed abusive, what could be abusive is the excess spread over a normal bid/ask spread. Okay. So -- and the Central Bank of Poland publishes bids and asks spreads, and one could do the calculation of what could be the excess spread over the bid/ask spread of the Bank of Poland, okay?

Thirdly, if we really wanted to penalize the bank and if the clause would be deemed abusive, then on top of this excess spread, what you could say to the banks as Judge is please give back all the spreads and not the FX spread. So please give back as if the transaction would be done at the needs between the bid and the ask that is published by the Central Bank of Poland. So we think that the natural solutions to the abusiveness of the clause would be one of these 2. So either to give back the excess bid/ask spread or to give back all the spreads but never -- because we don't think it makes sense, but never to say that because the banks could be making, let's say, an excess spread on the bid/ask of the CHF. Never to say that because of this, all the loans gets converted to 2 parties. We think this is clearly disproportionate. It's like killing ants with an atomic bomb. What we're speaking is about the ants in the contract. So we think this is clearly disproportionate, okay?

Fees. I mean, we have been changing. We are one of the banks in Europe that has been changing the business model for a very long time. It is actually to become much more fee based. So even in our retail business, I mean, we have more than 1 million customers get by the test paid accounts, the test -- packaged accounts that are used to pay a monthly fee in the same way as they pay their Netflix fee or their Spotify fee. They are used to pay their banking fee. And then the additional services that they get, they get a package for free. And we have been able to move in this direction very swiftly so that most of our available customers, I used this model, which we think is the model of the future is a transparent model is about all that increases the relationship between us and the bank that typically, the customers, I mean, feel that is a reciprocity in that. So that in terms of our retail business, we are more prepared for this low interest rate scenario than probably most of the banks in Europe because we already have a fee based fee.

In terms of the institutional and corporate clients. I mean, here, it's a little bit more complex. I mean, because we got, I mean, typical institutional clients and financial clients, I would say, I mean, do not qualify for this type of business model. And in this case, we have been approaching some of these clients to start charging fees when their investments in the bank. And then when the current account is clearly excessive vis-à-vis the relationship that they have with us. So yes, we are doing this. Speaking with some of these institutional clients to saying them that we would charge them the Central Bank interest rate as a fee, I mean, if their balances in their current accounts are cleared and balanced in terms of the relationship that we have with them.

In terms of the targets. I mean, the work presents is always challenges now. And of course, in a -- a lower interest rate scenario is a challenge. But it's also an opportunity because when we are in a market that is a low interest rate market and when we have the best cost to income, I mean, the, I would say, the stress that is put on our competitors in terms of increasing spreads on the asset side, in terms of charging more for clients, in terms -- I mean, this gives us -- I mean, having the best cost to income also gives us a shield from these movements. And this low interest rate scenario is clearly a much bigger problem for other banks that have a higher cost structure demand.

So right now, we are working on the assumption that we will stay with our targets. We think we will be able to do that. To be totally honest, we have not done all the homework in terms of how exactly will be the mitigating actions and how exactly we will have to adjust our business plan to get there. But it is normal that when the world changes, we have to change our way of getting there. And right now, we are working on the basis that we will get to this 2021 number.


Operator [18]


Your next question comes from the line of Mario Ropero from Fidentiis.


Mario Ropero, Fidentiis Equities S.V.S.A., Research Division - Senior Banking Analyst [19]


Firstly, I wanted to ask a follow-up on NII. You mentioned that right now, NII should be growing in line with volumes. Could you please also comment on the contribution of the ALCO portfolio? I mean, can this be sustained at current levels considering that this strong compression in Portugal yields? And then the second question would be, if possible, if you can give us an update on the DTA structure and how much of them are covered by government penalties?


Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [20]


Okay. Going back here to the -- starting with the last question, so to say. The ones -- the amount of DTAs that we have that have a government guarantee, so these are good for capital purposes because they do not get invested from capital because the most that they can have is a conversion in cash of the government is around EUR 1.8 billion, okay? The amount that we have that these -- that are tax clause carry forwards, okay, so that they are already invested from capital, if you wanted, are around [EUR 220 million]. And this is the amount that we typically sometimes derecognize because the have tax clause carry forwards have a schedule to be used, so this is EUR 220 million that are not in capital anymore, okay? I think this is important.

So -- and then there is -- there are the temporary differences. These temporary differences, the non guarantees temporary difference, they're to a large extent, also are not in capital, to a large extent. There is a threshold. They are cost in capital that have [EUR 772 million] okay? That's -- and from this, I would say, [EUR 300 million] are already not in capital. So I would say that as you see, the large part of our DTAs are government guarantees. But there is also an important part that is already deducted from capital, and it's already shown as such in our statements in terms of the ALM portfolio and going forward.

There are a lot of effects that we manage besides the commercial volumes. So when I tell you that, for instance, right now, we have around EUR 2 billion deposits that are BCP at minus [40 million]. Of course, we can manage this in a more efficient way. There are -- I mean, there may be still some positive impact in terms of wholesale funding in our part. There are -- of course there is also the ALM portfolio. But the contribution of the ALM portfolio is also not that flat. So what we expect is that these other effects that we have broadly compensate the ALM portfolio so that the growth of the NII, I mean, growth consistent with commercial volumes.


Operator [21]


Your next question comes from the line of Hugo Cruz from KBW.


Hugo Moniz Marques Da Cruz, Keefe, Bruyette & Woods Limited, Research Division - Analyst [22]


So 2 questions for me on NII. Can you talk a bit in Portugal about front book versus back book margins for the kind of loans you are issuing? Because the mix between the front book and the back book is quite different and people are starting to worry about loan rates falling in the front bookings in Portugal. But we just see the system that it will be helpful to see -- to know what you're seeing in your bank.

Second, on cost of risk. Can you give guidance for the full year for this year what cost of risk you're targeting? And third, can you update your guidance for the tax rate also for this year?


Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [23]


Okay. In terms of the -- starting with the last one. So the normal tax rate in Portugal is around 31%. So this would be the tax rate that I would use going forward. We are not expecting for the moment any new reductions in DTA, so in at least one that could have an impact in capital, so we are not expecting anything that could be material for our capital purposes in this way. So I would expect the tax rate to be broadly around the 30% using the current tax and the deferred tax, okay?

In terms of the front book versus back book in credits and deposits. What I can tell you is the following. We expect, as I was commenting, we still have some way to go in terms of the deposits, as you know. We have a positive impact in terms of the front book versus back book in deposits. And of course, there will be some margin compression on the asset side. We expect one to broadly compensate the other one so that going forward, the NIM would be constant. And this is what I would like to say at this moment.


Hugo Moniz Marques Da Cruz, Keefe, Bruyette & Woods Limited, Research Division - Analyst [24]


And guidance on the cost of risk, please, for this year, if possible?


Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [25]


I mean, the cost of risk, what we said is that we would like to go to below 50 basis points by 2021, with a smooth linear movement towards this rate. And I would not go more into detail than what was already said. So a linear movement towards this rate. You have the rate of last year. It should not be very difficult to get there, okay?


Operator [26]


Next line -- question comes from the line of Benjie Creelan-Sandford from Jefferies.


Benjie Creelan-Sandford, Jefferies LLC, Research Division - Bank Analyst [27]


Three quick questions for me. First of all, could you just remind us how much your NPL portfolio is currently contributing to net interest income? And the second question is on Mozambique. If you could just give us a bit of an update on the outlook for provisions there because I know that the NPL ratio was up again quarter-on-quarter and coverage was down by quite a bit.

And then the final question was just on capital. You've previously talked about potential optimization measures in terms of risk-weighted assets. I just wondered whether there was any update on this or whether there was anything specific pending for the rest of this year on optimization.


Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [28]


I mean starting with the last one. So I really don't recall. I have to check whether any type of project, any type of -- in terms of optimization of capital, what we have said always is that we have a normal, I would say, normal course of business way of approaching these capital issues that typically it is, I mean, it is a dynamics. It is directive, if you want, between ourselves and the regulator where sometimes, there are some issues that they raise and some issues that we raise, but we are not expecting, I would say, in these interactions that we have with the regulator where we sometimes ask for optimizations and then the reviews of the models in the size that is positive to us. And they may ask for others that are in the opposite direction. We expect them basically to compensate each other. And it's -- I would say this is the normal cost of business below the line that we do on a day-to-day basis when we review our models with the regulators. But we are not expecting anything. But we do expect a lot of things because there is a lot of work basically to maintain exactly the situation in which we stand.

In terms of the NPL. As we commented to you broadly, there are here 2 types of NPLs. So there are the ones that are really past due. The ones that are past due, they typically -- they do not accrue any type of interest, so their contribution is very small. And then there is the one that is -- that are unlikely to pay. And in this unlikely to pay portfolio, the contribution that they have to our NII is proportionate to the end covered part. So the way that the -- so if they have, let's say, a 50% provision and they have, let's say, a 3% spread, their contribution, I'm simplifying a little bit, is 1.5% spread.

The good number to think about is the unlikely to pay contribution is around 1% impact. So for every EUR 1 billion of reduction, if you want, of unlikely to pay, there's a EUR 10 million impact in terms of NII. That's the way that we look at it.

And in terms of -- Okay. Right. In Mozambique, what I think is important to say relatively to Mozambique is the following. The portfolio is very small in Mozambique and it's getting smaller. So in this moment of the situation in Mozambique, we are much more focusing on the franchise, on having the clients, on maintaining the client loyalty and being prepared for the moment in which the country takes off than on growing the current portfolio.n Our current portfolio has gone -- is becoming smaller at this point in time with a very rigorous cost of credit. The number of provisions or the size of the provisioning that's also for P&L is becoming smaller. So I would say that more than the cost of risk, it becomes more and more irrelevant as you converge towards a much smaller portfolio, so the cost of risk not a relevant metric. It is to model the provisions. And I think it's much more important to model the provisions on a downward trend. And of course, you see, if the portfolio is getting smaller, I mean, the cost of risk metrics does not make sense. But the provisions will continue to decrease at probably the same price as we've seen this year.


Operator [29]


Your final question comes from the line of [Sameer Aditya] from Citibank.


Unidentified Analyst, [30]


I've got 2 questions. Firstly, back to the evolution of your AT1. I know you mentioned some of this in previous question. But intrinsically, term, specifically, in your last conference call, you said your guidance could be 5 to 15 CET1 impact or even nothing. Could you give a bit more clarity on where your thinking is at the moment?

And secondly, looking at subordinated debt, we're looking at the current spreads of your AT1 and Tier 2. Now they're trading much tighter than in the way you issued in the last year or so. And given your MDA buffer is quite modest versus your peers, is there capacity for you to issue -- or to rephrase that, are you looking at the market to potentially issue more AT1 and Tier 2 here to boost your MDA buffer?


Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [31]


Okay. First, the trim. So we do not have any indications that we have here a negative impact from the trim, but as I was commenting, there is always, I would say, an interaction with the supervisor in which the supervisor pushes for more conservativeness in the models and we push for something that we think is more in our shareholders' interest. So right now, I mean, I commented a 10 to 15 basis points impact as a possible impact, just to say. I mean, in this interaction, it's very difficult to anticipate exactly what will happen. It's not -- I mean, it was not linked to a specific question or to specific issues. It was more to give you an idea of size of the type of impacts that we could have just to tell that we are not expecting any sizable impact. And I maintained this view that we're not expecting any sizable impact. Of course, it is normal interaction that we have with the regulator. I cannot anticipate exactly what the outcome is. This is a part of our day-to-day business, and it's a part of our work to push for it in the global. We think that we have conservative models and that we should suffer much less from any type of model revisions than the average banks in the European zone. So that's what I wanted to comment on it.

In terms of the -- I mean, the way that we look at it is the following. I mean, we have a very comfortable reasonable total capital ratio, okay? When you compare it with the P2R. We are seeing that the bank is improving and it's our ratings are improving and so on. So we have to make it clear that even if we could, it's not because we can do something that we should do something. So, of course, we could issue and we could issue at more interesting rates now than some time ago because we are in a much better position than we were some time ago. But we prefer to defend, so to say, we see the limits of what's reasonable. The shareholders and the shareholder value creation than to issue at the price that may still be too high when you compare it from 2 years from now. So this is always something that we always measure. Eventually, with the issue when we think that the price duly reflects our risk profile, we think that when you compare ourselves with some of our competitors, our spread is still not totally aligned with the difference in risk. So we still think that we deserve a better price.


Operator [32]


There are no further questions. Please continue.


Bernardo Roquette de Aragão de Portugal Collaço, Banco Comercial Português, S.A. - Market Relations Representative & Head of the IR Division [33]


If there are no further questions, let me conclude by stressing that we continue to face challenging conditions, but we were able to pursue a consistent path with a significant improvement in balance sheet quality and earnings. The digital transformation of our business and our customer relationship processes is resulting in customer acquisition, business development, improves customer appreciation of the bank and the ability to remain a benchmark in terms of efficiency. We are converging at a good pace with the goals established in the strategic plan we present to the market. We reaffirm that even in this more challenging environment, we will achieve the targets, the guidance projected in our strategic plan.

Thank you for the participation in this conference call. And the case may be, I wish you excellent vacations.