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Edited Transcript of BCP.EP earnings conference call or presentation 20-May-20 8:00am GMT

Q1 2020 Banco Comercial Portugues SA Earnings Call

Porto Salvo May 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Banco Comercial Portugues SA earnings conference call or presentation Wednesday, May 20, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* 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. - 3rd Vice Chairman, CEO & Member of Board for International Strategy

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Conference Call Participants

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* Benjie Creelan-Sandford

Jefferies LLC, Research Division - Equity Analyst & Bank Analyst

* Carlos Joaquim 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

* Jonas Scorza Floriani

Axia Ventures Group Ltd, Research Division - Director

* Maksym Mishyn

JB Capital Markets, Sociedad de Valores, S.A., Research Division - VP

* Noemi Peruch

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

* Sofie Caroline Elisabet Peterzens

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Millennium BCP Q1 2020 Earnings Conference Call. (Operator Instructions) I must advise you that today's conference is being recorded, Wednesday, the 20th of May 2020.

And I should now hand over to Miguel Maya. Please go ahead.

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Miguel Maya Dias Pinheiro, Banco Comercial Português, S.A. - 3rd Vice Chairman, CEO & Member of Board for International Strategy [2]

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Good morning. This is Miguel Maya speaking. Welcome to BCP's first quarter earnings conference call. We are going through an exceptional period. We all know the economic projections published by the Bank of Portugal, the IMF, the European Commission and ECB, all of which are different, but all of which agree that we are facing a severe recession, but all of which also points to positive developments in 2021 and the years thereafter. In this moment of uncertainty, we seek our possible scenarios, indicators that give us some confidence or points of contact with the new normality. But this is a peculiar and extremely volatile period and very few things are certain. The moment requires pragmatism. The most important thing now is to know how to select the relevant information for decision making that streamlines the bank's adaptability and resilience. At the same time, we have already started to adapt our business models and processes to the new normal. In many ways, this crisis is a powerful accelerator of trends. And in some cases, we will have to fit several years' worth of change into a single year.

Slide 5. That said, at BCP, we switched from a focus on growth to the defense of our balance sheet. That is to say our priority is defending the bank's health. We have adjusted our course, and we have defined clear priorities that will guide our actions in 2020, which are protecting our employees. The health crisis will be prolonged and our teams must be protected and prepared to continue to serve customers. Defending the quality of the balance sheet, the liquidity and the solvency of the bank, if the bank does not remain healthy, we will not be able to fulfill our mission. Supporting the economy as a systemic and relationship-based commercial bank, our health depends on the health of our customers. We must act with rigor. We must not promise what we can't deliver, and we must live up to our responsibility, which is to support viable companies and health families.

Adapting business models and processes to the new normal, we must accelerate the transformation of customer interactions and service models as well as the operational models that allow for efficiency gains. We aim to remain a benchmark in terms of service quality and operational efficiency and reinforcing the component of social support for the most vulnerable, seeking to protect employment and reinforcing through the definition of priorities. We are not going to have an additional budget for that, but we are going to make a definition of priorities and the social action of the BCP foundation.

Slide 6. The bank has efficient corporate governance structures that reacted immediately identifying the measures required to face the sudden changes in the overall context. The crisis management team went directly into action to ensure that business continuity was not compromised in view of the many risks that the pandemic poses to the bank's activity. We segregated critical teams and reinforced infrastructures that allows us almost instantly to continue operating with most people working remotely. We defined security procedures and changed the routine, so that the branch will network could remain operational.

During this period of our dynamic management of the retail network led us to close for disinfection and quarantine, around 20% of the branch in Portugal. Our commercial performance also had to adapt in order to continue to respond to the customer needs without neglecting analytical rigor, strict risk management criteria and the need to preserve the quality of our balance sheet. All this activity has been carried out in articulated manner with -- in the different geographies in which we are present with the Chief Risk Officer participating in the respective credit management committees.

Slide 7. As we all are well aware that the bank's future profitability depends on the viability and sustainability of our customers, we have implemented concrete measures aimed at supporting the economy. In Portugal, we provided companies with sales to credit lines worth EUR 6.6 billion, guaranteed 80% to 90% by the state to finance working capital needs affected by the sudden reduction in economic activity. In a short period of time, we approved more than 12,000 applications with the public entities, which translates into EUR 2.2 billion in financing for companies. We were the bank with the best performance in placing these state guarantee financing lines. We have made around 100,000 loan moratoria available to companies and families, and these moratorias meets EBA's guide -- requirements.

Slide 8. We are facing the economic shock caused by the pandemic with an appropriate capital and liquidity position. We are, therefore, at a substantially better starting point than BCP was before the previous economic crisis. Our common equity Tier 1 ratio was 12% in March, 6.2 percentage points above P2R and 3.2 percentage points above the fully implemented regulatory requirement after the easing measures introduced by the ECB and Bank of Portugal. In terms of liquidity ratios, we maintain a position comfortably above the 100% benchmark. We also have a loan-to-deposit ratio that is below 90%. However, we do not view the relaxation of regulatory requirements is opening the door to less rigor. We conduct our operations aware that these easing measures are temporary and that the previous level of regulatory requirements will be restored quickly.

Slide 9. The pandemic also brought the need for safety regulations to mitigate the spread of COVID-19, and this altered customer behavior and the patterns in the way customers interact with the bank. This trend will continue. And for this reason, we are intensifying the activity role of digital channels. Since March 19, there has been an increase of 12 percentile points in the rate of digital transactions. And each day, some 1,200 customers start using the bank's mobile solutions. Another highlight is our effort to increase the capacity of remote customer service, a privileged channel in this phase of social confinement, where we have seen an increase in the number of calls. We reinforced the call center dedicated to client's requests. We have increased the call center capacity with 4,000 new potential remote working agents, and this new capacity leaves us operationally prepared in the event we need to reinforce again the remote working component.

In the first quarter, our consolidated net profit totaled EUR 35.3 million, influenced by generic provision of EUR 78.8 million that we set up out of the prudence given the eventual consequence of COVID-19. This result was achieved with a core income growing 6.8%. We maintain our effort to improve credit quality, as evidenced by the NPE trajectory with a reduction of EUR 1.3 billion in the last 12 months, of which EUR 279 million in the last quarter. The intensity of commercial activity was reflected in the growth in business volumes with a 9.8% increase in performance credits to EUR 50.7 billion and 6.2% in customer funds to EUR 80 billion. This growth was accompanied by a 37% rise in the mobile customer base to a total of 2.3 million customers using Millennium's mobile solutions. In Portugal, clients using the app increased their frequency of interaction with the bank, making on average 68% more contracts than in March 19.

Regarding business volumes, the highlight was the EUR 4.5 billion year-on-year increase in performing loans. In terms of customer funds, mainly sustained by individual customer deposits, we highlighted the 6.2% year-on-year growth with an increase of EUR 5.1 billion and the 7.8% increase in balance sheet resources. The bank's customer base continues to grow in the geographies in which we operate, having increased by 714,000 customers since March '19 to more than 5.6 million customers with an emphasis on the increase of 634,000 mobile customers. In Portugal, the customer base increased by 6% in the same period, exceeding 2.4 million customers with an increase of 194,000 mobile customers. In Portugal, 33% of customers already used our app, which is responsible for 85% of customers' digital interactions with the bank. The new app continues to be very well accepted by customers and drove the growth of mobile, as reflected in the significant rise in the number of access, up 69%; payments, up 75% and transfers, up 108% and sales, up 72%.

Slide 14. As I mentioned, the consolidated net profit of EUR 35.3 million in the first quarter was influenced by the provision of EUR 78.8 million constituted in Portugal, Poland and Mozambique, as a prudential measure given the still unpredictable effects of the pandemic. To these generic provisions, we had a EUR 12.7 million increase of the provision in Poland for legal risks related to foreign currency mortgage loans. The growth in core income resulted from a 6.3% growth in the net interest income and a 7.9% increase in commissions. Loan impairments remained stable compared to the same period last year, with the cost of risk continuing its downward trend.

Slide 15. Our commitment to improving the quality of the balance sheet is clear in the reduction of EUR 1.3 billion in nonperforming exposures achieved year-on-year with an emphasis on the reduction of EUR 1.5 billion in Portugal. In the first quarter, we reduced NPEs by EUR 279 million in consolidated terms and EUR 328 million in Portugal. The NPE reduction trajectory was achieved without compromising the coverage levels, which remain with impairments coverage at 55%.

Slide 16. The bank's capital position made it possible to accumulate without a significant impact, the adverse effects of the main risks that are expected. Total capital remained at 15.4%, 2.1 percentile points above regulatory requirements, and the fully implemented common equity Tier 1 ratio was 12%, some EUR 2.8 billion above the P2R regulatory requirements. I believe that I have been clear about the path we are taking and the priorities we have for 2020. When we have greater visibility, we will consider revising the strategic plan presented to the market. For now, we maintain the goals we communicated to the market, knowing that with the headwinds, we will need some additional quarters to hit our targets in terms of efficiency and ROE.

I now give the floor to my colleague, Miguel Braganca.

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

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Good morning, ladies and gentlemen. Now as you see in Page 18, what you see is a quite healthy growth in terms of core income that grew from the first quarter of '19 to the first quarter of '20, around 7%. The cost at 9.4%, which makes that the core earnings increased 4.4%. They were the nonusual operating costs, mainly linked to severance payments that were minus EUR 9.5 million this year. And other income that, to a large extent, was linked to the trading gains in the ALM portfolio and the FX gains that also increased somewhat. So in general, so this meant that operating net income then decreased by around 8% year-on-year. And as Miguel Maya has commented, and in line with the Portuguese banks have done, we have created a COVID-19 associated provision. We don't have exactly yet a view on how it will be allocated because there is not a lot of clarity in terms of exactly what will be the length of this crisis. What we have done is created this provision of around EUR 60 million in Portugal, and the remaining, so around EUR 19 million in the other geographies.

Then the impairment and other provisions increased somewhat. However, this was linked, as you will see, to a decrease in the cost of risk converging to the goals in our strategic plan.

Going here to Page 19. What you can see is that there was -- here this decrease in net income that was, to a large extent, explained by the activity in Portugal because exactly of this provision that we have created. However, this -- we did similar provisions, both in Poland and associated to the Mozambiquan operation, albeit smaller, as I have commented, so that, I would say, all these activities have had a negative contribution. On a comparable basis, as you can see, Poland was quite stable.

In Page 20, we can see that the net interest margin increased 6.3% -- I'm sorry, the NII increased 6.3%, albeit some compression on the net interest margin because the credit volumes increased. This was, to a large extent, explained by the evolution in Portugal, and here, as will be commented, the main contributors were the decrease in the ALCO portfolio or the sale of the ALCO portfolio. In the end of last year -- of a large part of the ALCO portfolio in the end of last year that decreased the NII in the first quarter of the year. And also, the investments in -- of the excess liquidity in the European Central Bank and the negative yielding treasury bills. So this -- basically, these 2 effects explain the EUR 15 million that we see here. The remainder are then a remaining set of effects that more or less compensate each other.

In terms of fees and commissions, I would here highlight the very healthy growth from Q1 to Q2 of the banking fees and commissions in the -- of 7.1%, these are less volatile fees that clearly leads to our franchise. And to a large extent, also, as you see, there was an important contribution of the international activity. But even in Portugal, in spite of some regulatory headwinds, these banking fees and commissions have grown quarter-on-quarter on 2%. In terms of other income, we had one-off gains, as you may see, last year in the several real estates, in possession of EUR 11 million. This year, instead of having EUR 11 million of gains, we had EUR 4 million of loss, which is not a lot. What I would say, the typical is to have a lot of gains in reprocess real estate. This impact explains, so to say, the -- most of the bulk of this evolution. There was also, in the international operations, some increase EUR 5 million, not a lot, but some increase in terms of the monetary contributions, mainly in Poland.

The costs, as you may see in Portugal, decreasing costs, as you may see, of 2.8%. But on a recurrent basis, I would say, in spite of some cost inflation, we were able to maintain the recurring cost base. In the international operation, the recurring cost base increased 25%. The total cost base increased somewhat more, basically, because there were some costs linked to the integration of Euro Bank to capture the synergies aligned with the plan that we communicated to the market. We still compare very favorably in terms of cost to core income and cost-to-income with our peers and with European benchmarks, which is a very important sign of strength and size of internal capital generation for the future.

In terms of impairment and provision charges, as we have commented, we have done these additional provision, this COVID provision that we have not yet allocated to loan loss reserves because we don't have the models to do it. We did it out of prudence and out of management judgment. The normal trends that we were seeing in Q1 of '19 to Q1 of '20 was the decreasing trend of the cost of risk, as you will see here, aligned with what you were expecting, mainly in Portugal, where we were having a cost of risk of 73 basis points and/or the normal trend in terms of pure cost of risk was this decrease of 73 basis points to the 63 basis points.

The credit quality still improving in the first quarter of this year. As you may imagine, so the impacts of COVID were not particularly relevant in the first quarter of the year, I would say the COVID mostly affected the second half of March. So it was possible still to reduce the NPE stock around EUR 300 million, so EUR 280 million in 1 quarter, which is very good, which made a reduction in excess of -- or around a 25% of the NPE stock year-on-year basis. This makes that our NPE ratio, including securities and off-balance sheet exposures, is already at 5 -- according to the EBA definition is already at 5.2. And if you -- we only consider loans, not securities, neither the off-balance sheet exposures around 7.2%, which is a huge improvement vis-à-vis what it was in previous periods.

In terms of business activities, we see a very healthy growth in terms of customer funds in Page 28, with the customer funds of individuals growing 7.8%, of which 4.1% in Portugal -- I'm sorry, 5.6% of individuals in Portugal, 4.1% total in Portugal and 11.6% total in the international operations. So in general, we continue to have a very strong franchise and a very strong preference from our customers in terms of customer funds.

Loans to customers. We had here an important growth in the international operations, mainly linked to Euro Bank. And in Portugal, what we have seen in this quarter is that the growth in the performing portfolio, compensated, so to say, it is very good performance in terms of the reduction of NPEs. Liquidity, more and more, I would say, a nonissue in terms of balance sheet strength. It is an issue in terms of the cost of investment of this liquidity. So we are maybe too liquid in terms of P&L. But in these moments of uncertainty, it is an additional source of strength, as you may see here in Page 30.

In terms of capital, as Miguel has already commented, we -- in terms of fully implemented ratio, included the unaudited net income, we are still at 12% in spite of some regulatory headwinds that were commented. Actually, we were negatively affected by the reduction in P2R that can be realized through CET1 because the amount of minorities that we could capture was lower. There was also some negative impact in terms of the fair value reserve in the quarter. But in spite of this, we were able to grow well or to generate the normal capital that we have in a quarter when corrected for these effects.

Leverage ratio, as you see in Page 33, very healthy and mainly when you compete with high density. This gives you as an additional degree of comfort in terms of not a lot of surprises in this area.

I will pass it now to Bernardo that will elaborate a little bit more in terms of our geographies.

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Bernardo Roquette de Aragão de Portugal Collaço, Banco Comercial Português, S.A. - Market Relations Representative & Head of the IR Division [4]

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Okay. Good morning, ladies and gentlemen. On Page 35, starting with the Portuguese operation, net income decreased by almost 33%, mainly impacted from COVID provisions of EUR 60 million. Not considering the provisions, NII had decreased around 19% year-on-year, driven by lower contribution from other income and from some factors that impacted on NII. Banking income was mostly affected by lower sales on real estate assets that had a positive impact of more than EUR 11 million on the first quarter of '19. On the cost side, costs that were down 3% and were positively impacted by lower recurring costs as well as lower restructuring costs compared with the first quarter of '19.

On Page 36, looking to NII evolution through the year, there are some positive and negative impacts that is worth mentioning that explain the decrease on NII in Portugal. This evolution was driven by positive effects of EUR 11 million, out of which almost EUR 6 million from credit volumes, EUR 2.7 million from lower wholesale costs and EUR 2.4 million from lower remuneration on deposits. On the opposite side, the excess of liquidity placed at ECB and investments on treasury bills pushed EUR 4.5 million down. The normalization of the macro environment impacted in EUR 5.6 million on credit pricing and the lower yield on the ALCO portfolio, but aligned with the strategy, impact negatively with around EUR 10 million. And also the fast pace of the NPE reduction over the last year and the -- in even the first quarter of 2020 were also responsible for a decrease of around EUR 5 million on NII.

On Page 37, regarding spreads on term deposits, back book spreads stood at 56 basis points. But we have to consider the decrease on the average 3-month Euribor that happened during this period with a reduction of 10 basis points. Spreads on loans versus 3-month Euribor were up driven by some increase on consumer loans and corporate loans. NIM in Portugal stood at 155, lower than last year, reflecting, as mentioned before, some normalization of the macro environment.

On Page 38, moving to commissions and other income. You can see that banking fees and commissions grew 2% in the year, mainly driven by client acquisition. Market-related fees were also up influenced by securities and asset management fees. Looking to other income, decrease is mainly explained, as Miguel explained before, by lower gains on real estate and other assets compared with Q1 '19, lower contribution from insurance and as a more positive from trade in line with some rotation on the ALCO portfolio coming from securities as well as from FX.

On Page 39, looking to costs, there was a reduction in staff costs and the admin costs, partially explained by lower unusual costs and the reduction of more than 5% on admin costs. All in all, costs in Portugal went down 2.8%. Year-on-year, there was a reduction in number of branches as well as in the number of employees.

On Page 40, moving to asset quality. NPE reduction was strong with more than EUR 1.5 billion decrease since March '19. On the first quarter of 2020, there was a reduction of NPEs above EUR 325 million, reaching at the end of the quarter, a level below EUR 3 billion in Portugal. There was also a reduction in cost of risk to 63 basis points compared with 73 basis points on the first quarter '19 that shows the convergence to the normalized level of the cost of risk. On the first quarter '20, NPE reduction was mainly through sales.

On Page 41, regarding coverage breakdown. You can see that total coverage is still above 110%, where coverage for individuals with high levels of real estate collaterals stood at 100% and for companies at a higher level of 116%. As you can also see in this slide, coverage by loan loss reserves is high in loans to companies, where real estate collateral is lower than on individuals.

Page 42, looking at foreclosed assets and restructuring funds, there was a decrease of almost EUR 400 million and EUR 80 million, respectively, compared with the first quarter '19. In terms of property sales, there was a slowdown in Q1 '20 compared with previous year, but as you can see sales are still above the book value.

Now moving to Page 43. Customer funds were up 4.1%, mainly through individuals with demand deposits increasing 18.5% and term deposits reducing by 8%. Off-balance sheet products were growing prior to the intensification of the outbreak. And in terms of gross loans, there was some stability year-on-year because the strong reduction on NPEs was compensated by the same size of increase on performing loans.

On Page 44, we have a detailed overview of the evolution of the performing book, which increased 4.7% year-on-year and is explained by an increase on different segments from individuals as from companies.

On Page 45, let me highlight that since 2013, BCP performed very well on the NPE reduction, delivering more than the market expectation. And from 2013 until 2019, NPE reduction reached almost EUR 10 billion, which represents, in average, EUR 1.6 billion a year and on the path to the level below EUR 3 billion in consolidated terms. On the Q1 '20, there was a reduction of EUR 328 million. That also show that we were in the right path. Cost of risk with the trend to coverage to -- to converge to 50 basis points. And the additional level, as mentioned, is related with the NPE reduction. Considering the strong capacity to generate profit before impairments and provisions and the cost of risk on the performing portfolio allows more scope to accommodate the effect of the COVID-19 outbreak.

On Page 46, you can see that today, our starting point is different. Loan portfolio is much higher diversified, with mortgages representing almost half of the book. Exposure to -- through sectors more sensitive to COVID-19 accounts for less than 7% of -- over the total loan book. And on the top to exposures as autos and real estate promotion LTVs is mostly concentrated in the bucket of 0% to 60%.

On Page 47, analyzing our loan portfolio to individuals, mortgage represents almost 90% of total loans to this segment, around EUR 17.3 billion and LTVs are mostly concentrated in the bucket below 60%. And if we consider a higher bucket of LTVs, up to 80%, this exposure moved to 83%. Considering a back look on the statistic data or the macro data, where it is concerning different scenarios that happened on the past, let's say, since 2019, where GDP moved from minus 4% to plus 3.5%, and unemployance reached a peak of 16% at the lowest level at the end of 2019 of 6.5%. You can see that the cost of risk of individuals -- of individual loans portfolio is very resilient to the deterioration of the macro environment.

Moving to Page 48 and considering some projections from Bank of Portugal and the European Commission to GDP and unemployment Portugal compares better than the average estimations for the Eurozone to what concerns with the recession for 2020. According to European Commission, recovery for 2021 is almost aligned with European countries. As mentioned before, one of the reasons that explain a favorable scenario is a different starting point compared with the previous crisis. Considering some project scenarios of recession and recovery for 2021, it is expected some negative effects from the economic crisis that will push the cost of risk for the next 2 years within a range of 90 to 120 basis points. Cost of risk sensitivity of further reduction of GDP and unemployment by 100 basis points should account -- should be an impact of around 4 to 8 basis points on the cost of risk.

Moving to Page 50. And now talking about the international operations results, as mentioned, were mainly affected by lower contribution from Poland due to the COVID-19 provisions front-loading of almost EUR 14 million before taxes. Additional provisions of EUR 12.7 million for FX, legal risk and integration costs of Euro Bank of EUR 6.9 million. Mozambique was down due to the COVID-19 provisions and lower gains on securities. Contribution from Angola was weaker from last year, reflecting the macroeconomic environment. All in all, contributions from international operations were down 58%, mainly related with extraordinary impacts from Poland that on a comparable situation was aligned with the previous year.

Page 51. Net income in Poland was impacted by COVID provisions of more than EUR 11 million after taxes and other additional one-offs with total amount of EUR 28.4 million. Net profit when adjusted for extraordinary items were at a similar level as a year ago. And ROE, excluding one-offs, were at -- stood at 8.4% and CET1 at a high level of 16.5% and total capital of 19.5%, well above the regulatory requirements. Net operating revenues, up 24%, and that includes the accretion value from Euro Bank as well as the natural growth of Bank Millennium. Operating costs were impacted mainly by Euro Bank.

Moving to Page 52. Integration costs of Euro Bank in Q1 '20 stood at EUR 6.9 million and total integration costs until the end of first quarter account for almost 73% of the overall plan. Synergies captured in 2020 are almost compensating restructuring costs and are expected to offset other restructuring costs that are in place regarding the integration of Euro Bank for the year 2020.

On Page 53, some detailed information about Bank Millennium. NII up by more than 37% due to high volumes, and NIM increasing year-on-year to 2.8%. Operating costs in Poland were higher than Q1 '19, explained by the Euro Bank acquisition with what concerns basically with staff costs and other admin costs. But it's possible to observe some decrease in trends. Fees and commissions increased 19%, and the other income was lower due to higher mandatory contributions and lower trading gains in Poland.

In Page 54, in terms of asset quality, NPL ratio was slightly higher, reflecting the Euro Bank acquisition, and the cost of risk is higher because it reflects the new default of definition and the Euro Bank loan portfolio that increased the market share of cash loans in Polish -- in the Polish operation.

On Page 55, looking at volumes in Poland, customer funds increased 20%, with the highest impact from -- coming from demand deposits. In terms of loans, gross book went up from EUR 12.2 billion to EUR 16.3 billion, 33% more explained with the contribution from Euro Bank and the high levels of new production until the first quarter of 2020, where mortgage and cash loans were reaching very high levels of new production.

Page 56, regarding Mozambique. Net income was lower than in the same period of '19, driven by lower net operating revenues associated to last year gain on securities and lower NII results of lower interest rates environment. Costs increased compared to Q1 '19, mostly explained by staff costs due to the higher number of employees, considering the expansion of the network and other admin costs. Capital ratio stood at 43%, and ROE of 15%.

Page 57, NII and NIM, reflecting the normalization of the interest rates environment. Commissions increased 16%, and other income was lower than Q1 '19, mostly explained by, as I said before, some lower gains with securities when compared with the previous year.

On Page 58, NPL ratio stood at the same level at the end of the year, around 17%, and the coverage by loan loss reserves above 70%. Decrease on the cost of risk in Q1 '20 is explained by some reversals in impairments.

Page 59, regarding volumes. Customer funds grew 7%, and loans decreased 7% year-on-year, explained by a reduction of EUR 52 million in loans to companies, reflecting our conservative approach under the challenging environment in Mozambique.

So thank you for your attention. And before we move to Q&A, I will return the floor to Mr. Braganca for some final comments.

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Miguel Maya Dias Pinheiro, Banco Comercial Português, S.A. - 3rd Vice Chairman, CEO & Member of Board for International Strategy [5]

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As you know, we have presented to the market a strategic plan that had basically 3 components: a component of franchise growth that had to do with the growth in terms of number of customers and number of customers that are digital and mobile because it's very critical from a cost of servicing and the customer experience point of view; a part of the metrics that were more financial; and the part of the metrics that were mainly linked to asset quality. The way that we see now the COVID crisis is that we remain fully committed to attaining our key objectives. But in the context of this uncertainty, we may need some additional quarters to get there because, of course, the interest rate environment has changed. And we don't -- I mean, in all honesty, nobody can say is exactly how long this crisis will take and how long it will be. In terms of customer growth and franchise growth, we are quite confident that we will overachieve these values. So it is -- we are clearly evolving very, very positively and being even positively surprised by what is happening, and the COVID crisis may even have accelerated this digitalization and mobilization of customers that will bring, of course, long-term benefits. In terms of asset quality, we were on a very good path to decreasing around EUR 3 billion and reached a 5% ratio next year, as you have just seen. So even in the first quarter of this year, we were able -- in spite of some early warning signals of COVID, we were able to decrease around 25% year-on-year, the NPE stock, and we were decreasing between 25% and 30% a year the NPE stock, which would get there. However, looking at this crisis, looking forward, it is very difficult to project what's going to happen. We don't have here a crystal ball, but I would say that probably going forward, we will have here 2 compensating effects. One effect, it would be the normal reduction that we would have normally without sales because the sales in the markets will, of course, be (inaudible) right now. But then there will be, of course, some deterioration, I would expect in the next quarters, but of course, I have no crystal ball. We want to compensate more or less the other. So I'm not expecting -- or we are not expecting a huge increase in the NPE stock, neither a huge decrease. I would say, going forward, I would expect some maintenance in this level or even a small reduction, but let's see exactly how long the crisis will take because this will be very important. And in terms of the CET1 and loans to deposits, it is clearly a restriction to our objective function, that is value creation. We continue to be very liquid. We expect to remain very liquid. And we expect to remain in a strong capital position going forward.

In terms of the ROE and cost to income, this is not, I would say, a particularly favorable moment because there are some revenues that are linked to production and some -- and this, of course, will be more hit. The interest rate scenario of lower for longer, of course, will -- may have also an impact on NII as we're seeing this year. We expect going forward in Portugal to converge towards the NII of last year. In the international operations, it is more difficult because the tailwind that we have in the Eurozone with the TLTRO are not necessarily applicable in these -- other geographies, mainly in Poland, where the interest rates have gone down significantly, as you know. And it is also a particularly complex moment, I would say, to reduce headcount in a sharp way, so to say. It is a complex moment from a society and from a reputation standpoint. So I would say that in this 2 metrics, we will get there, but we may need some additional quarters to get there. But we remain fully committed in terms of the franchise growth and in terms of value creation over the long-term for our shareholders.

Thank you very much. Now we'll open the floor to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Maksym Mishyn from JB Capital Markets.

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Maksym Mishyn, JB Capital Markets, Sociedad de Valores, S.A., Research Division - VP [2]

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Also, many thanks for your constant updates on the state of things in Portugal. We find them very useful. I have a couple of questions. The first one is on NPE reduction. I was wondering if you could tell us how much of the total NPE sales in Portugal happened in March? The next question is on commercial dynamics. I've noticed your off-balance sheet funds in Portugal went down by 5% quarter-on-quarter. Could you specify whether this was purely impact of the market downturn? Or were there some net outflows that you saw in the period? And finally, on the loan book, performing loan book has grown strongly in the first quarter of 2020 in Portugal. What are your expectations for the rest of the year? And whether you have noticed any change to commercial dynamics in April and May?

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

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Okay. Starting with the last question, I would say that the origination of the performing book will -- or is being complex in the normal -- I would say, in the normal production of the bank. But as you have seen, we were a key player in the government-guaranteed lines. And in this particular segment, we are having a market share between 30% and 40%, which is clearly above, I would say, our normal market share. I would also expect that some of the clients that would be redeeming and some of the competitiveness that was in the market to reduce somewhat in the context of these uncertainties. So I would expect, so to say, less the production in some areas such as unsecured personal loans, such as credit card, such as the riskier areas, but some more production in terms of government-guaranteed lines and so on. And unfortunately, these government-guaranteed lines, I mean, the disbursements, I mean, are still to occur. So we will -- we have not seen this yet in April and March, but we have very good leading indicators, such as the closing the deal. So all in all, I would say that in terms of the total book, I would say that the evolution in terms of the size of the loan book will be positive during this year.

In terms of the NPE sales, effectively, this quarter was an important quarter in terms of NPE sales. And effectively we're able to sell some loans that had -- that were highly provided, and it's why also when you compare quarter-on-quarter, you see some decrease in the coverage, that's why. Most of these sales occurred in January and February, where a little of these large sales occurred in March, as you would expect also. In terms of the customer sense, in terms of individuals and taking a look at client by client, I would say, we did not have we don't have relevant outflows in terms of the total client's funds, so to say. We did have some reduction due to the market. And we also had some, I would say, some more -- I would say, risk sensitivity of clients that moves their investments more from off-balance sheet funds to deposits in the context of market uncertainty, but there were not any material outflows from the bank.

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Operator [4]

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Our next question for today is from Carlos Peixoto from CaixaBank.

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

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This is Carlos Peixoto from CaixaBank. My first question -- couple of questions. First question would actually be on capital and basically expected RWA inflation going forward. So the way that I see we have here is a lot of moving parts. So one of them is affected due to the duration of the economic outlook. There should be some deterioration on internal ratings in your models, which could generate some sort of overall inflation in RWAs? And then on the second, and on the other side, you have the state warranty loans or credit facilities, which should help to mitigate or which should have very low-risk ratings around June in the warrantied part. So therefore, I was wondering how what type of RWA's evolution do you expect throughout the year, considering these 2 effects?

Then on the second question, a bit of a follow-up on Miguel's comment on NPE. If I understood correctly, you're saying that you expect the stock of NPEs to remain more or less around these levels. My question here would be, how do you see these moving parts? Because basically, at the same time, you're guiding us towards 90 to 120 basis points cost of risk, which is an increase. So this seems to assimilate some reiteration on asset quality, the underlying assumptions for the NPEs to be stable would be for the pace of exit for write-offs or sales to equal the pace of increase? Or how should we think about this? Just to understand that number better.

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

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Okay. In terms of the NPEs, starting with NPEs. In our plan, we had several levers as we know. Now so we had a lever that was, so to say, the organic NPE reduction based on, say, of a -- on a back book. We had, so to say, the write-offs, and we had the sales, so to say. Our view right now is that most probably the sales processes will reduce very, very heavily. The write-offs may not reduce because this is a part of the normal process. So when a loan -- when you get to a situation in which the loan is not recoverable, you will get -- you do the write-off. And the organic recovery on the back book, if you want, may reduce somewhat, but our expectation is that not too much, so to say. So this is on one hand. So if there were no COVID crisis, we would probably get the 25% to 30% reduction a year that we were having in the last years, okay, and get to our numbers. However, right now, we have this COVID impacted. We really -- I mean, nobody knows exactly how long it will take, whether we will have a vaccine in the beginning of next year, I mean, or -- whether we will not have a vaccine and so on. So we think it is prudent to expect, at least from our perspective, that there would be caeteris paribus, some deterioration in terms of NPEs if we had on this COVID impact, so vis-à-vis not having the COVID. So having vis-à-vis not having the COVID will have more NPEs. So we would expect that these excess NPEs that we would have linked to the COVID crisis would not be higher than our reduction that we have on the back book. So this is our base case right now. It may be better, I would say that it may even be better than that. So -- but our base case right now is that at least until there is a normality, and at least there is -- I mean, the economic activity picks up, we would not expect any sharp reduction on NPEs. But also, and I think this is very important to say, any -- we are not expecting any sharp increase in E&P. So I think this is very, very important to say. So we expect some stability on this level. But with all the caveats that we don't know exactly what will -- I mean, this crisis is new for all of us.

In terms of other ways, we expect several moving parts here. So as you were saying, we will have a positive mix effect, so we'll have less cash loans or unsecured personal loans, less credit card loans and probably more state guaranteed lines, so to say, in terms of the mix. However, we also are somewhat positive in terms of volumes. And there may be, as we were just commenting also, some rating migration also in terms of some clients that also is linked to this NPE evolution that I was commenting. All in all, the resulting effect, we would expect a small increase in otherwise, low single-digit. But let's see. This is new for everybody. So every view about the future, of course, has to be taken with the grain of salt and has, of course, much more uncertainty than in normal times.

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Operator [7]

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Our next question is from Sofie Peterzens from JPMorgan.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [8]

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It's Sofie from JPMorgan. I was wondering if you could give a little bit more detail around how you've got bit of management over the vision of EUR 79 million. Were you using the assumptions that you have on Page 48 for Portugal, so minus 3.7% GDP growth in 2020 and plus 0.7% in '21? And if so, could you provide the details on what the macro assumption that you use for Poland and Mozambique are? So just a little bit more details around how you kind of reached the EUR 79 million of management overlay provision?

And then I had a question on the TLTRO3. How much are you planning to take-up from TLTRO3 in June? And should we expect that you potentially will buy sovereign bonds with this? And my last our question would be that so far in the second quarter, what trends have you seen on the fee side?

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

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Okay. In terms of the TLTRO, this is clearly an important tailwind that, as I was commenting, we expect to have a positive contribution in the margin of this year and of the next year. And we expect this will be one of the important effects that will allow us to converge towards the margin of next year. Exactly how much we'll do or not, I mean it is not our policy to comment on management decisions before we take them. But it will be more -- what I can say, it will be more than in the last TLTRO because what we are seeing is that the team associated to the TLTRO is much -- I mean, I would say there is almost no stigma or it's much smaller than at least that it was in the past. So as I expect a positive contribution from this towards the margin that will allow us in Portugal to converge towards the margin of next year. We will comment a little bit more in detail after we take the decision and after we finance ourselves in the TLTRO.

In terms of the -- how we got to the value of EUR 60 million. Unfortunately, we could not be very scientific because this is -- these are the March accounts. So -- and being the March accounts, we -- as of March, we don't have a lot of information. And even right now, we don't know a lot what's going on, and unfortunately, even with mathematical models or statistical models, I mean they are not particularly useful because for statistical models, to be very useful, you have to assume that the past is very much -- or the future is very much correlated with the past, which we are not absolutely sure right now. So what we saw is that the situation in Portugal, all in all, when you compare with some other countries from Southern Europe, is relatively benign in terms of public health, as you may know. Of course, in terms of economic, we expect this to convert to a speedier recovery than in other countries of Southern Europe. And we try to use our models that points to this 90 to 120 basis points of cost of risk in the next 2 years. Based on these -- on all these projections, this is more or less the gap of cost of risk that we will get based on these projects. And of course, if afterwards, the -- I mean, the vaccine is there in December or January next year and everything is much better than what you are expecting, of course, the projections will be revised. Your guesses on the vaccine are as good as mine. And what we have done is based on these cost of risks, we have anticipated, I would say, a large part of this to Q1. So to say that there was almost a no regret move. So what we are saying is that we expect that this EUR 60 million in Portugal, at least, this EUR 60 million will be used. Effectively, when you see what our competitors have done, it's very much aligned also with what our competitors have done. BPI, like I said, has done around EUR 30 million, and they are around half our size, give or take, a little bit more even in terms of Portugal. And the cash (inaudible) deposits disclosed an impact of around EUR 60 million, and they are somewhat larger than us, but not much. So effectively, there was here, I would say, some convergence in terms of expert judgment, if you want, or some judgment of the sector. We have the benefit of disclosing our numbers afterwards. And our models points to -- in these scenarios, not to have -- I mean, to have, at least, this impact.

Fees and commissions. Fees and commissions are very much -- a large part of the fees and commissions are linked either to sales, namely payments and cards and so on, or to markets or to production, okay? So we -- these are areas where, I mean, in a situation of where people were at home, not -- I mean, being particularly prudent in terms of sales. I know where people were more risk-averse, so that they are not investing so much in funds and in the markets, or, of course, were severely impact us in Q2, as you would expect. So we are here commenting Q1, but as you would expect. However, a part of it, namely in terms of the sales that are more of durables and so on and of payments that are linked to purchases of durables and so on, we expect some of these to be recovered afterwards. And I would also expect it as the markets become more normalized, of course, some of the clients that had asset management products and that went more to balance sheet products. They may go back to asset management products. So I would say that from a normality standpoint, over the longer term, I would say there was nothing that would change the new normal, I would say. But as you would expect, there are impacts from the crisis in terms of market-related fees and in terms of production-related fees.

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Operator [10]

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Our next question is from Noemi Peruch from Mediobanca.

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Noemi Peruch, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Analyst [11]

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I have three questions from my side. The first one is on Mozambique and Angola. Can you share with us the capital requirement and the current capital ratio of Mozambique and Angola? And when does the put option on Angola expire? And are you currently assessing whether to exercise it or not?

The second one is on loans. Can you share with us the euro billion moratoria for corporate and individuals? And how much of it is state guaranteed?

And the last one is a follow-up on cost of risk. If I understand it correctly, the EUR 90 million to EUR 120 million guidance is related to Portugal. So if I think about the group, what is the level you expect in terms of cost of risk for the group in 2020, 2021?

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Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [12]

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Okay. First, as taking the questions first off. The moratorium, as you may know, as of 31st of March, we had no more moratorium. The moratorium came afterwards, and they are still work in progress. We have here 2 types of situations. One are the COVID lines that are approved by the government that are not moratoria, that are new credits. Actually, they say very clearly that they should not be best in to the payment of old loans, so to say, they should be more money, so to say. And then you have the moratorium that we say it's old money, if you want. So it is money that is already, I mean, handed to the customers. In the Portuguese scheme, contrarily, to other countries, there is not any state guarantee on the moratorium. There are state guarantees on the COVID lines, but not any state guarantees on the moratorium. Everything right now is still work in progress in the moratorium. So as you may know, I mean, clients have until the 30th of June to ask for the moratorium. And I think it's still -- I mean, we are still in the middle of the process and so on. So we are not disclosing exactly where we are exactly in the process because it's too early. In the 30th of June accounts, then we will comment this because the process will have ended.

In terms of the cost of risk, we effectively -- as you say, the model that we have presented is for Portugal. In Mozambique, I mean, the portfolio is very, very small. I would not expect any type of impact linked to the COVID issue. And in Poland, as you may know, our best expectation in terms of the COVID impact, as of today, was the provision that was done in Poland. But as you know, our Polish bank is a listed entity with 50% of free float in the market. So I will not get too much in detail on it. So we can ask in the conference of the Polish entity, so as to arrive to strict polish regulations. But as of today, we are confident that Poland is also evolving quite well, is seen by the European commission as one of the countries, the county least affected in Europe by the COVID. So we are not particularly worried in terms of the impacts in Poland.

In terms of Mozambique and Angola, I would first -- I mean, not put both on the same level because Mozambique, it's a bank that is controlled by us, where we have 2/3 of the capital. It's managed by us. It's consolidated. It's totally consolidated by us. So in terms of the value in our books of the participation in Mozambique, if you want the book value, it's more or less the book value of Mozambique. So it is, as of the 31st of March, EUR 300 million, this 2/3 of Mozambique, which is the book value. We are quite confident that the banks is performing well. It has a capital ratio that is higher than 30%, as you have seen and with a very good ROE on top of this capital ratio. In Angola, we have a stake, it's a clearly minority stake. As you commented, we have a scheme of puts. The first period to exercise or not put is until next year. Then we have another period to exercise, another 2-year period afterwards to exercise the put afterwards. So I would say we have around 3.5 to 4 years to exercise the put. And the put accepting extreme circumstances is around 1.6 of the book value of the bank. And I can say that the value that we have in our books is much below the value of that would receive in the context of the put.

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Operator [13]

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Our next question for today is from the line of Jonas Floriani from Axia.

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Jonas Scorza Floriani, Axia Ventures Group Ltd, Research Division - Director [14]

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I want to go back to asset quality and back to cost of risk. I think this is something that everybody is trying to understand. If we can shorten maybe the time frame for the second quarter, I was wondering -- and also given the fact that you're just a month away for the end of the quarter, I mean, how are you seeing the dynamics on the NPE side compared to Q1? I mean I take the comments from Miguel and Braganca that he was saying that you still haven't allocated the provisions, but what will be the trigger for you to take prudential measures similar to Q1 in Q2? What kind of driver is behind the booking of that impairment in the next quarter? And then secondly, more of a strategic question. We've seen -- I think you show on Slide 9 and we've seen a significant increase in your -- in digital access by the customers in recent months. I think most of it driven by the changing dynamics due to the pandemic. I mean, in your scenario for a post COVID back to normal life, how do you see the usage of the digital channels once the restrictions are lifted and things get back to normal? I mean, are you -- is this going to be a trigger for you guys to maybe make more significant changes in terms of branches or staff level or your cost base as well? I'll leave at that.

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Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [15]

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I mean, as you know, I mean, there are a lot of regulatory restrictions, and we don't comment in the middle of the quarter exactly what's going on in this specific quarter. So we give longer-term views and longer-term guidances. And we give -- and we comment on past results. We don't comment on the results of the month as it's going on because this would create regulatory issues, I think, for all of us. So we don't comment on this very specifically. What I can say is that this provision was based on the view of the macroeconomic scenarios and the impact of what this macroeconomic scenarios could have on our cost of risk and on our balance sheet, basically. As you may know, the models were not particularly prepared for this scenario, and to do it properly, I mean, we need much more time to know exactly where to allocate, to which clients to allocate, because it's as of the end of March. It's very difficult to know exactly which clients will suffer the most from this COVID crisis. So it is easier to have a general view, so to say, because there is a diversification effect and some positive effect may compensate the negative effect. But it's more difficult to have a very client-specific view in terms of exactly to which clients to allocate, mainly when there's a lot of uncertainty. So I would say that what could change this provision? I would say, what could change this provision is scenarios that are very different from the scenarios that we have presented to you that are based on the international organization scenario. So if the scenarios from international organizations become either much more benign or much more pessimistic, I mean, we could change this impairment or this provision in one way or another. We have been very transparent and what we have commented is that our models, I mean, point to a cost of risk that is not particularly sensitive to small changes in GDP, as we have been seeing. So we have here commented that in Portugal, so a 1% change in GDP in 1 year, may have an impact in terms of cost of risk between 4 and 8 basis points. That's basically what we are saying. So if certainly -- I mean, the provision, the GDP scenario becomes much worse, of course, we would have to review our provision more or less aligned with the sensitivity analysis. It's not totally linear, but I think it -- we are giving much more guidance, I would say that most of the financial institutions are given in terms of the models.

And in terms of digital channels, we believe in digital, and we will believe in mobile. And as you've seen, I mean even in the format of our presentation, and if you see our share of branches vis-à-vis the share of clients and vis-à-vis the market share, we already have a share of branches that is clearly much, much lower and the share of cost that is much, much lower than our market share. So we have been frontrunners in this area. We believe that this is the way forward, and we believe that this situation may have accelerated and changed some habits of people in this area. The issue of how strong we will reduce costs and how strong we may reduce branches is, to a large extent, also linked to what the competitors are doing because we are already much on the forefront in terms of branch in terms of low branch footprint, and we don't want to lose the market share, the healthy market share that would be much more expensive to gain back. So we are one of the front runners. We have a much lower branch footprint than our competitors. We believe that this is a new opportunity. We are not alone in the market, so we don't have the monopoly. So we have to look at each other. And -- but I believe that once this crisis has gone away, there will be new cost-cutting opportunities. In the midst of the crisis to come up with a huge cost-cutting exercise in this scenario may have reputational effects that may outweigh the, I mean, 6 months or 9 months of additional cost savings that one could have.

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Operator [16]

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Our next question is from the line of Gabor Kemeny from Autonomous Research.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [17]

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Going back to the state guaranteed lending, can you give us a sense how you expect the guaranteed loans to impact your net interest margin this year. I understand that the spreads are limited on these loans. And to what extent do you think the company's could potentially use the guaranteed loans to refinance existing debt? And finally, a broader question. You flagged a pretty solid pre-provision profit buffer in Portugal. I think it was 2.3% of your loans as you mentioned in the presentation. How do you expect your pre-provision profits to evolve from here during the rest of the year?

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Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [18]

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Okay. In terms of pre-provisioning profit, I would say they are here to, I would say, 3 areas that are particularly important: the -- I would say, the cost side, the NII side and the commission side, I would say. I would say that the NII, my -- and this is also linked to the first question. So our view is that it will -- our base case is that it's an improvement vis-à-vis this quarter, mainly linked but not only linked to the TLTRO and more volumes and less, I would say, price pressure on the asset side. I would say these are the NII, a positive evolution. I would expect the -- as I have already commented, the fees, mainly the market-related fees, card-related fees, to have a somewhat negative evolution, at least in Q2. Let's see whether in Q3 and Q4, they recover or not. But at least in Q2, Q3, they may have a negative evolution for obvious reasons because, I mean, I have already explained it. And costs, I would expect them to be broadly constant going forward, compensating, I would say, some cost inflation with the efficiency measure that we've had. In terms of the state guarantees, we are not expecting the companies right now to repay a lot of that with the state guaranteed loans. So the state guaranteed loans, they have a maximum spread of 1.5%. The marginal impact on the NII is positive because effectively, we are financing it on marginal terms with deposits or if you want, with less cash put in European Central Bank at negative rates. So it is marginally positive. We could discuss whether a state guaranteed loan with a maximum rate of 1.5% is valuable or not. But at least in NII terms, it is very clearly -- it will be very clearly positive compensating, as, I have commented, some negative impact that we'll have from less cash loans and less credit card loans because of risk issues.

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Operator [19]

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Our next question is from Hugo Cruz from KBW.

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Hugo Moniz Marques Da Cruz, Keefe, Bruyette & Woods Limited, Research Division - Analyst [20]

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Just a quick question on RWAs. There's been quite a few changes in the regulatory scenarios. Can you give any guidance on the impact of the SME support factor, public sector support factor and the potential changes around the treatment of the software intangibles? That's it for me.

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Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [21]

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In terms of the SME support factor, I think both factors will happen, as you are saying. In our specific case, they are not very relevant because we don't have a lot of -- we are quite prudent that we don't have a lot of software activated in our books. As you may see in our books, I mean, the size of the intangibles of software in our books is very small. So we don't expect this to be relevant, as you can see in our accounts. The SME support factor, we expect to have a marginally positive effect between EUR 500 million and EUR 600 million of RWAs, give or take.

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Operator [22]

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The next question is from Benjie Creelan-Sandford.

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Benjie Creelan-Sandford, Jefferies LLC, Research Division - Equity Analyst & Bank Analyst [23]

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Just a few quick questions from my side. First of all, on deferred tax assets, it looks like there was another adjustment this quarter. Could you perhaps quantify whether you expect further adjustments on DTAs going forward or at least quantify the amount of DTAs that could be subject to write-down in the future?

And the second question, just a quick clarification on the 55% coverage ratio this quarter. Does that include the COVID-19 impairments that you've taken in the quarter? Or is that left outside? And then finally, I mean, I know you've touched on this already, but just going back to the 90 to 120 basis point cost of risk guidance for Portugal. I mean can you give any sense of this split in terms of how you see that being allocated to the sensitive portfolios like hotels, et cetera, that you call out in the presentation versus being directed towards the broader loan book in Portugal?

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Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [24]

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Effectively, there was not any type of adjustment in terms of the DTAs. What we have prudently assumed is that the EUR 60 million provision in Portugal until we have a little bit more, is not tax deductible. So effectively that in the tax line, you see, I mean, a higher effective tax rate. But it's mostly explained by this issue. Another important impact is when there are NPE sales, there may be -- I would say, there may be some usages, so to say, of the DTAs associated to it. What I can tell you is that we do the DTA recoverability analysis every half year, so in June and December. It is difficult to anticipate the impact. What I can tell is the following. The tax loss going forwards are already deducted from the regulatory capital. And the tax loss carryforwards -- I'm sorry, the tax differences, the timing differences are also, to a large extent, already deducted from regulatory capital. So I would not expect, I would say, even if there is an adjustment in June of this year, I would not expect this adjustment to have any impact in terms of our regulatory capital position. So that's what I can say at this moment. So even if there is an impact, it's totally irrelevant from a capital standpoint, so because they are already deducted.

In terms of the coverage ratio, it does not include yet the COVID-19. As you know, in terms of what we typically do is that we calculate the cost of risk based on the impairment cost. As you see in the graph, we very clearly said what this was and what was the cost of risk. And as you may see, until we very clearly allocate this, it is not in this number. It will be once we allocate it, and as we have shown, we gave this guidance between 90 and 120 of cost of risk -- of average cost of risk.

In terms of the split, I think it's very -- I mean, it's very early days to say exactly how it will be done. As I commented below it is much more -- it makes, from our perspective, much more sense right now with this huge uncertainty to give large numbers where some differences in estimations may compensate each other then to force a certainty that does not exist. So effectively, it will give you a false sense of security, if I told you that we already knew exactly which are the clients and which are the sectors and how much we will allocate this. Unfortunately, we don't have the security. We feel comfortable that, in general, this number makes sense. But we do not have enough information to be more granular because once we become more granular, the possibility of errors are higher. We expect that by June or September, to be able to be much more granular in this information. So if you want, I mean, this provision was more of precautionary measures, then of, I mean, something that was very much scientific based on the -- on a very scientific model because, effectively, if you wanted to be very scientific based on the past months, it would be very difficult to justify this provision because there were not yet any hints on this regard, okay? But as soon as we have it, we will disclose it to the market.

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Operator [25]

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Our next question is from Carlos Peixoto from CaixaBank.

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Carlos Joaquim Peixoto, Banco Português de Investimento, S.A., Research Division - Analyst [26]

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A few follow-up questions. I was wondering on capital, first of all, if you could also give us some details on the evolution of CET1 ratio for the quarter, namely, how much was the impact from the lower -- the lower eligible minorities that you refer to because of the changes in the P2R? And also the mark-to-market of the loan portfolio and any other impact that may have arised. And then looking a bit into the next quarter, I was wondering what type of impact could we see from a potential change in the pension fund discount rate, given the changes in some areas we've seen other competitors raising discount rates this quarter already, so I was wondering what can we expect on that front? And also, year-to-date, what has been the performance of the pension fund to date? And then finally, just a follow-up on the costs. You are mentioning that you expect them to remain more or less stable. My doubt here is, should we think about the first Q NOI as referenced for the full year? Or should we think as unstable vis-à-vis last year?

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Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [27]

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Okay. First, discount rate. As you commented, I mean, banks have different practices in terms of the period at which they update the discount rates and the actual studies of the other banks. Some banks only do it once a year in Portugal. Some banks do it every quarter. Some banks do it every half year, so to say. We are a little bit on the average, so we do it every half year. Santander only does it once a year and Caixa Geral de Depsitos also only does it half year. And Euro Bank does it every quarter. So that is -- there are different accounting practices in this issue. What I can tell you is that as of March, effectively, we could have -- with this announcement in parallel, we could have updated both the discount rate and the performance of the fund. And the impact would have been marginally positive. So I think -- so the fund has had -- and then the performance as we would expect because of the market situation as of March of around 5%, negative. This would have been more than compensated if we had updated the pension fund discount rate as, for instance, BPI has done, okay? Let's see how this evolves. It makes sense because, I mean, there is a natural hedge in terms of the portfolio.

In terms of the capital generation, to give you a little bit more insight in terms of what's going on. The -- there was, I would say, an evolution in terms of, if you want, the fair value -- so the fair value reserves that were around 20 basis points negative, if you want. And this basically -- and there were then a certain group of effects that more or less compensated each other. As I have commented, we have not updated the pension fund. In terms of coverage, if you want, and the FX evolution, they are compensated to a large extent by the hedges. But we had a fully loaded ratio of 12.2% at the end of last year. In the absence of COVID, if you want, we would have generated capital -- organic capital of around slightly above 20 basis points, so aligned with the 20 to 30 basis points that I commented. It's our regular creation of capital. With this COVID-19 provision that we have done, basically, this came to 0. So basically, we had a normal capital generation of 20, 25, more or less basis points that with the COVID provisions because of the net income came down to 0. With the evolution of the fair value reserves because of the situation in the market, that was around 20 basis points, these came from 12.2% to around 12%. So these are the main effects that are the effects -- the small effects that compensate each other.

The minority impact, I'm sorry, was 10 basis points -- slightly above 10 basis points. So it is a small impact. That these then compensated via the small impact, so to say.

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Carlos Joaquim Peixoto, Banco Português de Investimento, S.A., Research Division - Analyst [28]

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Sorry. And on the cost side?

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Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [29]

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On the cost side, I'm sorry. On the cost side, we would expect -- so in terms of the recurrent costs, as you see in Portugal, the recurrent costs of this quarter more or less aligned with the recurring costs of the same quarter of last year. So we expect the recurring costs to be broadly aligned with this quarter and with the recurrent part and with the part of last year also, okay, the recurrent part.

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Operator [30]

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And our last question for today is a follow-up from Noemi Peruch from Mediobanca.

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Noemi Peruch, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Analyst [31]

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Can you share with us your expectation on tax rate in Portugal, given your assumption of no deductability of the COVID-19 provision?

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Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [32]

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What I can tell you is the following. So the normal tax rate in Portugal is 31.5%. This is the normal tax rate in Portugal now. And we expect to converge to this tax rate in normal situations. As I have commented, this was already asked, what will be the impact or the potential impact of the recoverability of DTAs because the difference between this 31.5% and the remaining is basically due either to provisions that are not tax deductible and the COVID-19. Today, it's not tax deductible because it was not allocated. But once it's allocated, it will become tax deductible. But out of prudence, we have not considered it tax deductible. But what I would, for the moment, because it was an unallocated provision, and if they are unallocated, I mean, the tax office does not consider it deducted. But once it becomes allocated, it will be deducted for tax purposes. What I have -- what I want here to comment is what I've already said. I mean, we'll have to do a recoverability of the DTAs analysis that we do every half year. What I want to assure you is that this, I would not expect to have an impact in terms of capital ratio and in terms of real capital generation of the bank. Exactly -- that's what I can say at the moment. If we will derecognize something more or something less, I mean, everything is so volatile, we are speaking about 10-year projections, more 15-year projections, and the sensitivity of this is quite high. But what is important to know is that for the investors and in terms of capital generation, that is the main issue at which typically more sophisticated investors look at. I would not expect it to have any impact. So even if the tax rate is higher than that, this would not be relevant for capital purposes.

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Operator [33]

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And there are no further questions. I'll hand back to the speakers. Thank you.

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Miguel de Campos Pereira de Braganca, Banco Comercial Português, S.A. - CFO & Director [34]

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And thank you very much for -- these are difficult moments for all of us. Thank you very much for showing the interest and allocating time to analyzing our equity case. We do think that for somebody that is looking at the longer term, our -- the strength of our franchise and the strength of our pre-provision profit generation differentiates us all as materially. We do think that if we do a pre-provisioning profit multiple and franchise multiple, we compare favorably with many of our peers in Europe. And I would really -- and I really appreciate you dedicating your time and would really count on you following on us because it's very important to have investors and analysts following our equity story. Keep healthy, and have a good year. Thank you very much.

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Operator [35]

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Ladies and gentlemen, that does conclude the call for today. Thank you all for joining. You may now disconnect.