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Edited Transcript of CABK.MC earnings conference call or presentation 30-Apr-19 9:30am GMT

Q1 2019 Caixabank SA Earnings Call

Barcelona May 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Caixabank SA earnings conference call or presentation Tuesday, April 30, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Edward O'Loghlen

CaixaBank, S.A. - Director of IR

* Gonzalo Gortázar Rotaeche

CaixaBank, S.A. - CEO & Executive Director

* Javier Pano Riera

CaixaBank, S.A. - CFO

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Conference Call Participants

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* Alvaro Serrano Saenz de Tejada

Morgan Stanley, Research Division - Lead Analyst

* Andrea Filtri

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

* Andrea Unzueta

Crédit Suisse AG, Research Division - VP

* Benjamin Toms

RBC Capital Markets, LLC, Research Division - Analyst

* Britta Schmidt

Autonomous Research LLP - Former Partner, Spanish and German Banks

* Carlos Cobo Catena

Societe Generale Cross Asset Research - Equity Analyst

* Ignacio Ulargui

Deutsche Bank AG, Research Division - Research Analyst

* Javier Francisco Echanove

Grupo Santander, Research Division - Equity Analyst

* José Maria Abad Hernandez

Goldman Sachs Group Inc., Research Division - Executive Director

* Mario Ropero

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

* Marta Sánchez Romero

BofA Merrill Lynch, Research Division - Director and Analyst

* Stefan Rosenov Nedialkov

Citigroup Inc, Research Division - Director

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Presentation

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [1]

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Good morning. Welcome to CaixaBank's Financial Results Presentation for the First Quarter of 2019. Presenting today is our CEO, Gonzalo Gortázar; and our CFO, Javier Pano.

Let me mention a few housekeeping items for comparison purposes with last year's first quarter. You need to account for the Repsol announcement of disposal and the change in accounting treatment of BFA, as well as the capital gain of Viacer which happened at BPI. We have also provided new details of customer funds to highlight unit-linked products within the insurance breakdown. And finally, post the sale of our OREO last year, we have discontinued reporting the real estate segment, and what was left has now been integrated into the bancassurance segment.

With that, let me also give a brief reminder of format for our first-time viewers. We plan to spend around 30 minutes presenting with 45 minutes available for live Q&A. And again, you should have instructions on your screen to participate in that. My team and I will be available after the presentation to take any calls or questions you may have.

And with that, let me hand it over to our CEO, Gonzalo Gortázar.

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [2]

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Thank you, Eddie. Good morning, everybody.

Let's start directly with the summary of the quarter. I would say it's a quarter with market contrast between a pretty good performance on NII and obviously negative performance on noninterest income. NII, it's been supported by growth in the loan portfolio. We actually have achieved a 0.9% year-to-date growth in the performing portfolio, which is, I guess, again a continuation of good trends we saw in the last quarter of 2018. So good news there. And good news in terms of customer spread where we have increased 4 basis points. So we have so far managed to do better than others in terms of the loan side but protecting our margins, which is obviously tricky but quite critical to create value. With that, we have 2.9% growth in NII year-on-year and a small but positive growth versus the fourth quarter.

On the other hand, as you've obviously seen, though core revenues increased by 0.9%, we have negative performance on fee and insurance. I'm sure we will spend a lot of time on that both during the presentation, Javier will get into some of the details, and there will be surely questions on the topic. I want to advance at least one particular point. Asset management fees, which are down 3% year-on-year and 5% versus -- or 5.8% versus the last quarter. One factor that is behind this and that is positive vis-à-vis the future is obviously market performance, where we see 4.4% growth in AuM year-to-date, so pretty good number there. But in terms of average volumes, which obviously drive fees, we're below the first quarter of last year and certainly below as well the fourth quarter of 2018.

As a result of both matters, pre-impairment income has a positive 2.7% after the adjustments that Eddie mentioned. And here obviously, we have an increase in the expenses, recurring costs at 4.7%, in line with the guidance we gave for the year. But we also have a significant saving in real estate expenses, EUR 75 million, which is particularly high this quarter because of the tax impact on OREO portfolio. But we're saving EUR 75 million and, hence, actually offsetting that increase in recurring costs through other expenses saved associated to that real estate portfolio that we sold last year.

Balance sheet, positive evolution. CET1 increases to 11.6%. MREL ratio was published, that's increased a normal 20%, close to the minimal requirement that we are -- we have been fixed for, 22.5%. And NPL has come down in the first quarter. As we've said, we expect for NPLs to continue coming down in the rest of the year and hit our minus 4% target by the end of the year. All in all, net income is down 24.3%, up 4.3% once we make this adjustment and the group return on tangible equity is at 8.7%.

Commercial activity. Obviously in the short term, it does not necessarily drive ourselves. But in the long term, it does drive performance. And I think it's quite important to remind everybody, particularly as you see that we may have had a weaker quarter in terms of fees and insurance results, the realities in terms of market share and the presence in the market has been a very positive quarter. You can see the movement in clients that we call relational clients, those that have 3 or more products with us, continue to increase. This is obviously the base for our business continue growing. Payroll deposits, the Nóminas product, which is a critical way to attract and retain loyal clients, it's up to 26.9% in terms of market share. We've gathered 350,000 new payroll deposits in the quarter, 5% more than last year, which was a very good figure. And we are now at the 4 million number in terms of payroll deposits with us. So the machine continues to do fairly well.

Transformation program. We announced it in terms of increasing the advisory hubs, the store branches. It's been a very, very active quarter where we have either opened or planned with execution underway for 377 branches. Obviously, the sooner that we can find new locations and open these new branches, the sooner we will be able to reduce headcount associated to the branches that are integrated. So it's positive, no question, the fact that we are advancing swiftly here.

The inTouch remote systems model continues to do very well. In fact, we are ahead of schedule. We had by the end of March 1 million clients here. Remind you that this is more focused on digital clients that have also now the opportunity to have a relationship banker through a remote channel, mostly phone channel, which is allowing us to increase the efficiency, i.e. a business volume that is managed by one of our people here is approximately 3x when they are in the inTouch model than in the retail branch network. And they being actually much more effective in bringing new business. You can see the figures from payrolls which are probably the most meaningful for us in terms of gaining new business. It's almost double the speed at which the network is doing. I forgot to mention, on the left-hand side, that obviously, the statistics on the store branches are also of a higher productivity both in terms of absolute position today and also gaining new business.

Digitalization continues. 58.5% of digital clients at the end of the quarter, this is a trend that is actually fairly predictable. We continue to do well with mobile being the main channels. We made some interesting developments in the quarter with some noise, particularly positive noise on the biometrics for ATM and some other developments that reflect our innovation and our leadership in this area.

In terms of actual numbers on the balance sheet. 3.1%, it's a very positive number in actually 3 months. It's also a quarter where it tends to be seasonally weak with respect to the year-end where we have higher flows. So the fact that there's been a 3% growth is a lot to say. And again, I would urge you to consider these as indication of our commercial success which continues regardless of a weaker quarter in the noninterest revenue side. You can see that the growth has been supported by market development, EUR 4.8 billion of additional value of assets under management, which is definitely very positive. And hopefully, it's going to result in higher fees in the next coming quarters as obviously what drives fees here is average AuMs. And average AuMs have been lower in this quarter, but the end of the quarter suggests or basically is just the basis for a higher average AuM and higher average fees going forward.

Moving on to the insurance business. Again, we had a good quarter in terms of market presence. Long-term savings, 16 basis points growth in year-to-date, I remind you that we include here all the mutual, pension and life insurance funds. When we look at the total premia, we are actually at 12.8%. And adding the premia of SegurCaixa Adeslas, our joint venture associate, we actually get to 18.5%, by far the market leader, and with those 53 basis points of year-to-date increase in market share.

Some developments during the quarter. Smart Money, Ocean, on the financial advisory proposal to clients, we continue to see a higher proportion of funds in the discretionary management. Currently, 42% of our mutual funds are in discretionary management, up 9 percentage points versus last year. Important because this is obviously much more, I think, adapted to clients, very transparent with them in terms of new -- the new MiFID models and doing quite well.

MyBox is a new insurance offering that we have launched in March and April. That is doing very well. In March and April this year, we have already 50,000 new contracts under this product. It's part of the reason -- the fact that we were developing this new product, part of the reason why we cannot compare properly the first quarter results of insurance with the first quarter results of this year, so the year-on-year, it's a bundled offering of life and nonlife insurance products with a 3-year price that is flat for clients payable in monthly installments with us, a very high insurance value because of its predictability and the fact that lapses in this portfolio are expected to be much lower and is again a pretty positive development in terms of how the network and the business model continues to do fairly well.

On the lending side, it's been positive in terms of performing loans, plus 0.9%. Total loans is plus 0.8%. So it's -- those are good numbers relative to what we're seeing in the market generally. You can see that actually, it's the best fourth quarter by margin in the last 6 years -- sorry, I said fourth, I mean the best first quarter of the last years by some margin. We'll have to see to what extent we can sustain this differential growth and combine it with a good margin management. But certainly, it's now been 2 quarters of positive developments on this front, so there's good reasons to be hopeful here. The growth is based on businesses and consumer in particular. And in this quarter, there's also contribution from the public sector. That part is more, I would say, tactical, tends to be larger transactions and associated to shorter-term transactions, so I wouldn't read too much on that part. And it's not also driving the margin really. The consumer and the business side is much more relevant and is following, I think, nicely our commercial actions.

In terms of new production, I guess continuity in mortgage, plus 5%. Here the new product, CasaFácil that we launched last year is having quite a lot of success. 2/3 of the production has been in fixed rates with adequate rates for us, so adding value to the existing back book.

In terms of new lending on the consumer front, still nice growth. We have had even faster growth in the past, but that 6% in the new production is, I think, healthy. And we expect to continue to see this kind of improvement during the year.

On the business side, we had actually a very significant increase over last year. It's up 46%. Of course, there are some larger transactions, and this figure, by definition, because of the large ticket, is kind of more volatile. But there's no question it's a very positive development on this topic. And we'll continue to try and do better than others on this front.

So that's all with commercial activity. A pretty strong quarter I have to say. We're very satisfied with that.

In terms of financial results, you see the chart here. First of all, the adjustments on the BFA, Repsol and Viacer transactions that Eddie mentioned, and we do not adjust for that. Obviously, we have that 24.3% foreign net income for this quarter. If we take this into account, which in the end is making our P&L of higher quality, then what we have is modest but positive growth of 4.3%. Core revenues are up, contributing EUR 17 million. And then as I mentioned before, this graph is on a post-tax basis, what we're saving from the Lone Star transaction is offsetting the increase in operating expenses that we had anticipated. And there are some smaller impacts from provisions and trading and others.

As I said, core revenues are up 0.9% versus last year, and we got a sort of different view with NII growing 2.9% and net fees and insurance coming down. Other than that, I think there's not much more to comment. All is according to guidance and expectations.

Looking at the segment P&L. Obviously, Eddie mentioned that we're discontinuing the noncore segment and integrating it into the bancassurance activity now that it has a relatively low weight in our results. Bancassurance, with that sort of residual noncore segment, is having a 9.9% return on tangible equity. Investments and BPI are contributing positively.

As you can see, I'll refer to BPI shortly. In any case, BPI will also publish results on Thursday. But BPI results are now not including, I would say, any meaningful extraordinary, so a good indication of what the bank can do going forward. Which is somewhat reflected in this slide is the segment P&L for BPI including therefore the consolidation adjustments that we need to make. You can see NII growing 2.2%. And there's a big fall in net fees and commissions, but I have to say that is consequence of an intergroup transaction because, obviously, you remember that CaixaBank and our partner, Comercia, bought many of the sort of fee-generating businesses of BPI to consolidate it with CaixaBank and make it sort of more efficient and provide better products for BPI. So absent that factor, net fees and commissions are actually up.

The net attributable profit at EUR 58 million is a significant increase. Obviously, we'll continue to work, and BPI continues to for us to be a source of growth and providing those EUR 58 million to our P&L.

Growth in terms of mutual funds, customer lending, business lending, digital transformation of the bank, it's -- are all going in the right direction. And as you may have seen, we announced along those lines precisely yesterday that BPI will pay again a dividend of EUR 140 million after 9 years of the bank not having been paying dividends given the situation in Portugal.

So those are the highlights. There's a lot to be discussed in terms of the details, and I'm sure Javier will walk us through that.

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Javier Pano Riera, CaixaBank, S.A. - CFO [3]

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Okay. Thank you, and good morning. And well, I -- as always, I will comment on the different lines of the P&L and also focus on key items on the balance sheet.

First, on net interest income at group level. As commented, it's up by 2.9% year-on-year, slightly up also quarter-on-quarter. We have a clear positive contribution from higher average loan balances, also wider customer spread. Good contribution also this quarter from -- to NII to -- from life savings insurance. We have increased the size of our ALCO portfolio. We'll now comment on this. But although we have done so, it has not been enough to hedge the negative impact of very high cash balances. Just it's worth mentioning that we closed the quarter with EUR 21 billion at the ECB deposit facility. Also, the quarter is affected by a lower day count and also by the impact from this first quarter of IFRS 16, where we expect an impact between EUR 4 million, EUR 5 million every quarter from now on. All in all, we think that everything is on track to meet our guidance for the year for NII to grow around 2%.

Now focusing a little bit more on the impact of our -- the customer activities on NII. You may see that on deposits, everything goes according to plan. There are no changes. We are rolling our euro time deposits at -- virtually at 0. And our back book yield is not being affected that much.

And on the asset side, you may see that the front book yield goes up this quarter, 287 basis points, in this case helped by a higher weight of consumer lending this quarter and also this first quarter with better CIB margins on those last transactions that have helped our loan volumes. As a result of this and also thanks that from this quarter we are no longer having a negative rivalry pricing impact, our back book yield also goes up by 2 basis points. And this fact, together with a situation with higher or larger side deposit balances, our customer funding cost goes down by 2 basis points to just 2 basis points. And as a result of this, our customer spread widens by 4 basis points to 227 basis points. Net interest margin goes down by just 1 basis point to 127, in this case impacted by this -- the larger balance sheet as we have much larger cash balances.

Now I will comment on our ALCO activities. On wholesale funding costs, despite intense issuance activity, by the end of the quarter, our wholesale funding cost moved up by just 4 basis points to 116 basis point level. And it's still below what it was 1 year ago.

And on the asset side, as commented, we have expanded -- we have decided to expand the structural ALCO portfolio. It's a combination of lower yield environment for longer and also extremely ample liquidity situation. And we have purchased around EUR 3 billion of Spanish 10-year government bonds plus EUR 1 billion diversified corporate portfolio, European and U.S. corporates. And well, because at the end of the day, the size of our balance sheet has increased by close to EUR 20 billion this quarter, so we have to encompass also the growth of the portfolio according to the size of the overall balance sheet. The liquidity management portfolio has also increased a little bit as we are closer to the TLTRO maturing.

Now let's continue with fees. Well, as commented, we are having here this first quarter lagging impacts from the fourth quarter market volatility, that this is affecting mainly our asset management fee revenues. Net fees are down by 2.2% year-on-year and down by 5.2% quarter-on-quarter.

On banking fees, I would say that year-on-year are resilient with support from our payments fee revenues and also by CIB. But quarter-on-quarter is -- those banking fees are affected by seasonality, always the first quarter being a little bit weak.

But on the asset management is where we have larger impact. Year-on-year, our asset management fees are affected by the cap on pension plan fees that entered into force in -- on April last year and also some other one-offs. But quarter-on-quarter is where we have also the impact of markets. We -- and we tried to show this on the right-hand side chart, where you may see that the average balances of assets under management have been lower during the first quarter of 2019 than not only the fourth quarter of 2018 but also the first quarter of 2018. But the good news here is that by the end of the period, you may see that the balances have clearly recovered. Thus, we can expect that with markets performing, let's say, reasonably, that from now on, our fee revenue will recover markedly together with the fact that also the first quarter of the year is affected by seasonality. We expect that fees from asset management, with all things being equal, will grow during the second quarter by -- at least by 3% after those effects have already -- are already behind us.

On insurance distribution also, we have an impact year-on-year, in this case because we have had different timings of the new product rollout. The CEO has already commented on our plans on this front. And quarter-on-quarter, you may see that growth is already showing an improvement.

Now let me focus a little bit more on our insurance activities and the contribution to our core revenues. On the left-hand side chart, this is our overall total revenues that you may see that grow at 2.8% on a 12-month trailing basis. And on the chart on the middle, you may see here the consolidated revenues from insurance, and what we have tried to do here is to split in 2 the engines for growth that we identified on our strategic plan. That is on protection and long-term savings, where our insurance revenues land on those 2 engines. And you may say that although we have an impact year-on-year and our insurance-related revenues are slightly down by 1.7% quarter-on-quarter, once you consider all effects and also the contribution from the equity accounted from SegurCaixa Adeslas and everything, our fee revenue from insurance -- sorry, fee revenue and other related revenues from insurance are up quarter-on-quarter by 10.7%. On the right-hand side of the slide, you have the P&L, the contribution from insurance, that you may see that the net attributed profit also up by 6.6% year-on-year.

Now I continue with costs, where everything goes as expected and no news on this front, according to our plans as we are rolling out our new distribution model. Our recurring cost base goes up by 4.7% year-on-year and by 3.1% quarter-on-quarter. This is offset, as the CEO commented, by large real estate cost savings after the disposal of our nonperforming portfolio. And as you may see, costs related to this -- to our real estate activities have fallen from EUR 87 million during the first quarter of last year to just EUR 12 million this quarter. And this cost savings more than offset, as said, our core operating costs, and this helps to support our pre-impairment income, with growth -- after the adjustments that Eddie commented, that grows by 2.7% year-on-year. I would like here also to comment that the restructuring negotiations with unions are expected to finalize in coming weeks. Thus, cost savings will kick in later this year as expected.

And finally, on the P&L. On loan loss provisions, low levels. Although we have an uptick this quarter, we don't think that this will change an overall trend. And we expect cost of risk that will be below our 20 bps guidance for the year. And as you may see, we are, on a 12-month trailing basis, at just 3 basis points. And even not considering an extraordinary write-back we've had during the third quarter last year, cost of risk would be below, and it will be at 15 basis points.

And now let me shift to the balance sheet, a look to NPEs or our nonperforming exposures. The NPL stock has come down a little bit this quarter and set to be reduced further in coming quarters. Remember that we have a target for our NPLs to be below 4% by the end of the year, something that we reconfirm today. And we closed the quarter with an NPL ratio at 4.6%. And you may see that the nonperforming loan coverage remains stable. Our OREO exposure is nonmaterial. It's just EUR 800 million, and it has come down markedly. We'll continue to dispose EUR 90 million of real estate sales and making a 10% capital gain.

On liquidity, as commented, still in a comfortable situation, EUR 86 billion of liquid assets. Liquidity ratios, very comfortable levels: liquidity coverage ratio of 198%; also the net stable funding ratio at 121%. And liquidity metrics at CaixaBank on an individual basis also extremely comfortable.

Before commenting on solvency, let me touch on our MREL requirement that, as you know, has been released a few days ago. We must comply with a ratio at 22.5% by early 2021. The ratio as by the close of the first quarter of this year and according to the eligibility criteria that we understand that will apply the SRB, this ratio stands already at 20.2%, so just 3 percentage points to meet the target. This is around EUR 3 billion, so not that much. Once we consider these ratios made of our total capital, our senior nonpreferred, our eligible senior preferred and 60 basis points of other eligible instruments, our -- this MREL requirement is aligned with our expectations and consistent with our funding plan. Remember that we are done with Tier 1s and Tier 2s, and we don't face refinancing needs in the near future. And remember that our plan consists on the rollover of the next -- during the next 3 years of EUR 7.5 billion of wholesale debt through the issuance of MREL-eligible liabilities, mainly of subordinated nature. So far this year, we have already issued close to EUR 3 billion on different instruments, so we -- you may expect us to be present in the market with senior nonpreferred and senior preferred during the next few years.

And finally, on solvency. It's a quarter with several one-offs, but we have managed to improve our CET1 fully loaded ratio by 10 basis points to 11.6%. We have risk-weighted asset inflation from IFRS 16. That results into a negative impact of 11 basis points. Also, we have risk-weighted asset inflation from those exposures -- real estate exposures that are considered speculative. With risk-weighting now at 150%, this results on a negative impact of 5 bps. And we have had organic capital generation positive of 15 basis points plus also markets and the disposal of Repsol, this quarter helping -- adding 12 basis points.

On Repsol, I would like to comment that we closed the quarter with a stake at 2%, 2% of the company. But as recent as last Friday, our stake was already 1.1%. And our tangible book value per share also improves this quarter by EUR 0.12. And just to remind you that our final payout for 2018 was 51%.

And a few remarks to end from my side. We have lagging impacts from the fourth quarter market correction that has affected our fee revenues. This has been, to some extent, compensated by the good performance on NII and with better loan volumes and margins. And also, we have had the chance to compensate cost increases with savings from our real estate portfolio that was disposed last year, and this together with a reinforced solvency, liquidity and credit-risk profile. All in all, our view is that we are progressing well rolling out our new distribution strategy.

And with this, I think that we may be ready for questions. Thank you very much.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [4]

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Okay. Thank you, Javier and Gonzalo. Operator, can we now move on to questions, and could you please ask for the name and the company of the participant?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question we have today comes from Alvaro Serrano from Morgan Stanley.

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Alvaro Serrano Saenz de Tejada, Morgan Stanley, Research Division - Lead Analyst [2]

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Two questions, please. First of all, on fees. On my numbers, to get to the 3% growth this year, you need EUR 70 million higher fees for the rest of the year as a run rate versus your EUR 612 million. You've mentioned the AuMs are up I think it's 4% year-to-date. And then Javier, you also mentioned that fees on asset management should go up, but it looks like you need a bit more than that, especially in banking and insurance. So can you maybe give us some color? Is that 3% still achievable? Or if there is a shortfall, how -- what's the sensitivity around that?

And the second question is on the agreement with the unions. It's taken quite a while, so I don't know if you can maybe sort of talk us through what the difficulties versus other agreements we've seen in other banks that seem to be a bit faster. And if we do get the agreements in the next few weeks, your cost base is up 4.7% in Q1. It's a touch lower than the 5%. I realize it's not fully comparable maybe. But once you reach the agreement, the question is how quickly would the cost takeout will happen once the agreement. And can we look forward to lower than the 5% cost growth for the full year that you guided to?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [3]

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Thank you, Alvaro, and good afternoon. I'll let Javier elaborate a bit more on the first point with respect to fees expectations. But I want to make it clear we're not managing or changing our views on the basis of a quarter. It's obviously been difficult in terms of the average sort of market but then pretty positive at the end. There's many other sort of factors that have their influence. But we still are of the view that we can sustain the numbers we've guided for in terms of our expectations for the P&L this year. Obviously, it's a weaker start on fees, but it's a stronger start on the lending activity than we expected and a pretty good performance on NII. We're going to certainly be managing the business in order to get to where we want to be. And at this stage, we're still confident that we can be there.

With respect to the unions, it's an agreement that has taken time. Yes, it's an important agreement where we have many things being discussed. This is not just an exercise about headcount reduction. Obviously, headcount reduction is what is going to be most meaningful in the short term and most visible in terms of charges and expenses saved and cost savings. But we are negotiating a few other things that are quite relevant, including opening hours, including mobility for employees, including the structure of branches that we have to have in rural Spain as we want to have more branches with fewer people, more -- we're not opening branches. It's a higher proportion of our existing branches with fewer people. And obviously, we have different views from different unions, and we are making good progress. We are expecting to reach an agreement in the month of May, but we're still not there. And obviously, until we have an agreement, nothing is final. But we are hopeful that we will get there. In terms of what would be the numbers of this agreement, at this stage, it's difficult to comment as we don't have a final one. We certainly are, at this stage, looking for full delivery in terms of our -- not just this year but 3-year growth in costs, which means that even if this year we have 5%, that means we're going to have to come down to 2% for 2020 and 2021. And there's no question that we're going to try to do better. It's a difficult environment. Even if it wasn't difficult, we will try to do better as well. But certainly, we're going to do everything we can to see if rather than being at that level, we can be at least somewhat below. But it's not easy. It's complex. We hopefully are going to reach an agreement during next month. And certainly, we'll make a proper announcement about its financial consequences both in terms of charges and savings associated to it as soon as we have that agreement.

And maybe, Javier, you can elaborate more on fees in particular.

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Javier Pano Riera, CaixaBank, S.A. - CFO [4]

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Yes. Well, first thing, I would like to remark a couple of things. Our fee revenue is becoming more and more seasonal, first thing, unaffected by calendar effects in some cases. So our asset management revenues is around EUR 800 million per year, so this is more or less round numbers. This is 1/3 of our fee revenue base. Those -- thus, this quarter affected by 2 days less, so we have just by this an impact. This is more or less 1 percentage point of our fee revenues quarter-on-quarter. And then in other areas, for example, in payments, payments, our fee revenue on payment-related activities is around EUR 400 million per year. And clearly, we have strong seasonality on this with the third quarter and the fourth quarter being the strongest. So all in all, we don't see on the underlying trends of those, let's say, nonrelated -- non-asset management-related fee revenues anything that makes us think that we cannot attain our targets. So this is why we are not changing our guidance. Moreover, we see that our average balances on -- of assets under management have recovered nicely during the quarter. So the end of period, that is, let's say, the starting point for the second quarter is much higher figure. We have tried to show this in the chart we displayed in the presentation. Thus, only for this effect and together with the calendar effect, we can expect our asset management revenues to recover nicely from now on. Obviously, if there is another route in markets that would affect, but so far, we are not seeing that. Even the average fee revenue on our assets under management is fairly stable. It's around 81, 82 basis points, just slightly down by 1 basis point this quarter but because also the weight of those products with wider margins also has decreased because of the market impact. So all in all, we don't see any sign that is letting us to the fact that we cannot attain our target. So this is why we reiterate our guidance.

And also, our nonlife insurance-related fees also have been affected by that -- a different timing on the rollout of new products, as CEO commented, new initiatives on this front so far launched at late in March and so far this month of April, we see that the performance is doing well. So we expect that also. Fees related to our nonlife insurance activities will gradually recover in next quarters. And we set targets for the long term, and we are trying to run the business thinking on those long-term targets. And in some cases, you need to take some commercial initiatives that probably might have a short-term impact but, at the end of the day, would pay off over the long run. And this is why we may have this probably in the short term this negative -- or slightly more negative impacts than expected.

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Operator [5]

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The next question today comes from the line of Marta Sánchez Romero from Bank of America Merrill Lynch.

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Marta Sánchez Romero, BofA Merrill Lynch, Research Division - Director and Analyst [6]

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I've got a couple of questions. A follow-up on guidance on your life insurance business and these results from the Adeslas joint venture. I think if I'm not wrong, you were guiding for 10% growth year-on-year, and you're falling well below that target. Can you update us on us -- on that, sorry?

And then a second question, on asset quality and, in fact, a few quick questions here. The first one is we've seen another EUR 23 million release in BPI. Can you update us on the PPA tailwinds? How much is there left? The second question is an update on your outlook for savings related to the Lone Star transaction. You've said EUR 550 million in 3 years and over EUR 200 million in 2019. Do you stick with that guidance? What are you seeing there?

And then on NPL workout, we've seen a slowdown on generally you and the rest of your peers. Is this seasonality? Or are you seeing a more -- or trickier trends there? And if you're thinking about selling in wholesale transactions, residential mortgage NPLs and what the coverage on your residential mortgage NPL book is?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [7]

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Well, thank you, Marta. Let me make a couple of comments and then pass it on, on Javier. With respect to Adeslas, I'm not sure the basis for comparison, but what I can tell you that it's doing nicely, and it's working well and certainly in line with our expectations for this year. The joint venture is not having a negative impact. So that's working well, and Javier may have the ability to go through the detailed numbers. But there's no negative news there.

Let me also comment on your last question with respect to NPLs. It's our target to be below 4% this year, and the budget that we had as to how that works quarter-by-quarter has been exceeded in the first quarter. So there's no slowdown. It is true that, obviously, it is more difficult to bring down the level from 5% to 4% than it was from 6% to 5%, but we are well -- working well towards the plan to be below 4% by the end of this year.

And obviously, we have in the past done transactions from time to time. These are not large transactions like the Lone Star. Sometimes we're talking about maybe 200, 300 of NPLs that come here and there. And we will continue working on that front during this year. And depending on the timing, you would see particularly a quarter where the numbers come down faster or slower. There is -- from the point of view of the P&L in the guidance we gave for cost of risk that obviously includes some of these transactions. And hence, we are not thinking that in order to do more in terms of NPL reduction, we're going to have to exceed our cost of risk expectations. That's not the case. It's all, I think, budgeted and things so far, and we're in April, are working nicely on that front. Having made those 2 comments, Javier, you can help me out answering the rest of the questions?

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Javier Pano Riera, CaixaBank, S.A. - CFO [8]

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Well, absolutely. You mentioned the 10% implied, let's say, life insurance growth ratio. Well, that -- this is assuming the mid of the rest of our key reference points for our guidance. Well, in any case, for sure that the end result will not be the mid. Well, in any case, we set long-term targets for this business and we fully reiterate those. Thus, we are working on ways to fulfill those targets over the long term.

You had the specific question about the PPA. Now -- the balance on the PPA now is EUR 320 million. And as you say correctly, we have released EUR 23 million this quarter. And -- well, so far, it's something that is updated regularly every quarter, obviously. And so far, it's proceeding well. So the developments on the asset quality of BPI are developing, I would say, better than probably what we estimated when making this adjustment. So this is why you can expect our release.

You had a question also on the real estate savings. I think that we made an estimate on this when we closed the transaction. Also, we have to take into account that we are disposing our -- also from our rental real estate portfolio. You see that it's very early, but trending down. Now it's standing at EUR 2.4 billion. That's also -- that means that we are losing some revenues on this front. Everything is -- the net of all those effects are in the same line and remember that on this line on the P&L account, we have all our major impacts related to the deposit warranty fund, et cetera.

And I think that I will not talk much on what the CEO has already commented on NPL. So we are fully on track. The pace of NPL reduction is -- obviously is not linear, but we are fully confident. And as we see that the pace of inflows into NPLs and also if you look at the breakdown by status of our greatest exposure, you may see that we have had a clear reduction on stage 2 this quarter. So this also tells you about the underlying trends on our, let's say, nonperforming exposures or nonperforming or let's say credit watch exposures in this case that what makes us confident that we can attain our targets.

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Operator [9]

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The next question comes from the line of Benjamin Toms from RBC.

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Benjamin Toms, RBC Capital Markets, LLC, Research Division - Analyst [10]

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First question is can you keep or are you confident in keeping NIM relatively flat for the rest of this year?

Second question is, well, you're one of the potentially stronger domestic Spanish banks in terms of digital banking? Can you tell us what your annual budgeted spend for digital banking is?

And thirdly, your JV with Lone Star where you have a 20% stake, is that generating any profits in your estate line currently?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [11]

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First thing was flat, but I didn't understand what you meant flat. Flat -- what was the question, please?

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [12]

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Repeat your first question because we couldn't hear.

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Benjamin Toms, RBC Capital Markets, LLC, Research Division - Analyst [13]

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Are you confident in keeping net interest margin flat for the rest of 2019?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [14]

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Okay. Let me just answer the -- well, the third question Javier will have the detail. But basically in the first quarter, we have most of the payments of taxes associated to real estate in Spain. And hence, that affects the results of that joint venture. It's a joint venture where we do not have the majority, so I don't have at this stage the confidence to disclose those results without the majority shareholder having done that. But it's according -- it's going according to plan in terms of results. And again, we are going to have seasonality from that, in any case, not meaningful for our P&L. But the same way that we said we're having a big cost saving this quarter because we sold the portfolio. Obviously, that portfolio today is in the hands of Lone Star. And it is in the first quarter where the taxes associated to most of this portfolio are paid, so that has a negative impact on a seasonal basis. We expect this joint ventures to be obviously profitable from its first year of inception I think from overall of 2019.

NIM, I think, Javier, you are going to be better than certainly myself addressing.

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Javier Pano Riera, CaixaBank, S.A. - CFO [15]

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Well, on NII, I reiterated our guidance, our 2% NII growth guidance. And as per spreads, we should expect that with its ups and downs quarter by quarter, but 1 bps up or down should gradually recover as from next quarter, we should not only no longer expect the negative impacts from Euribor repricing, but also slightly positive, although Euribor has started at minus 11 bps, but it was below 1 year old. So in this front, we are confident. The only -- the main headwind that probably worries me on NII is the extremely large cash balances we are managing. I mentioned that we have -- we closed the quarter, but this a figure that remains fairly stable. We closed the quarter with liquidity deposited at ECB of more than EUR 20 billion. Thus, all the benefits of -- from TLTRO are already offset by this, so everything is matched. And I would say that trying to manage those larger cash balances that come from strong commercial activity, we are really strong on payments. At the end of the day, being so strong in payments we have a natural tendency to accumulate cash. And at the end of the day, we end with cash on hand. And also, issuance, we are issuing regularly in markets as you see for MREL purposes. Thus, we're accumulating cash. The size of our balance sheet is increasing. Our balance sheet is now over EUR 400 billion, close to EUR 20 billion up in 1 quarter. Thus, managing all the situation with negative rate and minus 40 bps is quite challenging. So I would say that this is the main challenge going forward. But so far, according to our projections today -- as of today, we will manage the situation and we have a clear tailwind here, which is loan growth doing, I would say, a little bit better than probably expected with our performing loan balances growing close to 1% year-to-date. Last year, we delivered loan growth at 1.8%. So far, we are at 0.9%. Let's see how the rest of the year evolves, but we are quite a bit on this front.

And you had a question about our expenditure on digital banking. Well, what I can give you is what impacts our P&L related of IT-related investments and amortization of intangibles. It's a figure that is around EUR 600 million per year. So this is the figure that is going through the P&L related to digital, let's say, but on a more broader view, digital-related activities.

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Operator [16]

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

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José Maria Abad Hernandez, Goldman Sachs Group Inc., Research Division - Executive Director [17]

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I have 3 questions, if possible. So the first one is on the broader economy. I think -- I mean we are heading to a slowdown already. We have a number of indicators, which point us in that direction. And interestingly enough, we -- I mean, you just reported a pickup in the NPL ratio in the consumer lending for the first time in a year. So I was wondering if you could tell us whether you are starting to see some indicators beyond actually this data point in particular, which is in -- which would support this idea of actually a broader slowdown in the economy?

The second question is a follow-up on -- from Javier's last point he was mentioning. So should we interpret that you are not interested in going to the TLTRO III?

And the third question. Javier, if you could update us on the outstanding IRPH book? Last time you reported this, I think it was EUR 7 billion. I believe there has been a number of amortizations and renegotiations in the meantime, if you could tell us what's the number as of Q1?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [18]

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José, I will try and address the first question and let Javier deal with the other 2. A slowdown, that's not what we're seeing. Obviously, there's many reasons why we need to be cautious. And obviously, not just markets but the international slowdown is quite obvious. In Spain, we have had a slowdown. We were 3% up to 2017, 2.5% in the region last year. We're seeing 2.1% GDP growth for Spain in 2019. With the information we have today, the information we have quarter-on-quarter, we actually see upside risks. Obviously, we're in April -- end of April and still a year ahead of us, so this may change. But to be clear, with the information that we have today, we think that the risk is on the upside to GDP growth for 2019.

In terms of the consumer lending NPLs, I would urge you to not measure it on the basis of quarterly NPL ratio. Obviously, consumer lending is -- usually tends to be short-term loan, and you know well that we have to look at this on a basis of the cost of risk, including what transfers are made to sort of written-off loans. And on that basis, what we're seeing in the customer lending is actually improvement in the asset quality. Every year, we're going to have increase in NPLs, but every year we'll also have write-offs. And depending on the quarterly schedule of write-offs and NPLs, we'll have different numbers. Really, what we do internally is regarded on the basis of the total cost of risk and the indications we have so far are positive. We are actually looking at, I think, a portfolio that is in better shape now than it was 12 months ago. Obviously, if the economy deteriorates suddenly, that will change, José, there's no question, but so far so good on that front.

And TLTRO, no, thank you, but let's see.

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Javier Pano Riera, CaixaBank, S.A. - CFO [19]

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This is the summary. Unfortunately, Jose, we -- as you know, we don't have the final terms. We have a natural tendency to rely much less on ECB funding, so we don't think that we should rely on ECB funding structurally. Thus, if there is not a clear economic rationale, we will not take part or at least take part significantly. So this is the summary. We need to see also if this time there's any kind of -- let's say, if it's again a monetary policy too as it was 3 or 4 years ago. Now it's not clear, which is the final purpose of this facility. So -- well, whenever it's -- the final terms are released, we will make a final assessment, but we are more prone not to participate this time.

And you had a question on IRPH. Yes, we have an update as we have -- obviously, there are payments on -- prepayments on this portfolio. And as -- and for the close of the first quarter of this year, the balances outstanding -- the performing IRPH balances to individuals was standing at EUR 6.7 billion by the end of this first quarter.

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Operator [20]

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The next question today comes from the line of Andrea Filtri from Mediobanca.

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Andrea Filtri, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [21]

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First question on capital. Could you give us your early preliminary indication of the impacts on CRD V and specifically, from the exclusion of software from deductions of intangibles and from the SME support factor?

And finally, if you could give us an update on the TRIM impact including the revision of the corporate book and the low-default portfolio and when you expect to get these impacts by?

Also, if you are swapping and how much of your fixed rate mortgage production, how much is being swapped into floating? And just finally, you've beefed up a lot of the ALCO portfolio with tightening spreads, where -- what's the level you're happy with?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [22]

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Andrea, lots of detailed questions that Javier will address better than I, but let me say just a couple of things on TRIM. It's the low-default portfolio that is yet to be carried out. At this stage, we do not expect that there would be an impact for us in this calendar year 2019. So the impact, if any, it will be most likely for 2020.

In terms of the CRD V, it's very early days, I have to say. But Javier, you may want to mention some of the color. But obviously, if it happens or when it happens, it will be positive. In terms of our consolidated financial statements, it's slightly above EUR 0.5 billion and the SME supporting factor will be positive obviously, but it's still to be quantified. Javier, you may want to...

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Javier Pano Riera, CaixaBank, S.A. - CFO [23]

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Well, on those 2 questions, not much to add. Just to reconfirm that on these potential deductions on intangibles, we don't expect a material impact, but everything is being worked on and probably we can update you in the coming quarters.

You had questions about the ALCO management. Well, I tried to give you a rationale. It's a combination of a larger balance sheet, larger cash balances, extremely ample liquidity situation. And as all of us, we think that we can agree the expectation that rates and also long-term rates will be at low levels probably for longer than expected. That's -- this is why we have decided to expand that portfolio. And I gave you some details on what we have already done, so we will adjust the size of the portfolio depending on market conditions on our expectations. And I think that we have to be a little bit flexible on managing this because, as I said before, probably this is one of the main headwinds that we face on managing our net interest income.

And you had a specific question about disruption mortgages. I would say that, generally speaking, yes, we have our mortgage -- fixed rate mortgage portfolio swap, although we are always a little bit flexible on timings and the final size.

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Andrea Filtri, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [24]

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And on the impact from TRIM on the corporate book?

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Javier Pano Riera, CaixaBank, S.A. - CFO [25]

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Well, I think that...

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [26]

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Not this year. And hence, it's further away, so we will see. We do not have an estimate. We did provide that 1% cash in terms of our target capital ratios of 12 plus 1. And hence, I think there's no news to be commented on at this stage other than the timing, which means -- with respect to capital creation this year, it is unlikely that the -- this TRIM sort of remaining TRIM exercise is likely not to conclude on time to have any impact during 2019.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [27]

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Okay. Thanks and you may want to follow-up later on with us.

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Operator [28]

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The next question comes from Ignacio Ulargui from Deutsche Bank.

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Ignacio Ulargui, Deutsche Bank AG, Research Division - Research Analyst [29]

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Just have 2 questions. One, if you could update us a bit on what you will expect as the economic capital buildup in the coming quarters? How do you see the capital going from here taking into the account the potential tailwinds that we have in terms of -- sorry, headwinds that we have in terms of regulation?

And the other thing is on the mortgage markets. I mean if I remember from the Strategy Day, your view on the mortgage market was somewhat more conservative. Could you just update us whether there has been a pickup in demand and lending growth? How do you see the mortgage trends? And also, how do you see the spreads from the competition going forward?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [30]

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If I may, on the second, there's not much news. We are I think doing reasonably well in terms of new production, but the loan book continues to deleverage. That's what we saw in the first quarter, a 5% increase in new production for us. Still, the loan book is down 0.6%, I believe. These are the trends that we saw, and I think what we're seeing is consistent. There continues to be very strong competition. That was what we expected. That's also why we did not sort of build our next 3 years' sort of business case on the back of growing mortgage book, but the opposite on deleveraging book. And it seems to be going that way. And our own strategy, which is to be pushing what we think is best for our clients and the bank. The fixed rate offering is going very well. I mentioned the CasaFácil product has had a very good acceptance and 2/3 of the production is being made at fixed rates and on attractive margins for us. So I would say nothing much.

In terms of the incoming quarters, we obviously have had these 2 impacts this quarter, which Javier mentioned. I think the most likely sort of source of capital is going to be retained earnings. And when we look at retained earnings, obviously, in the incoming quarters, we'll have to take into account the impact of our restructuring process, which is likely as we discussed before with the question of Alvaro, is likely to finish next month. And hence, we'll have to account for its costs in the year 2019 and most likely in the second quarter, and that will obviously reduce the capital generation for 2019, but it will not be driven, as far as we can know, by extraordinary or unpredictability of other elements, but just by earnings and obviously, to some extent also, are risk-weighted assets, given the good growth that we're seeing in the loan portfolio we have. We expect to be around 12% by year-end. And certainly, by the end of 2021, we'll continue to maintain our target of being at 12 plus 1%, with that 1% being built for the various sort of regulatory headwinds that we have and particularly Basel IV.

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Operator [31]

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The next one comes from Javier Echanove from Santander.

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Javier Francisco Echanove, Grupo Santander, Research Division - Equity Analyst [32]

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I have 2 questions on NII. The first one is, well, you could comment on the likely path of wholesale funding costs, particularly in view of the end release or MREL-related issuance you look continuing in the next couple of years. I also see that we see quite a positive performance in the last few quarters.

And the second one is on the ALCO. You've increased the ALCO by EUR 3 billion, but it looks like it hasn't really had an impact on NII. When we look at fixed income portfolio contribution today, NII is, if I'm not mistaken, more or less the same in the fourth quarter 2018 compared to first quarter of '19. And I was wondering whether this means that there will be a more positive impact or more positive contribution in the coming quarters.

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Javier Pano Riera, CaixaBank, S.A. - CFO [33]

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Javier, well, on incoming MREL issuance, you saw that we closed the quarter with wholesale funding costs around -- round numbers, 120 basis points. I don't expect that the average of the new issuance will be much higher to this. So if you look at our spreads as of today, there was a widening of spreads late last year, but now have tightened significantly. So if you look at the average of what we are trying to issue in coming years, that is senior nonpreferred and senior preferred also. I don't expect that the average will be that far from what we already have now, so -- on spreads. Obviously, their size probably may be a little bit larger, but not that much because we have also maturities.

And on the ALCO, well, sometimes it's difficult to track. So there are also -- on this information, you follow also the trading books, et cetera. We purchased those -- we made those investments around mid-quarter, so I would say on average. So we -- you should assume that we made those investments by mid-February. And for coming quarters, we should expect a larger contribution, although I remember again about the negative impact that ALCO level because I see probably the ALCO on a broader view also considering large cash balances that offset probably the positive contribution from the fixed income portfolio.

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Operator [34]

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The next question comes from the line of Carlos Cobo from Societe Generale.

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Carlos Cobo Catena, Societe Generale Cross Asset Research - Equity Analyst [35]

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I'd like to ask you a couple of questions and a very quick check, if I may. First one, on the business plan. Just wanted to revisit the guidance for the 12% ROTE target. You also, I remember, mentioned that, that target could be revised to 10% if rates didn't increase. So I was wondering if we should now assume that your 2020 ROTE target should be closer to 10% or if you stick to 12%? And why are you offsetting the lower rates? We've already seen some of your competitors in Spain cutting guidance on the back of the changes in the rate policy of ECB, so what are your thoughts around that? It will be nice to here.

And then the ALCO -- well, just to understand a little bit if you could repeat the new acquisitions. I remember you said something around buying corporate bonds. I'd like to understand a little bit better the type of assets you're buying. If it's purely liquidity management or this is starting to be some risk taking as well. So struggling to get traction on lending demand. You're adding NII through the corporate loan bond -- sorry, corporate bond, which could be seen as slightly more aggressive than your ALCO portfolio in the past. We understand the rate environment, but -- I don't know -- we'll enter the standard type of bonds that you are buying. And alternatively, to understand why you're not swapping, for example, as an alternative part of the deposits that you deposit -- that you have at the ECB for short-term government debt that has a lower cost in terms of negative rates. So wanted to understand better your strategy here. Yes, that's it.

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [36]

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Carlos, let me answer the first question and Javier will deal with the second one. In terms of our guidance, we continue to target the 12% return on tangible equity for 2021. Yes, rates are now lower than what we expected them to be. But bear in mind that we said 12%. And asset sensitivity in rates is not about rates being lower than expectation. There was no -- absolute no movement from the levels that we had in November than the 12%. Asset sensitivity would be 10%, and that's before any management action. But even today, we're expecting increases in rates. Obviously, very minimal, but not -- if you look at EURIBOR 12-month, obviously, it's starting positive by the end of next year and it's actually going in the right direction and it's not staying flat. So the 12% is not today 10%. The sensitivity case is not yet materialized, and we're hopeful it will not materialize. But, in any case, obviously, we have more pressure, and it means we need to do better or that the target is more challenging. We still are committed to deliver on that one.

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Javier Pano Riera, CaixaBank, S.A. - CFO [37]

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Okay. On the ALCO purchases, I mentioned that we purchase EUR 3 billion of Spanish 10-year government bonds plus EUR 1 billion of diversified portfolio of European and U.S. corporates, investment grade, in any case. And on average, maturities between 5 and 7 years. We think that, that makes sense. As you may remember, spreads in markets widened markedly late last year. And at the beginning of this year, we saw that there was a clear risk/return opportunity on this front and we thought that it made sense to diversify the portfolio with this small EUR 1 billion portfolio, but it's extremely diversified across different issuers.

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Operator [38]

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

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Mario Ropero, Fidentiis Equities S.V.S.A., Research Division - Research Analyst [39]

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My first question is on restructuring costs. Since you are aiming to book this in the second quarter, how do you see capital generation in the second quarter? Do you see negative quarter for capital generation because of losses or do you see negative each quarter in terms of capital?

And then the second question, a follow-up on the ALCO portfolio. Since the deposit book is still growing partly because of the performance of the economy should continue to grow. Is it right to assume that the additional money you get here is at least to an extent been invested in additional ALCO portfolios?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [40]

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Mario, in terms of the first question, at this stage, I'd rather not speculate because we obviously are giving guidance of where we see capital at the end of 2021. I mentioned that we expect to be closer than we are today to 12% by the end of the year. I think at this stage, elaborating on the next quarter is a bit more complex for us because it's driven by what is the exact amount of the restructuring charge. And at this stage, we're not being allowed to provide guidance on that front because it's obviously a material event. Javier?

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Javier Pano Riera, CaixaBank, S.A. - CFO [41]

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Yes. On managing the ALCO portfolio, we will be flexible as we think that we need to be and there is not a direct correlation on our deposit balances and automatically increasing the size of our ALCO portfolio. So we'll act depending on our views on market and what we see on fundamental value on the fixed income markets and also with an ample degree of flexibility.

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Operator [42]

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The next question comes from the line of Britta Schmidt from Autonomous.

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Britta Schmidt, Autonomous Research LLP - Former Partner, Spanish and German Banks [43]

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I've got a question on the ALCO portfolio as well. Could you comment a little bit on the increase in the duration that we've seen this quarter? Do you manage the duration on the total balance sheet? Is this partly a reflection of probably your loan portfolio reducing in duration? Or are you are increasing the risk appetite for this book? And in that context, would it be fair to say that you've invested into OCI rather than held-to- majority assets to manage the risk, given that it's corporate risk rather than sovereign risk?

And then secondly, you haven't provided any guidance on the corporate TRIM impact. You're also not providing guidance yet on the restructuring costs? Or shall we assume that your guidance to the CET1 ratio close to 12% by year-end includes these expected impacts?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [44]

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If I may answer the end, last part of the question even that probably Javier will have responded with more detail. But in any case, the low-default portfolio TRIM impact, we do not expect it to be impacting our numbers in 2019 because it will not finish in time. That's our expectation today. So if there is an impact, that's for 2020. And hence, our indication of being close to 12% by year-end does not include any impact from the low-default portfolios on the TRIM side, okay? But it does include obviously the impact of the restructuring of personnel that we are negotiating.

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Javier Pano Riera, CaixaBank, S.A. - CFO [45]

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As for your -- Britta, as for your first question, you're right. We are managing the balance sheet on a broader view and we are monitoring the sensitivity of the whole balance sheet. Thus, if we increase our cash balances because we have larger deposits or larger issuances, et cetera, then we have to encompass this with the management on the asset side. And this is why also we want to retain flexibility as we have classified those investments on OCI. And I would like just to reconfirm that the overall sensitivity of the balance sheet remains where we expect it to be despite all those investments and sensitivity that we have been disclosing, as you remember, is that at 20 to 14 months' sensitivity of an increase of short-term rates by 100 basis points remains at around or even above 15%.

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Operator [46]

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The next question comes from the line of Stefan Nedialkov from Citi.

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Stefan Rosenov Nedialkov, Citigroup Inc, Research Division - Director [47]

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It's Stefan from Citi. A couple of questions on my end. I will start with the sort of most straightforward one. On the new lending yields that you are showing in the presentation, the increase Q-on-Q in your lending yields is around 19 basis points. I'm not sure if this question has been asked before or answered. If you can just provide us some color on what is driving this pretty meaningful increase Q-on-Q.

Second question revolves around MREL. You have told us 22.5%. I think it was last week. Is that a requirement that has been communicated to you to meet by January 2021? Based on your reading of the banking package that's close to being passed by the European Parliament, is that the final steady-state MREL requirement for you? Or would you expect that to go up potentially by the end of 2023, I believe?

Related to that question, do you plan to have around 2% or more of senior preferred in terms of meeting your MREL requirement?

And if that's not enough questions and if you do have time to answer one more, I would love to hear your thoughts on your payroll model, where you basically are growing payroll deposits by 5%, I think you say, in the quarter versus last year. But obviously, your fees and NII are growing less than that. So are we basically stuck in a bit of excess liquidity problem with Caixa for the next couple of years?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [48]

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Let me answer the third question and Javier will take the other 2. When we talk about payroll deposits, we're talking about the inflow of the salary on a monthly basis that we receive from clients. This is the main 2. We have acquired new clients and make them profitable in terms of being able to cross-sell our kind of products once they have the payroll with us. There is obviously some associated increase in balances as people bring their salary payment to us that in today's interest rate environment obviously has a small cost, but we're not generally talking here about big deposits. These are monthly salaries. And certainly, very well received even if they have a short-term cost because subsequently, in following quarters, once they have the payroll, we'll be able to sell them consumer lending, insurance, asset management, you name it. What I want to say and -- because precisely, results have some appearance of weakness on the fee side, which we have discussed the reasons for. I will try and emphasize the point, let's go looking beyond quarter by quarter. This quarter has been very successful for our business model. We continue to gain market share across the board and results are going to continue to being delivered. Yes, when we compare one quarter with another quarter, we may have different timing for a campaign for the network for certain products, all those, but the track record of market share continues and payrolls are certainly one of the most visible ways for us to gain and cross-sell to new clients, not just when we acquire the payroll, but going forward. Javier, on the other 2.

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Javier Pano Riera, CaixaBank, S.A. - CFO [49]

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Stefan, well, front book yields have gone up quarter-on-quarter because of a mix of things. First thing is that we have a higher weight of consumer lending this quarter and that affects the average obviously. Also, the new production from CIB has been at wider margin, so this is a positive also. And then also, it's remarkable. And we commented before about mortgages that so far with this new product that we launched, CasaFácil, after the custom duty introduction last October. So far, we have been able to increase the front book yield on fixed rate mortgages that are being done now at an average of around 2.5%, thus absorbing completely, taking into account also reduction on swap market rates absorbing completely those extra expenses that now have to be paid by banks. So those are the main reasons.

On MREL, according to the information we have, this is our final requirement, although the SRB will review it annually and -- but so far with the indication, we have this maybe in our final requirement. Our plan, as you know, is to fulfill this requirement mainly with subordinated instruments, but also we want to build the buffer over this requirement. So we want to build, I don't know, how many percentage points, a few, 1 or 2 percentage points over this requirement that will be filled mainly with senior preferred. So this is the rationale and the plan we have to fulfill this MREL requirement. You know that we are already at 20.2%. Thus, we need to add around 2 percentage points as it's around EUR 3 billion according to our risk-weighted assets. So not much and we expect to be there and even surpass this requirement well ahead of the final date.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [50]

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It's 1:00. We've kind of run out of time. We'll take one more. I realize there are some people waiting in the queue. We'll take those off-line. So operator, let's have the last one, please.

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Operator [51]

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The next question today comes from the line of Andrea Unzueta from Credit Suisse.

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Andrea Unzueta, Crédit Suisse AG, Research Division - VP [52]

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Just 2 quick follow-ups, if you don't mind. Given that you mentioned seasonality is impacting your insurance revenues and that you also have the impact of the launching or the timing of your product, how should we think of the progression of the EUR 387 million of revenues that you disclosed in Q1 in the coming quarters and into 2020?

And my second question is a follow-up on the cost of risk guidance, which I'm -- apologies if I missed. But you're guiding for a cost of risk of less than 20 basis points. Does that include additional recoveries in Portugal?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [53]

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Javier, you want to take these 2?

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Javier Pano Riera, CaixaBank, S.A. - CFO [54]

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Okay. On insurance, as commented, we are launching a new set of products that kick in, in March and then in April. So we expect that the path and the progression of our insurance revenues will strengthen in coming quarters and -- well, this will be progressive and our expectation is that we'll have higher revenues as soon as next quarter and the pace will rather increase for the following quarters and even more for the next few years. Thus, we are not changing our long-term guidance or, let's say, projections that we outlined at -- on our Investor Day on this front as we commented before.

And as per the question of -- about cost of risk, the short answer is yes and the cost of risk includes any potential, let's say, updates on the PPA of BPI.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [55]

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Okay. Andrea, I hope that answers your question. That's all we have time for today. Thank you very much, and we'll reconvene next quarter.