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Edited Transcript of CABK.MC earnings conference call or presentation 31-Jul-20 9:30am GMT

Q2 2020 Caixabank SA Earnings Call

Barcelona Aug 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Caixabank SA earnings conference call or presentation Friday, July 31, 2020 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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* Adrian Cighi

Crédit Suisse AG, Research Division - Research Analyst

* 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

* Britta Schmidt

Autonomous Research LLP - Non-Designated Member

* Carlos Cobo Catena

Societe Generale Cross Asset Research - Equity Analyst

* Fernando Gil de Santivañes d´Ornellas

Barclays Bank PLC, Research Division - Research Analyst

* Francisco Riquel

Alantra Equities Sociedad de Valores, S.A., Research Division - Head of Research

* Ignacio Cerezo Olmos

UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst

* Ignacio Ulargui

Exane BNP Paribas, Research Division - Analyst

* Mario Ropero

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

* Marta Sánchez Romero

BofA Merrill Lynch, Research Division - Director and Analyst

* Sofie Caroline Elisabet Peterzens

JPMorgan Chase & Co, Research Division - Analyst

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Presentation

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

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Hello. Good morning and welcome to CaixaBank's results presentation for the second quarter of 2020. With us today is the usual management team of the CEO, Gonzalo Gortázar; and the CFO, Javier Pano.

In terms of format, we will do our best to keep the presentation within 30 minutes, and around 45 minutes of Q&A will follow after that. If you're new to this presentation, you should see the instructions on the screen.

Without further ado, let me hand it over to the 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. And you've set the limit, the time limit. So I'm going to try and be disciplined and see if we can get soon to the Q&A, which is obviously where most of the interesting stuff tends to be discussed.

Summary of the quarter and of this moment in time, a few ideas. One which I think is very important but sometimes people forget is we are gaining market share. And the second quarter has been very good from that point of view. The first quarter was also very good -- gaining market share. We'll see those numbers in some more detail. But clearly, long-term savings is a very important part of our core business. 53 basis points in pensions mutual funds and life insurance over the last 6 months, not bad. And obviously, this quarter has been marked by lending to businesses, 82 basis points of market share gain.

I think it's also important, and you'll see some slides, how May has been obviously a better month than April and June a better month than May and actually July, in terms of activity, a better month than June. So we've seen a fairly strong rebound of activity post the lockdown, which is obviously a fairly good sign.

We have been with our clients and with the society in terms of providing them with the 2 most important products they needed, liquidity through ICO loans and payment moratoria. You have there our figures: 6.4% of the loan book, that includes Portugal as well; and approximately EUR 11 billion in the quarter outstanding at the end of the period. So a very significant increase of credit with the state guarantees.

Cost targets, we've been working on that for quite some time. We've been gradually reducing the level of costs we feel we can operate at. And now we're announcing reduction for this year to more than 2% in terms of reduction. So we'll have costs shrinking by 2% or more or -- that's what we're seeing, hopefully more than 2%.

And we also wanted to give you a glimpse into 2021 because I feel the market is a bit confused sometimes what it is just COVID related because there's less activity and what it is that's structural. Most of this reduction this year is certain. And for 2021, we plan further cost reductions, which means that we would be having cost savings of over EUR 300 million compared to our initial targets in the strategic plan.

And then finally, obviously, we took a very large charge. And compared to what I've seen from competitors, a much larger charge than many others. And I have to say this is a front-loading decision from a position of strength that is going to allow us to have a much better second half in terms of provisions, and hence, in terms of bottom line as well. This is EUR 809 million (sic) [EUR 819 million], as you can see. And it increases our coverage ratio to 63%, which obviously indicates how much were already reserved for future issues.

Core Equity Tier 1, we're providing for full transparency, both with and without the impact of the transitional IFRS 9. Obviously, it's been a quarter in which we have grown a lot, and that has had an impact, a small impact on capital. But because for the transitional -- with the transitional IFRS 9, this big charge, which is really equaling to capital, is there to stand for future losses. It's not fully deducted so that we have an extra almost 50 basis points of capital on CET1 basis.

Those are the highlights, really. There's a good activity, coming up strongly, gaining market share, quite important because now we're all focused on cost and provisions. But when we come out, we're going to be even more of a leader in this market. And that is something that is sustained over time and a big exercise in costs and provisions.

We also announced yesterday a transaction in which we're selling 29% of our merchant-acquiring subsidiary to Global Payments. This is a business that I think you know but most of the investor community is not that familiar with. This is a joint venture that has now successfully worked for the last 10 years. And actually, during these 10 years, we have had a very productive relationship with Global Payments. Global Payments is well known. It's a very large company, specialized technology, payment provider. And we have agreed given the way this business is evolving, which is more and more into the technological world, software development, et cetera, that it was more logical for Global Payments to own a larger stake, 80% versus our 20%. But at the same time, we have agreed to keep everything equal in terms of the way we run the business. And both us and Global Payments are very satisfied with the results and the fact that actually we have worked together nicely for the last 10 years.

Being with Global Payments allow us to compete in this space. We could not compete in this space without Global Payments. Our competitors in this space tend to be new companies like Adyen, Stripe, others rather than traditional banks. We are able to compete with them, thanks to this alliance with Global Payments. We want to make sure we keep it, and that's why we have kept a 20% stake. And actually, the modus operandi with management, et cetera, everything is going to stay the same. On the other hand, we obviously owned a very highly valued business. You see that share -- sale price, EUR 493 million over net income loss of EUR 14 million, 1 4. That means a 35x multiple, which obviously indicates we are crystallizing value from a business that otherwise, market really is not properly variant, and at the same time, keeping all the good elements of this strategic alliance, which will continue to grow and will continue to facilitate to provide cutting-edge solutions, the payment point to our merchant customers.

Moving on to what we've done. I'd say gaining market share, activity rebounds, cost management and risks. And market share, you see the numbers. I think they speak by themselves. Life insurance, mutual funds, pension plans, long-term savings, all the juicy liability side funds are doing very well. These are not easy figures to achieve in 6 months. You know we've been delivering this for year after year, but we are accelerating. And my thesis is in this crisis, because of where we are and because we're in good shape, we're going to be able to accelerate market share growth organic.

Similarly on credit and the business lending, you have all the figures, figures for performing loans, for customer funds. It has been an extraordinary period. And based on the figures that all the banks have reported, we've done -- obviously, everybody has done more, but we've done more than more. And it's very rewarding and satisfying and not just on the asset side, clearly on sort of every aspect of what we do.

In terms of the recovery, we have changed the macro outlook. I'll discuss that later when we talk about risks. But clearly, we have a big fall this year. We're expecting 14% and an important recovery next year. And you see that the base case that we had before was obviously much more optimistic, and that's why we have come up with a much larger estimate of provisions by being very hard on our macro assumptions.

But important enough, what you see during this month is a very strong recovery. First of all, on the payment side, you see our -- particularly the hotel, restaurants, leisure, et cetera, came down to close -- sort of lockdown after mid-March. And they have recovered to minus 13%. So the sectors that are more affected are obviously affected, but they are now at minus 13%. It's not that they stay at minus 50% or minus 60%. And obviously, the overall level of activity in payments is now already above same period of last year.

New mortgage lending, consumer lending, you also see how rapidly, after the trough in April, things are improving equally in terms of net inflows. We're not yet at the level of January, February. Certainly, in terms of net inflows, we had January, February would have been the record exceptional quarter for us. But we're getting closer to those levels. And I have to say, activity in July continues the strength. So it's again an improvement on June.

I think it's quite relevant. We have some uncertainty obviously around the whole evolution of the pandemic and the economy, et cetera, but figures suggest that the world, and certainly Spain, is coming back to activity and knowing how to live with this terrible situation.

Loan moratoria, I mentioned the numbers in the beginning. I would emphasize only that we feel pretty good that this portfolio is going to be, in vast majority, paying. Actually, in July, we have also already seen some of these moratoria starting to pay because the principal stays but the interest does not, and for mortgages, that's a significant payment. By the end of the month, the vast majority of the moratoria that have now started to have to pay are actually performing. And we'll continue to see that trend on particularly the mortgage book evolving well with that loans -- with those loans to value, et cetera.

In government-guaranteed loans, we've done a lot. We've done what we had to do. We feel that the guarantee that we have has protected us to be active here with proper analysis. And obviously, we'll have to see how this develops over the next 12 months, depending on the overall economic recovery.

Digital increase in activity from digital clients. You see the trend is pretty clear. But in the last 6 months, it has accelerated with 64.7% of digital -- or clients being digital. Number of daily connections is up by 30%. It used to be up by 15%, 20%. So basically, it's a trend that is reinforced, accelerated. We have seen now a significant increase in mobile payment, in enrollment in mobile phones, all trends that are actually positive for us. Big success of our new fund platform Ocean and the Smart Money, the robo-advisor, which is also increasing the transactions, digital transactions, there.

Big performance of inTouch where we have this 1.4 million clients. That is certainly a business where we keep growing because the statistics in terms of productivity and revenue per client are improving and are competing well, I would say better than the traditional retail network.

We launched imagin. You know that this is now a platform, digital platform, that offers financial and nonfinancial products where enrollment is much easier. Onboarding is very simple. Just register with your mobile and your e-mail. And that means the sort of barriers to get into being client of a bank disappears when you are a client of imagin. But then on top of being a client of imagin, you have obviously the ability to, at some point, be offered financial services through the bank at imagin. We have now 2.6 million of our clients in imagin. So obviously a glimpse into the future. There's a lot of things we can do here. We've launched imaginShop, imaginMusic, Games, Planet, with sort of a very focused green mindset against particularly use of plastic, et cetera. And this is going to be, no question, a good tool for us to increase the loyalty of our young clients, retain them and also attract many others. But obviously, we'll be updating you as time goes by.

And costs. I mentioned in the beginning, we expect to reduce at least by 2% costs this year and we expect to have next year a cost base that is lower than the cost base that we had last year in 2019. How do we get to those EUR 300 million cost savings? They are in personnel expenses. They're general, depreciation and personnel. Obviously, we did restructuring. We managed to get more people to leave the bank than was the initial expectation. We reached, on the other hand, a preagreement a couple of days ago, which implies wage containment for 2019, '20 and 2021. 0% increases obviously helps.

On the general side, we are actively working on many dimensions, IT operations, facility, renegotiation of supplier contracts, and obviously quite a few other things, marketing, communication, as you can see in this page. I won't elaborate in detail at least now in order not to extend myself too much time.

NPL, you see how the coverage has increased to 63% and how we've come out to -- come out with this figure. And on the bottom, you have, I guess, full transparency on what we're doing. We have 3 cases, 3 scenarios: base, upside, adverse. Obviously, the base is the one with 60% probability, the others 20% each. The base scenario is a very tough one. It's one where GDP falls this year by 14% and recovers by 11% next year. And similar levels in Portugal, as you can see. Today, the GDP figure was published. It's minus 22% year-on-year. And actually, what's embedded in this base case scenario is minus 27%. Obviously, it's just 1 quarter but gives you an indication that this is a pretty tough base scenario, obviously much more negative than what we had at the first quarter presentation, but we wanted to be fairly clear with everybody. We want to be pessimistic about what's going to happen, and at the same time, provide for it. And that's exactly what we've done.

We have obviously upside case, which I would say today on the GDP number is much closer to what the numbers we have today, minus 12%. But obviously, we'll have to see how things evolve. So we consider the upside scenario and an adverse scenario where we have a minus 17% and a recovery of only 10%, so a 7% gap between 1 year and the other.

On this basis and without considering any long-term scenario, without any sweetening of this, we have come out with this COVID provision, EUR 1,155 million. And at the same time, we've estimated what we expect for the rest of the year. And what we expect to -- for the rest of the year is what we expected at the end of first quarter, 60 to 90 basis points. Obviously, with the figures in the first quarter, we were closer to 60. With these figures, we're closer to 90. We'll see what eventually happens because we've gone, I think, very tough on the macro expectations for next year -- sorry, for this year.

And on that basis, this cost of risk already in the first half without annualizing is 53 basis points. So from 53 basis points, as you can see, we are going to move to somewhere between 60 and 90. It means that for the second half, we need to do 7 to 37 basis points. Whether you want to be more optimistic or less optimistic within this range, it's clear that we're going to have a significant reduction in loan loss provisions in the second half if the numbers of the economy that we are using, which are pretty tough, are actually materialized. Hence, there is a big exercise of front-loading prudence embedded in this charge. And we feel -- we want to deal with this problem. We didn't want this problem obviously, but this problem is there. We want to deal with it soon, and that's what we're doing. I think we've said it at all times that we wanted to put this behind as soon as it can. Obviously, it's not going to be entirely behind after this semester. But according to the models, it is fully provided for. We all know the reality means that we're going to have increased NPLs, et cetera, particularly at the end of the year and into 2021. But our models are suggesting that we are going to be able to cope with this with the provisions that we have made. And obviously therefore, the rest of the year should be a much better year from the point of view of provisions. And certainly, we expect 2021 to be more of the same. We expect the cost of risk to peak this year. That is the way we're approaching this situation.

That's really it. Javier, if you want to take it from here.

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

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Okay. Thank you very much, Gonzalo. Good morning. We have added a lot of extra information to the second quarter presentation that I will try to focus on the most relevant aspects.

Let's have a look to the evolution of the loan book. Well, as already commented, record loan book growth, up 6.9% year-to-date. You may see on the right-hand side chart that the main contributor being guaranteed government loans, EUR 10.6 billion year-to-date; but also mainly in the first quarter, EUR 4.8 billion from lending to other businesses. As expected, there's deleveraging in mortgages but also in the second quarter with much lower new loan production, also the consumer loan book with some deleveraging.

And an overview on our ALCO portfolio. A slight decline to EUR 33.8 billion (sic) [EUR 43.8 billion]. We have taken some profits in parts of the portfolio, taking advantage of the sharp tightening of sovereign spreads. You have here all the metrics. The yield maturity almost unchanged and maturity profile and also sovereign exposure across different countries that remains broadly unchanged.

On the liability side. On our customer funds, probably the most remarkable here is that this second quarter, we have recovered approximately 2/3 of the negative mark-to-market impact we had in our AUMs. On top of this, we have had inflows, as you may see, EUR 900 million year-to-date. And I would say that the pace of those inflows, as you saw before, gradually gaining pace. And also, as is happening across the industry, a large increase of on-balance sheet deposits. What we are observing is that many government guaranteed loans are accumulating cash and parking cash in site accounts.

On the right-hand side chart, you see the evolution of our AUMs in the second quarter. The average AUMs are already in line with the average of last year. But by the end of the second quarter, we were already higher, 1% higher. And then as recent as July 15, up by 2%. So these markets permitting bodes well for the evolution of AUM revenues in coming quarters.

With this, let me shift to an overview of our income statement. Here, I would only remark that our core revenues despite current circumstances are down by 1.8% year-on-year. At the same time, as commented, our recurring cost expenses have declined strongly year-on-year by 3.9%. And as a consequence, our core operating income for the first half of the year compared to last year, it's up by 2.6%, thus keeping operating leverage below the line. The provisions, already commented, with strong front-loading of provisions that are expected for the whole year. With this, our net income ends the second quarter at EUR 115 million.

A few words on BPI. BPI continues to do well in terms of business volumes. I would remark here mainly that the loan book continues to progress, up by 2.4% year-to-date. Net interest income as a consequence is performing well, up by 7.8% year-on-year. It's a very good performance. COVID-related, we have also a moratoria program in Portugal in this case affecting also businesses. We have 2.6 billion of businesses in Portugal with a moratoria program. And also, there is a reserve build COVID-related of EUR 48 million year-to-date, EUR 31 million in the second quarter. As a consequence, we have an impairment loss in the second quarter in Portugal of EUR 33 million, resulting in a net attributable profit of EUR 13 million.

Let me now briefly comment on different lines of the P&L. NII up by 2.1% quarter-on-quarter. The main contributor being our ALCO-related activities. Remember that we increased the size of the ALCO portfolio late in the first quarter. On top of this, we are absorbing extra cash by doing so. And on the contrary, this second quarter, we have lower contribution from what we would call client NII. We have in terms of the back book yield a reduction. The back book yield now is standing at 198 basis points, down by 17 basis points. In this case, mainly, there is a mix effect as we are incorporating lower-yielding new production to the book.

On fees, we are down quarter-on-quarter by 7.5% and year-on-year, 4.4%. But you may see clearly in the central chart the positive evolution of fees monthly. And you may see that by June, we are already at the levels we were in June last year. And as our CEO has commented, this trend is continuing and we are seeing very positive momentum in our fee revenue. What has happened in the second quarter is that in recurrent banking fees, we are down year-on-year by approximately 14%, the same levels quarter-on-quarter here, impacted mainly by e-payment fees. You see that this part of the business is -- has been down by approximately 30% quarter-on-quarter. In asset management, we are already flat year-on-year as we saw with stabilizing average volumes. And in insurance distribution, although it was a segment that was affected during the lockdown, we are seeing a strong recovery on this business as people is looking for, let's say protection in general terms. We have had a very -- second quarter and first quarter of the year in CIB and everything related to corporate banking.

In the right-hand side chart, you see the evolution of our insurance revenues. I will remark here the evolution of life risk, EUR 141 million in the second quarter, better than the second quarter last year. And in this business also, we have quite a bit view on the future evolution.

On costs, I would here focus on the year-on-year evolution, down by 3.9% mainly to personnel -- due to personnel -- evolution of personnel costs as well. We are having the synergies year-on-year from the restructuring implemented last year. But also quarter-on-quarter, costs are down by 2.6% as we have, as you know, implemented other cost-saving initiatives. As a consequence and as commented before, we have a clear core operating income improvement. As core revenues, the loss in core revenues -- or what we have lost in core revenues is much less than cost savings. Reiterating that we are envisaging for this year, we are formally revising our target for the evolution of cost to grow by less -- sorry, to be negative by more than 2%.

Final words on the P&L on loan loss provisions. Here, already -- has already -- Gonzalo has already elaborated, but I would only add that as we have revised our -- updated our macro models, assigning those weightings into different scenarios. And also in this case, we have considered customer forbearance and other liquidity measures. So all this is taken -- being taken into account. But as a consequence, in the second quarter, we have a full front-loading of the impact of all IFRS 9 macro adjustments in loan loss provisions. This results in this EUR 755 million extra COVID-related charge.

Here, you have the evolution -- sorry, the breakdown across different stages and also segments. There is an increase in stage 3. This is resulting because also, we are estimating in our scenarios a negative evolution of real estate prices. And as a consequence, we are further providing for higher loss given default. And well, as commented, with this, we are front-loading the situation. And as we expect for total cost of risk to be closer to the guidance given last quarter, closer to the upper bound, now we are expecting clearly on the front to have lower loan loss charges in the second half of the year.

Let me now shift to the balance sheet. A few words on NPL formation. You may see that it has been very moderate, only EUR 200 million in the quarter. You may see that the NPL ratio is -- mainly because of the denominator effect, is down to 3.5%. So, so far, no impact on the front. And the coverage that, as commented, has increased markedly by 80 percentage points year-to-date.

In Slide 25, we have plenty of details on our loan book. We have the distribution of guaranteed government loans across different segments. Now 4.5% of our loan book is with government guarantee, together with the important percentage of loans with a mortgage guarantee that now stands at 50.2%. And this, also with other guarantees we have in the loan book, results into 50% of our loan book that is collateralized one way or another.

On the right-hand side, you have the sensitivity analysis or assessment we have made of our loan book to COVID. Those sectors that we assess that are highly impacted continue to be 10% of our loan book. You have the details of the different sectors. But also, we disclose the level of guarantees we have in each one. As an example -- for example, in tourism and leisure EUR 8.4 billion exposure with collateral for at least 55% of our exposure.

In the following slide, also plenty of details about the situation of moratoria. Here, the summary is that as of the end of June, 95% are performing. You have the breakdown across different stages for individuals and for businesses. 86% of the moratoria in Spain is with a mortgage guarantee with very low average LTVs of 54%, actually only a couple of percentage points above the average of the whole book. And with data as recent of a few days ago, 61% of those loans in moratoria are being billed and 100% of those will be billed in October. And 95% of those that are being billed are paying completely their installments. And the bulk of the moratoria will already have expired during the second quarter of 2021. You have all the details also on the breakdown of the LTVs of mortgages under moratoria.

Finally or close to finally from my side. In liquidity, well, we had a full take-up of TLTRO III facilities, close to EUR 50 billion. This places our total liquid assets to more than EUR 100 billion, EUR 107 billion. Our liquidity metrics are extremely comfortable as you may see. Here, I would only add that we took advantage of market conditions to issue a senior preferred EUR 1 billion bond for MREL purposes mainly. And in this case, it was a social one, very well received, as I say, by the market.

And finally, on solvency, we ended the first quarter with CET1 ratio at -- ex-transitional IFRS 9 at 11.87%. This quarter, we have organic capital generation of 8 basis points, of which 15 come from the quick fix in CRR 2.5. This is the supporting factor for SMEs and infrastructure. Then as you know, we are accruing dividend. This is having a negative impact of 3 basis points. And then we have other impacts of minus 11 basis points, ending the quarter with ex-transitional IFRS 9 CET1 ratio at 11.81%. On top of this, as you know, we have a transitional impact from IFRS 9 adding 48 basis points. And let's say that the regulatory CET1 ratio closes the quarter at 12.29%.

In this slide, I would only like to add that our MREL position by the end of the quarter stands at 23.29%, above our requirements.

And finally, from my side, just to wrap up, first half of the year with a difficult environment but where our core revenues show resilience. We are making an upgrade on our cost guidance, clearly, and also looking into 2021 on this front. We have front-loaded cost of risk in this first half of the year. And with all this, we have a strong ambition to deliver positive 2020 core operating jaws.

Thank you very much, and we are ready for questions.

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

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Thank you, Javier. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from the line of Francisco Riquel.

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Francisco Riquel, Alantra Equities Sociedad de Valores, S.A., Research Division - Head of Research [2]

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2 questions for me. One on -- the first on asset quality. So I appreciate the front-loading of provisions after updating the expected loss models and the new macro scenario. But I wonder what is the peak NPL ratio in this cycle derived from your models. And any color on the PDs for the main loan categories? And then on the LGD, I mean relative to the 55% coverage ratio on NPLs reported precrisis in 2019, do you think that the new NPLs from this crisis will require a higher or lower coverage ratio after all given all the guarantees that you are having on the ICO guarantees in particular or the mix of the NPL inflows?

And then the second question, I appreciate the guidance on costs, just missing some indications on revenues. And I want to ask about NII in particular. You were previously guiding for a slight fall this year in NII, but I mean corporate loan growth looks stronger. You will also have the TLTRO benefit. So I just want to hear if you feel more optimistic on the NII for the year or if you are still cautious with retail lending in the second half of the year or any other headwind that we might expect?

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

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Thank you. Thank you, Paco. And I'll let Javier deal with the second question on asset quality. Obviously, we have given you a reference that this year, we do not expect NPL to be above 5%. Clearly in June, we have had a reduction. And given what we're seeing, I have to say the figures from July are really good -- oh, I wasn't speaking with my phone on -- with my mic on. Okay. Sorry. I'll start again.

NPLs, we expect to close below 5% this year, clearly, but we expect NPLs to grow into 2021. At this stage, we're not, I think, venturing with a number. But certainly in terms of the effective losses for us, given the system of guarantees that is available, it's going to be obviously different for all that part of the portfolio. And certainly, that's clearly a positive.

On revenues and NII, I think, Javier, it's better for you to answer.

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

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Okay. Paco, well, on net interest income, we have, as always, plenty of moving parts. Volumes is clearly a positive. We expanded the ALCO portfolio. Also, loan book is doing well. But on the other hand, it's at lower yield. So -- and clearly, the new production of government guaranteed loans has much tighter spreads than the back book. So I would say that this -- you need to take this into account.

I would say that going forward, the main question mark for me here is which is the evolution of our consumer loan book. So you saw that in the first half, or mainly in the second quarter, we have obviously had some deleveraging. So to what extent we are able to stabilize this and even increasing or growing again. So I think that this is a very important aspect for us.

Another one is the extraordinary amount of liquidity we're holding. You see that mainly SMEs, large corporates are accumulating cash and work on this front, although as you know, we are passing on negative rates to some of large corporates and other players. It's not always possible. And so this is hanging across.

So with this, we keep with the view that NII is going to have a negative evolution this year. But hopefully or at least our estimate is that as we have done better in the second quarter compared the first quarter that this -- let's say that this pace can be maintained, that following 2 quarters also, we are able to do better than the first quarter. So this is our main ambition. And we say clearly that our ambition is for positive jaws as we are having our cost target for cost to be -- cost growth to be negative by at least 2%. So the implicit guidance we are giving for core revenues is better than minus 2%. So I would say that this is probably where we are. And in this front obviously, with all the uncertainties we have, but we had quite a bit mainly here on the evolution of fees. So we see a very positive momentum in them in different areas and also in our insurance business, that we are observing that. As I commented in the presentation, the demand for, let's say protection in the current environment is there, and we see a very positive evolution in June and July of this business. I don't know if I am missing something, Eddie.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [5]

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Paco, have we answered all your questions?

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Francisco Riquel, Alantra Equities Sociedad de Valores, S.A., Research Division - Head of Research [6]

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Yes.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [7]

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Thank you, Paco.

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Operator [8]

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Ignacio Ulargui from Exane BNP.

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Ignacio Ulargui, Exane BNP Paribas, Research Division - Analyst [9]

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This is Ignacio. I have 2 questions. The first one is on the fee income side. You planned a bit of a change in the strategy at the beginning of the year that was postponed due to the COVID. How should we see the change in that pure banking fees and becoming a bit more sort of like keen to pay -- the clients pay for the services that they receive? So how that could impact fee income into 2020 and 2021?

And the second one on capital. I mean if you could walk us a bit about the different moving parts and whether you have -- so there is any type of one-off in that 11 basis points of market-related negative in the quarter. And what could be the buildup that we could expect once you see that profitability is going to recover in the second half as lower provisions?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [10]

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Thank you, Ignacio. I'll answer to the first one. We had planned for this fee structure change to come -- be effective on the 1st of April. We decided to postpone for 6 months because it was the hardest part of the confinement of the lockdown. And it will now be effective in October. So you should see an impact on the fourth quarter and onto 2021.

As you know, the structure of the fee means higher fees for clients that are not relational. And whether this is resulting -- or whether this will result in higher fees because clients stay on relational and pay a higher fee or from higher activity and profits because clients become relational and they buy more products from us, obviously, the second one is going to be more profitable for us both short and long term. And we are going to make a big effort in making sure that these clients buy other products from us because I think we are an entity in which this works well given our sort of universe of products and services particularly with a very strong insurance business that we have. So I am -- I think that is going to provide us support for revenues. Whether it's fees or insurance or others, we'll have to see, but it will have an impact. It will be starting October.

And second question on capital, Javier, maybe.

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Javier Pano Riera, CaixaBank, S.A. - CFO [11]

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Ignacio, well, on capital, it's a quarter with a low, let's say, profitability, first thing. So organic capital generation is very low. On top of this, we have grown a lot our loan book. It's true that the main loan growth is coming from government guaranteed loans. But despite this, there is capital consumption on this front. So -- and other parts of the business mainly on corporate and SMEs, we have also loan growth other than government guaranteed loan.

So then we are accruing dividend. And as you say, we -- in the capital level with this minus 11 basis points, this is not actually market related at all, but we have positive markets from the ALCO that is approximately around 4 basis points, but then we have other things. Amongst those, we have a situation where we are not being able to transfer dividends from VidaCaixa to the parent company. That's -- let's say that the capital in VidaCaixa is increasing. You know that this is risk weighted at 370% as we are having an increase of risk-weighted assets because of this. So this is having a negative impact.

We have a negative impact also from pension liabilities mainly in Portugal. So we are evolving as always as every quarter. But this quarter, as let's say credit spreads have tightened, the liability part of the equation is having a negative impact. And we have an increase of risk-weighted assets related to markets. We have increased some hedges in some parts of our exposures. Then we have an increase in intangibles in terms of, well, this is software that has been booked as intangible and then is deducted. And then we have a small increase of tax losses carried forward as the profitability of the bank now is going to be lower this year, then we have to deduct part of this from capital.

So those are -- as you see, there are many little things here and there, actually not all markets, but I would point out precisely this effect from VidaCaixa as long as the insurance companies are not being able to pay dividends. Thank you, Ignacio.

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

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Ignacio, I hope we've answered your questions.

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Operator [13]

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Adrian Cighi from Crédit Suisse.

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Adrian Cighi, Crédit Suisse AG, Research Division - Research Analyst [14]

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This is Adrian from Crédit Suisse. Just a few follow-ups on capital and one on cost of risk, please. So on the capital, you've increased the transitional by 30 basis points quarter-on-quarter but remains flat on a fully loaded basis. Can you remind us that a 11.5% target is fully loaded or transitional? And in terms of capital returns, how are you still considering returning the excess capital above which level and over what time line? And then also if you can maybe give us an estimate of where you see credit risk migration and potentially other headwinds including regulatory coming in the next 12 months.

And then on the cost of risk, you briefly touched on the 2021 cost of risk in your opening remarks. Do you expect the cost of risk to remain elevated into 2021? Or alternatively, should we see the 2020 front-loading as a 2020 front-loading and expect a similar level of front-loading in 2021? Or should we expect a sort of move towards a more normalized level?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [15]

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Thank you, Adrian. I would clearly say on cost of risk, with a caveat that there's uncertainty as to how things evolve with these scenarios, we expect the cost of 2021 to clearly be below 2020 and have the cost of risk peak in 2020. I don't think we'll have a 2021 where we will go back to levels of 2019, but there should be a significant reduction. That's what we are doing by front-loading through IFRS 9. This is -- if it works, we'd all have not seen IFRS 9 in a crisis up until now. But clearly, this is what we're doing now. If not for IFRS 9, we would not have provided much. At this stage, we are providing for the problems that would arise later on in the year and into 2021. So yes, there should be a clear step-down in 2021.

In terms of capital, Javier will surely add, but our objective was to come down to 11.5%. This is -- in practice, it's ex-transitional IFRS 9. And we expect also that transitional IFRS 9 and fully loaded view, which -- will converge over time this quarter because making this very large provision. Obviously, there's a bigger gap between the 2. Had we made a lower provision, which obviously we could have, then we will have higher levels of capital and a smaller -- fully loaded and a smaller sort of range between one figure and the other.

We said when we changed our payout ratio policy for this year that it would be not more than 30% for fiscal year 2020 to be paid in 2021 and that we expect that if, as a result, we ended up having capital levels above 12%, we will look to return these to shareholders, not in 2020 obviously but in 2021 and subject to the overall economic situation having been normalized. And we'll stick by that plan. Obviously, this is a possibility and it's a possibility that is not that far apart. We have to decide. And given the current valuation levels, obviously, buybacks are an option to be considered. But for the time being, this is not something that we are discussing. This is a 2021 discussion.

I think there was something else, Javier.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [16]

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Yes. There was something on credit risk migration and what are our expectations for credit risk migration.

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Javier Pano Riera, CaixaBank, S.A. - CFO [17]

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Well, there was also another question about other potential regulatory impacts. Well, you know that we had all the dream processes that were, let's say stopped during this situation. And according to the ECB, the dream decisions will resume in September or October. So we had on this front pending the decision on our low default portfolio. As you know, as of today, we don't have visibility if this is something -- the potential impact of this may be in 2020 or in 2021 actually. But in any case, those -- the potential impact of this decision is already embedded in our solvency target, so in this 11.5%. And further elaborating on this, this gap between transitional IFRS 9 and fully loaded, this is going to -- as Gonzalo was commenting, this is going to narrow quite fast because you know that we have this kind of capital forbearance mainly for those provisions that are still in Stage 1 and Stage 2. Once these provisions are, let's say, for real and are for Stage 3, then automatically, this IFRS 9 allowance shrinks quite fast. So you should expect this to narrow quite fast.

And as regarding this risk-weighted asset inflation for credit migration, it's something that is not happening yet. We are estimating that the impact will be moderate. We are estimating, we are in the same position than in the first quarter. On this, I remember commenting that, well, first thing, we have approximately EUR 50 billion, slightly below EUR 50 billion of risk-weighted assets in -- coming from, let's say, exposure and default that is in advanced models. And we are estimating that credit migration may result into risk-weighted asset inflation of probably around 5% of this. So as you see, EUR 2 million, EUR 3 billion of risk-weighted assets, that is something that is manageable.

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Unidentified Analyst, [18]

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Perfect. Can we just -- can I just ask a follow-up question on the CET1 outlook? Can you remind us of the software intangible benefit for later this year?

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [19]

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Adrian, on the software intangibles?

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Javier Pano Riera, CaixaBank, S.A. - CFO [20]

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So, sorry. Yes, sorry. I could not understand the question. Yes, you mean the quick fix for software intangibles, which could be the impact? It's approximately, according to today's, let's say, term sheet or definitions, will be approximately 10 basis points. 10 basis points.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [21]

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So that's 10 basis points, Adrian.

Let's move on to the next one, please.

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Operator [22]

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Carlos Cobo from Societe General.

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Carlos Cobo Catena, Societe Generale Cross Asset Research - Equity Analyst [23]

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Carlos from SocGen. I'd like to ask about the state guaranteed loans, the Eco loans. I'll explain basically what's the question about. It was surprising to see that some competitors didn't use them, and those loans were reallocated to the rest of the Spanish banks. I remember that you also received part of that. Why do you think those peers aren't using the guarantees?

And who, if you can say that, is it the foreign competitors, foreign banks mainly in Spain? Or who hasn't used them?

And that is kind of combined with the other 2 questions. What's your expected default rate? Because at the end, you are adding risk to the portfolio. We've heard some regulators in, I think it was the U.K. that say that default rates in this type of lending is going to be substantial as well. So eventually, even if they don't consume a lot of capital, they do increase the expected loss of the overall bank from the moment that you start to grow the exposure. So what's your thoughts on that, on expected losses in this portfolio? Even when you have the protection from the government, the book is growing.

I'm not challenging the idea that obviously you are protecting yourself, and it's very good for the liquidity position of SMEs. But I want to understand the extra risk that you are adding.

And finally, if it is not so much about expected loss. As you said, the corporate sector is piling up in liquidity and cash in your balance sheet. How should we think about lending demand next year? Do you see a fair chance of this expansion in lending being reimbursed for CaixaBank? Because eventually, this is just a liquidity cushion in the corporate sector. Part of that should eventually be reimbursed if the corporates are not investing, right? And that is kind of the whole question.

And lastly, if you could touch on the bargaining agreement with the unions, is that going to allow you to stop that 2% wage inflation that you historically have?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [24]

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Thank you, Carlos. There's quite a few points. In terms of the eco loans. Obviously, I don't want to speak for others. I think in the end, the eco loans shares have been reassigned in a way that have reflected the activity and the demand that each financial institution has had, because the initial allocation was based on market share, but the reality is market share is only an element.

And anyhow, we have used a good part of it, but we still have free capacity. I think that's good. This is still open. We're still seeing some new requests for eco loans, so 200, 300 a week, but it's come down from the sort of big numbers. And I think it will continue.

Then we have these new eco loans that have been approved up to 8 years for sort of CapEx and transformation of companies and other lines that come from the European Investment Bank and other lines that will be also associated to the next-generation pact that the EU agreed for 2021. All this gives us the ability to think that we will see, particularly if this money is coming and there is a strong push for a recovery, that we will see growth maybe in some of the segments, certainly, green in the economy, digitalization projects, et cetera, I think there's going to be, if public measures work, there's going to be demand associated to the recovery.

And therefore, we'll see sort of closing a chapter of demand associated to staying liquid, while the lockdown into something different. It's probably not going to be immediate, so we may have a couple of quarters of lower level of activity. On the other hand, the mortgage and the consumer lending clearly is picking up. You saw our numbers on that. But this is the overall sort of background. The exact numbers that put into that at this stage are difficult because we really need more clarity.

And with respect to the collective bargaining agreement, it's been agreed a couple of days ago. And I think it's a good agreement because not reaching an agreement was complex. We need our people, our people need us. We want our people to be motivated, we want our people to be productive. And at the same time, we have achieved a number of things that are relevant. We have achieved an increase of 0% for 3 years, '19, '20, '21, and an increase at 0.751% for '22 and '23. For a 5-year period, it's obviously a fairly low increase.

And then we have managed to achieve a number of things in these famous triennials or triennials. We have reduced the number from 4 to 3 on -- we have suspended part of the (foreign language) the extra payments for a couple of years. We have reduced some other sort of perks that made less sense. Hence, I think it's -- as always, when you reach a compromise, you don't get everything you want. But it's been a reasonable compromise, and it's a compromise that helps us, gives us stability on this front and help us also, I think, clearly reduce the pace of salary increases, and hence, reduces that problem you mentioned.

And I would say this is probably a first in these processes. Obviously, the current environment didn't allow for anything else. So we would not have settled for anything less than this. But now we have a good environment, and I think an environment that is consistent with allowing us to manage these crisis, become more efficient and obviously, save -- obtain cost savings that we need to do, and what we have explained would be over EUR 300 million next year.

There was a couple of further questions, Javier?

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

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Okay. Well, you were asking about loan demand next year. So unfortunately, this is a difficult question for us. Well, we have our scenarios. We believe in our micro scenarios, it's going to be sound credit demand because with GDP growing over 10%, I imagine -- I don't know what exactly is in the models of our research department. But behind this, we should have much better loan demand than this year, although this year has been supported by government guaranteed loans. So unfortunately, it's too early to tell you.

You had a question on the fall rate on, let's say, eco loans, that in other countries, it's supposed to be substantial in equivalent schemes. We don't think this will be the case. Actually, we have been lending to borrowers with whom we already have risk. So borrowers that we know well. So we have exposure with. We had the breakdown even by sectors, very detailed in our presentation. So we think that there will be some defaults. But we don't think that -- we don't share this view that you mentioned in other jurisdictions. At least that's my opinion.

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

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Okay, Carlos.

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Carlos Cobo Catena, Societe Generale Cross Asset Research - Equity Analyst [27]

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And you don't expect that part of this liquidity to be -- sorry, sorry, sorry, yes. I'll follow-up later.

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Operator [28]

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Mario Ropero from Fidentiis.

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Mario Ropero, Fidentiis Equities S.V.S.A., Research Division - Senior Banking Analyst [29]

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My first question is, since you are assuming a macro scenario similar to the worst-case of the Bank of Spain 2020, but a much better macro recovery in 2021. Is there a way you can give a bit of a cost of risk sensitivity to different GDP growth recovery scenarios in 2021?

My second question is, could you please tell us a bit about the drivers behind the strong growth in life insurance income contribution in the first half despite life business volumes doing generally poor in the sector. Is it simply because the MyBox product is working super? Or any other insight you can give?

And finally, if I may, just to clarify, Gonzalo, you said that the cost savings are structural, and that means that 2021 costs will be below 2020. Can we assume that?

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

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No. I couldn't hear the last question.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [31]

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The last question was -- he was asking would the 2021 costs will be below 2020? That's not the case.

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [32]

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No, no, no, it's below

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [33]

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below 2019, Mario.

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Mario Ropero, Fidentiis Equities S.V.S.A., Research Division - Senior Banking Analyst [34]

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All right. All right. Okay.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [35]

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And then the other 2 questions, there was a cost of risk sensitivity and the insurance resilience of revenues.

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

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If I may? Okay. On cost of risk, our view is that clearly, loan loss provisions in 2021 will be lower than in 2020. So this, clearly. And it's true that, as you say, there is a strong recovery forecasted for next year, for 2021. But the loan loss provision cycle does -- is not exactly the same. So the peak -- actually, the peak in nonperformings probably will be precise in 2021. But as we have front loaded, at least according to our models, all this COVID-related impact, we think that provisions for 2021 will clearly be lower than in 2020.

On fees. Well, on fees, I would say, recurring banking fees, you show that approximately down by 15% quarter-on-quarter and year-on-year. In this, there is strong impact from e-payments, everything related to credit cards, et cetera, and merchant acquiring. This is recovering fast, as you saw. So this is a clear positive. And you are observing that week-by-week, we are doing better on this front.

Then we had a slowdown in some fees, wire transfers, et cetera, because activity in general was more subdued during the lockdown, but this is also gaining pace, clearly.

And then in AUMs, well, first, the good news is that we are having inflows. We have had inflows year-to-date. Thus, this means that our clients are confident with the advice we are giving her or receiving from us. So seeing very positive momentum on this front. And also, we are observing a very good month of July so far on this business. So markets permitting, I would say, that looks better for the rest of the year.

We had very strong first half in CIB. Probably this pace is not sustainable in this front. This is part of our business, not the major part, as you know. But so far in the first half has helped us to cushion a negative evolution in other parts.

And then everything related to insurance. I hear -- we need to distinguish between online, which is usually fees. And this was affected markedly during the lockdown. But at the same time, now we are seeing a very strong recovery.

And I mentioned it in my presentation, but there is like a general feeling amongst our customers for the need of further protection after what has happened in recent months. And we think that we will do well on this front with Adeslas, the largest health insurance company in Spain. Well, by distributing those products, we think that we will be clearly improving in coming months and quarters.

And then on life-risk, you mentioned MyBox. Well, MyBox is doing extremely well. So it's -- we are so happy. It's -- actually, we had a very upbeat view for this product and this business in life-risk for 2020. Unfortunately, it's not that positive. But our view is that we may end the year with this line having at least a small positive, at least flat, but I would say even slightly positive. So it's in the same pack with what I commented before about protection, all those kind of things are now, let's say, very well received by customers, and we think that we are the best prepared for it and we'll do very well. Thank you. Mario.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [37]

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Okay, Mario, I hope that answers your question.

Regarding sensitivity to GDP. We have that information in our annual report. It's around 5 basis points per point of GDP, and that's more or less what has actually happened. Obviously, it's not linear, but that's the public information we can share with you.

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Operator [38]

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Sofie Peterzens from JPMorgan.

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Sofie Caroline Elisabet Peterzens, JPMorgan Chase & Co, Research Division - Analyst [39]

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It's Sofie from JPMorgan. So my first question would be around money laundering re in BFA in Angola. A couple of weeks ago, there were some press headlines around the former Vice President at BFA, who had been warning the regulator about money laundering risk in the bank. So my question would be how do you think about money laundering risks in BFA in Angola? How are you taking this into consideration? And what have you done to improve any AML checks there?

My second question would be around your assumptions on real estate prices in Spain. You mentioned that you forecast around minus 14% decline in GDP, but how should we think about the impact on real estate prices? What kind of real estate price assumptions have you assumed?

And then my final question would be on payment holidays in Spain. Could you just remind us how long are they for consumer products? How long are they for businesses? And how long are they for mortgages? When should we expect these to roll off?

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

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Thank you, Sofie. AML and BFA in Angola. We are a financial investor in BFA since actually at the moment we took control of BPI. And we do not participate in management, in any executive positions. There have been resignation about 1 particular issue. We have fully supported the fact that the regulators should need to be informed, and the regulator in Angola is conducting an investigation. We'll have to see before we have an outcome from that point of view. But there's no involvement from us.

And obviously, on the other hand, we at BPI have reviewed all procedures where we controlled, and we're very confident that BPI and AML matters has complied and continues to comply with all relevant regulations.

The question on moratorium, maybe very quickly. We're talking about -- for consumer. It's a 6-month moratorium with 3 months of payment and principal moratoria -- sorry, interest and principle, and then 3 months of just interest being paid. In the case of mortgages, it's 12 months. Again, the first 3 months is principal and interest, and the last 9 months is a moratorium of only principal, so you have to pay interest. And there are not really any significant business moratoria granted in Spain. The situation is slightly different in Portugal.

And, Javier, do you want to complete and take the other question?

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

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Yes. Also, you had a question on our assumptions on real estate prices. You have all the details in the annex of the presentation on Slide 32. But as I commented, we are considering a negative impact in real estate prices in 2020 of 5.6% and minus 2.3% in 2021. And precisely because of this, is why part of the reserve built in -- for COVID is also going to Stage 3 as there is a larger loss, even default, because of you have a loss in the value of collateral. So this is the main assumption.

And in Portugal, it's slightly better. It's minus 4.1% and minus 2.6% for 2020 and 2021, respectively.

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Operator [42]

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Andrea Filtri from Mediobanca.

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Andrea Filtri, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [43]

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Yes. Just very brief. What is the PPI -- BPI drawdown on PPA in Q2? And how much is left?

And are you seeing any slowdown in the recovery of activity in the latest days, given the pickup in COVID cases?

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

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Yes, maybe I'll take the second question. At a national level, there's no slowdown, but there is some slowdown and in particular areas where the incidence is higher in Spain. So overall, the numbers are not changing. But when you get an area that is fairly affected, you see some reduction of the level of activity, and particularly of payment activity. All in all, at this stage, we're seeing a very good month of July, but there will obviously be changes region by region.

And with respect to the PPA in BPI.

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

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The PPA left in BPI stands at EUR 124 million. And what has been left in the second quarter is EUR 23 million -- what has been used, sorry.

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Operator [46]

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Ignacio Cerezo from UBS.

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Ignacio Cerezo Olmos, UBS Investment Bank, Research Division - Executive Director & Equity Research Analyst [47]

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A couple of things, actually for me. The first one is on the eco loans. If you can give us the all-in lending to once we have already incorporated the fee we pay to the government.

And then in terms of the asset quality, also related to eco. I think Javier mentioned that there is a big amount of these loans, which are going to the sectors which you expect the higher impact. Are you being able to roll back existing back book under the guarantee as well? Or it's incremental credit you're giving to those comments?

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Javier Pano Riera, CaixaBank, S.A. - CFO [48]

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Ignacio. Well, the all-in yield is approximately 1.4%. So the cost of the guarantee is approximately 30 basis points for a gross yield of 1.7%. So this is the -- more or less the average. Well, it's mainly incremental lending. It's incremental lending because -- but what the money is fungible. And over time, time will tell. But as of today, it's incremental lending.

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [49]

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Obviously, there is some impact for someone is having a maturity in 6 months. It's taking the opportunity to raise cash now and have cash to turn that maturity. So as Javier was saying, money is fungible. And clearly, there's positive impact. I want to emphasize that eco loans. Let me just make sure that you understand what we're doing. We have our clients classified according to the risk pre-COVID, then we had areas or sectors in which they operate and have an indication of risk, post-COVID.

So you have a matrix where you have clients that are low risk and are in low-risk sectors. They go into motorway and probably get a loan without an eco guarantee. Then you have the opposite, clients that were high-risk and any high-risk sectors, they probably will not get support or they will only get support after a proper detailed analysis where, clearly, we come with a solution that defends our position and helps their situation.

And then you have, obviously, all the clients in the middle. And depending on what kind of risk they had pre-COVID and what kind of risk they are adding post-COVID, we will act one way or the other.

So this is not a free for all. We had the mandate by law to analyze properly the credit quality of who was asking for loans, and we've done that. Obviously, we understand that there will be loan losses associated to that. But I think we have done things properly. Our market share in eco loans in terms of volumes based on the last numbers published is 13%, 1/3 -- no, sorry, not 1/3, 1-3. Which is actually below our market share and overall business lending.

We've been careful. We've done what we had to do, but we have been careful as well. And I think we're not going to see this becoming a large part of a problem. There will be losses. There's no question. I think they will be manageable.

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Operator [50]

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Britta Schmidt from Autonomous Research.

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Britta Schmidt, Autonomous Research LLP - Non-Designated Member [51]

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Yes, there's 3 questions for me, please. The first will be, how do you find the core operating jaws? So with regard to your comment over revenue drop of not more than 2%, what will be included in there? And if I piece it together, would it imply that you expect fee growth for 2020?

The second question would be on capital, do you have any intention of applying the prudential filter in your CET1?

And then lastly, what are you thinking about in terms of M&A? There's been a lot of talk in the press about potential M&A in Spain with some companies that are struggling a little bit more. You said you were growing your market share organically, but would you have any interest in participating in M&A? Or would this be definitely no?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [52]

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Javier, maybe you start with the first one.

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Javier Pano Riera, CaixaBank, S.A. - CFO [53]

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Okay. Well, our core operating revenues and costs, I think, that are very well-defined. On core revenues, it's NII, plus fees plus premium from life-risk plus equity granted from several Caixa Adeslas. So this is core revenues. And operating costs are the operating costs.

So when we say that we are aiming for positive operating jaws, is that if we have, let's say, minus 2% in costs, then we will have at least minus 1.9% or 1.8% or 1.7% or minus 1% in revenues. So this is the definition. I think that there is -- we have been quite transparent on this in the past.

And then on the prudential filters for -- I imagine that you are referring to the OCI in terms of ALCO portfolios, et cetera. Initially, we are not planning to use them. So if this is the question.

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [54]

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Thank you, Javier. Britta. In terms of M&A, our position has not changed. We like what we're doing on a stand-alone basis. Actually, what we have done in these 6 months in terms of market share gains give us further confidence that there's a lot we can do on our own. We see actually very big crisis like this one, and we see that we are liquid with good capital levels, that we have front-loaded provisions, gaining market share, and I see a great opportunity for us. So that is the base case.

As always, I said, if there are opportunities at some point that come to us, our duty to shareholders is to analyze them. And we would do so. But our central scenario is to continue the way we are, and we like it. It's not that we see what it's coming and we think that we have a problem and then we need to move nonorganically. No, I think we have a great opportunity. And hence, nonorganic would only be analyzed if and when there's an opportunity, if it's even better than our central scenario.

Nothing new from what I think I've been responding whenever I get this question for the last few years.

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

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I believe we have 3 more on the line. So we do have time to finish them off. Could we have the next one, please?

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Operator [56]

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Marta Sánchez Romero from Bank of America.

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Marta Sánchez Romero, BofA Merrill Lynch, Research Division - Director and Analyst [57]

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I've got several regarding your residential mortgage book. The NPLs there are very sticky, EUR 3 billion, roughly. They've actually gone up the bit over the past 12 months. What are your plans for this book? Do you expect any impact from kind of provisions on the stock? And do I understand correctly that you've already captured fully your new scenario of lower housing prices in Spain?

Also related to this, the density of your residential mortgage book in terms of more credit risk. Is this still low compared to your peers? Do you expect changes here as well?

And then on your residential -- on your rental portfolio. Is this coming down? Slowly, it's still EUR 2 billion. Can you give us an update here? Have you granted payment holidays on your rental portfolio? And how that may impact your revenue line?

And more broadly, just finally the -- on payment holidays. How much of your book under payment holiday is contributing to your net interest income at the moment?

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [58]

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Thank you, Marta. Lots of questions.

I would say, in terms of our mortgage portfolio, generally, the RWA weighting reflects the extraordinary quality of the portfolio. We -- you know Bank of Spain does published figures about what is the percentage of production that is made at rates above 80% loan-to-value or over 100% loan-to-value. And we appear in all those statistics as an outlier on the positive side. We've been extremely conservative in the residential mortgage portfolio. And it's a better mortgage portfolio, in my view, than the average of others. And I'm not surprised it results in lower density.

I'm sure that Javier has things to add, but I think at least that point is important to make. This is not -- not all mortgage portfolios are equal. You see how our mortgage portfolio has been coming down consistently over the years. And this is obviously not because we couldn't grow this portfolio, it's because we were selective as to where to grow. It's a matter of price, we've explained, but also clearly a matter of risk structure.

In terms of something you mentioned, the rental waivers. What we have done is actually forgive the payment for the months under the state of alarm, where people were in lockdown and for people that were heavily affected by it. So this is socially, we were not forced by law. We could have done moratoria, et cetera. But in this case, what we decided is that we would act in this way. It's obviously been very well perceived. We have had this on a little below 5,000 houses, and we're talking here about a very small impact, in the single-digit sort of euro million.

And we are getting back once the lockdown has finished. In July, we are forgiving just 50% of the rent, and then it will come into normal payment after that. Obviously, there will be people that will not be able to pay. There's a part of our social portfolio here which we are managing with care. But I wouldn't think, because of the size of all these leases in any way, something that is going to be material for our revenues going forward.

At least, I want to make those comments. And maybe, Javier, you can complement.

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Javier Pano Riera, CaixaBank, S.A. - CFO [59]

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Marta, well, on the -- what you mentioned on the low density on mortgages. Well, I have here some prepared figures because also, I understand that this has to do also with moratorias on these portfolios, et cetera. It's the following, and you can do your own numbers according to public information.

But if you look at PVs from IRB models for individuals for CaixaBank, PV is [1, 16%]. And our peer average is [1, 43%]. So this makes a difference. And this, as Gonzalo was commenting, is because the underlying quality of our portfolio is better than the average. And as a consequence, we have a lower density in our risk-weighted assets.

So -- and this is also a key element of what makes us confident about our moratorias because the underlying quality is a good one, and this is one number that I can share with you. And together with LTVs that are much probably lower than the average here. I don't have the data to compare. But at least for moratoria, for example, LTVs are 54%, and our book average is 53%. So it already tells you that there is not really much difference, and this is where we feel comfortable with this situation.

And regarding NII and payment holidays, we keep on registering NII on those loans under legal moratoria because you know that for voluntary moratoria, it's only for principal. And in this case, for legal moratoria, we have had an upfront impact, a negative upfront impact, that year-to-date has been EUR 48 million in loan loss provisions that is compensating for the -- let's say, the PV that -- of the loan that has been affected. But in terms of net interest income, we keep accruing. Thank you, Marta.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [60]

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Marta, I hope that answers your questions . We can follow-up. Otherwise, at -- sorry, go ahead, Marta.

Okay. We'll follow-up afterwards.

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Operator [61]

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Fernando Gil from Barclays.

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Fernando Gil de Santivañes d´Ornellas, Barclays Bank PLC, Research Division - Research Analyst [62]

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Two questions, two quick questions, please. I wonder if you could give an update on the strategy and valuation of the equity Holdings, BFA, Telefonica and Adeslas? And what's the take on Adeslas? And how are you thinking about replacing the earn-out ending this year?

And finally, what is the accounting of Telefonica to get dividend is going to be in this year? And this is the first part of the question.

And the second one is what are the KPIs that you're using on the following of the moratorias that are not mortgages? Just to try to understand how you -- how fast you recognize these trends going on.

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [63]

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Javier, do you want

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Javier Pano Riera, CaixaBank, S.A. - CFO [64]

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The second part on the moratoria

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [65]

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The KPIs we're using to track the portfolio of consumer debt moratoria.

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [66]

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Okay. Fernando, thank you. I'd say, obviously, Adeslas is a great asset we have in particular. And in this environment, is a - it fulfills a very important mission. And I think it has pretty good prospects. Where we have a great relationship, great joint venture here. And I think the company continues and is going to continue to be a source of earnings and certainly of fees for us. And I think, overall, it's a clear opportunity for them. And I think on -- and this year on claims, et cetera, they are offsetting well claims related to COVID with lower claims related to other illnesses, which is what's happening. And I'm hopeful for seeing a pretty good evolution.

Telefonica accounting of the dividend, maybe you want to?

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Javier Pano Riera, CaixaBank, S.A. - CFO [67]

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Yes. Well, on Telefonica, you know that this year, Telefonica has changed the dividend policy. So the -- although they have announced the intention to pay a second dividend, it has to be confirmed by the Board. Does -- once it is confirmed, then we will register this dividend. But so far, this has not been the case.

In previous years, it was the general meeting that already was announcing the two payments, and this time is different.

And you had the question on equity holdings. Well, actually, in terms of BFA, I would like here to mention that we have registered a dividend from BFA, EUR 40 million, and it has already been paid in hard currency, 80%. So -- as of a few days ago. So on this front, I would say that this is positive news. We don't have major changes this quarter in our fair value -- in the fair value of BFA because we're, actually according to our dividend discount model, valuation -- the evaluation was supporting the new data. We had a reduction in local yields, and we had different aspects that were doing better, so no further adjustments were needed.

I think that with this, we cover -- you had a question on our KPIs on moratorias here. Only to emphasize that 60% of the loans that are under moratoria are being billed. And 95% of those are paying the monthly installment. And well, this has a phasing process. And by October, all will be being billed because there are different moratoria vintages to some extent. That's -- we are monitoring this as close as possible.

And also internally, if I may say, we have organized things in order to be extremely close to the ground to the situation, in order to monitor those payments really closely.

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [68]

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And if I may, Fernando, on managing consumer moratoria. Generally, our consumer book, this is the first crisis where AI, artificial intelligence, is now playing in a large role. We have plenty of data, and we are using all the data we have on our clients to know who is likely to have a problem and act accordingly in advance. That's why you see more moratorium than other institutions. We have been selecting those clients based on their profile on their -- well, we know what happens to their income and we know plenty of other information on our models. So we know who is likely to have a problem. And obviously, we would rather be proactive and preempt that problem by offering appropriate solutions.

This is clearly the case for consumer lending, where we are obviously focusing on making sure that people are in a moratoria and are going to end at moratoria starting October. We know who is likely to have a program and who is not likely to have a problem and start managing it before we have a default.

I think this is going to be different from that point of view for those institutions like us that have the ability to use AI properly and have the models, and also then have the ability for those models to feed into actions taken by the branches. Obviously, also by specialized companies that help us in the recovery process. But because this is more massive, you need to have the branches as really knowing who is likely to have a problem and making sure they avoid it.

And that's certainly the plan. So far, so good. As Javier was saying, in the month of July, we had close to EUR 3 billion of mortgage moratoria in this case, that turned into sectorial moratoria, and hence, they had to pay interest. And was the first time that would be billed. And the reality is we have now more than 95% of these people that have paid, and we will get further above that level in the next few days.

So things are working well. The whole bank is prioritizing precisely asset quality. And I feel good about us not only having given good loans at the beginning, but also now having the appropriate follow-up process to make sure that we are paid, and where there's a problem, that we find a solution that avoids at least the worst case, where it's that we get no money back from a client.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [69]

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And we can move on to the last question, please.

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Operator [70]

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Alvaro Serrano from Morgan Stanley.

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Alvaro Serrano Saenz de Tejada, Morgan Stanley, Research Division - Lead Analyst [71]

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Three, hopefully, yes, quick, yes or no questions.

On the fees, just want to make sure I've understood. You mentioned in your presentation that June fees were now flat year-on-year. Is that a good proxy for the rest of the year? Because if I take second half fees and assume they're flat year-on-year, I get to plus 1% for the group fees. And I realize consensus is minus 3%. So is that a reasonable assumption or estimate?

And then 2 clarifications quickly. On NII, I think you said, Javier, that it would be -- in the second half would be above Q1. Obviously, TLTRO is coming in the coupon. Should we not assume that it's going to be above Q1 and Q2? I don't know if there's any nuance there that I should be aware of.

And the other one is on capital. You've given the moving parts, but if you're going to make profits and now that the inflation is going to be limited, any reason why fully-loaded capital should not grow in the second half?

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Javier Pano Riera, CaixaBank, S.A. - CFO [72]

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Okay. On fees, well, time will tell. So probably your assumption is optimistic. But I think that we are going to do well in the future. We are quite optimistic on the future evolution. I mentioned I had a long answer to one of the questions elaborating a little bit, and we have plenty of areas where we are seeing very positive momentum. But clearly, time will tell.

Also the last year, if I remember where we had an exceptionally good third quarter. It's always a difficult quarter to forecast with the holiday season. This year is different, holidays are also different. So time will tell. But we have quite a positive view on the evolution in some areas.

On NII, well, is what you say. We have TLTRO3. This is -- by the way, just to clarify, we are accruing minus 87 basis points because there is the average of different lengths and different vintages of TLTROs. And as a headwind, I mentioned, we have the leveraging in the consumer loan book, to what extent, this is one we reversed. And second, cash balances. So to what extent we can handle this cash balance situation. So those are the main caveats.

So what I said is we have done better in the second quarter than in the first one. And I think that the base we have in the second quarter is something that may be sustainable for the third and the fourth.

And in capital, sorry, but I am missing now exactly the question. Can you help me out? I was about capital distribution?

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Alvaro Serrano Saenz de Tejada, Morgan Stanley, Research Division - Lead Analyst [73]

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Is it fully loaded capital -- is fully loaded CET1 going to grow? Is CET1 fully loaded going to grow?

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Javier Pano Riera, CaixaBank, S.A. - CFO [74]

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Going to grow. Well, you have the impact from the transaction announced today with global payments, this is fully loaded. You have the positive impact from software intangibles. This is going to be also fully loaded. And then, well, it's a normal course of business. So the only question mark here is to what extent we face any potential impacts from TRIM this year or not, and the final amount of this impact, which is still unknown. I would say that is probably the main question mark for me while making this forecast. I don't know if this helps you, Alvaro.

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Edward O'Loghlen, CaixaBank, S.A. - Director of IR [75]

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Okay. I think it's a 1/4 past 1, so let's call it a day. Thank you very much, everyone. And I hope you have a great summer, and we'll reconvene in a quarter.

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Gonzalo Gortázar Rotaeche, CaixaBank, S.A. - CEO & Executive Director [76]

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Thank you very much.

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Javier Pano Riera, CaixaBank, S.A. - CFO [77]

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Thank you.