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Edited Transcript of Caixa Geral de Depositos SA earnings conference call or presentation 3-Feb-20 2:00pm GMT

Q4 2019 Caixa Geral de Depositos SA Earnings Call

Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Caixa Geral de Depositos SA earnings conference call or presentation Monday, February 3, 2020 at 2:00:00pm GMT

TEXT version of Transcript


Corporate Participants


* Bruno Miguel Cordeiro da Costa

Caixa Geral de Depósitos, S.A. - Head of IR

* José António da Silva de Brito

Caixa Geral de Depósitos, S.A. - CFO & Director


Conference Call Participants


* Samir Alaudin Adatia

Citigroup Inc, Research Division - Research Analyst




Operator [1]


Welcome to CGD's conference call. This call follows the fourth quarter 2019 results, which were released last Friday. It is possible to follow the earnings presentation from the CGD website.

The CFO, Mr. José de Brito; and the Head of IR, Mr. Bruno da Costa, will guide you through the presentation and a Q&A session will follow.


Bruno Miguel Cordeiro da Costa, Caixa Geral de Depósitos, S.A. - Head of IR [2]


Hi. Thank you. Good afternoon, everybody. Welcome, once again, to our results conference call. My name is Bruno. And we released last Friday, 31st, the full 2019 results. It's not yet the audited accounts. Those will come later. But we would like to share with you some of the main achievements that CGD conquered during 2019.

With us, as usual, we have our CFO, Mr. de Brito. So I will pass to Mr. de Brito right away, so he can guide you through the results presentation, which you can find both on our website as well as on CMVM's website.


José António da Silva de Brito, Caixa Geral de Depósitos, S.A. - CFO & Director [3]


So good afternoon, everybody. Thanks for joining this call. So I will go through the presentation, and then we have the Q&A session. And I will ask you to start on Slide 5 where we have the main highlights from the 2019 accounts.

Starting with the consolidated net income, which reaches EUR 776 million, an increase of 57% over 2018. This net income includes an extraordinary result of EUR 144 million related to the sales of international subsidiaries, not only the ones that were already concludes but also with the process that are on course.

So we also highlight that the recurrent net income reaches EUR 632 million, an increase of 27% over last year. This translates in a return on equity of 8.1%, exceeding the management target for 2019.

As you will see during the presentation, we highlight the recurrent net income and not the consolidated net income due to the extraordinary nature of those EUR 144 million.

In terms of capital, our fully loaded CET1 reaches 16.8%, including the result -- including the net income of 2019. And the total ratio reaches 19.3%, which is a strong signal of the -- of Caixa's robust and adequate capital position.

We also highlight the significant growth in Portugal corporate loans, which reverses the trends from the previous years. And in this year, we achieved a growth of 6.7% in corporate loans. As usually, we excluded the construction and real estate sectors as these 2 sectors concentrate the majority of the NPLs, so that's the reason why we exclude those 2 segments.

Also in terms of new mortgage loans, an increase of 33% in the new production not in the stock, as you will see, but in the new production, which leads also CGD to become market leader in terms of new mortgage loans production.

Also in terms of NPLs. Our NPL ratio in the end of the year reaches 4.7%, below the target, the management target of 5%, with a very significant coverage by impairments, which reaches 77.4%. Considering these 2 elements, we will see that NPL ratio net of impairments reaches 1.1% already below the European average.

Also to mention, as you already know that there was the conclusion of the sale of our subsidiaries in Spain and South Africa, and we proceed with the sale of the subsidiary in Brazil and also 1 of the subsidiaries in Cape Verde.

During 2019, we also have some impacts on capital that are already translated into those ratios. Coming from the pension fund, as you will see, due to the list to adjust to the discount rate of the liabilities to the market rates.

Finally, as this is the year-end accounts, we also mentioned the 2 rating upgrades that we have during 2019 from Fitch Ratings and DBRS. Also, the change in the outlook from Moody's.

On Slide 6, we have the achievement in terms of the main financial targets for the group. And as you can see, we are successful in all of them, with a return on equity achieving 8.1%, below the 7% target -- above, sorry, above the 7% target; the cost to income of 47%, below the 50% target; NPL ratio, 4.7%; and the CET1 of 16.8%.

You will notice that the management targets for 2020 are unchanged from what we presented last year in spite of the good performance of 2019. And the reason for that is that those targets are in line with the strategic plan targets. So we don't see any reason for changing those.

Nevertheless, it is our strong belief that in some of them, we will address the targets with a substantial margin, which is the case of the NPL ratio and the CET1.

So moving to Slide 7 is just the wrap-up of the changes in the international footprint of CGD since 2017 and highlighting the sales that were concluded in November and in October. In November '19, we did 2 subsidiaries because these are very important milestones in the implementation of our strategic plan.

The following slides, I wouldn't go on the detail, but it's mainly to mention the successful implementation of the digital platform strategy that CGD are investing with a very significant progress, which makes also CGD market leader in Portugal in terms of digital platforms.

Slide 8 shares some data on the -- this leadership. On Slide 9, we have some prices and the improvement on the different offers and services that our clients can have through our digital platforms.

Also, on Slide 10, we have the increase in terms of turnover through not only the digital platforms but also through the phone banking.

On Slide 11, we have the market shares for the group and also some prizes and distinctions. In terms of market shares, what we can see is that they are pretty much stable. I will just highlight a small increase in terms of the investment funds market share in Portugal. The others are pretty much stable, a small decrease in terms of the credit market share with -- because of some things that I will explain later, namely the early redemption of credit loans from some public entities.

On Slide 12 also, some commercial initiatives that took place during 2019. Here, I highlight the increase in new mortgage loans and also the continued success of Caixa accounts, which is a bundle of products and services that we launched back in 2017.

On Slide 13, we have some detail on the Caixa's sustainability strategy that was launched in the end of 2017. And here, we detail some of the projects and the initiatives that took place in 2019, and some of them continue for 2020.

So I will go directly to the results. On Slide 15, we have the graph that shows the improvement in CGD's profitability. As you can see, since 2017, there's a very sustained progress in terms of return on equity, which increases 1.5% since last year, achieving 8.1% in 2019.

If we move on Slide 16 to the quarterly evolution. And once again, we exclude the extraordinary results that took place in different moments. In the first -- in the second quarter, sorry, we adjust the provisions for the sale of those 2 subsidiaries, provisions that were made in 2017 after the recapitalization. In the third quarter, we have the closure -- sorry, we have adjust also to the reserves that were in terms of fair value for the -- those 2 subsidiaries. And in this fourth quarter, we also adjust the currency reserves, especially in terms of the subsidiary in South Africa and also in Brazil. That's the reason why we have extraordinary results in any of those 3 quarters.

So if we look on the chart on the right-hand side, can see that we have a 27% increase in terms of current net income.

If we look at the core operating income, which is just considering the net interest margin, the commissions and the current costs, we will see a small but positive trend, just 1% increase since 2018. And of course, this has to do with the pressure on net interest margin, which you can see on Slide 18. In fact, due to the low interest rate environment, our net interest margin decreased by 4.3% in consolidated terms and by 7.1% in the domestic activity. This was impacted not only by the low interest rate environment but also by substantial early redemptions of credit loans from public entities, which, for the whole of 2019, accounts by more than EUR 2.1 billion of redemptions, of course, making some impact on net interest margin especially because, as you can understand, in the small market like Portugal, it's not easy to replace such a huge amount of credit loss.

On Slide 19, we have the evolution on net fees and commissions, an increase of 4.6% over 2018. Sorry, just going back to Slide 18, it is important to mention that we continue to expect some decrease on the net interest margin for 2020, especially because, of course, the impact from those early redemptions. In 2020, we will have a full year impact and also because due to the fact that the majority of our assets are on a slow rate basis. Some of the repricing is not totally impact on 2019, so we can expect still some decrease if the market rates stay as they are today.

By the contrary, in terms of net fees and commissions, we could expect continued growth for 2020 as we are seeing an increase in terms of business volumes, but also some -- the recent revision in the price of some of our fees and commissions will have a full year impact whether in 2019, the impact was just in the last quarter.

Finally -- sorry, on Slide 20, we have some detail on which items increased more in terms of net fees and commissions. This is just for the domestic activity. And as we can see, the majority of the increase is coming from securities and asset management and also from Bancassurance, which means that this is due to an increase in business volumes rather than an increase in prices.

On Slide 21, we have the evolution of costs, an overall decrease of 2%, of which 6% in employee costs, 8% in other administrative expenses and an increase of 57% on depreciation and amortization. As you know, part of the decrease on other administrative expenses is the explanation for the increase of amortization because this is due to the implementation of IFRS 16, which moves the rents to amortization, so decreasing the administrative expenses but increases -- increase on the same -- more or less on the same ground amortization. Nevertheless, a decrease of 2%, which I think is still significant, especially after 2 years of substantial reduction in operating costs.

And as an example, we have on Slide 22, the evolution of several high-cost items since the beginning of 2017 until the end of 2019. And as you can see, there are very significant reductions, which means a substantial increase in the efficiency of our operations. Of course, these are ordered by their impact in terms of the size. Of course, the biggest contribution to these cost savings is the reduction of employee costs.

So by that, we were able to decrease the cost to income to 47%, which makes CGD one of the most efficient banks in Europe. And even if we consider just the cost-to-core income, once again, net interest margin plus commissions minus current costs, we see a stabilization of the cost-to-core income at 56%.

On Slide 24, we have the evolution of the number of employees, which, as you know, is also an important element of our strategic plan. In 2019 -- and this is only for the domestic activity. In 2019, we have a reduction of 575 employees, which makes the overall reduction since the beginning of 2017 around 20% of our staff, which I think is very impressive. Of course, in 2020, we need to continue this movement, and we need to have a reduction of an additional 475, more or less, to achieve the target on the strategic plan.

Slide 25 is just a detail of the movements in the provisions and impairments. Just to clarify that, a substantial part of those movements are coming from the extraordinary results, namely the 2 at the bottom, which is we have a reversion of EUR 160 million from the international subsidiaries. We also have a reversal of EUR 40 million on the staff reduction provision. But this has no impact to net income because we reversed the provision, but we have the same in terms of the cost line. And what we can consider current provisions and impairments are on the top of the page where I would highlight also the credit impairment, which has a net reversal due to the very low cost of credit risk and showing that this has mainly to do with some NPLs that become huge after the quarantine period, and so the impairments were released.

In overall in 2019, we have the total current provisions were just EUR 27 million, which, of course, we are fully aware that this is a very low level. But it has also to do with the interest rate environment in the market.

So as a breakdown of the net income. The consolidated net income of EUR 776 million includes extraordinary results of EUR 144 million. So we have EUR 632 million. The total operating income increases EUR 126 million, 7%. The net operating income before impairments increases 19%. Core operating income increases 1%. Net provisions and impairments with a limited expression just EUR 27 million. And as we will also see an increase in the international net income of 19%, and the domestic income reaches EUR 449 million, an increase of 32%.

And it is the international activity precisely that we have on Slide 27, with the contributions from the different geographies. I would say, overall, a very positive evolution. Nevertheless, we have some challenges in some of those geographies.

The last line, the other, includes not only the subsidiaries already sold because they contribute during 9 months to the consolidated net income and also the subsidiaries that are in the final stages of the sale process. But overall, positive evolution, 19%, which we think is quite positive.

So moving to the balance sheet on Slide 29, we have the market shares of CGD in Portugal. As I already mentioned, pretty much stable. I would highlight the market share in terms of customer deposits, 25%, of which 29% in households and also the mortgage market share of 24%. There's a small reduction in the total loans and advances market share to 18%, also impacted by the early redemptions of the public entities.

On Slide 30, we have the detail of the evolution of customer resources where we can see a substantial increase in deposits, especially from households but also from the other segments, corporate and institutional. And also to highlight the funds, the increase in terms of investment funds, which is also very expressive. The decrease in terms of bonds and treasury bonds has much to do with the redemption of subordinated bond that Caixa issued about 10 years ago and that by that time was placed in the retail market. That was -- achieved the maturity in May, so that's the reason why we have this debt decrease.

On Slide 31, we have the evolution of credit stocks. These are the gross book. And as you can see, we have a very substantial decrease in terms of the general government and others, which shows what I already mentioned, those early redemptions of EUR 2.1 billion. And in fact, it impacts substantially the stock of loans and advances. Also with impact in this item, the reduction of NPLs as these are the gross exposures.

On Slide 32, we have on the left hand, the evolution of the gross loans to corporates, excluding the construction and real estate where we can see a 6.7% increase. This is especially important. It changes the trend from the previous years. And it also shows performance above the market. We continue to see that the Portuguese corporates continue to deleveraging in terms of bank loans. So it is important to have this evolution, which is quite positive.

On the right hand, we show the most dynamic sectors, of course, which has pretty much to do with also the trends in the Portuguese economy.

Also on specialized credit on Slide 33, we have the evolution of the new production of factoring and confirming and also leasing transaction.

Finally, on Slide 34, we have the evolution on the production of mortgage loans, a 33% increase and above all, also a very sustainable trend in line with the Portuguese market trend also.

So moving to asset quality. On Slide 36, we have the evolution of the cost of credit risk. It is important to mention that some banks operating in Portugal were already presenting negative cost of credit risk in the last 2 years. This is the first time that CGD shows a net reversal of impairments, credit impairments. But of course, it's also a reflection of the good evolution on the Portuguese economy and of course, also the low level of interest rates, which is helping the corporates and households to fulfill their obligations with the banks -- with the banking system.

On Slide 37, we have the evolution of the asset quality ratios and the decrease from 6.7% to 3.9%. This is all -- all of them applying the EBA ratios, the EBA standards, definition. On the NPL reduction from 8.7% -- sorry, 8.5% to 4.7%. And on the last, one, the coverage by impairments where we can see a 77.4% coverage by impairments, which is very, very significant, and we think it's a very important element also to access the risk profile of CGD. If we consider also the value of collateral, we will see a full coverage above 117%.

On Slide 38, we have the main drivers for this NPL reduction, which is more positive than in the last 2 years, being the cures and the cash recoveries, the 2 main drivers for this.

The NPL net of impairments are just at EUR 600 million translated in a ratio of 1.1%.

On Slide 39, we have the evolution of the foreclosed assets, a decrease of 45%. And if we look at the end of 2017, we have reduced almost half of the stock. Also to mention the increase on the coverage by impairments.

For the first time, we are also presenting the evolution of the investment properties on the consolidated balance sheet, a very substantial decrease in 2019, 77%. This has to do with the sale of several real estate funds that we have in our balance sheet and that was sold during 2019. This is also a very important element, especially for rating agencies. And in fact, this is also one of our commitments to decrease the noncore assets on our balance sheet.

Also, on the right side, the corporate restructuring funds, a decrease of 14%. This is a more rigid asset that we will continue to make our efforts to reduce this type of assets in the balance sheet.

So moving to liquidity. On Slide 42, we have the ECB funding. The group continues to have no funding from ECB and a very comfortable pool of eligible assets. The reduction from '18 to '19 has also to do with the sale of the Spanish subsidiary. But even though it is a very comfortable buffer, this is the assets that are already pledged in ECB net of haircuts and valuations because the group has, I would say, almost the same size of assets outside the pool that are also eligible for ECB.

On Slide 43, we have the maturity. The wholesale debt maturity profile, as we can see, a very light profile. Year-on-year of 2022, we have the AT1, just assuming that the call is exercised, but of course, this is something that will be decided later on, also with the need to have the approval from the regulator. But for the evaluation of the liquidity profile, we decided to put the AT1 here in the year of the call.

On the right side, we can see that the eligible pool is covering the wholesale debt by close to 2.5x.

On Slide 44, we have the funding structure of the group. 86% are coming from customer deposits, so a very stable funding base. And on the right side, you can see that we are already with a loan-to-deposit ratio of 73%, which in the end translates in, I would say, excess liquidity on the group, which, for the time being, is not so positive as liquidity as a cost. But of course, this has to do with the divestment that the group has been made on those last 3 years and also shows the strong resilience and confidence of our client base in terms of the stability of the deposits within CGD. This translates in very high liquidity ratios, above 330% LCR and above 150% on the net stable funding ratio.

Finally, on capital, on Slide 47, we have the ratios, including the net income of 2019 in comparison to the regulatory requirements, 60 -- 16.8% CET1 for a requirement of 9.75% and 19.3% for a requirement of 13.25% on the total capital.

More important, the evolution of those capital ratios is shown on Slide 48, and we can see a very sustainable progress. Especially in 2019, there's a strong boost coming from the risk-weighted assets release from the sale of those subsidiaries, which leaves the bank with a very comfortable and adequate capital ratios because, as I already mentioned in previous occasions, we are fully aware of the circumstances of CGD due to the shareholding structure that we need to always work with, very comfortable and safer. But first, in order to take any new regulatory demands on any new adverse condition from the market, CGD should be always on the safe side in order to avoid entering in any more of these stated processes.

On Slide 49, we have the impact on CET1 since the beginning of the strategic plan, starting with the capital ratio after recapitalization on a pro forma basis. And as we can see, the big boost on capital ratios are coming from the commodities earnings on that period and also from the reduction in risk-weighted assets.

On the negative aspect, the changes in the actuarial assumptions of the pension fund, which had a cumulative impact of 75 basis points since 2017. And this is precisely what we show on Slide 15 -- 50, sorry. As we need, once again, to adjust the actuarial assumptions of our pension fund, not only the discount rate, which was adjusted from 2.075% to 1.4%. In line with that, we also adjust the salaries and pensions growth rate, but we also adjust the mortality tables in order to be more adapt to the actual mortality trends in the Portuguese population.

This translates in an extraordinary contribution of EUR 300 million, so slightly above EUR 300 million. This has an impact on capital, as you know. And it's also important to mention that part of this, about half of this, was already registered in June. So we adjust in December for the remaining part on the last quarter. I can give you the figure is EUR 144 million.

Moving to Slide 51. We have just a wrap-up of the rating changes since 2017. This slide is the same that we already present in the third quarter.

On Slide 52, the evolution of our subordinated and senior nonpreferred debt in the market, a very positive trend. Of course, benefiting also from the decrease of interest rates, but above all, from the progress in terms of the risk profile of CGD.

And finally, on Slide 53, the risk-weighted asset density, a small decrease. The tax ratio, a very substantial decrease, which is a clear signal of the actual risk profile of Caixa. The leverage ratio, pretty much stable.

And finally, on Slide 54, we have the available distributable items and the MDA buffers, which show a very comfortable level to the payment of dividends and the payment of the coupons of AT1.

On Slide 56, we repeat the requirement for MREL. This is the same data that we already released on the third quarter.

And on Slide 57, this is also a wrap-up of the senior nonpreferred issuance that we performed last November, a very successful transaction, which we have here the main highlights.

So in summary, from Slide 58 onwards -- on Slide 59, the summary on the different items: the positive evolution of the business; the core operating income, even with a very depressed interest rate environment, was positive; improvement in efficiency; improvement in the business activity. Also on asset quality, a very significant reduction on the NPL. Liquidity, we continue to benefit from a wide base of fundings. And capital, we were able to reinforce the capital position, which leads us today with a very strong position.

On Slide 60, we have precisely, once again, the execution of these 4 main items in comparison to the targets for next year. As we can see, I would say, the most challenging are, in fact, return on equity, especially due to the interest rate conditions on the market; and also the cost to income, yes, this is clearly a very demanding target. Nevertheless, we are pretty confident that we will achieve those 2 targets.

For the other 2, the NPL ratio and CET1, we are already inside the targets for 2020.

On the right column on that table, we show the data from EBA on the European banking average. Of course, the comparison is not totally fair as these data is from September and the execution of CGD is for December. Nevertheless, we think it is also -- it allows us to take some conclusions. And what we can see is that we are already performing better than the European banking average on return on equity, on the cost to income, definitely, not on the NPL ratio. But if we look at the NPL ratio, net of impairments, we will see that we already compare better than the European average. And finally, also on capital where, if we exclude the net income, our ratio will be at 14.8% and the European average was 14.4%. And this is precisely what we have in the following slides in terms of graph where we show the position of CGD to the average of some of the main markets in Europe and also to the average of the European Union and Portugal to reach to the same conclusions.

So this is it. We can go now to the Q&A session.


Questions and Answers


Operator [1]


(Operator Instructions) And we'll take our first question from Samir Adatia from Citibank.


Samir Alaudin Adatia, Citigroup Inc, Research Division - Research Analyst [2]


Congratulations on your results, which you posted on Friday. I have a question on your ratings, in particular. We've seen the introduction of a new Fitch criteria, which seems to be particularly penalizing in jurisdictions that have deposits or preference enforced. And given the introduction of your NPS structure, which you introduced to the market last year and your guidance on potentially getting an IG rating at the preferred senior level, my read of the new Fitch criteria is that if you choose to fill your MREL with both preferred senior and nonpreferred senior, it would be harder for you to achieve that IG rating at the preferred senior level. So I'm just curious to understand how this new Fitch criteria may change your plans around issuance.


Bruno Miguel Cordeiro da Costa, Caixa Geral de Depósitos, S.A. - Head of IR [3]


Samir, this is Bruno. Yes, in fact, the change in the Fitch methodology did have an impact at the time of issuance, precisely at the time of issuance. We started by having an expected initial rating of BB+, which was then downgraded to BB when we actually came out with the issue because in the meantime, the methodology had changed. We understand that this may make it more difficult for Caixa to achieve an investment-grade rating from that rating agency, in particular. But in any case, I think, at this point, Caixa should adjust its issuance plans according to its needs.

And yes, it is very important for us to have an IG rating because it not only affects the cost of our issuance and capital markets, but it affects the way we can overall conduct our business with counterparties. But in any case, it is also very important for us to -- as Mr. de Brito just explained, to deal with the depression that we have in net interest margin at this point coming from the very low interest rate environment. Therefore, we continue to believe that a combination of senior preferred and senior nonpreferred is the best to simultaneously achieve our MREL targets by January 2023, which is the deadline and at the same time, keep our costs, in particular, our net interest margin, under control.


Operator [4]


(Operator Instructions) And it appears that we have no further questions at this time. And I would like to turn the program back to Bruno Costa for any closing remarks.


Bruno Miguel Cordeiro da Costa, Caixa Geral de Depósitos, S.A. - Head of IR [5]


Okay. Thank you very much to everybody that was listening. And if you have, at some point, any additional questions, you can always call us or send us an e-mail, and we'll be glad to get back to you with any additional information. Thank you very much.