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Edited Transcript of Caixa Geral de Depositos SA earnings conference call or presentation 11-Nov-19 3:00pm GMT

Q3 2019 Caixa Geral de Depositos SA Earnings Call

Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Caixa Geral de Depositos SA earnings conference call or presentation Monday, November 11, 2019 at 3:00:00pm 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


* James Leonard Hyde

PGIM Fixed Income, Research Division - Research Analyst




Operator [1]


Welcome to CGD's conference call. This call follows the third quarter 2019 earnings release, which took place yesterday. It is possible to follow the earnings presentation from the CGD website.

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


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


Hi, good afternoon, everybody. This is Bruno Costa and the Investor Relations here at Caixa. Welcome to this conference call. As you know, we announced our results last Friday evening. You can -- you have the presentation available both on our website as well as on CMVM's website as usual. So the purpose of this call is mainly to lead you through the presentation and to explain in a bit more detail Caixa's third quarter 2019 results.

I will pass to Mr. Jose de Brito, our CFO, who will lead you through the presentation.


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


Hello, good afternoon. Thanks for joining this call. So I will go through this -- the presentation that were released last Friday. And I'll ask you to move to Slide 5 where we have the main highlights for the third quarter results. Starting with the consolidated net income that reaches EUR 641 million, which means an increase of 74% over the same period of last year. However, this net income includes the current profit of EUR 159 million, which is related to the reversal of impairments related with the sale of international subsidiaries, as we will explain later.

So if you look just at the current activity, the net income reaches EUR 481 million, representing an increase of 30% and resulting in a return on equity of 8.2%, which already exceeds the target for 2019. Also to highlight the evolution of the core operating income, which increases 1.6% over last year despite the pressure that is being noticed in terms of net interest margin.

The capital ratios continue to be robust. The CET1 reaches 15.6%, and the total capital ratio reaches 18%. We also highlight the significant growth in terms of the Portugal -- in terms of the domestic activity in corporate loans and also in new mortgage loans, which represents an increase over those last 2, 3 years where, as you know, the credit demand in Portugal is being more or less stagnant. Also a continued improvement in terms of asset quality. Our NPL ratio decreases to 6.6%, already below the target for the end of the year of 7%. And also to highlight the increased coverage by impairments that reaches 68.2%. Also to highlight the NPL ratio net of impairments, which is now just 2.2%.

We conclude recently in October and this last week the sale of the 2 of the international subsidiaries, our subsidiary in Spain and also our subsidiary in South Africa, which represents an important milestone in the execution of the strategic plan and also an important element to derisk the -- our balance sheet in line with what is projected to be achieved before 2020.

Finally, also to mention the recent rating upgrade by Fitch Ratings, which is the second one by this agency since the start of the strategic plan and which leaves the bank just one notch to become investment grade.

So moving to Slide 6. We have the performance in this first 9 months of 2019 in comparison to the targets -- to the management targets for this year and also the targets established in the strategic plan for 2020. And as we can see, we are already inside the targets for this year's execution. The return on equity reaching 8.2% is already above the 7% projected for 2019. Also the recurring cost-to-income which reaches 47% in this first 9 months is already below the target of 50%. The NPL ratio of 6.6%, below the target of 7%. And also the CET1, 15.6%, substantially above the target of 14% that was established for 2019.

In comparison to the targets of the strategic plan for next year, what we can see is that in terms of the NPL ratio and the capital ratio, we are already meeting the -- those targets. But nevertheless, we are still lagging in terms of return on equity and especially in terms of the recurrent cost-to-income, which for 2020 is envisaged to reach, respectively, 9% for the return on equity and 43% in terms of the cost-to-income. This is the target for the recurrent cost-to-income advised only to the domestic activity. So this is in line with the 47% that we achieved in this first 9 months.

On Slide 7, we have a brief overview of the movements from the rating agencies towards CGD. This is the fifth upgrade in the last 2 years, resulting in 6 notch upgrade, the second one from Fitch. We have also won notch upgrade from DBRS and 3 notches upgrade from Moody's. And in -- for the time being, we are just one notch to be rated the investment grade by Fitch and Moody's, and we are already investment grade by DBRS. This is also an important milestone for us. We expect to be able to achieve the investment-grade level by 2020.

On Slide 8, we have some details on this question of the sale of international assets. In fact, as you might remember, back in the end of 2017, we have made substantial impairments on a conservative approach towards the potential valuation for the Spanish and the South African subsidiary. What happened later is that the final sale price was better than the valuation envisaged in 2017, and we were able to reverse EUR 159 million of those impairments. So this is why we consider that the recurrent net profit should be highlight it's more than the total net income that we achieved in this first 9 months.

Also important to mention that we have these final statements for the September includes -- still includes those -- these 2 subsidiaries because the respective deconsolidation only takes place on the closing dates, which, just to recall, were 14 of October for the Spanish subsidiary and 7 of November for the South African subsidiary. We estimate that with the deconsolidation of these 2 subsidiaries, we will have an additional impact in terms of the capital ratios above 110 basis points due to the reduction in risk-weighted assets.

Moving to Slide 9. We have the time scale on those -- on the process of the sale of these 2 subsidiaries. And as you can see, we have still to recognize the deconsolidation of these 2 entities. And with that, we expect this positive impact in terms of the capital ratios.

On Slide 10 and the -- we have some data in terms of the digital platforms of the group. As we have -- as we show there, we are implementing a very substantial investment plan in technology and digital transformation. This is very important for the bank in order to be able to catch up with the most recent market trends. And what we can see is that we have been successful as far as up to now with a strong adherence by our client base, of which about 43% of our customers already use our digital platforms. So this investment plan, this should reach EUR 200 million from 2017 up to 2022. Up until now, we have already executed about 20% of those.

On Slide 11, also the same, just to highlight the number -- the increased number of users, especially in our apps, which is, as of today, the main channel that our clients use to reach the bank. It already overpassed the web access.

And finally, on Slide 12, we have also some data in terms of the deal flow through these digital and distant platforms. So this is just some data sets. As you know, today, it is important to understand whether the banks are positioned themselves for the new challenges from the market.

On Slide 13, we have the market shares for August in the domestic market where we can see that CGD's market shares are pretty much stable. To highlight the market share in terms of household deposits of 29%; also in terms of the mortgage loans, market share of 24%. CGD is, by far, the market leader in these -- in those segments. And also in terms of investment funds where we have a market share close to 35%. On the right side, we have some prizes and distinctions that were awarded to CGD during this first 9 months of 2019.

Finally, also in terms of commercial activity in Portugal on Slide 14. We have also some highlights where I would mention the very substantial increase in terms of new mortgage loans, an increase of 35% in comparison to the first 9 months of 2018, and also the continuous success of the Caixa -- Contas Caixa accounts, which continues to increase at a very sustainable trend and average. As of September, 1.75 million accounts opened, which represents slightly more than 50% of our client base in Portugal.

So moving to the financial data on Slide 16. We have the net income for this first 9 months. We distinguish between the net income and the recurrent net income and also in terms of return on equity where we should consider 8.2% as recurrent. But nevertheless, if we consider the total net income, the return on equity would be 10.8%.

On Slide 17, we can see that this is -- this proves to be a sustainable trend with the quarterly evolution also very positive. We know that the first quarter of each year typically has a lower profitability due to the recognition of all the regulatory costs for the entire year, which is our policy to recognize them totally in the first quarter. So we can see that we have a sustainable path, not only in comparison to last year, but also on a quarter-to-quarter basis.

On Slide 15 -- sorry, 18. We have the evolution of the net core operating income where we can see a slight improvement of 1.6%.

And if we move to Slide 19, we can see why there is this small positive evolution. It has been negatively affected by the net interest income, which decreases 2.2% on a consolidated basis. That 6.7% on a domestic basis for CGD in Portugal, and it has to do, as you can imagine, to the low level of interest rates, which have impacted, of course, our loan book and, I would say, a very substantial part of our assets. This has to do, not only to the evolution of the benchmarks, but also as I explained in previous occasions, due to the early reimbursement of some loans to public entities, which is understandable as those entities could, nowadays, fund themselves directly with IGCP with much lower financial costs.

So this is also an explanation for the decrease on the loan portfolio as -- because as we will see from the corporate side, we are having some increase in the loan performing portfolio. But this -- what can we expect for the net interest margin? I would say that we will continue to see a decrease, especially the fourth quarter will be also finalized. The repricing of the assets to this new level of interest rate is not totally finalized. Typically, especially on the mortgage loans, the repricing is made every 6 months. So we still have this impact from the low level of rates to be -- to affect the loan portfolio, as I mentioned, especially the mortgage portfolio because on the corporate portfolio, we have a 0% floor in the majority of the contracts. But by law, this is not possible for the mortgage portfolio.

So in terms of the net interest margin, if we look at Slide 20, we see that we have a small -- a very small evolution on the domestic activity on the right side, just 3 basis points. And this is, I would say, totally coming from the repricing of liabilities in a process that is, I would say, more or less finalized. As you might remember, I have mentioned several times that we would benefit in terms of net interest margin from the repricing of liabilities, especially deposits. This process is almost finished as we have now adjusted the total deposit book to the new level of rates. So we wouldn't benefit for the future from this repricing.

If we look on the left side to the consolidated activity, we can see that the evolution of the retail net interest margin is better due to some geographies where we are operating, which have a highest level of interest rates, allowed the bank to increase the net interest margin.

Moving to Slide 21. We have the evolution of net fees and commissions, positive evolution, 2% on a consolidated activity and 1.4% on the domestic activity. Here by contract with the net interest margin, we should expect this to gain some strength for the quarters to come as the bank recently decided to adjust the price on some of the services and commissions that we apply to our clients, and the effect of this pricing change wasn't yet reflected in this third quarter accounts. So we should expect for the future to have a slightly improvement in terms of the evolution of fees and commissions.

On Slide 22, we have some detail on how this evolution is coming from, especially coming from asset management and Bancassurance, also positive in terms of cards, payments and bank accounts, negative in terms of the credit and off-balance sheet items.

Moving to Slide 23, and I will say that this is the main driver for the evolution of the core operating income, which is the reduction of the operating costs. It's also a very important driver to achieve the target for the cost-to-income. And what we can see is that we have, I'd say, a significant decrease in terms of employee costs, 5%; also in terms of other expenses, 10%, but this is impact is by the implementation of IFRS 16, which has the opposite effect in terms of depreciation and amortization, which increased 46% in this period.

Overall, we have a reduction of 4% on top of the reductions that we have already achieved in 2017 and 2018. So I would say that this is the main driver for the positive evolution on the core operating income.

On Slide 24, we have some data in terms of the evolution of the number of employees and number of branches in Portugal. As you know, these are also 2 important targets for the strategic plan. In both cases, we are pretty much in line with the projected targets for next year. Just to remember on the number of employees on the domestic activity, we should achieve by the end of next year 6,650, and in terms of the retail network in Portugal, 480. So we are pretty much there in terms of the branch network. We are with the linear trends in terms of the number of employees.

So with that, we can see that the cost-to-income continues to be reduced at a lower pace. It is true because, of course, it's even -- every day, it's more difficult to continue to improve the efficiency. That's one of the reasons why we have this very ambitious investment plan for technology and digital platforms. It's a way to achieve the projected targets for 2020.

Finally, on Slide 26, we have the contributions from the international activity, which also have a positive evolution, growing 8% from the same period last year. The main contributors, the usual suspects, our subsidiary in Macau, our subsidiary in Mozambique and also our branch in France.

In terms of balance sheet evolution and moving to Slide 28, we -- as already mentioned, we have stable market shares. We are the market leader in Portugal. Total deposits, 25% market share, 29% in terms of households; in terms of loans and advances, 19% total share; in terms of the mortgage market, 24%.

Looking at both sides of balance sheet, starting with liabilities where we have the positive evolution in terms of total customer resources, especially in terms of deposits, which grow, I think, by 3.3% over the same period last year. And this was especially important in terms of households whose deposits grow almost EUR 2 billion. And this is more important as we have nowadays absolutely no competition from deposits in Portugal as in other -- many other European countries. So there is no pricing drivers for this evolution. This is the natural resilience and the natural connection with our client base.

Moving to Slide 30 where we have the loans and advances evolution. What we can see is that since January, the total gross book decreased by EUR 2.5 billion. This is mainly driven by the reduction of NPLs but also by the reduction in terms of public entities and public corporates where we have seen substantial redemptions due to the reasons that I already mentioned, the variability to funding themselves much cheaper directly with IGCP. If we look on the left side to the performing book, excluding general government, we can see that we are already achieving positive growth rates very timely but even though positive evolution with an increase of EUR 144 million. This is the performing portfolio.

On Slide 31, we have also some growth rates on the corporate sector. On the left side, the total loans to corporates, excluding the construction and the real estate. Why exclude this? Because this is a sector where we have more deleveraging coming from the reduction of NPLs. So do not distort the numbers. We have excluded these sectors. And what we can see, this is the gross loan portfolio that we have already a significant increase of 5.5% in all the other sectors. In terms of the SMEs, the most dynamic sectors are presented on the right side.

So on Slide 32, we have some data in terms of also in the new production of specialized credit, in terms of factoring and confirming, an increase of 7%; in terms of leasing, an increase of 8%.

And finally, on Slide 33, we have the evolution on the new mortgage loans where, I'd say, pretty much in line with the trend in the Portuguese sector. We have an increase of 35% in the new production, allowed the bank to rapidly approach the market leadership also in terms of new production of mortgages.

So moving to asset quality on Slide 35. What you can see is that we have a very low level of cost of credit risk, just 1 basis point. This is one of the reasons why the net income increase is much more than the core operating income. What we are seeing in the Portuguese market is that this is benefiting from the overall state of the economy but especially from the overall state of the real estate sector and also, of course, benefiting from the low level of interest rates, which means that corporates are not feeling any pressure coming from the funding costs.

What we can expect for the evolution for next quarters? We are expecting this to even turn to negative as we have several clients that are almost approaching the end of the quarantine period, which means new cures for the next quarters. And with that, we could release some impairments. So we could expect the cost of credit risk to become negative for the following quarters, pretty much in line with what other banks operating in Portugal are already presenting.

On Slide 36, we have the evolution of the NPE and NPL portfolio. As already mentioned, 6.6% in terms of the NPL portfolio; 5% on the NPE; and above all, a coverage by impairments of 68.2%. If on top of that we consider the coverage by collateral, we would reach a total coverage almost close to 110%.

On Slide 37, we show the evolution of the NPL ratio since the beginning of the strategic plan where we can see that in this 9 months of 2019, the main drivers for this reduction are the write-offs and also the cures. We have some portfolio sales, but they just represent EUR 200 million in this period. We are finalizing the sale of 2 additional portfolios, so we could expect until the end of the year an additional sales of EUR 200 million -- close to EUR 200 million, yes, allow us to decrease even further the NPL ratio.

I would also like to highlight the NPL ratio net of impairments, 2.2%. This compares much favorable with European average than the gross ratio. As the NPLs net of impairments just total EUR 1.3 billion, so much less than what we have in -- back into -- in the end of 2016 where they were close to EUR 5 billion. So this is a very strong effort that the bank is doing and we will continue to do as we have the target to converge to the European average by the end of 2020.

Finally, in terms -- on Slide 38, in terms of the real estate assets, we continue the decreasing trend. A substantial change in this third quarter as we conclude the sale of some assets last September. And with that, we have a reduction of 17% since the -- on the last 12 months. Also important, the increase on the coverage by impairments from 44% to 48%.

Moving to liquidity on Slide 40. We have ECB funding. This funding as of September were totally referred to our subsidiary in Spain. So as of today, with the sale of the subsidiary, we have absolutely no funding from the ECB. So this should be read as 0. And on the right side, we have the eligible assets already pledged in the ECB pool, which totals almost EUR 12 billion, and this is net of haircuts and already considered ECB valuation. So ample liquidity.

And we can also see debt on Slide 41 where we can see the wholesale debt maturities, a very light calendar and pretty much get a large scale covered by the eligible asset pools, so putting absolutely no pressure in terms of all sales funnel.

On Slide 42, we have the funding structure. And what we can see is that it's mainly based on the customer deposits, 86%, and the loan-to-deposit ratio, which continues to decrease due to this evolution of the credit and the deposits and reaches as of September, 76%. This is, of course, putting also some pressure on the bank because this generates excess liquidity. But of course, we will -- the benefits starting in this 1st of November, we'll also benefit from the tiering system that the ECB implemented.

On Slide 43, we have the regulatory ratios, 325% in the LCR and 158% in the net stable funding ratio. This last figure relates to June as we are yet finalizing the calculation for September.

Finally, in terms of capital on Slide 45. We have the capital ratio in comparison to the regulatory requirements where we can see a very comfortable buffer in all dimensions.

And on Slide 46, the evolution since the end of 2016 where we can see a strong capital generation during this period. We consider our capital ratios adequate. They should always have a buffer to meet any additional capital requirements or market impacts because we consider, as already mentioned in previous occasions, that considering the shareholding structure of CGD, we should always be on the safe side because we understand that for CGD, it will be always demanding to ask for any capital increase from our shareholders. So the best way to tackle this is to have significant buffers on top of regulatory requirements.

And if we look at Slide 47, we have the capital generation, capital changes since the starting of the strategic plan. And what we can see is that some negative impacts, namely -- some of them coming from regulatory changes or new regulatory demands, we were able to cover that by organic capital generation, especially coming from the earnings generation. On these 2 years and the 9 months, we already -- the impact of the income on capital was 2.4% and also in terms of the balance sheet optimization with a reduction in risk-weighted assets that -- for this period that reached 1.87%. So this is something that we would always want, to keep for the future, is to have organic generation of capital and the capacity to retain part of this capital generation.

On Slide 48, we have the evolution of the risk-weighted asset density, 54% back on 30 of September. Also to highlight, and I think this is the most important evolution, a very substantial decrease in the Texas ratio, 39%, as of September. The leverage ratio, pretty much stable.

Finally, in terms of the available distributable items and the maximum distributable amount. In both cases, we are working with a buffer above EUR 2 billion, so without any restriction to the payment of the coupons -- of the AT1 coupons or to the payment of dividends.

Slide 51 is on the MREL requirement. It's the same that we present back in June -- in July with related to June. So we have this request of 13.27% of total liabilities and owned funds for the CGD Resolution Group. And we expect that with -- for this period until the end of 2022, we expect that with the issuance of EUR 2 billion of the eligible liabilities to be able to achieve the regulatory requirements for MREL. This is pretty much in line with the funding plan that we have approved back in the beginning of the year. So as you know, our wholesale funding plan is, as of today, only driven by the MREL requirements.

So on Slide 53, as a summary, a positive evolution of the core operating income with positive evolution in terms of operating costs and also on fees and commissions. We understand some pressure on net interest margin that should continue for the next quarters. But overall, a positive evolution and a positive trend in the bottom line of the net income. On asset quality, very low cost of credit risk, and we continue and we will continue for the future to work hard to be able to have an NPL ratio in line with European average.

Liquidity, a very wide base of funding, very strong position in terms of liquidity. In terms of capital, we will continue to build strong capital ratios, but we consider that we already achieved an adequate capital position.

Finally, on Slide 54, we have once again the 2019 execution of these 4 main targets and the comparison with the targets for 2020 but also comparison with European banking average, as reported by EBA for June 2019. The comparison is not totally fair as we are compare numbers for September for CGD with a European average for June. And this is precisely what we have in the following slides.

On Slide 55, the comparison on the cost-to-income and return on equity where we can see that CGD already compares better than the European average and substantially better also with our domestic peers.

And on the last slide, in terms of the asset quality of respective coverage where we still have a lack to cover with European average in terms of the NPL ratio. This is one of our main targets for next year. But if we consider the coverage ratio, we would conclude that the comparison with our peers is not so bad as we just look -- if we just look at the NPL ratio.

So this is it. Thank you very much. We are now...


Bruno Miguel Cordeiro da Costa, Caixa Geral de Depósitos, S.A. - Head of IR [4]


Yes. Thank you very much, Mr. Brito. We are now -- we can now open the call to any questions that the investors may have.


Questions and Answers


Operator [1]


(Operator Instructions) And we will take our first question from James Hyde with PGIM.


James Leonard Hyde, PGIM Fixed Income, Research Division - Research Analyst [2]


I just wanted to know, do you have any views on how much subordinated MREL you should have in total and whether the bias from now will have to be nonpreferred senior to meet it?


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


Thanks for the question. Yes, I can answer that. Look, for the time being, we are still operating under BRRD1 rules. And according to BRRD1, the minimum subordination asked for Caixa is just 17%, which we cover just with our capital base. So theoretically, at this point, from the FRB's perspective, we would not need to issue any senior nonpreferred or any forms of subordinated debt. We could just issue senior preferred to cover the rest of the MREL stack.

Now we know that BRRD2 will kick in at some point. It will have to be transposed into national law. We hope that will happen eventually until the end of 2020.

And we also expect then the FRB to review Caixa's minimum MREL requirement, including the minimum subordination threshold at some point. We cannot say at this point what that minimum subordination threshold will be, which is the main reason why we also don't say, at this point, what could be the actual split between senior preferred and senior nonpreferred from those EUR 2 billion that we expect to have to issue overall until January '23 to cover the MREL requirement.

What we can say is that we are ready to adjust our issuance plans immediately as we incorporate new information, specifically the new -- any changes to the overall MREL requirement or any changes that may come to the minimum subordination requirements.


James Leonard Hyde, PGIM Fixed Income, Research Division - Research Analyst [4]


Just to clarify, for the subordinated requirements once it's given, how much time do you think you will have from the point it's given?


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


Well, I anticipate a new MREL requirements to be communicated to Caixa. Let's assume, during 2021, which means we would have theoretically until the end of the following year, i.e., almost 2 years to comply with that.


Operator [6]


(Operator Instructions) And it does appear that we have no further questions at this time. And speakers, we have no further questions at this time. If you would like to make any closing remarks.


Bruno Miguel Cordeiro da Costa, Caixa Geral de Depósitos, S.A. - Head of IR [7]


Okay. I just wanted to thank everybody to -- for your attention, and we conclude the conference call. Thank you.


José António da Silva de Brito, Caixa Geral de Depósitos, S.A. - CFO & Director [8]


Thank you.