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Edited Transcript of Caixa Geral de Depositos SA earnings conference call or presentation 31-Jul-19 1:00pm GMT

Half Year 2019 Caixa Geral de Depositos SA Earnings Call

Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Caixa Geral de Depositos SA earnings conference call or presentation Wednesday, July 31, 2019 at 1:00:00pm GMT

TEXT version of Transcript


Corporate Participants


* José António da Silva de Brito

Caixa Geral de Depósitos, S.A. - Director

* Nuno Ferreira

Caixa Geral de Depósitos, S.A. - Account Manager




Operator [1]


Welcome to CGD's conference Call. This call follows the first half 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 IR representative, Mr. Nuno Ferreira, will guide you through the presentation, and the Q&A session will follow.


Nuno Ferreira, Caixa Geral de Depósitos, S.A. - Account Manager [2]


Good afternoon, everyone, and welcome to CGD's First Half 2019 Results Conference Call, which will be delivered to us by CGD's CFO, Mr. Jose de Brito. If you log in to our website, you will find the presentation that we'll be following today. And with that said, I'll hand you over to Mr. Jose de Brito, CGD's CFO.


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


Thank you, and good afternoon. Thanks for joining this conference call. So I will guide you through the presentation that was released yesterday. And first, I would like to start by the disclaimer that we present on Page 2 that apart from the usual topics that we mention in this disclaimer, also mention an important statement concerning the sale of the subsidiaries in South Africa and Spain, which, as you all might know, are pending approval from local authorities. The fact is that, as you know, these were still unaudit information, but the audit process will run until the end of September. If the -- this regulatory approval for the sale of these 2 subsidiaries occurs prior to the close of the audit process, we need to restate the first half accounts as this constitutes an adjustable subsequent event. So in the final report that we will be released until 30 of September, it might happen that this change need to be reflected. If that was the case then for both subsidiaries, we expect that the impact on the net income for this first 6 months will be of EUR 157 million positive, which is related to the difference between the price that will be paid by the buyers of these 2 subsidiaries in comparison to the price that was booked in our records because we made, as you might recall, we made a very substantial provision back in the end of 2017 concerning these 2 sale process.

So moving to Slide 5, we present the main highlights of these first half accounts. Starting with the consolidated net income, that increased 46% from the same period of last year, reaching EUR 283 million, which results in a return on equity of 7.4%, an increase of 2.1 percentage points and perfectly in line already above the 2019 target. Also the core operating income increases 4.1%, a modest increase, and I will explain the main reasons for that, but even though, an increase over the first half of 2018. The capital ratios of the bank continue to improve. The CET1 reaches 14.8%, and the total capital ratio reaches 17.1%, even after the payment of EUR 200 million in dividend that occurs in this second quarter. And also after the impact of the revision of the discount rates of our pension fund, which I will give you more detail later.

In terms of the NPL ratio, we continue the path to reaching an ambitious target by the end of the year to be below 5%. And in this second quarter, we were able to improve it to 7.3%. Also the coverage by impairments increased to 64.3%. The final highlight is related to the MREL requirements, which we already received with the regulatory binding target. We will have details on the presentation. And with that, we estimate that we have future issuance of around EUR 2 billion and to be accomplished until the end of 2022 as the date that was established by the Single Resolution board for CGD to comply with the MREL requirements, what is set in the 1st of January 2023.

On Slide 6, we have the usual comparison between the main financial data and the management targets for 2019 and also the targets of the strategic plan. And what we can see, as I already mentioned, the return on equity is already above the target for this year. Nevertheless, still lagging from the 9%, which is envisaged to achieve next year, 2020. The cost-to-income reaches 48% also already inside the management target of 50% but also lagging from the targets for 2020. The NPL ratio is in a good trend, reaching 7.3%. In this case, we are very close to the target for 2020. But as I already mentioned, we will have a management target much more ambitious than the one that was established in the strategic plan. And finally, the capital ratio, CET1, which is already substantially above the targets both for 2019 and 2020.

On Slide 7, we just make some reference to the recent changes from our ratings. Moody's recently revised the outlook from negative to stable, and that rate winched 1 notch in our deposit ratings and DBRS that upgraded all ratings of the bank also back in June.

On Slide 8 and Slide 9, but first, on Slide 8, this is more to give an overview of the macroeconomic and market context that, as you all know, is becoming very challenging, especially due to the evolution of interest rates and more than that, to the forward-looking of the behavior of interest rates for the years to come.

I must remember that when we first designed the strategic plan back in 2016, we were supposed to, as of today, already have positive rates in Eurozone, which is not the case. And more, what we've seen recently, especially since May, is an increase of the trend to reduction of interest rates, which are setting to historical minimum levels subsequently. This, of course, puts lots of pressure in our interest income because we have, as it is typically the case for the Portuguese banks, we have a very high proportion of float-rate assets, and they are particularly affected by the evolution of the LIBOR.

On Slide 9, we also mention the risks coming from the global economic slowdown, and we mention the impact that the evolution of interest rates have already in the current value of our pension fund's liabilities because we changed the discount rate from 2.075% to 1.6%. This has a negative impact in our own funds as we need to record this negative actual -- actuarial differences in the size of close to EUR 170 million. But this impact is already accounting in the capital ratios that we present in these first half accounts.

The following slides are about our commercial activities. First, the evolution of our digital platforms, where we continue to see a sustainable increase in terms of number of clients that use our digital platforms, close to 1 million and 1.5 million households that use regularly our digital platforms plus 150,000 corporates, this only in the domestic activity. Globally, we have more than 2 million usual users.

On Slide 11, also some highlights about the success and the client satisfaction concerning our app, which is also a trend very visible in the Portuguese market.

On Slide 12, some data on the same reality. The increase in deals through digital channels, 44% in Caixadirecta and in phone banking, an increase also of 68% in mortgage lending. Nevertheless, it's important to say that we are still in a low base in terms of deals, so which means that we have lots of space to continue to grow on these digital platforms.

On Slide 13, some prizes and distinctions, and more important, the market shares of CGD in the Portuguese market, where I would highlight the market share in terms of household deposits, 25%; in mortgage loans, 24%; and also in terms of investment funds and wealth management, very substantial market share. Pretty stable concerning the last 6 months.

On Slide 14, also some data on the commercial activity of the bank in Portugal. An increase of 36% in the production of new mortgage loans from the first half of 2018 to the first half of 2019 and the continuous success of the Contas Caixa accounts, which is a bundle of services that we released in the end of 2017, and which is now used by 1.66 million clients, which is a proof of the success of this decision. Also some marketing materials, which I will skip.

And entering directly in the results on Slide 16. The evolution of the net -- the consolidated net income, an increase of the return on equity. And on Slide 17, the quarterly evolution of the net income, where we can see an increase of 24% from the second quarter last year. And on aggregate, this from the first half of last year to the first half of this year, an increase of 46%.

In terms of net core operating income, more modest increase, just 4.1%, where -- which we can see on Slide 18. And the reason for that is, as you can see on Slide 19, a decrease in net interest income. And I need to explain a little more about this because apart from the evolution of interest rates, which, of course, affects the net interest income of the group, we also have the early reimbursement of substantial loans from public companies, which has to do also with the low levels of the cost of funding for the Portuguese state. The Portuguese state is now with up to 5 years with negative yields in secondary markets. There's a very cheap cost of funding and so some public entities are early repayment their bank loans and substituted from funding coming directly from the state. And we were affected by that because in the end of last year, we have around EUR 1 billion of early repayments, and in the end of this first half, we have an additional repayment of EUR 1.35 billion. This is -- this impact substantially the first half net interest income, but we also must mention that this process is almost over because we have no more big deals with public entities.

Another element that also impacted this comparison in the first half accounts is the fact that we issued a Tier 2 in the end of June last year. So in the comparison of the growth periods, in 2019, we already have the impact of the interest rate of the Tier 2, which was not the case in 2018. And this explains generally the difference between 2 years. Nevertheless, we expect that until the end of the year, this decrease in net interest income could be reduced depending, of course, in the evolution of market interest rates.

On Slide 20, we have the net interest margin on the retail activity, both on the consolidated and domestic perimeter, where we can see that, on the retail, we were able to improve slightly the net interest margin. But we must mention that this improvement came almost exclusively from the deposit pricing because in terms of the new loans, what we are seeing in Portugal is a continuous competitiveness and some pressure on the spreads that are applied. We just include here the retail activity because the wholesale activity is being also affected by the excess liquidities that the bank continues to hold and, of course, by the reduction in the yields and in the interest rates of the financial assets.

Moving to Slide 21, we have the evolutions of net fees and commissions, a slight growth in the first half. These were particularly affected. You must remember that in the first half, we present more substantial growth, but this was affected also from some one-offs that we had last year, particularly in the investment bank activity and also with the issuance from the Portuguese state of retail bonds, which provide the bank with an important amount of commissions, which was -- is not the case in this first 6 months of 2019. So the comparisons suffers from that. Nevertheless, we expect the commissions to continue to improve in comparison to 2018.

So the evolution of the net operating income is coming mainly from the cost reduction and the improvement in efficiency as you can see on Slide 22. An overall decrease of cost of 6%, being 8% in the employee costs, 13% in the other administrative expenses and an increase of 51% on depreciation and amortization. These last 2 must be read together because, as you can imagine, this is a consequence also of the application of IFRS 16, which makes that the -- usually rent that typically were registered in the other administrative expenses now are registered in the depreciation and amortization. Nevertheless, an overall reduction of 6%.

In terms of -- Slide 23, in terms of evolution of employees and retail branches, we have a reduction on the last 12 months of 400 employees. And just 2 -- the closure of 2 branches. We don't present to you -- we didn't -- we don't present here the targets for 2020. Nevertheless, I must say that we are pretty much in line towards that target in the number of employees, it's 607 -- sorry, 6,700, close to that. In the number of branches, we are just need to close around close to 20 branches, so it's not -- it's perfectly achievable and we will do that for sure.

As a consequence, the cost-to-income that we present on Slide 24 continues to improve, 48% in the consolidated perimeter. And if we consider just the cost-to-core income, some stabilization at the level of 55% but where we also expect an improvement for the next quarters.

On Slide 25, the contribution from -- for the consolidated net income, where we can see that apart from the good and substantial improvement in the domestic activity, we also have an increase in the international area, being the main contributors, the subsidiary in Macau, the subsidiary in Mozambique and the branch in France. Particularly important, the subsidiary in Mozambique has a substantial improvement in its consolidated net income.

So looking at the balance sheet on Slide 27. We have the market shares, pretty stable. I already referred to it, so I will skip.

In Slide 28, a small evolution of the business volume in comparison to last year, all supported in the customer resources, mainly in the deposits, which we show on Slide 29, where you can see that the evolution of total customer resources, we have a substantial increase on bank deposits, EUR 2.2 billion, even not -- almost not paying nothing for the deposits. Generally, cash pays 1, 2 basis points for new deposits, but even though this is clearly a signal of the confidence and the loyalty of our customer base, also good evolution in Bancassurance and treasury bonds. The evolution on bonds is because there was a maturity of retail bonds placed by Caixa back in 2009. That redeems in last May, so this is the reason for this decrease.

On the right side, we have the evolution of just the deposits, where we can see there's substantial increases in all segments, not only individuals but also corporates and institutional.

Looking at the loan portfolio on Slide 13 -- 30, sorry. We have -- we can see that in the first 6 months, there's a reduction in the overall loan book. This is mainly due to 2 elements: first, the continuous reduction of NPLs because what we present is -- here is the gross portfolio; and also the fact that I already mentioned of the early redemption of 2 important loans to public entities that were redeemed in June, and this more than explains this decrease.

On the left side, we presented the loans and advances to customers just the performing book and excluding the general government and public entities just precisely to isolate these 2 exceptional elements. And with that, we can see that we already achieved an increase of 1.7%, more than EUR 600 million, which is very important because one of the weakest part in terms of our commercial activity on those last 2.5 years was precisely the low dynamic in terms of new credit production. And we start to see some reversal on this trend in these first 6 months of 2019, precisely the same we show in Slide 31, where we can have the gross loans-to-corporates. And here is gross and excluding construction and real estate because these are the segments -- the market segments where -- which has the highest concentration of NPLs. But excluding these segments, we can see that we already have an increase of 6.5% in the stock of loans to corporates, also a good evolution in terms of the production of the factoring and leasing transactions. In terms of mortgage loans, I already refer the increase of 36% from the first half of last year to the first half of this year. And even if we look on a quarterly basis, we have an increase of 16% from the first to the second quarter.

So entering in the asset quality. On Slide 34, we have the cost of credit risk, almost inexistent. This is, of course, a consequence of the economic cycle in Portugal, which has been fairly positive during these last years. Also the strong dynamics in the real estate market. And of course, also from the changes that were implemented in the risk policy within the bank since 2017, which are proved to be effective. But I would give more importance to the economic cycle in Portugal because if we look at some of our peers, they are also presenting very low levels of cost of credit risk. Our expectation is that for -- until the end of the year, this could even become negative as we have some perspective of the impairment recovery.

On Slide 35, we have the gross ratios of NPLs and NPEs. 7.3% on NPL, 5.7% on NPE, and the coverage by impairments in collateral, which taken together, it represents more than 100% of the stock of NPLs, more precisely, 1.7 -- sorry, 107.9% -- percentage.

On Slide 36, the evolution of the stock of NPLs. The reduction of EUR 6.1 billion since the beginning of 2017, since we start to implement these strategic plans. On these first 6 months, where we haven't performed any sales of portfolios, the main contribution comes from write-offs, EUR 500 million, and cures and cash recoveries contributing with EUR 260 million for this evolution. We have -- we are almost closing some portfolio sales, portfolios of NPLs. We are working in 3 different portfolios of total gross amount of close to EUR 800 million, which we expect to be closed during this third quarter. And with that, we could have a very important improve in the NPL ratios.

Still on Slide 36, I might also like to call your attention to the value we present on the right side on the last column, which is the net -- the NPL net of impairments of EUR 1.6 billion, which is the stock that is effectively in risk in our balance sheet, also bearing in mind that the coverage by collaterals more than covers this amount. But this is to say that we must read not only the NPL ratio, but we must read it in conjunction to the coverage by impairments because in our case it's substantially higher than the market average.

On Slide 37, we have the evolution of foreclosed assets. A modest evolution in these first 6 months of the year. Nevertheless, we expect also a substantial improvement until the end of the year, like it happened in last year. I must call your attention, there's a mistake there on the graphs. We mentioned March '18, in the first column of each graph. It's not correct. It's June '18. We will make this correction. But just to mention that this is the evolution on the last 12 months.

So finally, moving to liquidity. Sorry, not finally because we still have capital. But moving to liquidity, the banks continues to have a very stable and large liquidity base. We have no ECB funding. We just have this figure that is presented here for EUR 491 million is exclusively related to our subsidiary in Spain. With the sale of this subsidiary, this figure will come to 0 because since June last year that we repay all the ECB funding. Pool of collateral, very stable above EUR 12 billion and very well diversified.

And on Slide 40, a very light wholesale debt maturity. We just have a covered bond in June -- in January next year of EUR 1 billion, and then all the relevant debt matures after 2022, and all the outstanding debt is more than covered by the eligible assets pool. Of course, this will increase as soon as we start the MREL issuance, but even though with the EUR 2 billion additional, bearing in mind that these covered bonds will do -- will mature and will not be replaced. We will always still be below EUR 5 billion of outstanding wholesale debt.

On Slide 41, the liability structure, very strong retail funding. And the loan-to-deposit ratio, which achieved 75% in this -- in the end of June 2019, a very low ratio, which, of course, as you can imagine, put some pressure due to the excess liquidity and the charge on excess liquidity that we are paying.

On Slide 42, the regulatory ratios, LCR, 324%, and the net stable at 158%. So moving to Slide 44, the capital ratios in comparison to the SREP requirement, very comfortable buffers in all of them. 40 -- 14.8% in the CET1 for a requirement of 9.75%, and 17.1% in the total ratio for a requirement of 13.25%.

On Slide 45, we have the evolution on the last 12 months. And as I already highlighted, this is even after dividend payment and the impacts of the adjustments in the pension fund discount rate. These ratios, as it is mentioned in the disclaimer, include the net income for the first 6 months.

So on Slide 46, the risk-weighted asset density, slight decrease, but even though, substantially above the European average, which signals also some spare capacity to improve it. The Texas ratio already below 50%, so also a very important improvement. And the leverage ratio more stable, I would say, in these last 2 years.

On Slide 47, the available distributable items and the maximum distributable amount, still with very comfortable buffers, close to EUR 2 billion in each cases, which signals the capacity of the bank to fulfill its responsibilities in the AT1 and also to continue with a conservative dividend distribution policy.

On Slide 49, we have the MREL requirement that were required to CGD to be achieved by 1st of January 2023. A percentage of 13.27% of TLOF and 24.65% of risk-weighted assets, all based in December 2017 figures. What I can say about this, this is perfectly in line with our expectations. And this is consistent with our funding plan. We estimate to achieve and to fulfill these requirements, with close to EUR 2 billion issuance on the next -- until the end of 2022 also -- and with a combination of retained earnings during this period. We are still working on the format size and timing. But our expectation is to be able to maybe tap the markets in the first quarter of 2020 with -- but still, we haven't still decided on the subordination of the issuance that we could make by that bank. We are still working on it as soon as we have a more clear funding plan designed. Of course, we will release to you, which we admit it could happen in the third quarter accounts.

Finally, as a wrap-up. On Slide 51, a summary of the main highlights. A positive evolution of the core operating income, nevertheless, the pressure of that low interest rate environment is putting on our net operating income. And just as an apart, of course, as you can imagine, the MREL issuance, which we don't need for our commercial activity, will also be a burden in terms of the net interest margin because we will issue for just to increase our excess liquidity, so it's something that represents a burden. But it is what it is.

In terms of asset quality, continued and sustainable improvement, which we expect to continue and to be able to reach an NPL ratio by the end of the year of 5%. In terms of liquidity, an ample base, and of course, liquidity now did start to become a problem due to the excess and not to the lack of it. And finally, capital, where we continue to increase and to strengthen our capital base.

On Slide 52, we have, also as a wrap-up, the comparison to the execution on the main financial indicators to the strategic targets for 2020. And also we present the comparison to the European Banking Average as published by EBA in the March risk dashboard. And this is precisely what we highlight in the following slides. Of course, we must mention that this is not a totally fair comparison because the figures for CGD are for June, and the figures for the European Banking Average are for March. But I think still, it gives a good perspective on how the bank is positioning itself in terms of the industry and in terms of the trends in the market. Where we can see is that in terms of CET1, we are already above European average. And especially important above the average in Portugal.

On Slide 54, we compare the return on equity and the cost-to-income ratio. In the return on equity, we are just below Spain and Italy, but we also must mention that Spain and Italy have the lowest capital ratios, so it's possible to achieve a higher return on equity. So we must also read this projection.

In terms of the cost-to-income ratio, we present already a very good ratio, 48%, making CGD, for sure, one of the most efficient banks in the Euro area. That is in terms of commercial banks.

And finally, on Slide 55, where we present the nonperforming -- the NPL ratio and the coverage of the NPL ratio. And this is precisely on the NPL ratio where we are lagging substantially from the European average. The reason why we have set it up a very demanding target for this year and for next year because our ultimate target is to reach the European average by the end of 2020.

So this is it. Thanks for your attention.


Nuno Ferreira, Caixa Geral de Depósitos, S.A. - Account Manager [4]


And now we will be glad to take your questions should you have them.


Operator [5]


(Operator Instructions) And it does appear that we have no questions at this time. I'll turn the call back to our speakers for any additional remarks.


Nuno Ferreira, Caixa Geral de Depósitos, S.A. - Account Manager [6]


I want to thank everyone for having joined the results conference call and remind you that should you have any queries, please feel free to contact the Investor Relations office. Thank you again, and have a good day.


Operator [7]


Thank you for attending the conference call. The audio webcast will be available in the CGD website.