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Edited Transcript of LBK.MC earnings conference call or presentation 1-Aug-19 7:30am GMT

Q2 2019 Liberbank SA Earnings Call

Madrid Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Liberbank SA earnings conference call or presentation Thursday, August 1, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jesús Ruano Mochales

Liberbank, S.A. - Chief Corporate & Financial Officer

* Juan Pablo López

Liberbank, S.A. - Head of Corporate Development and IR

* Manuel Menéndez Menéndez

Liberbank, S.A. - CEO & Director

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Presentation

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Juan Pablo López, Liberbank, S.A. - Head of Corporate Development and IR [1]

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Good morning, ladies and gentlemen, and welcome to the second Q results presentation for Liberbank. This is Juan Pablo López. And as in previous quarters, I'm here today with our CFO, Mr. Jesús Ruano; and our CEO, Mr. Manuel Menéndez. We'll go through the presentation, and then we'll move to Q&A.

And now Manuel, it's your turn.

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Manuel Menéndez Menéndez, Liberbank, S.A. - CEO & Director [2]

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Thank you, Juan Pablo. Good morning, everyone, and thank you for your participation in today's conference call. Before going through the presentation, let's say that this has been another strong quarter of operational results. We are very pleased with the growth of the mortgage book, where we are a specialist and are able to achieve great risk-adjusted returns. We are also very pleased with how the strength of the franchise manifests itself in the growth of our fee income business. There is no denying that lower rates make traditional lending less profitable. However, our job is to adapt. We will go through sensitivity in more detail. But from the start, I will say that over the past 3 years, the bulk of the mortgage lending that we have done has been at fixed rates. Additionally, noninterest rate-sensitive income lines are performing quite well, and we continue to cut operating expenses without damaging business volumes. We are also pleased to inform you that we have received a written confirmation from the ECB that we are in the final stage for IRB approval.

Going to Page 3. We show you here a summary of our main targets, how they are evolving. We will comment in more detail in the following slides, but as you can see, everything is moving in the right direction, in terms of asset quality, solvency, volumes and profitability. Regarding commercial activity and lending, we keep increasing the book by close to 8% year-on-year. As you know, mortgages are our core product and one of our main priorities and continue to show a healthy growth of almost 5% on a like-for-like basis.

During the second half of the year, we plan to accelerate the new production by an additional 20% versus initially planned. We believe mortgages have a very attractive profitability, combine it with a low risk, and RAROC of the new production stands at circa 14% under standard models. In addition to that, the cross-selling opportunities add more than 3 percentage points to the profitability of the product. Corporates and consumer continued to show a good performance with our existing customers.

Moving to customer funds. They increased close to 5% year-on-year. I would like to highlight 2 things here. First, mutual funds increased more than 10% year-on-year versus a 6% decrease for the sector. Focus on this product has been so far a success with increasing fees contribution. We expect this to keep going and reach EUR 4.5 billion of assets under management in the short term, with the support of our partner, JPMorgan, our branch network and asset management business, together with the launch of innovative products for our clients.

Second, customer funds per rents have increased more than 70% during the last 3 years. We have been able to increase our customer funds. At the same time, we have reduced to fund our branch network. We are very proud not only about the growth but also in terms of customer quality service, something that has been recognized, and Liberbank stands now as the best national bank in Spain. The last thing to remark in this slide is that we continue to invest in our digital transformation and reaching agreements with third parties, such as Google or Samsung, in this second quarter.

In terms of profitability, let's start by net interest income that improved more than 4% year-on-year. We confirm our mid-single digit guidance, supported by volumes growth, higher from book yield and room-to-reduce retail and wholesale funding costs further. All this will more than offset the repricing to lower year-over-year.

In this sense, I would like to highlight that circa 50% of our mortgage book, that is the largest one, is not affected by recent or further decrease of year-over-year. Recurrent fees improved 2.5% year-on-year, supported by mutual funds and insurance business. As you know, these are recurrent and low capital consumption business that right now represent circa 50% of our current net income, excluding trading. Operating costs are 3.5% down year-on-year. This is very important. We have transformed and continue to transform the bank over the last years. A consequence of that is our commercial productivity that stands as second best practice amongst the Spanish banks. We keep taking restructuring measures, as the ones executed during the first half of the year, with a very attractive payback, circa 1.5 years that supports 2019 guidance and maintains costs under control going forward. Another example of this transformational process is the agencies that represents circa 19% of the current network and will increase further in the following months. They allow us to maintain commercial activity, our footprint and full-risk control, at the same time, we variabilize costs.

All in all, we expect this to be reflected in our cost to income and ROE once the costs related to employees that are outside of the bank and costs related to real estate assets diminish. Recurring cost of risk stands at 25 basis points in second quarter '19, while lower NPL entries support the guidance.

Moving now to asset quality. NPAs are 6% down quarter-on-quarter and 28% year-on-year, while NPL ratio drops below 10.5%. NPL ratio keeps improving and stands well below the sector and is second best among listed banks. We expect to widen it up as NPL entries remain low. Gross real estate asset outflows of EUR 143 million in the quarter, of which 41% is land, while coverage remained flattish at 50%. And lastly, Texas ratio drops to 63%.

In terms of solvency, CET1 fully loaded improved to 12.8%, an increase of 35 basis points quarter-on-quarter, supported by organic generation and NPAs reduction that more than offset the dividend accrual and lending growth. CET1 phased-in ratio stands at 14.3% and total capital ratio at 15.9%, well above capital requirements. And regarding IRB models, as I said, we are pleased to announce that after carrying out a comprehensive review, the ECB formally communicated in July 2019 that Liberbank was ready to move to the last stage of the process.

As we have commented in the past, getting here has been a long process, and although we already used the IRB models in our day-to-day business, we are waiting for the approval. Approval that would provide flexibility to keep a solid capital position and attractive shareholder remuneration, while at the same time, continuing to improve the profitability of the bank.

Lastly, we keep improving our shareholders' remuneration through different ways: the EUR 22 million cash dividend paid during the second quarter against 2018 results; cancellation of treasury stock during July, around 26 million shares, representing 0.84% of outstanding shares; and the improvement of the tangible book value per share that increased EUR 2.94 per share, an increase of 8% year-to-date.

Now I leave the floor to Jesús Ruano, who is going to present the results in further detail.

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Jesús Ruano Mochales, Liberbank, S.A. - Chief Corporate & Financial Officer [3]

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Thank you, Manuel, and good morning to everyone. We start on the detail of the numbers with the commercial activity slide deck. As Manuel was commenting, our performance in volumes and productivity remains strong. At the bottom, in the right, you can see the outstanding improvement in productivity. I mean, the table in the left, you can see the mutual funds, which amount EUR 3.4 billion at the end of June, growing by 10% in the last 12 months, while, as Manuel was saying, the sector has experienced minus 6%. So given this good performance, the support of JPMorgan and some innovative products we are about to launch, we think that we will be able to continue growing well above the sector, closing the gap that we still have, compared to the benchmarks in terms of mutual funds over total deposits.

Continuing with mutual funds. The strong growth is coming together with a change in the mix with more weight of balance funds versus money market or fixed income funds, what is also better for fee generation. Fees have multiplied by almost 3x in 4 years, as you can see at the bottom in the left. And regarding insurance, as you can see in the right, recurrent revenue contribution in the first half of the year has been EUR 20 million, going up by 6%. So as Manuel was commenting, both assets under management and insurance together represent today close to 50% of our current net income, excluding trading, with very positive prospects ahead of us, even there's still high remaining potential and without any capital consumption.

Loan book goes up by 8% in the last 12 months or by 4%, excluding public sector. Apart from our focus on mortgages, we keep having double-digit growth in consumer lending on a yearly basis. In corporates, there's also a positive performance, although at a lower level, comparing to previous quarters, as we are seeing new production prices to tighten in some specific segments. In public institutions, we have again generated double-digit growth in this quarter, with good names and mostly at fixed rates in order to protect the NII. New production keeps going up, although at a lower pace in corporates. We are very comfortable regarding risk profile. In the cases of both corporates and consumer lending, we are doing most of the new production with preexisting clients accounting with good information.

In the case of mortgages, new production, average loan to value is below 70%, affordability ratio is below 27% and the PV is 0.56%. Our track record in this quality is one of the best in Spain, especially in Asturias, where we previously operated as Cajastur, one of the 4 savings banks that was merged into Liberbank and which had the lowest NPL ratio during the crisis in this specific portfolio, mortgages. And today, even after the merger of the 4 savings banks, we have a significantly lower NPL ratio in this portfolio comparing to the sector average, as you can see at the bottom in the left. This is a product that we know very well and which is key for us, in order to capture all our clients through all the channels, while we maintain risk management totally in our hands. It is also very profitable. Manuel was commenting before, risk-adjusted return on capital is close to 14%, and cross-selling, we're at 3.5% additional percentage points. And this is under standard -- the approval of IRB models, which are already being used for risk management will boost this profitability metrics.

As in previous quarters, we continue doing 60% of the new production at fixed rates, and almost half of the portfolio today is not affected by Euribor.

Very quickly here, just to highlight that other products are showing also healthy growth and increasing penetration, as it is the case with working capital or credit cards. Manuel has already commented the position as best national bank and second bank in Spain in terms of quality services, having widened the positive gap versus the sector, again, this quarter.

We'll also keep advancing with the digital plan, assumed by the high growth in both active digital clients and products sold. Functionality and accessibility are also progressing. Our customers can already associate their credit cards to any of the 3 existing payment platforms, Google Pay, Apple Pay and Samsung Pay. And very recently, we have also signed a strategic alliance with Google Cloud and atmira to develop innovative solutions in the banking sector, creating new functionalities based on artificial intelligence through the latest cloud infrastructure technology.

Well, moving through the P&L. The NII goes up by 2.3% in the quarter and by 4.1% comparing first half this year with first half last year. As you can see on the right-hand side, strong lending growth and lower cost of wholesale funding are more than offsetting the likely lower contribution of the fixed income portfolio. So in spite of the lower rates, we maintain our mid-single-digit growth target for the year, thanks to our lower sensibility -- sensitivity, sorry, to lower rates and also to the measures that we are undertaking and we will comment along the presentation, including the 20% growth in mortgages Manuel was commenting.

Regarding the low sensitivity, during the last years, given the extremely low rates, we have taken a more neutral position towards rates, have been doing as much as 2/3 of the new production in mortgages at fixed rates during many quarters. In the cases of public institutions and consumer books, most of the stock and almost all the new production is at fixed rates. In the case of corporates, new production is also more weighted towards fixed. So today, only around 40% of the total loan book is affected by the decrease in reference rates. Thus, our position is quite resilient, and we will continue benefiting from new production in lending at higher prices comparing to the bad book and asset, even increasing new production in mortgages. Besides, in the funding side, we have room to reduce costs in both retail and wholesale, as I will comment in a minute.

Customer spread improved in the quarter by 4 bps, while the NIM goes up by 1 bps, and this is thanks to the new production we are doing at higher rates in the private loan book. Front book yields, excluding public sector, stand 75 bps above back book. Mortgage and SME yields on new lending will continue to stay well above the stock and is slightly above the previous quarter.

Regarding cost of funding, term deposits average cost goes down in the quarter by 1 bps, standing at 8 bps, while new production average cost has been 4 bps. Here, as well as in the site accounts, where we have some costs, we have room to improve given the current reference rates. And we are going to move pricing to 0 in the case of pure retail. In the case of corporates and public institutions, we also have significant room to reduce costs, as we are already charging negative rates to financial corporates, and we are reviewing the situation of the rest.

Regarding wholesale, we have the maturity of EUR 152 million covered bonds in the second half of the year at 1.34%. In general, prices at which we have the covered bonds under Tier 2 are too high compared to our current new initial pricings. In the case of the EUR 300 million Tier 2 we set back in 2017, which was swapped to floating a time ago, it has now a cost of 6.3% when it is trading at almost half this yield. So we will be able to call it at the beginning of 2022, and obviously, replace it -- we will replace it by a much cheaper instrument.

In the case of covered bonds, the leverage cost now is 142%, when new initial pricings would be around 25 bps fixed for 7 years. So the good news is that these expensive liabilities that's within the past were passed to floating a time ago. Therefore, we will benefit from the -- we are benefiting from the decrease of the reference rate. And in the long term, we will also be able to benefit from the replacement at much lower prices.

Recurrent fees increased 2.5% in the first half this year versus 2018 first half. Mutual funds fees go up by 20%, and insurance fees go up by 12%. Banking fees saw resilience despite competition for clients and lower contribution from recoveries. In the second half of the year, we expect a strong trend in our balance sheet to continue and a better performance in banking fees through the stabilize.

Operating expenses fall by 3.5% year-on-year, supported by a reduction in personnel expenses of 1.5% and by a reduction in administrative cost of 14%. If you look to the 2 charts at the left-hand side, from 2010, we have reduced both number of branches and number of FTEs by more than half, being one of the benchmarks in Spain in cost cutting, and we are far from being finished. In the last 12 months, we have reduced our branch network by 15%, and the number of FTEs by 5%. Restructuring costs during 2019, I mean, booking in 2019 have a payback of around 1.5 years, that should support a lower cost base going forward.

The reduction in our branch network is associated to the development of an agency network, especially in some small markets, where our traditional branch is not profitable but where the size of the market and volumes allow to maintain presence. We already account with 149 agencies, which represent 19% of the network, and they are performing quite well in terms of businesses volumes -- business volumes, and they're also allowing us to improve efficiency as we are being able to substitute fixed cost for lower variable costs.

Our productivity levels show an outstanding improvement in the last years, as you can see in the left of this slide. We are now #2 in terms of productivity in both metrics, as you can see in the right. This is strong position. We will be more visible in our cost-to-income and other profitability ratios as we advance with the disposal of the foreclosed asset portfolio that has many costs associated and as we complete our restructuring plan.

Loan loss provisions amount EUR 15.5 million in the quarter. Annualized cost of risk is 25 bps, in line with our target.

And finally, the detail of the P&L. In the left, starting with a quarterly one, just highlighting those items that I have not commented before. Results from equity method stakes are EUR 21 million, coming from our indirect stake in EDP and from our life insurance JVs. Trading gains are EUR 12 million, mostly from fixed income sales. Other operating revenues and expenses are minus EUR 5 million, EUR 2 million or EUR 3 million worse than in a normal second quarter due to some nonrecurrent impacts and operating losses. We have booked EUR 7 million in provisions, mainly for further restructuring. And in the other profit and losses, we have minus EUR 6 million from the foreclosed asset portfolio.

In the right, you have the first half P&L compared to last year. NII is EUR 230 million. Gross income is down in 7%, due to lower trading gains and also lower nonrecurring impacts comparing to 2018. Remember that during last year, first half, we had a positive EUR 4.7 million impact in fees, while in the other operating revenues and expenses, we had also a EUR 15 million positive impact. Pre-provision profit is EUR 144 million. Profit before taxes is EUR 90 million and profit after taxes is EUR 73 million.

So in conclusion, due to the lower-trading gains and absence of nonrecurrent revenues, the year-on-year comparison is slightly negative. However, all the key lines, NII, recurrent fees and operating expenses are performing quite well and in line with our plan.

Moving to asset quality, Slide 28. We continue to reduce both NPL stock and NPL ratio at an accelerated pace. The stock of NPLs has gone down to close to EUR 1 billion gross and NPL ratio is now 4.1%, second lowest among the listed Spanish banks. NPL entries go down 13% year-on-year, despite the larger size of the portfolio. And this will stay at low levels in forthcoming quarters as most of the refinanced loans are already classified as nonperforming and as the wait of watchlist refinanced loans is negligible, as you can see at the bottom in the right.

NPLs coverage is 50%. The net book value of NPLs, which is close to EUR 500 million is covered in 119% by collateral value. NPLs mix has improved since last year, with mortgages representing now 41% of the stock. Foreclosed assets are down 7% in the quarter and 23% in the last 12 months, while coverage remains flattish at 50%. As the stock of NPL reduces, entries to this portfolio are clearly coming down. They are only EUR 37 million in this quarter. So lower entries and strong retail sales are behind this reduction we are achieving of the stock. We have sold close to EUR 300 million in real estate gross debt in the first half of the year. Rotation is 27% in the first 6 months of 2019 comparing to 22% in the same period last year, as you can see at the bottom in the left. And close to 60% of the sales in the second quarter have been land and work in progress.

Finally, on this section, just the summary of our target NPL ratio should be reduced from current 4.1% to below 3% at the end of the year. NPA ratio is below 10.5% on the end of June, coming from 12.4% at December last year, and the target for year-end is to get below 8%. Regarding Texas ratio, it is at 63%. And our target for the year-end -- I mean, for December, is 55%, you can see at the bottom in the right.

On Solvency, CET1 fully loaded ratio goes up from 12.45% to 12.80% in the quarter, mainly thanks to organic capital generation and NPAs reduction that more than offset dividend payment and lending growth. Manuel has already commented the important state we have achieved in our process to obtain IRB models approval for the mortgage book in the short term. Here, just to remember, the gap we have in risk weighted asset density comparing to the average of Spanish banks already under IRB. This average could be slightly affected by the impact of TRIM for some players, but in any case, we could expect a significant reduction in our density, closing a significant part of this gap, subject to the approval of the ECB. In the right, well, you can also see the increase in the current year of our tangible book value per share, which has gone up by 8.5%.

And finally, on the presentation, liquidity and wholesale positions. We closed the quarter with a 95% loan-to-deposit ratio in spite of the high growth in lending. Both LCR and NSFR are well above regulatory requirements. Wholesale funding, there's a decrease in money market in EUR 1.6 billion in the quarter, associated to a reduction of the fixed income portfolio that we would see in a second, and this is the only relevant change. As you can see here, we have reduced the size of the fixed income portfolio, EUR 1.7 billion, of which EUR 1.1 billion were short-term BTPs, with a yield of around 20 bps. So the impact in the NII from this disposal is much limited and is already considered in our target for the year. The portfolio now has EUR 8.3 billion with 1.46% average yield. This has gone up in the quarter. It was around 1.3% at the end of March and duration is now 2.7%. So this is all on the presentation.

Thank you very much. And Juan Pablo, we can go to the Q&A.

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Questions and Answers

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Juan Pablo López, Liberbank, S.A. - Head of Corporate Development and IR [1]

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Okay, perfect. Thank you. Thank you very much, Jesús. Now we move to Q&A. We can start with the first topic regarding P&L. And the first questions are related to net interest income. There are several questions, maybe I can ask everything together, and maybe you can answer in just one.

But first one is regarding guidance for 2019-2020, in terms of loan growth expectations as well. And maybe if you could elaborate a bit more regarding the figures you commented regarding the percentage of the mortgage book and the total loan book that are not sensitive to the interest rate movement?

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Manuel Menéndez Menéndez, Liberbank, S.A. - CEO & Director [2]

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Okay. Thank you very much. Well, regarding guidance for 2019 and 2020, as we have said in the -- along the presentation, we maintain the mid-single-digit growth for 2019, and we are also expecting positive growth for 2020. This guidance takes into account the reduction of the main reference rate. It was mainly Euribor in around 20 bps, which, for us, has a limited impact, mainly due to the fact that, as already commented during the presentation, around 50% of the mortgages. The stock is not affected by lower Euribor after several years of doing the new production, mainly at fixed rates. Regarding the total loan book, which is also part of the question, around 60% is not exposed to lower rates. Bear in mind that in the case of public institutions, consumer and corporates, most of the exposures are either at fixed rate or without sensitivity to lower rates. Besides we have been doing, as you know, most of the new production in mortgages in many quarters, during many quarters, in around 2/3 at fix. This is a sensitivity. This is the reason why we have low sensitivity. Apart from that, in the funding side, we already have, coming from a time ago, the covered bonds and subordinated debt at floating. So considering this limited impact of lower rates, our targets are maintained based on a continuity of our plan together with some new actions that we have taken. First, we have decided to increase new production of mortgages around 20% in the second half of the year. In this segment, we are clearly outgrowing our peers, and this is proving to be very profitable for us. Some of our competitors seem to be focusing on other segments more, leaving us with a space for approval, where we are a specialist and we are cross-selling leaders to achieve very interesting returns. In general, I mean -- and this was also the second question, the lending growth will continue to be around mid-single digit this year and also for next year. This is behind our targets. As I said, what we are changing is increasing the production in mortgages and more or less maintaining the lines -- the trends in the rest. Also commented during the presentation, we are going to reduce further the cost of deposits. In retail term deposits, renewals will be at 0. And in retail side deposits, we will also eliminate any cost. In financial corporations, we are already charging negative rates. And we are accounting with reducing the cost of deposits of other corporates and public institutions to 0. This is what we have in our numbers, but we also think that in the current environment and especially as rates get worse, it could make sense to charge negative rates to some nonfinancial corporates, probably over setting thresholds, and we are currently looking at this. So low sensitivity together with maintain strong lending growth of around mid-single-digit, emphasizing on even increasing in mortgages are behind our mid-single-digit target for 2019 and positive growth for 2020. I think I have answered the 3 of them. Okay.

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Juan Pablo López, Liberbank, S.A. - Head of Corporate Development and IR [3]

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Yes. Thank you. Regarding sensitivity, there are some questions related to the sensitivity on NII of drop in interest rates of 10 basis points for the year 1 and year 2. Please?

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Manuel Menéndez Menéndez, Liberbank, S.A. - CEO & Director [4]

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Okay. Yes. A minus 10 bps decrease in the 12-month Euribor, which is the main reference. Well, we could have a minor positive impact in the NII of the first 12 months at 0.28%. While in the second 12 months, the impact would be negative in 1.36%. It is very important to highlight that this is a static sensitivity exercise that does not take into account new production lending or further actions on deposit costs. We strongly believe that we could easily absorb rate drops of this magnitude, provided that the economy and this bank keeps holding up well, as we believe it will continue to be the case.

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Juan Pablo López, Liberbank, S.A. - Head of Corporate Development and IR [5]

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Okay. Thank you. Now moving to fees. There are also some questions regarding guidance for fee income.

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Jesús Ruano Mochales, Liberbank, S.A. - Chief Corporate & Financial Officer [6]

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Okay. Yes. In fees, we are expecting a stronger second half of the year compared with the first half. Basically, thanks to the performance in mutual funds continuing -- I mean, improving the current trend, supported to highest end by our alliance with JPMorgan. And also by forthcoming innovative products to our customers. In insurance, we shall continue growing at similar levels in the first half and banking fees should stabilize. So we should be broadly in line with our 5% growth target in current fees.

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Juan Pablo López, Liberbank, S.A. - Head of Corporate Development and IR [7]

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Okay. Perfect. There's just one question regarding the quarter-on-quarter comparison fees. Just to highlight here that, in our case, the first Q usually is strong because we book the life risk insurance products. And it's little better, but if you look on ideal comparison, you can see the increase year-on-year. Maybe now regarding costs. If we can provide guidance regarding cost for 2019? And related to this question, also, if we expect any additional restructuring charges going forward?

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Jesús Ruano Mochales, Liberbank, S.A. - Chief Corporate & Financial Officer [8]

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In running costs, we will close the year well below the EUR 400 million target that we have, including amortization. During the first half of the year, we have continued with our restructuring plan, as I said before, which has a payback of around 1.5 years, and therefore, is a very positive in financial terms. And due to this process, we are achieving best-in-class productivity ratio with low restructuring costs. We are going to continue transforming the branch network and restructuring, assuming there are other changes in the structure of the bank to adapt the bank to the requirements of the market. We don't expect a big amount of restructuring costs in the second half of the year, but this is a continuous process that we are going to continue since it is positive in financial terms. So -- but nothing especial in the second half of the year.

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Juan Pablo López, Liberbank, S.A. - Head of Corporate Development and IR [9]

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Great. Perfect. Now regarding cost of risk, if we can confirm guidance?

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Manuel Menéndez Menéndez, Liberbank, S.A. - CEO & Director [10]

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Yes, we maintain the 25 bps target as a cap.

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Juan Pablo López, Liberbank, S.A. - Head of Corporate Development and IR [11]

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Okay. Perfect. Now moving to other topics. There are some questions regarding TLTRO3. Do we have any plans that we could share?

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Manuel Menéndez Menéndez, Liberbank, S.A. - CEO & Director [12]

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Well, we have not yet decided. It is true that the new TLTRO3 offers the possibility to extend current TLTRO2 at an attractive cost, but we have time before taking our decision, so we have not yet decided.

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Juan Pablo López, Liberbank, S.A. - Head of Corporate Development and IR [13]

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Okay. Thank you. There's one question also related to deposits. If we can share the split between corporates and retail deposits?

It's around 17% corporate and public administration, and 83%, the pure retail deposits.

Another question regarding litigation and potential impact from IRPH. If we can update?

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Jesús Ruano Mochales, Liberbank, S.A. - Chief Corporate & Financial Officer [14]

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Our risk is very small in this sense. So any potential impact would be no material at all.

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Juan Pablo López, Liberbank, S.A. - Head of Corporate Development and IR [15]

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Okay. Moving now to asset quality. We confirm our targets, but regarding NPLs, I don't know if you want to add anything else?

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Manuel Menéndez Menéndez, Liberbank, S.A. - CEO & Director [16]

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We can elaborate a little bit more. I mean, as we commented in the presentation, for 2019, we maintain our target of reducing the NPL ratio below 3%. This implies reducing the stock to a level close to EUR 650 million from the current EUR 1 billion gross that we have. The net book value is around EUR 500 million today. Entries, as we have seen, continue to be very low, while exits remain strong as in previous quarters. Here, the recovery team of the bank is doing a good job. And regarding foreclosed assets, in the next quarters, we will continue with our plan, which is mainly based in retail sales, which is working quite well with the support of our branch network as a new channel that we have been developing in the recent quarters, which is building momentum and is performing quite well. Sorry, maybe just to highlight the target of 8% NPA ratio that we have commented in the presentation, but this is what we are expecting. Our NPL ratio below 3%, NPA ratio below 8% for the end of the year and the excess ratio of 55%.

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Juan Pablo López, Liberbank, S.A. - Head of Corporate Development and IR [17]

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Okay. Now moving to capital. There are some questions regarding IRB models. If we can give any more color regarding timing?

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Jesús Ruano Mochales, Liberbank, S.A. - Chief Corporate & Financial Officer [18]

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Okay. As I said, after carrying out a comprehensive review in July 2019, the ECB formally communicated that Liberbank were ready to move to the last stage of the process. I cannot emphasize how crucial and transformational this process has been for us. Besides the capital benefits to come, this exercise has pushed the bank to improve the qualitative nature of the information that we use in making lending decisions. This will and has translated in significantly better lending standards. In terms of calender, I think -- it's difficult to say but based on previous experiences, we expect the internal model review to finalize around the end of the year.

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Juan Pablo López, Liberbank, S.A. - Head of Corporate Development and IR [19]

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Okay. Thank you. There are some questions regarding potential headwinds in capital in the second half of the year, if we expect anything?

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Jesús Ruano Mochales, Liberbank, S.A. - Chief Corporate & Financial Officer [20]

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No. I mean, we are seeing that in risk-weighted assets, we are growing in lending, but with a reduction of NPAs, we are more or less offsetting. There are other movements every quarter, but this is a general trend. And then in the case of the numerator, we are expecting to continue generating organic capital. So we are not expecting any headwinds.

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Juan Pablo López, Liberbank, S.A. - Head of Corporate Development and IR [21]

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Okay. Thank you. There's a more detailed question regarding the weight of the valuation adjustment on the capital.

This is around 50 basis points right now.

Now moving to M&A, there are some questions regarding our plans in terms of M&A, if we can update. There are some specific questions regarding some peers, like Unicaja Banco. Do you have any comments?

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Manuel Menéndez Menéndez, Liberbank, S.A. - CEO & Director [22]

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Okay. Regarding M&A and other things, we are here to generate value for our shareholders, and we will continue to work hard to deliver such returns despite the current low-interest-rate environment. In this context -- especially in this context, we recognize that consolidation process can be also a good way to drive shareholders' value. We'll design it, and we'll execute it. The M&A process is clearly favored the generation of costs-efficient synergies that can be very substantial. And in this context, we remain open to analyze any consolidation initiative that is well descended and that can generate value for all our shareholders. Talking about specific negotiations. As we explained in the relevant fact, the measure with Unicaja did not succeed earlier this year, as we did not reach an agreement on the terms of the potential integration, basically on the price. As per Abanca, we have not much else to say. Just, let me emphasize that any approach to Liberbank in order to be considered, we will have to comply with all the stipulation set by the law. And we are open, as always, to analyze any transaction that we -- that could make sense.

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Juan Pablo López, Liberbank, S.A. - Head of Corporate Development and IR [23]

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Okay. Thank you. That's all from our side. We remain available to answer any further questions, and wish you good holidays. Thank you.