Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) Earnings Call Transcript & Summary

So good afternoon, everyone. Good afternoon. It's my pleasure to welcome Onur Genc, BBVA's CEO. Good afternoon, Onur.

Good afternoon.

Thank you very much for taking the time. We're delighted to host you today. So thanks very much. So the agenda for today, we have about 25 minutes set aside to discuss the investment case. Afterwards, we will open the floor for a round of questions. And then we will end with an investor survey. You can use the devices you have in front of you to participate. So welcome to participate.

So if we start with the, I guess, the elephant in the room, the tender offer for Banco Sabadell. Can you walk us through the updated deal scenario? And what do you see as the strongest case for Sabadell shareholders to accept the deal?

The strongest case -- so what is our pitch to Sabadell shareholders, is what you are asking?

Correct.

Well, I mean, it's going to be a repetition for the ones who have been listening to us for 16 months, because it has taken 16 months from the launch of the offer to today where we opened the acceptation period yesterday, as you might know, the tender offer acceptation period. But a few bullet points for the Sabadell shareholders. Number one, we do think it's a very straightforward transaction, because it's an in-market consolidation play. In-market consolidation is ultra relevant in our view, in an industry where the costs are going up in an area where it is mostly fixed cost, which is technology. We mentioned it multiple times in the past. The cost of technology within the total BBVA, it used to be 20%, 5 years ago. Today, it's 26%. It keeps going up. In Spain only, it's 33%. So 1/3 of the cost of BBVA in Spain is technology, and it has been growing very, very -- in a very high way. And given that it's fixed costs, larger scale helps. That is why, for example, again, in the context of Spain, our technology cost is 1/3, is EUR 1.1 billion. BBVA spends every year, EUR 1.1 billion to technology. We don't know the exact numbers in this categorization of Sabadell, but something similar, because they're also a very large bank. Why are we spending hundreds of millions of euros, in our case, EUR 1.1 billion to technology? Two different banks serving the same market with two different systems, two different applications, two different brands, it just doesn't make sense. As a result, there are a lot of synergy potential -- there's a lot of synergy potential in this transaction. And we estimated our presentation on Friday has explained this in detail, but EUR 900 million of synergies. Because we are consolidating within the market, EUR 900 million of synergies. Is this big? This is pretax, obviously, EUR 900 million as compared to the profit base of Sabadell, which is EUR 1.6 billion, they are expecting, EUR 900 million is a lot of money, a lot of money. So in-market consolidation, very straightforward transaction, with a lot of synergy potential. And it's also a complementary business. They are very good in SMEs. We are very good in retail. We are very good in corporate business. So it's a good match. All combined, it makes sense. What does this mean for the Sabadell shareholder, coming back to your question. Given this huge synergy potential, we have basically extended, in our view, a very attractive offer to Sabadell shareholders. You might have seen this with regards to the undisturbed price, we offered a 30% premium, 30% premium when we launched the offer. It was 42% premium versus the 1-month VWAP of the undisturbed price, 42% premium. And if you compare this 42%, for example, to the deals announced afterwards, other tender offers like ours, unsolicited that happened mainly in Italy. And three of them have actually reached a success, three of the five offers launched after BBVA. This 42% compares very favorably as compared to 19% in one case, 14% in the other, 13%. So when others are offering 13%, 14% premium after rounds of increase of the price upfront, we offered 42% premium unforeseen in these type of transactions. So for the Sabadell shareholder, a lot of synergies, which is then reflected into a very high premium. And as a result of this premium, our EPS earnings per share upgrade that we are estimating for a Sabadell shareholder, solitario and solo versus as part of BBVA, it's 25% EPS upgrade. So it's a great deal. It's a great deal. And as we said many times before, a straightforward transaction, a lot of value. We do think it has to happen. It should happen. But if it doesn't happen, fine also. We also announced at the end of July our stand-alone plan, EUR 36 billion excess capital return in the next 4 years to our shareholders, amazing plan in our view. If it happens this deal, fine because it makes sense. But if it doesn't happen, we have a plan to deliver. We are very excited about that stand-alone plan ourselves as well. If it doesn't happen at these terms, we are very happy to move away and go into our own stand-alone plan and execute on that plan. I hope it was clear.

Yes, it was very clear. If we move on to capital, which I guess is another key pillar of your story, you're running at a 13.3% CET1 ratio and you're guiding, as you just said, to EUR 36 billion available for distribution between 2025 to 2028. That's a lot of money on a stand-alone basis. How do you think about deploying that capital between ordinary dividends, buyback, loan growth and potential M&A?

Again, we are very clear on this one also for a long time, but we have a few principles that we go really hard on. Number one, every organic growth opportunity has to deliver above cost of equity through the cycle in the long term. And we have established, in my view, a very good system. I mean, we spent a lot of energy on this as a team. But every single loan that BBVA gives in any geography, I was giving the example of any country actually you pick, but a loan that you give today in Peru in my desktop, I can go and I can check the return of that loan at the transaction level and at the client level for the return on capital of that client. So the organic growth has to pass a certain return above cost of equity through the cycle. You can invest in a client, you have a pool of investment. But in the medium term, you have to make sure that, that client delivers returns. That's the first principle. All initiatives that consume capital has to deliver above cost of equity through the cycle. The second principle, capital is scarce resource. They compete with each other, different initiatives who are basically demanding that capital. They have to compete with each other and whichever is delivering the best return should get that capital. That's the second principle that we have. With those two principles in mind, all else being equal, meaning at the same return levels, though, we have a preference. First, we prefer organic growth, because organic growth, it builds franchise value. You basically ensure the stability and long-term consistency of your returns. So organic growth, all else being equal, I underline once again, organic growth comes number one. Then we go share buyback, because share buyback or any form of payout, but share buyback, because it has no execution risk. Again, all else being equal, you do share buyback. And then, if it makes strategic sense and in that context, we like domestic consolidation as we are trying to do with Sabadell, but going into new markets and so on, very difficult on those. But in-market consolidation and if it makes sense also financially -- strategically and financially, then you can do M&A. But in that order, organic growth, share buyback with very limited execution risk or no execution risk and M&A as long as it makes strategic sense and financial sense. That's how we look into it. And together with the execution that we have been doing, this capital discipline and this way of being very rigid about these concepts, which we think is a good thing, we have delivered one of the best in the European banking tangible book value growth as a bank. We have the highest return on tangible equity in Europe. Among the 15 largest European banks, BBVA is #1. And we do have the best TSR. If you look into the EUR 100 that you put into BBVA stock, at the beginning of 2019, which is the date that the new management team of BBVA has started, since then the EUR 100 today is EUR 497. EUR 397 appreciation. That EUR 397 appreciation, European banking is EUR 220, around EUR 200 for the Spanish banks. So we are doing better than others because we execute well, and we have the clear ideas about the capital discipline. So EUR 36 billion, grow as much as you can as long as it's profitable. Go back to share buybacks and deliver -- give it back to the shareholders if you cannot grow. That's kind of the motto.

That clarifies. Yes. If you look regionally, and we focus now on Spain. In Spain, volumes and deposits are still growing very strongly. They've been growing around 5% to 6% per year. So that's very impressive. As rates stabilize, should we expect NII to continue to grow like in a mid-single-digit pace?

In the medium-term plan, we have given guidance for every single geography. In Spain, we weren't specifying it at the NII level, but it's specified at the revenue level, which is mostly NII. But revenue growth -- we said it, low to mid-single digits. So along the lines that you mentioned. And we think it's a very fair assumption that this happens. for a few reasons. Number one, Spain is doing really well as a country. So GDP growth is quite robust for three or four reasons. Number one, immigration. It is a very pro-immigration country, and it helps with growth in GDP, number one. Number two, it's a service-based economy. What we have seen after COVID is that, if you are a service-based economy, we typically grew better than product or manufacturing-based economy. And Spain, tourism and again, people moving to Spain, because we have a lot of sun in the country. It's a wonderful place to live, to work from there and so on. So the service-based economies have grown in general better and Spain is clearly a service-based economy, relatively speaking. And then the third one is, we have received a lot of funding from Europe. That's the third reason why Spain, because we have received EUR 165 billion in what we call next-generation EU funding. EU basically after COVID, decided to give a lot of money to southern countries. Spain was one of the benefactors. And we have received EUR 165 billion, and half of this was in grants, roughly half, which also helped the investment cycle in the country and so on. It's got a long story short. Spain has grown really well. Last year was 3%. And this year, we are expecting 2.5% to 3%, again, in a context where Europe grows less than 1% because of these structural factors. If Spain grows as such, the banking sector, we think, is going to grow also quite healthily, because Spain has deleveraged, as you know very well. For many years, lending growth was negative. For 15 years, deleveraging in a consistent manner. And since last year, we are turning back the curve in terms of growth. In this underleveraged economy, if GDP growth is there, the banking sector is going to grow healthily. And then within that, BBVA has been growing better than others. We have been gaining 30 basis point market share on average in the last 3 years. We expect that to continue. All combined, it will lead to mid-single-digit volume growth in Spain. And if you take some margin potential decline, because of competition, the revenue growth, as you said, would be low to mid-single digit in that range, 3% to 5% range going forward. But quite positive, quite positive.

Okay. And if we go to the other important market for you, which is Mexico. Mexico remains a profit engine. There is no doubt about that, but faces FX volatility, lower rates and raising competition. Can you walk us through how resilient earnings are against these headwinds? What underpins your confidence in sustaining high single-digit loan and revenue growth with declining cost of risk? And could you give us your assessment of the risk and potential catalysts around the USMCA renegotiation -- as the renegotiation approaches?

USMCA. Okay. So maybe let's divide it into two, the bank and then maybe the economy, and let's start with the bank. We were discussing it, Luisa, Patricia and Ricardo and I, this morning. I've been in the job for 7 years now in this job. For 7 years regarding BBVA Mexico, our bank in Mexico, it has always been -- and I would knock on wood, always been positive surprises over and over again many times, because BBVA Mexico and the banking sector in general, but particularly BBVA Mexico, we have some structural advantages that is going to -- you asked about resilience, that's going to ensure the resilience of our earnings. And I would give you a few things. First of all, on the banking sector, we talk about it in the calls as well, Cecilia, as you know, but banking sector debt over GDP is 33% in Mexico. This is one of the lowest levels even in the emerging markets landscape. It is lower than Peru, lower than Colombia, lower than -- Brazil is 72% on that same metric, more than twice. 33% banking debt over GDP. It's lower than Nicaragua, although Nicaragua is a wonderful market, I'm sure, but it's lower than many other geographies in the footprint and in the emerging markets landscape. That helps banking sector to grow healthily without creating too much cost of risk. That is why we have always grown BBVA Mexico double digit or slightly low double digit many years because of this low penetration level. This banking sector penetration, low banking sector level penetration is something to register when you think about Mexico. But more importantly, in my view, about, again, the resiliency of earnings, I've seen many banks in my life because I'm at BBVA for 14 years now. But before that, I've seen many other banks in many geographies. What we have in Mexico is really unique. Because in banking, I measure the strength of the franchise with the cost of funding advantage versus competition and with the position in hard-to-compete cash flow transactional areas. But if you are in those areas good, you ensure the resiliency of the bank. In Mexico, we have 44% market share in payroll accounts, 44%. I mean a country like Mexico, 44% of the salaries paid in the country, private sector, public sector combined, 44% goes through BBVA. Every month, you receive that salary in the account of those customers. We have 39% market share in acquiring in these POS machines, SMEs, companies, they do have POS machines, merchant traffic in the country, 39% goes through BBVA. And it's very tough to replicate this market advantage. You only do this over time, and you only do this by accumulating knowledge and the IT systems and so on behind that is not that easy. So we have this unique bank. If leverage is going to continue to go up, the growth is going to be there. And if you have this really amazing bank, we have the best NPS, customer satisfaction. We have the best app. We measure it by far the best app. You will benefit from this. That's why you're asking about the resiliency of the earnings. I would encourage all of you on this to go back to the history of BBVA Mexico, you would see that you do have this great bank. Then regarding the country and USMCA, first of all, again, resiliency of the country. In the short term, what we have seen was Mexico this year, we were expecting a lot of uncertainty, because of the tariff discussion, the uncertainty from the tariffs and also the discussions with the Trump administration and everything else. But even this year, which is a very tough year for Mexico, in the first 6 months of the year, exports have increased by 4% in dollars and FDI, foreign direct investment into Mexico, it has grown 8%, 6 months this year versus 6 months last year. It is still growing. So in the short term, and we were expecting -- in the second quarter call, we said that we have -- we are expecting a negative growth rate in Mexico this year. The latest numbers that we see is, again, very exceptional, and we are most likely going to revise our forecast to growth, not so much, but to growth in Mexico versus an expectation of a recession. So in the short term, it's going well, even better than what we would have expected in this very uncertain environment. But the thing that I would say regarding the medium to long term is -- and you asked about USMCA. I don't think it's -- or let me say it this way, it's in the best interest of U.S.A. to keep Mexico fine, to have Mexico in an okay situation. You wouldn't want a neighbor 130 million country, an unstable, not growing country right next to you when you complain about immigration. Because if things don't go well, the immediate outlay, the result of this would be immigration and so on to U.S. and so on. You would want a stable, okay environment, you would want the benefit of Mexico. If I was the U.S., that's what I would have done. And more importantly, there are some structural advantages of Mexico that cannot be ignored. And the labor cost of Mexico on average versus the labor cost in a low-cost state in the U.S., Indiana, I think you did the comparison with Indiana. It's 1:7. 7 Indiana, 1 Mexico. 1, 7. It's not like a percentage. No, it's 7x. So if as U.S. companies, if you want to compete with other competitors, if you want to compete with China, I do think U.S. needs in one form or another, Mexico, a stability right next to its border and a structural cost advantage that cannot be ignored. But long story short, you never know what's going to happen out of these discussions. We have seen back and forth on the trade discussions many times in the recent past. We'll see what happens. But we expect normality and positivity out of this. And if Mexico does okay, not so good, okay, the average growth rate, GDP growth rate of Mexico in the last 15 years is only 2%. If you expect okay, Mexican economy, you would expect very good BBVA in Mexico.

And now moving on to Turkey. You've guided to a contribution of Turkey of 10% to 12% of group net profit.

In the medium-term plan.

Through 2020 to '28. Yes. 2028. But this depends a bit on macro stabilization. How do you derisk that guidance if inflation and rates don't fall as planned?

How do we derisk it? You cannot derisk it. If the country doesn't do well, it will obviously have an impact on you. The only thing I can tell you is that as you might know, I'm Turkish, I'm very close to that market. As long as the team, the minister and the team that is in charge of economy today, as long as they continue to do exactly what they have been doing, I see that possibility of Turkey going off rails much lower. I'm typically very negative on Turkey. People here know me around this. But in the last 2 years, what I've seen in terms of what they are doing, it has been the right things to do. So I'm quite positive on the fact that, the possibility of that derailing is not going to happen. But let's assume, as you say, I mean, yesterday also, they announced the medium-term plan of the country. They are expecting 28.5% inflation this year, 16% next year, 9% 2027, 8% inflation in 2028. A bit optimistic, I would say, but still the intention and the strength that they put into their words -- how they will deliver this or this inflationary path is what counts, I think it's very positive. So in general, as long as the team stays in there, I'm quite positive that it's going to be fine. But if it doesn't happen as such, as you say, going back to your question, let me not mutilate your question. The thing that differentiates BBVA is, in wherever we are, we are either #1 or #2 bank in the big countries. We are #1 in Mexico. We are #2 in Turkey. We are #2 in Peru and so on. In Turkey, we have, in our view, the best bank in the country. The return on tangible equity of our bank in Turkey is much above than the average of the industry, the average of other private banks. If Turkey doesn't go on this path of normalization, but something else, the only thing I can tell you is that being the best bank in the country in terms of returns, the strength of the franchise, we will always deliver value in my view. The best thing about banking is anyone can attack it. The good thing about banking is that the banking sector has to be alive for the economy to be alive, which means if you have a positive premium and in the case of Turkey, this positive premium is very large versus the average of the industry, whatever the conditions are, as long as, again, the country is not in a full crisis mode, whatever the conditions are, you will always deliver above the average of the industry. And if the industry has to survive, the average has to survive. And if you are above, you will always be delivering above your cost of equity. So our focus is to make sure that we maintain this competitive advantage that we are the best bank in the country in terms of returns, in terms of franchise. If the situation turns out to be different than what we were expecting, what we are expecting at the moment, I still think we will deliver decent returns because of this, because we have the best bank -- by far, the best bank based on numbers. I'm quite objective, obviously, on these things based on numbers. If you have the best bank, you will still deliver.

Yes. And now to finish with profitability and I guess, valuation. You've guided to a quite impressive average RoTE of 22% for the midterm, obviously. This is an average in Europe that is around 14.5%. That said, the bank trades at a discount to the sector. What do you think the market is still underestimating in your story?

I should ask the people here or to you. Yes, we have, as you said, 22% goal of return on tangible equity. But more important than the goal, we have already delivered 20%, which is the #1 in Europe in terms of return on tangible equity. And despite that, why are we trading it? The market is the market. You cannot fight with the market, because you don't know what's really happening in the pipes of the market. Rather than thinking about why the market doesn't really understand us as a team, our focus has been and will continue to be, no, no, we deliver. We deliver. If we deliver whatever the market might be thinking today, we'll be corrected tomorrow as long as you deliver. If you deliver what we said we would deliver, the EUR 36 billion excess capital, I mean, we have a EUR 90 billion market cap. If you deliver EUR 36 billion excess capital in 4 years, more than 40% of the market cap delivered to the shareholder in 4 years, it's quite a nice number. So our focus is to deliver that number. Because if you deliver that, which means share buyback and so on, you will be buying our shares at cheap. Fine. No problems, whatsoever. So our focus is rather than complaining about, why does the market not see us and so on, no, no. We continue to deliver -- deliver the numbers, because the market will catch up if you do that delivery. At the end of the day, what differentiates BBVA? What is our equity story different than any other bank out there? Number one, we are diversified. We are in many countries and every market helps you diversify. For some reason, there's less value attached to it, but I do think it's an important notion. And the shareholder can diversify itself, but having this portfolio also helps on multiple dimensions. That's number one. We are diversified, different than others. Number two, I mentioned it partially, but it is very important, very important in the core countries that we operate. We are either #1 or #2. In Spain, we are #3. But in retail banking in Spain, we are #2 also. And again, Mexico, we are #1; Turkey, #2; Peru #2. All the large markets, we are #1 or #2. Having these leading banks with very large scale is an amazing advantage. Many others, basically, no one actually has this kind of 1 or 2 in many markets kind of a play. That's the second reason that we think we are going to be differential. And number three, we are very good in digital, and now we added sustainability to our strategy. In digitalization, we claim, and this is proven by numbers, that we acquire more clients, relatively speaking, digitally than any other bank. We make our client franchise larger through digital capabilities. We put so much money, so much thinking into this, creating this advantage, in our view, was worth it, and it is now delivering results. If you combine them all, yes, I think we should be trading at a higher price, but fine, we'll deliver. We'll get the numbers. And when we do the numbers, the market will see it as well.

We still have some time. Maybe we can open the floor for a question or two.

So two questions, if I may. The first one relates to the medium-term targets that you gave with your second quarter results. So I'm interested in the profile. It looks like quite a significant pickup from where you were at the end of '24 net profit, EUR 10 billion to profitably growing to -- possibly growing to EUR 14 billion. So how should I think about the pickup? Is it going to be back-end loaded, '27, '28? How should I think about '26 in the context of getting from the starting point to the endpoint was the first question, please.

So let's do the first one then. There is not a hockey stick in these numbers. As you said, EUR 10 billion is what we delivered last year. But in the first half of this year, 6 months, we did EUR 5.44 billion, so close to EUR 5.5 billion already in the first 6 months. So if you take the average of the 4 years in the medium-term plan, the average is EUR 12 billion. EUR 10 billion to EUR 12 billion, average EUR 12 billion, it's not going to be a hockey stick. You would see that especially starting next year, there is a very positive dynamic that we think we are going to be benefiting from, which is we have been growing very nicely, market share-wise, but also the countries that we are in are also growing in terms of banking sector. But all that activity growth that was happening is being used to consume the decline in the rates. Because we are asset sensitive, rate sensitive when rates come down, we are being hurt. In the case of Spain and Mexico, we have been growing very nicely in activity, but that activity growth was being used to absorb the decline in the customer spread, because of the rate decline. Starting next year, we assume maybe it's wrong, but based on the assumptions that we put into our presentation, the rate situation would normalize. So if you continue to grow as we are expecting to grow in activity rather than being used to absorb the customer spread decline, it's going to flow directly to the bottom line. And as a result, starting from next year, and this year, again, in the first 6 months, we did EUR 5.44 billion, already above last year. It's going to be a good year this year, but starting from next year, it's going to be in these core markets of Mexico and Spain, you would continue to see a growth in the bottom line, which is then leading this average EUR 12 billion. In short, it's not a hockey stick. It's not very different fourth year and so on. It's an increasing curve because of the dynamic that I just explained.

Okay. Very clear. And the second question relates to Mexico. So based on what you've been saying the last few months when I've listened to your presentation, you seem reasonably relaxed about the macro environment in Mexico. You've obviously got a fantastic franchise, which continues to deliver. Very specifically, therefore, from an asset quality perspective, you've got some reasonably significant overlays. So I mean, could we possibly expect to see some of those being released over the next several quarters?

Some, but it's less overlays that has been the story of cost of risk. I mean the cost of risk, we guided less than 350 basis points, you might have seen in the second quarter call for the cost of risk. The overlays or the beyond business as usual components in that is relatively small. In the second quarter, we mentioned it in the call, in the second quarter, you might have seen that, because every quarter, we do it, when there is a decline in GDP growth expectations, you take a hit, forward-looking hit as an overlay. So we did take that negative hit from the macro assumptions that Mexico is going to be in recession this year. Now we do think it's not going to be in recession. So in the third quarter, most likely, there will be some positive coming from this macro IFRS 9 provisioning. But it's a small amount. The core thing is business as usual, regular provisioning. And on that one, what we are seeing is that it's quite robust, quite positive, better than our guidance, better than our expectations for one single reason, which is -- again, the economy is not doing that bad, better than what we would have expected in this uncertain environment. I gave you the numbers. FBI is up 8%. Export volume is up 4%. Labor market is still doing quite well. More importantly, the rates are coming down. When rates come down, it helps on the cost of risk. So cost of risk at the fundamental level is still quite positive.

Should we now move to the -- unless there is any other questions. Should we move to the investor survey, please?

Can I also vote? I can buy the sample size of one, I can buy the whole thing.

I won't read the answer, just the question. What would cause me to become more positive on BBVA shares?

Did you see the results, by the way. No? It's interesting, Okay.

Macro resilience and outperformance in Mexico and Turkey.

Mexico. Okay.

Okay. What are you most excited about at BBVA?

I hope it's not number 5.

Capital generation capacity. That's a good one. Number three, how do you expect BBVA's RoTE to develop over the next few years by 2028 relative to 2025? Modestly higher. Number four, how do you see potential risks to BBVA's capital and dividend? Okay. Overwhelming upside risk on better earnings and lower...

I think, you can cut it here. It doesn't seem very good.

Number five, which of BBVA's businesses do you think has the greatest potential to positively surprise consensus over the next 2, 3 years? Mexico, sustaining high growth despite lower rates.

I also agree with this one. Yes. Mexico. It depends on whatever happens, you'll do really good.

Well, I don't think there is a sixth one. I think we're done now. Thank you very much for taking the time.

Thank you all for joining.