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

All right. Thanks everyone for joining the session...

Thank you so much. So Anton, you are having the Spanish banks one after another...

As I was going to say from one Spanish bank to another, or I could have said from one global bank to another.

On global bank tenders, yes. It's a bank that we respect a lot. So it's great to be here...

Well, there's a lot of overlap, of course. But obviously, I'm very pleased and thank you Onur for joining us. Onur Genc, Group CEO of BVA.

I think we can get started, if you agree. And maybe a good way to start is to look at sort of overall the outlook for the group. You've delivered a return on tangible equity of 22% in the first half of the year. That's broadly in line and consistent with your ambition to average around 22% over the plan period, 25% to 2028. At the same time, BBVA has consistently stood out in terms of better growth among European banks. And my question is, against this backdrop, how sustainable do you think the combination of sort of profitability growth and be able to sort of distribute the distribution -- the shareholder distribution that you delivered -- that you committed to distribute?

Sustainable, is it and also sustainable the distribution or the links with the distribution. If that's the question, yes? Antonio, as always, thank you so much for hosting us, for hosting me. And thank you also for pointing out to the growth dimension because it is true that our return on tangible equity in the first half of the year is now 22.2%. The decimals are even important for us. Every penny counts, as I say, in the bank. So the profitability has been at the forefront, and people were talking about it, writing about it, that we are the -- among the largest European banks. We are the most profitable. But the growth I mentioned in my humble view is less noticed or less taken into account, and I do think it's a very important number. And you have given the number, but let me repeat that once again. So we have grown our lending book 62% since the end of COVID since the beginning of 2021, 62% and the average of the 15 largest European banks, excluding us, is 13, 13 versus 62. I do think there's a meaningful difference in there as well. So our growth profile is also very noteworthy. It might be beyond the profitability. So in short, the question of sustainability. Is this sustainable? At these levels, our perspective is, yes. And the clear, yes, for a few reasons, and some of you who follow us really closely, we quote a few factors that, in our view, they are hard to replicate assets or capabilities that is leading us to this conviction that we will continue sustainably on these levels. What are those? Number one, we are a diversified bank, but we typically operate in low leverage countries, which is very important. It's like a household. It's like a company. If you have over leverage you face some issues if you take more debt on. And in our case, we are in many countries, but when you look into the leverage in those respective countries, they are very low. Mexico, is 1 of the least leveraged countries globally. Even in the emerging countries landscape, it's very low, 35% banking over GDP is 1 of the lowest that you can find out there in the emerging markets landscape. Spain -- it's 1 of the least leveraged now after 15 years of deleveraging within Europe. So low leverage countries, number one. Number two, wherever we are, we are either #1, #2 or #3. I mean we don't really care about being #1 or #2, but we have scale. We have leading enterprises wherever we are. And in our business, mainly a retail banking, commercial banking business, scale really matters. And what really matters in our view, still at the moment is local scale and being large wherever you are, having the leading enterprises in wherever you are, makes a huge difference being #1 or #6 in my humble view, there's a huge difference between the 2. That's the second factor that we have. Low leverage diversified bank leading enterprises wherever we are. And on top of that, I would add 2 things that we have been working on really hard in the last 10 years. One is this topic of embracing technology, embracing innovation, embracing digitalization which is, in our view, is a bit differential. Everyone does it, but we do believe it's a bit differential. It is proven by our numbers in terms of customer acquisition and what percent of our new customers come from pure digital channels. very different than the rest of the industry. And number four, very basic concept, easier to set that tone, but we do think our discipline on capital is also very good. At macro decisions, I think we have proven this in our M&A decision, especially in our sales decisions. We sold Chile, we sold Paraguay. We are now selling Romania where we have subscale franchises. So we are capital oriented in our macro decisions and also micro decisions. Every single euro of capital deployed in lending to clients, marginally speaking, that additional euro that you put into a client, it has to be profitable. And that discipline is a mantra in our bank, and we are -- we have also done really well on this one. Given these 4 topics, I'll repeat, diversified low leverage, leading enterprises, wherever we are, huge focus on technology and innovation and digitalization and now AI. And then this capital discipline meta-based concept you sum them up, our conviction is that we will continue to deliver the best profitability in the European making sector and then the best growth in the European banking sector. One final thing as you said in terms of sustainability, how do the sustainability of growth versus shareholder distribution? I'm not sure whether you implied it, but some people tell us that there is a clear trade-off between the 2. We don't agree. For a long-term investor, we do think, again, as long as you maintain the condition that marginally speaking, every marginal euro of capital that you put into deployment, that you put into your launch, as long as that marginal euro is productive and capital productive, profitable, there is no conflict. It actually creates a flywheel. You grow. It's profitable. You create more capital from this about your cost of equity and then with that additional capital, you compensate your shareholders. I mean we were paying EUR 0.31 of dividend in 2021 -- from 2021 results, 4 years ago, 5, 5 years ago, EUR 0.31. Last year, 2025, we paid EUR 0.92, 3 times. And this year, hopefully, we will pay much more. So as long as that growth is profitable, there is no trade-off. It's a flywheel actually, you grow you create more capital, you distribute it to your shareholders. You create more growth through this, you invest, and it's a flywheel positive flywheel as long as marginally you are profitable.

I think you've framed it very well for everyone to understand. I think it's quite important. Maybe let's go to some of the jobs that sort of contribute to what you just said. Starting with Mexico, which is your largest profit contributor, what BBVA is the largest financial institution in the country. And you've clearly been benefiting from the nearshoring trend. When you look at global trade, there's obviously been a significant shift with around 1/3 of global trade, now exposed to some degree of uncertainty, while Mexico is also navigating through sort of the U.S. process, which is going to stay with us. Now what are you seeing on the ground and our overview for your market position?

What you see on the ground is EBIT uncertainty, obviously. But I would say it's 1 of the misunderstood parts around Mexico, but we are quite positive. And let me see let me be more tangible and numbers oriented because otherwise, it's all concepts and nothing is real. So let me give it -- put it into numbers. First of all, before the numbers, I do think this concept of USMCA and the trade relationship between U.S. and Mexico because Mexico, 85% of the exports go to U.S. and so on. It's very important for Mexico. At the core, at the fundamental level Mexico will be a beneficiary out of this, in any case, because not because U.S. cares about Mexico per se, but for the competitiveness of the U.S. for the competitiveness of the U.S. businesses, at the fundamental level, we are positive. Why? We quote this number from time to time, and it's analysis and data done by the U.S. administration, U.S. institutions actually academic institutions in the U.S. The labor cost in Mexico for an average industry and for an average skill level versus a low-cost state in the U.S., like Indiana, I think, was the analysis. It's 1 77, on for competitiveness of the U.S. industry, it's a major difference. You just cannot deny this fact, our competitiveness, U.S. businesses at least, U.S. economic environment needs Mexico. And also, as a neighbor U.S. right next to Mexico, the other way around, you need a relatively stable neighbor. Otherwise, there are issues in immigration and many other crime and drugs and so on. So you need a relatively stable neighbor. So at the fundamental level, that is why if you read the U.S. trade representative report about USMCA, every single U.S. business who contributed to that report, every single one of them basically claimed that they need Mexico in the mix. As a result, all the supply chains are integrated. So at the fundamental level, you just cannot deny the fact that Mexico is needed. But what is happening, you ask on the ground what's happening on that when we share some data. The exports of Mexico to U.S. in the first 7 months of this year versus the 7 months of last year, January, July, is up 16%. The share of Mexico in the U.S. import market has gone up for 15.6% to be precise to 17.2%. So Mexico is gaining share and growing very nicely in the exports to U.S. The average tariff for the Mexican products and goods to U.S. is actually around 4%. And as a result of this, it is true that there is uncertainty. There is uncertainty. But it is true that at the real level when you look into the numbers, actually, Mexico is not negatively affected at all from all the dialogue and political situation around tariffs. But more importantly, I would claim that in Mexico, the key issue has always been in the last 10 years has always been domestic investments because FDI -- even this year, FDI is up 2% first half of this year versus first half last year, up 2% FDI investment. But domestic investments has been an issue. On that one, we see some light at the end of the tunnel. It's this President Sheinbaum. She is putting the right framework into mix. They announced this plan called Plan Mexico, which is basically $70 billion, $80 billion of investments every year in the next 5 years to be done to improve the infrastructure to improve the energy environment, energy production environment of Mexico and so on. And this plan, we see that in every single country because we operate in many, many countries, but it's tangibilizing. We are seeing it in the round. You might have seen it in the second quarter as part of Mexico. There were tenders 37 tenders finalized, worth $9 billion of investments to be done by private sector in the energy industry. They have named and now we are working with each one of them to be able to finance those investments. It is becoming real bit the domestic investments. Given all that, we are relatively positive on the macro environment. And on top of that, if you add the fact that -- again, I mentioned it upfront, low leverage, Mexico is one of the lowest leveraged countries, even in the emerging markets landscape. 35% banking debt over GDP when Brazil 70%. So there's so much potential in banking sector growth. Again, in short, if I wrap up everything up. The country, obviously, there is some uncertainty, but it has not been affected negatively from this latest trade disputes. It is affected actually positively. And on top of that, with the positive buys coming from plant Mexico, we are relatively positive on the environment and on the banking sector.

And I guess that's 1 of the reasons why a lot of players want to our banking license in the country. So staying with Mexico. You make nearly double the ROE of your Mexican banking peers. And whenever that's the case, I think it's natural for the market to wonder to what extent this gap can be sustained going forward with the competitive landscape changing both across banks and fintechs. Now -- what's your view there? And we've seen a few fintechs get a banking license? How do you see the competitive landscape in Mexico?

As you say, the competitive environment is changing with a lot of fintechs gaining ground or being very visible, very active in the market. But before that, Again, we talked about the environment, which is positive in the previous question, but on this one, I can also say that I've seen many banks in my career in many geographies even within the BBVA landscape. I would claim, again, a bit maybe objective, but I believe I'm objective by saying that it is one of the unique franchises that I've ever seen in my life in any country. It has the scale. We have 26% market share. It has what we call transactionality, which is very important for us. You have to be in the cash flow of clients in any segment, cash flow of clients to be able to have a better relationship with the customer. We have more than 40% market share in payroll. We have 35% market share in acquiring. We are over proportionately represented in the cash flow, cash management systems or companies amazing franchise. We have the best technological capabilities. If you look into our digital again, going back to the one of our differentiators as a bank, we are one of the best digital players for sure, in Mexico in terms of digital capabilities. And as a result of that, as we say, we have nearly double return on equity. It has come down a little bit in the last year, mainly because of rates because when rates are low, that multiple comes down a bit. But when rates are high, it goes up, it's mainly because of the rates. But we have the better customer satisfaction than any other player as a large player with 26% market share. It's not easy to be the by far the best customer satisfaction player in the market, which we are. So it's a unique, unique bank. But you ask about the competitive environment. and you refer to, I guess, to the fintechs, which is true. If you look into the last 5 years, the change in competitive environment is mainly coming from this new breed of players that we see in the country, which is fintechs. I can say a few things on that one. So it's a very competitive environment, but we are competing well. Again, past is not always the best estimate of the feature. But if you look in to it, that's the only fact that we have on the table. If you look into our market share, we have been growing market share very nicely, even in the markets, in the segments in the products that fintechs are competing very aggressively like in credit cards, we gained market share in the last 5 years. We gained market share. So fintechs, 1 of them has now 4% market share. Where are they getting their own share. They are getting it from the smaller players, typically, some ultimate midsized players. But us, we are competing real well. We claim that we are one of the best fintechs in the country. Last year in Mexico, we acquired 4.7 million new customers, 4.7%. 84% of the customer acquisition in Mexico came from pure digital channels. They even go to a branch, they didn't call anyone. They became like a fintech, a customer of a bank through pure digital channels, 84%, more than 4 million customers. With these numbers, we are acquiring much more than any other fintech in the country through digital channels, new customers. So we compete really well. And we do think we have certain assets that they cannot replicate. The cash infrastructure. We have 15,000 ATMs. Cash is still very relevant in Mexico. We do have the full product set. Fintechs typically pick a certain product, not the whole thing, obviously, we have the best brand score in the country. I can go on and on. But in short, very competitive, a lot of fintechs. We take them really seriously. I have a dashboard in my table. I go every single day to look into that. One piece of that dashboard is the development of fintechs in Mexico, especially on how they are developing for every single client that is a BBVA customer, we be a credit card customer, who now has who we detect also has a separate fintech credit card. We track that customer one by one. If we see a decline in the spending with us we immediately create a program, a campaign for that customer specifically. So we take them really seriously. But so far, it wasn't us lost position and share. There is some margin erosion, but it's very normal as long as we continue to do 25% return on equity in the country, we are okay.

It's interesting color on the dashboard. Thanks for sharing. Maybe moving on to Spain, which has been -- well, one of the fastest economy once again this year. You've been -- well, been gaining share actually with loan growth at 7% and significantly outperforming the market. A similar question to Mexico, can you talk a little bit more about what you're seeing about business and the competitive landscape. And to what extent are these market share gains can come without compromising pricing discipline and cost of risk?

And cost of risk. The competitive environment is very heterogeneous in terms of segments or products in certain products or actually in only one product, which is mortgage, which is very price sensitive, as you all know, in banking, where -- because you only buy a house and the mortgage once or twice, maybe a bit more, but very few times in your lifetime and you care about the price, you do the research. And so in severe sensitive product. And we see a lot of competition on that one. But beyond that, the competitive environment, in our view, is in general, healthy. But coming -- but you talked -- you asked about the market. So maybe I can break it down into different pieces. The country -- the macro continues to do really well. Spain, the latest forecast that we have is going to grow is 2.4% GDP growth this year. And now we have a positive eyes on that because the numbers came even better than what we thought, so we might need to revise it up. The team is working on this in October, they will be publishing the final forecast that we have. But we are positive 2.4% versus around 1% of Europe. Every single year in the last 5, 10 years, this has been the case. Spain grew more than 2% and Europe much less. So we are -- among the large economies, we are kind of the star in Europe for a few reasons. Number one, there's a very pro immigration environment. So -- and there's a very easy integration, especially most of the immigrants come from Latin America, which is the same language. We share the same culture, and that is creating a bit of a boost to economy that has been creating a boost. There is a lot of service-based economy -- Spain is a service-based economy. And what we have seen, especially after COVID, is that service-based economies, they grow much better than pure manufacturing-based economies. Tourism, again, this year, we are going to have another record, but beyond tourism all the service-based economies, all the service components. I mean, there are a lot of people, we are blessed with some many people basically work out of Spain to do software engineering for many other global companies. For example, the service-based economies are -- our segments are growing very nicely. And also, there has been this investment boost, investment drive for Spain, partially driven by its next-generation EU funds. We have received basically EUR 80 billion in 3 years from Europe to boost the economy, to boost the infrastructure. So there was also an investment component, which was very positive. And when I look into the future, most of these components in 1 way or another, will be there. So we still expect the macro to be quite positive. On top of that, -- so the economy grows well, the first part of the puzzle. The banking sector grows even better for 1 simple reason, macro is strong. But even beyond that, Spain has deleveraged for 15 years after 2010, 10 -- or 13, 14 years. Only after 2024, we are seeing some growth. But every other year, we have seen loan balances come down. And for the first time, after many, many years, basically the leverage in households in corporate is now half of what they were in 2010. And now we are much lower leverage than European averages, EU averages. So there is room also in the banking industry in a positive macro environment to growth. That's why you might have seen it in the first half. We grew our loan book by 7%. So macro is positive. Banking sector is positive. Then you asked about the competitive environment. In this environment, BBVA has been doing really well. We have been gaining market share, but we were very selective in areas where we do think -- again, I go back to the global priorities or global differentiators of BBVA. This capital discipline topic, again, easier said than done. But we are -- it's a mantra in BBVA. We have to be getting the worse of the capital deployed. As a result, in the last 5 years, when you look into what has happened to BBVA again, proven by numbers. We have grown our enterprise loan market share by 250 basis points, not easy in banking to gain as much. We have grown our consumer loan portfolio by 260 basis points, mainly to payroll clients because we are overrepresented in payroll. The only place that we lost market share is mortgages where the competition is. So you asked about growth is coming well. But aren't you compensating the implication, I guess, was the returns? No, not at all. In the areas where there is no return, we stay back. In the areas where we see return, we push hard. As a result of that, we again have more than 20% on an equity in Spain business. So it's going really well. It's the same story as the global thing as well. We have an amazing franchise in Spain. It's a 169-year old bank. The brand is someone that everyone knows. It's the household name in Spain. We are overrepresented in cash flow businesses, as we call them. We have 14% market share in overall lending, but we have 17% market share in payroll. We have close to 17% market share again in acquiring. We are in the cash flow of clients. We have this entrenched customer relationship. We have an NPS, a customer satisfaction, much better than others. Again, it goes back to digital, it goes back to capital discipline. But I don't think we are compromising at all the return because we don't again, marginally, we don't invest our capital in areas that we don't see value.

So very positive in Mexico, quite positive on Spain. Maybe talk on -- move on to Turkey, which is part of your sort of diversification..