Banco Comercial Português, S.A. (BCP) Earnings Call Transcript & Summary

Good afternoon. This is Miguel Maya speaking. Welcome to BCP earnings conference call. I will go through the main highlights, followed as usual by a more detailed presentation by my colleague, Miguel Braganca; and by our Investor Relations, Bernard Collaço. 2019 was a difficult year for the financial industry players that have retail and commercial banking business models. It was a year deeply marked by interest rates levels, which were kept below forecasts. The effect of the trade tensions between the main economic blocs is also reflected on global trade and on the evolution of the economic activity. We dealt with an increasingly volatile and more complex context. Besides the common diversities of the financial industry, for BCP, 2019 was an increasingly challenging year, considering the national legislation changes that stipulated the termination of the special treatment for impairment costs under fiscal and accountable perspectives, which, in this context of lower interest rates, are -- and following a period of stronger restructuring, have a significant impact on our tax line. The previously envisaged transition period for the impairment costs special treatment was unexpectedly significantly reduced. The uncertainty of the Swiss franc loans in Poland, notwithstanding the specific situation of Bank Millennium loans being different from those of other banks, led to the constitution of a significant impairment for the sake of prudence, the integration costs of Euro Bank, the significant impact on 2019 costs derived from the ongoing restructuring effort and the extraordinary compensation payment to the employees, the decrease in NPE stock ahead of the projections in the NPE reduction plan, the resumption of priority investments in technology and security that represented a relevant additional cost, including the hiring of employees for the digital areas and for the second defense lines of the bank, investments that we consider could not have been postponed, the specific context costs in Portugal that are contrary to the effort for construction of a level playing field in the Eurozone, namely the contribution for the contingency capitalization mechanism of Novo Banco, that regulatory provisions in Portugal regarding the commission for some financial services, the provision in Portugal, contrary to most Eurozone countries to charge commissions on large deposits of entities that aren't financial institutions. Against this backdrop, we have spent our time and talent looking for solutions and not justifications. So in 2019, we achieved a net income of EUR 302 million, as shown in Page 5. That resulted from a 12% year-on-year increase on the profit before taxes driven by the performance in Portugal, which improved the pretax profit by 79%. This performance was supported by a 7% growth of the consolidated core income, particularly with the NII growing by almost 9%, confirming the quality of our franchise. We pursued our path of consistent improvement of the assets quality, steadily decreasing the cost of risk led by a decline of [ 16% ] of the loan impairment. BCP priority in the reduction of NPEs is clearly illustrated on Page 6, showing that we achieved an overall decrease of EUR 1.3 billion, having the NPE stock stood at EUR 4.2 billion. The NPE's reduction effort is more relevant in Portugal, where we reduced EUR 900 million during the second half of the year, after a reduction of EUR 700 million in the first half. This reduction of NPEs was achieved while reinforcing the coverage levels, with the cash coverage reaching 58% and the total coverage increased to 116%. Moving to Page 7. We see that our business model has organically generated capital, exceeding the impacts from the acquisition of Euro Bank, the adjustments on the pension fund discount rate and other less relevant impacts. Therefore, our capital position was reinforced, staying clearly above the common equity Tier 1 requirements and reaching a capital buffer of nearly EUR 1 billion above the total capital requirement. The common equity Tier 1 rose to 12.2%. And while the total capital ratio stood at 15.6%, including the EUR 400 million additional Tier 1 and the EUR 450 million Tier 2 that were successful issued last year as part of our funding plan. In 2019, customers renewed the trust they have on us, resulting in the growth of the business volumes above 9%. Customer funds increased EUR 7.7 billion and the performing loans grew 11%, an increase of nearly EUR 5 billion. Moving to Page 8. We confirm that our customer base is expanding in correspondence with the recognition the market has of the quality of our franchise. More than 700,000 customers were -- add up to our customer base, which grew by 14% and includes new customers coming from the acquisition of Euro Bank, together with an increase of more than 140,000 customers in Portugal. Globally, we reached almost 5.6 million clients, of which 40%, more than 2.2 million are customers that have adopted our mobile apps. The new app launched last night catalyzed the customer's digital adoption growth in Portugal, which is essential for our strategic aspiration for a mobile-engaged relationship model. The number of mobile clients grew by 34%, reaching 750,000, which represents 31% of our customers in Portugal. The release of the app provided a seamless and completely new experience to customers through a front-stage differentiating mobile-first approach based on journeys and products specifically designed for this platform. With the new app, we are experiencing a consistent increase, both on transactional and sales dimensions as shown by the daily average usability figures, an additional 61% in log-ins, 66% more payments, 87% more transfers and the number of personal loans sold doubled. On Page 10, we mentioned the priorities for the incorporation of new technologies in our business models. We are leveraging on technology to benefit from the open banking environment, designing innovative solutions that customers recognize as available and, therefore, enhance our relationship model. Efficiency is another priority. We have been focusing on, improving the capture of productivity gains by activating levels of advanced technology into daily operations, such as artificial intelligence, debt analytics and LCR. The success of our digital transformation process has been achieved alongside the development of competencies in new technologies, valuing the existing workforce and selectively recruiting external reinforcements, bringing together people from different backgrounds in the highly collaborative environments to foster and scale up our capacity to build innovative solutions. In 2019, the credit agencies significantly improved their risk perception of BCP, therefore, confirming that we have reliable business model with a proper strategy and a proven capacity to deliver performance. Since June, we are investment-grade for senior debt from DBRS. And in July, Moody's also issued the same qualification for deposits. In October, both S&P and Fitch, reviewed their outlook for BCP from stable to positive. Before concluding, I would like to renew our commitment in improving profitability, in keeping the pace in NPA reduction and in reinforcing our efficiency. I now give the floor to Miguel Braganca.

Thank you very much, ladies and gentlemen. Coming now to Page 13. We see here the main highlights of the evolution of our net income from 2018 to 2019. The first conclusion that I would like to highlight here is that what are the variables here of management of the bank made the activity improve. Related earnings increased by almost 30%. This is very, very important. Then we have a series of items, most of which were well-known during the year, of which, I would highlight here, the provision that was done for the CHF portfolio in Poland. This is the impact that -- what was announced in Poland held in our accounts. I remind that we have slightly above 50% of Poland and around EUR 20 million of additional impact related to the first year acquisition in Poland. Half of it has absolutely not any type of impact in terms of tangible equity. So all in all, I would say these noncomparable effects of Poland this year represents, as was disclosed, the property to the market in due time around another EUR 50 million. We have had the special bonus to the people rewarding them for the repayment of the CoCos as a compensation for the huge effort that was done from the structure by reducing the salaries. This was also communicated during the year. We had an increase in mandatory contributions in Poland during the year as was highlighted here already, I think, in Q1. And we had a particularly good year due to the decrease in interest rates in terms of gains in Portuguese foreign debt. So all in all, factors that were almost all, I would say, anticipated. The only one that was a little bit less anticipated, I would say, is the impact on income taxes. The income tax in Portugal is, with all the impacts, 31.3%. So what is normal in terms of projections in Portugal is to have a total tax rate of 31.3%. This year, we had somewhat above it. And we had already disclosed EUR 30 million around it in the first half of the year due to a series of factors, one of which was the reduction of interest rates in the longer period, in a lower for longer interest rates. And the other one was a change in tax legislation that of large banks somewhat to anticipate the deduction of impairments. This basically has an additional impact, vis-à-vis what was disclosed in June, of around EUR 20 million. I would like to highlight, however, that this has absolutely no impact neither on regulatory-owned funds nor on tangible equity because this -- effectively, this impact is totally neutral from a tangible equity point of view, because this has no impact in terms of -- this is basically the recognition of tax loss carryforwards that are already deducted from capital. And looking now at the income statement in Page 14. What we see is a healthy, I would say, evolution of the income statement, with the top line growing strongly, the core income growing almost 7%, the core earnings 4%, the operating income -- the operating net income stable in spite of the nonusual cost that I've just referred. And then we have here the very solid evolution of the income before tax of around 12%. And in the tax line, we have exactly the effect that I've just commented, that has absolutely no impact in terms of capital accretion of own funds accretion and so on, linked to DTA recognition. In Page 15, trying to understand a little bit better how this evolution reflects itself in terms of the Portuguese and the foreign operations. What we see is that in spite of this challenging interest rate scenario, we were able to maintain the NIM, with a slight decrease of the NIM in Portugal and also a slight increase of the NIM in international operations. And this was basically due both in Portugal and international operations due to mix effects. We have had more personal loans, mainly in Poland, and this has helped, of course, the NIM. In terms of fees and commissions, I would like to highlight the recurrent fees evolution. We see here the banking fees and commission in consolidated terms growing almost 6%. And very healthy, both in Portugal, where they grew 5%, and international prices where they grew 8%. Where we have had a less good year, which is also, I would say, good news in the sense that there is a potential to grow there, are in market-related fees and commissions, which also include asset management -- asset management -- distribution commissions, [ they're not ] asset management, but to receive the distribution fees from the funds, which decreased vis-à-vis last year. So that the total fees in consolidated terms increased 3%. In terms of other income. As we see, it grows 10%. I'm looking at Portugal, we have here a couple of effects. First, I would like to say the monetary contributions are high but stable. I think this is very important in terms of projections. Secondly, as we see, we have had a quite good year in terms of the ALM portfolio and of the recognition of capital gains in the ALM portfolio, which is mostly responsible for the EUR 50 million of guidance that you see here. And then we have had during the year, and this was disclosed, if I'm not mistaken, in June, that our participation in the insurance company had, due to the low-for-longer interest rate scenario, had a negative impact due to the, so to say, the mark-to-market of the liabilities in terms of our minority participation in the insurance company. And this has had this impact, basically, a pure interest rate effect associated to the issuance liabilities. This is old news, as you know, disclosed in June. But when we look at the full year, this is the impact. The good news is that all these impacts were more than compensated by the trading gains. In the international operations, what we see also is a very healthy growth in terms of the normal trading gains. In terms of the operating costs, we are in the middle of the transformation phase. And this, of course, there's a part of it that goes through investment, but also part of it that goes through recurring costs. We have to have people that are of different skills and different profiles of the traditional banking. Our CEO just explained all the transformation and all the capabilities that we are creating in this regard. What we see is that the recurring costs in Portugal have grown 3.2%. And this -- -- in this recurring cost there is already a part of the transformation, namely, the hiring of people with different types of skills. And in the international operations, we have had -- we have a higher growth. When we look at Poland, basically, what we see is that half of this growth broadly is organic. Half of this growth is linked to the Euro Bank acquisition. We still compare very favorably with our peers, both in Europe and in the Eurozone, which is, I would say, it gives us a degree of confidence in terms of our capital accretion. Going now to Page 20. What we see is that we have been able to decrease the cost of risk. As I've commented here several times, our cost of risk of the performing portfolio at the beginning of the year of each year is around 35 to 40 basis points. We have -- we are having a higher cost of risk than this right now, partly due to the nonperforming portfolio and to the speed at which we want to reduce this nonperforming portfolio. I mean, speed implies a higher cost, but we think all in all, this protects the shareholders' interests because we think that for the market and for the supervisors, it is important to show a consistent and aggressive pattern in terms of the reduction of NPEs. We see here that in Portugal, the cost of risk reduced from 105 basis points to 76 basis points, very important, clearly on track to our partner as I -- to our target. As I had anticipated in our previous calls that are in the absence of surprises, our pattern, in terms of cost of risk, at least if we annualize it on a quarter-by-quarter basis, should be a gradual pattern. And in terms of the international operations, if we exclude the initial impairments of Euro Bank, [ very stable ], around 50 basis points. The credit -- this was done as was commented in the highlights by our CEO, with an increase in the coverage. Our coverage, cash coverage is already 58%. And our coverage, including collaterals, that in Portugal have not faced the same type of volatility [ value ] that in other countries, is already at [ 116% ], which gives us an additional confidence in terms of the recovery of the credit. Effectively, as you see in our accounts, when we sell the collaterals, the foreclosed collaterals, we are even having capital gains. When you look at our ratios, they are still high. But clearly, on the good pattern. So the overdue loans, the 90 days, the NPL 90 days that, of course, help the capital is already at 4.1%. The NPE ratio, including only loans, is already at 7.7%, still high when we compare with Europe, but decreasing at a very fast pace. And the NPE ratio relevant in the EBA maps that includes both off-balance sheet and securities is already at 5.3%, okay? It's very important. In international operations, you see here a growth in the NPE, but the NPE ratio even decreases. This is basically -- leads to a position of Euro Bank. That has a good NPE ratio, but, of course, has NPEs. In terms of business activity, as you see in Page 23, a very healthy evolution of our franchise. And I would like to highlight in terms of customer funds both in consolidated terms and in Portugal, growing 13%; and the individuals -- 13% in individuals in consolidated terms; and almost 9% in Portugal. This shows exactly the perception that the customers have of us. And I would also like to highlight this inflection that we are able now to bring mainly in the Portuguese market, [ or phasing ] more and more off-balance sheet funds that you see here growing from EUR 14.4 billion to EUR 15.8 billion. So around 10% in 1 year. This is very important from an inflection point of view and clearly critical for our business model going forward. In terms of loans to customers. We are seeing here that the growth of 7.2%. Of this value, around EUR 3 billion is, of course, the acquisition of Euro Bank. But looking at the international operations, you see that in the international operations, besides the acquisition of Euro Bank, there was a EUR 1 billion increase in performing loans. And looking to Portugal, you see a EUR 1.1 billion increase in performing loans. Of course, when you look at the total value, we are somehow here victims of our own success in terms of decreasing the NPEs because we clearly exceeded, in terms of the reduction of NPEs, our targets. And so the total does not increase as much. Our liquidity position is very comfortable, I will not spend any time with it. And in terms of capital, we were able to complete a challenging year in terms of capital. As you know, we have acquired Euro Bank during the year, and this has had a 50 basis points impact in terms of capital. We also have had a discount rate decrease, a very important discount rate decrease, pension fund discount rate decrease from 2.1% to 1.4%, and which represents effectively an impact in terms of capital, the whole pension fund universe of around 0.8%. So that this means that adjusted for these effects, you see very clearly our ability to generate capital. So as I was commenting last time in -- over the cycle and over the long-term on a smooth basis, we expect to generate capital for around 30 to 40 basis points per quarter. We are clearly -- we were clearly on track if we look at these one-off effects. If you correct for these one-off effects this time. Leverage ratio, very, very positive, as you see here. And this is partly linked, of course, to our RWA density. It is our RWA that somehow deteriorates our capital ratio when we compare with other markets. This gives us some comfort when you look at Basel IV. This gives us also some comfort when we see this economic situation improving, because a part of this high-RWA density is explained by the fact that our models are influenced by the recent history of Portugal that faced the crisis. And of course, the LGDs and the PDs and so on are still influenced by the historic data. But as time goes by and as the situation in Portugal improves, we expect -- and also of course, there are some limits to more, I would say, to more aggressive models imposed or common in other geographies. We should expect here a higher convergence between our RWA density and the ones of our competitors elsewhere in Europe. The pension fund, as I had explained, has here had a challenging year. In terms of the discount rate, we reduced the discount rates from 2.1% to 1.4%. That is an important impact. Of course, the pension fund is managed through a long-term perspective. So we have a maturity around 17 years on one hand, but also with a certain ALM management. So the fact that the interest rate went down was -- partly half of it was compensated with the funds profitability that was 8.2%, vis-à-vis a discount rate of -- or at the beginning of the year of 2.1%. As you see, a quite conservative profile. While we have bonds representing 50%, shares only 12%. One could argue that with a 17-year perspective, one could even have more shares. But this is to protect the capital evolution. And rent, [ as was ] stated, I would like to highlight this is basically rent of -- long-term rents, almost -- this is more real estate debt than real estate equity, 7%. I will now pass the floor here to our IR, Bernard Collaço.

So good afternoon, ladies and gentlemen. Starting on Page 31, and as usually, to the Portuguese operation. As you can see, we have a solid improvement of 25% on net income in 2019 to almost EUR 145 million. This improvement was driven by an increase of 1.6% banking income and by lower impairment and provisions. This performance in Portugal shows the resilience of the business model in a more challenging environment on the financial sector. On the cost side, recurring costs increased 3.2% mainly related with investments on the business model, meaning, becoming more digital and, of course, recruiting young people with more analytical skills and more focus on digital, and of course, as well, with some salary adjustments that we did. Nonrecurring costs in 2019 reached EUR 40 million, splitted by EUR 12.4 million related with the compensation for temporary salary cuts applied from 2014 to 2017, based on the second quarter of this year; and EUR 27.7 million of restructuring costs, which were below estimates that we were considering for 2019. On Page 32, we present a snapshot on NII evolution through the year. And as you can see, there are some positive and negative impacts that is worth mentioning that explain the slight decrease from 2018. This evolution is driven by positive effects of EUR 22.6 million, out of which, EUR 3.8 million from credit volume; EUR 8.2 million from lower wholesale costs that was impacted on Q3 with a subordinated debt that was successfully placed in September '19; and EUR 10.6 million from the lower remuneration on time deposits. On the other side, there were some negative effects coming from the decrease from credit pricing, reflecting the normalization of the macro environment and the lower contribution from yields on the ALCO portfolio, but aligned with the investment strategy -- with our investment strategy. On Page 33, regarding spreads on term deposits, the back book spread is at 56 basis points, and we have to consider the decrease on the average 3-month Euribor that happened over this period. But there is as well still a potential to capture 10 additional basis points once the front book spread is at 40 basis points. Regarding loans. The average spread on the performing loan book stood at 2.74% in December '19. NIM in Portugal stood at 1.67%, lower than last year, reflecting, as mentioned before, the normalization of the macro environment. On Page 34, moving to commissions and other income. You can see that banking fees and commissions grew 5% in the year, mainly driven by the increase of customers. On the other hand, market-related fees offset a better income on this line. That is mainly explained with less deals related to investment banking transactions and lower demand for investment products on the beginning of the year that has been changed over the last quarter, where market-related fees were up 21% compared with Q3. Regarding other income. Increase is mainly explained by trading income where we make some profits with the [ retention ] of the securities portfolio. On Page 35, looking to costs. You have to consider some one-offs related with restructuring of the EUR 27.7 million and the compensation paid for temporary salary cuts. That -- all in all, recurrent operating costs were up 3.2% in 2019. Number of employees increased because, as said before, we are recruiting for people for digital areas, although we are also doing some redundancies. Moving to asset quality on Page 36. Since 2013, we reduced more than EUR 9.5 billion of NPEs. And in 2019, the reduction was EUR 1.6 billion. That reflects 32% reduction, reaching a level below $3.2 billion at the end of 2019. At the same time, the cost of risk is reducing, and it stood at 76 basis points in December '19 versus 105 basis points in December '18. Over the last 12 months, NPE's decrease was then through a combination of EUR 561 million of net exits, EUR 521 million of write-offs and EUR 469 million of sales, which reflects the balance of 1/3 of over those 3 components. On Page 34 -- 37, sorry, regarding coverage breakdown. You can see that total coverage is above 110% for both individuals and companies and for both NPE categories. As expected, coverage by loan loss reserves is high in loans to companies once individual coverage is mainly then through real estate collateral. Page 38, foreclosed assets and restructuring funds on a decreased path. And in 2019, there was a significant decrease of 34%, meaning, EUR 431 million in foreclosed assets. And at the end of the year, the bank had a net value below EUR 900 million. There was an increase in terms of property sales from previous year. And as you can see, BCP continues to make some profit on those transactions. Restructuring funds decreased but at a lower pace. And in percentage terms, went down 8.2%. Now moving to Page 39, you can see a strong growth of 6.6% of customer funds, mainly coming from individuals, which represents a stronger engagement with our clients and the potential increase in the share of wallet. It is also important to highlight the increase of balance sheet products that were up -- were at almost 10% in 2019. Gross loans decreased 1.3%, and as already mentioned, came from the combination of the reduction of EUR 1.6 billion on NPEs and the increase of EUR 1.1 billion on performing loans. On Page 40, we have a detailed view of the evolution of the performing book with an increase of 3.3% in 2019 or EUR 1.1 billion and is explained by the increase on personal loans that represents 23% and the commitment to the bank to support companies, representing 34% of the performing growth on the credit portfolio. Moving now to the international operations in 2019. Results were effective by a lower contribution from Poland due to the acquisition of Euro Bank, and the provisions in Poland as well regarding the CHF loans. Without those effects, Bank Millennium in Poland would increase 17% in terms of the net income. Mozambique was in line with 2018 and -- was more or less in line with 2018, and there was an improvement of 3.2%. Contribution from Angola was weaker from last year due to the macroeconomic environment -- due to the macroeconomic environment on the country, and a kind of [ AQR ] that occurred in 2019. On Page 43. In Poland, net income decreased 26%, and excluding one-offs of around EUR 76 million, would increase 17%; return on equity, excluding one-offs at 10.2%; and common equity Tier 1 at 17%; and total capital above 20%. Net operating revenues were up 27%, and that includes the accretive value from Euro Bank as well as the natural growth of Bank Millennium. Operating costs were impacted by Euro Bank integration and higher contributions to the mandatory funds. Moving to Page 10. The integration of -- moving to Page -- sorry, 44. The integration of Euro Bank performed one of the fastest and smoothest mergers on the Polish banking market by finishing on the 11th of November the operational merger of Euro Bank. This merger allows Bank Millennium to increase number of customers, expand geographically to 200 towns in Poland, and grow in terms of digital sales and the potential of cross-selling with -- of cross-selling of additional products to the acquired customer base. The table at the bottom is a summary of the impacts resulting from the acquisition of Euro Bank, some of them impacted on previous quarters. Integration costs estimates were revised downwards to PLN 300 million versus initially PLN 350 million. And we expect -- it's expected that integration costs for 2020 will be more than compensated by synergies. On Page 45, we present some information on Polish FX mortgage that were presented with more detail on Bank Millennial [ earnings ] presentation on the 3rd of February. Currently, there are around 2,000 individual court cases in progress and an [ old ] class action initiated in 2014. Second instance rulings were favorable for Millennium in most of the cases, that means 90% were favorable. And the bank has appealed against nonfavorable court decisions. So until now, there are no final rulings. About provisions. Taking into consideration the increased legal risk after the European Court of Justice answers to the questions of the Polish Court, Bank Millennium decided to create a provision of PLN 223 million for the legal risks connected with the FX mortgage loans. The methodology takes into consideration the number of current cases, the potential number of court cases during a specific time horizon and probabilities of outflow funds in the case of a specific court judgment. On Page 46, some detailed information of Bank Millennium. As you can see, NII, up by 33% due to the higher volumes and commissions that are partially explained by Euro Bank acquisition, but we have not forget the maintenance of the focus of Millennial Bank over the year. Costs, excluding integration costs from Euro Bank, increased 27%; and commissions and other income, up by 14%; and, of course, mandatory contributions, up 22%. On Page 47 in terms of asset quality, the NPL ratio is slightly higher due to Euro Bank acquisition, cost of risk at 70 basis points. And if we exclude the additional impairments related with Euro Bank, cost of risk were at 57 basis points. And coverage ratio is -- coverage ratio on NPL 90 days past due is above 100%. Cost of risk is naturally higher than before because you have to consider the change of the loan portfolio. As you know, Bank Millennium now have a bigger share of cash loans, which, of course, drives up the cost of risk. On Page 48, looking at volumes. Customer funds increased 21%, with a contribution of around EUR 2 billion from Euro Bank. In terms of gross loans, book went up from EUR 13 billion to EUR 17 billion. That means more 32% explained from one side with the contribution of more than EUR 3 billion from Euro Bank and from the increase on cash loans and mortgage loans from Bank Millennium over the year. Now on Page 49. Regarding Mozambique, net income, up by 3.2%, with a return on equity above 20%. Banking income was stable compared with 2018, and costs increased 4.5%, but still with a cost-to-income below 40%. Let me also highlight the total capital ratio of 45.8% that allowed the bank to be prepared for the expecting growth of the country. On Page 50, NII and NIM with a slight decrease, explained by the normalization of the country and the reduction of the loan portfolio, reflecting a conservative approach by Millennium bim under the challenging environment. Commissions and other income were up by 9.2%, and operating costs, up by 4.5%. Branches and employees increased over 2019, preparing Millennium bim to the next stage of the development in Mozambique. In Page 51, stock of NPLs down from last year. Coverage by loan loss reserves increased to 71% and cost of risk went down more than 150 basis points to 277 basis points. Regarding volumes on Page 52. Deposits grew 6.6%, and loans were down 11% and as it was presented on previous quarters and reflects the conservative approach of the bank. So thanks for your attention. And before moving to Q&A, I'll turn to Mr. Braganca for some final remarks.

Okay. As you know, in the beginning of 2018, we have presented a plan with our view of the steady state of the bank in 2021. And it is our commitment to present to you how we are going vis-à-vis the plan. I would say that in terms of the franchise, we are clearly exceeding the bank, and this is very important, both in terms of active customers. And in terms of the quality of these customers in terms of being able to cross-sell through digital and mobile channels and being able to do it at a low cost. So we are evolving there very, very smoothly. I would say also that in terms of NPE stock, we are also clearly overachieving our internal targets, and this comes -- of course, at a cost, because we think it is in the interest of our -- of the bank and of our shareholders to normalize the situation of the bank and to make the bank converge to the European averages in these indicators. In terms of common equity Tier 1 and in terms of loan-to-deposit, we are clearly on track. I would say that in terms of loan-to-deposit and common equity Tier 1, we are even -- I would say in terms of loan-to-deposits, we're even better than what we expected, and the debt is probably optimal. We have now probably too much liquidity, which is an issue that affects very -- many banks in Europe. But it's also an opportunity, once we become more and more successful in terms of originating credit and in terms of off-balance sheet investments to clients. It gives us some leeway in this respect. In terms of cost-to-income and transformation of the bank. When we presented the plan of 2021, first of all, the rates were different from the ones that we have right now. We are clearly on track in terms of digitalizing and making our customers more mobile, which would allow us to serve them at a lower cost. And we think that in a steady state, we will get to a cost-to-income of 40%. And -- but as I have commented in the last presentations, this is becoming more difficult in this lower interest rate scenarios than what we had in 2021. We have to do it more through commissions and through asset management product than what we were originally expecting. So all in all, I would say in a more difficult macro environment for banking, we are broadly on track in our plan and in terms of shareholder value generation, with a clearly overachievement in terms of quality of the balance sheet, NPE and convergence of the cost of risk and in terms of franchise creation and with a challenge that we are trying to address as executive committee, in terms of how to achieve quickly our cost of equity in this low interest rate scenario. Thank you very much. And now I open the floor to the -- to Q&A.

[Operator Instructions] Your first question today comes from the line of Carlos Peixoto from Caixabank.

A couple of questions. Start with on the cost side. Basically, I was wondering if you could shed some light on how you see costs evolving next year and in the following as well. And particularly on the restructuring cost side, whether we should expect additional restructuring costs over 2020 in order to meet the 40% cost-to-income target for '21 that you have laid out. At the same time, I was wondering also some outlook on NII, basically, for 2020, particularly in Portugal. And finally, on the capital front, if you could lay out a bit the main pieces -- the main moving parts in the fourth quarter. Basically, well, from what I can tell, you have around -- you should have around 40 basis points negative impact from the pension fund. But if you could lay out the layers that offset this, and namely as well what type of dividend accrual was done on the full year earnings.

Okay. In terms of -- starting probably with the last questions. In terms of NII in Portugal, as you know, we have issued a sub-debt end of Q2 in September. This sub-debt has a cost, a yearly cost of around EUR 16 million to EUR 17 million a year. We have 1 quarter. So the fourth quarter, when you compare the fourth quarter with the third quarter, there's a difference of EUR 4 million. And this explains a large part of the reduction in Portugal. Another very important reduction in Portugal was our balance sheet positioning because we were seeing in the beginning of Q3 that the interest rates were coming to very low levels, and there could be an inflection or some inflection interest rates. So we reduced somehow our ALM portfolio, which was reflected in the very positive gains that you see in the balance sheet. But of course, this had an impact in terms of the NII of Q4. In the meantime, as I had commented in previous times. We expect that our wholesale funding issuances there could be quarters where, I mean, we anticipate the issues, quarters where we delay issues, but all in all, across the cycle, we are not expecting, so to say, higher wholesale funding costs, in which we include subordinated costs than the ones that we had in the beginning of 2019. So basically, the wholesale cost that we have in -- during the year of 2020 will be broadly equal to -- in terms of run rate, to the types of wholesale costs that we had in the first 9 months, the first 6 months of 2018 or even slightly better. So the -- this impact will revert. So these are the 2 effects that basically explain its evolution of the margin in Portugal. In terms of the capital front. We have been very, very consistent in terms of the organic capital generation. So if you see -- if you aggregate, so to say, our net income and the tax effect. So I would highlight here, that the tax -- the tax recognition is impacted from the net income. But then it's irrelevant in terms of capital what we see, both in Q2 and in Q3, is that we have had an impact of around 30 basis points -- 30 basis points positive in a very consistent way. And if you look through the full year, you are seeing also an impact of around 1.3 basis points. So basically, these types of levels. The pension funds in the last quarter took out around 30 basis points. So basically, one compensates the other. When you compare the capital ratio in Q3 and Q4, they are basically equal. Actually, they change the first decimal. But [ if I can ], if you go to the second decimal, we are speaking about 4 basis points. So basically, it's equal. So we were able, through organic capital generation and through our activity, to compensate for this very sharp decrease in costs -- I'm sorry, in the pension fund liability impact. In terms of the cost side. We will address I would say, we have presented a plan for 2021. This plan was, as it was said at the time, made under the assumptions that were the market assumptions at the time in terms of the forward rates, it was also nothing spectacular, but were the market rates, so to say. And now they are lower for longer. We are trying to compensate these impacts, adjusting our business mix. But it's still early days to do it. So we are analyzing these days ROE to see how we can get to a steady state ROE of 10%, because it is, for us, very important to achieve a steady state ROE of 10%. And we are trying to do it basically via asset management fees, commissions, more clients and so on. If we reached the conclusion that the way to get there is through higher cost cuts, of course, we will have to readdress this. This is something that we are trying to address. It's still early days to come up with the conclusion. We are analyzing our -- exactly how we are performing, vis-à-vis, the plan, and then we will correct our decision, and we will try to make sure that we get to a steady state ROE of 10%, because we think it's our obligation as -- pardon me, the largest private banking franchise in Portugal to earn a 10% ROE.

Miguel, sorry. Just on the NII, I was actually referring to more on a prospective view. So on the outlook for 2020, considering the departure rates we have in the fourth quarter. How do you expect the NII to behave throughout the year? Sorry about that.

If I have commented over the time, our base case, when you will see the full years, and there may be here some small, it's always a small volatility on a quarter-by-quarter basis. When you look at Portugal, is an evolution of the NII of very low single digits when you compare the full year with the other full year. And we maintain this perspective, for 2020, a low single-digit NII growth. Of course, this implies performing credit growth as we are doing. This implies a very disciplined approach to pricing. But we also will benefit, as I commented, from some redemptions of wholesale funding during next year, that somehow it will compensate the cost of the sub-debt.

Your next question today comes from the line of Mario Ropero from Fidentiis.

My first one is on the provisions you made in Poland. You mentioned that the methodology is based, among other variables, on the amount of potential cases and the probability of negative court judgments. Could you please tell us how this probability is calculated? I mean, is it -- the question is, is it based on the cases you have won so far? And in that case, can we expect potential additional adjustments going forward depending on how courts rule every month? And linked to this, could you please comment on how the core judgments are evolving in the last few months. I mean, February so far, compared to January, and January compared to December, just to see the trend? And then the second question is on the ROE target. I mean, Miguel, you have been saying that basically, you guys, you have to rethink about it. Is it possible to -- I mean, can we expect like a strategic review at some point in 2020, with perhaps a change in the target, or perhaps more clarification on the levers to get there?

Okay. Mario, thank you very much for your questions. They're all very, very relevant. Starting with the ROE target, we do think that in terms of steady state as of today, we think that we should get to a 10% ROE target, where there are shocks to the activity as these low-for-longer shocks or as regulatory shocks, it might mean that it may take a little bit more time to get to the steady state, basically. This is possible, of course. Because -- but we do maintain, this is our steady-state scenario. In terms of -- we are exactly looking at how this new reality is affecting us. Last year, as you see in the beginning of the year, it was very difficult to place investments in the beginning of the year, unfortunately for the clients, because if they have bought more equity in the beginning of the year, they would have made a lot of money, as you know, but it was difficult. We are here trying to review it. But it's still, I would say, it's still early days to make conclusions exactly on how we'll adapt to this new scenario. I would say we look here at Q1 and Q2. And if we think that it's important to review the levers and to give more, so to say, more information to the market on what are the levers, hand ow can we convince the market that we will get to these type of values, of course, we will give this to the market. At this point in time, no decision was taken yet. And of course, the decision will be taken by the full Board with the presence of the independent Board members that represent the market and so on. In terms of Poland, I have to be a little bit careful here because, as you know, Poland is a listed bank, with its own supervisors and with its own information to the market. So I would not like to give more information than what is given in Poland, else there could be here some issues. But having said that, in terms of the -- we do have an issue in Poland in terms of the quantification of the risk because there are very, very few data points. So effectively, we had an evolution during the last years where this issue of FX litigation was not relevant. The risk of FX legislation, okay? In this FX litigation, in the few cases that we had, we made -- we won in second instance more than 90% of the cases. With the decision of the European Court of Justice, there was a sense of the feeling and I would say, a general PR perception that the judges would start to decide on different ways and that the risk would be -- is higher. And I do think that today, the risk of litigation is higher than 1 year ago. But we have very, very few data. We have very few data points. To give you an -- we have basically 19 cases that went through second instance, of which we won 17 and we lost 2 in second instance, and under which we appealed. Since the European Court of Justice trial, there were 2 cases, 1 we lost. So -- but in 2 cases, it's very difficult to take it from any type of statistical -- or statistical implication in these cases. So it's very early days. So we -- and to be fair, when we looked at the provision, what we tried to do is to be broadly aligned, correcting for different sales processes and so on with what the competitors have done, namely Pekao and other banks. But it's very early days, and the model is influenced by slightly low default portfolios, by a lack of that. But in any case -- but we're not doing any type of provision. And being the sole bank without any type of provision, because of lack of data and trying to come up with the beginning of a methodology, we chose to come up with something, albeit with still very lack of data. Of course, the risk has increased. We have somehow translated this into our models. If the situation changes and if we start losing more cases than what are implied in the model, the provision will grow. If the situation improves and really, the judges come to the conclusion that banks do have rights to an FX spread table, so to say, it will decrease. But it's very, very early days, as I tell you, even these well-known case that was -- which decision was taken by the European Court of Justice. Here, it's first instance decision in Poland in January, so not that long ago, and it's only the first instance, and it still will take 4 or 5 years. So it's very, very early days, okay?

Your next question today comes from the line of Sofie Peterzens from JPMorgan.

This is Sofie from JPMorgan. So I wanted to ask you about kind of your almost -- or you're slightly above your 12% Core Equity Tier 1 target. How do you think about the kind of returning excess capital to shareholders? Do you have any preference for dividends versus buybacks? And how do you think about kind of -- or how should we think about the future capital returns to shareholders? So that would be my first question. My second question is -- that should we expect any impact from the EBA and ECB calendar provisions? We saw one of those Spanish banks guiding for a slightly higher cost of risk and of some capital impact. Is that something we should take into consideration for BCP? That would be my questions.

Okay. Thank you very much, Sofie. So in terms of starting with the calendar provisioning and so on. As you see, we are reducing very aggressively the NPEs and, of course, focusing on the ones that have all the time frames. And when we presented here, this cost of risk of 50 basis points, it already had the impact of the calendar provision that will be much lower in the future than if it were -- if it would have been in the past, because our NPE is reducing at a very sharp pace. So I would not correct this target of cost of risk of 50 basis points based on the current provisioning. In terms of going forward, how do we look at our steady state. I would like more than 2021, how do -- would we look at our steady state? The way we look at it is the following. We do think that a bank such as ours, when you look at our business model, at the resilience of our business model and the very good results that we have in our stress tests, that 12% capital ratio in relative terms, should be our target across the cycle. Having said that, I mean, it's not that we have a little bit more or a little bit less in any quarter. So this is not like a mathematical target that if we have less we have a capital increase, if we have more, we immediately distribute dividends. This is an across the cycle, I would say, level that we think is appropriate for our steady state, okay? So this is the first point. Then how do we come to the 40% dividend payout in steady state? If we have an ROE of 10%, and if we are already in steady state, we do think that we will grow in RWAs around 5% to 6% a year at most, because we are present in Portugal. Portugal will grow somewhat, but clearly below 5% in terms of RWAs. Poland will grow probably more than 5% in RWAs, but we are only half of it. Mozambique is a very small market. So we look at this, in principle, in a steady state we will grow around 5%, our RWAs. So the calculation is very simple. So if we have a 10% ROE and we have a 5% RWA growth, I mean, we can distribute around half of the ROE in steady state. Because we never know -- and it's always possible to have here a little bit more. I mean, we don't know exactly how the supervisors will react instead of having here a dividend payout of 50%. Just in case we have here a buffer, we present here a dividend payout of 40%. So this is our, so to say, our reasoning in terms of steady state. And of course, this is much more consistent with a dividend and a smooth and a regular dividend in steady state than anything else. Then the other question is, I mean, when we will get there and how we will get there? So to say. We do think right now that we are not in steady state still because of our NPE stock. And the last thing that we want to do is to somehow to raise concerns with stakeholders or with the regulators or with whoever, about not being prudent enough in terms of capital. So we want to distribute dividends because we think that for our different types of investors, it's important to receive dividends, if only to make it clear that the regulator is satisfied with our capital level, okay? We do think that in the steady state, the 40% dividend payout makes sense. Exactly how we go from the 10% to the 40% is something that will be -- is -- will be analyzed at the Board, will be analyzed together with the supervisor and with the regulators. So as to see exactly, I mean, how we maximize the interest of all the parties involved.

And just very quickly, I mean, given where your share price is trading, I mean, instead of dividends, do you consider to do buybacks at some point?

I mean, we do think that the issue of our share price is very much influenced by Poland. And the fact that there is, as we have seen here, a tail risk and uncertainty around the CHF issue that makes it different for the markets to price our stock. We do think that during the year, as this end market as we all know, hates uncertainty. As we see much more data points coming in and much more, I mean, confidence in the market on how to price this risk, we do think that -- I mean, this issue of Poland will be much clearer, and this will then explain exactly, I mean, the correct -- what the correct share price should be. And it's not because we distribute dividends or share buybacks that we have it, because we do think we do like share buybacks in situations in which we -- there is a huge windfall, and we have somehow to go out of the normal pattern of the dividend -- or distribution to -- I mean, to make -- to distribute this huge windfall to the investors. And we are not -- I mean, we are not envisaging any type of windfall in profit in the next months. By the way, just as additional information in terms of our share price. I mean, as you know, we clearly outperformed the market until the middle of the year. And then basically, our share price came down. And if you see the evolution of our share price. And if you do a simple calculation in terms of sum of the parts, you clearly see that all our market cap evolution is explained by the reduction of the market cap of Bank Millennium in Poland. So it's clearly these FX -- these CHF FX risk that is difficult to price. And that frightens, I would say, some investors that explains, so to say, this evolution, okay? And by the way, just in case, I think this is interesting also to comment. When you look at other banks that are as good as us, and as active and as challenging as in the Polish market, you see that some of these banks that don't have Swiss franc exposure because they came later, have the types of price-to-book values between 1.5 and 1.6, where we have 0.8. So there is already, I would say, when you compare ourselves, both with our market price when this risk was not particularly relevant in terms of transformation and with the market price of competitors that don't have this risk, you see that's already a huge discount in the markets related to this risk.

And your next question today comes from the line of Maksym Mishyn of JB Capital Markets.

The first one is on Portugal. According to my estimates, performing loan book in Portugal was flat quarter-on-quarter in the first quarter of 2019. Could you please elaborate on why growth has slowed down in the period? And the second question is on problematic exposures. After having done so well in reducing your NPEs, do you consider updating your 2021 guidance? And also, could you give us some color on what to expect for foreclosed assets and corporate restructuring funds in 2020?

The 2021 that we present here is not the guidance. Actually, we have to probably -- to be a little bit clear in terms of this slide. This is the value that we committed in the plan to you. If it were a guidance, we would have to be reviewing all the data every quarter because, of course, when we present the plan to you, as a unique plan, some things will go better, somethings will go worse, because the reality is not static. So we are not -- you should not interpret this as the guidance. Because, of course, we have more than 6 million customers as of today. And if you ask me, with the partners that we have right now, I think that, of course, knock on wood, that we also will overachieve in terms of NPE stock. And then there will be other areas where we might underachieve. But our commitment to this, to present a plan and then to -- not to review the plan every quarter so that you forget our commitments, but to say exactly how we are evolving, vis-à-vis, the plan. We don't have the habit of reviewing quarterly the guidances to the market. But if and when we present the new plan, and we might present the new plan. I mean if not this year, at least in 2021 we will have to present the plan for the next 3 years, because '23, it is the last year. We will, of course, come up with new values. In terms of the problematic -- and this is in terms of problematic exposures. In terms of the foreclosed assets and then -- and the funds, the foreclosed assets had a very good evolution this year, as you've seen, and we expect the percentage decrease of the foreclosed assets to continue in the next years. As you know, the real estate market in Portugal is going well. And this is, I mean, it's an area that is going well. And we expect the very good performance that we had this year in the percentage terms reduction to continue next year. In terms of the restructuring funds. Restructuring funds, as you know, are funds that were created to allow for a coordination of interest of the different banks when firms that were seen as economically viable. I mean the management had to change, and the banks had different interests, and they had to be turned around, so to say. And typically, I mean, it takes time to turn around a company and to place it in the market and to -- it takes more time to sell a piece of real estate. What we can tell you is that we expect an important reduction of restructuring funds this year. But of course, the assets of the restructuring funds are less liquid than pieces of real estate. But there are already some assets being sold by the -- or in the process of being sold by the restructuring funds. And we expect a couple of hundreds of millions of euros to come down this year. But of course, this is an area that has more execution risk in areas, because the assets are not as liquid as real estate. In terms of the performing assets in Q1 versus in Q3 versus Q4, I would say that there were more -- some specific large cases, some larger loans, but nothing that has not to do with our franchise. So personal -- so unsecured personal loans are growing very well and this is very profitable. Mortgages are growing very well. The -- if you do the -- I mean, we -- as you know, we have been given the composition of the growth into several quarters. So it's not difficult for you from the presentations to simulate what's going on in different segments. The SME market is going also very well. What -- where you see some volatility, and this is a volatility issue because large-cap corporates may have a loan and then they maybe pay it and so on is in the large corporate. So I would say this is more -- this is more linked to these large corporate loans that in one quarter may go down and in another quarter may go up than anything else. We are saying about I mean, in the large corporate area, basically, we are speaking about a reduction of around EUR 200 million, which is nothing for the Portuguese market. And this was compensated by unsecured personal loans and mortgages. So it's basically flattish due to the [ recession ], but there will be better quarters also.