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

Good afternoon, ladies and gentlemen, and welcome to the Millennium bcp Q2 2020 Earnings Conference Call. [Operator Instructions] And just to remind you all, this conference call is being recorded. I would now like to hand over to the Chairperson, [ Dr. ] Miguel Maya. Please go ahead with your meeting, and I'll be standing by.

Good afternoon. This is Miguel Maya speaking. Welcome to the first semester earnings conference call. The activity of the bank on the first half of 2020 and mainly on the second quarter was, as expected, strongly affected by the overall reduction of the economic activity in Portugal and by a less pronounced decrease of GDP in the remaining geographies where we operate. Despite still dealing with a high level of uncertainty, as shown by the significant reviews that institutional entities are doing to their previous forecasts, we have no doubt, though, that we are facing a deep recession. But it is important to underline that the confidence and activity indicators of June and July may support some optimism regarding the recovery of the economic activity. It is, however, too soon to take for granted that we have already started a solid and sustainable recovery. So BCP's priorities remain focused on the reinforcement of the bank's resilience and adaptation capability. As highlighted on the last earnings presentation, we promptly adjusted the bank's priorities in anticipation of the pandemic impacts, having switched our focus from a growth-driven mode to a defense balance sheet mode, mainly in the admission and monitoring of credit, the protection of capital, the reinforcement of liquidity, the control of costs and investments and the additional preventative charge of impairments to face foreseeable losses caused by the pandemic. The earnings in the first half were also influenced by a lower contribution from Bank Millennium in Poland. But I want to highlight that the Bank Millennium shows a resilient commercial and operational performance in the second quarter, and the synergies of the integration of Euro Bank have been delivered. Unfortunately, and due to well-known reasons, which we still believe could turn into a fair and balanced outcome, the FX mortgage litigation risks have overshadowed relevant achievements of Bank Millennium in other major fronts. The earnings of our subsidiary in Mozambique were quite consistent, showing once again the resilience of that subsidiary's business model. I want to stress that the granting of loans in Portugal has been centered on the credit lines backed by the state to support the economy. We achieved the market share on those credit lines that almost doubled our natural market share, counting on strong commitment from our commercial and operations teams and benefiting from the investments already made in automation technologies. Let me also underline that due to the changes we have been making this year in the risk appetite and in the loan underwriting standards of the bank, we have now what could be considered a prudent level of exposure to most vulnerable sectors of the economy, which represents around 7% of the performing loan book, from which I highlighted the low exposure to real estate promoters, around 2.4%. On the credit segments, we foresee as potentially more affected, namely the SMEs and the unsecured consumer loans. Our exposure to SMEs has adequate collateral levels, and most of them mainly work for the domestic market. And our unsecured loans in Portugal just represents less than 11% of our household loan book and less than 5% of total loan book. We are still moving in a high uncertainty environment, having our teams focused on the priorities we defined for the near future. The economic impact of the pandemic will depend heavily on the evolution of the global sanitary situation. And some optimism is currently being sustained by recent news about the testing results of vaccines under development and the positive signs for the envisaged economic recovery pace being particularly relevant for Portugal, the recent agreement for the European recovery program and the multi-annual European budget. We have important challenges ahead. But fortunately, BCP counts on teams that already proved their resilience, their ability of adaptation to new realities, their capability to recover credits and their relationship skills. In the first semester, our consolidated net profit reached EUR 76 million, affected by additional provisions and impairments to face the major risks ahead, including EUR 108.8 million of impairments to mitigate the economic impact of COVID. The core income on the second quarter was mostly influenced by a decrease on commissions. However, year-on-year, the core income grew 2%. Let me highlight that on the second quarter, there was an inversion of previous quarter's NII downward trend in Portugal, showing a positive evolution of more than 3% from first quarter. Our high-intensity commercial activity played a crucial role for the year-on-year growth of business volumes, with both the performing loans and the customer funds having a similar growth, around 5%. The support BCP provided to the economy in Portugal during the most critical confinement period is a clear example of such commercial intensity. We stand out as the principal bank that financed more than 12,000 companies with COVID lines backed by the state guarantee. And we swiftly implemented moratoria to more than 120,000 loans of households and companies. During this period, we have expanded our mobile customers base by 36%, and the digital sales have boosted to 35% of total sales. Looking at the net income of EUR 76 million. We see a year-on-year decrease of 55%, which, as I just mentioned, was influenced by the impairment charge in Portugal, Poland and Mozambique due to COVID, but also by provisions of EUR 38 million this year in Poland to mitigate FX mitigation risks. Therefore, the cost of risk increased to 85 basis points in the first semester. NII was negatively affected on the second quarter by a reference interest rate cut in Poland and Mozambique, while in Portugal, we saw, as I already mentioned, a 3.5% increase of NII, inverting previous quarters' downward trend. The commissions remained stable year-on-year despite a decrease on the second quarter as it was hit by the lockdown and social distance measures in full. The recent legislative measures in Portugal will put additional pressure on the commissions evolutions, although these political headwinds could be reasonably mitigated by an increase of the relationship with our clients, with a model supported in transactional package and actively managing the bank's price policy. As a result of this evolution, the core income grew 2% year-on-year. The customers confirm their positive feedback regarding their satisfaction with our digital approach, and that satisfaction continues to be reflected in the growing number of mobile customers. Overall, the number of mobile customers on a consolidated basis grew 36% year-on-year, with mobile customers already representing 44% of our global customer base. In Portugal, we reaffirmed the leadership in customer satisfaction, having recently been elected as best digital bank in 2020. And our app is receiving top recommendation ratings by Google Play store users. In June 2020, 43% of our digital customers in Portugal used exclusively our app, a growth of 10 percentile points since June 2019. And they are responsible for 87% of digital interactions the customers have with us. The app's high degree of satisfaction and utilization level by the customers is driving the growth of mobile business, and that is shown by the 70% increase this semester in the number of sales, 79% increase in the number of payments and almost doubling the number of transfers. We have established as a priority to put our innovation competence at the service of the customers as to provide them better convenience and user experience, aiming to exceed their expectations and obtain their confidence and preference. The onboarding on the apps is simplified and enables us to streamline day-to-day management of the customers' banking needs, a best-in-class that provides innovative and digital exclusive products and service that is open to integration with other complementary digital platforms, while it promotes aggregation and initiation of payments on the customers' accounts in other banks. This innovation priorities reaffirm Millennium bcp as the customer's first option when they want to start a digital relationship with a bank. And this first-mover choice is of utmost importance to retain customers on the long term. We are getting more than 1,200 mobile customers daily. Although operating in a tougher environment due to COVID-19 pandemic, we managed to increase our business volumes without compromising our risk management standards. I want to highlight the EUR 2.4 billion increase in the performing loans, a 4.7% growth year-on-year, of which EUR 1.5 billion was achieved on the first semester of 2020. The customers funds also have grown 5% year-on-year, increasing EUR 4 billion since June '19, of which EUR 1.5 billion also achieved on the first semester, mostly on balance sheet resources from depositors, which reveals the customers' confidence on BCP on the edge of a global crisis caused by the pandemic. We did not refrain our commitment to improve the quality of the balance sheet, having reduced EUR 1.1 billion of NPEs since June '19, while improving even further the already good coverage levels we have. As usual, this effort has greater relevance in Portugal, where we reduced EUR 1.2 billion of NPEs, of which EUR 338 million on the first half of 2020. In the second quarter, the reduction capability was severely restricted by the lockdown measures. However, we managed to compensate the end balance and even able to achieve a small reduction. We have a solid recovery know-how, as we already proved, and we will prove once again. The NPE coverage increased to 58%, considering just the impairments. And if the collaterals are included, the NPEs total coverage reached 109%. The impairment charge is down this year due to foreseeable losses related to COVID pandemic, justified increase on the cost of risk in Portugal and in the international subsidiaries. Our suitable capital position and our resilient business model, capable of organic generation of capital even under current circumstances, made possible that we have accommodated risks, as the ones we are facing, without disruptions in the capital ratios. Total capital stayed at 15.5%, standing 2.2% above the regulatory requirements -- percentile points above regulatory requirements, while the fully implemented common equity Tier 1 improved to 12.1% vis-à-vis 12% in the previous quarter, which stands at 3.3 percentile points above regulatory requirements on a conservative approach, without considering the temporary flexibility permitted by regulators since March. We continue to have a very comfortable position in terms of liquidity situation, as shown by the liquidity ratios. The additional EUR 2.2 billion in ECB net funding resulted from our take-up at last TLTRO auction as part of our NII management and optimization policy. However, this increase in net funding was followed by the increase in eligible assets as well. As a final remark, I would like to underline our priority in defending the quality of the balance sheet; our commitment to stand out as a benchmark in operational efficiency; the investments we are making in the customer relationship model, highlighting the mobile as a distinctive element of our franchise; the use we are making of technology to leverage automation and operational efficiency; and most of all, the remarkable commitment of BCP employees with the process of transformation of the bank to the new environment. I now give the floor to Miguel Bragança.

Thank you. Thanks very much, ladies -- thank you very much, ladies and gentlemen. As you see now in Page 16, in our income statement, we show a growth of 2% in our core income, driven basically by the NII that was 2.6%. The operating costs grew 4%. Both of these factors, the core income, the operating costs and also the impairment are somewhat influenced by a small change of parameter, that is the acquisition of Euro Bank in Poland. The core earnings are stable. In terms of the non-usual operating costs, which are basically severance payments, they decreased somewhat. And the other income, very much influenced by the mark-to-market of funds in our balance sheet and by the lack of capital gains in real estate that we had last year, decreased EUR 70 million. This makes our operating net income decrease around 12% when you compare with the same period of last year. And then the major impact now of the COVID and of the legal -- the risks that we have mainly in Poland is this growth of 45% in impairment and provisions, that imply then that our income before tax decreases 53%, and our income after tax and minorities decreases 55%. Let's go a little bit more in detail in terms of these movements. We see that the NII grows 2.6%. This NII is linked to a growth in volumes. Together with some margin compression, the NIM decreases by 13 basis points. In Portugal, what you see is that this -- there is some decrease in margin that is basically explained by the excess liquidity that we have. We have been generating a lot of customer resources that have been invested at negative rates at the European Central Bank or in short-term money market instruments. However, we already see some growth from Q1 to Q2 in Portugal of 3.5%, a growth that we expect will continue with the tailwinds of the TLTRO. In the international operations, there is a growth of the NII, to a large extent, explained by the acquisition of Euro Bank in Poland. However, there is some margin compression in this and is also explained, to a large extent, by the decrease of interest rates in Poland and in Mozambique. The fees and commission, in spite of a very adverse environment, show a lot of resilience with stability in -- both in consolidated level and in Portugal and growth in international operations due to the change of parameter that I've commented. In terms of the other income, that is explained in Page 19, we see a small growth in mandatory contributions, around 6%, as you see in the left-hand corner; and a decrease in the net trading income, to a large extent, due to the mark-to-market of restructuring funds; and a decrease in the other net operating income. This other net operating income is basically a net effect of the capital gains in real estate and mandatory contributions. So as of this year, we did not have almost any capital gains in real estate. The number that is there is basically the negative number of mandatory contributions both in Portugal and in Poland. Operating costs. You see some decrease in spite of the challenging environment of the recurring operating costs in Portugal of 2%. And when you consider also restructuring charges, the operating costs will decrease even more. We would think that until the end of this year, we would think that the level of operating costs that we saw in this first half of the year will continue. So we are not expecting any type of cost inflation, and the positive numbers that we have in the first half of this year is something that we expect to continue. In the international operations, we have here the parameter change of Euro Bank. Here, I would like to stress that the capture of the synergies is going ahead of the plan. So we expect here to deliver more cost-cutting than what was announced when Euro Bank was acquired. Cost-to-core income. In spite of all these adverse movements, we continue to show best-in-class numbers when we compare ourselves both with our competitors in Portugal and with the main banks in the Eurozone. In terms of impairments and provision charges, there is an increase in the cost of risk. The cost of risk in Portugal grows from 76 basis points in the first half of last year to 82 basis points. And if you consider the quarter in an isolated way, you see that we are very close to 100 basis points, as was somewhat anticipated in our last call. This is a trend that we expect to continue. It is the provision that we have this year already reflected the anticipation of the IFRS 9 scenario modeling. So we have already registered, according to the IFRS 9, the different scenarios with the probabilities, and there was a provision of around EUR 70 million allocated to stage 1 and stage 2 credit based on the new scenarios. In the international operations, there is also some increase in the cost of risk from 69 basis points to 92 basis points, which has increased our loan loss reserves from around EUR 520 million -- EUR 518 million to around EUR 630 million. In terms of other provisions, we see here an important increase that is basically linked to legal contingency fees in Poland. Credit quality. If you see here the one -- the last 12 months, you continue to see here a decrease in the NPE number of around EUR 1.1 billion. And what you see is that our NPE ratio according to EBA, including off-balance sheet, so the whole exposure, including securities, is already below 5%. And if we consider only loans, we have here a ratio of 7%. Going forward, as we have already anticipated, we don't have -- we do not have more information than you have in terms of when a vaccine will come through and exactly the extent which this crisis will affect our income statement, and the visibility that we have is until year-end and as anticipated. So our normal rhythm would be a decrease of around 30%. If it were not for the COVID virus, we -- in this environment of -- that we live today, we do expect until year-end the maintenance of the NPE with the positive efforts that we are doing and the positive recovery performance that we are having, being compensated by some increase of nonperforming exposures due to the crisis that we are living. In terms of customer funds, you see that our franchise is very, very healthy. You see that the individual customer funds grew 12% in Portugal; the total, up 5%. And even in the international operations, we see here a growth of around 5%. This, of course, has a cost. We have tried to be very disciplined in terms of the pricing. So our cost of deposits is very close to 0, but we are getting individual banking driven because we think that for the future, it still makes sense to have deposit clients. In terms of loans, we see a growth of the performing loan book that is more than twice the reduction of NPEs. So the performing loan book increases EUR 2.4 billion, while the reduction of NPEs is around EUR 1.1 billion. And mainly in Portugal and the international operations, the book was quite stable. What you -- we also see right now is that the new performing book is having in Portugal a more positive impact in the NII than the reduction of NPEs. In terms of capital, we have increased since March our capital ratio around 16 basis points. This is -- has many effects, some of them more relevant, some of them less recurrent. But what I would say is that our organic capital generation coincides with this increase in the capital ratio. So as we have commented, we have a positive capital generation quarter after quarter in the positive quarters. So we have an organic capital generation in excess of 20 basis points in this situation in which we are facing this crisis situation that we all know. We were still able to generate capital by around 16 basis points. Leverage ratio and RWA density. I mean, we showed also the resilience of our banking model -- of a liquid banking model with an RWA density that is quite high, which shows, hopefully, the conservativeness of our risk models. In terms of the pension fund liabilities, we had here -- we try to manage the pension fund in a way that is -- that tries to give a good balance between return and risk management. The profitability of the fund was slightly negative, around minus 0.2%. And -- but there was an increase in the discount rate because the reference discount rates have increased in the period. That more than compensated these effects. So that effectively, we are more than covered for the liabilities that we have. I will pass on the floor here to Bernardo.

Okay. Good afternoon, ladies and gentlemen. On Page 32, starting with the Portuguese operation. Net income decreased by 38% year-on-year to EUR 45 billion, affected mainly by the COVID-19 context. Net earnings were influenced by lower NII that I will detail on the next slide, lower commissions and other operating income due to the lower level of sales of real estate assets compared with the first half of '19 and by a devaluation as well on the restructuring funds as well as higher impairment charges that more than offset lower operating costs. On the cost side, costs went down by almost 5% and were positively influenced by lower recurring costs as well as lower restructuring costs compared with the first half of 2019. On Page 33 and looking to NII evolution. In Portugal, net interest income amounted to EUR 379 million in the first half of 2020 compared with EUR 399 million in the first half of '19. Favorable impacts of the expansion of the credit portfolio accounts for almost EUR 10 million. That more than compensates the negative impact of EUR 7.7 million from the NPE reduction. The reduction of the wholesale funding as well as the continuous reduction of deposits had a positive impact of more than EUR 15 million -- of EUR 15 million. That was not sufficient to offset the negative impacts of the securities portfolio of minus EUR 13.6 million, which reflects the lower yield on the amounts invested on -- in securities; the reduction of the credit rate of EUR 11 million; and the application of the surplus liquidity that had a negative contribution of EUR 8 million. Let me also highlight that it was possible to see a turnaround on NII in Portugal when we compare Q1 with Q2, where there was an increase of 3.5%. On Page 34, regarding spreads on term deposits back book. Spread stood at 48 basis points compared with 53 basis points on the first half '19. It was -- it is also important to consider that there was a decrease on the 3-month Euribor of 4 basis points that happened during this period. Spreads on loans stood stable around 270 basis points, and NIM in Portugal stood at 153 basis points, lower than last year, reflecting the impact from guaranteed loans related with COVID-19 as well as lower production on the personal loans. Moving to Page 35, regarding commissions and other income. You can see that banking and commissions decreased 3% in the year, due to COVID-19, related mainly with impacts on payments, transfers and cards. Market-related fees went up as a result of securities and asset management fees. Looking to other income. And the strong decrease was mainly explained, as Miguel mentioned before, by lower gains on real estate sales, the devaluation of the corporate restructuring funds that affect the trading line. And on the opposite side, there was a strong contribution from the equity earnings due to the reversal of the liability test on insurer. Going to Page 36, looking at costs. There was a reduction of 6% in staff costs and of more than 7% in other admin costs, partially explained by lower one-offs and lower admin costs due to the lockdown. All in all, recurring costs went down 2%. There was also a reduction in the number of employees as well as a reduction on the number of branches. Moving on to Page 37, which refers to asset quality. NPE reduction was strong since June 2019 with more than EUR 1.2 billion decrease. On the first half of 2020, there was a reduction of more than EUR 335 million, mostly concentrated on the first months of 2020 before the increase of the pandemic. Cost of risk increased to 82 basis points due to the update of the macro scenarios and credit models. Let's move to Page 38, which looks at the NPE coverage breakdown. You can see that total coverage stood at 115%, where -- as coverage for individuals with high levels of real estate collateral stood at 100% and for companies at a high level of 119%. And as you can see in this slide, coverage by loan loss reserves is high in loans for companies because real estate collateral is lower for this segment than for individuals. On Page 39, looking at foreclosed assets and restructuring funds. There was a decrease of more than EUR 354 million and EUR 144 million, respectively, compared with the first half of 2019. And toward -- concerned with restructuring funds, decrease was influenced by the COVID-19 context affecting the net asset value of the units that we hold. In terms of property sales, there was a slowdown in the first half of '20 compared with the previous year, once again, influenced by COVID-19 outbreak. As you can see, even on this challenging environment, sales are still above the book value of the assets. Now moving to Page 43 (sic) [ 40 ]. Customer funds were up by 5%, mainly due to the increase of demand deposits. Off-balance sheet products stood at the same level as previous year. And in terms of gross loans, there was an increase of 3.3%, mainly related with loan to companies that increased 6%. In this period, performing loans, as mentioned, increased 2x the high level of the decrease that we have in terms of the reduction of the NPEs. Going to Page 41. We have a detailed overview of the evolution of the performing book, which increased 7.2% year-on-year as a result of the strong support to companies, which accounted for 83% of the total performing loan book from June 2019. On Page 42, you can see our support to companies and families on this difficult period. As mentioned before, since the first days of the outbreak, BCP were close to our customers, supporting their needs and helping them to make the most adequate decisions. On companies, BCP have more than the double of the natural market share in terms of loans. So credit lines with state guarantee that we provide have a share of 38%, and we already provide more than EUR 2.2 billion of funds to our customers. Relative with moratoriums to households, the moratoriums reached EUR 4.1 billion and mortgages account for more than 92% of the individual moratoriums. Moratoriums for companies, we see it as a prudent measure regarding the uncertainty of the situation. So companies are taking advantage of this measure to manage their needs. And it's important to highlight that out of those EUR 4.7 billion, 1/3 are related to what we consider the most vulnerable sectors, and only 1/3 of those have LTVs above 80%. Moving to Page 44, which -- with regards to the results of the international operations. We can see that there was a significant reduction of the contribution from the international operations to net income. That were mainly explained by the lower contribution from Poland due to the COVID-19 provisions and additional provisions for FX legal risks and integration costs from Euro Bank. Moving to Page 45. Net income in Poland was impacted by several one-offs, including EUR 38 million for legal risks. Net profit when adjusted by -- for extraordinary items was down 7.7%. Net operating revenues increased by 14%, which includes the accretion value from Euro Bank as well as the strong franchise of Bank Millennium. Operating costs in Poland increased year-on-year, mainly impacted by the Euro Bank acquisition. And CET1 ratio stood at 17% and total ratio at 20%, well above the regulatory requirements. Return on equity, excluding the effect of the one-offs, stood at 8.7%. Moving to Page 46, regarding integration costs of Euro Bank on the first half of 2020, stood at EUR 8 million. And total integration costs increased -- incurred up to June 2020 account for 77% of the overall plan. Euro Bank's synergies of EUR 14 million more than compensates the integration costs and are expected to total EUR 35 million for 2020 as a whole. On Page 47, some detailed information about Bank Millennium. NII, up more than 22%, and we have to bear in mind the 140 basis points of interest rate cuts from -- the recent rate cuts from Bank of Poland. NIM stood close to the level of previous year. Operating costs were higher than first half of '19 due to the Euro Bank acquisition, mainly related with staff costs and other admin costs. But -- and it is possible to observe some significant decrease in trends when compared with the first quarter of 2020. Fees and commissions increased 10%. And on the opposite side, other income was lower due to high mandatory contributions as well as lower trading gains. Moving to Page 48, related with asset quality in Poland. And NPL ratio was slightly higher, once again, reflecting the Euro Bank acquisition and the more consumer loan portfolio. Cost of risk was higher as a result of COVID environment, and the coverage ratio by loan loss reserves stood at 108%. On Page 49, looking at volumes in Poland. Customers funds increased almost 10%, with the highest impact resulting from demand deposits. In terms of loans, gross book went up almost 6%, and it has registered -- and important to mention that the new production in mortgage reached the -- on the second quarter 2020 the highest level that was registered in terms of production. And cash loans are also on the same -- on the good trend, achieving the levels of production before the lockdown. With what regards to Mozambique, turning to Page 50. Net income was lower than the same period of '19, driven by lower net operating revenues associated to last year gains on securities as well as lower NII, resulting from a lower interest rate environment. Costs increased compared to Q1 -- to first half '19 mostly explained by staff costs, considering the expansion of the network. Capital ratio stood above 41% and return on equity of more than 17%. Moving to Page 52. And NPL ratio 90 days past due stood at 20%. Cost of risks stood at 190 basis points, reflecting COVID-19 provisions. And coverage by loan loss reserves stood at 67%. Moving to Page 53. With regards to volumes, we can see that customers funds grew 13% and loans were broadly stable, according to June '19, or with a small increase year-on-year, reflecting our conservative approach under the challenging environment in Mozambique. So thanks for your attention. And before we move to Q&A, I will return to Mr. Miguel Bragança for some final remarks.

We like to present to you exactly how we are evolving according to our long-term strategic objective and intent. And here, the key message that I would like to highlight is the following: First, in terms of franchise, we are clearly overdelivering, in terms of the transformation of the bank, in terms of turning our customers more and more digital and mobile, in terms of customer acquisition, that we have -- we are having positive surprises. And for the long term, for the value generation, this is very, very important. In terms of NPE and cost of risk, this asset quality world that was one of the weaknesses of the bank, what we were seeing is that we were clearly on track to achieving our objectives. And we have shown the operational capabilities to manage NPEs and to reduce NPEs. And these operational capabilities that we have nurtured in the past and developed in the past years will be crucial in this new environment that we will live in the next years. And we sincerely hope that this will be a key competitive advantage in terms of maintaining the asset qualities at acceptable levels. In terms of CET1 and liquidity risk, we are also on solid foot grounds, and we do not expect any deterioration in this regard. In terms of ROE and cost to income, this is an area that, of course, will suffer more in the next periods without compromising the long-term objectives of the bank, a bank such as ours, with the franchise that we have, with the client preference and client loyalty that we have, clients that, as I often stress, like our service as much as they are prepared to pay for it. So we are not a free bank. So we offer quality client preference, and the clients are -- recognize it and pay for it. We think that a bank such as ours should be capable of earning its cost of equity that we estimate at around 10%. In this short-term period, of course, we will leave a period of more turbulence, and it's more difficult exactly to forecast on a quarter-by-quarter basis exactly what will be the impact in terms of top line and, consequently, through the leverage effect in terms of bottom line. But nevertheless, this key value generation for our shareholders, both in terms of development of the franchise and in terms of having the capabilities and the core competencies to achieve this ROE, we think that we are evolving on a good track. Thank you very much, ladies and gentlemen. I will open the door now to Q&A. I have opened the floor to Q&A. [Operator Instructions]

[Operator Instructions] We have one question, and it comes from the line of Ignacio Ulargui from Exane.

I have 2 questions and one very detailed one on the restructuring funds. So the first one on the [indiscernible], how do you see your pre-provisioning profit evolving from here in the second half? So 2Q, it's normally the weakest part of the year and then you have had the effect of the pandemic. How do you see that evolving from here? And secondly, on costs, whether you could be able to take any additional cost-cutting measures, particularly thinking about Portugal, even though the situation is very challenging, if you could take some measures there in order to protect your pre-provisioning profit? And the last question is on the restructuring funds. How do you see -- I mean, how do we expect -- we need to expect the restructuring funds and performance in terms of trading income, whether we should see additional provisions and additional hits in coming quarters? So what should be the main drivers that we need to look to expect this type of negative trading income that we have seen this quarter?

Ignacio, thank you very much for your questions, very useful questions. In terms of the pre-provisioning profit until the end of the year, we see here some tailwinds in terms of NII, namely with the TLTRO. We took EUR 7.5 billion, and we expect this EUR 7.5 billion to be able to increase our NII. And it's easy to do the numbers in the next 2 quarters, around EUR 15 million per quarter compared with the last quarter. So it's basically an arithmetic operation. The remaining effects will basically cancel each other. In terms of commissions, we are taking also some measures and we expect some marginal growth. The growth will be higher if it were not for some headwinds due to legal limitations. But we -- nevertheless, we expect some small growth in Portugal. And going to the pre-provisioning profit, in terms of costs, we had a very good half year in terms of costs this half year. And we expect to maintain more or less the same cost level for the second half of the year, which is good because I think this was a quite low cost level. So until year-end, that's what we are expecting. In terms of the restructuring funds, we have basically -- we had, in the past, some restructuring funds that were more linked to construction. Right now, our restructuring funds are more linked to tourism, and they have good assets in the tourism business. So the assets are good. For some of the people that know Portugal, I mean, good hotels in the Algarve coast region, so with good quality, with good franchise and so on. Of course, in a moment where tourism is leaving, once it's leaving, we have to mark-to-market the hotels. And of course, at least they lost a large part of the cash flow of this year. So -- and this -- we still feel bullish over the long-term about tourism in Portugal. But at least the cash flow of this year is gone or almost gone, so to say. And our base case right now is that tourism will be reasonably back to normal in the summer of next year. So if it is reasonably back to normal, we would not expect, I mean, a higher devaluation. If it is not, so probably, this would have another impact in terms of the restructuring funds valuation because, I mean, the business is what it is. I would like to recall that these funds are not managed by us. They are a good hotel. But of course, they suffer in tourism, as any other business. So what are the key drivers for it? I would say the vaccine and whether we have a normal summer here next year or not. Hope that answers your questions, Ignacio.

[Operator Instructions] We have some questions coming from the line of David Grinsztajn, José Abad, [indiscernible] and Sofie Peterzens.

Here is Sofie from JPMorgan. I don't know if you can hear me. But basically...

Yes. We can hear you great.

Okay. Great. So we saw one of your Iberian competitors this morning paid very large DTA write-downs. How should we think about potential DTA write-downs for BCP? Is this something that one could potentially be coming your way as well? And so how should we think about that? And my second question would be the CRR [ increasing rates ] or the SME supporting factor. Did that help your core equity Tier 1 in the second quarter? And if not, how much tailwinds should we expect going forward? And also, if you could remind us of the IT intangible software benefit that you expect and if you're expecting any headwinds on capital? And then my final question was the cost of risk guidance for 2020 is 100 basis points, right?

Okay. Thank you very much. In terms of DTA write-down, in these accounts, we have already made our projections until the relevant period or the end of the relevant period, and these projections that we have for the DTAs already reflects the COVID. So of course, these are always projections, but they already reflect the COVID. I would also here like to highlight that in Portugal, in the context of this COVID, there was a deferral, so to say, of the period that we have for tax loss carryforwards for 2 additional years. And for the tax loss carryforwards generated in 2020 and 2021, we will have 12 years. Now this was a recent legislation that somewhat protects our DTAs. Having said that, I would like to highlight that DTAs are -- I mean, are already deducted from the capital ratio. So this is after the -- whether we write them down or we will write them up, this should not be relevant in terms of capital ratio and so on. But we feel quite comfortable that our present projections already reflect the COVID. As I was commenting in terms of capital ratio, I mean, we have grown 16 basis points of capital ratio, and this coincides reasonably well with our organic capital generation. And then there were a lot of movements that more or less cancel each other. But one positive movement was the SME factor. But this SME factor, in our case, is very small. And the software is also very small. It is irrelevant. And they also got canceled by other small effects. So in our case, this is relatively negligible from a capital standpoint. In terms of -- and it got somewhat canceled for the other way for market risks. There were sort a couple of movements that cancel each other so that effectively, our increase in the ratio coincides with the organic capital generation. In terms of the cost of risk, in our last call, I said that from now on, for this year and for next year, and based on some simulations and sensitivity analysis, we were expecting something between 90 and 120. This was exactly what I said in my last call, between 90 and 120 for this year and for next year. We still maintain this view, even in spite of these new scenarios that we are seeing because as we have shown also here last time, our business model is not tremendously sensitive to the GDP evolution. Even in the last crisis, as you've seen, I mean, our mortgage cost of risk on the top of the crisis with unemployment at 16% was around 50 basis points. So -- and this is around half of our book. So for the time being, we maintain this guidance. But of course, I mean, this could be closer to 90 or closer to 120. Let's see exactly where we -- in this quarter, we have done, as you've seen, around 110, so -- which is reasonably aligned, already anticipating through the IFRS 9, the scenarios, I would say, more extreme scenarios, I would say.

We have another question coming from the line of Jonas Floriani from Axia Ventures.

I have 2 questions. One is again on your capital. And just having in mind the recent changes from the ECB side, kind of allowing the banks to run more time with a lower capital level, does this change in anything your strategy on how do you see your capital levels going forward at least over the short term? Second question is more related to asset quality. I was just wondering how you're thinking about the day after in terms of the support measures. What do you expect to see in terms of asset quality dynamics once we see the support measures being phased out towards the next year?

Okay. Thank you very much. In terms of capital, we still think that a bank with our business model and with the strength in the market that we have in being a retail bank, we should have over the cycle and structurally a CET1 of around 12%. Having said that, we are not, I would say, on a totally automatic mode so that if we are a little bit below 12%, we immediately look at cash flow. Or if we are a little bit above 12%, we immediately try to decide a share purchase program. So the way we see it is the following: with more flexibility from the regulator, as long as our business model remains capital accretive as we think it is, we think it gives us more time to cope with some fluctuation around 12%, and it gives us more time to think over the longer term. But we will fluctuate around this level. We think that -- I mean, it may come somewhat down before it goes up. But what this gives us is more time and more serenity to think over the long term and exactly what we have to do. In terms of asset quality, as I was -- as I commented, until year-end and based on the assessment that we do until year-end, we do think that it is possible to -- not to increase the NPEs in spite of the crisis. So our base case, and this may fluctuate, is a base case of stability of the NPEs from now on. This is something -- I'm speaking basically about Portugal. Next year, it's very difficult to make a projection. What we know is that the most sensitive factors are, as was already shown in our last presentation, slightly above 7% of our book. And if we take a look at the moratoria that we have, only 1/3 are in these most sensitive questions -- sectors. And as Bernardo commented, of this 1/3, only 1/3 have an LTV that is worse than 80%, which gives us some comfort in terms of recovery and in terms of potential LTV. So of course, we are not -- we don't want to sound complacent, but we think that our business model, the internal capital generation that we have, the diversification in terms of credit portfolio and in terms of business mix that we have, will allow us to be within the most resilient banks in Europe. And also, the other point that I would like here to highlight probably, a colleague of mine is here to answer your point, I would say that for individuals, the moratoria is very efficient in the sense that almost all the moratoria that we have, as was presented, is in mortgages. And in mortgages, basically, what we have is somebody does not pay the installment during 6 months. And let's say, the person has a 25-year mortgage, the 25-year mortgage then translates into a 25 years and 6 months mortgages. So this will be extended over time and will not create a cash flow problem for the client. So it's very long term, okay?

We have a question coming from the line of Noemi Peruch from Mediobanca.

I have 2 questions on my side. The first question is on loans. As the remaining cost of the guarantees are unlocked during the second half of 2020, do you expect this to end up with a market share closer to your natural one on state guaranteed loans by the end of the year, i.e., only marginally increasing the EUR 2.2 billion loans already granted? And my second question is on asset quality. Can you share with us the evolution of stage 2 loans in Q2 vis-à-vis December 2019?

In terms of loans, the large part of the loans with state guarantee were front-loaded. And in this situation -- or in this tranche, we have had a market share that was twice our natural market share. The remaining part will be lower, will be much lower. Unfortunately, for us, because we like to think of ourselves as more efficient and more performance, in these recent tranches, the government has created a quota so that every bank can only originate, so to say, its marginal market share. So assuming -- so in the new loans, we will have probably a market share that will be our natural market share. But of course, the average between our natural market share and twice our market share will be higher than our market share. So we expect at the end of this process to -- I mean, to have -- it depends on how much new loans there will be, but at least 50% above our natural market share. In terms of stage 2 loans, let me just here check. Basically, stage 2 loans in the context of -- were basically stable vis-à-vis March, okay, at around EUR 5.8 billion, even a small reduction, okay, from March to June, a very small reduction in Portugal. By the way, in consolidated terms, it's always -- it's also basically the same at EUR 6.9 billion in March and June.

We have a follow-up question coming from the line of Jakub Lichwa from RBC.