CaixaBank, S.A. (CABK) Earnings Call Transcript & Summary

Thank you, yes. So insurance and other financials get a break now. But in banks, we're dedicated. We're pushing on straight through. You are welcome to drink a coffee as long as you pay attention. I am just covering while Antonio get his mic on. We're doing everything in just in time here. Thank you for being timely back in the room. I mean I'm going to try and do on the radio countdown, 6, 5, 4, 3, 2, 1. So welcome back to CaixaBank. I'll leave you Antonio's hands.

Back to back from one room to the other, Spanish bank to another one, and we've got another deal for you, be pleased to have both Gonzalo and Javier respectively, CEO and CFO, of CaixaBank. Thank you all for coming and attending this session. Thanks for joining us today. We've got a lot to talk and there's been an eventful 12 months for the banks when we look back. And the resilience of your business model has been tested once again, I would say.

Maybe to start, we can run through some of your thoughts, how are you seeing fundamentals in this environment. How do you manage a bank like Caixa in such a steep and fast changing rate environment?

Thank you, Antonio, and thank you for the invitation. Once again, it's a pleasure to be here. It's obviously a better year than other years for the sector, also for us. Fundamentals all point in the right direction. I think to the point we haven't seen in the last 15 years. The change in rates is now it's evident. It's coming to a new normal, that's a reality. It's new, but it's the old normal because we always have positive rates. And where we are now is as we're, I think, steady state of things should be. The change has been very fast, it's obviously very extraordinary, but the landing zone is normality. And hence, we need to look at the business, we need to look at the fundamentals with positive rates. And what we see is obviously that we are an institution in a strong position because we have taken advantage over the last 15 years to actually fight hard to include certain businesses that were not NII dependent, namely, obviously, insurance business and asset management, private banking, where we have very strong growth engines even though maybe seasonally or at this point because of markets that may not be growing as fast in certain cases, but clearly, structurally very effective businesses. We've made our bank much more efficient. Obviously, through M&A and organically, we have now, I think, the right size and structure both in terms of branches and people, solvency, liquidity and asset quality during this year, we'll continue to manage to reduce our nonperforming loans. We continue to maintain a fairly low cost of risk as well as a very sizable and assigned provisions. So what can I say? The fundamentals are, I would say, very strong. We all know that the pace of change has been very quick, and we are all debating about when this peak works, that has its relevance. But if you look at what you asked, Antonio, the fundamentals, what is more important is that now we're in a different time zone and this time zone is actually here to stay.

Very clear. And one of the questions that comes up a lot for you over the last 2 weeks that's been probably dominating debate also with respect to the rest of the Spanish banks is, of course, we've seen new launch, a new commercial initiative recently and introduced a new term deposit offering for weaker clients, which have deposits of EUR 5,000. Why launch it now? And how do you think this will affect your business and the second derivative effect deriving from how your competition might respond to that?

Well, thank you. Yes, we've launched this time deposit. As you probably are familiar with it, but it's a 12-month deposit with a base rate of 1%, and that base rate can go up to 2% as long as the client has certain other products with us relatively simple, but mostly insurance-related and income related, whether they have a payroll pension or similar. Why are we introducing this product? Because market where rates have now reached the level of 4%, it's necessary to have a time deposit offering for your retail clients. And obviously, it was a matter of when, but I haven't seen any market where this does not happen. Otherwise, we, as banks would not be fulfilling our mission. And why now? Well, I will say why not, at some point is needed to come. And we thought it was a good time after the summer. And obviously, it's something that we've been planning for some time and decided to move ahead, just to be clear. Let's -- I'll remind you that we have obviously given some guidance from betas NII, this move is entirely consistent with previously given guidance and there's nothing that is not kind of part of the logical evolution in a market where rates used to be negative and now they're at 4%, and obviously, banks need to launch a product. This product is obviously aimed at our existing clients, completing our product offering, making sure that when we discuss about savings, if a client has a short-term horizon and wants absolute safety on their funds, then we have a product. So that it doesn't mean that this is a product on which we want to lead the discussion about financial objectives, time horizon, portfolio diversification. This is just one part of it, but one part of that needs to be in the picture.

Great. In the meantime, I remind everyone that if you have any questions, we're going to leave the last 10, 15 minutes for you to sort of be able to raise and interact with management as well. Going back to sort of the year, it's obviously been a very strong performance by second quarter, best first half and probably you're going to be printing the sort of record high profitability for this year for Caixa. The market, however, still believes the banks are over earning and then be trying to figure out what is the true sustainable level of profitability beyond this year. Now you guided to NII in 2024 to be not far from the levels of this year. What is the overall profitability outlook for CaixaBank looking into next year?

Well, thank you. Obviously, what we talk about next year, we tend to compare what 2024 will be compared with what 2023 is likely to turn out to be and what we are seeing during the year, increasingly quarter after quarter is that 2023 is becoming a better and better year, better than we had expected. Some of the trends that we had forecasted that actually having an impact on the business area and I'm talking obviously fundamentally about net interest income. So when I look towards the next 6 quarters, I see a very strong positive development. Clearly, with an initial continuation of a strong improvement during the second half of the year. Depending on how rates evolve and let's assume that the range will be stable around these levels. We still have part of our asset repricing to take place. But we will also have, obviously, part of our deposit repricing to be made and in line with what the betas that we have been giving guidance for what we are going to see and remind you the guidance we gave for NII for this year is above [indiscernible] and around 9 for next year. So you're seeing that there's some slowdown and small coming down on NII. That is an assumption based on rates. Rates are doing a bit better than what we expected and its assumption based on betas and betas are also doing clearly better than expected. So we still have -- very strong growth in NII, very strong levels this year and next year. And most importantly, I think a new, as I was saying before, a new normalized level of NII going forward. If we have -- this materializes a small slowdown on NII when we compare 2024 to 2023, we are going to see also a very significant offset in force when you look at net revenues, which is the drop of sharp all in deposit guarantee fund contribution and the resolution fund contributions. So when you look at net revenues, we're actually seeing, I think, positive environment as we move into 2024, we should have a normalized development of our cost base. Hopefully, disciplined one and then cost of risk, which is still very much under control and what we're seeing that actually, again, every quarter, we are having better news than the news that we were expecting for the quarter. Still expect some deterioration in asset quality. We were expecting it from the beginning of the year. It hasn't happened yet. We're still in produce our nonperforming loans in the second quarter. But even if there's some slight deterioration in asset quality, we feel that our cost of risk is going to be well contained. So all in all, it goes back to what I was saying at the beginning. We moved completely from 1 zone of profitability to another. This latter one is the good one to project on our future. And we are obviously looking forward to grow profitability from this new level in 2024 and onwards.

Let's talk a bit more about those 2 levers that you mentioned. There's sort of the noninterest income revenue stream and then we'll touch on asset quality. Noninterest income growth is going to be a focus point for the market next year as and when rates start to come down. I think the market sometimes forget the cash is not just all about NII, the ability to cross-sell is one of the key strengths for you. So markets, of course, are always difficult to predict. And we've not had an easy year for fees. But when you look at the outlook for fees across the different products, which we obviously have retained a lot of the factories in-house, what do you see the biggest opportunities for growth and maybe a word on sort of now that the bank integration has been sort of dealt with, where do you see the biggest product penetration gaps from bankers products into your own?

I'll take that one. Well, you are right. So this is an engine for growth has been there since the beginning. And now we have the second engine, which is NII, but obviously, it's not the only one. Well, we have to remember about our unique business model in the sense of being actually the only pure bancassurance business model in Spain. And basically, it's insurance, not the area where we are more optimistic. Remember that in terms of P&L, after IFRS 17 reclasses, we have now a dedicated P&L line or insurance result, that is basically savings insurance, risk insurance and some other. Basically, we are really optimistic with [indiscernible], for example, online meetings averting related to save insurance. Life risk as has been the case in the past, we think that we can deliver really well. We have a very well structured product offer that is continually probably over in terms of new production. And then on fees, it's true what you say that probably this year, we have had some winners. We have to remember here that the cash custody fees we were charging to large corporates, this has gone, obviously, with positive rates. And then we are managing those, let's say, current account maintenance fees trying to strike the right balance on that front. And obviously, you have the other side of the going as positive NII. But going forward, we think that our very well-established long-term savings business, remember, close to 30% market share and gaining market share on that front in Spain will continue to deliver. We see positive inflows and were coming down despite the new rate environment and markets, hopefully doing better vis-a-vis the previous year compared to -- let's say, '23 vis-a-vis '22, let's say, '24 vis-a-vis '23, we will have a much better comparison. So in terms of average AUM balances, this will not be [indiscernible] and then also the payments business, we see that consumption in Spain as also Portugal is doing well. Our payments business is set to continue delivering. And more in the short term, I think that probably the second half of the year will also show better figures on that front. So overall, I would say that insurance, that is a key differentiation, we really have a strong focus on that, is going to be the case for next year and our long-term savings business, so those are the key engines that are going to support. You mentioned -- and I think the potential -- well, the revenue synergies that's actually not potential, but the revenue synergies we're having from the banking integration, it's true that the former bank clients have a lower penetration rate in several products. Basically, it's protection in general or insurance in general, longterm savings, also consumer lending. And we have key differences in products with high value added, like health insurance, for example. We are market leaders. I think it's a huge penetration gap between both, and we have our long-term plan on that, and we are delivering, we are on track. Actually, we are ahead of our initial estimates, and this is going to be an additional tailwind to what I was commenting before.

Thanks, Xavier. Maybe staying with you on the asset quality, which was the second follow-up which we've touched on our provisions in this cycle have turned out to be maybe below what expectations looks like at the beginning. We've seen a number of banks that have called for below the cycle cost of risk. You've guided to cost of risk to be below 30 bps for this year. How do you think that changes in the current environment? I mean you had overlays as well, which are significant. How should we think about the utilization also this overlays in the second half of this year and in 2024?

Okay. Well, the truth is that we were expecting some kind of new nonperforming formation, and this is being postponed. So the truth is that the macro conditions are better than initially expected. We have just presented a record low NPL ratio last quarter. And we are expecting some deterioration at some point, but it's being postponed. And now we were expecting that probably we would go up on NPL ratio from 2.6% to 3% by the end of this year, but now we have the view that this probably is going to be further down the road or probably even at lower levels. So we hold those overlays as you mentioned. Some of those will be used by the end of the year, but we have the feeling that we will end the year with still a decent amount of those for 2024, which obviously gives additional protection. So we are quite a bit on the situation. We expect some deterioration, but clearly, not in line with our initial expectations.

Yes, as I would say. Maybe 1 last question before we open up for any questions from the audience on capital returns. And obviously, this is a key pillar of your investment thesis. You're now a 12% pro forma for regulatory headwinds and the 500 million share buybacks that you've just approved. You're pending on the 20 bps to go. After that, my understanding is you'll be paying 100% of your organic capital generation. By that date, it should be well in excess of the EUR 9 billion you had guided by the end of 2024. So is that fair? And what's your stance in general in terms of shareholder remuneration from here? How should we think about the mix between dividends and buybacks going forward?

Well, indeed, back to the strong fundamentals in which we are in the result of all those strong fundamentals. It's not just profitability, but also the fact that these profits are available for distribution. The growth we are seeing is limited, particularly on balance sheet, capital heavy, RWAs. And it's likely to stay that way for some time, even though in due course, obviously, we expect for loan growth to resume and accelerate and that will be good news because we're having really a business in which we make returns above our cost of capital. That's certainly how we see going forward. But in the meantime, growth is going to be on balance sheet limited. A lot of our growth is coming actually from capital-light activities. Insurance is 1 example. And obviously, the Danish compromise means that the very high profitability of the insurance business is to at a very large extent distributable. And hence, we need to decide what to do with our capital. We'll be very open that we're of an aggressive M&A bank. We're not looking to do acquisitions. We feel that we have the perimeter in which we operate in Spain and Portugal and for certain business it's Europe or maybe on the CIB side, but for our fundamental retail business, Spain and Portugal, we are in the markets where we are. We have appropriate market shares. We have the product capacities. We do not need to sort of add on skills that we do not have. And hence, as long as we keep being profitable and generating capital, this capital should go back to shareholders. We don't see a reason to keep it on balance sheet. Certainly even less so when valuations are so depressed for the entire banking system, but also for us. So yes, our expectation is that we continue to be highly capital generative and for this capital to be regularly from to shareholders. How? We've mentioned already. What's our payout? 50% to 60%, which we think is a reasonable sort of sustainable payout in almost any scenario. But clearly, in the current scenario that is still quite a lot of capital generated above and beyond this level. And that is what we were saying, we will continue to do extraordinary capital distributions, i.e. share buyback, like the one we have announced. On this basis, as we do not see our share buyback coming out of one specific divestment or situation, but out of our current capital generation program, we have decided to move into what we announced at the second quarter results presentation. It's a smaller buyback, only 23 basis points, which was approved fairly soon and we started yesterday with the intention of being more regular in our buyback programs. So you should expect that we come back as we keep generating capital over and above the 12% level to come back with announcement of capital distributions, there could be. And our aim is that they will be more regular, maybe less spectacular in terms of size, but our aim is that after a while, the market gets to putting these into our stock as an extra capital distribution that comes regularly and hence, obviously something that should be incorporated in our price. That's the message. Obviously, if circumstances were to change, we need to retain more capital. We will suspend or reduce buybacks. But clearly, when we look at the next years, we see a horizon where capital distributions over and above the 60% level are going to be a frequent pattern.

Any questions from the audience? We have about 10 minutes to go. If you do have any, please raise your hand and we'll get the mic to you. Otherwise, one question on costs from my side. You're targeting 300 million of incremental OpEx related to sort of IT and business development over the plan horizon, which was inevitably also a function of sort of your revenue expectations when you've announced this. I wonder to what extent with higher revenues, you'd be willing to increase the size of such investments? And where would you see the biggest returns? And maybe related to that, how should we think about sort of staff cost [indiscernible] from here, there is an important sort of labor contract update into year-end?

Thank you. Obviously costs, a critical part of our business. How do we manage costs? Because we have had this significant increase in revenues, any organization could be attempted not to look so much on the cost base. We've been very clear that this very significant increase in revenues, which is, again, returning to normality is a 1-year process. When we look into revenues in 2024 versus 2023, we'll go back to, let's say, single digits comparison. That's my expectation. And hence, they need to take a very hard look at costs again. At the same time, we have a business that offer substantial opportunities for us, the market leader, having gone through an integration, but having now the house in order, we see plenty of areas in which we can do better. Some areas where we actually thought that there were no profits to be made. Now they are fairly profitable. Obviously, everything has to do about collecting retail deposits has completely changed. And hence, the investment and the expense that we need to dedicate to this from an economic point of view is much high. We have already been doing it in 2023 to a large extent, for instance, all the initiatives with undertaking to better share the senior citizens on which I think we are market leaders. We're going to continue that way. But the part of the discipline is that we need to look hard of the business and see where are we going to finalize and disinvest from in terms of money that we may be spending that can be spent in a better form elsewhere. In terms of being specific about the numbers, there is this negotiation that has not yet started that it will be for a large part of the industry, but in fact, for CaixaBank or former commercial banks will have their own negotiation in parallel and the experience shows that those processes tend to end up with fairly similar results. This will take months. I want to project now how the negotiations will evolve. We need to be obviously open and reasonable, and we expect the other side to be also reasonable. The fact that inflation is coming down, which is now, I think, very clear. But how much it is coming on and the fact that this is coming down, is obviously going to be helpful. In the nutshell, we're going to continue to invest. We need to -- we see opportunities. We want to spend money, but only where we're going to get the appropriate returns. And all in all, I think we're going to continue to have a cost base that is managed in a way that is consistent with positive jaws, which is obviously the key to long-term success.

Thank you. Any last -- there's one question there.

You've got obviously quite a short-dated balance sheet, which has benefited a lot as short rates have risen. How much -- and you've expressed sort of confidence this is a new normal in rates. But how much flexibility do you have to kind of lock in this higher profitability and extend duration, whether it be by bonds or floating to fixed rate kind of duration on the asset side? Just in case you're wrong, right? And this is not a new normal, rates come back down. Could you just talk a little bit about your thinking with regards to kind of extending duration for a potentially different world to how you see it?

Okay. Actually, we have been doing so naturally. We have been reducing our NII sensitivity. So I remember when presenting our strategic plan in May '22, in an environment where we were foreseeing rates at, let's say, 1.5, talking about sensitivities between 15% and 20% for a 100 basis points move on the yield cut. And now this is down to less than 5% because first thing with higher rates you have less sensitivity because deposit betas are higher. And because of a natural way, we have been originating fixed-rate assets, basically originating mortgages at fixed. So first thing is that the sensitivity is lower than it was previously. And second thing, as this has been the case, we are a little bit opportunistic on that front. So now you have a negative fuel curve that is pricing rate cuts and actually hedging via ALCO portfolio loans or derivatives or whatsoever. Actually, we are looking -- locking, sorry, those rate cuts and you are protecting again, as you suggest, even a more negative rate scenario. So we are happy with this lower sensitivity a little bit on the sidelines. So we don't have a negative carry with cash at 4%. So looking for, let's say, more flatter yield curve in order to take action. And actually, if you see market rates as of today, as we speak, are at the highest of the cycle, even long-term rates.

That was great and perfectly on time, actually. So thank you very much. for joining us, Javier and Gonzalo. Thank you, everyone, for attending the session. We have HSBC next. Thanks.

Thank you.

Thank you.