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

[Audio Gap] with our next session. So it's a great pleasure to introduce our next speaker, Javier Pano, Chief Financial Officer of CaixaBank, a role he's held since July 2014. And Javier also sits on the ALCO Committee and on the Board of the Portuguese bank, Banco BPI. So thank you very much for joining us. It's a pleasure to have you.

Thank you. Thank you and thank you for -- to host you in Madrid. And thank you for coming to see us.

But maybe to start with a broad question. I mean, how do you see the macro backdrop currently evolving for Spain and Portugal?

Well, it's doing better than our initial expectations. I think it's across all Europe and across the world that the economies are doing better, but let's say that the positive spread of Spain compared to core Europe is also doing very well. So actually, we had an initial projection for GDP growth this year at 1.9%. We are revising this, and we are going to be closer on our forecast to last year performance that was 2.5%. So personal consumption is helping. Employment is doing very well. Record high social security affiliate. So the economy is performing well, and probably CapEx is lagging a little bit still, but hopefully, the business world will also be more positive in terms of confidence, et cetera, once perceive that the economy across Europe is also doing better. So we expect that, that part will also have a positive impact going forward. And obviously, this has positive consequences in terms of business, in terms of general dynamics commercially speaking, and basically on lending, where obviously, we are -- we can touch on that later, but we are having a more positive view, clearly.

Okay, brilliant. I suppose topic, which is always top of mind thinking about NII, you raised your 2024 guidance at Q1 results. So you now expect mid-single-digit growth year-over-year. While for 2025, we said at the time, consensus was EUR 9.7 billion, you saw upside to that. So could you just run us through your latest expectations here? What are the moving parts behind the margin evolution in particular?

Yes, we have revised the NII guidance. Basically, what is behind is, well, higher rates. You already know this very well. So the market was really aggressive pricing rate cuts late last year. We had even 7 rate cuts, 0.25-point rate cuts for this year. This is now slightly over 2. And -- well, that makes a difference for sure. Then as I already started to comment better volumes in general, also on lending. So we are already very close to stabilize our mortgage portfolio after an [ intense deleveraging ] after several years. And then deposits also doing well. And from our side, a much better visibility in terms of deposit EBITDA or deposit costs in general and with a much better perception where is the end on that process. So if you combine all that, you have that more positive view in terms of NII. But also into 2025, as you incorporate a better tone on volumes, you have also the visibility on our ability to keep funding costs low and even to push them downwards once rate cuts start. And then on looking beyond '24, also, we have legacy parts of the portfolio at very low yields that obviously gradually are maturing, and this is over time becoming a tailwind. So yes, this is why we made that comment now that market consensus are EUR 9.7 billion for 2025 NII was, in our view, there was upside and it was, in any case, a floor.

That's clear. Now I suppose just to touch a bit more on lending growth in particular. So how do you see that developing across the different sectors? Do you expect the widely anticipated rate cut coming up will have a big impact on that?

I think that has not that much to do with rates because actually, we have had a more positive tone since late last year. So that was well-ahead rate cuts. And well, it has more to do about activity and macro related than good rates. Obviously, lower rates is always a marginal positive, but I don't think it's the clear [ trio ]. So in the Spanish case, we have been throughout a lengthy period of deleveraging since the Great Financial Crisis. And if you look at the debt-to-GDP ratios of the private sector both for households and businesses in Spain, we have -- we are well below the average of the Eurozone and trending down. And we are of the feeling that we have gone too far and that very soon, we should be stabilizing and having a loan growth closer to nominal GDP. I'm not saying nominal GDP exactly, but at least getting closer to that. And well, as I said, a better tone since late last year. The surprise has been probably more than, it has been more driven by individuals, that better tone, than from businesses. It has been a better new production of mortgages. That combined with lower earlier prepayments. We have -- we are already being able to stabilize the mortgage portfolio, as I said before. And also, consumer lending doing well on the back of positive unemployment figures, et cetera. And our feeling is that as long as that more positive tone filters into the SME world, also, the CapEx cycle will improve and eventually, businesses will join to cut the CapEx cycle. And consequently, to new loan demand. So I think that that's the plan. This is what we are already observing. So a better tone. And as we are already thinking into our new 3-year plan, you know that is ending in '24. So for '25-'27, it's difficult for us not to be more positive in terms of volumes. So it's something that obviously we'll consider.

Understood. And while a lot of focus is, of course, on NII, around 1/3 of your revenues in 2023 came from outside and so business like wealth management, protection insurance, banking fees, so how are you thinking about the growth outlook for those businesses? And where are the areas that you, as management, are most focused on?

Well, it's true that, obviously, there has been a lot of market focus on NII because it has been obviously a remarkable change. But as you say, with management, AUMs plus insurance protection is a key strength for the bank and quite differential. You know that we are a unique pure bancassurance player in Spain, something that is quite common in other jurisdictions like Benelux or France, et cetera, but it's quite unique here in Spain. And we are quite strong on our wealth management business and protection. Already with market shares approaching 30% on wealth and well over 30% in Spain on insurance, generally speaking. And this will continue to do very well. So we don't think that there is any reason not to be the case. There is first thing a gap in Spain in terms of the penetration of those products across Spanish population, and there is a gap, clear gap. And second, even within the bank, after the merger with Bankia we have also former Bankia clients that are less penetrated than former, let's say, CaixaBank clients. And we are in the process to cover that bridge. And well, it's a long-term bet, but I would say that we are midway on that process, but it's progressing according to our plans. So there is a constant tailwind because of all that. And as you are quite a unique player in -- basically, on insurance, so obviously, it's very positive for the business. So that's clear. Then you mentioned the other part of that group of revenues, which is pure fees, pure banking fees. Here, we have had a headwind basically coming from maintenance fees on current accounts. This is coming from the period of negative rates. We have been charging clients with fees to hold balances basically. That obviously was clear with corporates but also with retail. And now we are trying to find the right balance on that front, considering that we are in a positive rate environment. So we have been waiving gradually part of those maintenance fees, but we are getting closer to the landing area. And we think that during this year, we are going to be able to stabilize that part. So I think that, that pure fee revenue pool are going to be stabilizing also now. So obviously, adding to the positives.

Okay. And I suppose turning next just to think about efficiency and operating expenses. Your OpEx target is less than 5% year-on-year growth, which you've recently reiterated. And how are you thinking about the upside and downside pressures there? Are there any efficiencies that are cropping up that are helping you fund investment or other challenges?

Well, obviously, this year, we have the impact of still some carryover effects of the high inflation we have had in the last couple of years. But the whole thing is that we have reached an agreement with unions for wage inflation for a 3-year period, including '24 to '26, and that is a wage inflation of 5% this year and 3%, '25; and 3%, '26. So this is over 60% of our core base, and having that settled is important. And besides this, obviously, there is CapEx, there is investment, basically IT-related to a large extent. This will continue. So this is something related to, obviously, new developments, new commercial solutions for clients, more digital, and this is ongoing. It's -- obviously, you need to take care of cyber. And there is an underlying journey to the cloud that obviously entails some investments. So this is continuing. So obviously, we do our best always to keep our cost base contained by -- but the -- there is a certain limit to extract those efficiencies. And moreover, you have to consider the impact of currently this higher rate environment on, well, your branch network also. All that is a positive in terms of quality of service and also is helping us as a retail bank to keep low funding costs. So in that also, we should think a little bit differently on -- in terms of cost of optimization as we are in a different rate environment.

Okay. And I suppose, thinking next about the other costs, cost of risk. You posted 28 basis points cost of risk in Q1 and you guide for around 30 basis points for the full year. How relevant is the path of interest rates for that? And more generally, how are you thinking about asset quality within your book?

Well, it's always -- as with new loan to manage lower rates is a marginal positive, but honestly, it's not the major driver. So major driver is macro, it's employment, it's GDP growth. If that does well, asset quality remains stable and does work. So well, here, I think that if to any of us, the question was 4 years ago that we would face a pandemic, 10% inflation, 4 percentage points of rate hikes, et cetera, we -- all models would have been telling us that we would face a huge deterioration of NPLs. And it has not been the case. There is something here and there, but nothing I would say material. So honestly, we don't foresee this happening if it has not happened already. So we are quite a bit on the evolution. So we'll stick with our guidance for 30 basis points. Also, you need to take into account that very gradually, the bank is moving towards less mortgages, more consumer lending, more SME, more corporate. So obviously, that entails a slightly higher cost of risk. But in any case, no news. So no news is positive news, and we are set to deliver on our targets for sure.

And wrapping all the P&L together, now we've gone through it, and you target a return on tangible equity of 16% for 2024. So what sort of profitability level do you see as sustainable over the medium term if terminal rates land in that 2% to 3% range that we expect?

Well, in our opinion, not distant to the current levels. So we should not be thinking that because of lower rates, automatically, our profitability comes down. No. First thing because NII is less sensitive to lower rates than before. So we have been working on that. Adding fixed rate assets to our loan book, we have been growing on that. Take into account that our new mortgage production is 2/3 at fixed rate, and this is like an automatic stabilization or stabilizer on our NII. On top of that, we're increasing hedges, et cetera, taking advantage of market opportunities on that front. So we have an NII sensitivity to a shift of 1 percentage point of rates of approximately 5%. But well, that is just to rates, but then you have to add to that, that more positive tone in terms of volumes I have just commented. And on that front, it's more important the evolution, the future evolution of the pool of deposits than loan growth. So the margin on deposits is wider than on lending. So it's very important that front, and we are very good deposit gatherers, as you know. So we are basically a retail franchise, 37%, 36%, 37% market share on payrolls, 34% on deposits, so in pensions. So that means that we have quite a very strong deposit gathering capability, and we are good on that. So having that part, under control is very positive. And then well, there is -- we have just commented on those key businesses that probably have been under the shadow by the focus on NII but are still there, and that also will have a lot of commercial attention from our side. And then over time, a lower share count. So we are buying back shares, and this is a process. So once you do the math considering, I would say, NII per share or fees per share, et cetera, also, it's important to take into account. So don't think that profitability is that impacted by lower rate or at least rates in the environment you have just commented.

Okay. I mean that creates a very nice segue to think next just about capital and capital allocation. So you finished a EUR 500 million share buyback in May and indicated that Q1 results that we could expect more extraordinary distribution later this year and again in 2025. So how are you thinking about that and excess capital over the longer term? Should we still think of 11.5% to 12% CET1 as the relevant threshold? And how does the recently announced countercyclical capital buffer interact with this?

Well, here, you have to take into account two considerations. First thing is loan growth. So as you have to incorporate, you have to fund in capital terms that loan growth, and that has to be taken into a question going forward. In any case, even considering loan growth, which in any case, is going to be moderate. So it's not about double-digit loan growth going forward. So our deposit -- sorry, our capital, organic capital generation capacity is going to be significant. So there will be plenty of organic capital generation even after loan growth, but you need to take this into account. As you say, we have a new capital requirement, Remember, this 1% requirement [ and '26 ]. In our case, as this is impacting basically credit exposures in Spain, the impact is 75 basis points. So well, we have to accommodate that requirement on our incoming capital plan. In any case, the message is that it's not impacting 2024 capital evolution plans. When I say '24, I mean fiscal year '24, although part of fiscal year '24 capital evolution, obviously, will fall into 2025. But if we talk about fiscal year '25, fiscal year '27, obviously, that new requirement is going to be taken into account. But the message is that with a starting point with an MDA, let's say, around 350 basis points, we have room to accommodate part of that impact. So you should not think that we are going to pass on those 75 basis points fully into our capital targets. We have to think about it. We have to make our numbers long term. For sure, once we present in November our 3-year plan, I'm sure that we come back with something more specific. But that's -- those are the broad messages I can give you today.

Very clear. And elsewhere in capital, you've been quite clear in recent quarters that M&A is not at the top of CaixaBank's agenda. But to the extent that an attractive opportunity arose, which would be the sector that you would be potentially most interested in?

Honestly, there is nothing on the [ cash ]. So talking about the future, but if the future -- the circumstances are not today that I think it's not -- probably not realistic. So I will stick with the message that there is nothing on the [ cash ], not in Spain or not in other countries. So not in terms of bolt-on acquisitions. We are of the feeling that we have the factories. We have the capabilities to run our business and to grow. So we are not aiming to do anything on that front, honestly. So basically, in terms of capital use is loan growth, which is something new. That is on the horizon compared to the recent past, but to some extent, and in any case, with plenty of capital left organically, then the new requirement that we have to accommodate, but obviously, something that we have time to do so. And that is for shareholders. So there is nothing on the radar in terms of M&A.

Okay. And thinking next about Basel, which remains top of mind across the bank space. And you've been clear that you expect a broadly neutral impact from Basel in 2025. But through the medium term, are there any other regulatory headwinds that we should bear in mind, whether they'd be an on-site inspection changes to models?

No. So in short, Basel IV, no, because basically, I think that all banks will have some negatives because of Basel IV, but we are being able to compensate those negatives, basically on operational risk on a lower risk weighting on our insurance business that is coming down from 370 to 250. So -- and this is coincidentally compensated, okay? So this is why we say there is no impact, and we reconfirm that. And further down the road, nothing on the pipeline, honestly. So we have gone through all the process of internal model inspections, on-site inspections, probably in some cases, ahead of the rest of our peers precisely because of the merger with Bankia and obviously, for the ECB to approve that merger also have to give us some visibility on what was coming on that front. And we have been able to probably be a little more vocal or front loading some of those impacts compared to some of our competitors. But in any case, as far as we know, we are done with all that. There is nothing on the radar either. So honestly, you never know. But as with the information we have today, nothing on the [ cash ].

Okay. And one more question for me before we turn it over to the audience Q&A. How are you thinking about digitalization within CaixaBank and more broadly at the moment as you imagine franchise play a big role here? And to what extent are you facing competition from the neo banks? And does your digitalization help fend off some of that?

Well, honestly, you have here 2 walls. So you have big techs and then you have fintech. So fintechs that at some point look like to be a threat are no longer so much the case. I think that once the rate environment is different, so holding a cheap funding source is key. And obviously, larger franchise, a traditional franchise or retail franchise like us of first clear competitive edge compared to fintechs in general. Then you have big techs. Obviously, you have the very large players. This is always there. But well, you have -- there are some potential competition on the payments wall, et cetera. But we are trying to do our best. So the future also probably will have to deal with digital euro with plenty of things. But so far, we have been able to do well. And I think that also will continue to be the case. But obviously, this is an evolving world and something that we need to look at closely.

Very clear. So I think we have a little over 5 minutes left if we want to open up for audience questions. So if you could raise your hand and we'll bring you a microphone, but I would request that you please introduce yourself and the name of the institution you're representing. No questions? Here.

This is Filipa from Goldman Sachs. I wanted to ask a bit more about the cost of deposits. How you have seen it evolve throughout the year so far? And also, what are your expectations for the cost of deposit evolution once rates are cut?

Well, I think that the situation is calm in Spain. It's a little bit tighter in Portugal. As an example, we have, by the end of March, 21% of our deposits that are interest-bearing deposits. In Portugal, this is 40%. So you have a difference there. Basically, the difference comes from the fact that in Portugal, you have a more balanced situation between loans and deposits. So you have a loan to deposit well below 100% in Spain. While in Portugal, it's more balanced, the situation. And you have had a more competitive environment in Portugal on that front. In Spain, it's not the case. And already, being at that point in the interest rate cycle, we don't think that it's going to be changing already. So we have much better visibility. We think that we are getting closer to the peak in terms of the percentage of interest-bearing deposits. I'm not saying that we are already at the peak because there is always a carryover effect, but the feeling is that we are getting closer to that. So that's the situation. Once rates start to come down, basically, it's about repricing that downwards. We have over 40% of those interest-bearing deposits. So 40% of the 20% that are, I would say, indexed by contractual indexed. So that means that basically is related to large corporates, public sector indexed to an interest rate index, which means that as rates go down, automatically, it is going to be repriced downwards and then time deposits that are no longer than 1 year. So it's usually 6 months, 12 months. No longer than that. So we'll have, let's say, as a negotiation process. We think that considering our liquidity levels, how we manage deposits, and generally speaking, our ability on this deposit gathering we have. So we think that we are going to be able to reprice downwards, at least replicating what is happening at market levels. So that's basically the plan. And then what is important and I mentioned already, but it's important to keep in mind because I understand that there is always a lot of focus on loan growth, which is obviously important. But it's also very important the deposit base to be stable. And even if it grows, the better because there is obviously a margin on that.

Okay. Anyone else with a question? If not, I think, I mean, I have one, just thinking about sustainability. So you're one of the top-ranked banks there and have set out clear transition goals. And could you talk about how that is creating new opportunities and what discussions you're having with clients?

It is. It is. Hopefully, also the next-generation funds will -- although probably a little bit more slowly than initially expected but will end filtering into the chain. And I'm gradually generating some attached loan demand to those projects that, to some extent, are related to sustainability issues. And in our case, in particular, it's not only the G but it's also the S. And due to our [ provisions ], our DNA, we have a lot of focus on the social angle of ESG. And well, this is a positive. So this is an additional tailwind that obviously results into lending opportunities need of CapEx for -- basically, on the SME and corporate world, but also eventually on individuals in terms of refurbishment of houses, et cetera, that obviously results into an additional tailwind for loan demand. And this is a positive. This is besides our targets that obviously we have established even across different sectors in terms of decarbonization that obviously will be upgraded and updated once we present our new 3-year plan.

Okay. Great. Well, I think ESG is a very positive note to end on. So Javier, thank you so much for taking your time.

Thank you. Thank you.