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

Please take a seat. We're very pleased to be joined this afternoon with Gonzalo Gortazar, CEO of CaixaBank; as well as Javier Pano, Group CFO. Thank you both for taking the time to join us.

Thank you for having us. Thank you.

So why don't we start with sort of where we left things. You're now making more than 16% ROTE. That's one of the highest levels in Europe. A key question that always comes up when it comes to European banks is how sustainable is this level for you to defend in the outer years?

Sure. Well, obviously, what we're seeing is conditions that are attractive and that are more attractive than the conditions we could foresee when we presented our 3-year plan back in November. And that plan had a target for us to be over 16% by the last year of the 3-year plan, that was 2027 and on average, about 15%. To be honest, everything is going better than expected. As I said, external conditions, growth has come back faster than foreseen, margins, asset quality. So I would say rather than think about 16% as a sustainable level, it's clearly a level on which we want to grow our return on tangible equity, and the conditions currently suggest that we can be above that level. Is it sustainable? Guys, I'm saying above that level from 2027 onwards, in particular, when we have that target. And obviously, today, we're already well above that level. Is it sustainable? I think it is. To be honest, the most important thing is, we are in a situation in which we have had 10 to 15 years of pretty difficult times in Spain. I know generally in Europe, we have negative rates, but we have a deleveraging for more than a decade. Now we're seeing that our clients have less leverage than ever. Hence, there's more potential for loan demand to pick up, which is happening. The economy is among the large economies in Europe, the one that is growing faster. Portugal is doing very well at the same time. So yes, we feel pretty good, not just about the current conditions, but about the sustainability of the conditions for us to continue growing and continue growing our profitability.

Now when I look at one of the key drivers of profitability, of course, NII is not top of mind still, and you guided to NII to be around EUR 11.5 billion in 2027. Now can you remind us the key moving parts that are affecting your NII outlook from here?

Well, indeed, but -- well, actually, we guided over EUR 11.5 billion.

Over 11%...

Just to be more specific. Well, basically, we -- you know that this guidance for 2027 is coming from when we presented a 3-year plan 1 year ago, November '24, that we knew that rates were coming down, this would be impacting NII. But over time, thanks to volumes, hedges, legacy portfolio maturities, et cetera, will gradually recover. And back 1 year ago, we said that would be circa EUR 11 billion. Now we are saying really above EUR 11.5 billion. So that's basically -- where is it coming from? The improvement is coming from better volumes. So we were expecting loan growth circa 4% for the 3 years. We will probably talk about that later, but we are already having better momentum than that into 2025. Also deposits are doing better. So volumes are doing clearly better. You have a steeper yield curve. So basically, you know that we lend long, we borrow short. So any rollover of legacy portfolios, et cetera, is going to be at better yields than initially expected. And well, that's the summary. So we are guiding for '25 NII to come down by mid-single digit. We already called the trough for NII in the second quarter. So in the next few quarters, we are going to have better NII quarterly than the second quarter, further accelerating into the second half next year. So '26 is already be -- better NII than '25 and then even further accelerating as we have more impact from the compounded effect from volumes plus particularly some specific legacy maturities in fixed income and also some hedges that are maturing and that will boost NII further into 2027. So that is basically the summary. And at the same time, we are managing well, pricing in terms of deposits, which is a key contributor for NII.

We will come to that. But if we can focus a little bit more on loan growth because this time last year, very few would have anticipated the sort of the pickup in loan demand that we've actually ended up seeing. And as you said, both Spain has been one of the fastest-growing economies this year in developed markets. And so can you give us a little bit more color around the outlook for loan growth? What are you seeing both from clients and from your competitors on the ground in Spain?

Well, as you said, we've seen a strong rebound from a sort of basically flat level for close to 15 years. And that was something that at some point, it had to happen. But I remember maybe having this conversation 5, 6 years ago and saying it has to happen, but it never came. And now it has come. The leverage of Spanish families and business is approximately half, as a percentage of GDP, half the level that it used to be in 2009, 2010. It's been an incredible deleveraging in the country. Same thing when you look at the net external debt for Spain was close to 100% of GDP. Now it's below -- clearly below 50%. So the private sector is in a completely different situation, 30, 32 percentage points below the average levels in the Eurozone. So that gives you the indication that there is a -- potential for growth is there. Our families and our businesses have a lower level of leverage, which is also great news in terms of if there's ever a downturn for asset quality. But now clearly, they have the potential to take on more debt. And this cycle has finally started. Clearly, we now have 3, 4 quarters of accelerating loan growth. We saw already consumer lending growing 6%, 7% last year. This year is growing a bit higher. But now we've seen the mortgage sector growing and particularly the business one. Year-on-year, we have a growth that is just below 5% on the loan demand and an accelerated one. I think we will obviously see some seasonality in this third quarter. But still, we have a good chance to have a pretty decent growth in lending. We had assumed 4% for the compounded annual growth for the 3-year period for our plan, but it was always kind of -- will start slower and then gradually will pick up to get closer to sort of evolution of nominal GDP and -- nominal GDP. GDP was upgraded today both by the government, GDP expectation by the government and by Bank of Spain. But anyhow, we are already growing in 2025 so far in line with nominal GDP. I see no reason why that would change. Obviously, there can be a big shock to the economy global, worldwide, some shock of -- to the confidence that you can never discard it. But actually, we didn't have the great -- or the greatest environment for business confidence over the last quarters. And even in that -- in those circumstances, we had a pretty decent lending growth. So it's, I think, something pretty robust and something that even if it's just along nominal GDP growth at close to 5% -- 4.5%, 5% which is a good level. It would still mean that we have, again, lower the level of debt that we used to have and 30 percentage points lower than the Eurozone. So there is plenty of room to see a fairly resilient lending demand in the next years. Here, obviously, what we need to ensure is that we do that profitably because we're not here to lend more, we're here to lend more, but profitably. And certainly, you can expect us to do that.

We've come a long way, and I think it's remarkable to see that level of growth now. When everyone sort of thinks of banks and growth, the first association, I think the market does is to think of loan growth picking up. One tends to overlook. I think the importance, especially in the case of a bank like yours, of deposits growing and how meaningful that is in terms of liquidity management for some of the points that I talked about earlier. Now can you give this audience a little bit more context around the initiatives that you've taken here and really what sets you apart from your competition when it comes to deposit franchise?

Okay. Thank you. Well, I try to summarize this by saying that we are being successful on 3 things at the same time. So when we talk about customer funds management, so we are being successful first on keeping our deposit interest-bearing balances, let's say, contained. Now, I would say, stable. While at the same time being able to reprice those noninterest-bearing balances according to market prices, which have been obviously down in recent times. And second, also, we are growing on noninterest-bearing balances. We are disclosing very clearly that on our quarterly reporting. And this is due to the increase of the transactionality of the clients with the bank. So that means that we have more clients. We are gaining year-to-date like -- 360,000 year-to-date. So year-on-year 360,000 clients. We are gaining payrolls. Spain is generating circa 0.5 million of new employments year-on-year. We have a 36% market share in payroll. So that means that we are acquiring payroll accounts. That means that you have more transactional balances, let's say, liquidity buffers for households, et cetera. So we are gaining that part. This is really important in terms of NII. And third, at the same time, we do that, also we are being able to have inflows into wealth management that basically are off balance sheet. So basically, here, it's mutual funds and also savings, insurance. In terms of noninterest-bearing balances, if you look at our recent performance, it has been already a few quarters, approximately EUR 5 billion on average every quarter, increase. And we are having inflows into asset management approximately EUR 1 billion per month. So that means that per quarter, it's like circa EUR 8 billion, EUR 9 billion improvement of high-quality customer funds. Some of those having a direct impact on NII, but also on our, let's say, fee-related business, wealth management mainly. So I think that being successful on managing all those 3 parts is the key for our success. So we have, I would say, the right internal framework to show the right fund transfer pricing system, the right incentives. So we have been able to fine-tune when necessary. Obviously, client first always, but it's something important, and we have been successful at that.

Rates have come down, of course, noninterest income growth has been a market focus, I would say, and you've upgraded your revenues from services in terms of guidance. And now markets are always difficult to predict, but you've had a strong year so far. Can you talk a little bit more about the outlook for noninterest income across different products and particularly emphasizing those opportunity you see as greater?

Sure. Well, noninterest income has been traditionally our, I think, most successful sort of P&L revenue line. It's only in the last 3, 4 years that NII and rates have moved, that obviously the main actor has been NII, but traditionally looking at us, really, we went through this very difficult period for banking in Europe and particularly in Spain by growing very strongly our noninterest income line, and that was obviously focusing on asset management, payments and to a very large extent, wealth management, including insurance. That is our competitive advantage, I would say. NII is a question of finding again what's the right level. And as -- obviously, as Javier said before, there's quite a lot of upside there. But in terms of structural growth, here, we have our advantage with our 38% market share, for instance, in life savings. That means when we have 25% generally, it means we're doing something that is different from others. We basically cracked the code on having the right product, so the right factory, but at the same time, most importantly, the distribution part of the bank that understands and is comfortable with selling products that are obviously more sophisticated than time deposit, but they are critical given the longevity needs of our clients. And this is structural. The one thing we can be certain of is a year from now, we will be old, 1 year older. That's one of the easiest predictions. The fastest-growing segment for our clients is obviously over 65. And that is where we have probably the strongest position, certainly the strongest position in Spain when you speak to customer service surveys recently, 50% of banking clients say there is one bank particularly specialized in senior citizens which is CaixaBank. By the way, they also talk about imaginBank being in the same situation for the younger part. So it's not that one thing is exclusive or the other. But wealth management is clearly going to be a big factor. On the protection side, we still have a relatively low level of protection vis-à-vis our European peers. And again, we have a great position, health business in particular. And the health business, by the way, is going to be aided this year because of the renegotiation of the terms with MUFACE, the civil servants, which was a loss-making part of the P&L, which is no longer going to be -- and is no longer affecting our P&L. So pretty good growth there. This will be somehow offset on more traditional banking fees. People in Spain and many other places but particularly in Spain don't like to pay fees. They don't understand why they pay fees. But while they have their money with us and we can make profitability on the balance sheet because of not remunerated deposits and some of our transactions, that's fine with us. So that is the picture. I think it's probably going to be with us for some time, gaining market share in insurance and protection as sort of key levers for a pretty good noninterest income performance.

That's very clear. Now capital returns is and has been and continues to be an important pillar of your investment thesis. You have a payout of 60%. You've increased the frequency of those payments as well as the frequency of share buybacks. You're at 12.5% now and you've been basically committing to pay 100% of your organic capital generation. Now with balance sheet growth and at the banks that you've talked about, and the returns that you now make from deploying this capital towards additional business, how should investors think about sort of the return on investment here versus the appetite for additional buybacks, for example? And related to that, if I may, and maybe this is a question for Javier, what flexibility do you retain to sort of further optimize RWA density?

Well, we have a very well-established framework for our capital evolution. So you already mentioned, cash payout 50% to 60%; interim dividend, November; final dividend in April. And well, we have a very clear threshold above which we accelerate capital evolution via share buybacks. This has been the case already for some years. Now this threshold is established at 12.25% for the CET1 ratio, moving up to 12.5% for next year as we are incorporating all the new counter-cyclical buffer requirement into our, let's say, capital management targets. So it's very clear. So well, look, when we disclosed our 3-year plan back in November, we were expecting loan growth circa 4% and we said, okay, you can assume that risk-weighted assets would grow circa 3%. I'm talking 4% CAGR, 3% CAGR. So well, some, let's say, management actions in terms of risk-weighted asset management, SRTs, other tools that we can use. Now we face faster loan growth. But you may think that we are going to be also accommodating our toolkit in order to absorb that additional loan growth. So you should always expect our risk-weighted assets to grow below the pace of new lending. So well, that's clear. So the market is there. So we are quite active. So we have even reorganized things internally in order to be more efficient in this, let's say, capital management tools. And well, that's the situation. So we think that in any case, we are going to be generating capital organically beyond, let's say, this 50% to 60% cash payout. So that well, from time to time, we will continue to have share buybacks. We are executing a share buyback as we speak. We already have a CET1 ratio of 12.5% as we closed in June. So the threshold for additional capital evolutions this year is 12.25%. So we already have the buffer in place. So we think that we are in the right position.

And maybe we touch on costs and IT investments because I think it's an important part of your plan. You're targeting over EUR 5 billion in CapEx and OpEx related to IT and digital over the plan period. When do you see the biggest returns in terms of efficiency gains? And how much of these investments have already been front-loaded?

Well, I would say back to your first question about sustainability of ROTE, we're doing a great effort now in making sure that our profitability long term is sustainable, our profitability, our growth. And that means we have to invest now, also over EUR 5 billion. There's EUR 1 billion that is really discretionary where we took a conscious decision we could spend this EUR 1 billion or not. I don't think you would notice a lot if we hadn't spent that extra EUR 1 billion. This is again through '25 to '27. But we thought we owed it to obviously, our shareholders longer term to take advantage of strength to make sure that we, again, future-proof the bank. And that means some investment now this year, next year, '27. This year, we're growing costs around 5%, as you know, which indicates some inflation pressures associated to labor and others from the inflation period that we had before. And 1% of that growth is, again, this IT program. We are going to be obviously collecting the results and harvesting the fruits in the future. I don't think that means '25, '26. It will probably be '27 onwards. Investments are associated to just upgrading legacy, increasing resilience, cybersecurity, a lot of it to AI, particularly generative AI and a number of other things that you can imagine. We're seeing already the benefits of that throughout the organization. Customer service, clearly, whether it's call centers, that's opportunities for our relationship managers to be more effective when they call clients to make sure that they have the push of a button, all what they need to have an intelligent conversation with the client on what their issues have been, what the opportunities may be, what's the next best offer to make them. Operationally, obviously, there's a lot that we can automate. We're really aiming for zero operations, all obviously automated. It's going to take time. We're investing heavily in people, but that means in technology. It means we're going to have more people in our payroll, but much less that we have to depend on them through outsourcing of sort of software programming development, et cetera, a very significant efforts. We have already launched a number of initiatives, which I'm not going to explain in detail in the benefit of time, but it's a platform for secondhand used cars, which has been a total success, a platform for housing where we have already 50,000, and we launched this earlier in the year, it's been very, very quickly. We are launching now a cashback program, which is absolutely new in Spain and a number of other things. So heavy investments. And again, what this is, is about making sure that we can increase our profitability over the longer term and certainly make the bank resilient in an environment where, obviously, competition, new entrants are part of the picture. We have no reason to think that new entrants are better equipped than us. But in order to be better equipped than them, we need to make sure that we invest and match and surpass the capabilities where we can.

We covered, of course, a number of line items, and you seem to be -- the message has been particularly positive and much better than you had anticipated as part of the plan. So I'm going to ask you a question on asset quality. Nonetheless, even though I've heard you say in one of the meetings that credit risk is one of those risks that is subtle, things generally look good until they don't. And the provisions so far have turned out to be much better and much lower than probably any of us would have anticipated. I think you guided to 25 basis points cost of risk this year. How sustainable is this level going forward? And maybe it's a philosophical question about what do you think this credit risk is if it's not in bank's balance sheet?

Javier, do you want to take that one?

Well, it's really a benign environment, as you say. So -- but it's macro related. So we have plenty of positive things impacting. So you have, as I said before, more employment growing, disposable income. Now on top of that, we have rates coming down, certain rates, but there's still plenty of legacy portfolios, mortgages indexed to certain rates. So it's really a benign situation. I would say that employment is the key. So if you ask me what may happen for this to go wrong, well, it's macro related, something coming from whatever. I don't think it's going to be something specific in Spain or Portugal. So it has -- it may have more to do with any kind of geopolitical or other impact that -- well, we have had a few examples recently, at the end of the day, not having much impact, but eventually something may happen. If it's not for that, honestly, we are quite a bit and also we are reducing our NPLs. We are being able also to dispose in the market. So there is a liquid market for NPLs. Well, that's trending down. We have a nice coverage ratio for those NPLs. Also we hold unassigned provisions. So circa EUR 350 million that are still pending to be assigned. So it's really a comfortable situation, and we don't observe any material pocket of industry or sector that is worrying us, not even those early signs of deterioration before it's 90 days past due or 50 days, 60 days, et cetera, nothing at all. So we think that in this environment, we are going to be able to keep reducing gradually our NPL ratio. And as a consequence, our cost of risk, we guided for '25 if nothing wrong happens around the world. So I think that is sustainable. So if you ask me, okay, this is through-the-cycle cost of risk. This is not the through-the-cycle cost of risk because eventually, we'll have a bad term in the cycle and cost of risk will be higher. But if things continue the way we are having today, I think that, yes, that is sustainable.

There are 2 things I would add. One is just the great financial crisis was very hard in Spain and very long. We have short memories, but not that short. And certainly, at Caixa, we have absorbed quite a few institutions that basically went under one way or the other. So actually, the prudence in risk underwriting for us now, but also in the previous year has been very strict. And that gives us an additional degree of comfort. And back to where the risks are, you have to think that generally, obviously, the banks are being more and more regulated, have been so. Hopefully, there will be some simplification coming from the new program from the EU. Banks have been losing market share to nonbanking financial institutions, and obviously risk is not to all nonbanking financial institutions. There are some that are very sound and great, but are accumulating in that part of the space. We talk a lot about SRTs. SRTs are a great tool, but basically, this kind of risk transfer works best. When you sell a regulatory risk that there's a lot of capital for you, but it has a lower economic risk, and hence, there's someone else that is a better holder of that instrument. The converse of that is that what you're keeping is assets that have higher economic risk and regulatory risk. And I think that is why we will be doing, as Javier is saying, SRTs, and we will be doing much more than the ones we've done even though we've done that for a few years. It's a tool to use with care. No use would be bad. I think there's an extreme where it won't be good for the system either because you will end up not knowing where the risks really are and thinking the risks are in one place and they are in another, in this case, being kept by some financial institutes. Time will tell.

I'm going to ask you one last question, and then we'll ask the audience for any Q&A for you. M&A, I could ask you about M&A. I mean you've proven over the years that you're able to pursue M&A opportunity when this come available. I mean, Bankia, of course, has taken a lot of management time. In Portugal, we've seen Novo Banco was acquired by BPCE at a very high valuation. So what's your stance on M&A? And there also, if I can broaden that question, any product, factories that you'd like to strengthen further or any markets you'd like to add?

Well, M&A is not something we're considering. We clearly are very focused on Spain and Portugal. We believe in domestic consolidation, and we have proved that in the past. We do not believe that today, there is value in cross-border consolidation, at least as a rule and certainly for us, lots of premium to be paid for no synergies and quite a lot of complexities around that. So we're not spending much now. We haven't spent it. While, as you said, we did well, and we're very happy about having grown our market, our market share in Spain. And actually, we did acquire in Portugal. BPI was a cross-border consolidation where we made that deal in 2016, but it was quite special. We already had 45% of the bank. And obviously, in some very close markets like Spain and Portugal, I think there are some good logic for that kind of consolidation. There's no factory or segment or something. We're not great at everything, of course. We're not the best in everything. But we are sort of good enough either to be there or to develop organically what we need. Bear in mind that our system is one where a bank or a financial group like us is present in every part of the financial system arena. And it's not that we don't know asset management or payments or we like -- we are everywhere. We like to dominate our market. And we -- the same way that we're not focusing in doing things in the half of the world, we are absolutely 100% determined to make sure that we exploit every single opportunity in Spain. When we do not have the capabilities, we develop them. If need be and in this new world, we would partner up with sort of start-ups or whatever to do something specific, maybe in technology, maybe in product know-how to make sure that we develop quickly rather than wait and do everything internally. But we're not, at least at this stage, seeing that there's any capability or any part of the market where we're not present and we need to buy. Where we're not doing well enough, we'll partner up or grow organically.

Any questions from the audience? Please raise your hand. I think there's one here.

Probably the toughest part of your operating environment right now is new business mortgage margins. Could you talk a little bit, please, about why you think they are so tight and how you think about the trade-off between market share evolution and the ROE hurdle that you're running the group for?

The mortgages have been very competitive in Spain for as long as I remember, certainly before the financial crisis. They used to be floating based with spreads of 20 basis points and things like that. Today, the market with some sort of cycles, but today, the market is most primarily fixed rate mortgage. But still, it is not a product that per se usually meets cost of capital. And that's why the reason why banks can either not be in that product if you took an isolated product or took a view as to what does the mortgage bring. If you gain a client with a mortgage, normally, you're going to cross-sell. In fact, in our case, contractually, we will have a number of conditions for the mortgage rate to come down, having the payroll, having a home insurance or risk insurance or an alarm or a certain amount of savings. In a way that when we lose that part of the revenue, if the client decides to take that insurance away, immediately, the spread goes up. So it's not yet wishful thinking. It's actual contractual profitability. On top of that, we know that beyond the products that the client has contractual right to -- or we have those businesses by contract, on top of that, there's obviously even more. As long as banks perceive the situation in which the overall client with the mortgage is profitable and the market continues to be extremely competitive. And bear in mind, people shop around for the mortgage. They may not shop around for some other financial products. But I mean, most of you whenever you got a mortgage, you would have consulted and made sure you've got a very good price, very good rate. So you have many institutions with 3%, 4%, 5% market share that are very competitive. We'll outprice any bank if they are not taking what the market rate is, which is -- anyhow, it's not observable. But in practice, if you are not in the market, you immediately start losing volume. There's a very high correlation of volume and profitability. For us, obviously, is an attractive business when we look at the overall client, and it's a core part of the business. So we will continue to be a participant in the market where we still meet our return on our risk-adjusted return hurdles, but not on the specific product, but on the bundle of products that comes with the mortgage. And my expectation is that this is probably likely to be the pattern in the market based on how it has actually performed in the past.

We might have time just for a very final question if there's any from the audience. Otherwise, it's always super insightful to hear you both. Thank you, Gonzalo; thank you, Javier, for joining us today once again.

Thank you very much.

Okay. Thank you.