Unicaja Banco, S.A. (UNI) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us for our Full Year 2022 Earnings Presentation. I'm here today with Juan Pablo Lopez, our Head of Investor Relations; Pablo González, our Chief Financial Officer, and they will guide us through the presentation. Please remember that we will have a live Q&A session after the presentation. And now, Pablo.

Good morning. Before we get into the details, I would like to remind you the big changes the bank underwent this year, such as the branch network restructuring, large number of early retirees, and IT migration to name the most important. Despite all these major changes, we have been able to deliver a strong set of core results in the year, which is very encouraging for the future. Now getting into the details. As we had anticipated in the previous quarter, we are focused on growing consumer lending and residential mortgages, while on corporates the main focus is to improve the profitability of the book and volumes is a second priority. As a result, we can see both retail books growing in the year at 1.7% in the case of mortgages and 3.5% the consumer loan book. Deposits from individuals were also up in the quarter, which shows that our consumer are not using their savings. I believe this shows the resilience of our franchise. All 3 lines of our core banking margin have posted fantastic results in the year. Net interest income is 11% up quarter-on-quarter and 3% in the year on the back of the improved new lending yields and repricing of the loan book, ALCO portfolio and wholesale funding, while maintaining retail funding costs at very low levels. In fee income, we have delivered a very strong result with the growth over 7% despite volatile equities and fixed income markets during the year. Strong banking activity and the integration have allowed for this result. Operating expenses are 8% down versus last year. All cost lines showed yearly decreases, which additionally, to the restructuring that is taking place, shows our cost discipline, which is even more remarkable in such an inflationary environment. Adding these 3 together, our core banking margin improved by 24% in the year, which will keep improving going forward. And again, it is very encouraging for the future. At the same time, we keep reducing our stock of NPAs, which, as you know, is a key target for the bank. The stock of foreclosed assets went down by EUR 54 million in the quarter and EUR 375 million in the year, helped by the sale of a wholesale portfolio. NPAs coverage levels increased by 141 basis points in the quarter, which reflects some additional efforts on our side to accelerate disposals going forward. NPLs are slightly down in the quarter with the limited NPL entries in the quarter and coverage ratio up nearly 2 percentage points. Recurrent cost of risk for the year was 24 basis points. On top of that, we have booked extraordinary prudential provisions based on updated conservative macro scenarios. This effort makes us comfortable going forward in this area. Finally, about capital and value generation for our shareholders. CET1 fully loaded ratio stands at 13%, which is flat quarter-on-quarter, as we have generated little capital organically in the quarter with the deposit guarantee fund charge this quarter. This is a very comfortable capital position for us, and we expect to keep generating capital organically going forward. The total shareholder return in 2022 was over 22%. And as you know, we are committed to distribute 50% of 2022 net income as our current dividend payout policy. Finally, a brief note that I think is worth mentioning is that we have been included in the IBEX 35 index at the end of 2022 for the first time in Unicaja Banco history. This is important for us and for our shareholders as it makes our stock more liquid and more attractive for investors of different types. We are very happy as this is something that we thought was achievable with the merger, but it has happened before we were expecting. Now I give the floor to Juan Pablo, who is going to cover the business activity of the quarter in more detail.

Thank you, Pablo, and good morning, everyone. Let's start right now with customer funds, which, as you know, they have very high value again. And we think we have here a competitive edge. As you can see on the right, more than 75% of total deposits come from households with a very granular balance, less than EUR 20,000 on average per customer. They performed quite well in the quarter with positive growth and offsetting the exit of more volatile corporate deposits. In terms of pricing, we are paying basically nothing for these household deposits. For us, this is probably the best proof of the value of our franchise. And also, this is also a very good read across for asset quality. Our customers are not tapping their savings in an inflationary environment, quite the opposite. In terms of balance sheet products, the evolution is clearly influenced by market volatility in the year, but you can already see stabilization in the last quarter with market valuations improving. In Slide 7, we take a closer look at our mutual fund business, one of our main fee income growth engines. AUMs have decreased in the year on the back of market volatility, but we remain positive as we keep working to increase penetration within our customers. The beginning of the year has been good for the market. And this is very important in order to pick up the pace on customer inflows as they are quite sensitive to short-term valuations. On the right side of the slide, you can see the increased profitability of the mutual fund portfolio, more than 33% year-on-year. And our strategy here is to offer more value-added products that generate return to our customers. In Slide 8, we take a look at the insurance business, which is actually very significant as the ongoing operations revenues represent almost 10% of the gross revenues of the bank. And on the right side of the slide, you can see a summary of the life insurance business restructuring, where Santa Lucia is now our sole partner under a 50-50 JV structure. This was a complex transaction as there are many parties involved and we have achieved a good result. And we are also encouraged, not only because of this result, but what is ahead under the new structure. As we anticipated in June, we released EUR 24 million that were provisioned in the PPA. And this quarter, we have a positive impact of EUR 17 million in the P&L. Going forward, we have 3 more items pending to be accounted for, all of them positive. First one is a EUR 19 million capital gain in the sale, and then we have EUR 23 million gain related to the extension of the agreement. These 2 impacts makes EUR 42 million and we will get it for sure. What we are discussing with the regulator is the accounting period for this EUR 42 million. And finally, we have EUR 40 million earn-out depending on the achievement of a 10-year business plan target. All in all, you can see the transaction was very successful for the bank. Moving now to lending on Slide 9. Retail lending book is up year-on-year by almost 2%, which compares to a flattish book at sector level. As you know, and Pablo commented, retail lending is our main focus, both residential mortgages and consumer, which are growing its market share despite intense competition in the year. On a quarterly basis, mortgages are slightly up and consumers are 2% up, supported by strong marketing campaign in November. Corporate loan book, deleveraging continues this quarter as we have seen some large ticket early amortization still coming from extra liquidity granted to companies during COVID and TLTRO era. And our main focus here in corporates is to target the right clients and improve our product offering and profitability. We are starting to see signs of much better pricing for this portfolio over the last couple of months. Next slide on new lending. Strong activity on individuals. Corporate new lending still being quiet, as I just mentioned in the previous slide. On the retail, mortgages are 16% up, consumer is 29% up in new lending. And as we anticipated, once the new systems have settled across the organization, we have been able to accelerate activity levels again. You can see new lending for the year is significant in residential mortgages at EUR 4.3 billion. Consumer is starting to pick up. And as we have been discussing, we have room for growth here just by working with our existing customers, and we are positive for the next quarters with the development of digital and risk tools that will enable us to grow further. In Slide 11, looking at our 2 biggest portfolios. On the left, you can see the main KPIs of the residential mortgage book, very stable through the year, mainly first resident mortgages, defensive LTVs in the portfolio, and also at an origination level. In terms of geographic exposure, Andalusia and Madrid have the highest weight of new lending, and this is very important for us as both of them are the top housing markets in Spain and with a very high percentage of first residents. And this also shows our dual strategy of strength in home regions and leverage alternative channels for growth in provinces like Madrid or Barcelona. On the bottom left, the average loan has increased quarter after quarter as we keep attracting a more affluent customer and mortgages help us to expand our relationship with clients through cross-selling. It's important to say that we have acquired almost 20,000 new clients through our mortgage business in 2022. And it's also very important to keep in mind that these customers are profitable since day 1. On the corporate portfolio, a quick note on the ICO loans. During the year, more than 15% of the portfolio has matured or early amortized, leaving an outstanding balance of EUR 2.1 billion, and this explains part of the decrease of the corporate loan book. On Slide 12, we keep advancing our digital business. Since we completed the IT integration in second Q, we keep posting good figures in some of the key metrics. Number of digital customers keep growing, reaching 61%. Customer acquisition keeps going well. 1/3 of the new customers come from the digital channel and nearly half of those through our strategic partners such as PlayStation and Real Madrid, and we continue to reinforce this alliance and looking for new ones, especially in the home segment, like IKEA or Tyco for home alarms. On the right, we can see improving figures in terms of sales conversion on digital and 34% of consumer loans and 24% of mutual funds have been sold through digital channels. Moving to Slide 13, a quick summary of the recent developments in ESG. On the environmental front, we have made good progress. We continue to expand our portfolio of sustainable products. We continue to transform our mutual funds into articles 8 and 9, and as you know, we have already issued EUR 1 billion of green bonds. On the social front, this is something that we have in our DNA historically, and we are proud of the educational work we do, and we have joined the code of good practice. And finally, on the governance side, we have taken a very important step with the creation of the Sustainable Committee within the Board of Directors, which will ensure that the planned environmental and social actions are implemented. So a lot of work done and a lot to do, but great progress in ESG. Moving now to the quarterly P&L. We will comment more in detail the different lines, but let me highlight just a few things. NII is up 11% in the quarter and 3% in the year. Higher yields on new lending and back book and ALCO repricing are partially compensated by a very moderate increase in retail funding costs and wholesale funding costs. Fee income is stable quarter-on-quarter and grows more than 7% in the year. Associates show a strong quarter in insurance business. The 4Q is always seasonally strong, thanks to the agro business. Other revenues includes EUR 20 million of extraordinary impairment losses for real estate assets in the quarter and the deposit guarantee fund of almost EUR 90 million. OpEx, very strong delivery this year in all lines. General expenses, as it usually happens in the last quarter of the year, is lower than the previous quarters as we adjust the budget at year-end. Loan loss provision higher than normal in the quarter, explained by the backstop provision and updated macro assumptions, mainly inflation to very high levels. We increased the post-model adjustment provision by EUR 50 million in the quarter. Other provisions include a EUR 15 million release from defined benefit pension plan. And then we got the run rate of legal provisions that we have seen in previous quarters. And other profits or losses, here we include the EUR 17 million already commented from the insurance restructuring, EUR 40 million of capital gains from real estate disposals, and a big effort of EUR 60 million impairments on real estate that will again support NPAs disposals going forward. All in all, as Pablo said at the beginning, we have delivered a strong result of the core lines of the business, net interest income, fee and OpEx. Now going into a bit more detail. Customer spread increased 14 basis points in the quarter as loan yields increased 18 basis points and customer deposits just 4 basis points. We are just starting to see the repricing effect, as we have explained before. We have a large weight of our repricing coming from the mortgage book, and this is a bit slower as it's reprice once a year. And then on the corporate book, probably we have a longer duration and also it takes a bit longer than other peers, the repricing. And on the right-hand side, we expect the loan yield to keep improving, not only because front book yields are much higher, but you can already see the loan yield at the end of the quarter was 1.90%, 1.9%. This is 30 basis points more than the average yield on the quarter that was 1.6%. So this means a lot of repricing coming next quarter. Next slide. Loan book repricing contributes EUR 25 million quarter-on-quarter, mainly coming from the mortgage book. Our mortgage book, this is interesting, is currently repriced at around 50 basis point Euribor. So there is a lot of room to grow here. Euribor right now is at 3.3%, 3.4%. So we have almost 300 basis points still to reprice the floating mortgage book. The fixed income portfolio at EUR 27 million. We have a short duration as we do some interest rate hedging on the ALCO portfolio instead of the loan book. And this has an impact on NII much quicker than the mortgage loan book. And on funding, we have a small impact on retail funding, which comes mainly from the corporate and public sector deposit. As individuals, funding cost remains very low even at the beginning of this year. Average term deposits cost for individuals stand at 7 basis points in December. Finally, wholesale funding costs increased as we swapped around 2/3 of the debt, and this part repriced very fast. For the next year, we expect positive evolution of NII in the high-teens territory. In terms of fee incomes, in the next slide, total fees are slightly up in the quarter and 7% up in the year, which is very remarkable given the market volatility we have seen in 2022. Banking fees, that are mainly cards and payments and current accounts, are up quarter-on-quarter and flattish during the year. Nonbanking fees are down in the quarter, mainly explained by some seasonality in securities in the third quarter. The yearly evolution, as you can see, is remarkable at 17% on the back of mutual funds and insurance business. So all in all, very sound thing on delivery in the year. And we expect this to continue in 2023 with a 5% growth guidance. Moving now to OpEx. Total OpEx are 4% down in the quarter and 8% down in the year. As we commented, more than 80% of the employees under the agreed restructuring plan have already left the bank. This is a bit quicker than what we initially expected. And it's also worth noting that since the merger, the branch network has gone down by 37% and is already below 1,000 branches, the initial target size. We have done this at, again, faster speed and with no impact on the business momentum. Despite inflationary pressures, we expect OpEx to keep going down next year at low single digit. Next slide regarding cost of risk. I will explain with a bit more detail this one. You can see the recurrent cost of risk stands at low levels, around 25 basis points in the quarter and the year. On top of these recurrent provisions, we booked in the quarter extraordinary provisions of EUR 49 million and EUR 80 million during the year. And here, we acknowledge that we are probably overconservative, and we justify these generic provisions due to 2 reasons. First reason behind this additional cost of risk is the post-model adjustment. Basically, here, our models give us a certain level of provisions. And on top of that, we stress the models, mainly the inflation to a very high level. Basically, we assume here inflation average of 10% in 2022 and 8% in 2023. Accordingly, we booked a EUR 49 million provision in the 4Q because of this stress. And second one, we booked a EUR 60 million backstop provision. And we think this is important. This is differential compared to other banks, to other options. As you know, there are other options to cover these provisions via higher capital requirements or capital reductions, but we prefer to do it basically through P&L because the underlying cost of risk was low. And to be honest, we didn't expect to reinforce the PMA, post-model adjustment provisions, as much as we did in the 4Q. So we could have done it better in terms of cost of risk if we have done through a different route for this backstop provision, a different option to book this one. The positive news is that we maintain high coverage ratios with our conservative loan book and risk appetite make us believe that we are in a comfortable position to tackle any downside risk in the economic activity, and we expect the cost of risk to stand between 30 to 35 basis points in 2023. On Slide 21, on the left, I guess, this is the best recap of the year. You can see a significant improvement in all 3 major P&L lines where we are optimistic for next year, and we expect them to grow even more than this year, more than 30% for 2023. And on the right side of the slide, you can see the return on annual equity. The evolution is positive, and we are in our path to reach our strategic plan target. And now I pass the word back to Pablo.

Thank you, Juan Pablo. Let's move now to asset quality. On the top left-hand side, you can see we maintain the same trends seen in previous quarters. We reduced NPL while maintaining a prudent recognition of NPLs with a 66% of NPL entries being subjected in the fourth quarter. These are NPLs that are performing or past due below 90 days. Coverage ratio rose 2 percentage points to 67% after the provisioning effort in the quarter. In addition, if we include the guarantee from ICO loans on NPLs, coverage ratio stands at almost 76% and corporate NPL coverage level is over 100. On the bottom left, you can see the disclosure by portfolio. NPL ratio remains stable in all segments and coverage ratio remains very comfortable, especially if we look at our main business mortgages, which also has a strong collateral and low LGD. A few message from the right side of the slide. We have a very defensive loan book with 75% being individuals and public sector, more than 50% of NPLs are residential mortgages and 78% of NPLs have a real collateral. We have a prudent recognition approach where over 50% of NPL entries were subjective in 2022 and 66% in the fourth quarter. And we have best-in-class coverage levels that if you include ICO guarantee, as I have just mentioned, goes up to 76%. Next slide. Foreclosed assets are down by EUR 375 million in the year to EUR 1.8 billion after reclassifying over EUR 100 million from investment property to foreclosed assets this quarter. The trend in the year has been very positive. Total sales amount to EUR 584 million, while the level of entries in the same period are EUR 112 million. In Q4, total sales amount to EUR 208 million, including the sale of a wholesale portfolio that will have some additional impact next year. We keep combining the granular selling of assets with portfolios to accelerate the pace of reduction. Coverage ratio of foreclosed assets was reinforced to 65% this quarter, which will help us to maintain the speed of sales. Finally, looking at NPAs altogether, the NPA ratio net of coverage improves to 2.4%, which is already a very low exposure. Having said that, you know we have some ambitious targets to keep decreasing our NPAs. Moving now to solvency. Let me explain the main changes in the bridge. Well, the CET1 fully loaded in the quarter has been quite flattish. And the main changes, as I said, for the bridge are the AT1 coupon explained around 3 basis point reduction while net income contribution was known this quarter after the payment of the DGF and the extraordinary provisions book. Lower risk-weighted assets coming from a smaller corporate loan book and mortgages with the new lending and mortgages under IRB model as well as lower NPAs adds 5 basis points and more than offset the increase in risk-weighted assets on some equity stakes where we took a prudent approach and increased the risk weighting to the highest possible level, the 370%. Finally, we had some negative impact from valuation adjustment. The good performance of EDP is more than offset by the write down of our stake in CECA to 0. CET1 fully loaded stands at 13%, well above our 12.5% management target. This, together with our expectation that the bank will accelerate its ability to generate capital organically, leaves us in a very comfortable solvency position. Very quickly, in the next slide, capital levels remain well above capital requirements. We have a very significant CET1 fully loaded buffer of EUR 1.6 billion and an MDA buffer of more than 430 basis points. MREL stands at 21.9% as of December, well above their interim requirement. Moving to the next slide. The fixed income portfolio. Not a lot of news here on the composition of the portfolio. The size also remains quite flat quarter-on-quarter at around EUR 27 billion. The average duration decreased slightly from 2.9 to 2.6 years this quarter, while the yield continues improving to 1.9% at the end of the period. We expect this will continue improving in the coming quarters due to the weight of the portfolio that we have at variable rates. It is also important to highlight that almost the entire portfolio is accounted at amortized cost with no impact on capital. Now on the next slide on liquidity. As you can see, and even after the early amortization of EUR 5 billion from the TLTRO in November, we maintain a very strong liquidity position with a 79% loan-to-deposit ratio and very sound LCR and NSFR levels. In November, despite market volatility, we successfully issued EUR 500 million of our inaugural senior nonpreferred. You can see the details in the slide of the maturities that are well spread over the next years and coupons are relatively high for the 2023 and 2024 maturities especially. Last quarter, we had maturities of nearly EUR 300 million of covered bonds, which had a relatively low cost. Last slide. Let me recap the main guidance for 2023. First, NII. We expect to grow close to -- in the high teens in 2023. And our main assumptions, which I think is key for the NII guidance, is an interest rate curve at around 3% on average, and our average beta in the high teens as well, between 15% and 20%. Second, on fees. We expect a mid-single-digit growth on the back of best practice sharing and larger contribution from insurance and transactional services. Third, on cost, we think it should decrease between 2% or 3%, thanks to the synergies that will more than offset inflation and higher salaries. All in all, our core margin should increase around 30% year-on-year. Lastly, cost of risk, and assuming we will deploy part of the provision booked during this year, we expect cost of risk to stand between 30 and 35 basis points.

Okay. Thank you, Pablo and Juan Pablo for the presentation. We are now ready for the Q&A. Operator, if you could get the first question, please.

[Operator Instructions] Our first question comes from the line of Maksym Mishyn from JB Capital.

I have a couple. The first one is on your NII guidance. I was wondering if you could tell us what are your assumptions for the cost of deposits and especially the deposit beta and how you expect it to evolve in 2023 and maybe 2024? And the second question is on the cost of risk. I was wondering if in the PMA adjustments, you only changed the inflation expectations, or also touched on other macro variables? And if so, could you tell us what you expect for GDP and the unemployment? And then the last one is on capital. There is density increase in equity space. Could you shed a little bit more color on this change and how much would be the RWA evolution if you had to change the ratio of area density for equity space?

Okay. I'll take the NII guidance and the cost of deposits. I think the -- we are confident that we have a prudent guidance on NII, as I said, in the high teens. And I think the major driver, as I said, is the Euribor, the implied 12-month Euribor that we have used in the forecast for the guidance, which is around 3% for 2023. At the moment it's higher, as you know. Also a larger contribution from lending due to a more visible repricing on corporate and mortgage book. We also consider a negative impact from customer deposits, and I go here from your question on the beta on deposits. And I think the -- we consider -- we know we have a very spread and transactional deposit base. And our beta, we think, should be lower than most of our peers. But even with that, we want to be prudent here and we understand that some repricing of the deposit is going to happen. Although we think this time will be different from other periods because of the liquidity position of the system. The loan-to-deposit ratio of the system is a lot better than in the past, and the ample liquidity in the system is still very high. And so that's the major reasons. And most of the banks in Spain now are mainly funded through a strong deposit base. So we don't see any weak link in the deposit competition. So we consider the high teens a prudent approach. Obviously, this process on deposit will be -- it will take some time, it will be gradual and will keep increasing. And in 2024, we think this will be closer, this beta, to the 35%. So I think this process on average in the high teens in 2023 is a growing beta. So it will be rapidly spreading through our customer base. And also, I think in the NII guidance, the other moving parts is the ALCO contribution, which will be, as you can imagine, with the new level of rates of the ALCO portfolio, it will be significantly higher than the contribution from 2022. And we have the negative from the TLTRO contribution that we wouldn't have any more in 2023. And also some changes in the interbank, but slightly smaller. So all in all, we think we will be in the high teens, and we're confident this has been done this guidance with very prudent assumptions.

Thank you, Pablo, I will take probably the next question regarding the macro assumptions. First of all, the assumptions that we are applying to our models in terms of GDP growth, for instance, for 2023 is 1% growth year-on-year. And for 2024, 1.5% growth. If we compare this, for instance, to the Bank of Spain projections in 2024, we are assuming almost half GDP growth. On top of this -- well, before that, unemployment rate is around 13% our assumption, so slightly above the Bank of Spain assumptions again. And this is what we apply to our models. We get the provisions with these assumptions. And then on top of this, what we are doing with the post-model adjustment is to stress further variable, that is inflation, that probably the models do not get the potential impact that inflation could have. And what we are doing with this post-model adjustment is to stress inflation to an average level of around 10% in 2022 and 8% in 2023. So probably above the forecast, the consensus for 2023, and actually for this year as well. And due to this stress on inflation is why we book this additional post-model adjustment provision that is almost EUR 150 million in stock at the end of the year.

Let me develop a little bit on the post-model adjustment. I think the inflation -- why we have done this analysis. I think all the internal models for the expected losses on our loan book has been made with information and data that never had an inflation pickup that the one that we had in this year. And we consider that the model had worked quite well in the past on estimating potential losses on the loan book, but that we need to review the loss on real disposable income from our individual customers and the position on our corporate customer as well. And this inflation has also pushed interest rate higher at a very speed base that we haven't had in the past as well. So the position for corporates and individuals coming from high inflation and high interest rates wasn't in the data set that we used to build the models. That's why we consider that we have to introduce and stress analysis on inflation. And probably this is too prudent, but we consider that the right thing to do is taking into account all the variables. And although this always is very hard to forecast, as you are in this business as well, we have done our best maintaining our prudent approach.

And maybe I would take very quickly the question regarding risk-weighted assets that you were asking Maksym. We increased the weighting to the maximum level, 370%. This implies around EUR 300 million of risk-weighted assets impact almost. This is around 10 basis points on capital. The good news is that this is already at maximum level that with -- in the next years, with Basel IV, this risk weighting will come down. And we will probably comment later. But what we see in the next quarters is regulatory tailwinds with the IRB models migration, but we can comment later. That's all.

Thank you, Maksym. Operator, we are ready for the next question.

Our next question comes from the line of Ignacio Ulargui from BNP Paribas.