Banco Bilbao Vizcaya Argentaria, S.A. (NYSE:BBVA) Q4 2022 Earnings Call Transcript

Banco Bilbao Vizcaya Argentaria, S.A. (NYSE:BBVA) Q4 2022 Earnings Call Transcript February 1, 2023

Patricia Bueno: Good morning. Thank you very much for your interest. I’m joined today by Onur Genc, our CEO, and Rafael Salinas, BBVA CFO. As in previous quarters, Onur will start reviewing the group figures and then Rafael will go through the business units. Then we will move to the live Q&A session. And now, I will turn it over to Onur.

Onur Genc: Thank you, Patricia. Good morning to everyone. Welcome and thank you for joining our 2022 results audio webcast. I hope you have had a great start to the year. So let me just jump into it. Slide number three. So I’ll start with that page by highlighting the outstanding results of the year. First, in going through the lines on the page, we have made significant progress in the execution of our strategy, focused on profitable growth. We are accelerating our profitable growth. At the same time, we are leading the digital and the sustainability space. We have ended the year having acquired more than 11 million gross new active clients, a new all-time record; 78% of our unit sales have been done digitally another all-time high.

And we are also at the frontline of the industry in terms of sustainability. In 2022, we be channelled €50 billion in sustainable business; again, another record. Second line, we have achieved the highest annual net attributable profit ever €6.6 billion, an increase or 31% versus 2021, which represents also a 48% increase in our earnings per share. Third, we continue delivering on our commitment to profitable growth and value creation for our shareholders with ROTE, return on tangible equity of 15.3% and then exceptional — exceptional 19.5% increase of tangible book value per share plus dividends. All of this obviously is allowing us to significantly increase the distributions to our shareholders for a total amount of €3 billion, which is equivalent to €0.50 per share.

While at the same time our CET1 ratio continues comfortably — very comfortably above our target of 11.5% to 12%, as you know, our target. These highlights are what I would be expanding upon in the coming pages, but just to reiterate, the common theme of all the numbers in this page is that we are growing and we are growing in a profitable way. Moving to Slide number four; new customer acquisition, so our relentless focus on this, growing our franchise, the healthiest way to grow our business. Our focus on this has allowed us to acquire 11.2 million gross new active clients in 2022, more than doubling the client acquisition that we had five years ago and this has also allowed us to reach at the bottom of the page to reach more than 67 million active clients in stock in 2022.

Additionally, the share of those acquired through digital channels has also increased from 7%, as you see on the page in 2017 to 55% in 2022. This 55% we do think it’s a clear differentiator versus most of our competitors out there. Moving to Slide number five, our leadership in digital, it has also proven to be essential and differential again in serving our customer base. Let me again put some figures to this on the page. On the left hand side of the page, you see that we have almost 50 million mobile customers, a figure almost three times higher than 2017 and the record 70% penetration rate on mobile. And at the same time, our digital sales as I mentioned, it has reached 78% in terms of units and 61% in terms of value. This leadership in digital obviously translates into higher client satisfaction.

As you can see on the right hand side of the slide, the Net Promoter Score is continuously improving in the group, it clear leadership positions across the main countries or the footprint as you can again see on the page and in the last year we have improved our customer satisfaction by five percentage points, which is very strong. Slide number six; the other piece of our strategy that we put a lot of energy, a lot of efforts on sustainability. We are also in our view trendsetters in sustainability. We maintain the top ranked European bank position in Dow Jones Sustainability Index. This is the third year in a row. And as you can see on the left hand side of the page, we have set clear targets in our goal of achieving net zero by setting decarbonisation targets in the key CO2 intensive industries.

And we are very serious about this, how to achieve these goals, how they achieve these alignment goals, obviously by accompanying our clients in the process and supporting them with investments for decarbonisation. As such, we do think sustainability is also a great business opportunity. And again, as you see on the on the page, in 2022, we channelled more than €50 billion in sustainable business, totaling €136 billion cumulative since 2018 and we remain aligned with our increased target of channelling cumulative €300 billion to sustainability by 2025. Then page number seven, I’m going to walk you through starting from this page through the financials. 2022, obviously, it has been a great year. We delivered the highest annual recurrent and reported in both of them profits ever of our history.

So we’re very happy with that result. In the bars at the centre of the slide, you can see the upward evolution of our annual results. So beyond the fact that it’s the highest; the trend that you see in this page, in my view is impressive. 2020, €6.6 billion of recurrent profits, 31% higher than the €5.1 billion that you recorded in 2021, which was already in again an exceptional level and these results, it brings our earn — it bring our earnings per share up to €1.05 with an increase of 48% year-over-year, obviously significantly higher than the growth or the profit. Thanks for the share buyback that we have been executing in 2022. And lastly, let me note that for comparison purposes, all these figures they exclude the non-recurring impacts reported on those respective years, but in any case, if you want to see them, we put those reported figures at the bottom of the page as well.

And again, even on those numbers, we are posting our best ever reported profit. Slide number eight, our tangible book value per share plus dividends, it continue the outstanding evolution closing at 7.79%, a 19.5% increase year-over-year. I believe in this presentation, we have a lot of impressive figures, but this growth, 19.5% growth in tangible book value per share plus dividends, it is one of the most impressive figures in my view in the presentation. And regarding profitability on the right hand side of the page, we continue to improve our excellent profitability metrics, reaching 14.6% return on equity and 15.3% in ROTE. With these numbers, we believe, at the end of those nine months, we have also compared it, but we believe we are still one of the most profitable European banks out there.

In fact, again, the highest ROE bank in Europe among the 15 largest European banks at the end of the third quarter and we keep advancing, we keep advancing on these metrics. Slide number nine, I do think it’s an important one, in managing our business, we always compare ourselves in every single geography, in every single business to competition. Competitive success is what we’re after. So how do our numbers at the group level? How do they compare with competition? So on Slide number nine, we wanted to highlight again, the exceptional comparative performance of our profitability and efficiency metrics. So on the left hand side of the slide, our tangible book value per share plus dividends growth of 19.5% that I just explained, it compares with the 3.8% for the average of the peer group, and then the peer group, you have it in the footnote, it’s the largest 15 European banks.

In the centre of the slide, our mid-teens ROTE of 15.3%, again, compares very favourably with the 7.4% for the peer group. And lastly, on the right hand side, one of the key elements of our success in our view, our strong efficiency levels, it stands out at 43.2% versus the 62.8% of our peers. So comparatively also, we are creating a very good picture as you can see on this page. Slide number 10 In terms of the details of the financials, I’m going to go very quickly from these and maybe just the headlines. As we are going to be looking into them in the next few pages, but in the summary of the P&L and the financials, and the results is first, outstanding core revenues and activity growth number one. Second, in the page, our improving and industry-leading efficiency ratio as we just discussed; third, highest annual operating income ever also; fourth, very solid asset quality metrics with cost of risk clearly aligned with our guidance and lastly, our strong capital position, comfortably, very comfortably above our target range.

So let’s just jump into them. Slide number 11. Looking at the summarised P&L of the year. Again, there are many numbers in this page, but I would like to highlight the excellent evolution of gross and operating income improving 22.9% and 29.2% respectively, driven by strong core revenues evolution and positive jaws in the case of operating income. So beta positive growth figures. Also in this page, it’s important to note the evolution of impairments, very good evolution of impairments with asset quality remaining solid in this profitable growth context. Slide number 12, you have the quarterly P&L, year-over-year comparisons. The second column from the left is the year over. What stands out is the impressive 47.5% increase in operating income, again driven by the strong core revenues and positive jaws, which then leads to an excellent net attributable profit growth of 29.8%.

In terms of the quarterly evolution, which is the second to last column in the table on the right, gross income and operating income, they increased 6.6% and 4.2% respectively, versus the third quarter, despite, obviously, as you know, being negatively affected by the once in a year deposit guarantee fund contribution in Spain. We do it at the fourth quarter, as you know, and given that the quarterly comparisons at revenue numbers is a bit misleading, but even with that, we have grown our revenues. All in all, fourth quarters, 2022 reported an up net attributable profit is €1.578 million as you see on the page. Slide number 13; there are too many — there are too many numbers on this one, but as I said, one of the clear highlights of the year and of the quarter has been revenues.

I don’t want to dwell too much on the page on the details, but please, please do register the excellent trend in the revenues, the trend curve, for example, net interest income, quarter after quarter, quarter after quarter, we are increasing our revenues and we are breaking new revenue records, which I think is again very positive. Page number 14; let me do a quick deep dive on the net interest income growth, especially Spain and Mexico, so that you can also see why we continue to be quite optimistic for the quarters to come in 2023. So there are some signals of the future in this space for you. On the left hand side of the slide, you can see the strong loan growth for the group, which has accelerated obviously since last year; so, 13.3% versus the 5.6% of 2021, so, very good growth in activity.

And in the center of the slide, you can see the improvement in the customer spreads for Spain and for Mexico, our two core geographies. In the case of Spain, it has strongly picked up during fourth quarter to 221, following obviously the recent increase in the interest rates. We have been telling you that it takes a bit time in Spain to get — to reflect the higher rates into the spreads and that’s clearly happening in Spain and again there is more to come. And for Mexico, again in the center of the slide, interest rates have been increasing for several quarters. Lending yields and customer spreads, they have a longer track record of an increase in a very consistent manner. So you also see a very positive curve, trend wise, quarter after quarter, there is an improvement in that number for Mexico.

As a result of all of this, obviously, on the right hand side of the slide, you can see the strong NII growth, both quarter-over-quarter and also year-over-year in both countries; 26% in Spain, 35% in Mexico in constant Euros and quarter-over-quarter numbers, 17% in Spain and 8.5% in Mexico, very positive, very positive figures. Slide number 15, is around costs and the jaws. On this page, I would highlight the fact that once again we end the year with positive jaws, with gross income growing obviously more than the costs. Costs are growing 15.5%. That also remains well below the blended inflation rate in our footprint. So as a result of all of this, you can see our efficiency ratio, the best among our European peers, further improving to 43.2% from the 46% levels of last year.

Slide number 16, asset quality. It remains solid in this growing context. First of all, NPL ratio on the right at the bottom of the page, it continues to improve NPL, including the effect of a debt sale that we did in Spain in the fourth quarter and also due to very good underlying performance of the portfolios. In this context, impairments increased in the quarter due to higher requirements from the macro models updates. As you do every quarter, we do the macro updates and also as a consequence of cautiously setting additional provisions in certain portfolios, sectors more vulnerable to the macro situation, leading to this quarterly increase, but still resulting in a cost of risk of 91 basis points, which is within guidance and obviously below pre-COVID levels.

Our coverage ratio, the other key number on the page, decreases slightly to 81%. This is again partially due to the aforementioned debt sale that we did in Spain in the fourth quarter. It was a highly provisioned sale and highly provisioned book that we sold. As a result it had this impact obviously in the number, a part of it, a part of the decrease is explained by this. Slide number 17, as we have repeatedly stated, we have a clear focus on value creation for our shareholders, which guides all of our decisions. In this regard and in line with our payout policy, I’m quite happy to announce that the proposal to be sent to the next Annual General Meeting contemplates the distribution of total amount of €3 billion for 2022. This payout is equivalent to a total shareholder remuneration of €0.50 per share, and it’s split among a total cash dividend of €0.43, which is 39% higher than last year in terms of the cash dividend, which again also implies that €0.31 to be paid in April, 2023, subject to the approval of the Annual General Meeting, obviously, and complimenting the €0.12 per share cash dividend that we have already distributed back in October.

In addition to this cash dividend of €0.43 per share, we will be proposing a new share buyback program of €422 million, equivalent to 1.1% of BBVA’s market cap. We have been growing — we have been growing profitably — we have been generating capital organically, and as we have been saying consistently in the past few years, we are determined and clearly dedicated to share that profitable growth with our shareholders in terms of higher remuneration, as you can see here, you are seeing clear growth in the numeration to our shareholders. Slide number 18, our capital, our CET1 fully loaded as of December 22, remains at a very strong level of €12.61. Needless to say, again, much above, comfortably above our target range of 11.5% to 12%. In terms of the change in the quarter following the waterfall, main impacts; first, obviously our strong results generation, that contributes 47 basis points with the ratio.

Second, the dividend and the 81 , it detracts 20 basis points, and then the third, 25 basis points due to a relatively contained RWAs growth. And last the bucket of others of 14 basis points it’s positive, positively impacted in the quarter by the market related impacts, and especially by the credit in the OCs due to hyperinflation. And these positives are more than absorbing around 20 basis points, negative impact due to the final batch of so-called regulatory impacts, model updates and others for the year. So we have compensated for the 20 basis points impact and as you — if you remember, we have done a 10 basis points throughout the year in 2022. So the 30 basis points impact of regulation and model updates is basically already incorporated into our capital figures.

In January, 2023, the second box, second bar from the right, we have a relevant positive one-off due to a release generated by the reversal of the NPL backstop deduction for 19 basis points, which would increase our CET1 ratio to 12.80% pro forma. So you see that pro forma number also on the page. At this point and in a full year view, let me stress that once again, our ability to generate organic capital is impressive in my view. It has allowed us to keep financing the desired profitable growth. We have grown a lot in the year. It has allowed us to remunerate our shareholders with an increasing momentum, and we still ended up the year with a yearend CET1 ratio well above the upper part of our target range. It all goes back to the profitable growth mandate that we had and that we have been sharing with you.

And Page number 19, I’m not going to go into it, but it basically is telling us that all the long-term targets that we announced in the Investor Day in November, 2021, we are clearly in line to meet those goals. And now for the business update for the countries also Rafa, I turn it to you.

Rafael Salinas: Thank you, Onur. Good morning, everyone. As Onur said, we are very happy to present outstanding result for the year ’22. I would like to highlight asset management and very positive contribution for all the franchises, focus on delivering on our commitments and to exceed the objectives set at the beginning of the year. We will now comment on the performance of our main franchises. In the last quarter, I will provide our guidance for 2023. Let me begin with Spain. Slide number 21. Some business trends and strong result evolution, continuing the fourth quarter, closing up an excellent year. A positive loan growth with significant market share gain in the year, both in consumer lending 140 basis points, and in commercial 76 basis point, continue shaping up a more profitable lending mix.

That translate into very solid dynamics in terms of P&L. Pre-prohibition, profit hits double digit growth in ’22 above 13%. The main driver here is the NII, which clearly accelerated in the fourth quarter reaching high single digit growth year-on-year above expectation. Interest rate increases are positively supporting the NII are more expected to come in the following quarters as you will see in our guidance. Despite the positive growth in banking services and insurance fees, total commissions are affected by lower asset management fees due to market evolution. Expenses decreased by 4.1% year-on-year, a figure that shows our cost control commitment in a contest of higher inflation and growth in activity. All-in, significant improvement in our efficiency ratio to 47.5% in ’22 from this 51.7% last year.

On the asset quality side, the cost of risk improved to 28 basis points in ’22, driven by solid underlying asset quality trends throughout the year, while higher impairments in the last quarter as Onur mentioned are mainly related to the macro scenario update and additional adjustment in certain portfolios after updating our level of conservatism in the models. To sum up, very strong result, reaching close to €1.9 billion on our recurrent basis. For ’23, we expect similar positive dynamics. NII trend should accelerate further as a higher percentage of the portfolio resets as rates, in this context, we are updating our 2023 NII guidance to grow at low 20s, and fees will slightly grow subject to market volatility. After years in a row of continued cost cutting in Spain, we are expecting expenses to increase around mid-single digit in ’23, while efficiency will continue to improve.

Our expectation for the cost of risk in Spain is to stand around 35 basis points in 2023, slightly higher in the new economic scenario, but a manageable increase taking to consideration the strong provision effort than during the pandemic, the degree of leverage of the economy and our product new loan origination policies. Slide 22, turning now to Mexico. Once again, we are happy to share with you on a standing set of results, a strong loan growth in the year, balance among retail and wholesale segments, benefiting from positive economic momentum in the retail segment and hybrid working capital needs in the commercial segments in an inflationary environment. In terms of P&L, fantastic year in Mexico, the net profit reaches a record figure sitting €4 billion due to an impressive revenue growth close to 26% year-on-year, driven by a strong NII growth supported by long growth and higher customer experience, that has increased 71 basis points during the year, benefiting from an effective repricing of the asset sites, while the cost of the deposit remains well contained.

Some performance in fees, growing at high thins based on our higher volumes in credit cards and transaction ID and payment services, and a very positive year on improving efficiency to outstanding 31.7% efficiency ratio. And finally, very solid risk metrics with the cost of risks improving to 247 basis point to the full year, while the NPL ratio continues to decline, and the coverage level increases to almost 130%. For 2023, we expect activity dynamism to continue and the loan book to grow at double digit. We see clear opportunity to continue growing in the country, and we are well prepared to take advantage of them. Based on those solid dynamics and an effective prime management in the context of higher rates, WE are expecting the NII to grow mid teams in 2023 above loan growth.

Expenses, we’ll be growing at double digit in ’23, and we will continue investing in the country to reinforce our leadership in all states, products and segment, but maintaining positive jaws. On asset quality, although we expect some quota potential deterioration in the risk metrics, our solid starting point make us to estimate the cost risk to stand below 300 basis points in ’23. Slide 23, regarding Turkey, in terms of activity, I would like to point out the significant de-dollarization of the balance sheet during the year. The leverage of foreign currency loan continuum where targets lead deposit grew strongly favored by the conversion of foreign currency deposits about the growth of the TL loans book. On the P&L, the net profit in the full year ’22 stand at €509 million driven by good underlying business trends at a better than expected FX evolution.

On the quarterly basis, the net profit continue to improve in constant terms in the fourth quarter, driven by the increase in trends in growth income; thanks to higher core revenues, NII supported by activity growth in Turkey and free growth mainly for payment service and brokerage, and a lower quarterly high proliferation adjustment, impacted by the depreciation of the Turkish lira during the last month of the quarter. Finally, asset quality trends improved throughout ’22. Progressive decline in the MPA ratio, thanks to the strong recoveries and limited provisions and a higher recovery level over the year. Financial impairments increased in the quarter due to the macro update, while underlying trend remains sound. The cost of risk stands at 94 based point for the full year will contain.

Finally, for ’23, what can we — what can we expect going forward? The first is that we will continue to manage the bank following a present and anticipatory approach of how we have done since we took control in 2015. Our priority will continue be to preserve the value of the franchise and his fundamentals, both from the capital and liquid perspective. Having said this and highly uncertain environment, we expect BBVA to contribute to the P&L in ’22 in line with his contributions in 2022. And finally in South America, Slide 24, the regions maintain a solid performance in terms of revenues. NII growth is the main driver of the P&L in ’22, with a strong growth throughout the year, supported by sound loan growth and higher rates. A strong performance fees supported by activity developments across the board and despite inflationary pressure and the increase in cost, efficiency continues to improving to 46.4% ratio at the end of the year.

As in the rest of the year, Greece indicator remains sound with NPL on coverage improving in the year and cost of risk remain broadly flat at 170 basis point in ’22. All in, net profits in the regions exceeded €700 million in the year, more than 80% as compared with the last year results. And for 2023, our guidance, we expect the cost of risk to be below 200 basis points in the region, and we expect the efficiency to improve, aligned with our long-term targets. And now back to your Onur, for the highlights and takeaways.

Onur Genc: Thank you, Rafa. We’re a very performance-oriented organization based on numbers and metrics. We always promise that we’ll be done in half an hour. So I have two more minutes. So I will skip Page 26. The only summary that I have for you is that as on behalf of the really wonderful teammates that we have at BBVA on behalf of the whole team, we feel very, very happy with what we have delivered in 2022. And we have — we have had our best year ever on multiple dimensions, not only on profits, and the team is very motivated and energetic to do even more and that’s page number 27, the guidance. Looking also, what excites me more is because 2022 is already gone, is that as we look into the coming year and as we have seen the first numbers coming along at the beginning of the year, we are quite positive on what we are seeing and you see that in the guidance.

On the right hand side of the slide, Rafa all went through them. So I’m not going to go through those, but by country, all the key fundamentals of our business, they have been performing quite well. Obviously, we have to be cautious. We do see still some uncertainty in the macro environment and that will obviously affect our business, but overall, quite positive as you have listened to from Rafa and as you see on this page. At the group level, all of this, it translates into a few things. For the group, we expect core revenues to grow at mid-20s in constant euro. We don’t have it in the guidance here, but depending on obviously the FX evolution based on our own estimates of the FX evolution in terms of the current Euro revenue growth, we expect it to be in the mid-teens, which again, is a very, very positive figure, and again, reflects our optimism going forward.

It goes back to our strategic focus of profitable growth. It goes back to serving the most profitable segments, but we are quite positive on core revenues. Then on costs, we expect to grow around average footprint inflation, focus on the jaws as always. In some countries we are investing, but in general still below the average inflation is what we are aiming to do. And lastly, cost of risk, we are expecting it to be around a 100 basis points based on the readings that we have at the moment. Again, we have to be cautious, but based on what we see, we are quite confident that we can guide you around a 100 basis points. With this, I conclude the presentation; 10:00, we are right on time. So let’s go to Q&A.

Patricia Bueno: Thank you, Onur. We are ready with the Q&A session. So the first question please.

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Q&A Session

Operator: Thank you. The first question today is from Benjamin Toms from RBC. Benjamin, please go ahead. Your line is open.

Benjamin Toms: Good morning, and thank you for taking my questions. Firstly, on your group cost guidance, which is to grow around average inflation based on the footprint weighted by operation expenses, can I just confirm that the number you expect this to be then is around 16% your weighted average inflation across your geographies. And then on ROTE, the print this year was 15.3%. Your target for 2024 is 14%. That’s looking a little bit redundant to this stage. I think that the net of all your new guidance implies that ROTE in 2023 will be higher than in 2022. Can you confirm that’s the case and can I push you to give any guidance that’s firmer than that? And if not, can you guide when you’re next we’re next likely to hear an update on your 2024 ambitions. Thank you.

Onur Genc: Thank you, Benjamin. On the — maybe on the costs, you can lay a view Rafa on the ROTE, on the return on tangible equity. You are very well, right? Our original goal was 14%, as we have said, November, 2021. When we set it up, we heard many comments saying that, isn’t it too aggressive? Are you going to be really able to do it? And so on. And we are already above that. So it’s set three year plan that we have had, and that three year plan we are already on in the first years, we are not even half of the planning period yet. The only thing I can tell you is we are not revising those figures. But as you can also see from those pages, in multiple of those metrics, not only in return on tangible equity, but the target customers, the customer growth, definitely the tangible book — tangible book value per share plus dividends, we have a clear positive upside potential and hopefully we will clearly beat the goals that we have.

So, in short, let me not mumble with the words, but the goals, we are not going to revise them because it’s a three-year plan. We are only in the first year, but we have a clear positive upside on all of those metrics. Regarding the costs, the 16% inflation, we are guiding around debt inflation. But Rafa, do you want to comment?

Rafael Salinas: No. It’s just, that, I mean, you are right Benjamin on the numbers. The weighted average inflation that we are projecting, our research department is projecting for next year just slightly above 15%. So it’s just that between the 15% what in the high, in the heightened levels. So around the 16% that you mentioned,

Onur Genc: Benjamin, maybe one addition to this cost number, when you would see it in the coming months and quarters, as you have seen also this year in 2022, in Mexico, we are slightly or we are above inflation in terms of costs. We do see an opportunity still in Mexico of growing further our position. That’s what we have been doing. We have been gaining market share consistently year after year and also in 2022. There’s a discontinue in the market. One of our competitors is being sold and so on. In this context, we do think that an investment, a further investment into Mexico, which might lead into remaining in costs above inflation, is very well justified. So that’s one of the drivers of this around inflation. But overall for the group, then we will make it in such a way that we will be around inflation. But in Mexico, you might see a bit higher figures than the average inflation.

Patricia Bueno: Thank you, Ben. Next question please.