Banco Bilbao Vizcaya Argentaria S.A.

Good morning, everyone, and welcome to BBVA's second quarter 2019 results presentation. I'm Gloria Cauceiro, Head of Investor Relations, and here with me today is Onur Genç, Chief Executive Officer of the Group, and Jaime Sánchez Tejada, BBVA Group CFO. As in previous quarters, Onur will begin with a presentation of group's results, and then Jaime will review the business areas. We will move straight to the live Q&A session after that. As always, let me remind you that we would appreciate all the participants to try to make the calls from the landlines and avoid using the speakerphone. And now, I will turn it over to Onur to start with the presentation.

Thank you, Gloria. Good morning to everyone, and welcome to UVA's second quarter 19 results audio webcast. As Gloria mentioned, I'm going to talk about the group, the group's evolution, and Jaime will focus on the respective business areas. So let's jump into it. Page number three. Starting with slide number three, we are reporting a very good second quarter in terms of results, value creation, and capital generation. This is the same page that you have been seeing in the past few quarters. and very good progress on all the key metrics that we see on this page. So, our net attributable profit on the left-hand side of the page in the second quarter is 1,278,000,000 euros. This represents an increase of 2.6% versus the second quarter of last year, but as you all know, given the sale of BUVA Chile in July 2018, if we exclude BUVA Chile, recurrent operations from the base from the second quarter of 2018, The true comparable Apple to Apple increase is 5.7%. And comparing to the previous quarter, the first quarter of the year, net attributable profit grew at a strong rate of 9.8%. There are two other very important key messages on this page. In the middle of the page, you see that we continue to deliver outstanding value for our shareholders. In the first half of the year, we have increased our tangible book value per share plus dividends by 6.9%. We haven't seen this level since 2014, basically, so very strong. The evolution on a year-over-year basis is also worth to mention with a double-digit growth rate of 12.6% versus June 2018. And second, on the right-hand side of the page, what you see, we would like to highlight on the right-hand side, is despite absorbing 24 bps from two regulatory impact, IFRS 16 and TRIM-related regulatory impacts, our capital position increased 18 bps versus December 2018. And we already stand within our target range. As you all know, we have communicated a target range of 11.50 to 12%. And earlier than expected, we were expecting to be in that range by the end of the year. But earlier than expected, we are now within our capital target range. Slide number four, the key highlights of the quarter. We would like to highlight the excellent evolution, again, on some of our core performance metrics. As in the first quarter, the year-over-year variations exclude BBVA Chile recurrent operations, just to be comparable, in this slide and also in the consecutive slides. So in the rest of the presentation, we wanted to make it more comparable. With that footnote, the main highlights of the quarter are, first, number one, We would like to highlight the robust growth in core revenues, so net interest income plus fees, growing 8.7% year over year, in constant euros as always. And net interest income, growing even at double-digit, 10.4% at constant Euro terms, again. Second, the good performance at the top part of the P&L, coupled with our constant focus on efficiency, it helped us show a reduction in the cost-to-income ratio of more than 40 bps. Now our cost-to-income ratio stands at 49%, continuing the trend of positive operating jobs, which we care about a lot, as you all know. Risk indicators, number three. Risk indicators were one of the bright spots of this quarter. Excellent trend in the year, with NPL ratio down 57 bps versus one year ago. And our NPL ratio now stands at 3.84%. and an improvement of 330 BIPs in the coverage ratio. So the coverage ratio now stands at 75%. Also, we have seen an improvement in our year-to-date cost of risk. It now stands at 0.91%, 91 BIPs, in year-to-date accumulated terms. Again, much better than our expectations. Number four, capital. I partially mentioned it, but our strong capital position is obvious in the numbers, 1,152, increasing 17 bps in the quarter. And in this quarter, we absorbed 13 bps from trim-related impacts. So again, as I mentioned in the slide number three, we have already achieved our target earlier than expected. Number five, we continue creating value for our shareholders in terms of profitability and return metrics. BBVA is at the forefront of the European banking industry. Return on tangible equity, which is a number that we care about a lot, it remains strong at 12.4%. Another outstanding figure on this page, obviously, is the tangible book value per share plus dividends. As I mentioned in the previous page, it grew 12.6% versus June 2018. And finally, we are progressing ahead of the expectations in digital transformation. Digital sales increased to 58% of the total units sold in the year. I remind you, this number was 30% two years ago. And digital customers, they're up by 17% to 29.7 million customers. Similarly, the number of mobile customers, it reached 26.1 million with a yearly growth rate of 25%, and this represents a 48% penetration. As I mentioned in the previous quarters, our goal is get to 50% by the end of this year, and we are well on track to get to that goal as well. Slide number five, this is about the second quarter profit and loss, simplified P&L statement. You can identify the positive evolution on the core business drivers on this page. As mentioned, net interest income is up 10.4%, gross income is up 5.1%, and operating income is up 6.1% at constant Euro terms. Also, as I mentioned, very positive news regarding impairments with an improved figure in the second quarter versus the first one. The soft spots of the quarter, again, they're obvious on the page, but there are three soft spots that we would like to highlight. The first one is NTI. The NTI contribution was lower given the market situation due to the muted markets activity, basically, and lower portfolio sales that we did in the second quarter. Other income and expenses negatively impacted by the hyperinflation adjustment of Argentina. It was higher inflation adjustment for Argentina in this quarter. Plus, this line includes a higher contribution than last year to the single resolution fund in Spain. And also the last, I would pick the soft spot as the provisions line here, provisions and other gains and losses line. Note that in the second quarter 18, we recorded in this line some capital gains from the sale of a building in Mexico. So the base is not fully comparable, but as compared to that base in this quarter, we have had higher early retirement costs in Spain and higher contingency risks we potentially accounted in Turkey. So leading to a negative year-over-year comparison. But again, in our view in this page, the highlight is the core income, core operating income, and core business drivers, which are showing very positive signals. Slide number six, this is the half year numbers. Again, in a summarized P&L format. The top line, similarly, shows a very strong evolution versus the six month 18. Gross income is up 6% and operating income is up 8.2% at constant Euro terms. Looking at the bottom line, though, I mean, again, we improved a lot in terms of year-over-year comparisons in the second quarter, but this is the half-year numbers. We remained flat versus six-month 18, driven mainly by the impairments line. As you can see, the impairments line has grown 15.7% versus the six-month 18. Multiple things, but due to the negative impact of the macro update, higher provisioning in the commercial and the unsecured consumer lending portfolios in USA in the first quarter, as you would see in a few pages now. There's a very meaningful improvement in those numbers in the US in the second quarter. And the low base of the US, actually, in the six months of 18, because we did some, there were some provision releases in that period in the US, mostly due to Hurricane Harvey releases, and there was a positive macro impact, so that was basically the key changes versus the base. And also in Turkey, as you know, we have had higher requirements in the retail portfolios in the first half of this year. So impairments line was the key difference, but on the core top line drivers, as you can see, we are again registering a very robust growth. Slide number seven. We talked about the revenue, maybe a bit more details on the revenue. As I mentioned, net interest income growing double digit, 10.4% versus a year ago. This year's trend is also very positive comparing to the first quarter. So second quarter is doing much better at 4% growth. Very important to note that, and you will see when Jaime talks about the countries, but most geographies are performing very well on this line item, and it's a critical dimension of our business, so we welcome this opportunity, this development. The positive evolution in net fees and commissions, as you can see, 3% versus the same quarter last year, and 4.2% increase versus the first quarter of this year. This is, by the way, the highest figure in the last 10 quarters at constant euro terms, so very well on the net fees and commissions. Net trading income, as I mentioned, is down 58%, highly impacted by the muted global markets activity and lower portfolio sales, as I mentioned, that we did in the second quarter. All in all, total revenues are up 5.1% versus the second quarter of last year. 1.9% down versus the first quarter, but as I mentioned, in the second quarters of every year, or this year, in the second quarter, we registered our annual single resolution fund, so comparison between the first quarter and the second quarter is not apples to apples. But overall, 5.1% growth in gross income. Moving on to slide number eight. One more quarter, we continue to show positive operating jaws. It is once again very satisfying to see our expenses growing at 3.9%, well below the growth rate in core revenues, which is 8.3%, as you see on the left-hand side of the page. And it is doing this for so many quarters now, and it is despite the high inflation in some countries of our footprint. In the middle of the page, we show the strong evolution at high single-digit growth, 8.2% growth in the operating income. And on the right-hand side of the slide, as you can see, the efficiency ratio keeps improving, showing a 41 BIP decrease to now standing at 49% overall cost-to-income ratio, significantly better than the European peer group. And if you calculate cost-to-income at the core revenue level without the NTI, the improvement is actually more than 70 BIPs. I keep reiterating this every quarterly call, our commitment to improve efficiency is clearly top notch in the context of our transformation. We are highly prioritizing this topic and I believe our track record shows how high it stands as a priority for us as the management in the group. Moving on to page number, slide number nine, asset quality and risk indicators. Very good news, as I said here on this slide. In the impairments line, we see an improved figure versus the first quarter of this year. So the provision impairments line, 25.6% down versus the previous quarter. And it's flat versus the second quarter of last year. So the quarter over quarter decline improvement is driven by Spain, thanks to the sale this past June 21st of another mortgage portfolio of 1.2 billion euros of gross book value. But beyond Spain, by Turkey, due to lower requirements in Turkey, especially on the wholesale side, by the U.S., driven by the lower requirements in the US as compared to the first quarter. On other risk metrics, MPLs were significantly reduced by 2.6 billion euros on the top right versus last year, 2.6 billion euro reduction versus last year, and 0.6 billion reduction versus the first quarter of this year. Cost of risk at the bottom keeps improving versus the first quarter, stands now at 91 bps year to date, an increase of 9 bps versus last year. And at 77 bps actually on a quarterly annualized basis for the quarter, it was 77 bps, a very strong figure, declining 27 bps compared to the previous quarter. The MPL ratio keeps decreasing this quarter, 57 bps reduction to 3.8%, and coverage ratio, again, improving 330 bp improvement to 75%. So overall, we maintain an excellent risk profile and better than our expectations. Capital, slide number 10, regarding the quarterly capital evolution, the CET1 fully loaded ratio, as you can see, it has increased 17 bps, even after absorbing the 13 bps of trim, related impacts in the quarter. The good evolution was helped by the grant of regulatory equivalence in Argentina, as you can see on the waterfall chart, and the good performance of the health to collect and sell portfolios. But beyond that and overall, these numbers underscore once again our very strong organic capital generation capacity. I would also like to highlight the quality of our capital on the bottom left side of the slide. We think it's an important metric to look into. You can see that we continue to lead the ranking of our European peer group in terms of the leverage ratio, which stands at 6.6% versus the European peer average of 4.9%. Regarding the AT1 and the Tier 2 buckets, they are already covered and completely endowed. And lastly, at BBVA, I would like to mention this topic that we keep strengthening our capital position through green, social, and sustainable bonds. And last June, we successfully issued our second one billion senior non-preferred green bond. This perfectly illustrates BBVA's vision and strategy towards a more responsible way of doing business, as you can imagine, because our success depends, and this is a genuine belief culturally shared across the organization, our success depends ultimately on the prosperity of the communities that we serve and the society in general. So you will hear us talk more about this going forward, but in short, we believe Business should up its game, addressing the main challenges the society has, both environmental and social, and we intend to be one of the leading actors here. Moving on to slide 11, outstanding delivery on shareholder value creation. Again, we keep delivering on this. As you can see, I repeated it, so I'm not going to spend too much time on this. 12.6% yearly increase in tangible book value per share and return on tangible equity. We are at the forefront of the European banking industry and 12.4% return on tangible equity. Slide number 12, as we have commented in the last quarters, underpinning the growth in the digital business is the continued digitization of our customer base. So on the left hand side of the page, you see the evolution of digital customers up 17% versus June 2018. It represents a 54% penetration of our customers. And same with a different angle, mobile customers, the penetration of mobile customers. Mobile customers grew more than 5 million in one year, up 25%. And now we are at 48% customer penetration. We had a goal of 50%. We are very close to it. We believe we will achieve it by the end of the year. And finally, on the right-hand side of the page, as a consequence of the strong base of digital and mobile clients, digital sales continues to grow. Now 58% in terms of number of units and 44% in terms of value. In our view, very, very strong numbers. Moving now to slide number 13, I would like to highlight the impact of our transformation on our business drivers. This is important because we talk a lot about digital transformation. We believe we can create a competitive advantage through our investments in digital and through owning this topic. And in every quarterly call, I would like to highlight to you a few things which does, a few things which do highlight the reasons on why we think this is a competitive advantage. So first, the impact of digital transformation on growth. On the left hand side of the page, I believe we can further foster growth by leveraging our digital capabilities. We have been doing well in serving our own customers through digital, but now we can use our digital advantage to acquire, to grow our customer base, to acquire new customers. One example of that is Uber. I mean, the partnership that we launched in Mexico. So Uber has partnered with BBVA to launch its first financial product outside the U.S., And this is also BVA's first product created through our open banking capabilities and the API-based infrastructure we have been building all around the world. So this is an important partnership that we pay attention to. Second, the customer engagement and advice. You can see on the right-hand side of the page, technology and data will be key to deliver advice-based value proposition at scale and increase our customer loyalty. One good example of this is this new feature in the BBVA Spain app, which is set up your account. And this is beyond... Beyond alerts, it aims to help customers manage their everyday finances, automating certain tasks, creating a self-functioning bank for the customer through simple settings. And these initiatives, it helps us to be in the daily cash flow of our clients and to help them make better financial decisions. So very important developments it keeps adding on. And then, finally, I would like to give you an example of an end-to-end, a holistic assessment of how digital is helping us in delivering better numbers. The numbers are up, obviously, at the surface, but there are many things that are being done underneath. So our transformation in Spain, I think, is a good example of that. I mean, we have started our transformation a long time ago to generate growth in our customer base, to improve engagement, to improve efficiency, and we are seeing clear results there. So on growth, bringing new clients to the bank. Even in a very mature, highly mature and bankerized market like Spain, increasing cross-sell and transactionality were made possible through digital transformation. As you can see on the left-hand side of the page, customer acquisition by digital channels in Spain, it has grown 33% in the last two years. On engagement, on the middle side of the page, creating a world-class customer experience. I mean, we are being recognized by Forrester three years in a row now as the best mobile app in Europe, and it has helped BVA to lead Spanish MPS, ranking for the last two years among the large banks in Spain. And also, it has helped us reduce the attrition rate by 18%. And finally, on efficiency, thanks to digital transformation, a convenient relationship model With the seamless integration between digital and people, it helped us to lower the cost of doing business. Again, past two years, total costs have declined by 8%. So I'm now handing it over to Jaime. Jaime, maybe you talk to us about the countries and the business units.

Thank you very much, Honor, and good morning, everybody. Let me begin with Spain. The economy here remains quite strong, with GDP expected to grow by 2.3% in 2019, more than 1% above the European average. We expect GDP growth to continue at healthy levels, around 2% also in 2020. Net attributable profit in the half decreased by 1.7% versus last year. The decrease is fully explained by a significant reduction in NTI, down 67%. And the release in other provisions, as 2018 included significant provision releases from the real estate area. Both impacts are only partially offset by the provision release coming from the sale of the mortgage portfolio. that was closed this quarter. The most relevant P&L drivers are, first, a significant NII recovery versus Q1, up over 5%, thanks to good commercial activity and an improvement in the customer spread by three basis points, a higher contribution from the ALCO portfolio, and the lower cost of excess liquidity as we have reinvested part of the excess cash at the ECB in high-quality liquid assets. As a consequence of this improvement, the evolution of NII on a year-on-year basis improved significantly to minus 2.4% in the half, in line to meet our year-end guidance of NII decreasing slightly by between 1% and 2%. The second most relevant driver is again expenses. They continue to go down 3.5% on a year-on-year basis thanks to the success of our transformational efforts. And finally, impairments that showed a positive figure driven by provision releases. Excluding the one-off already mentioned, cost of risk would have been 18 basis points year-to-date. More in line with our year-end guidance of around 20 basis points, that excludes this positive one-off. Let's move now to the U.S. We continue to expect a good macro for the Sandbelt region, with GDP growing around 2.8% in 2019 and 2.7 next year, outperforming once more the U.S. average in the period. Revenues in the U.S. are growing by 5% year on year, driven by NII and NTI, mainly due to ALCO portfolio sales. NII is also growing around 5 percent, supported by long growth, up 4 percent year-on-year, and higher customer spread, up 21 basis points versus the first half of 2018, benefiting both from the change in mix towards higher yielding consumer products and last year's rate increases. For the whole 2019, and considering the change in interest rate expectations for the U.S. dollar, we now expect NII to grow at the low single-digit level. We continue to enjoy positive operating yards in the U.S. as expenses remain flat. In terms of asset quality, impermanence increased versus last year. As Honor has already mentioned, in the first half of 2018, provisions were extremely low, positively impacted by provision releases, both from hurricanes and some commercial portfolios, and a positive IFRS macro impact. The increase in provisions is explained as follows. Fifty percent, more or less, comes from retail portfolios, mainly consumer loans write-offs, 25% due to negative macro impact, and the remaining 25% due to high provisioning needs from wholesale portfolios. Having said this, impairments show a meaningful decrease versus Q1 of this year, down 24%, mainly explained by lower provisioning needs in retail books, driving cost of risk from 106 basis points in Q1 to 82 basis points in Q2. We want to reiterate our 80-90 basis points guidance for the year. Let me focus now on Mexico. BBVA Research has revised down its GDP growth expectations for Mexico in 2019 to 0.7%. Despite this, BBVA Mexico continues to deliver very strong results. Net attributable profit increases by over 7% in the half in current euros, 1% in constant. The comparison is impacted by a 40 million capital gain post task from the sale of two real estate assets that took place in the first half of 2018. Excluding these, net attributable profit would have increased by 11%, 4% in constant euros. NII remains as the main P&L driver in Mexico, growing by 8% in constant euros and supported by activity and a higher contribution from the securities portfolio. Activity grows by 5% year on year. Bias towards retail portfolios, particularly consumer loans, growing at 12%, where we continue to gain market share. The commercial segment grows slightly, 2.3%, excluding the FX impact. And as you remember, in Q2 of last year, we had a strong lending growth rate as companies covered their funding needs ahead of the presidential election. All in all, we remain committed to our year-end guidance of a long growth at the high single-digit level. Positive jobs are maintained, with core revenues growing at 6.2% versus 4.7% growth in expenses. Expenses growth continues to be impacted by the additional contribution to the BBVA Foundation, which doubled this year. Excluding this effect, OPEX would have grown by 3.7% and well below the 12-month average inflation of 4.5%. Impermanence are up by 8.4% and above activity growth, and explained fully by a negative IFRS 9 macro impact. Cost of risk stands at 298 basis points year to date, in line with our 300 basis points guidance for the year. And as you know, significantly below the historical average of the last nine years, which is 340 basis points. These solid results continue to reflect BBBA's leadership position in Mexico, both in terms of market share and profitability, proving its resiliency even in lower GDP growth scenarios. Let's move now to Turkey. Despite domestic and geopolitical tensions, the macro recovery is on track. Positive quarter-on-quarter growth in Q1 points towards the end of recession. We expect a positive GDP growth rate already in 2019 and to reach 2.5% next year. In this context, guarantee continues to surprise, reporting better than expected results. Net attributable profit in the half decreased by 24% year-on-year, mainly explained by the teal depreciation. In constant euros, and despite a much more challenging environment, net attributable profit was down by only minus 2.8% versus the first half of last year, proving guarantees earnings resiliency. Pre-provision profit is up by 12% versus the first half of last year thanks to a robust core revenue growth and expenses growing below inflation. NII is up by 15% year-on-year due to a higher contribution from the CPI linkers and also the foreign currency portfolio. whose spread is up by over 75 basis points in the half, more than offsetting the pressures in TL customer spreads due to the increase in deposit rates. Following the Central Bank July decision to cut rates by 425 basis points, our 2019 guidance of flat NIIX, the contribution of the linkers, has clearly put upside potential. Fees increased by 24% year-on-year with good performance across the board. This double-digit pre-provision profit growth was upset by the increase in long-run provisions by 37% due to the deterioration in some retail portfolios as a consequence of the worsening economic conditions. Partially mitigated, though, by lower provisioning needs for some large tickets. It is worth mentioning that provisions are down versus Q1 by 26%, driving year-to-date cost of risk to 157 basis points as of June, down from 182 in March, and clearly much better than expected. This leads us to improve our cost of risk guidance for the year. We now think we will probably end the year closer to 250 basis points below the 300 basis points previously guided. Other provisions for contingent liabilities have also increased this year, while in the first half of last year we had a positive result coming also from the sale of a real estate asset. And finally, South America. Colombia's and Peru's GDP growth rates remained quite healthy, around 3% for 2019. In 2020, they should continue to behave well. Colombia's net attributable profit in the half is up by 13%. with NII increasing 4% year-on-year on the back of higher volumes, improving customer spreads, and a higher contribution from the securities portfolio. Expenses remain flat, achieving again positive jaws, and year-to-date cost of risk significantly down after Q1 one-offs. Peru's net achievable profit also grows in the half around 13% year-on-year, with NII up 14% and remains as the main P&L driver, growing above activity thanks to lower funding costs. Positive jobs are also maintained in Peru. Argentina reported a net attributable profit of 110 million euros in the half, improving its contribution versus last year, thanks both to NII, boosted by the contribution of the securities portfolio as the excess liquidity is invested in high-yielding short-term treasury notes, and also don't forget the positive results from the sale of Prisma that took place in Q1 of this year. And now back to Honor for some final remarks.