Banco Bilbao Vizcaya Argentaria S.A.

Good morning, everyone, and welcome to the BBVA third quarter 2019 results presentation. I'm Gloria Cauceiro, Head of Investor Relations, and here with me today is Onur Gent, Chief Executive Officer of the group, and Jaime Sandetejada, BBVA Group CFO. As in previous quarters, Onur will begin with the 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. And now I will turn it over to Onur to start with the presentation.

Thank you, Gloria. Good morning to everyone and welcome to BVA's third quarter 2019 results audio webcast. So let's jump into it, starting with slide number three. Once again, we are reporting an excellent quarter in our view in terms of results, in terms of value creation and capital generation. On this page, our net attributable profit on the left-hand side of the page in the third quarter is €1,225,000,000. At the constant perimeter, which is basically excluding the recurrent operations and the capital gains from the sale of BBVA Chile in the third quarter of 2018, Our net attributable profit grows 6.1% year over year. There are two other very key and important messages on this page. In the middle of the page, you can see that we continue to deliver outstanding value for our shareholders. The year-on-year evolution of our tangible book value per share plus dividends is... in our view, extraordinary. I mean, growing 14.2% year over year. The annualized year-to-date growth, if you take the nine months and annualize it, that same percentage is actually 16%, which is even better. And then on the right-hand side of the page, I need to highlight once again that our strong capacity to generate capital is obvious in these numbers. In this regard, our fully loaded CET1 ratio has increased 22 bps in the year. And as you know, this is happening even after absorbing 24 bps due to regulatory impacts, namely TRIM and IFRS 16 in the first half of 2019. It's also worth to mention that we are already within our capital target range of 11.5 to 12%. Moving on to slide number four. And to be more specific on the quarter, let's highlight some of the key metrics and the evolution of some of our core performance metrics. For comparison purposes, the year-over-year variations in this page and beyond exclude BBVA Chile recurrent operations in 2018 and the capital gain, obviously, from that sale. So at that constant perimeter, the main highlights of the quarter are, so number one, we would like to highlight that our core revenue growth is very robust, with net interest income growing 3.2% in constant euros, and as you know, despite a challenging macro environment and the low rates environment in some of our core countries. We are also showing strong fee income generation, growing 6.4% year over year in constant euros. Number two on the page, the good performance at the top part of the P&L is coupled with our constant focus on efficiency, resulting in an excellent operating income evolution. Operating income is growing close to double digits, 9.6%, to be more precise. Our cost-to-income ratio continues to show a very positive trend with a reduction of 75 bps in the year. Now it stands at 48.7%. And the trend of positive operating jaw creating positive operating leverage, it continues in this quarter as well. Number three on the page. Risk indicators continue to be sound. Good trend in MPL ratio reduction. It's now at 3.90%, dropping 23 bps versus one year ago. An improvement of 257 bps in the coverage ratio also to 75%. And our cost of risk remains stable in the year, standing at 101. Year-to-date accumulated terms completely in line with our expectations. Number four, I already mentioned it, but our solid capital position. Fully loaded CET1 stands at 11.56. Four BIPs increase in the quarter and 20 BIPs increase in the year. Next, we remain focused on creating value for our shareholders in terms of profitability and return metrics. BBVA continues to be at the forefront of the European banking industry. Return on tangible equity remains very strong at 12.2%. And as mentioned in the previous page, tangible book value per share plus dividends, a key metric that we look into all quarters. grew exceptionally well at 14.2%, as I mentioned, versus September 2018. And finally, we are progressing ahead of expectations, I would say, in digital transformation, doing very well in digital transformation, a key lever for our results this year and beyond. So digital sales. increased to 59% of the total units sold in the year versus it was 33% two years ago. And 56% of our customer base interacts with the bank now through digital channels. Similarly, 49.7% of our customers interact actively through our mobile app, almost reaching the 50% target we have established for ourselves for the end of the year. So we are going to arrive at that goal much earlier than the end of the year. Slide number five. If I move to slide number five, summarize P&L of the third quarter. You can identify the positive evolution on the core business drivers. I mentioned some of them already, but net interest income is up 3.2%. Fees and commissions up 6.4%. Net trading income is up 76.1%. mainly impacted by global markets, very strong global markets results and some portfolio sales. And all these result in gross income being up 5.9%. Again, cost control, excellent cost control, operating expenses growing only 2.2%, leading to nearly 10% growth in operating income at constant euros. Some of the soft spots that I would like to highlight, though, other income and expenses negatively impacted by the higher hyperinflation adjustment on this line item due to Argentina and some lower insurance activity in Mexico. And then the impairments on the impairments line, you might be looking into the increase, but it's mainly due to a worsening macro environment in most countries. And mostly due to base effect, because in 2018, we had some significant provision releases last year in Spain and in the U.S. Moving on to the year-to-date numbers, slide number six. The top line shows, again, very similar trends, strong evolution versus the same period in 2018. Gross income is up 5.5%, and operating income is up 7.9% at constant euro terms. And looking at the bottom line, we are nearly flat versus the same period last year, driven by the impairments and the provisions and other gains lines. But regarding the impairments line, the 16.2% increase in that line item is all within the expectations, and as you might all remember, within the previous guidance that we have all given to you in the previous quarters. And regarding the provisions line, please note that in the first nine months of 2018, we recorded some capital gains from divestments, mainly real estate-related divestments in Mexico and in Turkey, And there were some provisional releases from the real estate business again in Spain. So as compared to that low base, it's mainly a base effect. As compared to that low base in 2019, we have had some higher contingency risks. So leading to this negative year over year comparison. But again, as you can see from the page, very positive core operating performance. Slide number seven. Let's talk about revenues, the top line. As I mentioned, net interest income growing despite the challenging macro environment. And as you all know, despite the lower interest rates in developed markets, we have grown our net interest income by 3.2% versus a year ago. And this growth is emerging also despite the lower CPI linkers contribution in Turkey. We have registered 113 million euros less in the CPI linkers versus the third quarter of 2018. And again, despite the low interest rates, despite lower contribution for CIP linkers, 3.2% in net interest income growth. On the top right, you see the net fees and commissions up 6.4%, as I mentioned, versus the same quarter last year. This is the highest figure in the last 10 quarters at constant euro terms. So the performance in the net fees and commissions is making us particularly happy. Net trading income increasing 76.1% versus a year ago, positively impacted by portfolio sales. Global markets obviously is also performing much better, as I mentioned before, compared to the third quarter of 2018. All in all, total revenues, the gross income is up 5.9% versus the third quarter of 2018. Moving on to slide number eight, operating income growth and efficiency. Again, we continue to show positive operating jaws. Our expenses are growing 3.2%, well below the growth rate in core revenues of 6.3%. These are nine-month numbers and well below the blended inflation in our footprint. Our blended inflation in our footprint is 6%, again, versus the cost growth that we are realizing. So we are on the positive territory here. In the middle of the page, we show the strong evolution of operating income. High single digit. This is year-to-date growth of 7.9%. Finally, on the right-hand side of the slide, you see the efficiency ratio improvement, showing a 75 bps decrease to 48.7%. A figure, again, as you see on the page, significantly better than the European peer group. And if you calculate cost to income at the core revenue level, at the denominator, the improvement is actually even better at 90 bps. So I have often reiterated our commitment to improve efficiency. in the context of the transformation that we have been pursuing. But once again, I believe this page is a clear display of our track record, of our focus on this topic, of the management discipline that we are putting onto this area. Slide number nine, the risk indicators. We continue to see sound risk indicators. This quarter we saw impairments growing at 17.6%, but as I said before, It's mainly due to the base effect in the U.S. and Spain, and it's macro-related provisioning because, as you know, in many countries we have reduced our macro growth forecasts throughout the year, especially in Mexico. And as a result, we have seen some impact here. But quarter-over-quarter increase also shows... some change, but it's mainly because of the lower base in Spain. As you know, in Spain, in the second quarter, there was a sale of a mortgage portfolio, and quarter over quarter increase, also partially driven by Turkey, because in the second quarter, we had very low wholesale requirements in Turkey. On other risk metrics, MPLs were reduced by 0.6, 600 million euros versus last year, mainly due to portfolio sales in Spain. Cost of risk is now at 101 bps year-to-date, an increase of 10 bps versus last quarter. But as I mentioned, and as we have discussed with you before in the previous quarterly calls, it's completely in line with our expectations. The NPL ratio decreases 23 bps in the quarter, and it stands now at 3.9, and the coverage ratio is at 75, an improvement of 257 bps on the coverage. Slide number 10, the capital position. Regarding the quarterly capital evolution, and as previously said, CET1 has increased four bips in the quarter. Again, these numbers underscore our strong organic capital generation capacity. I would like to highlight that the four bips comes in the context of some negative market-related impacts included in the others bucket, coming mainly from the U.S. dollar appreciation in the quarter, which has created a minus four bips impact on the CET1. plus the increase in the RWAs in Argentina. As you know, there was a sovereign rating downgrade in Argentina that resulted in another minus four bips impact in the quarter. Despite those two, despite the US dollar appreciation creating a minus four bips impact, Argentina sovereign creating another minus four, we still have improved our capital position by plus four, again, thanks to our organic capital generation capacity. All in all, our CET1 ratio today stands at 11.56, well above the regulatory requirement of 9.26, and continues to be within our target range of 11.50 to 12%. I also would like to point out, it's very important to us, the high quality of our capital ratio. As you can see on the bottom of the page, we continue to lead the ranking in our European peer group in terms of the leverage ratio, which stands at 6.9% today on a fully loaded basis. And regarding AT1 and T2 buckets, we maintain both buckets fulfilled in both fully loaded and also phased in basis. And the last page on the financial side is page number, slide number 11, shareholder value creation. Mentioned it already, tangible book value per share, including dividends growing 14%. And the more important message on this page is the continuous evolution of upward trend that you see on this page. Every quarter, every quarter, Tangible value per share is going up consistently and nicely, as you see on the page. And also, in terms of profitability, I mentioned about return on tangible equity, 12.2%. Obviously, this is one of the highest. We are at the forefront of European banking industry in terms of profitability and return on tangible equity. Moving on to 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. And as you can see on the left-hand side of the page, we continue to show positive evolution here. And our digital customers, they're up by 17% versus September 2018. And now it represents 56% penetration of our active customers. In the center of the slide, you see the mobile penetration and the mobile customers. We grew our mobile customers by more than 5 million in one year. It's up 26%. And now it's at the penetration level of 49.7. Again, very close to the 50% goal that we have. And finally, we are very happy again, once again, that our app in Spain was once again awarded as the best banking app in the world by Forrester in 2019 for the third consecutive year. And as you know, the second best in the world is Guaranty BBVA in Turkey. Slide number 13. I would like to highlight the impact of our transformation because we talk about transformation. Okay, but how do we extract more value from digitization? And here you see some clear highlights of that process. Digital sales. I believe we can further foster growth by leveraging our digital capabilities. And given the digitization that we just talked about, you see here that our digital sales now represent 58.9% in number of units sold and 44.8% in terms of the value of the sales done through digital. Very strong numbers. And secondly, we are constantly trying to improve the customer experience together with that sales goal. In this context, one good example of growth and customer experience playing together is this digital end-to-end onboarding for SMEs. We launched this in Spain very recently, allowing SME clients SME potential customers to open a fully operative account through digital means. And BVA is the first bank in Spain to provide this capability, digital onboarding capability for SMEs and targeting 650,000 potential new clients. And thanks to our global capabilities, we have done this platform in such a way that we can take this platform to other countries through our global platform. And finally, on slide number 14, end-to-end view on how digitalization is helping us to propel our numbers and in order to understand the impact of transformation holistically. I gave you in the last quarterly presentation an example on Spain and now I'm putting the Mexico case on the table and you can see very strong numbers on multiple dimensions and you can see the clear evidence of how digital is helping us to push our numbers. So on growth, on the left-hand side of the page, we are bringing millions of new clients to the bank in Mexico with the help of digital sales. So our total sales increased by 14% in value, and it's mainly fueled by our digital end-to-end sales capabilities. And as you can see, our digital end-to-end sales has gone up by 131% in two years. And then we gain new clients through these capabilities. Second, on engagement at the middle of the page, creating a world-class digital experience, it helps us to lead the MPS customer satisfaction in Mexico. Among our peer group, we are by far number one for the last two years. And our digital clients in Mexico, they are showing a nutrition rate which is 54% better than non-digital ones. And on the right-hand side of the page, on efficiency, Obviously, transformation is also positively impacting our network efficiency. I would like to highlight here that the sales growth that I just mentioned Despite all that sales growth happening, we only increased our branch sales force by 1%. Additionally, and as a result of the transformation, our clients are moving to lower-cost channels for the cash-related transactions. You see on the page that the transactions managed by tellers decreased by 13%, while at the same time, the use of ATMs, a much more efficient channel, increased by 20%. So I'm finishing this section. I now turn it over to Jaime for an overview of the business areas. But overall, very good quarter. So Jaime, on the countries.

Thank you, Onur, and good morning, everybody. Let me begin with Spain. The economy remains strong, and even if GDP is slowing down, it's still expected to grow by 1.9% this year and 1.6% in 2020. maintaining a gap of nearly one full percentage point above the growth rate in the Eurozone. Net attributable profit in the first nine months of the year decreased by 2.5%, that's 27 million, mainly explained by a significant reduction in NTI, down by 202 million, and the increase in other provisions, up 63%. as 2018 included significant provision releases in the real estate business, as Onur has already mentioned. Both negative impacts are partially offset by lower impairments, thanks to the sale of a mortgage portfolio in Q2 that released €185 million in provisions. The main P&L highlights are, first of all, NII. In the first nine months of the year, it decreases by 1.9% year-on-year, in line with our 2019 guidance of a 1-2% decrease. The positive evolution of the commercial activity and the customer spread was more than offset by the lower contribution from the ALCO portfolio. and the 32 million euro impact coming from IFRS 16. We had a strong growth in fees in Q2, up over 5% versus last year, supported by both CIB asset management and retail banking fees. We confirm our guidance that fees will go up in the low single-digit level in 2019. Costs continue to go down 3% year-on-year, sorry, thanks to our transformation efforts. Cost of risk stands at a solid 23 basis points, excluding the provision release from the mortgage portfolio sale we did in Q2, with coverage and the MPL ratio further improving this quarter. The quarter-on-quarter increase in cost of risk is fully explained by the extraordinary real estate write-offs in the quarter, as the underlying trend remains stable. We remain committed to our 20 basis points cost of risk guidance by year-end. That is excluding the provision release mentioned before. Let's now turn to the U.S. Macroeconomics prospects for the Sanbel region continue to be solid. In fact, our research department has recently revised upwards the GDP growth rate expected for the region to 3.4 percent in 2019 and 2.8 percent in 2020, outperforming once again the U.S. average. Operating income is up by 15% versus September of last year in constant euros, driven by NII, up by 2% versus last year, supported by a slight increase in loan growth, a more profitable loan mix, and a higher customer spread. still benefited by the rate increases in the second half of 2018. Having said this, and given the LIBOR decline well above expectations in the last few quarters, and our high NII sensitivity to interest rates, we now expect NII to be flat this year. versus 2018. Trading income continues to behave well due to some portfolio sales, higher valuation of equity stakes, and higher global market results. We sustain positive operating jobs as expenses remain flat year on year, while gross income is growing above 5%. Growth in the operating income line is offset by higher impairments. Remember that provisions in the first half of last year were affected by some releases. Having said this, impairments are trending down quarter on quarter since the beginning of 2019, in line with our expectations. Cost of risk is also trending down, while coverage levels are also improving every quarter. Cost of risk stands at 87 basis points year-to-date and already within our 80-90 basis points guidance for the year. Let's now move to Mexico. The macro scenario in Mexico has proven to be more challenging than expected at the beginning of the year, with BBVA research now forecasting a 0.2% GDP growth rate in 2019. For 2020, we expect the economy to recover to levels around 1.3%. Despite this, BBVA Mexico continues to show its earnings resiliency, with net attributable profit growing by 7% in current euros as of September. Last year, numbers included capital gains from the sale of two real estate assets. Otherwise, net attributable profit would have grown by 9.4% in current, or 4.2% in constant. NII continues to be the main P&L driver in Mexico, increasing by 6.5% in constant euros, growing in line with activity as average balances are up by 6.6%. The decrease in the customer spread is mostly offset by higher contributions from the securities portfolio. We maintain our expectations of NII growing at a high single-digit level in 2019. Regarding activity, loan growth continues to be driven by retail portfolios up by 8.5% year-on-year, supported by both mortgages and consumer loans, where we continue to gain market share. In the commercial segment, growth remains subdued, up only 2.1% year-on-year due to the lower public and private investment in the country. Net trading income increases by 15%, favored by some portfolio sales and strong global markets activity with clients. Positive jobs are maintained in line with guidance, with core revenue growing 5.4% year-on-year versus OPEX at 4.8%. OPEX will be growing by 4.2% if we exclude the increase in the contribution to the BBVA Foundation in Mexico. Improvements increased by 11% in the year and above activity. due to a negative macro impact in 2019, actually it was positive in 2018, and growth being biased to retail portfolios. All in all, cost of risk remains at 298 basis points in line with our guidance for the year of around 300 basis points. And as you know, at the lowest levels of the last decade. These results reflect once again BBVA's Mexico leadership position, both in terms of market share and profitability, proving its resilience in lower GDP growth scenarios. Let's now focus in Turkey. Macro data is improving, with GDP showing already two quarters with positive quarter-on-quarter growth, and inflation falling significantly to 9.3%. BBVA research expects GDP growth of around 0.3% this year and around 3% in 2020. In the first nine months of the year, numbers continue to prove guarantees BBVA's earnings strength in a challenging environment with operating income increasing by 1.5% in constant terms. This has been possible thanks to our robust core revenue growth and our focus on efficiency. NII is up by 6% year-on-year, explained by higher customer spreads, especially in the foreign currency portfolio, up 76 basis points, and lower wholesale funding costs, more than offsetting the lower contribution from the TL loan book, both because of loan activity and customer spreads. CONSIDERING THE YEAR TO DATE EVOLUTION AND THE CENTRAL BANK RATE CUTS SINCE JULY AMOUNTING TO 10%, WE NOW THINK THAT WE WILL BEAT OUR PREVIOUS GUIDANCE OF NII EXCLUDING CPI LINKERS BECAUSE IT WILL INCREASE IN 2019 VERSUS 2018. Fees continue to increase by over 22%, with very good performance across the board. Expenses grow significantly below the 12-month inflation, improving the efficiency ratio by 61 basis points versus the first half of the year to 34.8%. Growth in the operating income line is offset by the increase in loan provisions, up 16% versus last year. The quarter-on-quarter increase in cost of risk was suspected and is due to higher provisioning needs in the commercial portfolio being consistent with our guidance. The year-to-date cost of risk stands at 199 basis points in September, still below our year-end guidance of around 250 basis points. We now expect to end the year below this figure. Other provisions have also increased, explained by provisions related to contingent liabilities and a base effect, as last year numbers had a positive result from the sale of a real estate asset. And finally, South America. Colombia and Peru will continue to show a solid GDP growth rate, around 3%, both for 2019 and 20. And we will wait until the new government announces new policy measures to update Argentina's macro. Colombia's net attributable profit grows by over 18% in the first nine months of the year in constant terms. Thanks to NII, up almost 5% versus last year on the back of higher activity. Positive jobs with expenses growing below inflation and also lowering permits thanks to a positive IFRS 9 calibration impact. Peru's net attributable profit also grows strongly. by almost 18%, driven by NII, increasing over 11%, and growing above activity thanks to lower wholesale funding costs. This has allowed the franchise to generate positive jobs, offsetting the increase in provisions explained by some provision releases in 2018. And finally, Argentina. It had a positive contribution in the first nine months of the year of €117 million. And that was partly thanks to the sale of our stake in Prisma in the first quarter of the year and a higher NII driven by the contribution from the securities portfolio. that has been able to more than offset the impact from the inflation adjustment, the depreciation of the currency, and the increasing cost of risk related to the macro and sovereign rating downgrade. And now back to Honor for some final remarks.