Banco Bilbao Vizcaya Argentaria S.A.

Good morning, everyone, and welcome to BBVA's second quarter 20 results presentation. I'm Gloria Gauthiero, head of investor relations, and here with me today is Onur Gens, chief executive officer of the group, and Jaime Sanetejada, 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. And now I will turn it over to Onur to start with the presentation.

Thank you, Gloria. Good morning to everyone. Welcome and thank you for joining us. I hope that you and your families and friends are all healthy and safe in this environment. Let me also express my support to those affected by the pandemic and my deepest condolences to the relatives and friends of those who passed away. So let me start with slide number three by updating you on BBVA's response to this environment. As mentioned in our previous quarterly results presentation, our three priorities to navigate this crisis remain the same. So first and foremost, to protect the health and well-being of our employees, our clients, and the community in general. This has been our number one priority from the very beginning. We acted with anticipation before the official government measures were put in place, activating plans in order to have as many of our employees as possible working from home, 86,000 of them working from home at some point. I really would like to also put focus on the fact that in this situation, our bank, thanks to the technological investments that we have been doing in the many years to date, Our bank has been performing as usual thanks to our people and again thanks to our technological capabilities. Our second priority in this environment has been to continue to provide an essential service to the economies that we operate in. We are managing the branch network in a very dynamic way based on data. As of June, 87% of our physical network is open versus 59% as of March, so it has been improving day by day. We have also leveraged more than ever our competitive advantage in the digital front. Our digital and mobile customers have reached their maximum ever 60% and 56% respectively penetration rates in this period. So our digital channels, something that we have been focusing on again significantly in the past few years, we think it's paying off all those investments. And the third priority has been to provide financial support to our long-standing clients We believe, we, the banks, we are a powerful part of the solution to this crisis, continuing to finance the economy. So we have contributed with a full pack of measures, including especially deferrals. As of today, 4 million transactions have been deferred, which represents in value 9% of the group's total loan portfolio. We have been very prudent in our credit admission policies, but we also tried hard to stand next to our long-standing healthy clients. In the first half of the year, we have increased our total gross loans by 26 billion in constant euros. Additionally, we have provided new lines of credit and loans to our business clients through government facilities, the government support programs, for a total of 20 billion euros. Moving on to slide number four, as highlighted in the previous slide, once again, I would like to remark that our leadership in digital has been a huge advantage in this context. So, on the left-hand side of the page, you see that our relentless focus on technology and the effort BBVA has been putting over the last few years in building what we call end-to-end digital products and processes are proving to be differential. So, some examples on that side of the page. The number of visits to the BBVA app globally, it increased by 20% if you compare before and after the COVID-19 crisis periods. In addition to Pure Digital, our high-value customers, they continue to interact with their relationship managers through our remote infrastructure embedded into our app. Like in Spain, the number of visits to my conversation, as we call it in the app, That functionality, the chat functionality directly with your RM, it increased by 68% in this period on an apples-to-apples basis. As a result, given also our differential capabilities to go beyond servicing and execute sales digitally, in this quarter we have achieved the milestone of reaching 50% of total sales in terms of value. 50%, the tipping point that we have been looking for, we passed that threshold. In terms of units, digital sales now represent 66% of our total sales, which are again, as compared to many other peers that we are looking into, these are uniquely differential figures. Second, on the right-hand side of the page, in this complex environment, despite all the complexities, we continue to deliver on the digital tools and functionalities. Maybe very quickly, a few examples. GloMo, our global mobile app. This is inspired from our Spanish app, as you all know, which is recognized by Forrester as the world's best mobile banking app. We are now extending it to several other countries. More than 240 solutions and features of the app have been developed globally, and they are now reusable globally. So any of those solutions can be plug and play in any of the countries that we are operating in the future. This is a clear example of how our globality allows us to optimize costs, share best practices, and develop industry-leading solutions. The second example is we developed a very specific SME-specific app. Again, a global one. We call it HEMA. We launched it in Mexico, and it will be launched in other countries along the way, along the same lines. And similarly, for large corporates, at the bottom of the page, you see that given the work-from-home trend in our clients, we are seeing huge traffic, 29 times, in the usage of technological infrastructures we have built, such as digital signature. Moving to financial results. Slide number five. I would like to emphasize that in this complex, unprecedented environment, we continue to deliver a strong pre-provision profit, which increased 0.7% in current euros, but 17.6%, 17.6% in constant euros, versus the same quarters of last year. In our view, a very, very strong reading on this one. From a pure bottom-line perspective, in the second graph from the left, You can see the reported net attributable profit is 636 million euros due to higher impairments. As I will explain later, we continue to do some extraordinary additional COVID-related provisioning. Nevertheless, given the even heavier upfront provisioning we have done in the first quarter, it is important to highlight that net attributable profit for this quarter, it's more than doubled, like 118% increase versus the first quarter of this year. The third graph from the left, it shows the very strong capital generation, one of our best quarters ever. 38 pips increased in the CET1 ratio, so we now stand at 11.22 at the end of June 2020, being very close to the upper part of our target range that we shared with you in the first quarter presentation. Finally, on the right-hand side of the page, you see that it's important, again, to note one of our core metrics to look into is the tangible book value per share. Despite the fact that the currencies are being significantly affected, we continued to grow our tangible book value per share plus dividends. It's very, very important in my view. Going to page number six, slide number six. So if there are a few messages that come out from the results that we would be explaining in detail later to you. Again, resiliency in pre-provision profit. Resiliency in pre-provision profit. Increasing 17.6% in constant euro versus the same quarter last year. Very strong cost control and efficiency. We will share the detailed numbers with you in a second. But in our view, an excellent management of our costs, decreasing 4.9% in constant euro versus the second quarter of 19. And as you know, we have significant inflation in some of our geographies. Despite that high inflation in those geographies, minus 4.9 blended for the whole operation. Third, Significant improvement in our cost of risk, it's now 151 bps versus 257 bps in the first quarter. So we'll again talk more about this in the coming slides, but cost of risk, which is one of the core topics that we are putting significant management attention to, continuously evolve within our expectations, within our expectations. Once again, I think it is one of the great news of the quarter. Strong evolution in capital metrics. Fully loaded CET1 increasing significantly by 38 bps versus last quarter, standing now at 11.22. Moving to slide number seven, I would like to highlight the positive evolution of the net interest income in this challenging environment, increasing 2% in constant euros. Together with the impressive evolution on net trading income, it offsets the negative evolution of fee income, leading to a strong increase in gross income of 6.1% in constant euros. This evolution coupled with the good performance in expenses that I mentioned explains the 17.6% increase in operating income. As I explained previously, the bottom line has been negatively affected by the increase in impairments and provisioning versus the same quarter last year. All in all, though, net attributable profit for the quarter is 636 million euros, 40%, 40.5% year-on-year decrease in constant euros. Moving to slide number eight. If you turn to slide number eight, you can see the evolution in the first half of this year, so year-to-date, versus the same period last year. Again, very positive evolution in net interest income, gross income, expenses, and operating income. Our operating income in the first half, it has increased by 19.2% in constant euros. Again, very strong reading, even in normal times. First quarter COVID-19 front audit provisions of 1.4 billion euros, together with the additional COVID provisions that we are booking in this second quarter of around 0.6 billion euros. They lead to a negative impact on the bottom line, but we wanted to be, as we mentioned in the first quarter, very prudent in our provisioning. In the first quarter and in the second quarter, we have taken these additional extraordinary provisioning. Net attributable profit for the first half of the year is 928 million euros. 57.8% decrease year-over-year if we exclude the non-cash, the BBVA USA goodwill impairment that we have recorded in the first quarter of this year. If we include that impairment, it's minus 2.1 billion, the impairment. The final reported net attributable profit for the half of the year is 1,157,000,000 euros. Moving to slide number nine, to shed more light into the revenues breakdown, and it's also a quarterly evolution. You see here the quarterly evolution. It's important to note that the 2% growth in net interest income has been achieved, again, despite the lower interest rate environment in practically all of our markets. The performance of net fees and commissions with a decrease of 9.5%. This is very negatively affected by lower economic activity, especially in card payments. The payment business is a good part of that number. We are seeing clear pickup in that figure in the last months, but still it has affected the quarterly figure. Retail loan production related decrease in insurance related fees under the fees and commissions. And there's this new regulation on fees in Turkey capping certain commissions, which also affected that figure significantly. Excellent performance in our view on net trading income, fourfold increase versus a year ago, positively affected by the portfolio sales, driven by the volatility in the sovereign yields, and also very positive results on global markets. All in all, again, robust revenue growth of 6.1% versus the second quarter of 2019. Here, let me note that the second quarters, because you see the quarterly evolution on this page, second quarters are seasonally affected by the annual deposit insurance payments that we do to single resolution funds. So there's some seasonality in the second quarters. Moving to slide number 10, I did mention it, but I think it is important we put a lot of attention to this, a lot of attention to this, the good performance of expenses and It continues to drop quarter-on-quarter and year-over-year. If we compare the year-on-year evolution, expenses dropped significantly by 4.9%. We also maintain positive operating jaws with our core revenues increasing by 3.2% in the first half, when the expenses are decreasing by 1.5%. Again, the blended inflation rate in our footprint is 4.7%. In that context, These decreases in the costs, it clearly highlights our discipline on the topic. And finally, on the right-hand side of the page, as a result of all of this, you can see an outstanding efficiency ratio of 45.8% in the first half of the year. Keeps improving, 389 BIPs versus 2019, a figure, again, that is significantly better than our European peer group. Slide number 11. Loan loss provisions for the quarter, 1,665,000,000 euros. As I mentioned, a bit of this is extraordinary provisioning due to COVID. In the impairments line, there is also some peace under the provisions line, but in the impairments line, we have 576,000,000 related to this additional provisioning. Still high, still a significant number, but significantly improving versus the first quarter, whereas all of you know that we have front-loaded significantly in the first quarter. More specifically, the 576 million euros of COVID-19-related provisions, it includes a few things. It includes the additional provisioning driven by IFRS 9 macro scenarios update, additional management adjustment related to some idiosyncratic factors in order to include the expected COVID-19 impact on specific names or certain sectors in certain countries not factored in the macro adjustment. So as already explained in the first quarter, we front-loaded the expected full impact of COVID-19 for 2020 according to macro estimates that we had back in April. As of July, we have updated these macro scenarios, and I will share with you in a second, and the forecasts have been reviewed downwards in some countries, leading us to include some additional provisions, which are the numbers that you are seeing here. Again, still significant, but much lower than in the previous quarter. Excluding the COVID-19-related provisions, as you can see in the top left chart, the underlying impairments, they would have remained almost in line with the previous quarters. except for the second quarter of 2019, which we included some provision release one-offs. So it was a particularly positive quarter, that one, 2019 second quarter. But in general, it's in line. MPL and coverage ratios remain almost stable versus last quarter, 3.7% and 85% respectively, which again shows that we don't see a deterioration in the underlying risk parameters yet. So all in all, we see a significant improvement on the cost of risk in the quarter, decreasing significantly to 151 BIPs, quarter-only annualized, versus 257 BIPs in the first quarter of the year. Again, good evolution in our view, within our expectations, completely within our expectations so far. Moving to page number 12, I did talk to you about this macro and this additional aspect. macro-related provisioning that we did. Let me update you on the GDP growth estimates, which forms the basis of this quarter's additional provisioning. As in April, the updated economic forecasts, they continue to project an incomplete V. We call it an incomplete V-shaped recovery. However, in general, a deeper contraction in 2020, especially in some countries, so a heterogeneous impact across regions. That said, uncertainty remains high, so we continue to show, as you see in this page, some ranges. For 2020, again, downward adjustments in Spain, in Mexico, around three percentage points in the point estimates, a more moderate revision in the U.S. with minus 0.0 percentage point revision. And the forecasts in Turkey, they have been kept unchanged in the case of Turkey. Not depicted in the chart, but as announced by BVA research, we also do expect a deeper contraction in South America, especially in Peru. So the Peru chart is not here, but Peru is also seeing some negative downgrade in terms of the contraction in 2020. So we took these scenarios in general towards the mid-range and smoothed them out, the quarterly spikes as recommended by ECB, and we have redone our provisioning on these forecasts. So the impact and the results, this is on slide number 13, the breakdown of the impairments and cost of risk by country, differentiating the COVID-19 related impairments and the recurrent underlying impairments. As mentioned, out of the 1.7 billion euros of total impairments, 0.6 billion correspond to extraordinary provisioning due to COVID. Out of the 0.6 billion extraordinary provisioning, Mexico and Peru, they are affected more significantly than others, with a worse evolution versus several expectations, as mentioned in the previous slide. But I would again highlight the fact that we continue to be, as we have done in the first quarter, we continue to be prudent in these expectations and estimations. Additionally, in Spain, we have included some specific adjustments related to those sectors that are affected in this crisis, especially tourism and leisure. Similarly, in the U.S., we are taking some specific provisions in the retail book, consumer auto loans, given the evolution of the pandemic. And in the case of Turkey, we have incorporated the impact of the TL depreciation on the stock of the provision for foreign currency loans that we have in the country. And on the right-hand side of the page, you see the year-to-date cost of risk, year-to-date. Total impairments imply an annualized cost of risk of 204 BIPs, as it is negatively impacted, especially by the provision front-loading that we have been doing in the first quarter and now in the second quarter. As mentioned, the quarter-only annualized cost of risk has been 151 BIPs. It's very important to highlight that excluding the COVID-19 impairments, underlying cost of risk continues to be within the traditional ranges, 113 bps, the underlying cost of risk, which is, again, in alignment with the previous quarters. As we guided in the previous quarters, for 2020 full-year cost of risk, our best estimate, acknowledging the uncertainty still, because there's still uncertainty clearly out there, We still expect this range of 150 to 180 bps. So considering the fact that our year-to-date cost of risk is 204 bps, we are expecting in the second half of the year to be much below than what we have booked in the first half of the year. If you go to slide number 14, before I hand it over to Jaime, this is the capital page. Very strong reading, one of our best quarters ever. I would like to break down that 38 BIPs, CET1 capital accumulation of the quarter, if you can follow it in the waterfall at the top. First, our result generation that contributes 17 BIPs. Second, the decrease in RWAs in constant euros, adding 6 BIPs to the ratio. From the 6 BIPs, the 5 BIPs comes from CRR supporting factors, especially on SMEs and infrastructure. But excluding this, RWAs added only 1 BIP to the ratio. There was good growth in the portfolios in this quarter, as you would see in the country figures, so big growth still in credit, but growth was supported by state-guaranteed loan programs, and it helped, and there was some improvement also in market risk. Third, on the page in the waterfall, you see the positive market-related impacts, this quarter adding 14 BIPs, mainly due to the mark-to-market of our fixed-income portfolio. And last, in the others bucket, we include the release of three BIPs related to prudent valuation adjustment following the EBA decision. All in all, our CT1 stands at 1122 as of June, 263 BIPs above minimum requirements. 263 BIPs above minimum requirements. It is important to also highlight that we practically achieved our year-end guidance. That is being close to the upper part of our CET1 target range. Our target range, as you all know, is 225 to 275, and currently we stand at 263. On this page, it's once again worth mentioning the high quality of our capital ratio, its real capacity to also absorb losses. We are best in class in terms of the leverage ratio. standing at 6.1%, and also considering the reasons they executed and announced AT1 and Tier 2 transactions, we have fully endowed our AT1 and Tier 2 updated requirements after the P2R tiering. This allowed us to optimize our capital base, and our distance to MDA, distance to MDA, is now standing at a very comfortable position of 304 BIPs. Now, I turn it over to Hayme for the business areas. Hayme?

Thank you very much, Honor, and good morning, everybody. Let me begin with Spain. As Honor said, GDP expectations for 2020 have been revised downwards, with BBVA research expecting a GDP contraction of between minus 10 and minus 15, due mainly to a longer and more intense lockdown than initially expected. On the other hand, 2021 expectations have been revised upwards, with BBVA research now expecting GDP to grow between 3 and 9%. In terms of activity, loans have increased by 2.7% year-to-date and better than expected, driven by the strong growth across commercial segments and very small businesses, supported by government programs. That more than offsets the negative impact of the lockdown in retail portfolios. For 2020, we now expect total loans to increase slightly versus the slight decrease before. In the first half, BBA Spain delivered an outstanding pre-provision profit up by almost 20% versus last year, and that's despite the challenging environment. Thanks to core revenues growing by 3.6% year-on-year in the half, driven by strong growth in fees up almost 7.5%, thanks to higher fees in CIB and asset management. NII grew by 1.7%, mainly due to lower wholesale funding costs, and a higher contribution from the global markets and the ALCO portfolio. For 2020, we now expect NII to increase slightly in line with activity versus the slight decrease we had before. Higher NTI, up almost 80%, mainly driven by ALCO portfolio sales. And then we also have a remarkable decrease in operating expenses, down over 6%, and exceeding expectations. For 2020, for the whole year, we expect expenses to decrease by more than 5%, and we could even beat this half evolution. The strong performance of operating income has allowed us to absorb the increase in loan-loan provisions versus last year, explained, first of all, by the best effect that Honor commented, In the first half of last year, we included 185 million of provision releases from a mortgage portfolio sale. And also the significant front-loading of COVID-related provisions we've done in Q1, plus the 64 million of additional provisions we've done in Q2, mainly related to sectors most affected by the crisis, such as leisure and transportation. Having said so, cost of risk improved significantly from 154 basis points in Q1 to 100 basis points year-to-date and in line with expectations. For 2020, we now expect cost of risk to be significantly below first half levels. As you can see, a good set of numbers and clearly above expectations. Let's now turn to the U.S., It gives the expectations for the U.S. in 2020 and currently in a range of between minus 4% and minus 7%, with a recovery of between plus 2% and plus 5% in 2021. While the Sun Belt is expected to have a more negative growth rate this year, its dynamism will allow the region to catch up with the U.S. recovery in 2021. Loan growth is up almost 13% year-on-year, driven by the commercial segments, supported by the drawdown in credit lines in Q1, and the $3 billion granted under the Paycheck Protection Program in Q2. For 2020, we expect loan growth in the mid-single-digit range. As for the P&L... The contribution of the U.S. has clearly improved this quarter, and we've generated 126 million euros of net achievable profit versus the 100 million loss in Q1, thanks to our resilient pre-provision profit and lower impairments. Looking at the half numbers and comparing to last year, we have a 9% decline in NII, mainly related to the lower interest rates levels, However, we've seen NII growing by almost 6.5% versus the previous quarter due to a higher contribution from the securities portfolio and the loan origination fees received from the PPPs. I would also like to highlight the lower funding cost due to a better deposit mix with demand deposits representing now 84% of the total and a great price management with cost of deposits down by 39 basis points in the quarter. For 2020, we expect a reduction of cost of deposits to continue and NII to decrease at low single-digit, improving on first-half trends. We've also faced an increase in impermanence here today, mainly explained by the front-loading of COVID provisions in Q1. In fact, impermanence in Q2 are down 56% versus the first quarter, and cost of risk decrease quarter on quarter as guided from 260 basis points in Q1 to 180 year to date. For 2020, we expect now cost of risk to be significantly below the first half. These two headwinds are partially offset by a very good performance both in expenses and NTIs. Expenses are down by 2.5% versus last year. For 2020, we expect expenses to decrease in line with the first half. NTI increased by over 80% versus last year, supported by sales in the securities portfolio as well as better results in the global market division. All in all, a good performance of the U.S. franchise despite lower rates and the challenging environment. Let's now move to Mexico. In Mexico...