Unicaja Banco, S.A.

Good morning to everyone. We hope you all are okay and that you keep safe. Welcome to Unicaja Banco first quarter 2020 results webcast. As I usually do, let me start confirming that we have published the quarterly financial report and this presentation this morning before market opens in the CNMV website. This quarter, our chief financial officer, Pablo González, will explain the main trends of the quarter. And following the presentation, we will answer your questions. Pablo, whenever you want, please.

Thank you, Jaime. Good morning to everyone. As Jaime said, we hope you are all right. These are the first quarterly results that we published after the COVID crisis started. The lockdown that has followed the pandemic will change behaviors and we'll need to continue to adapt ourselves and the business to the changing environment. It is too soon to quantify how deep the situation will go. And in the first quarter 2020 results, the impact was limited. However, we have decided to book some COVID provision this quarter, as I will explain later. Also, before I start with the quarterly details, I want to thank you all for listening to us, our shareholders, investors and analysts, and especially our employees that have been working very hard since the lockdown started to continue offering financial services and help our clients under this new and difficult environment. That said, this quarter the presentation is split into three sections. The first one includes the main highlights of the quarter, followed by the results and the final section with the details on our asset quality, liquidity and solvency, where this quarter we have also included some additional information regarding the COVID. If we move now to slide four, you will find the regular summary. Starting with the business, performing loans grew 1.7% in the first three months of the year, supported by public sector growth. In the private sector, we also saw the book growing, although at a slower pace. New lawn production fell 10% compared with last year, affected by the COVID lockdown. But the trend until the lockdown started showed a 20% increase. Regarding customer funds, the one on balance sheet customer funds grew 0.6% while of balance sheet funds fell 7%. and this was mainly due to the lower valuation more than to the redemptions. If we move to results, net interest income fell 1% quarter-on-quarter, while fees grew more than 3% in the same period. Total cost fell 1% year-on-year. Regarding impairments, we have anticipated 25 million of provision related to potential interest asset quality deterioration from the COVID, excluding such provision impairments remain low, similar to previous years. This led to a reported net income of 46 million or 63 million when excluded the COVID provision. On asset quality, liquidity and solvency, NPAs fell by 29% year-on-year, while coverage levels improved from 57% to 58% in that same period. Regarding liquidity, our provision remains very comfortable with the loan-to-deposit ratio at 72% and the liquidity coverage ratio at 335%. From a solvency point of view, I would highlight that our seed one fully loaded remain among the highest of the sector after growing 10 basis points in the quarter to 14.1%. I will continue with the results in slide six with the results and business section where you can see the P&L details. NII fell 3% year-on-year and 1% quarter-on-quarter. As we will see later, the small decrease on the quarter was explained by the calendar effect. Net fees showed a positive trend, improving 10% compared with 2019 and 3% above the previous quarter. Dividends, as you can imagine, were below the ones of last year because part of our equity portfolio reflected more conservative dividend policies. Equity method was slightly above the previous quarter, although significantly higher than in the first quarter 2019, owing to the higher contribution from a specific affiliate that benefited from the disposal of some assets. Trading income was below the one of the previous quarter, but 18% above last year, following the realization of some gains from our debt portfolio. Other operating income and expenses was $5 million falling from $16 million in 2019 owing to lower real estate results among others. Total cost fell 1% year-on-year and a bit more than 2% quarter-on-quarter, in line with what we have guided in the past. Regarding provisions, we have anticipated 25 million of provision for the COVID crisis. Excluding such provisions, our net income was flat year-on-year at 63 million. However, the reported figure decreases to 46 million when considering such provisions. If we move to customer funds in slide 7, you can see that total customer funds fell 1.8% year-on-year and 1.6% quarter-on-quarter following a 7% drop in off-balance sheet funds. Most of this drop was explained by the lower valuation of our asset under management balances as you can see in the bottom right side of the slide. In slide eight, we show the credit and loans trends. Gross loans grew 1.5% in the first three months of 2020, with public sector growing 14%, NPLs decreasing by 1%, and private sector growing slightly below 1%. On the right of the slide, you have the details on performing loans. As you can see, they grew 1.7% year-on-year and a bit more than 1% quarter-on-quarter helped by public sector loans. On the other hand, private sector lending decreased 0.8% year-on-year owing to the drop in mortgages. It is worth noting that in the bucket that we call consumer and others, not all the exposure are consumer loans. Out of the 2.6 billion, there is 1 billion of mortgages that from an accounting point of view, we consider unsecured loans because it's a portfolio with relatively higher LTVs. In this segment, we also include 250 millions of loans to employees and 450 millions of advances. Being pure consumer loans, only the remaining 900 million. This is relevant because it explains part of our more conservative loan mix. In slide 9, we show the regular information of the new lawn production by segments, but this time we also include details of the trends we had until the lockdown. Overall new production was growing 20% until the lockdown started, but finished decreasing by 10% at the end of the quarter. While new loans to individuals fell 14%, corporate new loan production was 14% above the previous year. In slide number 10, we start the P&L review with the NII details. As you can see in the top right... The quarterly decrease was explained almost in full by the lower days of the quarter, something that was also reflected in the net interest margin performance, which grew a little bit from 100 basis points to 101 basis points. On the other hand, as you can see in the bottom of the slide, the customer spread of the front book continues to be above the back book one more quarter. In slide 11, you have an update on our debt portfolio, where you can see that overall balances have grown slightly in the quarter following a small increase in the fair value OCI portfolio, which is the one that we manage more actively. It is worth noting that during the quarter, we have also generated 28 million of trading gains. as usually, just to highlight that the big bulk of the exposure remains sovereign debt classified in amortized cost portfolio, and that the yield was also very stable at 127 basis points this quarter compared with 128 basis points last quarter. If we move to slide 12, you have the fee income trends that were very positive. Net fees grew a bit more than 10% year on year and 3% quarter on quarter, supported by a positive trend in non-banking fees, partially explained by a small one-off. However, excluding such recurrent fees, it was still a positive growing trend when compared with 2019. Now, moving to costs, as you can see in slide 13, operating expenses fell almost 2.5% in the quarter and 1% year-on-year. When we compare it with 2018, the drop is above 4%. This trend is consequence of all the measures that we have taken and announced in the past. As we have anticipated too, we have already booked the required provisions for further crystallized cost-cutting measures until 2022. In slide 14, we show impermanence trends. As we have explained, we decided to book in first quarter 2020, 25 million of provisions for a potential deterioration of the asset quality as a result of the COVID crisis. Excluding such impairments, total provisions reached 19 million, almost 20% below the 23 million of 2019, and representing an underlying cost of risk of 13 basis points. However, this figure increased to 48 basis points when included the 25 million of COVID provisions. If we move to asset quality in slide 16, we have details on the evolution of our NPLs that continue to fail during the first quarter 2020, leaving the NPL ratio at 4.6% at the end of the quarter. It is also worth noting that as we show in the bottom, the NPL trends so far continue to be positive. Gross entries remain low and below cash recoveries, something that explained the quarterly drop despite not having portfolio disposals this quarter. So, as you can see, the potential deterioration from the COVID was not reflected in the first quarter 2020 trends. In slide 17, we have updated our credit risk exposure and NPL coverage details. Overall NPL coverage continued to grow to 56% in first quarter 2020 from 52% one year ago and 54% at the end of last year. a very prudent level when considering that 87% of the NPL balances are secured and 74% secured by Finnish buildings. It is also very important to take into account that the big bulk of our loans are mortgages. As you can see in the bottom, Of the slide, 71% of our total exposure have mortgage collateral and less than 20% of our total loans are corporate and secure loans with very low sector concentration, as we will see in the next slide. In this slide, in slide 18, we have included some additional details on our loan book that we understand that should be considered when looking at the risk profile of the bank. As you can see in the left-hand side of the slide, 62% or 18 billion of our lending exposure are loans to individuals of which the big bulk, 17 billion, or 95%, are mortgages. Those analysts and investors that follow us in more details know that a significant part of our loans classified in what we call consumer and others are mortgages that, owing to our prudent accounting policies, we treat them as unsecured loans. Also, if we look at the other main portfolio that include corporates, out of the $7.7 billion exposure, $2.4 billion are also mortgages, meaning that only $5.3 billion are unsecured loans to corporates. of which we have included the breakdown in the right-hand side of the slide. In other words, only 18% of our loans are unsecured loans to corporates. And more important, there is not concentration in this exposure. As you can see in the right, the highest concentration Exposure is to agriculture with less than 600 million representing 2% of our lands. The remaining sectors have unsecure exposure below 500 million and decreasing very sharply while you go down through the table. Some of the specific sectors that are under focus such as the hospitality sector where we have less than 150 million of unsecured exposure or others like oil and gas that do not appear in this table because we don't have any exposure at all. The objective of this slide is to share with you that Unicaja loan book and its risk exposure has a very low risk profile as a consequence of years and years of a prudent and conservative credit risk approach. On top of this, we have other metrics that are better known as our relative higher NPA coverage, the highest seed one ratio among Spanish-listed banks, one of the lowest, it is not the lowest, loan-to-deposit ratio of Europe at 72%, and probably the highest LCR at 335%. All these metrics are explained by the relative conservative and prudent management that we have been following in the past. The impacts ahead from the COVID are probably difficult to assess and to quantify in details, but under our view, UNICAJA is in a very good position to absorb the potential impact that is coming. In the next slide, slide 19, we have included some information related to the COVID crisis. It is too soon to provide specific information and expected impacts. However, we believe that this is positive to give you some color regarding some of the relevant measures taken. As you all know, the different governments, supervisors, and regulators, among others, have put in place several measures trying to mitigate or at least reduce the potential negative impact that the pandemic might have in the real economy. Among them, there are two specific measures that for the Spanish banks and their clients are very important. The moratorias for individuals and the guarantees for corporates, SMEs and self-employed. In this slide, we share with you some information regarding these two measures. Starting with the guarantees, so-called eco lines, we have already received requests for the first two available tranches from 8,000 clients representing around 600 million. This is in line with our market share for this type of loans. Regarding the public moratoria, we have received around 9,000 requests for a little bit more than $500 million, of which 97% of balances are mortgages moratoria and only the remaining 3% are moratoria for consumer loans. we understand that both measures will help and will contribute to partially mitigate the potential negative impact from an asset quality point of view. In this sense, we believe that UNICAJA is in a relatively good position owing its financial strength. In slide 20, you have an update on the foreclosed assets. This type of assets were more stable this quarter owing to the lack of portfolio disposals. However, on the right, you can see the provisions released and outflows details that continue to be positive as a result of our coverage levels. In the slide 21, you can see how overall NPAs have decreased during last years and quarters. Total gross NPAs fell 29% last year to 2.5 billion. In net terms, this represents less than 1.8% of total assets with a coverage of 59%, one of the highest of the sector. Finally, I would only highlight that our Texas ratio continues to decrease quarter after quarter, reaching level close to 46% in Q1 2020. In slide 22, we have a summary of our liquidity position of the bank that, as you can see, remain very comfortable. Our LTD ratio was 72% and the liquidity ratios continue to be among the highest of the sector. In terms of wholesale maturities, we have some small costly maturities this year. And finally, we show in slide 24 the solvency position of the bank in march as you can see in the top left the positive impact from retained earnings that is considering around 50 of first quarter 2020 net income and the 2019 dividend enabled us to compensate the negative impacts from the treasury stock the increase in risk-weighted assets and devaluation adjustments while still generate close to 10 basis points in the quarter. The regulatory capital ratios remain well above the SREP requirements with 1.1 billion buffer over total capital requirement. And I usually do. All these relative higher ratios are calculated in full under very conservative assumptions, as you can see in our credit risk density in the chart at the bottom left.

Thank you, Pablo. We will now move to answer the questions that we have received. Starting, there is one specific on CASER. What is the pending impact coming from the deal announced with Helvetia and CASER? And what is the use and the timing of the pending gains, Pablo?