Unicaja Banco, S.A.

Good morning and welcome to Unicaja Banco second quarter 2020 results. Let me start confirming that we have published the quarterly financial report and this presentation this morning before market opens in the CNNV website. Pablo González, our chief financial officer, will present you the quarterly results and afterwards, as usually, we will answer your questions. Pablo, whenever you want.

Thank you, Jaime. Good morning to everyone. These are the second quarterly results that we published after the COVID-19 pandemic started. We have now left behind the lockdown, which is a very positive news. This quarter, we have booked additional provisions for the future potential impact from the COVID-19. However, We haven't seen any asset quality deterioration so far, as I will explain later. As you will see, since the pandemic started, we have been able to increase significantly our solvency and our coverage. We have further reduced our NPAs and still reporting positive net income. So, before entering into the details, I would like to highlight, as you will see later, that UNICAJA Bank of Financial Position has been reinforced year-to-date. Moving now to the presentation, as you can see in slide 2, we have three sections. The first one includes the summary of the quarter, the second one the results, and the third one details on asset quality, liquidity and solvency. If we move directly to slide 4, I will start with the regular summary. Regarding the business, performing loans grew 2.7% in the first six months of the year. However, if we exclude the regular second quarter seasonal consumer loans, the growth was 1.1%. While new loans to individuals fell 38% compared with last year, new loans to corporates were quite stable. Customer funds showed a positive trend, growing 4.1% quarter on quarter, supported by a 6.5% growth in site deposits and almost 3% growth in balance sheet funds. From a P&L point of view, second quarter results reflect a negative impact in NII and fees related to COVID-19 lockdown. with net interest income falling 2.4% quarter on quarter, while fees decreased by 14.4% in that same period. This quarter, we have booked the 47 million of gains from CASER, something that together with the strong trading gains mitigated, the provision effort done in the quarter. It is probably worth noting that the gains from CASER, in our case, are not explained by the renegotiation of our distribution agreement or the disposal of part of our stake. In our case, we didn't sold nor renewed the agreement. In our case, it was a bit different because the distribution agreement included a clause saying that there was a change in control in the company we had, if there was a change in control in the company, we had the right to finish the agreement. And the change in control happened, so we reached an agreement with the insurance company and in exchange of this agreement, there was a payment to resign for this, our right to finish the distribution agreement. Regarding expenses, total cost fell almost 6% quarter on quarter or 4.3% when compared with first half of 2019. It is also worth noting that we have booked this quarter an additional 78 million of COVID-19 related provisions. leaving the total provision in the first half of this year for COVID-19 at 103 million. Excluding such provision, the cost of RICs remained very stable and close to 2019 levels. On asset quality, liquidity and solvency, NPAs fell by 26.2% year-on-year, while coverage levels improved from 57% to 62% in the same period. Regarding liquidity, our position remains very comfortable with the loan-to-deposit ratio slightly below 70% and the liquidity coverage ratio at 346%. From a solvency point of view, our seed 1, fully loaded, continued to grow, reaching in June 14.4%, which is 32 basis points above the previous quarter and almost 130 basis points higher than one year ago. A significant capital generation that maintains our solvency position among the highest of the sector. I will move now to slide 6, where you can see the P&L details. Starting with the quarterly trends, Both NAI and fees reflected the negative impact from the lockdown this quarter. However, this quarter will be the bottom as we expect second half 2020 trends in core income to improve significantly. The rest of the revenues in the quarter were supported by a strong trading income and the 47 million of gains from CASR including in the other income. Such gains more than compensated the contribution to the resolution fund of $16 million accounted in that same line, leaving gross margin 8% above the previous quarter and 16% above the second quarter of 2019. In terms of costs, this quarter we have reported a very positive trend with total costs falling 5.6% quarter-on-quarter and 7.5% year-on-year. As we will explain later, such positive trend was focused in general expenses. The strong revenues reported in the quarter and the mentioned cost-cutting effort left the pre-provision profit at 134 million, 59% higher than in the second quarter of 2019 and almost 28% above the previous quarter, something that has enabled us to book 110 million of impairments while reporting 50 million of net income in the quarter. It is worth noting that the big bulk of impairments, 94 million were long-loss charges of which 78 million are COVID-19 provisions and the remaining 16 are regular long-loss provisions. Let me highlight now the main trends of the half-year results. Net interest income was 5.3% below the previous year, but we reiterate our expectation to finish 2020 at the same level as 2019, something that implies a significant improvement in the second half of this year. Despite the low level of activity, mainly in the second quarter, and helped by some one-off fees reported in the first quarter, fee income was flat in the first half of 2020 compared with the first half of 2019. Here, the idea would be, in our base scenario, to finish 2020 very close to 2019 final year figure. Dividend income and equity method has been also affected by the pandemic as you can see in the right side of the slide. Trading games and other income have been strong so far mitigating higher impairments. Gross margin grew 7% compared with the first half of 2019. Regarding costs, the trend is very positive, decreasing more than 4% year-on-year, leaving pre-provision profit at 239,024% above 2019. Finally, the previously mentioned provision F4 left income at 61 million for the first half of 2020. If we move to customer funds in slide seven, you can see that total customer funds grew 2.5% year-to-date and 4.1% quarter-on-quarter. It is worth noting that after a few months decreasing, off-balance sheet funds showed a quarterly improvement of almost 3%. Trends of unbalance sheet funds were also positive, supported by a 7.1% year-to-date increase in side deposits. In slide 8, we show the regular credit and loss info. Gross loans grew 2.4% in the first six months of 2020, with public sector growing 9.6%, non-performing loans decreasing by 2.3%, and private sector growing 2.2%. On the right of the slide, you have the details on performing loans. As you can see, they grew 2.7% year-to-date. However, let me remind you that this trend includes around 400 million of seasonal advances that we usually have every second quarter and that are included in the segment called consumer and others. In terms of segments, in June 2020, corporate performing loans grew 8.4% year-on-year, helped by the eco-loans, while mortgages decreased a bit less than 3% in that same period. In slide 9, we show the new loan production by segment. Overall new production has been directly impacted by the COVID-19 lockdown, mainly in individual loans. While corporate new loans were stable compared with the first half of 2019, individuals' new loans fell by 38%. Total new loan production in the first half of 2020 was 25% below the previous year. However, it fell only 2% compared with the second half of 2019. In slide 10, we start the P&L review with net interest income. As you can see in the top right, the quarterly decrease was explained by lower income from some products that are related to COVID-19 situation as delinquencies and set up fees that were not charged throughout the lockdown, negatively reflected in the second quarter of 2020 interest income. Such measures explain almost 5 million of lower interest income in the quarter, On top of it, the rest of interest income added other negative 1 million, mainly explained from the lower income from loans, which was partially compensated by higher contribution from our debt portfolio. On the other hand, interest expenses decreased a little bit, partially compensating the previously mentioned lower interest income in the quarter. As a result, the net interest interest income fell 3 million quarter on quarter and bottomed at 137 million, a level from which we expect a significant improvement in the second half of this year, supported by the savings in interest expenses from the maturity of high yield deposits and an improvement from the impacts in NII related to COVID-19 lockdown. In slide 11, you have an update on our debt portfolio, where you can see that our overall balances grew during the quarter following the increase in the liquidity position of the bank, explained by both the commercial gap and the higher ECB funding from TLTRO3. as usually just to highlight that the big bulk of the exposure remains sovereign debt classified in amortized cost portfolio. The yield of the portfolio was 123 basis points in the second quarter of 2020 compared with 127 basis points on the previous quarter and 125 in the second quarter of 2019. So quite stable. If we move to slide 12, you have the fee income trends. Total fees fell 14% in the quarter owing to the impact from the lockdown, but also partially explained by some one-offs included in the first quarter of 2020, as we explained last quarter. However, if we compare net fee for the first half of 2020 with the first half of 2019, the trend was stable. As you can see in the right hand side of the slide, for the second half of 2020, we expect fees to improve to a level somewhere between the first quarter and the second quarter of this year. Moving now to costs. As you can see in slide 13, operating expenses fell almost 7% compared with first half 2018 and more than 4% compared with the first half of 2019. As you probably know, cost cutting is part of Unicaja bank strategy. We have a plan to continue to reduce our cost base This quarter, improvement has to do with some measures driven by the COVID-19 situation that have enabled us to report lower general expenses in the quarter. In slide 14, we show impairment trends As we have explained, we book in the second quarter of 2020 other 78 million of provisions for COVID-19 potential future impacts, which added to the 25 million booked in the first quarter of this year, explain the 103 million of COVID-19 impairments that we show in the left-hand side of the slide. In the right of the slide, you can see that excluding this impairment, cost of risk represented only 17 basis points. However, when we include the COVID provisions, the cost of risk increases to 89 basis points, which is the high range of our guidance. If we move to asset quality in slide 16, we have the details on the evolution of our non-performing loans that continue to fail one more quarter. In the second quarter 2020, non-performing loans balances fell 1% quarter on quarter, leaving the NPL ratio at 4.5%. So, as you can see in the slide, NPL trends remain similar to the previous quarter, with a small improvement, something that is positive. Gross entries remained very similar as the previous quarter at 58 million something that together with the 62 million of recoveries mainly cash recoveries and 10 million of write-offs left total NPL balances decreasing 10 million quarter on quarter. It is worth noting that this drop took place in a quarter where four closes were historically low owing to the lockdown, something that makes the NPL quarterly trend even more positive. So, as you can see, the potential deterioration from COVID-19 was not reflected in Q2 2020 NPL trends that continue to improve. In slide 17, we have included information related to the different mitigating measures introduced as the moratoria and the guarantees of the government for corporate loans. Starting with corporate loans guarantees, what is called the ECO lines, as at the end of July, we have approved 10.5 thousand loans representing a limit of €750 million. This balance represents around 10% of total performing loans to corporates. However, this is not really comparable, because the 750 is the limit, while, for example, as at the end of June, the lines used were only 426 million, so only 57% of the limit. So bear in mind that the 750 million is the balance of the limit of loans formalized under the guarantee scheme. The government guarantees for that limit represent close to 600 million or 330 million if we only consider the amount used. which is far less below the 1.2 billion guarantees assigned to Unicaja Banco. In the case of the moratorias, as you all know, we have the legal and the sector moratorias. In the first one, we have approved 8,000 moratorias. and 600 million in mortgages and other 3,500 and 30 million in consumer loans moratoria. Regarding the sector moratoria, the amount reached 540 million in mortgages and 25 million in consumer loans. It is worth noting that 340 million of the mortgages and 15 million of the consumer loans have requested both moratorias. So after the three months in the so-called legal scheme, clients will benefit from other nine months in the sector scheme. In relative terms, this means that 800 million or 5.6% of our mortgage income mortgages and other 40 million or 1.3% of consumer loans are under moratoria schemes. In summary, total moratoria represented less than 5% of individuals performing loans, of which 95% are mortgages and only 5% unsecured loans. something explained among others owing to our mix of loans where the weight of mortgages is high while pure consumer loans is very small. In slide 18, we have updated our credit risk exposure and NPL coverage details. Overall NPL coverage continues to grow quarter after quarter. In the second quarter of 2020, NPL coverage was 61%, which compares with 52% one year ago and 54% at the end of last year. So, an extremely prudent coverage when considering that 87% of the non-performing loan balance are secured. As a reminder, 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 left of the slide, 71% of our loan exposures has mortgage collateral and less than 20% of our total loans are corporate and secure loans. In slide 19, you have an update on the foreclosed assets, of which balances have been more stable during the last two quarters owing to the lockdown. However, we can say that the situation has improved by the end of the second quarter. Coverage ratio remains among the highest of the sector and disposals, despite representing fewer balances, continue to be formalized at very good prices, well above our net book value. Actually, if you look the trend of released provision over book value on the top right hand of the slide, you can see that they reached 66.8% in June. So, despite the lower volumes, prices are even better than the previous ones. In slide 20, you can see how overall NPAs have decreased significantly during the last year, representing in net terms only 1.5% of total assets with a coverage at 62% well above the 57% at the end of last year, being one of the highest of the sector. Finally, I would only highlight that the lower NPAs balances higher provisions and the tangible book value increase continues to push down quarter after quarter our Texas ratio reaching a level close to 45% in June 2020. In slide 21, we have the regular information of our liquidity position that as you can see remains very comfortable. Our loan to deposit ratio has moved below 70% in June and the liquidity ratios with the LCR at 346% and the NSFR at 141% continue to be among the highest of the sector. And finally, we show in slide 22 the solvency position of the bank. Our regulatory seed won reached 15.8% in June and our total capital was at 17.3%, one of the highest of the sector and representing a 1.2 billion buffer over our SREP requirement. In fully diluted terms, this is not considering the transitional benefits from IFRS 9 and from Basel 3. Remember that we applied the long calendar for the DTA's deduction. The ratio improved 32 basis points in the quarter to 14.4%, of which around one-third is explained by the SME factor, and other third by the new rules for intangible, specifically software. The remaining slightly more than 10 basis points reflect the rest of the moving parts of the quarter, which are, among others, quarterly retained earnings, a small risk-weighted asset decrease. Bear in mind that the second quarter results always include a seasonal increase in risk-weighted assets from the seasonal advances that usually decrease in the following quarter. Also, let me remind you that our relative higher solvency is calculated in full under the standard approach, so this means that it's considering very conservative assumptions, as you can see in our credit risk density in the chart at the bottom left. Finally, let me finish highlighting that in the first half of 2020 and mainly since the pandemic started, we have been able to further reduce the MPS balances, increase significantly our coverage. We have improved by 40 basis point our solvency from the already relative higher ratios. We have also reinforced our liquidity So, in summary, the financial position of the bank is extremely strong and, under our view, leaves us in a very positive position to deal with the COVID-19 future expected recovery.

Thank you, Pablo. Let's move to the questions. We've got lots of them, so let's go straight forward. The first one, Pablo, let's start with the NII trends with the P&L, as usually. The first one is if we can update the dates of the high-yield deposits, the exact dates of the high-yield deposits maturity in the second part of 2020 and 2021.