Unicaja Banco, S.A.

Good morning and welcome to Unicaja Banco annual final year 2020 results. As always, let me start confirming that we have published the quarterly financial report and this presentation in the CNMV website this morning. Pablo González, our Chief Financial Officer, will explain the quarterly results and afterwards, as always, we will answer your questions. This quarter, we have split the presentation in four different sections. The first one includes an update and a quick overview of the merger with LiberBank. As you all know, it was announced in December. The second section includes the main highlights of the quarter. followed by a third session with the results in detail, and finally, an update of our solvency, liquidity, and the asset quality trends of the quarter. So, Pablo, whenever you want.

Thank you, Jaime. Good morning to everyone. Before reviewing the quarterly results, as Jaime said, let me review and update the merger process with LiberBank. In slide 4, you have the main transaction terms and the calendar. I won't go through all of them, but let me only highlight that the process is progressing as expected, and as you can see in the calendar in the bottom, in January, the independent expert was appointed by the registry. So we keep on advancing. In slide 5, you have the details of the adjustments that we have announced. As a reminder, the restructuring charges will enable us to crystallize 159 million cost synergies that together with the Unicaja Banco Estanalo and Pending Savings represents almost 200 million of total future savings, representing a bit more than half of LibreBank's total cost base and around 20% of the combined entity. Also, following the provisions booked in the quarter, the NPL coverage after the mentioned adjustments will reach 74%, which is two percentage points above the previous guidance. Total NPA coverage will also grow to 69%, also slightly above the level guided in the merger presentation. All in all, these charges will enable the bank to deploy partially the current excess of capital to improve recurrent profitability. Moving to slide 6. As it happened with the coverage levels, the quarterly increase of the solvency of both banks has also improved the solvency levels above the reference published in the merger presentation. The combined seed, one fully loaded, has reached 14.7% in December. However, the larger equity of the combined entity also increases the thresholds applied for the deductions, adding to the solvency other 40 basis points from the buffer's adjustments. In other words, There are capital synergies explained by the larger capital of the combined entity, which increases the thresholds applied to deductions and levels to seed one of the combined entity at 15.1% at the end of the year, well above the 14.7% of September that was considered in the merger presentation. So really good news with higher than initially considered solvency. Now, moving to slide 7, we remind the synergies calendar. We expect a fast crystallization of synergies explained by some specific circumstances, as we explained at the top right. Almost half of the savings are already identified, mainly from Unicaja Bank standalone measures, LiberBank EPCs, and the lower amortization of intangibles that will follow the impairments. On top of these measures, the experience in previous integration, together with application of the best practices of each bank, will help to meet the targets on time. And finally, in slide 8, we show the mentioned adjustments will significantly increase the returns that consensus is expecting for banks. both banks in 2023, from levels of around 3% to around 6%. It is worth noting that such improvement is coming mainly from cost-cutting measures with low execution risk. It is also important to realize that we are not considering any potential revenue synergies despite the opportunities arising from the merger and the limited commercial overlap. In addition, the relative high coverage of MPAs and the conservative loan mix should also help to improve the future cost of risk. Finally, these profitability levels are considering seeing one level well above the one of our peers and it is not adjusted for that. All in all, the deal will enable to allocate the excess of solvency to increase consensus earnings per share by around 50% to a profitability that is close to 6%. All these while are currently trading the banks at around 0.2x tangible book value and 4x 2023 consensus earnings. If we move now to the quarterly results, I will start the second section in page 10 with the main highlights of the quarter. Regarding the business, customer funds grew 6.5% year-on-year and 2.6% quarter-on-quarter. With off-balance sheets, funds also growing 2.6% in the quarter. Total performing loans grew 0.8% in the quarter, leaving almost flat for the year. New loan production improved significantly in the fourth quarter, with new loans to individuals up 24% in the quarter. From the P&L point of view, as we will see later, trends are quite positive for second quarter in a row. On one hand, NII grew 1.1% quarter on quarter, owing, among others, to the lower cost of deposits. Fee income also showed a significant improvement, growing 10.7% quarter on quarter. Such a positive trend left the core income almost 4% above the previous quarter. Regarding expenses, total costs fell an impressive 5.7% compared with 2019, with savings amounting to 35 million in the year. In terms of impairments, we have anticipated other 34 million of COVID provisions in the quarter, totaling 200 million in the full year. All in all, net income fell 55% in 2020 compared with 2019. However, excluding the mentioned COVID provisions, net income was 218, almost 27% above the previous year. On asset quality, liquidity, and solvency, I would highlight that both NPLs and foreclosed assets fell in the quarter. NPAs fell by 8% year-on-year and almost 6% quarter-on-quarter. with MPLs decreasing 13% and foreclosed assets almost 3%. It is also worth noting that the MPA's coverage levels continue to grow one more quarter above 65%, which is more than 7 percentage points above the previous year's. the previous year. From a liquidity point of view, very little to add. LTD was 65% and our LCR 310 by year end. Finally, our solvency continued to improve. We see one fully loaded growing other 33 basis points to 15%, mainly owing to the lower risk weighted assets. Regulatory total capital also improved to 18.2%, implying a 1.3 billion buffer over our SREP. So, as you can see, in 2020 trends are quite positive. Lending was stable. Core income finished the year with significant improvement compared with the first half of 2020. Total cost fell an impressive 6%. Impairments include 200 million for COVID provision. That explains the best-in-class coverage level. On top of this, NPS balances continue to decrease. through the year and in the quarter, and finally our solvency position has been reinforced, enabling us to merge with Libermans in a deal that will crystallize significant synergies that will boost our profitability. I will move now to slide 12, where you have the P&L details. Starting with the quarterly trends, as I already mentioned, both NII and fees improved in the quarter, with fees reaching an all-time record of $63 million, that is almost 11% above the previous quarter. Regarding the rest of revenues, I will highlight the relatively strong trading generated to partially compensate the additional COVID impairments. Finally, other operating income and expenses include the DGF charge that explains the seasonality in each fourth quarter. All this led to a gross margin of 195 million in the quarter. Total costs were 143 million, well below the 152 of the fourth quarter of 2019, leaving pre-provision profit at 52 million, of which 34 were used to book additional provisions for COVID-19. As a result, the net income was close to break-even. From an annual point of view, I would highlight that despite the COVID-19 core income was pretty stable, even growing a little bit. Gross margin fell 5%, mainly owing to the lower other operating income as a result of the lower contribution from our real estate servicer that fell from 55 million in 2019 to 50 million in 2020, but still positive. Bear in mind that it was extremely high in 2019 following some portfolio disposals. Total costs showed a very positive trend and finished 2020 falling 5.7%, slightly above our mid-single-digit guidance. Finally, as you can see, in 2020, we decided to book 200 million of COVID-related provision that left pre-tax profit at 99 million and net income at 78 million. However, excluding these extraordinary impairments, the net income grew from 172 million in 2019 to 218 million in 2020. If we move now to slide 13, you can see that total customer funds grew 6.5% year on year. This trend is explained by a strong growth in deposits that grew almost 9% year on year, but also And for third consecutive quarter, we have seen an improvement in assets under management and of balance sheet funds that recovered throughout the year and finally finished at the same level as in 2019. In slide 14, you have the credit and loans trends, with gross loans fell 0.8% year-on-year, with NPL's balances decreasing almost 13%. By segments, loans to individuals fell close to 5%, while corporate loans grew 4.4%. As usually, on the right-hand side, we include performing loans evolution that, as you can see, remain stable in the year following an almost 1% quarter-on-quarter increase in the fourth quarter of 2020. By segments, corporate performing loans grew 5% year-on-year, while consumer loans and mortgages decreased both around 4%. In slide 15, we show the new loan production by segments. Overall new production improved a lot in the quarter. In individuals' new loans, the improvement was around 24% in the quarter. However, total new loan production still finished the year below 2019, with total private sector new loans falling 21% in 2020 compared with the previous year. Now, in slide 16, we start with the P&L review with net interest income. As you can see in the top left, net interest income improved significantly in the second half of the year. In fourth quarter 2020, the improvement was mainly explained by lower cost of deposits because, as you probably know, we still have some redemptions of costly customer deposits. In the bottom of the slide, you can see that back book customer spread grew by 4 basis points to 156 basis points, following the mentioned lower cost of deposits. In slide 17, you have the regular details of our debt portfolio, where you can see that overall balances reached 22.3 billion, as a consequence of the liquidity position of the bank. However, as you can see in the right-hand side of the slide, most of the exposure remains sovereign debt classified in the amortized cost portfolio. If we move to slide 18, you have the fee income trends that under my view are one of the most positive news of the quarter. Total fees grew almost 11% in the quarter owing to the improvements in our transactional business. Year on year, such fees reflected the impacts mainly in the first half of the year from the pandemic. However, this was compensated among others by higher non-banking fees that grew almost 5% in the year. Net-net total fees grew 1% year-on-year, something that under my view is quite positive. If we consider all that has happened this year, and more important, it shows that the underlying trend going forward in fees will continue to improve. If we move now to slide 19, you have the total expenses evolution that under my view is one of the other positive news of the quarter and the overall year. Total costs fell almost 6% in 2020 and 7.6% since 2018. Savings were possible following the provisioning efforts made in the past when we announced our standalone cost cutting plan. We also did a review of the plan, including measures taken to accelerate the savings. Part of the savings are explained by the evolution of branches and employees that, as you can see on the right-hand side of the slide, have been decreasing during the last years at a run rate above 7% for branches and close to 5% for employees. In slide 20, You can see the details of the impairments that we have booked during last year. As I explained before, we booked in Q4 2020 another 34 million of provisions for COVID-19 potential future impacts, totalling 200 million in the full year. In the right of the slide, you can see that excluding these impairments, the recurrent cost of risk represented only 14 basis points, increasing to 85 basis points when including all COVID provisions, which is under our upper cost of risk range guidance. for this year. However, following the provisioning effort made in 2020, we expect to book much lower provisions in 2021 and onwards. We can now move to slide 22, where we start the regular asset quality review. In this same slide, we have the details on the evolution of our NPLs. As you can see, NPL balances continue to fall one more quarter, NPL ratio fell to 4.2%, and balances continue its downward trend, decreasing more than 8% quarter on quarter. As we show in the table in the bottom of the slide, quarterly gross entries remain low, something that together with strong recoveries and stable write-offs explain the 109 million or 8% quarterly decrease. In slide 23, we have updated the eco loans and moratoria balances. In the left of the slide, you can see that we have granted almost 900 million loans and credit lines guaranteed by the state. However, such amount is the limit, with the balance drawn at the moment representing only 578 million at the end of December, which represents 7.5% of corporate loans and only 2% of total performing loans. In the right-hand side of the slide, we show the moratoria details. As you can see, 99% of the outstanding moratorias are mortgages, representing 567 million after falling by one-third and representing only 2% of the total performing loans. In slide 24, we have updated our regular credit risk exposures and NPL coverage details. Overall NPL coverage continues to grow one more quarter, At the end of 2020, NPL coverage reached 67.4%, which is 13.5 percentage points above the previous year, an extremely high coverage when considering our loan mix and that 85% of the non-performing loans balances are secured by secured non-performing loans. In slide 25, you have the regular details on the foreclosed assets. Coverage remained one of the highest of the sector at 63%, while gross balances fell 2% quarter-on-quarter, or 26 million, leaving total gross balances at 1.1 billion, although in net terms they only represent 400 million, or 0.6% of total assets. Finally, let me highlight, as you can see in the right-hand side of the slide, that we continue to sell assets at very good prices, at around 33% above book value on average last year. In slide 26, you can see how overall MPAs have decreased to a gross balance of 2.3 billion and the net balance of 790 million, representing only 1.2% of total assets with a coverage of above 65%, which is one of the highest of the sectors. In slide 27, we have the details of our liquidity position that, as you can imagine, continued to be extremely comfortable one more quarter. Following the increase that we have in deposits, our LTD ratio fell further to 65%, with the LCR around 310 and the NSFR at 142%, which are among the highest of the sector. Finally, we update our solvency in slide 28. Our regulatory seed one reached 16.6% in December, 36 basis points above the previous quarter, and our total capital ratio was 18.2%, representing 1.3 billion buffer over our spread requirement. In fully loaded terms, the ratio improved 33 basis points in the quarter, reaching 15% with the big bulk of the improvement coming from lower risk-weighted assets, among others, explained by the continued decrease in NPAs. Finally, as I usually do, let me also remind you that our solvency ratios are calculated in full under the standard approach, something that we expect to change in the short term, but by the moment is still calculated with quite conservative credit risk densities. So that was all from my side. But before we start with the Q&A, let me finish reiterating that in 2020, despite the pandemic and its negative economic impacts, we have kept pretty stable our core income. We have reduced by almost 6% the total expenses, something that has helped us to further and significantly reinforce our coverage and our solvency. And at the end of the year, we have announced a very positive agreement with LiberBank, an agreement that was possible owing to the strong financial position of both banks, and an agreement that will improve significantly the future profitability of the bank and its shareholders' returns, all these with limited execution risk.

Thank you, Pablo. We move now to the questions that we have received. Let's start with the P&L. Pablo, we've got lots of questions regarding NII trends and net interest income guidance. If we can provide some color, please.