We Have A Clear Picture That Provisions Will Be More Than Enough

Javier Pano, CaixaBank’s financial director, welcomes us on the top floor of one of the Kio Towers in the capital, where previously the profile of a green fluorine bear was glimpsed as the logo of the more than extinct Caja Madrid, which later became Bankia.

It is the first time that it has granted an interview since the merger, which openly acknowledges that it precipitated the Covid and from which it does not rule out the emergence of new and greater synergies. Looking ahead to spring, CaixaBank will present a new strategic plan to the market, and in it, perhaps, it could propose new shareholder remuneration formulas, following the path of the sector in Europe.

The share buyback has already landed in Spain . BBVA, first, and Banco Santander, later, have included them as part of their remuneration. Will CaixaBank follow in your footsteps?

We have announced the dividend policy for 2021, which does not contemplate this formula. What we have announced is a 50% cash payout on earnings adjusted for the extraordinary impacts of the merger. Time will tell. It is something that depends on the decision of the board of directors and we are now working on a new strategic plan that we hope to present to the market in the spring.

I am convinced that at that time we will be able to give more details. Now the objective is to return to where we were practically pre-pandemic and, above all, after such an important operation [absorption of Bankia].

In any case, would you consider advancing the first payment to this year, taking advantage of the end of the ECB’s ban?

The normal thing is that it is as always, after the holding of the Shareholders’ Meeting, which is usually in the month of April [2022].

The estimated remuneration for CaixaBank for the year 2023 exceeds 7% profitability and would be a clear catalyst. What is not knowing how to interpret the market or where is the logic of what is happening?

Virtually all banks are trading below their book value. It is a situation that, above all, occurs in Europe because in the US banks are better valued. A situation of interest rates converges that makes there are doubts as to when the industry is really going to recover levels of profitability on capital.

There is a reality and it is the interest rate environment and a certain sluggishness in the granting of loans in Spain that calls into question these forecasts. Due to the pandemic, there has also been another doubt, greatly reduced, about credit quality and that has created a shadow for the market. There is uncertainty and this ultimately means applying a discount to the valuations. After the transaction with Bankia, we should tend in the medium-long term to approach our book value, which, discounting intangibles, is at 3.60 euros.

“We only share 5% of the retail customer with Bankia. We are optimistic about the number of synergies”

In a scenario of maximum crisis, some of the entities have already exceeded ROEs of 10% [CaixaBank closed June at 8.2%]. Is it the starting point of a new scenario, with a potential rise in the price of money one year from now, perhaps in the US?

The way I see it, the market is demanding a lot right now because what it thinks is the cost of capital [above 10%] is excessive considering the general context of interest rates. After the shares comes the additional tier 1 , which is the Cocos [perpetual debt], and last month we made an issue at 3.65%, a record in southern Europe , which was later tied by another Spanish entity [Banco Santander ]. Between 10% and that 3.65% there is a lot of difference. That said, our job is to achieve the profitability that the market demands.

Within the strategic plan in which you have begun to work, have you already introduced the variable of somewhat higher interest rates?

The prospect of a rate hike is not there and we cannot build a business plan based on that. In fact, the merger with Bankia, to a large extent, obeys this rationale. With the Covid came an even longer stage than the initially expected of low rates, but we could not wait all that time for the bank to be profitable. As a result of this operation, we have a set of synergies and savings in costs and future income that must lead us to a significant improvement in profitability.

“We aspire to at least 25% of the 70,000 million European funds”

Where can be the additional levers that improve the bank’s profitability until the rate hike occurs?

In costs, there are two vectors. It is evident that in a merger of two businesses that are similar, such as retail banking, there is an opportunity to reduce overlaps of a multitude of things. Based on that, we have a savings plan. We have reached a labor agreement for 6,500 people to leave the bank in the coming quarters, which will have a return in the coming years. At the expense level, there are savings [by avoiding duplication]. And there is also a reorganization of the offices at street level.

The estimated number is 1,500 offices to be restructured. We expect annual savings of 940 million euros, of which a large part will be from 2022. The market has no doubt that this will be achieved, it depends on ourselves and our track record supports us. On the income side is where the market is most skeptical. We have quantified them and we have put 290 million euros on the table, of which 75 million are semi-automatic [derived from the purchase of half of Bankia’s insurance business with Mapfre]. If you add the two parts, costs and income, they are more than 1,200 / 1,300 million.

They have already revised upwards once the amount of synergies, will they do it again?

Yes, there are more, but just like there is some additional impact. Although I am in a position to give some information: we have only 5% shared customers in retail , less than a million people, which is really very little, and it makes us quite optimistic about the number of synergies.

Future buybacks ?: “Time will tell. For the 2021 dividend, with a ‘payout’ of 50%, it is not contemplated”

You spoke before about a ‘shadow’ that affects banks in the market and that is the fear of a sharp rise in delinquencies as a result of the Covid, but it seems that it is not finally occurring. How will the photo of the moratoriums that remain until the end of the year change to know exactly what this crisis is leading to?

The moratoriums have evolved much better than initially expected. That is the summary. In Spain practically all of them have matured and there has been no material increase in delinquencies, neither in mortgages nor in consumption [as of June, there were moratoriums in force amounting to 6,789 million euros, of which 25% were due in the third quarter and the rest before December, according to the entity]. We have more and more the perception that the level of provisions that we built last year on a preventive basis is going to be more than sufficient.

Could these provisions soon be deconsolidated from the balance sheet and put on the income statement?

I think it is not a 2021 issue. We do have a clear picture that it will not be necessary more, but if there is more or not I still do not know.

So, could the non-performing loan target of less than 4% that you have proposed for this year be revised down? They already closed in June at 3.6% …

What we said in June is that we expected to close below 4% and time goes by and we feel better and better.

Do you think the credit paralysis in Spain is worrying?

It is not worrisome, but there are times when we forget what happened. The companies accumulated a lot of liquidity with ICO loans and we were also very active in giving loans. We are waiting for European funds, which may come a little later than we expected, but they are going to be a very powerful tailwind. These dynamics have to be normalized and the same happens with consumer loans. Little by little we are picking up cruising speed.

Financing and loans
The banking sector has spent months putting in figures what will indirectly mean the arrival of European funds that are estimated, in a first round, to be worth 70,000 million euros. The approximate calculation is that for every euro that a Brussels company receives, another two or three are financed, among other actors, by financial institutions.

“There are 70,000 million euros of aid and there is an estimate that approximately half will be channeled to the private sector. What we hope is that this part [of European public financing] will be a third of the total project, with which you would have leverage almost three times.

If you do the numbers, you get about 70,000 million euros that the private sector has to finance with credit or its own resources. We have, in round numbers, in assets, a market share of 25% and, of course, we aspire to it at least [some 17,500 million more in credit]. It will not be something at once, but it will generate a positive dynamic, “says Javier Pano.

After the merger with Bankia, it must be taken into account that one out of every four loans that are signed in Spain are managed in a CaixaBank branch, as well as 24% of the deposits or 28% of the total mortgages granted. With regard to its own financing cost, CaixaBank made headlines at the beginning of September for the issuance of a green CoCo (debt in perpetuity) worth 750 million euros with a coupon of 3.65%, the lowest data obtained by a financial institution in southern Europe.

How much will they accelerate sustainable financing in the coming months?

“We have a sustainable asset generation plan, both social and environmental, and we hope to be a recurring issuer.”

Would you say that sustainable financing has already become cheaper than traditional financing?

“Something else. Right now it is in a range of between 5 and 10 basis points depending on the moment, but I don’t know if this is going to be maintained. There is a lot of demand for this type of fixed income from fund managers.”

“Wait” to buy bonds
Inflation has returned to the scene (in Spain the interannual rate stands at 4%) due to the acceleration of the economies that is taking place after the Covid and that also accompanies the announcement of the end of asset purchases by central banks of the US and the European Union.

Worried about managing assets?

“The situation that we expect is normal, without out-of-control inflation. Now, it is desirable that this situation lead us to a slightly higher inflation that does not make it necessary for the ECB to continue applying so much stimulus and that it allows it for if only to stay. If the ECB withdraws these stimuli it could cause a positivization of the interest rate curve and, in a controlled environment, it is positive “, says Javier Pano during the interview.

On the other hand, the CaixaBank CFO acknowledges that he has not yet put that future rise in the price of money in the euro zone on the calendar. “It’s a tailwind for the sector (??) but it won’t be until 2022 or 2023,” he says. With the latest figures on the table, CaixaBank’s ALCO portfolio [made up mainly of government bonds] amounts to 60.3 billion euros -15.8 billion come from Bankia-, and is 2,000 million less compared to March of this year. Basically, the expirations that are having are not being covered because the entity “has decided to wait”.

“We had the perception, with the announcement of the tapering in the US and the rise in the inflation outlook, that the yields [yields] would be adjusted upwards. In five years the fixed income portfolio will tend to be somewhat larger because there is a reality: the loan to deposits ratio , in general, is falling [currently, by 94%].

Although we are now in very exceptional liquidity circumstances, it does seem that there is a certain structural trend of deposit growth and not both by individuals, but by companies and the public sector, which accumulate liquidity and deposit it in banks. The logical thing is that part of that gap [between the fall in loans and the increase in deposits] is covered by fixed income ” , concludes.