Banco Popular's (BPESF) CEO Francisco Gomez on Q1 2016 Results - Earnings Call Transcript

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Banco Popular Espanol SA (OTCPK:BPESF) Q1 2016 Earnings Conference Call April 29, 2016 6:30 AM ET

Executives

Francisco Gomez - Chief Executive Officer

Analysts

Francisco Gomez

Good morning to you all and thank you very for joining us this morning at our event. In my presentation, I’ll be making a brief reference to the key elements of this quarter and then I’ll go on to analyze our results in detail. Following that I will talk about the acquisition of the Barclays's credit card business on the Iberian Peninsula through Bancopopular-e. And to finish off, I will conclude with some brief remarks and outlook.

With regard to the key elements of the results that we present in Q this morning, let me highlight the following. First of all that Popular continues to demonstrate high capacity to generate recurring income supported by its banking business that can be seen by the fact that the Bank’s customers and net interest income are still leading the way forward in the industry.

Rates for new font book are higher than our back book. The difference is 59 basis points. Our administration costs have been reduced by 2.5% year-on-year. At the same time, allows us to generate solid pre-provision profit. Previsions fell by 19.3% at the same period. And our net profit totals EUR94 million in the first three months of this financial year that is 2.6% up on the same period last year.

Secondly, let me highlight to that we are still gaining market share and strengthening our position as a leading Bank in the small and medium size enterprise sector. Profitable lending, our total pick up of profitable lending is stable whereas our lending to corporate is still growing. Our market share both for lending and for deposits is improving. And new lending has shown a growing trend over this quarter and still very much concentrated in the business segment of small and medium size enterprises and some point professional.

Our third point there is a key highlight that I would like to underline is the fall in NPAs. On one hand, we have the good performance of real estate sales EUR510 million in the first three months of this year.

Secondly, the NPL ratio is still falling once again this quarter it is now at 12.68% that 64 basis points below the figure recorded in the first period of 2015.

To finish off talking to our about the highlights of this quarter, let me underscore the good position of Banco both as regards liquidity and capital compared to the same period of the last financial year 2015. Popular has brought its loan to deposit ratio down by 531 basis point, is now 107%.

Common Equity Tier 1 phased-in capital ratio is stand now at 12.81% and the fully loaded capital ratio 11.10% that’s 56 basis points more than in the first quarter 2015.

Now that I’ve highlighted to you the key points that have underpinned our activity in this first quarter of the year. I’d like to analyze the results of the Bank in more detail. To start off, let me highlight that the financial business in Spain is determined now by a certain number of features, there is a greater supply of lending. The retail funding cost is now at all time low level.

Whole sale funding costs in the market are very low. NPLs are falling. There is a high competition in prices and strong pressure on margins.

Even though we have to take into account these factors, generally speaking for our Bank, this has been a very satisfactory quarter. Undoubtedly we have major challenges ahead of us because 2016 is a financial year full of uncertainties. Nevertheless, Popular is well positioned to deal with it.

Let me start off analyzing our P&L account for you. First of all, I’d like to underscore our profit figure. Popular made a profit of EUR94 million in the first quarter 2016, that’s 2.6% up than in the same period last year.

Net interest income down very slightly compared to Q1 2015, totaling EUR551 million. Now that very slight change is due to the impact of the withdrawal of mortgage flows which amounted to EUR18.8 million in the first quarter. If we strip out that impact, our net interest income increases by 1.4%.

Our pre-provisional profit is still demonstrates just how strong up is this model is. We’ve recorded EUR470 million in pre-provision profit this quarter. If we strip out the trading gains, this margin is 5.8% in year-on-year terms without taking into account the impact of those mortgage flows. I think that is proof of our dynamic business activity and potential and the high capacity that Popular has to generate recurring income. With provisions, let me point out that they fell by 90.3% compared to the first quarter 2015.

Our recurring banking business continues to be the prime drive underpinning net interest income totaling EUR551million. If we strip out the impact of the mortgage flows, the total is EUR570 million, one of the highest figures in the sector when you measure it against average total assets.

Once again for another quarter, I have to point out that the cost of term deposits has falling, it’s now 0.67%. This improvement is due to the cost of new deposits which stands at 0.40%. This fall off has been more intense in March. And now this month of March, we have renewed term deposits at 0.37%. That shows just what excellent work that is being done at in our branch network. Furthermore, this price is comprised by favorably with the cost of the maturities of the term deposits that we’re expecting over the next few months as you can see in the graph on the right hand side on the screen.

Another one of our management drivers underpinning income this year will be wholesale funding as the deposit spread between the cost of issues and maturities is still holding up. Furthermore, there is upside still to be obtained out of this cost during the rest of this financial year.

This year Popular has already made one issue of covered bonds that was in February early on this year for total of EUR1.5 billion for six year term. The demand for the issue was more than 2.8 billion. This new issuance confirms the banking that the Bank has from capital markets with a very positive response to the issuance both the level of international investors and 77% of the total demand covered by international investors and national domestic investors 23%.

Our customer spread has also performed very positively compared to the previous quarter stripping out the impact by the withdrawal of the mortgages floors. Now that improvement is based on a very active price management as you can see in the higher rates for our front book 59 basis points above the rates on the back book.

Thanks to this competitive effort and strategic focus on self-employed professionals and small and medium enterprises, we are still leading the way forward in the industry with regard to a net interest income, customer spread and profitable lending. This better provision is also being appealed once we have adjusted the contribution to the net interest income of our ALCO portfolios. That also shows the greater relative weight of the retail business in our P&L account. And looking at these figures, we can certainly affirm that our focus is to continue to improve here.

Furthermore and despite then, the tremendous existing competition, Popular is still able to maintain high profitability of its leading to corporate and SME’s segments which we are intensifying our activity as we move forward.

As you know, part of our activity has been in JVs. These businesses have performed very positively during the quarter with relevant contribution made to the profit of the group. That is why for the purpose of the comparing the performance of fees for services with the rest of the industry, it’s necessary to adding the results from the JVs to actually receive by the Bank. The income the revenues from our active stakes from commission fees have increased by 2.1%.

Bancopopular-e and Allianz Popular should receive a special mention in this presentation because they have presented very high results, thanks to the higher capacity to generate incremental fees.

In the case of Bancopopular-e, the core business is called the credit card business. And the net interest income achieved by Bancopopular-e recorded that for EUR79 million with a return of tangible equity of 34.4%.

Allianz Popular which is in the asset management pensions insurance business, show an increase of 11% in the volume of mutual funds managed compared to the previous year, 15% to insurance and 30% private banking assets. So the recurring income generation is being applied despite the complex environment proof of that can be seen in our total revenues excluding trading without taking into account the impact of mortgage flows which were EUR751 million in the first quarter of 2016.

I want to also point out the fact 33% of our total revenues is made of the net interest income and commission fees that is to save our recurring banking business compared to 76% last year. This is a huge improvement in a very competitive environment.

Once again we do have to point out the efficient management of our cost one of the commitments has been made by the Banco which is still producing good results. Total expenses have fallen 2.5% compared to the first three months of 2015. General expenses fell 4% during the same period this year.

And what is more, we have done this consistently. Overtime, we have very gradually being adjusting and downsizing our branch network and the number of employees to adapt to the changes of the market and changes of the financial industry. Since our integration with Pastor in 2011, the number of branches has fallen by 23.5% and the number of employees by 17%.

Let me address once again, this has been a very natural reduction is taking place, we’ve been opening branches in those sites those venues where we think our clear business opportunities. We closed branches in those parts of the country where they are not necessary. That for in our case, our optimization of our branch network has been carried out with no dramatic adjustments and we will continue to that as and when we need to and depending on technological changes, IT and market conditions.

As with pre-provision profit, excluding trading gains and excluding the impact of mortgage flows, this is gone up by 5.8% compared to the first quarter 2015. And the cost income ratio if we don’t take into account the trading gains and extraordinary one-offs, the cost income ratio stands at 51.7%, 74 basis points better than a year ago.

This is certainly a good indicator of our management. We have to underline the Bank’s capacity to generate business and with high cost restrained. Furthermore, the trend of recent months for provision has also continued. We’ve been reducing provisions considerably specific 19.3% a year ago. Provisions made in the first quarter totaled EUR292 compared to EUR362 million in the first three months of 2015.

Looking at the performance of the key items in our P&L account, we can see that the net profit figure of Popular in the first quarter of 2016 totaled EUR94 million, up 2.6% in year-on-year terms.

Now I’d like to talk through the key areas of our business activity in the Bank during this first quarter. First of all, let me highlight the stability of profitable lending in the Bank. At the same time as our corporate lending is still growing on the one hand, profitable development loans continued to fall more than 11% compared to the first quarter of last year. We continue to analyze the performance of lending in more detail.

You can see that expect for January, in February and March, new lending was certainly favorable and grew focused on small and medium size enterprises and self-employed professional. In fact, over the last two months of the quarter, the results that we achieved are very similar to the results achieved in the previous financial year. Furthermore, the figures we have for this month April encourages us to be optimistic.

Let me stress how dynamic and the SME and self-employed professionals segment is, it’s 64% of all of the lending the Popular has granted during the year. We have also made market share gains, thanks to our great retail activity 4 basis points in the case of deposits compared to the first quarter 2015. That’s 5.98% to be more exact 13 basis points in our lending market share in the same period. We now have market share of 7.68% and 39 basis points up compared to the market share we had in corporate a year ago, our market share is now 12.28%.

To sum up, this is a clear proof of Popular’s competitive capacity in an environment of changing banking business. As precisely that was to our competitive capability that Popular has been into consultative position. In the corporate segment, our business model is based on specialization and our personalize management.

We have now 238,000 corporate clients that we gave directly to banking advice to and that of those has a better opportunities for cross selling. In fact, we increased the number of corporate credit cards by 60% - corporate cards certainly by 60% over the first quarter of the year compared to 2015 first quarter and 115% in the case of insurance policy.

The insurance and card businesses are also performing very favorably. As you can see in the graph, the number of insurance policies, as you believe 1% increase in our card balance almost 4%.

Let me spend a few minutes talking to you about risk management. As you know this year, we have settled as a priority go, a reduction in our NPAs by EUR4 billion. This will be sustained by our sale of real estate and reduction in net NPL entries.

In this first quarter of the year, we’ve tripled compared to the same period of last year. The reduction that we’ve made in our NPAs, in line with the goal that we - the target that we hope to achieve by the end of the year, the NPL ratio, once again this quarter has fallen, it’s now standing at 12.68%. That’s down 64 basis points over the year so far.

As regard to our coverage ratios, as they are all satisfactory right across the board, NPL coverage ratio without write-offs is now 40%. Our coverage ratio if we do include those write-offs is now standing at 54%.

Once again, this quarter, we have to highlight the excellent performance of the sale of real estate, despite the seasonal factor and the current economic contacts in the first quarter 2016, the volume of our retails totaled EUR510 and we are expecting to hit the figure of 2.8 billion in sales by the end of the year.

Retail sales performed particularly well, up 4% compared to the first three months of 2015. For forth coming months, we also hope to be able to prove more in this area, driven by the recovery of the real estate market. In this regard, Popular should benefit from the recovery of the factor because our real estate assets are located in the most buoyant geographical areas in this business as you can see in the picture we are showing on the screen.

And we also tell you that sales continue to be representative off the portfolio, the quality of the sales and also geographical location and the type of asset that we are selling. That is why end of the heading real estate sales and taking into account, all of those indicators that I’ve just mentioned, as well as the pipeline we have for sales, we are fairly optimistic with regards to performance of results for the rest of the year.

Let me now make some brief remarks about our very good liquidity and solvency position. Retail funds have performed well at earlier on this year increasing by EUR3 billion compared to the first quarter 2015, essentially because of the good performance of our current accounts.

Our loan to deposit ratio has also improved compared to 2015, it now stands at 107%. Popular solvency is still very high. Our CET1-phased capital ratio is now 12.81%. We are maintaining the high a large surplus capital surplus above the regulatory minimum specifically 256 basis points above the SREP requirement. On the other hand, our fully loaded capital ratio is now stands at 11.10%, 56 basis points higher than the first quarter 2015, so once again a very comfortable level.

Lastly, our leverage ratio is still one of the best in the banking sector. It’s 5.97% at the moment. Before, finishing off my presentation, I want to just talk briefly about the acquisition of the Barclays's credit card business here on the Iberian Peninsula through Bancopopular-e.

First of all, I’d like to highlight the fact that we felt that the acquisition of the Barclay card business in Spain and Portugal was very tiny opportunity because the specialization in Barclay credit card model is similar to the one that Banco Popular was already operating and previously by Citibank in Spain this operation this deal and reinforces our leadership in the revolving card business in Spain.

And let’s just at the same time get into the Portuguese market. We are now leaders in that country with more than 30% of market share there. Therefore, we have a unique opportunity now to be able to strength the Poplar’s position in the credit card business both in Spain and in Portugal. There the rates are highly profitable business that brings in major synergies to the existing platform and gives us more opportunities for cross selling.

All in all, it will increase Banco Popular’s business and it will allow Popular to strength its position in the consumer finance business which is very attractive and that was a lot of profitability in the current low interest rate environment.

In this slide, you can see the Barclays card key figures business with the return on tangible equity last year totaling 28%, it’s a leader in the consumer financing segment in Portugal already with 450,000 cards in the market and with a very relevant position in Spain 300,000 cards in our country last year, it obtained a net profit of EUR45 million.

Once more, this acquisition creates added value for Popular’s shareholders right from year one. And as you know that is one of key condition that has to be met if we are to move forward with any corporate deal.

As I’ve already said, this transaction is aligned with Popular strategy to strengthen its position in the consumer finance business. As you know, we are launching a specialized unit which is called Popular Consumer Finance. Because of the importance and the performance of this image in the Bank, we feel this is the right thing to do to create an independence that brought subsidiary for this business Popular Consumer Finance. So we’ll cover all of the banking operations in this segment both directly and also through other subsidiaries or equity stakes and we’ll cover all of the current bank consumer finance business and card business.

Let me finalize with some conclusions. The environment in general is still complicated one for the banking industry overall where competition it continues to increase, but with clear opportunities for strong banks like Popular. I think proof of that has been seen in this first quarter of the year when we have reinforced our capital position in continues fashion and we’ve also continued to reduce our NPAs. As you know is one of the priority targets that the Bank has for this year.

Let me also underline that the Bank has a business model that all banks would love to have with our key business, our core business focused on small and medium size enterprise. That is a segment that we especially benefit from improved economic situation general and that’s when we make available for companies and companies the funding that need to be able to undertake their projects.

Essentially then all in all, Popular has had a very good quarter and has the foundations to continue improving its current activity through rest of the year. Thank you very much.

Question-and-Answer Session

A - Unidentified Company Representative

Thank you very much. Good morning. We’ll take the question by different subjects with Fidentiis, BPI, JP Morgan and Banco. They are asking about net increased income, that’s the first subject. Are we keeping the guidance for net interest income for the rest of the year is the question?

Francisco Gomez

The answer. Yes, we reporting our focus that we gave you at the end of the year net interest income would have been about EUR2.2 billion. The full year, the performance in Q1 has been very favorable, if we strip out the impact as I’ve already mentioned in the presentation of EUR18 million because of the mortgage. Quarter-on-quarter if you actually compare to Q1 2015 NII is growing by 1% that is because of the greater competitive position that we have in our business that is main with the SME segment.

Unidentified Company Representative

Societe, Banco, Mirabaud and BPI, Fidentiis are asking about the performance of lending interest rate. So the next few quarters, do we expect our deal to have an impact on lending prices? And in general how do we expect to see the rates going?

Francisco Gomez

Well we are very happy about loan lending prices. You can see that 17 basis points is the improvement we made to rates for front book. Now it’s now 3.4%. We build to do because more than 60% of front book is now in now closed segment SMEs. We are able to improve the profitability of our lending in that segment not 3.4% for new production, new lending that’s front book and favorably with 2.81% of our back book. In other words, the trend is certainly an upward trend. I really don’t think that TLTRO will change that tool.

We don’t think so, we certainly hope that we will be able to improve the profitability lending our loans to individuals and SMEs and that will be the trend we will see to growing over the next quarters. I think prices what you see - we can see with this and the segments that the Bank is operating and which are mainly individual for customers and SME. The price is not a determining factor. It’s the service and that makes the difference. And customers are certainly are looking the value in what we do. Our traditional business is SMEs, there is the loyalty that we have shown to all of these corporate clients is more of companies doing the crisis and that is why we’re reaping the vote and having good result compared to others.

Unidentified Company Representative

Fidentiis, JP and Autonomous are asking about performance of lending. What do we expect to see over the next few months is the question. And this is specific question about whether we’re seeing any reduction demand for credit because of political uncertainty in Spain?

Francisco Gomez

Well, we are keeping our target that we gave you at the start of the year which is about 2.3% for profit of lending. And growth over this first quarter, we have seen larger increases to corporate lending about 1% because of that new front book that I mentioned. And we are deliberately reducing our developer lending which has come down 11% over the quarter. So the expectations we have for the rest of the year are very positive. We believe that we will be up to achieve the growth rates that we had.

Unidentified Company Representative

Already told you JP Morgan is asking about the cost of retain funding, our term deposit. How much can we reduce the cost?

Francisco Gomez

Well, it’s 40 at the minute, what is that - that was the first quarter of year, it’s now 0.37% that was in March and we believe that will be a driver for forth coming months. Our target is 0.30% for the rest of the year. We hope would even be able to better that figure. But more than anything else I think the important thing to note is that we are still able to increase our market share there with a reduction almost 3 billion new funds coming in over the first quarter of the year. And we’ve also improved our financing structure there. And we have more current accounts and lower volume of deposits - of term deposit.

Unidentified Company Representative

We are also asking about our new policy with regard to this TLTRO, and what would be the impact at Banco, you can answer that?

Francisco Gomez

Well our intention is to actually renew the EUR14.2 billion that we’ve already taken out the loan through TLTRO because we will actually - we will make savings of EUR30 million during the year. This is something will come into the year, so expecting about EUR6.5 million for 2016 to get to the 40 basis points the facility has the improvement upside that we can get. We’re still waiting for that technical note to be published and we’re reviewing the estimates that we have for that saving. Between January 2016, January 2017, we expect to have 2.5% increase in lending and that is the requirement. We believe that feasible. And if that does happen in a strain line fashion, we’re talking about an upside that could even be bigger perhaps close to EUR70 million in an annualized figure.

Apart from the EUR14.2 billion, we also have the possibility of going for calling on another 10 billion. And we wait and see, we have to be tactical here and let’s see we could actually replace some of the covered bonds that are from maturity at a 3% rate with this new facility make more savings for new few years.

Unidentified Company Representative

We also have a question coming in about commission fees. What is for in the quarter two to and what’s the outlook for the rest of the year?

Francisco Gomez

Well as we did try to explain during the presentation in our case because of the joint ventures that we have in the card business, mutual investments, insurance policies, asset management, other asset to be to properly calculated. But think we have here in our account, you have to also look at the fees and equity stakes bringing the commission there. And strictly business, I would say that the very positive performance of Bancopopular-e which is our card joint venture and the - also very positive performance of Allianz Popular. During the quarter, all of their contributions are keeping us growth figures around 2.1% there for commission fees. But if you look at specifically commission fees and there are some that I’ve obviously worse off because of the situation, market situation that being impacted.

But others are benefitting from the economic situation and the commission fees of defaults have come down. So our position for the rest of the year is positive one and we do expect that this trend will continue. We might get more upside there.

Unidentified Company Representative

JP Morgan is asking about costs. Essentially the question is, if we can explain the performance of costs this quarter and if we expect to close more branches and if this is sustainable?

Francisco Gomez

The costs have come down 2.5%, that is a consistent figure, the very favorable figure. Especially if you compare that figure to the cost exercise last year quite clearly we surpass the goal that we had set for ourselves. Last year we reduced general cost by more than 10%. That we were close at 12% in that cost reduction for those general expenses there. So we are still driving forward with cost reduction this quarter and we hope next time to be able to maintain that trend over the next few quarters with regard to our branch number management, we are going to continue to optimize our branch network has we have been doing.

Even since the outset, since I started 2011, we have reduced our branch network by more than 22%.We’ll continue to do that. And the process is we will go up and analyze, where there are business opportunities and which location where it make sense to open branches and then we look at the other areas where because of IT changes or because of market situation, we will see where branches really make no sense anymore and close them down. But whatever happens, it will be a gradual phased in reduction optimizing our network.

Unidentified Company Representative

Fidentiis and Autonomous are asking about trading grains at ALCO portfolio for the quarter, what is our policy there?

Francisco Gomez

Over the quarter, we have excellent performance of trading gains and mainly driven by the volatility we’ve seen 12% over the quarter. We are still holding that estimate of around EUR250 million in trading gains for the full year. That’s the normalized figure for you.

And the contribution, if you are asking about the contribution of the ALCO portfolio to net interest income, it’s 11% figure that we expected over that and that will continue over the next few quarter and also with the lower contribution of the banks and the system. In other words, we are less viable to any impact there in that market.

Unidentified Company Representative

Let move forward to questions about provisions for Fidentiis, BPI, Autonomous and Credit Suisse are asking about performance of provisions for the rest of the year. We are maintaining our guidance that came before 90 basis points. And then question about this accounting circular?

Francisco Gomez

Yes, the answer - yes, and I am with budget there in our provisions in the first quarter this year, so we are maintaining our guidance about 90 or 100 basis points. There is risk cost that we’ve given you as guidance. And we are maintaining that restricting related across to NPLs. The NPL rate and calendaring, we are expecting a more sustained reduction in NPL entries over the rest of the year. So there will be an improvement of that guidance.

And the question about the new circular. That’s to come out at the moment, it’s only a draft form and I think it’s too early to talk about what impact we might feel from that circular.

Unidentified Company Representative

There are couple of questions from Fidentiis and JP Morgan about the amount of that rate to ATAs and other operating indicators. And asset qualities, we have a question Nomura and Autonomous. They are asking about our NPA guidance, are we maintaining it?

Francisco Gomez

Yes, we have a target which is one of the priority targets of our management team for this year which is the production of NPS by EUR4 billion. And during this first quarter of the year, we’ve brought that figure down by EUR400 million. That’s three times the reduction we achieved in Q1, 2015. So this is on track to hit to goal we set up for the year and NPL rate has come down over the last nine quarters. WE believe that this will be a big driver for us as we also reduce our real estate assets and with the sale of real estate. These will help us to move towards that figure.

Unidentified Company Representative

JP Morgan, Fidentiis, Bank of America and Morgan Stanley are asking about sales of real estates. How we access the sales over the quarter, have we noticed any political uncertainty affecting the sales rate and now we are keeping for the year?

Francisco Gomez

Yes. We - EUR510 is the figure for sales over that quarter. So your positive assessment of real estate sales. And yes you are right, after the general election, the end of the year there has been political uncertainty but the sales will improve over this quarter. As it’s gone through, our retail sales are better than last year, it was Q1 last year. We have a number of different projects that we expecting for wholesale sales over the next few months. So fully aligned with our target to 2.8 billion in sales of ROE over the year, the sales that we already mad are highly representative of what we have on sale as for the quality of the pipeline that we have, the location as well.

Geographically speaking that’s why we do expect to hit that 2.8 billion figure of sales. Another thing in fact is that we actually selling. Very slightly about the net book value and that shows you that the current coverage that we have for real estate are.

Unidentified Company Representative

Grupo, Goldman, BPI and Fidentiis are asking about coverage, do we believe we have sufficient coverage ratios and if we set any goals, targets for the year?

Francisco Gomez

The answer is, well as for real estate, I’ve just given you the other side, I think there is no better proof that can confirm that our coverage rates for real estate is adequate, the high rate of sales and that we actually selling above the book value. So yes correct, as for lending coverage, we said this number of occasions that Popular has a higher than industry coverage rate for our lending. That been reviewed by many supervisors, that’s our NPL coverage rates and then the asset quality review as well by the supervisors. And so our lending, our loans coverage rates are the regulatory rates that we have.

Unidentified Company Representative

Turning to BPI and Kepler are asking about capital movements over the quarter, about CET1 fully loaded.

Francisco Gomez

The CET1 fully loaded went up by 24 basis points over the quarter and that was essentially because of a 12 basis point increase and the profit and also because of lower rate of APRs. And essentially to do with rebalancing of our models, you know that we have had a higher figure of risk weighted assets coming to the banking industry. That has a lot to do with fully loaded. The changes that we are just calendaring an impact because it’s a Saturday, there is always a seasonal factor in Q1 in the year, but that’s all.

Unidentified Company Representative

Citi is basically asking about the dividend policy payout for 2016.

Francisco Gomez

Exactly the same as we’ve done in the past, it will be combination of scrip dividend with cash dividend with payout of about 50%.

Unidentified Company Representative

There were couple of questions from Autonomous and Credit Suisse about whether we are expecting two issue subordinate debt this year and what expectations do we have about the MDAs moving forward?

Francisco Gomez

Yes, the first thing I’d like to highlight is that we’re still higher than the requirements, for the scrip requirements for 2016. You probably saw in the presentation, we have 246 basis points as a surplus over the buffer. We’ve been asked for 10.85% and so we are pretty comfortable with we are in at the moment. That is true that there is this new draft circular that that till measure the total capital ratio and the pillar two might end up being divided into two parts that be the record drips part and then be the estimate or the guidance for capital.

The regulatory level that this is important thing would be the key factor for the calculation MDAs. It’s true to say that methodology for 2017 will not be the same methodology for calculation MDAs as we’ve seen in 2016 but this will - this won’t be positive and I think we will have that.

Unidentified Company Representative

Are we going to be issuing anything is the question.

Francisco Gomez

We’ve said this in quarter-after-quarter, Popular growth have a proactive anticipation policy. We always tried to one step ahead of the capital requirements always. In tracking ahead of those capital ratios, we know that TLTRO1 is when we’ve always talked about the TOI or TO2 rather that we’ll be expecting that. We are not in hurry at all where, our minds at rest about this and we will just do what is possible in the market. But we do have attention not sure whether it be short term but we always want to make sure that we have the right levels, but we are no hurry for any TO2 issue.

Unidentified Company Representative

There are number of questions from Mirabaud, Fidentiis and Autonomous about outflows. Are we going to peel against that court ruling. There is a question, government thinks about the positive retroactive nature of that ruling on close and if we think our provision to 150 million is sufficient?

Francisco Gomez

First me of all let me address that our position is that the mortgage flows that we marketing and are legal and transparent and they have been properly sold. And so we will analyze a possible defense of against that ruling. It’s appropriate that this also been a ruling from a moderate quarter that was like legal action about the mortgage flows and the ruling might against as, the ruling said that there was no transparency in those mortgage grow closer in the same ruling. The courts said each case had to be analyzed on the case by case basis.

Our legal team is analyzing that ruling I have to say. And I can assure that we will very properly peel against it with regard to the retroactive nature of the total of all of those flows. There has been an issue a preliminary hearing in the High Court of Justice - the European High Court of Justice about this.

Let me tell you that our position is that the Supreme Court in Spain which is the most relevant court in this case has already stated that there is not applicable to have any retroactivity there. And I the state of Spain and other states in the U.K. have already come out and said publically that they are against that happening, that doesn’t happened yet.

Unidentified Company Representative

A number of questions about Barclays card. One is whether we expecting to issue capital to neutralize that capital consumption there? And Norbolsa have sent in a question, are we expecting to buy up a 100% of Popular?

Francisco Gomez

The question about capital, capital’s consumption there is very small and we can totally neutralize offsetting through the organic generation of capital. I think you’ve seen that in the presentation today already.

And the second question, no, we have no short term intention of doing that. I guess the tradition is we used to actually keep options therefore the buyback that we have it in the intention at the moment.

Unidentified Company Representative

There is also question about when we are expecting to close the deal, if it will be late September, early October?

Francisco Gomez

Yes, that is the best estimate that we have at the moment. And to finish off on M&As and update on our position.

Unidentified Company Representative

The question is, what do we think will be happening in the industry and what positioned around to be in?

Francisco Gomez

Our position is clear and we always stress and the high potential case of any more integration, we want to be the back that integrates other banks. We want to be an independent bank. We want to lead the way forward if there is to be an integration, we have the support of the Bank’s board representing about 24% of the Bank’s share capital and we obviously convince that we will be able to maintain the independence of the Bank. Together with that our obligation is we’ve said many times in the past and this is obligation and the duty of the management team, we have to of course study any possible deal that might be beneficial for the Bank and provided of course that it is clearly advantageous from day one for this Bank shareholders. Now if any opportunities come out, we’ll continue to steady them. But right now at the moment, there is nothing on the table.

Unidentified Company Representative

That’s all the questions for you. Thank you very much.

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