The PNC Financial Services Group, Inc. (PNC) Earnings Call Transcript

Good morning, everyone, and welcome to this analyst webcast following the announcement of the sale of BBVA's U.S. subsidiary to PNC. I'm Gloria Couceiro, Head of Investor Relations. And here with me today is Carlos Torres Vila, Executive Chairman of the group; Onur Genc, Chief Executive Officer; and Jaime Saenz De Tejada, BBVA Group CFO. Carlos and Onur will do a brief presentation, and then we will move straight to the live Q&A session after that. And now, I'll turn it over to Carlos to start with the presentation.

Thank you. Thank you, Gloria. Good morning, everyone. Welcome. Thank you for joining the call at such short notice. But today is a very, very important day for BBVA. As you have heard already and read this morning, we announced an agreement to sell our bank in the U.S. to PNC for a cash consideration of $11.6 billion. Now there's good reason for this high price. PNC has not only recognized the uniqueness of our franchise in the U.S., the value that uniqueness has to them, strategic entry into the most attractive markets in that country, and thereby, they're creating this coast-to-coast leading franchise, but PNC has also factored in their ability to capture additional value through synergies and their increased scale. So for them, it's a very compelling value proposition to acquire our bank. It's really an attractive redeployment of the proceeds of the BlackRock divestiture that they did earlier this year. That's for them. For us, this is a great transaction. It's one that is testament to our focus on generating value to shareholders. First, because of the price, $11.6 billion, certainly very compelling. We are capitalizing on a very rare circumstance of a strategic purchaser who can pay in cash, because they have it fully in-hand. And it is a price that is very attractive in comparison with any measure you might want to use, in comparison with our recent earnings, in comparison with our projected earnings as well, in comparison with the capital that is invested in the business. So it really unlocks tremendous value for our shareholders. You only have to compare the price with our market cap, it's almost half of it or compare with your own analyst valuations of our U.S. business. The price we will receive is more than 2.5x the average value that you -- the analysts, are assigning to this business in the calculations you do of our sum of the parts. Now beyond the massive immediate unlocking of shareholder value, as you will see in the few pages that we have prepared, and that Onur will now explain, the deal significantly reinforces our financial position, generating significant excess capital, and this not only gives us the strength that is so good in these uncertain times. But above all, it provides lots of strategic flexibility. First, to deploy part of the capital in our markets, markets in which we're leaders, with very profitable franchises and in which there will be growth opportunities in the recovery phase; and second, flexibility also to increase distributions to shareholders once the restrictions are lifted. So we're very happy -- we're also very happy that this is very positive for all sides. For PNC, I mentioned already, for BBVA and our shareholders as well. But it's also a great transaction for our people in the U.S., for our clients, for the communities that we serve, all of them will continue to have a bright future as part of the leading financial services group in the country. So in sum, it's a win-win situation for all, and this makes us extremely happy and extremely proud of what our people have achieved. I will now turn it over to Onur, who will quickly go over the transaction before we take your questions.

Thank you, Carlos. I hope all of you and your families are healthy and safe in this uncertain environment. But we have prepared a very few number of pages to go through the deal, and then we'll take your questions. So before getting into the details of the pages, though, I would like to reiterate one message that Carlos has already emphasized, which is this transaction, in our view, proves the alignment of BBVA's management with shareholders' interests. It clearly displays our focus on shareholder value creation and the associated disciplined capital allocation mindset in our view. So on Slide #3, you can see the transaction summary. BBVA has agreed to sell its U.S. subsidiary, BBVA USA Bancshares, to PNC for a fixed price of $11.6 billion or EUR 9.7 billion, paid 100% in cash at closing. This $11.6 billion, fixed price, is based on, first, a total consideration price of USD 12 billion for the full entity of BBVA USA Bancshares, minus the USD 0.4 billion for the Fintech investment fund, Propel Venture Partners, that we have in the U.S. and BBVA Securities, the broker dealer. These 2 are currently legal entities under BBVA USA Bancshares, and they will be carved out at book value from BBVA USA to support the remaining activities of BBVA Group in the U.S. So the transaction perimeter includes our core U.S. retail and commercial bank with $102 billion in assets, 637 branches and USD 587 million in 2019 earnings contribution. After the close of the transaction, we will continue to operate in the U.S., serving our CIB, large corporate and investment banking clients through our branch in New York. Our card out broker-dealer, BBVA Securities and BBVA, Mexico Houston agency. You will also keep the San Francisco rep office and the carved out propel venture partners to maintain our connection to the U.S. fintech ecosystem. The deal is expected to close by mid-2021, and once, obviously, the required regulatory approvals have been obtained. Moving to Slide #4. This is a large transaction at a very attractive price that creates value for shareholders, and it also generates significant excess capital. First, on the left-hand side of the page. The transaction implies very attractive multiples, 19.7x P/E '19 and 1.34x price to tangible book value as of September 2020. The P/E multiple of the deal, the 19.7x, for example, it stands at 2.2x of U.S. regional bank peers P/E multiples. Second, at the middle of the page, as Carlos mentioned, the price represents almost 50% of BBVA's current market cap, market cap of November 13 for a business that contributes less than 10% of group's full year 2019 net attributable profit. So 50% of value for 10% of our 2019 earnings. And third, on the right-hand side of the page, the deal enhances our already strong capital position. It will have a significant positive impact on BBVA's fully loaded CET1 ratio of approximately 300 basis points. Including the positive impact of the transaction, the group's pro forma fully loaded CET1 ratio would reach 14.5% as of September 2020. The total capital generation, based on the post-deal figures, amounts to EUR 8.5 billion capital generation. Slide #5. If you go to Slide #5, from a different perspective, you can see that this transaction unlocks the hidden value of our U.S. franchise. We are selling the U.S. operations at a price significantly above the value assigned by analysts in their Sum of the Parts valuation. So the analysts' consensus was assigning EUR 3.8 billion to the U.S. franchise on average versus approximately the EUR 10 billion transaction price, EUR 10 billion transaction price. In other words, more than 2.5x the value assigned by analysts. The EUR 6.2 billion additional value -- the transaction price versus the average of the analysts, the EUR 6.2 billion additional value represents 30% of BBVA's market cap again as of November 13. It is worth to reemphasize that Carlos has already mentioned, but in our view, this is also a very attractive deal for the buyer as it allows PNC to access some of the most attractive markets in the U.S. and to achieve significant benefits due to much larger scale, distribution and reach, something, obviously, that we were lacking. After the operation is completed, PNC will become the country's fifth largest bank in the U.S. Now moving to Slide #6. As mentioned before, you can see the positive impact of the transaction on capital and on the fully loaded CET1 ratio of approximately 300 basis points. Including this impact, again, as mentioned, the group's pro forma fully loaded CET1 ratio would reach 14.46% as of September 2020. The total capital generation from the transaction, based on post-deal figures, amounts to, again, EUR 8.5 billion. The main impact comes from the deconsolidation of the RWAs. EUR 15.7 billion of RWAs would be deconsolidated, creating 234 bps of capital. In addition, the capital base will increase due to 2 things: number one, the capital gain of the transaction EUR 0.6 billion, to be precise, EUR 580 million, which creates 17 bps. And then other CTE impacts, which is 43 bps coming mainly from a few things, but the deconsolidation of intangibles, tax losses carried forward and lower capital deductions to the thresholds, partially offset by the deconsolidation of the other comprehensive income. All in all, the other bucket is 43 bps. This increase in the capital base also means that BBVA's tangible book value will increase by EUR 1.4 billion. And needless to say, the capital gain, the capital, the TBV impacts at closing might differ from these estimated figures, depending on the evolution of the book value of the business and also the exchange rate movements from signing to closing. As it is a transaction, this is a transaction with a fixed price at closing, the book value changes from signing to closing long to the buyer. Now for the strategic implications going forward, I turn it back to you, Carlos.

Thanks, Onur. I will reiterate what Onur has just said, and I said at the beginning also that the transaction unlocks tremendous value for our shareholders. And that it exemplifies BBVA's disciplined value-based approach to capital allocation. The sale has, because of its size and its relevance, significant positive implications for us. On one hand, it enhances our already strong financial position. Welcome situation given the uncertainty we're living in. But more importantly, it gives us strategic optionality which, of course, we're going to use to continue to maximize shareholder value. First, we can now profitably deploy capital in the markets in which we operate. We can take here advantage of growth opportunities in the recovery phase. We can strengthen the leadership positions we already hold in most markets. And here, I remind you that our banks in those markets deliver above peers in terms of performance, in terms of efficiency, in terms of returns, we are better than competitors. And we can also increase distributions to shareholders, no doubt. That includes the possibility of a sizable share buyback, which at current share prices would make a lot of sense. But obviously, we will have to evaluate it once the transaction closes in a few months' time, and we would then need regulatory approval. Now in any event, any combination of these uses of the excess capital generated by this transaction will imply very significant earnings per share and tangible book value per share accretion to the benefit of our shareholders. And now back to Gloria for the Q&A.

Thank you, Carlos. We are now ready to move into the Q&A. So please, first question.

Our first question comes from Francisco Riquel of Alantra.

Yes, congratulations for the deal, first of all. I would go into the last slide of your presentation and the options to deploy the capital. So when it comes to M&A, first, can you remind us of the financial targets that you would consider in any potential acquisition? And second, qualitatively, what would be your strategic priorities at this point in terms of capital allocation? You already have the best bank in Mexico, so probably Spain and Turkey came as the potential options for M&A, obviously, with much different risk return profiles. So what would be your preference if the right acquisition opportunity arises? And so taking into account that the weight of emerging market increases, just with this sale? And then the second question is in terms of shareholder remuneration. You mentioned a sizable share buyback, so assuming the ECB dividend restructuring is lifted. Would you change your dividend policy after this deal? You are currently targeting 35%, 40% dividend payout. Would the share buyback come on top to compensate shareholders for the lower returns achieved in the U.S. to date?

Thank you. Thank you, Francisco. So in terms of M&A, I'm not going -- today, really, the announcement is our sale in the U.S. So I'm going to withhold from commenting any specifics otherwise. Only to reiterate what is precisely on that page that, on top of strengthening our financial position, we are buying with the strategic optionality. And again, looking with what might happen in the months ahead and in the recovery phase, we believe there might be opportunities to reinforce the franchises where we have leadership positions, we have superior performance, and the same that it makes sense from a maximizing shareholder value standpoint to divest in the U.S. because others can do better. We also believe we can grow in the places where we can do better. So I'll leave it at that. Now you were also asking about the financial targets that we look at. I think we have reiterated this throughout the years that we have a very disciplined approach to M&A. And today's transaction is testament to that. Not only today's transaction, I think we have a long history of purchases and divestments that showed that as well. We always look at the strategic side, attractiveness of the market, attractiveness of the industry, strategic fit, the impact on competitive position and strategic position of any deal. We also look at execution risk. And in terms of the financial side, the key metrics are NPV and internal rate of return. Although, of course, we also look at the EPS and tangible book value per share accretion, which would be more immediate or point-in-time metrics versus the longer range, shareholder value-creating measures that NPV or the rate of return would show. In terms of the remuneration and dividend policy, I'll turn it to you, Onur.

Yes. On the right away to the straightforward question. The 35% to 40% total payout ratio, the dividend ratio that we have been applying and we have been very consistent in this, in my view, will continue to be a valid reference going forward, too. So the shareholder buyback and dividends. They're not mutually exclusive, given our capital position. I remind you, at the end of September, we had a 293 bps buffer to CET1 requirement. With this additional 300 bps that is coming from this deal, it's going to be 600 bps buffer to the requirement. So we have enough capital buffer to be able to do both. And I would also remind you that, again, this year is an interesting year in terms of the provisions and the send up. But in a typical year, 2019, we were the highest return on tangible equity bank in Europe so our earnings potential, our continued flow of organic capital generation will be there. We currently have 600 bps of buffer. So we'll continue with the 35% to 40%. And then on top, entertain the idea of share buyback.

The next question on the line comes from Alvaro Serrano of Morgan Stanley.

A couple of questions, follow-ups from me. There's no question that financially this makes a ton of sense, as you've outlined. The follow-ups are on following Paco's questions. And I remember Carlos, when you were CEO, I seem to remember at least that the debate around the EM/DM contribution to the earnings of the group. And back then, I think the idea was as developed markets, in particular, Spain recovers, there would be a more balanced sort of contribution earnings for the group versus the EM SKU at the time. Obviously, with the disposal of the U.S., that rebalancing is affected. I don't know if you can speak to that sort of strategically going forward. And would that make it more likely to redeploy capital in DM versus EM? That's the first question. Second, on shareholder remuneration. It's more about the ECB time line. There's been a discussion, and I've spoken to your IR department about that and potential risk that the ECB could delay a few more months, even 6 months till after the stress test, the approval of -- or the lifting of the dividend ban. Have you heard anything around that? Is that -- any comments you can speak to that about how once you are allowed to pay how that's -- the size of those buybacks and dividends, presumably there will be limitations.

Thank you, Alvaro. Yes, the contribution of developed markets has been lower than it should have been because of the low rate environment that we're in. Of course, there's many levers we're pulling also that you can see quarter-on-quarter how things are also improving, in terms of, for example, cost management and price management and in that way, compensate partly that environment. But certainly, as the market situation recovers, we will naturally recover part of that weight that developed markets have. Now what we have with this transaction, though, is now more emerging markets, immediately, also more cash in hand. So we have the flexibility, as you point out, to balance the portfolio as we think about its deployment. But I'll reiterate what I was telling Paco earlier that today, the announcement is the sale. There's still a few months ahead before closing. So it allow us not to have specifics beyond what we have shared. On the ECB, I have no news. I don't know, Onur, if you want to comment?

As you said, we have no news. We have no news. So we'll see. But again, we have 600 bps of a buffer. So when the time comes, we will be able to do both, buy dividends and share buybacks and so on. So but we don't have any news, yes.

The next question comes from Carlos Cobo of Societe Generale.

Congratulations on the deal. Definitely a positive surprise to some of our financial estimates, as you said. My question -- I understand why you can't discuss on what investor -- that actually limits our capacity to ask, so I'll focus on capital and your capital target. Do you -- okay, I'll put it this way. Is reinforcing the capital ratio of the group a possibility here? And could you elaborate on the positives and negatives of running BBVA with a stronger capital buffer versus peers than your previous target, which was below 12%? And do you consider there is some extra value in running the bank with the capital ratio closer to European peers? Could that be parked before shareholders as well?

Maybe, Onur, you want to take this one?

Yes, why not. Carlos, as of September 20, we have been saying this because we believe we have to be compared versus our requirement. Our position was CET1, 11.52%. We had a 293 bps of a buffer. I repeated it, but I think it is important. After this transaction, CET1 fully loaded ratio would increase by 294 bps again to 14.5%, close to 600 bps, once again above requirement. In this context, as Carlos said today, we are announcing the deal. We have a lot of strategic optionality around this. Regarding capital. As we have discussed in the past before in our calls, we do not like to operate with structurally high capital buffers, that it penalizes profitability and shareholder returns. But at the same time, it is also important that the market perceives that we have the right capital level. So again, today is about the deal. Going forward, regarding capital in order to reach the right balance, after this transaction, we will continue to assess what is the right capital level going forward.

The next question comes from Ignacio Ulargui from BNP Paribas.

Congratulations for win. Just one quick question in terms of timing. So when do you think we could get sort of like some thoughts on the combination of sizable buybacks or dividends? I mean, is it sort of like wait until ECB says something or in your view, that there is a chance that you could just consider changing your shareholder remuneration plan in advance of that?

Well, certainly, there will be no buyback before closing, and that's 6 to 9 months. Onur?

Yes, exactly. Six to 9 months.