Spain's CaixaBank SA is expecting net interest income to grow by low single digits in 2017 as consumer lending picks up and funding costs continue to fall, but profitability will continue to come under pressure from the low interest rate environment, the bank's executives said Feb. 2.
"We expect funding costs to continue to trend lower ... volumes are expected to be stable hopefully with some growth but particularly with growth in the consumer lending," CEO Gonzalo Gortázar told an analysts' conference call.
Net interest income for full year 2016 was down 4.5% to €4.16 billion amid lower interest rates and lower volumes. Full-year profit rose 28.6% to €1.05 billion.
Fourth-quarter 2016 net interest income edged up year over year to €1.08 billion from €1.05 billion, and it rose on a sequential basis for the third straight quarter. Spanish banks have struggled for several years with the lingering effects of high rates on time deposits offered during a battle for clients, but CaixaBank said it priced new time deposits at 3 basis points in the fourth quarter, down from 27 basis points a year earlier.
Its back book of time deposits now carries an average cost of 35 basis points, down from 85 basis points a year earlier.
However, Gortázar said the bank would lower its target for a key profitability ratio as the interest rate environment remains challenging for the banking sector. CaixaBank is now expecting return on tangible equity of 9% to 11% in 2018 compared to a previous estimate of 12% to 14%. ROTE in 2016 amounted to 5.6%.
CaixaBank has been looking beyond Spain for growth amid a challenging low interest rate environment and is the process of taking over Portugal's Banco BPI SA.
Gortázar said the bank's fully loaded common equity Tier 1 ratio would be between 11% and 11.6% following the purchase, depending on what stake the bank ends up with. The CET1 ratio stood at 12.4% at the end of 2016.
The bank is aiming for a CET1 ratio of between 11% and 12% by 2018 and would consider returning capital to shareholders if it exceeds the 12% mark.
"We may exceed 12% in 2018 and in that case we intend to do something to return that excess capital assuming there is no change in circumstances," Gortázar said.
CaixaBank launched its BPI takeover bid Jan. 17, offering €1.134 a share for the 55% of BPI that it does not already own in an offer that runs through Feb. 7. CaixaBank had been trying for more than a year to take over the Portuguese bank but was blocked in its efforts by Isabel dos Santos, the daughter of Angola's president and Africa's richest woman, who owns just under 20% of BPI.
She was against lifting the cap on shareholders exercising more than 20% of voting rights, effectively blocking CaixaBank from taking control. The protracted dispute led to Portugal's government changing the rules, paving the way for the takeover.
Gortázar reiterated that CaixaBank had received a nonbinding recommendation from the ECB to gradually reduce the 48.1% stake in Banco de Fomento Angola SA that it will acquire when it completes the buyout of BPI. The Portuguese lender had to sell a 2% stake in BFA after European authorities excluded Angola from a list of countries with regulatory regimes equivalent to those in Europe, leaving BPI at risk of breaching large-exposure limitations.
Gortázar added that CaixaBank had no exposure itself to Angola and that the BFA stake was a purely financial investment because it would not gain control of the Angolan lender.
"The investment in BFA for us will be a financial investment and therefore we are not expecting to extend any liquidity line," he told analysts.
No further 'material' impact seen from mortgage floors
The bank reported a fourth-quarter 2016 net profit of €77 million, compared to a €182 million loss in the year-ago period owing to write-downs related to its stake in oil producer Repsol and other impairments. Fourth-quarter 2016 profit was dented by an additional €110 million charge related to the lender's exposure to mortgage rate floor clauses, bringing total provisions to €625 million.
The majority of Spain's banks have been hit by claims over mis-selling of mortgages with lower bounds on interest rates, which borrowers have claimed left them unable to benefit from the drop in interest rates. The European Court of Justice ruled in December 2016 that banks should reimburse customers for losses incurred over the lifetime of a loan, an expansion of a Spanish court ruling that required repayments of losses from 2013 on.
Gortázar said the bank was working proactively with customers to return any money due and would continue to be vigilant with regards to potential new claims.
"We will continue to be watching and obviously it will have an impact but at this stage we do not feel it that this is going to have an impact that is material and certainly nothing likely to be of the size that we have seen with the floors," Gortázar said.
The bank said it would continue its cost-cutting measures in the first quarter with the reduction of 350 jobs, which CFO Javier Pano said would result in a one-off restructuring charge of €150 million and annual cost savings of €40 million.