The Montepio mutual association had losses of €18 million in 2020, but Virgílio Lima guarantees that it does not need public funds. In an interview with ECO, he contests PwC.
The Montepio mutual association has injected €2 billion into Banco Montepio since 2004, but its president assures in an interview with ECO that the mutual association will not need any support from public funds. Virgílio Lima reveals that the first months of 2021 were positive for the association, criticises the reservations of PwC to last year’s financial statement and lets it be understood that there may even be a replacement of the auditor.
Has the Montepio Mutual Association reported €18 million in losses? What are the reasons for it?
The €18 million loss was based on a positive recurring result of €14 million throughout the year, but at the end of the year, as we have technical provisions to meet the liabilities to our members, we always make an actuarial calculation in terms of the expected future evolution of this provisioning. To this extent, we are very dependent on interest rates. Interest rates have fallen, they are very volatile. In July they were releasing 30 million, in December they required the creation of 30 million [in provisions]. Roughly speaking, it was this substantial movement that transformed 14 million of positive recurring results, which I would like to point out, bearing in mind the year of the pandemic, into negative results. These values are reversible with the rise in the rate as soon as it occurs.
The act of managing the associate, of obtaining new associates, is an imminently face-to-face act, and the lockdown was a strong limitation in this context. Even so, the year had positive recurring results of €14 million, had a growth in the associative margin to €70 million…
…between investment and disinvestment of associates?
Yes. New subscriptions exceeded salaries and bailouts by 70 million in a year whose difficulties were universal and, in particular, in our country, we were not immune. Regarding the number of associates, there was a drop in the number of associates in the first nine months as a result of the country’s lockdown and the face-to-face act that the new associate implies for their adhesion.
Although the lockdown continues, in the last three months [of 2020] we significantly recovered the number of associates. Already this year, we reached the end of April with 602,200 associates, so we have already grown this year by 3,500 new associates.
PwC has two reservations about the association’s financial situation. One has to do with the value of Montepio Bank, the mutual association’s major asset, and the other has to do with the deferred tax assets. Why do you think the value of Banco Montepio is what it is in the balance sheet despite the reservations made by PwC’s auditor?
Regarding the bank’s overall value, the auditor has not changed the value this year…
Didn’t it change due to the auditor’s choice or because it was a management choice? In the previous year, PwC had adjusted the value of the bank…
Regarding the value of the bank, there is a fundamental concept here, which is the distinction between value in use and fair value. Fair value is the value that the bank may have for third parties in the market, that is, to compare with the value of other banks for any investor. That’s a value that compares with the market value of all entities, with the multiples, with all those known valuation logistics. But there is the value in use, the value in use for the holding entity. For us, this value in use is very expressive and relevant.
We [mutual association and bank) lived together until 2015, we were a single entity with a single structure. The distribution network we have today in the association is the bank. There are 300 branches. We don’t have our own distribution network. How much is it worth? It’s only worth it for us, it’s not worth it for third parties. But for us, it has an actual value. There is a culture of placing mutual modalities, of relationship with the associates, which is an intangible of extraordinary value. They are prepared, trained; they are the interlocutors. This has a substantial value not immediately measurable, but very important.
We continue to use the bank as a provider and supplier of services in terms of IT technologies, in terms of a set of other services… With the separation in 2015 that we were rightly forced to do, with the transformation of the bank into a limited liability company, we had to replicate all the structures. There were unique structures responding to the two entities, and we had to replicate all of that. We tried to minimise and in one or another area where it is possible to provide services, with transfer prices, with transparency, we maintained… what is the value of an IT centre that provides a service and has people who are prepared and knowledgeable about our specificity.
What is it worth to the association…
If the bank were to be sold at its fair value, the value it may have for third parties, we would have a loss well beyond that, so we would no longer have a distribution network, we would be left without a qualified and knowledgeable service provider. I must also say that while we advocate segregation, separation and autonomy, in reality, we are an inseparable whole. This bank, 600,000 of its clients are its associates. They are its best customers because they have a higher level of attachment. The 200,000 best customers are associates. In other words, if there is a problem with one entity or another, this has repercussions for both.
Isn’t it possible to separate them?
Theoretically, it is. In fact, it has market and continuity implications that must be considered.
Is PwC making a wrong assessment by considering that the bank is worth 1.5 billion when the share capital is 2.4 billion?
As a board of directors, we had the autonomy to consider the value we wanted, and the auditor would make the reservations it should, if necessary, we could have done so and maintained the value. However, we understood that, given some media noise that was being made about the bank’s value, even within the context of the financial system and in which perfectly nonsensical values were being advanced, we preferred, not agreeing, to accept the auditor’s suggestion and reduce it to €1.5 billion, having no reserve in the balance sheet for that reason, rather than maintain a value that, in our opinion, is the correct value for use. It was not easy for the auditors, in a first year, used to working with other realities and unaware of the associative situation, to fit in with all this reality. So, we accepted it and had an impairment of 377 million in the bank [Montepio].
This year, the figures even gave a slight relief, using the auditors’ criteria. But the auditors considered that, in this context, it would not be prudent to release any impairment without observing consistency, also because of the atypical year that the bank also experienced with regard to its business plan. They felt that it would be preferable to wait in order to see if there was consistency so that there could be a release of impairments in the future. But in terms of calculation, in terms of evaluation methodologies, this year, with the criteria defined by the auditor itself, it was already reasonable to have some impairment of a few million.
At what price would you be available to do the deal with Santa Casa da Misericórdia de Lisboa: at value in use or at fair value?
From the perspective of the deal with Santa Casa, that was before this devaluation. This is not irrelevant. Once the devaluation has been made, we have the possibility and the duty to first recover the impairment so that there is no loss for the member if it is not the one who enters who appropriates the recovery of the impairment. This is highly unfair to the associate that has supported in times of crisis these entities that have been with us since the beginning. When Montepio was conceived, the Caixa Económica was also conceived, although it only started four years later.
That would be, at a time before the great devaluations, and depending on the amount involved, which was nevertheless a relatively small amount, because we have €2.4 billion there. But it would be a social economy entity, the entity that owns the bank must always be a social economy entity, which has values and principles that match us. From a development perspective, it would be the entity that in national terms could have the muscle for that.
For known reasons, this was not observed, but it is a scenario that, with international partners of this social economy, once these impairments are recovered, which is what we are trying to do, and the bank is fulfilling its business plan, it is making its way… Despite this interruption that the pandemic brought; the bank has all the conditions, by the projections that we make for several years… because we are the shareholder and when necessary we have to respond… all this is now articulated.
With this phase concluded, and we believe it has a place even by our 10-year plans and the plans we have to make for convergence, we have this perspective of development and, once the impairments are recovered, we may then have conditions to make development partnerships with entities of our social economy family.
So, in the next 10 years, the mutual association will not open its capital to third parties to reinforce Banco Montepio’s capital?
I would not say 10 years. Although we have a convergence plan for 10 years, there is the possibility of recovering these impairments in substantial terms much before that. Depending on this evolution, according to our cautious forecasts, in five or six years’ time, we may have development conditions without implying a loss for the associate. It is mandatory that there are no losses for members. It was they who supported the crisis, the development, and since 2004 they have put 2 billion euros there… This must be recovered, and it can be. We have a deep conviction…
…Recovered through dividends and the appreciation of the bank?
Precisely. On the one hand, the impairment recovery goes straight into the financial statement [of the association] as a result because there is an increase in value, and in terms of result this is an immediate surplus. This is very relevant and it will certainly be one of the fundamental sources in the coming years, because the dividends, which we also expect on this horizon, are not instantaneous. But we are counting on them starting in the third or fourth year, when the bank will be in a position to pay dividends.
These are not hopes, they are deeply tested exercises, internally, with the shareholder, with the bank’s supervisor, who is very demanding in this matter, and with the supervisor of the mutual association, because today we have a convergence plan and everything that is done in the group is reflected afterwards.
Coming back to the auditor’s reservations, this time with the so-called deferred tax assets. How do you assess this reservation by PwC and how will this issue be overcome?
The issue of deferred tax assets and the reservation placed by PwC was a real surprise for the association. We had had a previous auditor who validated this, KPMG. When PwC started raising the issue, we called in BDO to do a study on the recoverability of the deferred tax assets which the auditor confirmed, showing that a substantial part of the initial DTA, around 60%, had already been recovered in four years. Despite confronting PwC with these data, the auditor supported an interpretation of the norms that we believe to be inappropriate…
… or careful.
Misplaced. PwC uses IAS12, paragraph 29, to say that the recovery of deferred tax assets has to be done with results obtained not by the same activity that we do because, for them, this constitutes a revolving that keeps the stock permanently. Well, we only have this activity.
There is no revolving here. There are other members who subscribe to these types of products or the same members with other values over time. There is no revolving. And there is an effective recovery in relation to the ones that fall due. Because here the question is: there are only active deferred taxes because the plan for social economy entities does not admit that technical provisions are considered a cost when in insurance they are. Here, everything that comes in is profit and is only an expense when it goes out, ten, 20 or 30 years later. The Tax Authority, given our chart of accounts, says that the mathematical provision is not a cost. And when we finish the financial statement and find the financial result for the year, we have to add to this value all the technical provisions of the year, i.e. all the technical liabilities set up in the year and pay corporate income tax on this value. This is disbursement, it is delivered to the public treasury, but it is temporary. In the reimbursement, when it is observed, we are entitled to recover that value. What we lose is the value in time.
At the time these DTAs were created, they were classified as a “fiscal device” to strengthen the balance sheet and prevent the mutual society from presenting a situation of imbalance in its net financial situation.
In fact, as we became subject to corporate income tax, we were going to recover in future reimbursements as a cost something that would have completely destabilised the balance sheet if there had not been the initial compensation movement to make this situation neutral. This is the continuity principle. Technically, it was impossible to work any other way, otherwise, the financial statements would never be balanced. Until 2017 we lived this way here at the mutual association.
How do you overcome this problem, bearing in mind that the auditor maintains this reserve?
We accepted the auditor would rethink the situation. Faced with the situation, we tried to find the best national tax experts and chartered accountants to help us resolve this issue. We had other auditors with a contrary opinion, an auditor with a strong position, and we tried to look into the matter.
Two statutory auditors, a tax specialist, professors in this field worked with us and, from the inside, the chairman of the supervisory board, a representative of the general board who is a statutory auditor, Alípio Dias, myself, and a set of directors from the key areas, risk, actuarial and accounting. And they concluded, and this is in this year’s financial statement, that PwC is wrong and that KPMG is right. Moreover: we asked, at the proposal of the working group, two more independent opinions, to Professor Azevedo Rodrigues and Professor Pires Caiado, and these two professors also consider that PwC is not right and that what is correct is what the administration has been doing.
Is the alternative to change auditors?
It is a question we are looking at with the auditor. The auditor also has the whole group [Montepio]. For reasons of simplification in consolidation we normally have the same auditor in the group and so there are periods of work here. We also don’t change auditors just because it’s convenient. We have to work with criteria and look into the issues with them [the auditor] and not against them. They have their legitimacy. Now, having the legitimacy to give an independent opinion doesn’t mean that they have the truth, and we don’t think that they do. But in the context of PwC itself, it would not be easy… PwC was called to the working group, KPMG was called to the working group, BDO was called to the working group, all this with immense transparency.
Do you have any sign that PwC will review its position?
Now, with two more independent opinions, with this opinion from this group that they knew would exist… And because these are matters that require the attention of different players, it is a matter that is being analysed and is in progress. This is a real asset and in reputational terms, it would be extremely damaging for us if this were to be called into question. We will recover this in time and people look at the reserves at this value and think: “Well, if we take this away, there is a huge imbalance here”. This is terrible in reputational terms and we have drawn the auditors’ attention to this matter, but they, in their legitimate right of interpretation, have this interpretation of IAS12 that is not ours.
The mutual association has already invested €2 billion in Banco Montepio. Does the mutualist association need an injection of public funds?
No. The convergence plan and the business plan that we had to prepare within this transition period, with prudence, with extreme caution on our part, demonstrate this. And the support for this demonstration is the perfectly scrutinised plans of the bank, insurance and group entities, but in particular, these two most relevant entities in our portfolio, which are the banks and the insurance, which, scrutinised by their supervisors, we see here the path to achieving balance levels adjusted to our reality and which do not need, as has never happened in our history, this type of intervention.
It is necessary to clarify these misunderstandings about what deferred tax assets are, to understand that they are an effective asset, which is recoverable by us, and that continuity is in an entity that is 180 years old and that experienced the year 2020 with 400 million of negative results because of impairments that could have created some… we grew that year by 70 million in terms of net flow of savings from associates, we had positive results. Is there any greater proof of the resilience and capacity for continuity of this entity?
The year 2020, despite this, was a year of an in-depth review of the operation. We created a cost control office, a cost committee. We had a substantial reduction in costs and that contributed to the result. We created investment committees, risk committees, sustainability committees. We created a strategic committee for the group, integrating the whole group, where the chairman and CEO of all the group entities sit with the board of the parent company and where we discuss and appreciate the group’s problems on a monthly basis.
There are mission charters where everything that is transversal is common. Codes of conduct where everything that is transversal is common. A strategic plan for the group where there is a chapter for each entity and which corresponds to the strategy of that entity.
We are creating and identifying by the group managers as to the impact of rationalisation measures and working together and their feasibility. For the quadrants high impact and easy feasibility and high impact and less easy feasibility, we are creating an ACE that is approved by all the group’s entities so that we may work together and recover the synergies we lost through segregation and now benefiting the entire group.
We are also working by market segments, bringing together all the offer to make several sales in one contact, obtaining greater efficiency. All this is happening, we are in our seventh or eighth meeting.
All this is happening naturally and flowing and giving good results. By 2021 we are realising that. In March, we already have positive results of over 8 million euros in the mutual association. We reached 602,000 members. The financial margin was 50 million in March, and in April it’s 60 million. And around 40 million were earned. In other words, on top of these 40 million that were reimbursed, we grew 60 million.
Everything you pointed out, all the changes to strengthen the governance of the mutual association, is the recognition that Tomás Correia’s management did what it should not have done?
Every time has its own framework and there was unequivocally a significant problem in stabilising the group. The group had no stability. Particularly between the bank and its parent company. And even within the bank itself. This was a major work in the last year, this greater stability via this committee, this ongoing relationship with the entities, which is a major issue for those who are here.
It ensures that the mutual will not need public funds. But will it need to raise dues or reduce member benefits?
No, in principle. But these solvency issues are for extreme events. Minimum capitals are for 25-year events, maximum capitals are for 200-year events. No one can say there might be an extreme event.
We are talking about a 5-year time frame. Does the business plan foresee an increase in dues or a reduction in benefits?
No. We have conditions. Each modality has a balance sheet and income statement and has its own reserves. If that is not enough, it resorts to the general reserve in intra-associative solidarity. In all its plans, we find balance, positive equity and, therefore, the capacity to respond to the responsibilities taken on.