Banco Bilbao Vizcaya Argentaria SA (BBVA) 2005 Q1 法說會逐字稿

We are going to start with the Q1 Results Presentation on the basis of the cycle of 2004. As always we will start with the CRO giving the presentation, the basic one, and then we will open the floor to questions. And this time apart from the questions that we will have with the Webcast and from here from the floor we will also have conference call questions, which will come over directly.

So first of all we will deal with the questions from the public here, then the questions from the public of the conference call. And then Isabel will be here just in case there are problems hearing the questions. And then we will have the Webcast questions. So we would like to thank all of you for coming here, and to thank you for coming we will give you coffee in the room next door after the presentation is over. Thank you very much.

Well good morning everyone. Many thanks for coming here. Those of you who have come here. And many thanks for your attention if you are listening to us over the Webcast as Manuel said we will be presenting the results for the first quarter. And for the first time, we are doing it under the new IAS. Anyway the presentation will follow the now traditional format, starting off talking about the most relevant aspects of the first quarter for the group. And then secondly we would give a breakdown for all the different business areas, which we have divided the group up in to and then we will end up with the conclusions.

So amongst the most relevant things that happened at group level, we thought we should have an overall view and say that it really was an excellent quarter with strong growth concerning what we said at the beginning of the year. At the beginning of the year in the presentation of the 2004 results, we said that 2005 was going to be another year of strong growth and indeed it has been in the first quarter with a growth in attributable profit as you can see there of 20%. Attributable profit is €815 million for the quarter. Now that's true in year terms, but also in quarter-on-quarter terms.

Here you can see the patterns for our attributable profit quarter by quarter. I would like to show that with the new IAS the second and the fourth quarter from now on as you can see here of course it happened in 2004 though we didn't report it as such then will peak because of the dividends. At the moment, we are booking the dividends under the cash criterion and that will mean that the second and fourth quarters will always peak slightly. But anyway €815 million is the record quarterly profit ever presented to the market.

And I also wanted to say that this attributable profit is driven by our most recurrent earnings the BBVA group in the first quarter year-on-year, is showing a growth in its operating profit of 16.3% which means 20% growth in the attributable profit which is what I told you before. And here I wanted to highlight that this 16.3% moreover is based on very strong earnings in the core revenues were growing 9% and here in this slide you can see the absolute value of the three main business areas. So looking at the most recurrent earnings we can see that, that is being driven by the revenues that the group is making because if we analyze the cascade as a whole, here you can see that below the line there aren't any items bringing in much contribution to the attributable profit in comparison with the operating profit which is 2001 million whilst the attributable profit is 136 million.

Anyway earnings per share are growing at 17.4, therefore 20% growth of attributable profit based on the most recurrent part of our business and that is in turn being driven forward by our revenues. Now that is happening, thanks to the progress that we are making in achieving the objectives we set at the beginning of the year, consolidation of growth in retail banking which we have achieved, and later on we will go to more depth in the further details of this growth. But anyway lending is growing 20.4%, customer funds are growing 8.2% and that means that we are getting growth in retail operating profit at 11.5%, which means growth in attributable profit to retail banking is 13.2%.

In the wholesale banking, we have had another quarter in which we have seen the franchise get stronger and stronger in terms of activity as we will be talking about again later. We are showing very high growth rates, lending at the moment in wholesale banking franchise is growing at 11.7% while customer funds are growing nearly 32%. What's really important is that this means that we have a very healthy operating profit in wholesale banking which is growing at 12% and that in terms boost the attributable profit, which has shown significant growth at 22.7%.

Our third main business unit is the Americas and there we are reporting a quarter, a very strong growth in activity. And as we will see later, in lending which is growing 26.2% while total funds, which we are managing in the Americas are growing at 14.6%. More relevant still is that this strong activity growth means that the different profit items on the income statement are also showing high growth. So operating profit in the Americas in current euros is growing 15%, and that would be 21.8% if we gave it in local currencies and net profit, not attributable profit, net profit is growing in current euros at 37.4%, which will be 46.2% in local currency.

And talking about the Americas, what's most significant and we will be analyzing it more later, is the contribution being made by Mexico. Mexico is still growing very fast in activity, especially with respect to lending as we announced it was going to. In this first quarter, lending in Mexico in Bancomer has shown a growth of 36% and that can be seen in the operating profit which as you saw there in current euros has grown 20.2%, which comes down to net profit where Bancomer is recording growth rates of 40.9% for the quarter.

And as I come to the end of the introductory part of my presentation I want to say that apart from the activity we have in all the business areas we are also strengthening our management skills. And here there are three areas I wanted to mention, we are making a lot of progress in managing risk. Here you can see what's happening with the NPL balance and our coverage and reserves. So with the new IAS we had to reclassify and restate the volumes of our NPL balance but here you can observe how they are being restated. But the consequence of all of this is that last year we dropped in absolute terms in NPL balance and we have done so again the NPL ratio that we have in the group at the moment is 1.06% of the group as a whole and our coverage is 228.1%.

We are also working on improving our efficiency. Here you can see the cost income ratio, which match our efficiency. Cost income ration here is being shown as it is here in europe and it includes the amortization in the expenditure and that means as you can see that it's gone down from 51.2% to 48.5%, if we were to analyze the cost income ratio without amortization, last year in the first quarter it would have been 46.9% and this quarter it will be 45%. What's really relevant as I see it is the fact that the cost income ratio is improving across the board in all of the business areas.

And then finally there is another aspect that I think is of special relevance, when we talk about our management skills in the BBVA group, that's how we manage our distribution networks and here I wanted to give you some information that we don't normally announce, but I thought it was very relevant is we wanted you to understand what's behind the excellent quality of the management of our distribution networks. It's the productivity of all our commercial staff, which we think is a cornerstone for the business and you have to understand that in order to understand how the bank is managing to get such good people.

This is the best way of improving the cost income measure really and in our strategy for the future, we have always said that improving the commercial skills of our staff will be essential in order to sort out the excellent banks, the top of class banks from those who aren't. So here we are taking the number of products that we are selling for the sales force as a whole. In retail banking, we're talking about the average sales by the sales force which includes the most relevant products which we are asking our employees to sell with special incentive guns and there we are seeing a growth in commercial productivity of 11.6% in quarter-on-quarter terms over the -- and this has happened after improving the commercial productivity last year 30% in Mexico where we are basically including the financing products.

You can see the average sales by sales force on a monthly basis and there you see a substantial increase. And in the first quarter of 2005 compares very happily against the first quarter of 2004 with a growth of 45.6%. This is the kind of information that we will keep on sharing with you in the future, because we think that it's very useful for understanding what's really going on. So having looked at the activity in the different business units has to be finished off with report on core capital of 6% and using the new ways of calculating return on equity, we have got a 30.8% figure there which we are proud to announce.

So I hope that will help you to interpret what we have been doing in the first quarter, but now I wanted to tell you about more specific aspects related to each of our business areas. So let's start with retail banking and you can see the cascades for retail banking with the absolute figures and then the year-on-year changes in absolute terms and in percentage terms. The operating profit is growing at 11.5%, net profit is growing 14.2%. And in retail banking I think there are three aspects we are focusing on now.

First of all, the strong generation of revenues, which I referred to before and we will go into more later. Secondly, the improvement in efficiency, the wonderful cost income ratio we have got and thirdly the risk controls. First activity, let's start with lending, this quarter too we are showing an even higher inter-annual growth rate. Lending and retail banking is growing, as you can see here, at 20.4% and within this growth I think that it's very important to get a breakdown and to help you understand as we are showing the year-on-year average rates that we gave in 2004 and the year-on-year average rates that we are getting in retail banking so far.

So in mortgages we are maintaining a level of 35% and where we are showing strong drive is in SME where we are growing at 22.6%. I think this is especially relevant because it reflects the fact that the strategy that we began to roll out some time back is working. We said that for us SME banking was going to be a top priority and it was and that's shown in our activity figures. If we compare the growth in the profit in the lending that we had to SMEs in the first quarter of 2004 and we compare those figures against what we have got now, you can see the SME banking is contributing a lot to the growth of lending in the entire retail banking area.

And when we talk about SMEs I always like to leave things clear, here in Spain the undisputed leader in the SME market has to be the BBVA not just in banking products but also in non-banking products and so you know what I mean about this, I wanted to show you the market shares that we have in factoring, in conserving and in leasing, so strong growth in lending to SMEs and in general strong lending in retail banking.

And what about customer funds? Well there you can see changes in the year-on-year growth rates. In December last year, we gave the figures which you can see on the third bar and in the fourth bar it says what's happening now, liquid customer funds have been growing 6.6%, which is more or less what they were growing at the end of last year and in customer fund what we are doing is to be much more active in term products, while in terms of pensions we are not showing such strong growth.

Of course, this is the way that the market itself is behaving. Now let's look at customer spreads, in your brochure you can see what's been happening in customer spreads in terms of euros and you can see that the spread comparing this quarter against the end of last year has shown a drop of 3 basis points. What we are analyzing here is the evolution of customer spreads in retail banking only and here you can see the cost of creditors, which goes from 0.4% to 0.9% and there are two explanations for this, first of all greater activity in term products and second there are no reason as well mainly because of the fact that in the first quarter as you can imagine the weight of liquid customer funds which across three customer funds dropped.

So we have good news in terms of the yield that we are getting on our lending, here you can see it with the restatement that we have done for IAS. On the basis of that as you can see there was a peak in the fourth quarter in net interest income basically for seasonal reasons. In the fourth quarter, cancellation fees for tax reasons usually on mortgage products tend to grow very strongly and the consequence of the new way of booking cancellation fees take on a heavier weight but if we look at net interest income you can see that basically it's stable and has been since the first quarter of last year.

As a consequence of the new IAS as well, we now have to get used to talking about other revenues where apart from fee income we also include insurance products. Here, basically we can see the technical earnings of the companies and the net trading income, which in retail banking has to do with the project that we call risk payments and that is basically market products through SME branches here in Spain.

So those other revenues have been grown 7.7% and for us that's very good news, because it mean that this risk premium project which we launched last year is already giving us a significant contribution to our bottom line in terms of fee interest we're growing at 6.4% and in banking fees as such we have got an excellent growth rate of about 7.2%. All of that along with very tight cost control means that we are boosting our efficiency. Costs including operating costs and depreciation are growing at 0.5% whilst the cost income ratio as you can see has gone down from 48% to 45.5%.

If we were to calculate this without depreciation, the cost income ratio last year would have been slightly higher and would be even though now. And we've got operating profit as well growing at 11.5%, this 11.5% I think is significant because it's very close to the operating profit that we got in the fourth of quarter last year and as you know for seasonal reasons the fourth quarter is always one of the strongest in the year. So that means that we have jumped out to a new basic starting level for the year, which we expect to consolidate as in the next three quarters in risks, the non-performing loan ratio is 0.71% and coverage ratio is 283.4%, which means that our net attributable profit to retail banking has grown 32.2%, but in year-on-year terms.

But we should also say something that I think is very important which is that the quarter-on-quarter comparison shows that we have moved up to a new starting point this year we think. What's the next unit we going to cover? Well wholesale and investment banking. As you can see here, there we have consolidated our activity levels. In lending, we are showing a very strong drive which can be seen in the profit items and in quarter-on-quarter terms you can definitely see that here too, we moved up to a new level, made a constant leap ahead and here you can see the cascade of income statement and you can see that it is not very intuitive should we think.

Basically because of the net income behavior in core revenue, so let's start with ordinary revenue. The net interest income in core revenue subject to market fluctuations with the ordinary revenue shows the real evolution of the level of revenues and in the wholesale investment banking ordinary revenues have been growing 7.2% this quarter. Operating profit 12% and net attributable profit at 22.7%.

What are the keys to these figures in wholesale investment banking? Well, first of all the evolution of revenue and secondly the fact that we have been improving fundamentals that is our efficiency and the quality of our risks. Looking at revenues we thought it best to divide things up to make things clear, to divide things up into the ordinary revenue in wholesale banking and in global markets. As you can see in wholesale banking we have consolidated growth and here we are comparing our sales against the first quarter of last year, but also against the quarterly average for 2004 as the whole.

So in global market and distribution we have also had an excellent quarter. In wholesale banking we are also comparing the first quarter of last year with the average for the year as a whole and the first quarter of this year and we do this comparison because the first quarter last year was especially high in wholesale banking, because of a one off transaction, we think that the first quarter this year if we compare it against the average for 2004 as a whole was very good.

Excellent performance which anticipate to expect excellent performance in the future in terms of activity in the wholesale banking, we can say that we have very positive growth, you can see year-on-year average rates in average balances for lending and for customer funds. In lending we have already got a figure of 11.7% here and if we look at the composition of this 11.7% you can see that there is very strong growth in corporate international banking and this is a consequence of our strategic plan for corporate banking, which we launched 18 months ago, the plan 400 which wanted to widen our customer base worldwide and that it's giving us excellent results now in the final profit figures for the year.

So stronger there and excellent control of prices, net interest income over average for the assets have peaked in the first quarter of 2005 in domestic corporate banking and in institutions it is maintaining -- stable. So with more activity whilst maintaining the margins that we have, we can understand why I can say that the outlook for wholesale banking is very good for the year as a whole. And I also talked about our stronger fundamentals, again we see an improvement in the cost income measure and here we are talking about cost income ratios with depreciation, if it was without we would say that last year without depreciation it was 32.9% and this year we would be giving 33.3%.

The MPL ratio is 0.29% and our coverage ratio is very high, 473.2%. As a result we have got a net attributable profit, which has increased 22.7% and in quarter-on-quarter terms, we got a magnificent comparison as well. This area tends to be quite volatile quarter-on-quarter, so to understand the underlying trend we've not only compared it against the first quarter of last year but also the average quarterly growth for all of 2004.

And now I wanted talk about the Americas. Quite honestly the result as I suggested earlier on today have been magnificent. In this income station or in this income statement we can see the absolute value in euro and the year-on-year change, which is in red and blue in current euros would be absolute value and a percentage change and then just to give you a point of reference because if you want to analyze the fundamentals of the business, it's quite useful to know what kind of change there has been in local currencies and in constant euros.

So we are seeing 15% growth in ordinary revenues, net attributable profit is growing strongly in both current euros and in local currencies of 37.4 and 46.2. So Bancomer has only been on the consolidated accounts for a month and a half, which has to be taken account. So what were the key features of the market in the Americas over this quarter? First of all, a strong generation of the current earnings and secondly something I think was very important at times of strong activity like now, apart from strong recurrent earnings we're also strengthening our fundamentals which is the way of guaranteeing a sound future for the Americas.

And when we talk about the Americas, we have to refer to the excellent contribution made by Bancomer Mexico. Talking about recurrent earnings, you can see here the core revenues, which look very positive not just in year-on-year terms with 23.9% growth, but also in quarter-on-quarter terms. Here you should take into account that if there is some seasonality, it would be in our American business where the fourth quarter tends to be much stronger than the others. Well here we're showing a first quarter of 2005 where we are generating far more revenues even than we got in the fourth quarter, traditionally our strongest quarter in 2004.

That's because American franchise in the banking industry there is really showing brand growth in lending where as you can see here we are recording year-on-year growth of 26.2% and there on the right you can see the breakdown of lending, again in year-on-year terms. Obviously, the figures aren't the same everywhere because there are very different markets in the different countries. But what we see here is that we have got uniform positive growth in all the different countries in Latin America in lending and in customer funds as well where the year-on-year change is 14.6% positive and on the right again you can see the breakdown by the different countries which we presented at the end of last year and the ones for this quarter.

Mexico is growing as we'll see later at 13.3% in customer funds with brand growth in liquid customer funds. This strong generation of revenues and strong activity rates means that our cost income ratio is improving. And here again we are showing it with depreciation, if we said it without depreciation then the first quarter last year we would have had a ratio of 45.7% and this quarter we will be talking about 45.1%.

The NPL ratio and this is great news after the drop that we got over last year as a whole, but this quarter we managed to bring it down to even further to a figure of 3.13% as you can see here, which means that we have got very strong growth in our net profit which in current euros is 37.4% and in constant euros shows the kind of growth patterns you can see in the block graph with an year-on-year growth of 46.2%. And I was saying in the Americas, it's Mexico that is really making the most decisive contribution.

So here I would like to focus on Mexico for a few moments. Here you can see the cascade for Mexico and here once again you can see the year-on-year change in terms of current euros and in the last column you can see the variation in the local currency in Pesos, which if you get to analyze the business is really the most significant figure. So we are talking about growth in the operating profit of 20.2% in current terms and 28.4% in constant local currency. So activity is really doing well there, lending is the most significant and if we are continuing to get very strong growth rates as we announced.

I would like to say that when we see these kinds of percentage growths, we have to take into account the basic point of reference, so we are announcing year-on-year growth which is very high in relative terms because we are starting off from quite a low starting point. But it's making a significant contribution to our accounts with a 36% growth in general, which includes incorporation of Hipotecaria Nacional in customer funds, we're growing 13.3% and as I said before in current accounts we are growing at 13.6%, that's really important for our income statement because we are talking of a time in Mexico when interest rates have been growing very fast as you know.

And apart from our activity in Mexico, we are also seeing customer spreads behave very well. Here on the left, you can see what's been happening to the customer spread and on the right you can see what's been happening to net interest income over average days lending (ph). If you look at the structure of the balance sheet of Bancomer, you can see what's most important is the NII over ATA figure which in the first quarter has made an important leap forward. And there were two reasons for that, first of all indeed, we are benefiting from the interest rates in Mexico and you can see what's happening to the TIEE there which is obviously good for the Bancomer lending that there are another two aspects, first of all excellent price management in Bancomer and secondly modest growth in the cost of our funding.

And secondly you can see the better yield we are getting on the lending, the returns which are based on a better structure which will continue to benefit us over the next few quarters and the cost income ratio is improving very fast from 46.4% we've gone down to 45.2% and that has a knock on effect in terms of NPL ratio and coverage. So with this buoyant behavior, net attributable profit is growing 50.6% despite the lower net trading income compared against the NTI that we got in the first quarter of last year.

So, that's excellent behavior not just in year-on-year terms, but also in quarter-on-quarter terms. So I'm now coming to an end and I would like to give you the conclusions we draw from all of these figures. As we see it we think that we have been working very hard along the lines that we announced to the market at the beginning of the year and we think that the results of this hard work are very clear. An excellent quarter and I can also say that in terms of the trends suggested by these figures make things look very good for the rest of the year because the fundamentals underlying these results are very positive.

In the first quarter in retail banking we have sustained growth in activity, and if we analyzed what we can expect for the year as a whole we can actually forecast that retail banking will just go up and up. In wholesale banking we have had a good quarter and we hope that for the year as a whole we should continue with such good figures. In the Americas, the results for the first quarter were excellent driven mainly by Mexico, but we are very optimistic for the rest of the year.

In terms of non-organic expansion, we have been pretty active too. First of all, we signed the Laredo acquisition at the end of April and as you know we also launched the offer for BNL in Italy. This offer is now moving ahead on schedule more or less as you know we have got board support for it, the CONSOB are also behind this and Brussels are backing us and so we trust that we should be able to bring this transaction to a successful close in the third quarter of this year as we announced when we started everything.

So the changes brought in by the new International Accounting Standards have simply shown the BBVA is a high productivity bank with a cost income ratio which is getting better and better with minimum risk with an MPL ratio of 1.06 and we are also showing high solvency with fantastic capital adequacy in terms of full capital rating, with full capital at 6% and our return on equity is 30.8%.

So that's all I wanted to say for now. Those were the most relevant aspects that I wanted to highlight in this presentation. And now as Manuel has said we can move on to the Q&A, I'm going to take questions first of all from the public here in this room and then we will go out to the webcast and the conference call. So perhaps Isabel will help us make things run smoothly. Thank you.

Good morning. So shall we begin with the questions here in the room? Good morning. Could you say who you are please?

Javier Bernat from Caja Madrid Bolsa. I have a couple of questions. One is the return on equity in the first quarter, would you say that will continue throughout the next few quarters? Will it be round about 30% because that would be quite a leap for you? And could you clarify in Mexico this big increase in business, I mean how much is due to the integration of Valley and Laredo Bank, which were not consolidated in the Q1 2004.

And, could you say something about Venezuela and Argentina? What do you think the perspective is there or what the outlook is there, please?

Well, beginning with return on equity, we think that this return on equity at a constant parameter is perfectly sustainable. We think it is the trend for our return on equity. And Valley Laredo Bank are not incorporated in Mexico, in fact in the Q1 Laredo Bank was not even included because it was closed on the 20 April, and Valley is in fact very small and its included in Mexico, so Mexico's activity is organic and in fact in all the growth that we have shown you we are not even including Hipotecaria Nacional, so its constant parameter. So we have to add Hipotecaria Nacional actually on to that. So we thought that gave you a clear idea of how business is evolving there.

Now Argentina and Venezuela. Well, in your documentation actually in the annexes, you do have information about Argentina. Banco Francés had a good quarter confirming the evolution that we have seen in previous quarters and attributable profit 17 million euro this quarter and in terms of activity its business as usual really and the cruising speed this first quarter is basically I think constant for the next two quarters. However, as you know in Argentina we are still getting back to normal, we are getting back to normal business for the financial system Banco Francés is doing very well in customer funds and I think the results we have achieved there are stable and we expect them to remain so.

Venezuela, you will also see from the annexes that Venezuela in operating margin is negative in year end year terms so margin is falling there. That's because of the huge drop in interest rates in Venezuela and this fall in operating profit is I think probably the same figure we will have by the end of the year. Basically that's what we are expecting for Venezuela.

Luiz Danielle(ph) from Societa General (ph). I have a question which is really two I suppose because you have seen in that interest income for Spain what you call financial services but net interest income fell 2% when compared to the last quarter of 2004. I find that quite surprising compared to other Spanish banks. At least the ones you have given a result so far have shown good progress. Then you've also talked about difference in spreads and -- but it seemed to have come down in the first quarter of this year compared to the fourth quarter last year. So the cost of creditors I mean, what does that exactly include? And secondly, how do you think this spread will progress in the next few quarters?

Okay what -- or how I -- as I said in the presentation when we talked about spreads in euros we do it in a euro balance which as we have said overall the foreign spread has been three basis points. What we call retail banking in Spain and Portugal when you analyze the evolution of the customer spread in cost of resources, we include the cost of resources, the cost of customer funds and transfer costs to fund the assets and the transferred costs at market level.

When I said there had been an increase in those costs it was due to two reasons. First of all because we are having -- we have more term deposits and in the first quarter for seasonal reasons you have lower liquid assets.

The good news in my opinion is the evolution of ROI because that is very good news in retail banking because we are the same level as we were in the third quarter last year. The peak that we had in the fourth quarter last year as I've also said before is due to IAS because as you know fees have less activity -- fees on transactions of course cancellation fees are a different matter. We had a lot of cancellation fees in the fourth quarter which is part for the cost and that's why we get that peak which we didn't use to see on the Spanish GAAP but which we now see was IAS. And net interest income in retail banking overall which I suppose is what you are getting at. We are growing 5.4% and in the next few quarters we expect to increase it quite significantly. Any more questions?

Luiz, I would like to add something else. There is another factor you have to bear in mind. Because of the way we calculate results according to business areas a unit is on the balance sheet for the whole year but then that result disappears so you always get an impact on the financial margin of the first quarter compared to the fourth quarter, that's something you should always bear in mind. Any other question?

Yes, I -- I forgot one of my questions before. This morning we heard the news that the Bank of Italia -- the Bank of Italy is -- has given the go-ahead to ABN Amro for their operation. Could that speed things up for you because I think you talked about the third quarter for the operation. If we got positive news soon would that mean that your operation on BNL would go faster?

I don't think so. It's very difficult I think to expect anything before the third quarter because of legal limitations and requirements and I think the ABN Amro operation and that the BBVA operation are both different. They each have their schedules and it's great that they have got their approval but I mean I don't think that's going to effect us at all. And I don't expect anything before the third quarter as far BNL is concerned because of the legal requirements, the timings and schedules. Manuel can probably give you a summary of that.

Yes, basically we have the following things ahead. That's the approval of accounts, the renewal of the BNL board which has nothing to so with the bid process although the renewal of a board for three years within the context of a bid is pretty important. Once that's over we once -- we presumably get the approval of the Bank of Italy we have to convene an AGM of BBVA, AGM for the capital enlargement for the share swap and you need at least 17 days to convene the BBVA AGM. Once that's approved the shares and the capital enlargement we will have the bid term which will take about 25 to 40 days and so that's the time margin that we are dealing with right now.

Any more questions from here in the room?

Yes, good morning. I have a couple of questions. The first one is about wholesale banking. You talked about interest income and return on -- on trading. Could you tell us a bit more about your expectations for the rest of the year there? And then, there did seem to be some trading losses in Mexico. Could you tell us why and what your outlook is for the rest of the year. Okay?

Well basically we have lots of operations under trading which -- I mean you are basically you are funding your position so you can't have different impacts there and a lot of our market operations really should be considered under ordinary margin rather than trading margin or financial operations so we have to consider that and also vice versa. So from that point of view I think you -- it's best to look at ordinary margin which is a better reflection of what is going on. And in securities lending derivatives or maybe we have got fixed income with a derivative so you shouldn't always expect to see exactly the same figures.

And Mexico and return on -- on trading there -- you are quite familiar with Bancomer by now and lending there is only 25% of its activity although it's grow -- it's increasing but it's only 25%. As a result of that structure, we always have big trading activity in Bancomer and that gives us quite a lot of volatility in our return on financial transactions. If you look at last year the first quarter, we had 80 million positive and I think in the second we were 39 million negative. So it usually coincides with the changes in interest rates. When interest rates goes up our most recurrent business improves and our portfolios after mark to market tends to be negative. So it's basically powerful of course in this first quarter because if you look at last year you will see more things happened.

What should we expect for the rest of the year? I think the negative figures for the first quarter this year, I think it was exceptional just as the interest range change was so I think there is always quite a lot of volatility in trading gains in Mexico in the past and I think will continue to have it and it's always counter cyclical. When we have negative trading gains we always have very positive net interest income.

But do you have any measures? Have you implemented any measures? I mean -- I mean have you - have you hedged your funding instruments to mitigate this split or this break between net interest income and trading gains?

Yes, yes we have been doing it for a while. But markets there have -- they have and so it's not always that straightforward but we believe that the operations that we have on the initiatives of the of the coop in Mexico have been really significant over the next - over the last few months and will continue to be over the next few months. So we do need a certain time I think and volatility is not a bad thing.

If you compare the increase in interest rates and what happens to net interest income and trading gains, you can see that in that interest income which has improved this quarter which will improve in the following quarters because of the high interest rates having an impact over several quarters. This is a much higher impact. It certainly is higher than the losses in trading gains. For net interest income 100 basis points increase in Bancomer is the growth in net interest income in annual terms of EUR 75 million. Just to reassure you I think that sort of put things back into perspectives, we have -- in terms of basis points and then percentage growth, so we do have measures but there will be volatility because that's just part of it's activity and part of the way the balance sheet is structured. I think we have another question.

Good morning. I wanted to ask several questions in fact. At the end of 2004, you said that 2005 could be double-digit growth between 10% and 15% in the bottom line. The Chairman said getting to 20 would be incredible. It just sound - I don't know - did -- did you fix it, like that? Was it bottom up, which is you know fair enough? Or is this something that is sustainable I mean, is this bottom line growth sustainable throughout the year? Do you feel comfortable with this kind of growth in your profits?

And the thing is Manuel is here, I would like to talk about BNL. Can I have your personal impression of what could go on, what could happen with the operation and what is your -- what would be your preferred target for capital, 100% or less? And there have been a lot of things in the press. What would your capital targets be which is sale of anything in your industrial portfolio because that seems to be what the headlines are BBVA is going to sell off its industrial holdings to partially fund the BNL operation. That I mean seems quite sensible to me because the stock market is better that BNL are...

Well, I hadn't heard that news I have to admit. Well, Manuel could you talk about BNL then?

Okay. Okay. As far as BNL is concerned, everything is going according to schedule and I think the reactions we have seen in Italy are also par for the course. Institutionally, politically, the trade unions are happy with it, the small shareholders -- the minority shareholders are happy with it, consumers are happy with it, and the press -- the serious press have been very positive about the bid. Most of the big Italian banks including savings banks have said they are not interested in buying BNL so I think we have a very positive impression staying in mind is that Italy is rather unique in the way it works.

Our preferred capital position would be, well to have Laredo closed by the end of the first quarter and Laredo will actually come in into the second quarter because it was closed on the 20th and if it that will have an impact on capital ratio and we have to be disciplined with regards to regulatory capital and that will mean that most of the increase in results will be paid out in dividends to shareholders, the only limitation we have is that our core capital should be between 5.5% to 6% because that's where we think it is best to have it terms of regulation, we think it helps with our ratings and reduces risks.

So we really do not need to sell off any significant holding in our industrial portfolio. I think that news is to due to the fact a lot of our equity method stakes have been put up for sale but I think you've all know that since February any way and it's available for sale. That doesn't necessarily mean we are going to sell it overnight. That's the situation as it stands and I don't ever remember a thing that 20% would have been absolutely crazy. When you analyze the groups' attributable profit it's 815 million euro and if you look towards the future, what can we expect in absolute value for the next few quarters? We are optimistic and we think that things will look very, very positive indeed.

Anymore questions from here in the room? Okay let's go on to the conference call.

(Operator Instructions) We have a question from Mr. Digrandi.

Yes, good morning this is Carlo Digrandi from HSBC. Just one question on the margins especially domestic margins. Can you give us a little more flavor about this marginal erosion that you add. How much could be pricing? How much is competition? How much is really queuing from the market? How much is a deliberate action from you in order to be competitive? and how much is asset mix? Clearly it is not a surprise that everybody is pushing mortgages in Spain and in some respect this will have an impact on the net interest income. Thank you very much.

He wants more details on margins and talked about price pressure being due to competition in Spain or the asset mix that we have.

Generally, we can differentiate as you said, between the evolution of the competitive pressure and the evolution of the mix. In terms of competitive pressure it's my opinion, it has been my opinion in the last 12 months that we are not having more competitive pressure in the lending part of our business. Basically we are having the same competitive pressure and that is very normal because in Spain we have, as you know, the lowest prices in terms of our lending portfolio view, which is a good news and a bad news. The bad news is that we have the lowest level of prices. And you will see that it is very difficult to foresee a more competitive pressure in our lending portfolio in terms of prices. In fact the evolution as suggested before in the -- in the last two quarters has been very flat. In fact -- in the past the evaluation has been more influenced by the re-pricing of our mortgage portfolio due to the decrease of the interest rates level compared to any other thing.

That there is a way now, we are foreseeing a evolution in terms of interest rates basically flat and that there is why we are seeing only an element of mix in the - in the slight reduction of our investment in our lending portfolio prices. So we don't think that competitive pressure is now higher, the VP used to be either six months ago, we don't foresee a higher competitive pressure and the -- we are very happy because evolution of our -- the prices of our lending portfolio is basically flat and that is the situation that we are expecting for the next quarter. There has been a slight decrease due to the next component basically.

Thank you. Any more --?

Operator Instructions. Okay, you can speak now.

Hello? It's Arturo de Frias from Dresdner I am afraid that I will have to insist a bit on the margin because I think it has -- on the domestic side, because I think it has been clearly a disappointment in -- in the results and I agree that the stability of the average yield on the assets side they say is a good sign but when looking at the performance of the net interest income in millions and looking at the growth which is well below the growth in volumes one gets a different picture, I mean it looks like the overall margin is performing much worse than the few analysis of this spread would let us think.

So again why -- why is this happening? Is this because of more expensive wholesale funding? Is -- is this because of any other reason? And I would be especially interested if you give us a kind of outlook of what the total gross in net interest income could be by the end of the year. And on top of that a small additional question. Can you please tell us how much was this consolation commissions in fourth quarter 2004 that made the total net interest income to look better than what it was on underlying terms. Thanks.

First of all, when you are comparing the evolution of the net interest income and evolution of volume, you should consider that you are comparing the net interest margin of the first quarter of the current year with the first quarter of last year. And I remember you that the decrease in terms of customer spread took place in the first two quarters of last year but there is no why. During -- during the year we are going to have a -- a closer correlation between activity and increase in terms of volumes of net interest income.

And that is very important because when you analyze evolution of net interest income and the evolution of volumes you should consider that you are comparing the net interest income of this quarter with the net interest income of the first quarter of last year. And you should consider as well that the reduction of the customer spread took place, as I said before, in the first two quarter of last year. So the comparison along the year is going to improve the level of growth rate of our net interest income at which extent I will like to give you a figure but I can tell you that we are now having a growth rate of 5.4% and perhaps we are not going to get a double digit but we are going to be very close to that.

With respect to the commissions, total commissions in the deal (ph) loan portfolio which is banking in Spain and Portugal in the fourth quarter was 0.35 and in the first quarter of '05 it was 0.30. That was practically 5 to 6 points less than in the fourth quarter. That is the explanation of the major part of the reduction of the deal on investment from 04/11/04 to 02/04/05. And as we have said, this is the explanation of the reduction of this deal because if we see the deal of -- of the long book because interest accruals we are at 375 with the comparison with the fourth quarter of 376 respectively the same and this is the level more or less in which we are from the third quarter of 2004 as Manuel was saying before.

So basically all the reduction on the deal on the long book of the retail banking division Spain and Portugal has been associated with these seasonally increase in the fourth quarter 2004 of commissions associated with the consolation of mortgages basically,

We have with us another question. (inaudible) you can speak now.

Hello, it's Santoro(ph) again. Sorry to hold on but I have another question, this time it's on provisions. Provisions have been much better than in previous quarters. It's clear that we are seeing the impact of IIS on the fact that if I'm not wrong, you are already very, very close to the 125% maximum on the retail side of the provision possibly in Spain -- and possibly as well in Mexico. So the provisions came very, very low in Q1 in basis points. Are these levels going to be seen in following quarters? Thanks.

Well, we -- we have to differentiate the different the different business units. In retail banking in Spain, we are comparing a very special quarter. When you compare the first quarter of the current with the first quarter of last year, we have seen a decrease in terms of percentage of 20.5%, that's very high, that is not going to continue through the year. In fact at yearend we are expecting a level of provision in the year '05 very similar to the year '04. In fact we are expecting a decrease of 1.2% or something like that.

So the first quarter of the --- the current -- the comparison of the first quarter in retail banking in Spain is very profitable in the first quarter and is not going to be the case in the -- in the whole year. In the whole year we are going to have basically the same level of provision. In wholesale we are going to maintain the level -- the absolute level that we are having now. We don't expect any change around the year and in Mexico which is perhaps the -- your principal concern, we are expecting a level of provision in the next quarter around 50-60 million euro. That is going to be the -- the basic speed.

Next question conference call in English please.

We have no more questions.

So what about the conference call now in Spanish are there any --? Well, doesn't look like there are any Spanish questions, so let's have a look at the webcast questions. (Inaudible) from JP Morgan asked several questions which have already been answered but there is one new one. What about the levels of the front and back mortgage groups in Spain? Right now the back books is at 0.90 approximately in terms of ROI for mortgages and the near ones between 0.75 and 0.80. Those new ones have been at the level for some time now. They are pretty stable. I think they have been stable since the first quarter of 2004 in terms of new mortgage business has even grown slightly.

So the front book, back book impact is still there, it was still have a slightly negative impacts but it's going down because the entrance prices are being stable for sometime now and then of course we have the margins on new business. We have the mixed affect where mortgage lending is not quite as big as 40% of total retail banking investment and then the replacing impacts because of the reduction in one year rates. For the first time, we are actually higher in terms of the one year rate this quarter than we were in the same quarter last year and there are of course expectations about short term rights on the one year rate well then the better return on investment we will get.

I have a question from Manuel Cantalapiedra from Banesto Bolsa about costs in Mexico because they've been quite high this quarter. Why is that and what are you expecting for the rest of the year?

Okay. Cost in Mexico and cost in the Americas in general at the beginning of the year we did already well --- in fact it was same as of last year we started to say that our growth model in the Americas including Mexico was changing quite significantly. We said so because we were seeing big impetus in activity and in revenues and obviously that increase in activity meant higher revenues but also higher costs which we had to control very strictly and invest in the knowledge that Bancomer and the other banks need infrastructure that will guarantee excellent service and excellent growth in the future and that is what has happened.

I think there are some quite relevant aspect here in Mexico in the first quarter. We increased our number of branches as we had anticipated, about a 100 branches and there is an incredible growth and upsurge in activity. Our management committee has just seen that in Mexico in the last nine months transactions, the number of transactions are increased by 25% and of course you have to respond to spectacular growth in credit cards, et cetera by investing in services. So if we exclude these (inaudible) because the cost are separate but that's been an increase in cost by 13%.

What can we expect by the end of the year? Well, if activity continues to grow as much, costs will be -- come down slightly. It wont be at 13% but they wont be much below that. Of course our policy is to keep profits as far as possible but we don't want to compromise growth. So I think costs will not be as high as 13% but if activity continues to grow even 13% wouldn't be that much.

I have a question from Inigo Vega from Dexia. He wants to know what was the contribution of Hipotecaria Nacional to Mexico?

Bottom line 12 million euros is the answer.

And another question from Goldman Sachs. What about the tax rate we expect to accrue in 2005 and can we say anything about the tax rate in Mexico which has gone up slightly this quarter. Can you estimate anything for the rest of the year? The tax rate for the group as a whole 28% for the whole of the year and in Mexico I suppose, well the important figures was the whole group and that's 28%.

And I have a question here from Mann(ph) Securities. Whether the trading income level in the first quarter is sustainable? Well, as I said before the market as part of wholesale activity has been a very good quarter. If we compare it to the first quarter last year were even to the average for this year, I don't know if we can sustain it at this higher level but we believe that basically it could fall slightly but we are expecting big increases for the year probably not as big as we had in this last quarter but certainly relevant. So definitely I mean, definitely not sustained at this level but they certainly won't come down to last years' in terms of (inaudible) margin which was you know, 50 million euros.

A question from Pedro Reis from UBS. Could you give us some information about the evolution of profits in the Texan bank because we know it hasn't been consolidated yet.

Well, in line with our estimates nothing new really. Basically in line with what we have already said. I mean there is nothing of specific relevance. We haven't got the results yet but as of the second quarter Laredo was basically in line with our expectation.

That's it. I was just checking the questions but we've answered them all. That's it then. Okay, I am glad it's over.

Thank you very much for your attention those of you were here in person and those of you who've listened in thank you very much.