Banco Bilbao Vizcaya Argentaria SA (BBVA) 2005 Q3 法說會逐字稿

Well good morning everyone. We're now going to give you the quarterly results for the third quarter. As we usually do, our COO, Jose Ignacio Goirigolzarri will give a presentation of the quarterly results, and then afterwards we'll open the floor to questions, well the floor first of all we'll open the floor to questions and after that we will take questions over the conference call. And [inaudible] will help us with them and then we will take the e-mail questions. So without further ado I give the floor to our Chief Operating Officer.

Well good morning everyone, thank you very much for coming here today. Those of you who are physically, and thank you for coming to be with us virtually over the web, those of you are listening over the web.

We've already heard that we're going to be talking about the third quarter results today, and we're going to follow the order you can see on the screen. As this has become habitual now, we're going to start with the key highlights for the quarter, and then we'll give you an analysis of each of the business areas that the organization is structured into, and then we'll give you a few conclusions.

Well, as we see things, there are five key highlights which explain the results that we've achieved this third quarter. They are results which we consider to be excellent. The first thing is, once again, we are reporting record level profit growth. And here you can see how attributable net profit which we're now presenting to the market compares to previous quarters and to last year. If we look at the first three quarters of last year and compare them against the first three of this year, growth has been 24.9% with an attributable profit of EUR2.72 billion and that means in earnings per share which is probably the most significant variable here, year on year growth of 24%.

You should take into account when you do quarter on quarter analysis according to the new IAS the second quarter always looks better because of dividends. So the third quarter which hardly has any dividends shows EUR914 million, and that means a growth of 35.7% over the third quarter of last year. And more relevant still, this kind of growth is based on the most recurrent business, and here you can see what's been happening to our operating profit figures. All in all, the three quarters it's grown 19.7%, and in this quarter, against the comparable quarter of the previous year, it's grown 23.8%.

The second key highlight we wanted to talk about today, apart from talking about our income figures, is the quality of what we are reporting here. And we've got an attributable profit in the operating profit which is growing very fast, but it seems to me very significant that the ordinary income is growing at 14.3%. And activity in the Group is really behaving very well and expanding in all business areas, so that would be the third key highlight.

And here you can see the data for the three main business areas, and if we look at what's happening in lending and customer funds. So first of all you've got the average figures -- growth figures we had for the end of 2004, and how these compare against the 2005 figures. And here you can see how in all of the business units we are reporting expansive business. That's true in retail banking, in lending and customer funds; it's true in wholesale banking, again in lending and customer funds, and it's also true as you can see here on the screen in the Americas.

And all of that brings us to the fourth highlight. We're presenting results which are on the up, and here you can see this in cumulative terms and in terms of standalone quarters. The operating profit which you see on the left shows how, in year on year terms, the quarters compare. We've reached cruising speed in operating profit of 23.8% which gives us year to date growth of 19.7% as you can see on the right.

But what's especially significant here is looking at the left-hand side and what's happening to the operating profit there because it immediately impacts on the attributable profit. And here you can see the standalone quarter growth of year on year change, and the cumulative figures as well. So look at the standalone quarter growth; quarter on quarter we are speeding up our cruising speed. If we compare the standalone quarters we can see that we are growing then at 35.7% in attributable profit.

And, as important as that, is the fact that this kind of performance is not just for the Group as a whole but also for all the different business areas as you can see here. What we're seeing on this screen is the cumulative year on year change in the operating profit for retail banking. We started growing at 11.3% and we're now growing at 14.3% in aggregate year to date terms, and in wholesale banking where we started at 15.1% at the beginning of the year and we're now talking over [14%] growth. And then the Americas where we began with 14.2% growth and now we are way over 30%.

And so all of these key factors really strengthen our competitive position both in terms of profitability, and in something which I think is really important, in terms of our ability to manage our distribution networks, and to manage efficiency and risk, and it's boosting our capital adequacy.

I'd like to explain what I mean by all of these statements. So let's start by our profitability. We are offering a return on equity at the moment which is higher than any of our European peers. Our ROE is 35.2% which compares very well against a 33.3% figure for last year, and compares very well against the average for our European peers.

The second issue that I was referring to before is the fact that we're still making progress in the management of our distribution networks. For the last two presentations I've been talking about this matter because it is very important to us. Part of the Bank's strategy is based on what we call commercial productivity. There are many ways of measuring this productivity, but in order to simplify things in these presentations what we always report to you is how average sales per sales person are going. So here you can see, and this is something you've seen in earlier quarters, we are reporting very significant growth, not marginal growth at all, but qualitative growth. That's the case in retail banking in Spain and elsewhere in the Americas, we give the example of Mexico here.

So if you measure the performance of our sales persons here you can see there's a growth of over 40%. And I was saying that part of our model, our business model, was based on improving efficiency, and that’s something we've managed very well. With cost income ration with depreciation, which is how we've been reporting it recently in order to be easier to compare with other European banks, over the first nine months has reached 47%. That means a drop which in this case is the improvement of nearly two points, and moreover, you can see this improvement in all the business areas as is shown here on the right. In retail banking, in wholesale and investment banking and in the Americas, all of them have improved their cost income ration.

And what about risks? There our NPL ratio once again is below 1%; our coverage ratio is now 246% and we are really seeing how our provisions balance is improving with our generic provisions policy. So that means profitability, risk control, greater efficiency, and that all comes together with a higher capital adequacy. Here you can see our core capital situation 5.9% core cash capital and our BIS ratio is 12.7%. Consequently the highlights of this quarter, well the highlights of the first three quarters of 2005 give us a picture of a buoyant Group which is rolling out its policy to boost profits, and boost above all its most recurrent business which is shown in the operating profit figures, growing at 20% or more.

So I think we should now move on and talk about the most relevant characteristics of all the different areas. We can start with retail banking in Spain and Portugal. As we usually do, we wanted to show you the whole cascade of the income statement showing year on year change compared to the first quarter results we gave to you and the second quarter results and now these results.

There's not much to say about this screen because it's crystal clear really, that all of the income lines are showing excellent performance over the year. Operating profit is 14.3% in retail banking in Spain and Portugal now, for the nine months, the third quarter that is. We're in an expansive situation where we are rolling out the policy that we've discuss with you in the different presentations over the month. In lending we're growing at 20.4%, and you remember that in March we said that 20% growth was expectable for the year as a whole.

And then secondly, if you look at things in terms of structure, how we've structured this growth, you can see that on the right, and again we are fulfilling our expectations with mortgages slowing down in terms of growth whilst we are really doing well in small businesses and SMEs. So overall growth of over 20% which is also growth that is structured according to the policy laid down and reported to you at the beginning of the year, on repeated occasions.

And customer funds; there we are also expanding and growing; our growth is already easily double digit growth, 11.4%. Our stable funds are performing excellently, and of special relevance, if you look at the structure of our stable funds and how they're growing, on and off the balance sheet, and our policy to establish a balance between those is reflected in these figures.

This improvement in our activity means that we've also improved our customer spreads. This is growing quarter on quarter at 7.4% in terms of net interest income, and that's the first time that the net interest income in retail banking in Spain and Portugal has been higher than the second quarter in the third quarter, because traditionally the third quarter tends to report lower figures than the second. And there on the left you can see what's been happening in customer spreads, and you can see that this spread between yield on loans and the cost of deposits has been doing very well. Let me explain why and how.

You remember that at the last presentation we said that this would happen as the customer spread was very seasonal, and you remember that I said that in the second quarter the customer spread had performed very well, but the third quarter we were expecting it to go down for seasonal reasons. Now why is it so seasonal? Well because the third quarter, in seasonal terms, has fewer contracts arranged and fewer early redemptions, or early repayments, and that's important. So here we have an impact which is no less than 5 basis points.

And secondly last quarter, we said that there wasn't any competitive pressure, and what we were going to be impacted by was just the shape of the curve and interest rate behavior, with respect to our mortgage lending above all. And it's true, the second quarter was especially bad in terms of one year [inaudible] and that meant 15 basis points below the previous year on our mortgages in general, and again the seasonal impact because of the costs of promoting the [Levriton] passbook, we've had a marketing campaign this quarter, which does have an impact on the figures.

So as I see things personally, here we're talking about something which is clearly focused; what's most important is the entry [prices] over the last three months, have been focused constant and remains the same. The fourth quarter will show an increase in customer spreads and we will fulfill the promise that we made at the last presentation, that the fourth quarter, as compared to the fourth quarter of 2004, would have a drop of 20 basis points, and that's something we already told you about in the second quarter.

But anyway, this good behavior of net interest income is accompanied by excellent performance of revenues per service. Here you can see fee income quarter on quarter are growing, and you can also see how net trading income and insurance are doing very well, with the new special project we have. First of all a medium size enterprise that we reported to you last quarter, and you can see that we're getting 12.5% total revenues from services as compared to 7.1% growth in the first quarter. And that shows that we are boosting our efficiency in retail banking which is reflected in revenues growing at 8.4%, and costs, despite the fact that we have opened 138 new branch offices, still being kept in check growing only 44.3%, which means that our cost income ratio is 44.3%.

And that gives us the following operating profit figures. What I think is especially significant here is that in the third quarter, in absolute terms, we've got a higher operating profit than in the second. You can see that EUR726 as opposed to EUR717 million, and that means quarter on quarter growth in inter-annual terms of 16.5% which is the cruising speed that we have currently achieved in growth on our operating profit in retail banking in Spain and Portugal. This along with our risk control with an NPL ratio at 0.67 and a coverage ratio of 298% means that our attributable profit is growing with year to date growth of 13.3%. So the results of retail banking I think this quarter, once again have been excellent, and they have confirmed the momentum that we have managed to gather over several quarters, well at least nine quarters in fact, during which we have constantly been reporting results on the up.

The second business area I wanted to look at was wholesale and investment banking; here too we are reporting excellent results. Once again here you can see on this screen the comparison, excuse me, the comparison between year on year growth reported in the first quarter, in the first year half end, and then now. And once again, as I said in retail banking, quite honestly, there's not that much to say. All of the income lines are obviously growing and expanding.

Why? Well this is because our wholesale banking is working very well, and because our markets, our lending area especially, are doing very well. In wholesale banking activity we are reporting a very positive performance, here you can see how we were growing a year ago and how we're growing now, in lending and in customer funds, and then you've got a breakdown at the bottom of the growth between corporate banking and institutional banking.

But more significant than that still, I think, is to look at this screen; you can see the wonderful pricing policy we're rolling out in wholesale banking which means that we can keep up the net interest income to ATA's constant high, and we are really passing on all that kind of growth immediately to the bottom line. Apart from the excellent performance of wholesale banking, we are all seeing how our market area is working very well; in terms of ordinary revenues, we're getting EUR271 million from this area. And here I wanted to say that within this EUR271 million 80% of the revenues come from customer relations. And only the rest of it comes from gearing, and that shows great stability in the very key unit. With markets and wholesale banking doing so well, these are the figures for a whole are, and our ordinary revenues here are growing 67.4% year on year. And once again this is not only excellent in terms of quarter on quarter growth, but also in cumulative year to date growth.

With this kind of performance in the ordinary revenues we are strengthening our fundamentals with our cost income ratio down to 29.8%, and excellent figures in our NPL ratio at 0.22%, and our coverage ratio, soon we're going to have to change the scale of this graph because we're always hitting the ceiling as we reach 567%. All of that means that our operating profit is growing 42.6% and our attributable profit is growing nearly 60% in wholesale and investment banking. So in general this area is reporting an excellent quarter. We began the year strongly; we said that we were very optimistic as well about the upside in this area, and as you can see, we were quite right because the third quarter has been really magnificent.

And now I come onto the third area in our organization, the Americas. Here too I'd like to show you the same slide so that you can compare what's been happening in the different quarters. And here you can see that each one of the income lines has behaved very, very positively indeed. It's not just the operating profit growing at 36.4%; another significant thing is to see how the 14.2% growth we had at the beginning then moved onto to 27.7% and then up to 36.4%. In the Americas revenues are really the driving force behind this growth. In year to date terms you can see that core revenues have grown 24.4%, and in quarter on quarter growth the third quarter of this year compared to third quarter of last year has grown 25.6%. But more than that you have to look at how the [runs] are obviously getting bigger and bigger every quarter.

In the Americas business activity is very sound indeed, it's sound growth, not just in Mexico, but in all the other countries as well. In lending with constant parameter we are seeing growth of 24.1%, and customer funds growing at 12.7%. Since we're controlling prices very well, and also controlling costs with such high growth in income, cost income ratio is doing very well and has come down to 45.7% as you can see.

What about risk? Well the NPL ratio as you can see is still going down, and we are reporting an NPL ratio in the Americas of 2.64% with a coverage rate which is moving up to 200%. As a consequence of all of this we can report the following operating profit growth. In year to date growth we've grown 37.3%; in quarter on quarter growth which shows the cruising speed that we have achieved at the moment, we are growing at 46% with net profit growing in parallel to this.

When we're talking about the Americas, Mexico is always the most important chunk of our growth; Mexico is doing very well, so let's talk more about that. But before that I wanted to repeat something I've said in other presentations that Mexico is doing well, but so are the other Latin American countries. So if you look at the operating profit and the net attributable profit figures for the different countries you can see excellent performance, and I think we have an excellent franchise. Sometimes I get the feeling that the market doesn’t know how important insurance and pensions are for us in Latin America. There too we are growing very much both in terms of operating profit and in terms of net profit. As you can see here our growth is over 40% in net profit in pensions and insurance.

So Mexico is important, but the other countries are also on the up. You’ve got your figures in your documentation, but look at what's happening in Columbia and in Peru. There we are getting a lot of good news, not just this year, but also last year. So within the Americas we can now move on to focus on the star for us in Latin America, Mexico.

Mexico is very important; Mexico is doing well, but please don’t forget that the rest of Latin America is also doing very well. MEXICO is doing very well indeed as you can see in this screen, which once again I'm not going to go into details about, you just have to look at all of the plusses with year on year changes which are very good. You can analyze it column by column, and you can see that we are moving on an upward curve and operating profit is already over 50%. Mexico is reporting a lot of increase in lending and customer funds activities. Bigger rises in lending as we are growing at 32.6% as you can see on the screen with constant [parameter]. That means that we are growing in each and every one of the segments of activity we have as you can see at the bottom of the graph; consumer lending is doing very well, SME banking as well and mortgages which is something I'd like to talk more about is really beginning to take off. Something that we had forecast.

Talking about percentages, you should remember that in Mexico that percentages are one thing and absolute values are something quite different. We're growing a lot in percentage terms, but in absolute terms we can see that there is still a lot of upside left.

Like I said I want to talk more about mortgages. You will remember that we've been disclosing to the market our forecasts as they were made, and we thought that in 2006 to 2007 we would been seeing boom years for mortgages in Mexico. And that’s why we wanted to move in and get in the right position and that was why we bought Hipotecaria Nacional. And now there are two things here I think are especially relevant. On the left of this screen, here we're just talking about retail banking which is the biggest part of our Mexican operation, you can see that in mortgages, which is in red here, we are outstripping the overall growth of lending in the system as a whole, and that suggest that we will be moving on the up with the market for mortgages.

So here you can see flows rather than stocks; this is the turnover, the billing share that BBVA Bancomer has with market share in mortgage [production] of 29.4%. All the Safoles apart from Hipotecaria Nacional are growing at 23.6% whilst our other peers would be pure banks, and so we are growing very, very fast and very soundly. The growth is what we had already forecast here before, and our prior experience in mortgages enables us to think that we can keep up this growth.

With excellent pricing control and with this kind of growth our ordinary revenues has behaved as follows with year to date growth of 35.1% in the first three months of the year. And then look at the quarter on quarter growth; you can see how the columns are getting higher and higher, quarter by quarter. Which leads us to a clear cut improvement in fundamentals. Our cost income ratio in Mexico is now down to 40.4%. The NPL ratio is 227 and our coverage rate is nearly 300%.

All of that means that our operating profit has been able to grow as well as you can see here. Operating profit has grown in year to date terms and in quarter on quarter terms in an excellent manner, with over 60% growth in the first nine months. I don’t know how many consecutive quarters we have been reporting such good news from Mexico, but anyway, once again good news is coming out of Latin America for the BBVA Group.

So now I come to my conclusions; these conclusions I think can be summed up in two screens. First of all the results that we are now presenting confirm the plan announced at the start of the year. At the beginning of the year we said that in retail banking we were obsessed by consolidating the business growth we had already achieved in 2004 and we wanted to boost our commercial capacity, and that that would be shown in our profit levels; that’s the case. In wholesale banking we said we wanted to strengthen our franchise and really get the value out of it that we thought it deserved, and that’s happening. And then in the Americas we talked about profitable growth because we knew that there would be a lot of expansion.

At the end of the day with all these management lines, we can see that we are rolling out the business model that we've reported to you for some time now. So the generation of value in financial group or in any group will depend on two things. First of all the corporate positioning, and secondly on the business model. When we talk about corporate positioning basically we are talking about the portfolio management. We say what countries we are in, if those countries are growing or stagnant, if there's upside there, and then the franchises we have in each market. Markets that aren’t growing very much, but with strong franchises won't show a lot of value, and ones that are growing with a poor franchise might even do quite well.

We are very lucky; we are in countries that are growing very fast, and our franchises are very, very powerful, so that’s good luck, but its not only good luck its also matter of application. It's not a random happening, it's because our business portfolio has been cut to measure how we wanted it over the years. If we look at economic capital in our business areas we are focusing on our core businesses, and we have reached 86% in 2005 as compared to 62% in 2002. But corporate positioning on its own, that is basically portfolio management, can't explain how we have been growing. You have to have the right kind of business model in order for the value of the business to grow, and there we have several competitive advantages. Our management of our distribution networks, our ability to boost commercial productivity, our efficiency management, and our excellent track record for risk management.

We have demonstrated that we are able to optimize traditional franchises, like we had here in Spain where we have done very well over recent years, and non-traditional franchises like we had in Mexico as well, and these competitive advantages give us higher profitability and sound growth. And alongside all of that our capital discipline is excellent; our growth model is self sustaining, which means that we can generate capital to maintain the 6% core capital ratio with a 15% payout ratio, which means earnings per shares in the future, as in the past, will be closely linked to profit levels. And having a self-sustaining capital policy is very important; that's part of our business model which you know about and which we will continue to share with you.

So as we roll out this strategy one of the people who has been of extraordinary importance, and I think you know him, has been Julio Lopez, Julio left us last Thursday. I remember it was only Tuesday last week when I was talking to him about these results in my office, and we were discussing these results and saying how well the Group had done. And such a great satisfaction to me that Julio did manage to know that these were the results, and that we could share these good results with him before he died on Thursday. And I must say right until the end he was a real professional. He was an extemporary professional; he was a wonderful work colleague, and I think that this was expressed very well at his funeral. And for me as well he was a close friend, someone with whom I have shared good, and some bad times, it's true, over the last few years working together very closely. So in my own name and on behalf on the BBVA Group I'd like to render homage to Julio. Thank you very much and now we can move on to the questions.

Good morning, we will now go onto the question and answer session, and following the usual format. First of all questions here in the room, then the conference call and then the e-mail questions. So here in the room would you please use the microphone and say your name before you ask the question.

Alejandro [Rith] from KP Equities; about retail banking in Spain and Portugal because I have several questions. The first one is given the spreads and volumes do you think we can reasonably expect faster growth in interest income in 2006, or will we have to wait for short term interest rates to change before we see that?

Secondly, about your costs. I suppose you can say something on that because you are more of an investor now and you are opening branches, so there must have been some changes there. And I have a doubt there about some of the shoring up activities in London. I suppose you're at maximum levels in generic provisioning, but I'd like to hear more about specific provisions. Have there been any changes there, are you doing anything about specific provisions in retail banking in Portugal? Because I think you're at a historic low, and I suppose anything else could just be going up.

Okay, your first question about spreads. I think, well I've said what I think, at the last meeting that we had we said that the change in customer spread from fourth quarter to fourth quarter would be about 20 basis points. I stick to that; in fact at the beginning of the year we talked about between 15 and 20 basis points, and last quarter I said nothing had really changed from a business perspective in the last nine months. But because of the curves which were different from what we expected I said instead of 15 or 20 I was talking more about 17 to 22. And like I said I'll stick to that. For seasonal reasons there has been an improvement, or there will be an improvement in the spreads in the fourth quarter.

I think the most important thing here is to stay, as they have done for several quarters now, is that there is a lot of competitive pressure, but not as much as a year ago, so our entry prices are unchanged.

Looking forward now to next year; customer spread could come down if there is no change in interest rates, and even if we do get lower volume growth in this year, that is to say a certain drop, -- a slight drop in volumes, I still think the interest income will be very good independently of an interest rate increase.

Secondly, about costs; we haven't changed our obsession, as my colleagues very well know. I think this is an incredibly important issue, and in retail banking we are sticking to what we said at the beginning of the year. We said that our capacity to reduce headcount would be linked to opening up branches. We've opened up 38 branches, and we'll be opening yet another 30 around till the end of the year. Costs will be slightly below inflation and that is an environment in which we feel very comfortable.

And about provisions; [Manolo] may want to add something about the specific provision, but in retail banking everything is in perfect correlation with increases in volumes, generic provisions, and in terms of risk quality we are extremely comfortable. We've seen that the situation is what we expected, it's excellent, and we feel very comfortable with the risk quality of retail banking, and everything seems to indicate that things will stay that way.

Yes just to add something, and I don't have the exact figures for retail banking, but I do for the Group in Latin America for retail banking and we've made 105 million provisions, and 102 of those are generic. So for specific provision net of recoveries is basically zero, everything is generic provisions and we have those covered to their maximum level.

Any more questions here in the room?

Jose [Rita] from [La Caisa]. I'd like to know about the capital gains from BNL; when will they appear, and will they be included as extra ordinary's, will they be used for provisions? And then about your industrial portfolio; we've seen that the Santander is divesting itself of its industrial portfolio. And you have always said that Repsol and Telefonica are strategic investments for you, and that you would be keeping them. Have you changed your mind about that because they do consume capital don't they?

Okay well, starting with your first question about the capital gains of BNL and how long that will take and what will we do with them. As far as time is concerned the BNL operation will take a while, and so we probably won't see anything until the beginning of next year, that's our best estimate.

What will we do with those capital gains? Well of course they will go to the P&L. And as far as our capital structure is concerned, we're very predictable I think. Our core capital aim is about 6%, our business is expanding, we have a sustainable model, but because of this expansion when we make our -- we get back to the 6% core capital. If by any chance we're systematically above that 6% then we would do something to get back to 6%. But the BNL capital gains you have to realize that it's not actually that much money, and keeping in mind what the Group makes all over the world.

And then about our industrial portfolio. If you analyze what we've done with our industrial portfolio in recent times it's not so big now in terms of economic capital which is quite logical. Our overriding obsession is for our economic capital to be where it is most profitable for our shareholders, and our core business is a much bigger part of the BBVA's economic capital. Our industrial portfolio is not core business, and therefore is not so big anymore. For example with the Bancomer operation we partly funded that by selling some of our industrial portfolio apart from the capital enlargement, and I think that as we've already told the market, our industrial holding policy is that it will gradually be reduced over time because we'll be giving more emphasis to our core business.

Any more questions here in the room?

I'm Luis from [inaudible], I only have two questions. One is about Argentina because nine months I've seen it's EUR100 million, is that what you're expecting now from Argentina, or do you think it will get higher? If that is the case could you give me some estimate there? And then interest rates in Mexico, what is your point of view about interest rates next year in Mexico, what about the impact on net interest income therefore in Bancomer? Thank you.

Okay starting with Argentina. Argentina's results are excellent in the first nine months, and they are actually beyond our expectations. As far as next year is concerned I don't think we'll get such a big increase in profit. I think this year we've made a pretty big leap forward, and I can't imagine that we'd repeat that next year. Argentina is doing well, but not that well.

And interest rates in Mexico; well our estimates are those of the market. I think that in 2006 there will be a fall in interest rates in Mexico as we're seeing already, and if we look at average rate versus average rates, I think we're talking about 100 basis points less. Certainly not less, but maybe a bit more. And what impact will that have on our net interest income? Well I'd like to make a couple of comments here. We've always shared with you that an increase in interest rates would be positive for Bancomer's bottom line; we've seen that over the last few quarters. However we've also said that Bancomer's net interest income growth was two thirds due to volume and one third to price. And that doesn't just mean interest rate increases, it also means the right kind of pricing policy.

And actually our balance sheet is less sensitive to that now than it was in the past for two reasons. First of all because we now have Hipotecaria Nacional and secondly we're being very active in generating portfolios for the [co-ops], and increases in interest rates next year would have an impact on Bancomer's net interest income, but not a very big one.

Any more questions from here in the room? Okay then we'll go on to the conference call [inaudible]. We have two questions on [inaudible question - microphone inaccessible]

Hi its Fred [Rousso] from Citigroup, I've just got a couple of questions. First off on Mexico; I know you just talked about the [inaudible - microphone inaccessible] past several quarters and [inaudible - microphone inaccessible] income and commissions have improved every single quarter [inaudible - microphone inaccessible] revenue trend a change of interest rates [inaudible] and you’ve re-priced your bond portfolio in the past, do you have hedges in place going forward to benefit from that? That's question one with Mexico.

Question two with Mexico is, can you continue to control your cost base despite the strong value in demand that you're seeing, or do you anticipate an increase in spending to support the volume growth?

My second and final question is; would you consider doing a share buyback versus an acquisition over the next 12 months, or do you feel an acquisition is absolutely necessary?

Okay, well let's just repeat those questions about Bancomer's growth in net interest income in commissions or fee income; is this sustainable? What kind of growth can we expect for the future, given falling interest rates? And then, what about our costs in Mexico? Will we have to spend more to support volume growth? And the third question is whether we've considered a share buyback rather than an acquisition?

Well, it's the same answer that I gave before. I mean, from our point of view, when you look at what is going to happen in Mexico, and what is going to happen in Bancomer in terms of net interest income, I look at volumes being very strong with strong growth in the year '06. And I believe that this strong growth is going to continue.

And from the point of view of the evolution of the interest rate; we are expecting a drop of interest rate environment, but that is not going to affect in a tremendous way to our net interest income. So, I really believe that the volumes that we are giving in terms of low rate net interest income in Mexico, are sustainable, at least for the next two or three quarters.

Talking about fees, basically the same consideration; I think that the volume -- the growth rate that we are giving now is in a stable growth rate.

With respect to the second question, which is cost; in fact we are having a very strong increase of activity in Bancomer. I would like to share with you a couple of pieces of information. The first one is that, in terms of transaction, we have an increase of 25% in the last 12 months. And in terms of customers, during this year -- in the first nine months of this year, we had an increase of 1 million customers in Mexico. If you analyze what is our growth rate in terms of cost in Mexico now, it's 20%; that is affected by Hipotecaria Nacional.

With the same perimeter, we -- our current growth rate in costs is not 20%, but 14%. This 14% is affected basically by two things; the first one is the increase in terms of activity; the second one is some one-offs that we have during the covering year. Looking at the year '06, we are going to have a growth rate higher than inflation because we have to cope with the increased interest of transaction. And in terms of the number of customers, and in terms of number of branches, because we have opening branches this year 140, and that is going to affect our growth rate in terms of cost. But, in any case, next year we are going to have a growth rate higher than the inflation rate, but lower than the growth rate that we are giving now.

With respect to the third question, I think that we are in a growing business; we are increasing our assets in a very clear way, so we don't think that we have to choose between acquisitions and buybacks. I think that we are able to generate core capital enough in order to cope with the growth of our business.

Any more questions? Please proceed with your questions, thank you.

Thank you, George Karamanos from Keefe Bruyette & Wood. Just a couple of questions. First of all, starting with the numbers; on total in Mexico you have a big chunk in provisioning levels, and on my numbers at least, you went towards 200 basis points. If you could comment on that and what exactly happened there because my understanding has been that over the cycle, they should be more closer to 100 basis points.

Second question is your wholesale banking; your [net worth] income was a bit lower than the previous quarter and historically, you have played -- you said your treasury department has been active with getting the dividends from certain corporates etc and playing that the trading gain around those dividends. I was wondering if it was continued?

Thirdly, concerning Laredo; if you could give us an update on the savings and the synergies that you're now seeing now that you have full access to the bank.

And finally, if you could reiterate a bit your acquisition strategy in general; the fact that you're looking still for -- to leverage on your [standing] population exposure in Mexico into the US, you are still looking for EPS, accretive deals only, if you would commit to that statement? Thank you.

Those were your four questions from George Karamanos. The first one is about the level of provisions in Mexico in the third quarter, which was higher than in the previous quarters. The second question was about net interest income in wholesale banking because it was lower than the second quarter, and was this due to dividend payments, which often offset by trading gains? And then about Laredo; could we give some update about the synergies being achieved between Laredo and Bancomer? And then, could you tell us something about the Bank's acquisition strategy? What about our priorities -- our geographic priorities, and what about financial metrics for possible acquisitions?

Provision levels in Mexico in third quarter. We have here the combination of different things. The explanation of the increasing provisioning levels for our losses in Mexico accounts for different explanations. First of all, we are growing at 70% in our consumption and credit card business. So, evidently, we have to increase provisioning levels in order to cover these big activity volumes that we are having in Mexico in a very prudent way.

Second thing, we -- evidently this growth is bringing also some new bills. If you see on bills, the total amount of [inaudible] bills in Mexico, they are coming down. But if we see specifically the portfolio of consumption in credit cards, non-performing loans are increasing evidently because we are growing at a very, very rapid way. And if you see, three quarters compared with two quarters, you can see the amount of growth that we are generating in Mexico in that business. That means that we are also to attend to specific provisions that, in local terms, has a very rapid timetable of provisioning.

And third effect, is that we are finishing -- we have finished in the third quarter the implementation of model of provisioning of our portfolios in Mexico, based on expected loss adjusted to cycle -- to economic cycle. That means that we have covered the part of the provision that we should have done in [base] of this model in the second quarter. We talked to you in the second quarter that the level of provision, specifically in the second quarter, was a little bit low because of this affect, and now we are compensating part of the provisions related to this -- the implementation of this model in the third quarter.

Against that, under normal circumstances what we are going to see is the total amount of provision on a quarterly basis in Mexico coming to a more recurrent level of -- we can speak around [1.15] on average. Considering that we are [inaudible] the expected loss of our [consumer] portfolio at a level of close to 7% of expected economic loss. That means very, very generous coverage of this portfolio of credit cards and consumption.

Coming to you second question of the wholesale banking division; you have seen in 2004 and during the first quarter of 2005, a lot of volatility between net interest income and trading income in our wholesale banking division. Basically there is only the restructure of [inaudible] of companies that in accounting base is great for local volatility. We are trying to manage a little bit better this volatility trying to avoid these big changes, or these big gaps, between the two lines to a more stable base. Anyway the important thing in that division is always ordinary revenue because evidently there is a lot of transactions that have a reflection in the trading line.

Okay and going to the fourth question which is acquisitions. Well we are very predictable, so we are not changing our mind. When we are talking about our policy in terms of acquisition basically we have two references. The first one is the creation of value, the value creation for our shareholders, and the second one is just the strategic focus. That was our idea, and that is our objective now as well. And when I am talking about the strategic focus I'm talking about possible acquisition in which we can develop our management skills. And talking about creation of value, we are talking about creation of value. For us creation is value is the key, size is not the key, creation of value is the key. And from this point of view that the reason why in my presentation I was talking about evolution of EPS not only about the evolution of the attributable.

From this point of view our ideas in terms of possible expansion of our business are very clear. I think, and we share this with the market and for us, a very, very important objective is our expansion in the States. And basically our expansion in California and Texas. The very relevant thing here is that we are not in a psychological pressure, I mean we are going to take our time. We have stated many times that our strategy in the States is a long term strategy, and that it's going to be driven by the creation of value.

And from this point of view we believe that we can combine organic and underlying growth, but I can assure you that any acquisition that we could do in the States, or indeed anywhere, is going to be driven by two basic ideas, strategic focus and creation of value. And that's what the idea of Laredo was. [inaudible] the synergies of Laredo are basically according to expectation which is normal because in fact we enter at the closing of the Laredo's operation was in April. So in these six months we are doing the things that we expected to do, and the results are basically according to expectation. In order to see we are going to have higher or lower synergies I think that well first, we are optimistic, but in any case I believe that it is going to take us more time, in six months according to expectations.

Any more calls? Could you repeat the name of the person that's going to speak.

Yes my name is Arturo [Rais] from [Brazil]. I have a few more questions, but before that I would like to send you my deep condolences for the news about Julio which is really sad news. Regarding the questions I would like to insist a bit on the Mexican provision insight. It was to be expected that we are starting to see at some point an increase in provisions given the low previous levels, and given the very very strong volume growth. Should we understand that from now on to expect a these provisioning rates are sustainable, and this means that from now on we will see provisions growing more or less in line with the volumes? Or is starting to catch up in terms of growth with the volumes? That will be one question.

Second question would be regarding some expenses on the corporate center which have been increasing quite significantly in this quarter. I think this is surprising and I would like to know why these costs in the corporate center are going up so strongly in the third quarter?

And the last question would be regarding Italy; you have been asked already in this presentation what you're going to do with the capital gains, but obviously before doing anything with the capital gains you have to sell the stake. And my question is regarding the strategy -- regarding BNL; have you, let's say, given up completely? Because we are hearing news from Italy that you are still in the courts; we are hearing also some rumors that Unipol could be more inclined to reach a kind of friendly agreement with you. Would that be possible, given that BNL was obviously important for you? Would you like to negotiate with Unipol and would you agree with them somehow, are you still thinking that there is a small probability of BNL ending up in your Group or not? Thank you.

So three questions, another one about provisions in Mexico and whether from now on provisions in Mexico will increase in proportion to volume growth or activity growth, and whether in the corporate centre why has there been an increase in costs and then BNL? Have we just given up with BNL? Do we think anything could be saved there, because there are many rumors in the market about a possible friendly agreement with Unipol?

About the corporate center expenditures, we have [an] increase in the third quarter which is based basically of single number of corporate projects. First of all we have all the expenditures of the implementation of the new accounting regulations, the return on the [inaudible] project which is based also to the adaptation of Basel II, and also the [inaudible] project based on the application of the new regulation of Sarbanes-Oxley. There's a number of projects that implied applied some consulting expenditures that we are accounting in this quarter.

Additionally to that we have two other things; first of all the institutional campaign of image of the Group that we did at the beginning of the year. That is also increasing the expenditures at the corporate center level in 2005. And finally we have accounted for all the expenditures associated with the transaction of BNL which are also another factor, and net increase of expenditures at the corporate center level. Okay.

Well the other two questions Arturo. Well, first of all, thank you very much for your reference to Julio. Your first question about Mexico and the correlation between volumes of provision and volumes of activity. Well, that is going to depend basically on the structure of our growth. The structure of our growth in our lending portfolio in the last three years has been very biased to the consumer -- the consumer portfolio, consumer and credit cards. And in fact if you analyze the evolution of the percentage of the [weight] of the consumer and credit cards over the lending portfolio in the year '03 was 18.5% and now is 30%.

But looking at the future, I believe that we are going to have bigger increases in the mortgage portfolio. And big increases in SMEs as well, so the structure of the lending portfolios is going to change. So it's not so easy to correlate growth in terms of activity and growth in terms of provision. But in any case, in the case of the consumer and credit cards portfolio, the correlation between volumes of provision and volumes of activity is going to be absolute because we are provisioning based on expected losses. And as [Manolo] said before, these expected losses are very prudent, but they give us tremendous comfort, but we are provisioning based on a model of expected losses. So the correlation between volumes or provision and volumes of activity is going to be 100%. But at a global level the situation is different because that is going to depend on the structure of the portfolio.

And the third question was about Italy; well we believe that Unipol is going to go through all the approval process, and that is our basic scenario. And all the rumors that are in the market well, we don’t know who or why is launching this sort of rumor. Our position is the same position that we had in the past and that we share with you.

Any more questions for conference call in English? Mr [inaudible] proceed with your question, thank you.

Good morning, a very simple question regarding Mexico. First the number of houses in Mexico is exponential growing; all the developers are pushing volumes, so would you expect, over the next 12 to 18 months, mortgages to grow much faster than what they have been growing so far and hence we may see a stabilization of the asset growth toward more mortgages and less consumer credit?

Second question also regarding Mexico; you have always had a very proactive hedging policy vis-à-vis interest rate movement, given the size of your balance sheet. Do you have anything in place in the local books on Mexican pesos vis-à-vis any potential shortfall in the shortening interest rate in the quarter later?

So two questions about Mexico; exponential growth in housing, so in the next 12 to 18 months will we see a much bigger increase in mortgages rather than credit cards? And do we have any local hedging in Mexico vis-à-vis a possible fall in interest rates. Do we have any peso hedging?

[inaudible] risk management in Mexico. I would like to tell you that we have taken some specific measures in order to cover interest rate movement in Mexico. That, as our COO was explaining before, has reduced dramatically the sensitivity of the balance sheet of Bancomer to interest rate movements. We can tell you that we have been prudently buying during the year a portfolio of Mexican [inaudible] in Bancomer balance sheet.

We have in this moment approximately 27 billion Mexican pesos; we have a very significant capital gain on this portfolio because we have been taking advantage of the opportunities that the market has been giving to us. This has been neutral or slightly penalizing in our net interest income at the current levels of interest rates during this year, so has no [inaudible] at all of the net interest income of Bancomer during 2005. And this is helping us, of course, to reduce sensitivity to the balance sheet Bancomer.

Additionally to that we have something which is extremely important in changing environment of interest rates which is the Hipotecaria Nacional balance sheet which gives us a lot of flexibility to manage sensitivity in the balance sheet of Bancomer, and a lot of flexibility also to change [inaudible] exposure to the balance sheet of Bancomer without having additional exposure to the Mexican home market.

As you know Hipotecaria Nacional has a portfolio of mortgages today of EUR3 billion, practically all fixed rates, that are fixed rate with [inaudible] expanding programs with former government agencies. So only changing part of this funding or managing this funding requires a lot of opportunity to manage the sensitivity of the balance sheet of Bancomer.

With respect to the other question that was the evolution of the lending portfolio of mortgages depends on two things. The first one is the construction of houses, and the second one is the structure of the funding of this construction. When we are talking about the structure we are talking about how it is going to be divided between the federal agency and the private sector.

Well, In fact when we analyze what is in fact going to be the evolution I really believe that we are going to have in the public, sorry in the private sector, the financial system we are going to have a [inaudible] increase in terms of demand. In fact we are having a [inaudible] increase in terms of demand. And that is basically the same thing we said a couple of years ago, and one year ago.

The year 2006 is going to be the first year of boom in the mortgage market in Mexico. That is going to imply an important structural impact in terms of flows, but not in terms of stocks. In the next couple of years we are going to have an increase in terms of flow, so new operation of mortgages is going to see take us more time in terms of the impact in the balance sheet structure. But in any case, we are going to see in the year 2006 a clear change of the structure of our new operation in the new portfolio of Mexico. In the stocks I insist it is not going to have the impact so big.

Anymore conference questions in English?

[inaudible question - microphone inaccessible]. If I'm not wrong, I think it is slightly higher than previous quarters what is driving that?

Second, obviously trading gains have been negative in the quarter which implies what has been the negative impact of that non-recurring?

And third what has been the growth in demand deposit in Mexico in the last quarter. and what is the growth we should expect for the next 12 to 24 months? Can we be clearly confident that the demand deposits will continue to grow at double digits? Thank you.

That was [inaudible], the three first questions are about the corporate center for the net interest income, negative trading gains, why? And then the increase in demand deposits in Bancomer, and what about our estimated growth in excess of 10%?

Julio can answer your questions on corporate center. If you see [inaudible] quarter on quarter in typical quarters you see how net interest income improves a little bit in the corporate center, and you see in a cumulative nine months against nine months you see an [acceleration] of approximately EUR118 million of the net interest income at the corporate center level.

The reason of this inter-annual year on year change in the net interest income generation [against] dividends in corporate centre is basically based on several factors. First of all we have the increase of the financing of the investments in Latin America; we have here the part of Bancomer transaction that was found in cash and not through increasing capital. Last thing the [inaudible] reducing in Laredo because the Hipotecaria Nacional's fund directly into the balance sheet of Bancomer. So the increase of investments in Latin America plus the increase of the interest rates have increased the cost of the funding of these positions.

Second we have a substantial increase in the hedging cost of our hedging of capital in Latin America, especially Mexico through currency swaps. Cross currency swaps were the differential of interest rates because local currency and the euro is really the cost of this perfect hedging of our capital in Latin America. We have an impact this year of EUR73 million before taxes of this sort of [inaudible] of hedging. Also we have the impact of the [inaudible] decision. We have been reactive over the years in [inaudible] decision. Obviously when you drive this to the business units and really the cause of this is absorbed in the corporate center. That is compensated [this cause] to net interest income to other lines of the profit and loss account of the corporate center, basically commission and trading income.

Also we have internal pension funds which are growing, and also the interest rate has not changed. A few interest rates of these internal pension funds has a higher cost, and finally we don't have any sort of positive contribution from the portfolios that we have of the [liability] management in the [euro] balance sheet which are not giving a positive contribution in terms of growth. They are giving the same contribution that we had last year. This has all the factors after the net interest income at the corporate center level evolution.

As far as the trading income is concerned we have a negative trading income of 36 on this quarter, and this is absolutely based in the cost of the hedging of the currencies of our hedging results, and the part of the hedging capital that we go through options. Evidently, the hedging has been growing positive between the second quarter and the third quarter, and also in year on year comparisons. And we have the cause of this hedging evidently at the corporate center level. Additionally we don’t have any significant net revenue from the portfolio this quarter nor [dividends in trading]. These are the explanation of these.

Okay and talking now about Mexico. First of all I would like to say that in Mexico we have the typical evolution of a financial system that is growing. With growth rates relevant in the lending portfolio and it's smaller growth rates in the [inaudible]. And that is a reality now in Mexico, and is going to be the reality for the next years.

That is the first idea; the second idea is that Bancomer is having a good behaviour in this environment because in terms of market share we have a slightly increase in our market share in the demand deposits. And looking at the future we believe that to expect double digit growth is our expectation, our hypothesis in any case. We believe that it is going to be possible and that is our best guess.

Are there any more questions conference call in English? The Spanish conference call, any questions there? Okay thank you very much everybody and for those persons we are hosting a cup of coffee and biscuits next door. Thank you.