使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Editor
[Audio begins in progress]
Unidentified Company Representative
[translated] ….2006 as well. As always, our chief operating officer will be giving us the presentation and then afterwards we'll be happy to receive your questions.
First of all, we'll take questions from those of you who are actually here in the room with us and then we'll take questions over the conference call. And then, finally, we'll deal with the questions that will reach us through e-mail or through the webcast.
And again, as always, we've prepared some coffee for anyone who wants to have a quick coffee with us after the presentation here...Thank you.
Jose Ignacio Goirigolzarri - COO
[translated] Fine, well, good morning everyone. Thank you very much for coming. Once again, we are now going to be explaining the quarterly results for the second quarter of 2006 today. These results have reflected various different happenings. The second quarter of 2006, for us, has really been an excellent quarter for various reasons.
First of all, because, if we look at the results, and we'll be talking about this later, in my opinion we have to admit that they are especially good this quarter. Especially taking into account the fact that we are comparing ourselves against past performance which was pretty good already, but if we compare ourselves against 2005, when we had good performance, in fact we thought it was the best at the time on record, we've got even more record results this quarter.
And then we've got some other news that's come through this quarter. One has to do with growth and one with transformation. With respect to growth, as you very well know, we announced the expansion in the United States with the purchase of two banks in a conference call that Manuel Gonzalez had with all the analysts and the financial sector.
And then, last week, we also announced that, as part of our transformation plan, we were rolling out a new project for our distribution networks. I hope you'll allow me to start my presentation today referring to these two events. Expansion in the United States and the new strategy we have for our distribution networks. In the United States, as Manuel already said when he made his presentation, I think he gave you all the information, but we have reached an agreement to buy two big banks on the frontier between Texas and Mexico, namely Texas Regional and State National.
Along with Laredo, at the moment, we feel that we are able to construct a group with a lot of assets, credits, deposits and also a high headcount which you can see here on the screen. These two acquisitions, when they actually get closed, will account for EUR2.1 billion in initial cost. But we'll be establishing a big franchise in Texas, we'll be the biggest there. You can see the market shares here. You can see how we compare with the Texan banks and, for Texas as a whole, our market share is 3% but we are the benchmark bank in the frontier so -- which was our main objective.
And I can also remind you how we are funding these transactions. It's very rational because we are just using the disposal of holdings in Repsol and BNL to fund the entire operation. So, the idea is to go on investing in our business portfolio wherever we feel that we can do our core business, namely banking.
The other aspect I wanted to refer to is the growth project we have there and we are seeing the results, however, on a like-for-like basis today, obviously without including them.
And, at the beginning of the year, we also said we were going to launch a big transformation plan in the Group and, indeed, we are rolling it out now with various projects. Probably the biggest one so far has been that for the new distribution network set up here in Spain and we announced this last week. This change, this attempt to transform the networks, is based on our pursuit of three objectives which you can see on the screen. Obviously, we want to guarantee our leadership here in Spain by first of all trying to become more and more efficient and then eliminate, compartmentalization in different business units whilst generating synergies in order to bring the organization closer to our customers.
I think I'm going to devote a whole transparency to the basic concept behind what we're doing here...This could be summed up, I think, as follows.
If we look at things over time, obviously with very broad brushstrokes, but if we look over time at the way we've done segmentation in the Spanish banking industry, which has been a banking industry that has always segmented very clearly, there are three main stages.
Up until the 90s there was really little or not segmentation. All customers were treated alike. Obviously, the big -- very big customers got special treatment but the rest were all treated the same. Then, during the 90s, the banks came to the conclusion that segmentation had to form a key part of the commercial policy of BBVA. And, as a consequence of that, we set up various different segments that would get a different kind of treatment with different kind of account managers etc. And, at the time, the only way that this could be done, taking into account the technological constraints we had at the time, was by setting up branches with their own keys to group together the relationships with these customers. Because that was the only way, at the time, that we could monitor the performance of these customers.
And, at the time, it was decided that whilst constituting specialist branch offices, we also wanted to establish what we called organizational silos. Namely the central administration had certain responsibilities and then these dropped down until they reached branch level. This is a spectacular improvement in the way that we were treating our customers but, at the same time, it entailed certain disadvantages to our [performance].
First of all, it generated compartmentalization and the different networks were cut off from one another. And also there were very heavy intermediate structures but, quite honestly, at the time, with the technology available, it was the only thing we could do. As you know, we have been working very hard on IT systems to improve management and we've got very strong IT platforms now with a lot of information on our customers, on the account managers and we have a marvelous CRM system which gives us a lot of quantitative data too.
So that means we can now start -- if you allow me to put it like that, de-branching things so that we can treat our customers as customers and not as part of a branch and so we no longer have to have specific branch offices in order to follow them because we have information on the customers and on the people who are managing them.
So that means we can avoid these watertight compartments that were established before and we can lighten up the intermediate structures at the same time by uniting it where it's needed and getting rid of it when it's redundant. And that means that we can have a different treatment for different kinds of customers with different account managers. This makes things much more efficient because we can get rid of 750 jobs in the intermediate structure. The structure that's not directly related to customers.
And, at the same time, we can empower the account managers and open special centers in areas where we didn't have much presence before whilst, at the time, getting much closer to all of our customers. So this change, this transformation, this new way of dealing with the very concept of networks in Spain, I think, is a qualitative leap forward.
The other day we were talking about this in-house with all the managers and, quite honestly, in the last few years I think this is probably one of the biggest changes that the Spanish financial services industry has seen. So I wanted to talk about that before talking about the key features of the results for the first half and for the second quarter. So, I wanted to talk about the plans for growth, the plan for transformation and then I can talk about these half year results. They are record results.
Excluding the one-off transactions, which I'll be referring to as well, you can see that this is due to the way that we are generating very strong revenues and are improving the fundamentals of the BBVA. Let me explain exactly what I mean by saying this. Here you can see what's been happening in net attributable profit. I think it's very relevant to separate out the one-off transactions from the more recurring business. With one-offs, the total for the half year is over EUR3 billion of which 1.15 billion are from the one-offs but, from now on, I will be excluding the one-off transactions. So, without these, the attributable profit has gone up 20.2%.
In order for you to find it easier to follow the impact of the one-offs, I've got a special screen here to explain them. The Repsol transaction had an impact in terms of capital gains of EUR523 million which goes to NTI. The transactions from BNL and the disposal of Andorra, which you will remember we announced to you at the time, however had capital gains of 751 million, which will be booked below the line in our P&L.
The final impact, as I said before, is attributable profit of 1.157 billion. So, from now on, I'm going to be excluding these operations from the results that we are presenting to you. So these are the figures that we get without them then.
The operating profit, we have seen a growth of 24.8%. And, if we look at it in quarterly terms, the first quarter we said that the exchange rate impact was positive 7% now, in this quarter -- well in the whole half year in fact, the impact is only 3%. Anyway, for the first time, we're presenting an operating profit which is over the EUR2 billion threshold. I was also saying that the growth in this operating profit starts from the upper lines of the account with revenues. As you can see, core revenues are going up over 19% and we're getting excellent performance in the net interest income and in net fee income.
And also our insurance business, our core revenues are growing at over 20.4%. And, if we analyze the performance of the whole cascade of the different revenue streams, we can see that we're evolving very well. Here you can see that first of all the absolute figures for each of the items in the first half year. And then you can see the growth that we're getting compared to the results we gave a year ago and the results we gave at the end of last year and the quarter-on-quarter results and their changes.
So you can see that we're getting significant growth in the first half of the year. But also, if we compare that against the past, quite honestly, the trends are very, very positive with very strong growth. And that's true when we talk about the Group as a whole. But it's also true when we talk about the different business areas as we'll see later when we analyze them, in retail banking in Spain and Portugal, in wholesale businesses, in Mexico and USA and in South America. And that's true for the attributable profit and the operating profit.
So, in terms of the recurrency of our business and our operating profit, we've got new records with very strong growth, which is constantly increasing its speed for both the Group and for the different business units.
Then, below the growth in the operating profit, we can see strict risk management. Our NPL ratio, as you can see, is now at 0.82% and coverage at 275.1%. I think that it's especially significant to look at something we looked at last quarter as well. Namely, the volume of the loan-loss provisions that we have. And more important still is to understand the composition of these provisions.
So you can see that a year ago we had nearly EUR5.5 billion and now it's EUR6.75 billion. And you can see that the structure however has changed. Last year 36% of the provisions were used for specific provisioning whilst that figure now is only 30%. In absolute terms, if you wish to look at it like that, a year ago the specific provisions went up to 1.96 billion and now it's 1.83 and that's due to the quality of our assets.
Along with that improved risk management quality and asset quality, we've boosted efficiency and we now have a cost income ratio, including depreciation, of 44.3%, which compares very well against the figure we reported a year ago. And, if we look at our returns on equity, there again we're repeating the same figure that we reported last year at around about 36%.
And then our solvency. This is what we look like if you want to divide it out into core capital Tier 1 and our BIS ratio. And you can see it comparing it against previous year. So we talk about core capital of 6%, and I must say that the proforma after the acquisitions and the operations I referred to before in the United States, the core capital would be about [5.6]%, the proforma would be [5.6]%.
These results and their ever better performance, if we compare ourselves against last year's figures, needs to be understood in context. Looking back at the whole history of how this Group has been growing and its operating profit and in terms of its recurrent activities. So here you can see nine different half years, three and a half total years. And then you can see that every year half we are presenting improvements in our results and the growth in percentage terms is constantly speeding up. Significant growth, which has now reached 24.8%.
So, that's the overall view of the Group and I think it very much justifies what I said at the beginning of my presentation about the excellence of this quarter's results. And now, as I always do, I'd like to give you an analysis of all the different business areas starting with Retail Banking in Spain and Portugal.
First of all, as I always do, I've got the whole cascade of the results for Retail Banking in Spain and Portugal and here to, just so that you can have something to use as a point of reference, we're showing the growth rates that we presented a year ago, then at the end of last year, and those that we're presenting right now...
So, as you can see all the different items is increasing the pace of growth. Operating profit growing at 13.2% and then pre-tax profit and attributable profit figures are being impacted by the generic provisioning I was talking about before.
Retail Banking in Spain and Portugal is growing in its activity and has an excellent pricing policy. If we look at its activity first of all you can see what's been happening in lending and customer funds. In lending we're presenting growth of 19%. And you can also see in the overheads just how that growth is structured by the different modalities. You can see that, in accordance with what we told you we were going to do, on the basis of what we were seeing in the market, there is some slow down in mortgages which nonetheless is still growing at 19.9%. We are continuing to grow very vigorously in small businesses. And as we announced, we are growing especially fast in consumer and cards.
The growth that we're reporting in consumer financing cards aren't just the outcome of chance. That growth is being achieved as a consequence of a strategy that we prepared very carefully last year, that we've been rolling out this year. It's a strategy that brings together new products and novel products such as our payroll product and then new approaches to the way that we deal with our customers. And it also incorporates other new ideas in the way that we run our distribution channels so that customers can have access to financial services through different channels that aren't necessarily branches, like [ATMs] for example.
As for customer funds, here you can see that this half we've presented a slightly more moderate growth. This growth is the outcome mainly, as you can see in the slide, of what's been happening in mutual funds. Basically, it's the consequence of the impact of the market on the assets under management in the mutual funds we currently have. It would seem to me especially interesting to look at the performance of our liquid funds. These products are obviously growing year-on-year especially for individual customers. This is also the outcome of various different things. The strategy that we've been preparing for several quarters now and also a consequence of the tremendous growth we've had in customers who take out other products in the banks because of using us for their payroll and other products.
Having said that, I thought it was important to look at the price management policy because, here, and in wholesale banking as well, we are assuming that the units can manage to handle the pricing properly and we've discovered that the results are very positive. When there are changes in the interest rate, this becomes especially important. When you've got stable interest rates then there's not much difference between the pricing policies of the different competitors but when there's a change in the interest rate, all of a sudden you can see which distribution networks are skillful at managing prices.
And here there are two things I wanted to say. First of all, if we look at our customer spread in Retail Banking in Spain and Portugal, it's grown again. It has grown in the first quarter and then it's grown again in the second quarter, as you can observe, reaching 2.87.
And then, if we look at the net interest income over average total assets, there are two things we should say here. First of all, in Retail Banking in Spain and Portugal, which is the line at the top, where we're getting higher margins, we can see a reduction of four basis points between the second and first quarter. However just so that you can compare us against our peers, it's important to talk about the net interest income over ATAs in the resident sector -- the domestic sector, which brings together Retail Banking in Spain and Portugal and SME institutional and national corporate banking, which are all segments that are operated here in Spain. And there we can see that our net interest income over ATAs for the entire domestic sector, is doing extremely well.
In the second quarter we've repeated the excellent performance of the first, stabilizing out our net interest income over average total assets, then in the entire domestic sector.
And then in service revenues we can once again confirm the strength of the revenues which we get from the distribution of new products. And here you can see on the left what we're doing, the commercialization of insurance and of derivatives through the retail bank networks.
And then, if we look at fee income, we're growing at 10.9%. This growth is especially relevant if we take into account that in terms of fees we've seen a big impact from what's been happening in the market as a whole, especially with fees from funds.
We've also been affected by what's happened in the market with respect to securities trading but we have managed to offset the slow down we've had in those two items and we have got two digit growth of 11% nonetheless. So, the total income we're getting from services has gone up 13.2%.
And what about our fundamentals? Well the cost income ratio in Retail Banking in Spain and Portugal once again has been proved. As you can see we are now at 46% and then the NPL and the coverage ratio are excellent as you can see on the screen. So I want to repeat that 81% of the allocations to provisions and 82% of the total stock that we have of provisions for Retail Banking in Spain and Portugal are generic provisions.
So a good quarter in Retail Banking. Pricing policy was especially significant, the only element to take into account has been the impact of markets on our funds affecting our volumes and affecting the speed of growth in net fee income for that item, and exclusively for that item.
And what about wholesale businesses? Another quarter with excellent news. First of all, you can see the absolute values for the different items for the first half of the year and then the change against previous years. You can see that operating profit is growing at 29.6% and, as I said last quarter, we're very optimistic about what's going to happen for the rest of the year. We think that the levels of growth will be about 30% probably. That would seem quite feasible for this area from now until the end of year.
If we then do a breakdown of operations and activities, banking activities and market activities, in this area, you can see what's happening in terms of lending and customer funds. Customer funds, I think, have shown very significant performance. If we look at the low cost current accounts that are a big component of them. And also I wanted to focus on how well SME banking has done, where we're growing at 19% in lending and 17% in customer funds.
But as I was saying before when I talked about Retail Banking, quite apart from activity, what's really important here is pricing policy. And here you can see what's happened to net interest income over ATAs with the three business units making up what we now call the BEC, corporate banking, SME banking and institutional banking. And you can see net interest income over ATAs as well for all of these units on the right. At the moment we can confirm the growth in net interest income to over ATAs in this corporate and institutional and SME banking area...And then in NTI and in fees, we're also growing 19% as you can see.
And then global businesses. Again, it's been a fantastic half-year. If we look at the ordinary profit, as you can see it's growing at 41%. This 41% is based on our relations with our customers, what we're doing with the customers that are working with us that account for 75.3% of our revenues. It's based on the cross selling that we're doing so very successfully through our different distribution networks. And as a consequence of all of that the cost income ratio for wholesale banking has reached new record lows, below 25%.
And the NPL and coverage ratios, well I hardly have to [say] anything. 93% of provisions and 89% of total stock in wholesale banking are generic provisions. So wholesale banking has shown once again its capacity to grow very strongly and has also shown that it can repeat its business. It gets good recurrent results as it has done for the last three years.
Now South America. South America has also given us another quarter with better and better figures. As we've seen in the other screens, we've not just got the absolute figures but also the comparative figures over time. The operating profit of 45% here is impacted by the incorporation of [Grenora] without [Grenora] quite honestly the cruising speed in operating profit in South America would be at about 25%. South America has such strong growth because we continue with a lot of activity. We've got a very expansive policy for getting more lending and more customer funds and that gives us growth in our ordinary revenues of 33.2% as you can see.
On the right of this screen, what we're trying to show is really the way this is structured. So we're looking at ordinary revenues but it could have been all operating profit. But, anyway, you see the structure by countries and you can see that it's very well balanced. At the moment, Argentina, with 30% of the share, which will probably go down over the year -- because you'll remember in the first quarter we were talking about some special training operations that we were doing in Argentina, but nonetheless, as you can see, our geographical distribution is pretty well balanced. And that's another strong point when we look to the future.
In cost income ratio, you can see what's been happening. Here on the screen for South America reaching a ratio of 48.6% with NPL ratio going down. And again, you can see the coverage level and the fact that 48% of our provisions are generic.
Now we come on to Mexico and the United States. Because of the higher numbers in Mexico obviously most of our talk will be about that. We're getting fantastic results here from this area. In the operating profit we're seeing a growth of 45.8% and, as you can see, the different income streams are growing very strong and ever faster.
In Mexico we are getting excellent results as a consequence firstly of our activity but also because of the excellent pricing policy and I wanted to focus on that a bit. In our activity you can see here what's been happening in lending. There are various pieces of good news to give here.
First of all SMEs are still growing very strongly and we think that they will continue to grow like this because there's a lot of latent demand in this market. Secondly, the mortgage market is in expansion. The kind of growth that we're seeing is over 50%. The good news is that if we analyze the number of mortgages and look at the market share for new production in Bancomer, for the year as a whole, 36.6% of new mortgages granted in Mexico have been granted by Bancomer.
And in June, when we had a record month, 42% of the mortgages signed in Mexico, the new mortgages that is, were arranged by Bancomer. That's a consequence of a strategy that we've been consolidating for some time that we've been rolling out especially with the incorporation of Hipotecaria Nacional . In customer funds we're also seeing growth, 15.4%, especially significant if we take into account the composition of the funding from Bancomer.
So if we look at the current and savings accounts, these are growing 15%, that's really significant. But the good results of Bancomer aren't only to do with the activity in the market, they're also related to very careful and very brilliant management policies, especially pricing policies. So here you can see what's happening to the net interest income in Bancomer. You can see that we're showing growth of 30%. You can also see what's been happening to the interest rates over this period, as we've said on several occasions to you.
Despite the drop in interest rates, [the Tier], the net interest income performance of Bancomer was very good. And indeed we have had and will continue to have a very positive impact from our structure on the quality of our assets. So, with a good pricing policy keeping up spread, net interest income to ATAs therefore has improved yet again this quarter. And, as a consequence of the improvement in the structure of our assets, the net interest income over ATAs is about 6.10%.
There's one aspect that I wanted to highlight here. Bancomer has got a lot of activity with a great pricing policy. Fees are growing significantly, and so now I'd finally like to refer to our asset quality.
Here you can see what's been happening in the NPL ratio. But more than that, I wanted to go into greater depth regarding the charges for provisions. I think we've explained this several times, for several quarters I've talked about this. We are provisioning on the basis of expected losses in Bancomer so the volume of provisions that we have to have is closely related to the performance of the lending balances. We're doing that for consumer lending which is very important. We are provisioning on the basis of expected losses of 6.5% and that's what explains what's happening in provisioning against the profit and loss account...
But, regardless of that provisioning we must also understand what's happening in our loan loss provisions. I think that that's very significant so we've put it up here in a graph on the right. You can see, on the right of this screen, how our NPL provisions in Bancomer a year ago stood at EUR1.26 billion -- constant euros that is with no exchange rate impact. Now they stand at 1.48 billion. The most important is the change in the structure. A year ago, 63% of the NPL provisions were for specific provisioning whilst that figure is now 51%. We can put it in a different way, EUR800 million a year ago and now 750 million, which are the way that we deal with the requirements for specific provisioning.
That means that generic provisioning has increased above all for consumer finance and less so for mortgage finance. Consumer finance provisioning is growing because consumer finance is growing and because we are working on the basis of expected losses which are considered to be generic. So that's the situation we have in Bancomer.
Consequently, the asset quality in Bancomer can be said to be very strong and this is compatible with the strong growth in activity that we're reporting. And I think that's finished now.
I was talking about Retail Banking, wholesale business in South America, Mexico and USA. In all of the areas, but especially in Mexico, we've got very important results and it's not only the numbers that matter. It's not quantitative terms only that we're looking at. We have to look at things in qualitative terms and we're very satisfied with that performance as well for the three reasons I said at the beginning. Because we're very satisfied with what's been happening to our underlying fundamentals, the recurrency of our earnings, then the successful transactions carried out in the US. And the way that we're rolling out the first project in our transformation process with a new strategy for commercial networks here in Spain.
So that's about it. Thank you very much. If you wish we can now open the floor to questions and answers.
++++q-and-a
Operator
At this stage we will start the question and answer session. [OPERATOR INSTRUCTIONS].
Unidentified Speaker
[translated] Good morning. We'll start with the questions from here in the room first in Madrid. Any questions? Please go ahead.
Javier Bernat - Analyst
[translated] Hello Javier Bernat from Caja Madrid Bolsa. My first question is about your new network strategy. I'm quite struck by the fact that about three and a half years ago you also launched a strategy to increase personal managers --these 700 and odd managers, as being the ideal instrument for the bank and now it seems you are making a U-turn?. Is the new strategy the definitive one? Could you give us more details about those changes?
And the second question is about operating costs from now to the end of the year. Do you have any estimates?
And what is your view point about the real estate sector following the publication of your research this week? What are your expectations for Spanish real estate? Thank you.
Jose Ignacio Goirigolzarri - COO
[translated] Thank you Javier. Okay, well, I'll start at the beginning. Three and a half years ago when we launched the network strategy and personal financial services and commercial financial services, that was the beginning of today's strategy. What we've been doing in the last three years has been to improve the training and information of the different managers in our branches. And that is absolutely essential and we will continue to do that.
The additional step we made last week is somewhat different because it maintains and even boosts the sales force in our different branches, basically because we need to keep segmentation of differentiated treatment. What we're doing now is eliminating back office structures. Instead of having organizational silos, given the -- given our IT capacity and our organizational maturity, we can get rid of a lot of intermediate levels And that is not going against what we did three and a half years ago, it is something that is complementing it. Three and a half years ago we talked about evolutions at point of sale and now we're doing it with regards to back office and intermediate structures.
I said that there are 750 middle management people being changed and José María Abril himself said, we're actually improving customer service and personal customer service. And we're doing that now because of the management information we have because now we can go beyond the branch concept. Our structure no longer has to be limited to branches and I think that's in complete coherence with what we did three and a half years ago because we're actually boosting the manager or advisor figurehead.
Then you asked for an estimate of operating costs from now until the end of the year. I think we have to talk about operating costs in Spain and operating costs in Mexico which are probably the most relevant. For Mexico, last quarter, we said that after the big increase in costs, because of the huge increase in activity in Mexico in 2004 and 2005, we did say that we expected single digit cost increases in pesos terms for 2006. So clearly below 10% but probably in line or above inflation. I think that's particularly relevant given the increase in the number of transactions, numbers of customers, number of credit cards and number of mortgages we have and cost increases will only be one digit.
Real estate in Spain. Well both the bank and its research department are sticking to our guns. We've always said recently that the Spanish real estate sector will gradually slow down and that is what is happening, in price terms and in mortgage volumes. We've already seen that with our own figures. We think that this is the main scenario in a country that has huge demand for houses.
For the next three or four years, this country will be demanding 450,000 houses a year. This is because of socio-demographic changes in Spain. It's because of the increase in the number of immigrants and also because of the increased demand of people from North Europe coming to the Spanish [Florida]. And that's something that we should constantly bear in mind. That demand will be there, we believe there is a slow down, we think that will continue in the future and we actually think that is good news...
But what does that mean in terms of mortgage values? I remember that at the beginning of this year we were talking about a 15 to 16% increase in mortgage volumes, were growing at 19% and that's with a very gradual slow down, I do want to emphasize the word gradual, and I think that gradual slow down will continue, although stocks will continue to increase. So this gradual slow down I think is the main scenario. It's where we're wielding our bets.
More questions from here in the room?
Jose Brid - Analyst
[translated] Good morning. [Jose Brid] from [La Caisa]. I'd like to hear more about the underlying capital gains and the goodwill of your industrial holdings? And -- well apparently according to the press, you've been buying more shares in Telefonica, could you give us some information there?
Jose Ignacio Goirigolzarri - COO
[translated] Okay, Telefonica. We haven't changed our stance vis-à-vis Telefonica. We've always said that our optimal holding there was between 5 and 5.5% and that is still the reality today. Although of course sometimes some of the Group's units may have a bigger stake in Telefonica but there is no change in our policy as far as Telefonica is concerned. Unrealized capital gains up to June 30 is EUR3.4 billion. It's basically the same as it was one quarter ago except we've now sold BNL and Repsol.
Yes, as you know, we do have the available for sale label and so there's no consolidation and therefore no acknowledgement of goodwill because, as I said, the majority of our holdings are classed as available for sale.
Any more questions from here in the room? Javier again.
Javier Bernat - Analyst
[translated] Yes, I forgot one of my questions. I see that core capital is 6% and you're talking about 5.6%?
Jose Ignacio Goirigolzarri - COO
[translated] So I was talking in proforma terms 5.6% because of the drawdown for the two Texan banks. We are currently involved in approval and regulations and once the operation is completed that will be EUR2.1 billion. That will have an impact on core capital of 40 basis points, that's what I was referring to. That's the difference between the 6 and the 5.6.
Any more questions from here in the room? Okay then, we'll now go to the English conference call questions please.
Operator
Okay, the first question is from George Karamanos of KBW. George please go ahead with your question now.
George Karamanos - Analyst
[translated] Yes. Good morning. George Karamanos, from KBW. I just have a couple of questions in Mexico. Looking at the quarter-on-quarter evolution of your loans and your net interest income, I see that there is a drop of 3% quarter-on-quarter in loans and 4% on NI. Yet when I see through the presentation I can see a very strong loan growth year-on-year and especially on the line items you've produced, there was strong growth in SMEs etc. So I was wondering first of all if there is any seasonality there and secondly the currency effect that we should be looking at, the quarter-on-quarter evolution, whether that explains the 3% drop and excluding the currency there will be a 5% increase?
Also if you could elaborate a bit more on the customer spread evolution that you're expecting coming out of Mexico and the impact of the interest turning asset mix, namely the bonds you have for [inaudible] etc?
And a bit more on the customer spread in Spain that, we have seen two quarters in a row where that has improved by seven basis points per quarter and we still haven't seen the full impact of the duration risk [matches] etc. So whether we will see that trend to continue and potentially accelerate towards the end of the year. Thank you.
Unidentified Company Representative
[translated] So George Karamanos has asked questions about Spain and Mexico. He says that the balance sheet figures in current euros show a 3% drop in lending in Mexico and a slight fall in margin for the quarter. To what extent is this due to seasonality or is it an exchange rate impact?
George's other question was about the evolution of customer spread in Mexico up to the end of 2006 Do the improvements in our -- or will the improvements in our mix lead to an improvement in customer spread?
And, finally, what's basically the same question for Spain about the evolution of customer spread and about mortgaging [real] pricing because he thinks that will probably continue.
Jose Ignacio Goirigolzarri - COO
This one is basically the evolution of the pesos with the euro. In fact, in all my presentations all the figures are without the impact of the evolution of the exchange rate of the different currencies. So the figure that I show in the presentation are the figures in pesos, and that's the reality. So the difference that you realize between the information of the -- that you have and the information that I presented, the reason, as I said before, is due to the exchange rate evolution.
Talking about the second point which is evolution of customer spread and the net interest income divided by total assets. Looking at the next two quarters in Mexico, I would expect some reduction in the customer spread but this [reduction] is going to be compensated by the structure effect of our asset. So I don't see reductions or relevant reductions in the evolution of the -- our net interest income divided by total assets.
And, in Spain, it's a bit the same. Basically, I believe that the important thing here in Spain is to see the evolution of the net interest income divided by total assets and I think that it's going to be basically stable for the next two quarters.
Unidentified Company Representative
Once again [operator] next question please?
Operator
The next question is from Kato Mukuru of Citigroup. Please go ahead with your question.
Kato Mukuru - Analyst
Hello, Kato Mukuru from Citigroup. Just on the deposit growth in your domestic Spanish business, I see you're growing it by 15% year-on-year. That's significantly ahead of what we're seeing from some of the other domestic banks. Could you just explain what you're doing differently to drive this level of deposit growth? And just tell us if there is any impact on pricing? And also what your outlook for that deposit growth is?
Second question is on SMEs. With a lot of the domestic banks focusing on SME market share growth I wanted to know if you have seen any impact on your market shares? And, if possible, if you could tell us how your market shares have moved quarter-on-quarter that would be helpful? Thank you very much.
Unidentified Company Representative
The question is now being repeated in English here in the room in Madrid.
Jose Ignacio Goirigolzarri - COO
The deposit side. Well, I believe that the result that we are having now is a consequence of the strategy that we have been following in the last years. And basically I believe that in the first two quarters of the coming year we have some promotion activity that has been especially successful.
And I would like to talk, first of all, about consumer loans. And I was saying in my presentation that we are innovating a lot in this side, in Spain. And we are innovating from the point of view of product, from the point of view of approach of our customer in the front and therefore, from the point of view of a distribution channel.
And, at the same time, in the last five months, we have a tremendous increase in our customer base. And basically due to a promotion that has been very, very successfully, basically focus on payrolls. The payrolls that we are paying has increased in the last five months for more than 150,000 people. I believe that all this combination of impacts are having a tremendous impact at the same time in the growth rate that we are showing in our current accounts.
And talking about SMEs. Well, I always say that to talk about SMEs is not to talk about promotion. If you want to increase your market share in SMEs you need a lot of things. You need training, information and experience in the approach to each segment. And from this point of view BBVA had all of that. In fact when you analyze which is our market share in SMEs, we are clearly the leader. And in the last 12 months, we increased our position.
The second player in SMEs in this segment -- the segment that you are referring to is [cash] but our position in SMEs is clear. Leadership with a strong growth, as you can see, and we are following the strategy that we defined three years ago.
Unidentified Company Representative
Next question please?
Operator
Okay, at this stage, there are currently no questions left in the queue for the English speakers and there are currently no questions in the queue for the Spanish speakers.
Unidentified Company Representative
Thank you then, I'll read out the questions that have come in via e-mail...
I have a question from Arturo de Frias. He says, investors are wondering how generic provisions would stand if the cycle changes? Could you say something about those provisions being used to cover a possible impairment or worsening of NPLs?
Unidentified Company Representative
[translated] Okay, it's true that we do have a policy of maximum generic provisions. And when we're dealing with expected losses, which is the case of Mexico that Jose Ignacio mentioned, we would use the generic provisions and provide for specific provisions. And that is very good hedging for any scenario of worsening credit risk, which we are not anticipating.
I'd like to add that for Mexico we are using the -- we are very conservative in terms of the expected loss concept. Because of our experience there and I think after time has elapsed and the expected losses do not materialize, we can free-up those provisions.
Unidentified Company Representative
[translated] I actually have one, the same question from two analysts who want to hear more about the evolution of NPLs in Mexico. Which segments are going well? Why does the NPL ratio seem to have increased slightly in the second quarter?
Jose Ignacio Goirigolzarri - COO
[translated] Well, what I think that was is most surprising about Mexico is that the NPL ratio is so stable. Because we've experienced such huge growth in consumer lending and credit cards and now in mortgages. And logically the -- this mix of growth at this stage, because the biggest, or the lion's share, is consumer lending and that obviously usually means higher NPLs.
Despite the huge growth, I sometimes find it quite surprising that the NPL ratio is so stable. Even if it did go up it wouldn't be such bad news given the huge growth. And a slight increase in Mexico would -- should not ever be surprising or a source of concern because of the provisions we have for expected losses etc., etc.
Unidentified Company Representative
[translated] I have a question from a shareholder. What about [inaudible] and Bolivia? Is that going to have any impact on the bank?
Jose Ignacio Goirigolzarri - COO
[translated] Well, I think we've said this over and over again, no. It has no impact on our income statement.
Unidentified Company Representative
[translated] Now from [Pablo Andres]. Will the new structure mean more advantages in the very small companies segment? Will you be letting branches make more of their own decisions about risk?
Jose Ignacio Goirigolzarri - COO
[translated] Okay, that's a very important thing for us. And that's a result of our scoring, rating schemes. And as I've said more than once before, we're investing a lot in Basel because we think it could be a competitive advantage for us. And that is why we're developing a series of tools and instruments which mean more flexibility and obviously more responsibility for our branches.
We've been doing that for some time now and we'll be continuing along the same lines. And risk decisions will not be affected by the new organizational structure. However, it would be true to say that the new organization does aim to take us closer to our customers. And the people that work in our branches, the people that see the customers on a daily basis should be more empowered. And that's not just as far as risk is concerned but also many other issues. For example, planning their activities and also human resources.
Unidentified Company Representative
[translated] There are two questions about corporate banking. What are we expecting as far as SMEs and ATAs are concerned? Fee income is currently 25% of the revenues from this segment, are you expecting net interest income to grow faster?
Jose Ignacio Goirigolzarri - COO
[translated] Well as far as that is concerned, I certainly hope so. Not so much because of fees, but because of income from net interest income because of greater distribution capacity that is happening now in the insurance world and in the derivatives world. That is happening now.
I'll try and give you an idea of the number of operations, not so much the volume, but the number of operations that are distributed through our SME banking. This year, the growth has exceeded 50% and I hope that that will continue to be the case for the next few quarters. That generates revenues, not so much from net interest income but service fees are heavier which took over. And I hope that we'll also see fees from other services which are growing by 19% right now, I hope will continue to grow above the net interest income level.
And, on the other question. I talked about net interest income and ATAs and this quarter even surprised me. I wasn't expecting that in [BCBs] but because of -- well, our pricing policy has just achieved these results that I certainly hadn't expected. And I think things will be pretty stable from now on.
Unidentified Company Representative
[translated] I have a couple of questions from [Ignacio Cerezo] from JP Morgan. An update on the competitive environment in Mexico? And should we expect anything extra on the income statement to offset the capital gains?
Jose Ignacio Goirigolzarri - COO
[translated] Well, charges don't have anything to do with capital gains.
And the outlook in Mexico. Well there's not really that much to say. As you know, we have four big competitors -- well one really big competitor, Banamex, another one, HSBC and Santander and then a very strong competitor which is Banorte. And I think that increased -- well competition is increasing in Mexico. I think that's good for the system because it's all very rational. We have a market that is increasingly competitive but extremely rational, and our competitors are acting in an extremely rational fashion. Given their profile, I think we should expect to continue to see increased competition but certainly no savage competition.
Unidentified Company Representative
[translated] Another question from [Santiago Lopez]. The profits -- ex one-offs, does that include the capital gains from [Technicas or Almenas]?
Jose Ignacio Goirigolzarri - COO
[translated] Yes, but I don't consider that to be a one-off, that's just sort of normal operation as far as our non-strategic portfolio is concerned like, say, Gamesa or [Serinox] in the past. It's really no different.
Unidentified Company Representative
[translated] There are a couple of questions from Christoffer Malmer, from Goldman Sachs. He refers to something in our brochure apparently, Bancomer customer deposits fell this quarter?
Jose Ignacio Goirigolzarri - COO
[translated] Ah yes, I think we mentioned this last quarter in fact. In January/February we changed our commercial policy in Mexico in Bancomer. And basically that change was to take term -- change term deposits to repos and that because a term deposit -- well, increased specific costs for a guarantee fund whereas the repos don't. Apart from the exchange rate.
It's a structural change but if you look carefully -- and without the exchange rate impact where we have mutual fund repos and term deposits we have achieved 15% growth. Now, Citibank is asking whether we could say what sort of risk premium we expect for Bancomer to the end of the year because it is higher than originally estimated? Well I'll hand this over to [Manolo], I think. You can't measure risk premium, I think, like that.
Unidentified Company Representative
[translated] Well given the provisioning system we've been applying since last July, that's why the year-on-year growth seems to be so high because we started in the second semester 2005. We've had to provision the mortgage and lending portfolio based on expected losses. And so it's very complicated to talk about risk premiums for loan loss provisions.
I think we -- what you should monitor is the consumer lending portfolio and the mortgage portfolio and the expected loss concept -- which is, I think, 2%, no two and a bit percent, and a normal risk premium for other portfolios. So that, at the end of the day, that will give us the figure for provisions. To give a risk premium now off the top of my head, is extremely complicated because the biggest growth portfolio has the most provisions. It's the consumer lending one. And so it's very difficult to talk about a general risk premium but I suppose I could say 82%. But it's very much off the top of my head. I think we really should stick to see how lending increases and adjust the loan loss provisions accordingly.
Unidentified Company Representative
[translated] We now have a question, or a request, for comments for 2006?
Jose Ignacio Goirigolzarri - COO
[translated] Well, you know that our policy is not to give any guidance for year-end results. This first semester has been very good and I think the bank is extremely focused, it has very clear targets and I am still very optimistic about the second half of the year.
And now the last question? [Christoff Rogetti] from [Axis]. What is our point of view about the current political situation in Mexico?
Jose Ignacio Goirigolzarri - COO
[translated] Well, Mexico is no exception in terms of recent elections. If we look at Europe with a very sort of close run race. So the result of the Mexican elections, there are a series of complaints to the Election Tribunal. The results have been challenged but Mexico does have very strong institutions. I see that it's sticking to the rule of law and on September 6 we'll know who the new president really is.
Unidentified Company Representative
Okay, well, that brings us to the end of the session. Thank you very much.
Operator
This now concludes our conference call. Thank you all very much for attending.