Banco Bilbao Vizcaya Argentaria SA (BBVA) 2006 Q3 法說會逐字稿

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  • Unidentified Company Representative

  • [interpreted] First of all we'll have the presentation from chief operating officer, Jose Ignacio Goirigolzarri, then we will take questions from the room first of all, from the people who are here. Then we'll take questions over the conference call and then finally we'll take questions over the webcast.

  • As always, Isabel will help us by reading them out here so everybody can hear them. And then as always, those of you who are actually here with us today can come and have a quick coffee with us. We can't spend too much time on it because we've got a press conference afterwards, but at least we'll have a coffee together. So, many thanks.

  • Jose Ignacio Goirigolzarri - President & COO

  • [interpreted] Well good morning everyone. First of all good morning to those of who you are actually here and then good morning to all of you who are following us over the webcast. It's another quarter that's gone by and we now want to share the results of it with you. This quarter, once again, we're presenting results that you've probably got quite used to hearing which are results of strong growth driven by the most recurrent business on our income statement, and that's a point of great satisfaction for us because it's based on very standardized success across all the different business areas. Later on, I'll be talking about this in more detail, but we definitely see an improvement in the fundamentals in terms of the sound base they give us, and the kind of yields they're offering.

  • Here you can see the profit figures; it's the attributable profit. And all in all, as you can see in the overhead, we've got an attributable profit of EUR4.45 billion. It's grown 63.4%. As you know there are three one-off transactions; BNL; Andorra and Repsol which would account for 1.57 million on the net attributable profit figures. So anyway throughout this presentation we're going to take away the impact of those three one-off operations and we're going to be talking more about the recurrent results of our Group. And if you look at the recurrent results then, here you can see that in the third quarter the attributable profit went up to EUR1.15 billion with a growth over the first nine months of 21%.

  • And as I was saying before, really this growth in attributable profit is based on the most recurrent business that we have and here you can see what's been happening in terms of our operating profit. You can see that the operating profit in the third quarter is over EUR2 billion and if you look at year-to-date growth over the first nine months of the year, it's 23.1%. As has now become habitual, this growth in our recurrent business starts from the very beginning of the income statement with the generation of revenues because the core revenues are growing at 17.3%. And we're reporting the highest core revenue figure we've ever had in this Group. And the structure, and this is going to come out very clearly in all the different business areas, is very consistent, very coherent between the net interest income, provisions and insurance because all of these three items are making a big contribution to the core revenues.

  • As a consequence of all of this, we've got the following revenue lines in the BBVA Group, and just to give you a point of reference as I always do, I want to show you the growth that we were presenting to the market a year ago. So you can see that all the revenue figures are doing very well and they are growing even faster than they were a year ago in terms of current euros. If you look at them in constant euros, I think you've got a slide in your documentation for it, but I'm not going to show it here, it's more or less the same. There's not much impact, or less than 1% impact from the exchange rate. The exchange rate had a positive impact of 7% in the first quarter, then it was 3%, but now it's below 1%.

  • So if we measure it in current or in constant euros, we're still seeing our revenue items grow constantly. As I said at the beginning of the presentation, the growth in our margins is not only being seen at global level across all of the Group, but also in all the business areas that we have divided the organization up into. And here you can see it, and what it looks like in the different areas between the operating profit and the net attributable profit. And again we've given you the growth figures that we were reporting a year ago.

  • Anyway as you can observe, all the business areas are reporting very high growth rates which compare magnificently with the already very high rates that we had a year ago. So very strong margins, good operating profit based on a high revenue generation and then, as we always do, we can now look into what we're doing with risk management and how the fundamentals are doing.

  • If we look at risk management I think once again we can say that it's been very strict. As you can see the NPLs as you see on the bottom right, are below 1% at 0.82 with a coverage ratio of over 275%. The level of provisioning that we're reporting which has been charged to the income statement, has a generic component which is very important as you can see on the left of the slide; 73% of the funds and 87% of the endowments are generic -- the provisioning endowments that is. And so now you can see what's happened to the loan loss provisioning over the last few quarters and you can see that specific provisions are staying at the same level. So it's the generic provisions that are going up. And that's why on the right of the transparency you can see that the loan loss provisions are growing, and they're growing because of the generic provisions. Whilst -- in fact there's even shrinkage in the specific ones. And that's why we're having a higher coverage ratio. So strict risk management and a very prudent provisioning policy.

  • All of that leads to an improvement of the fundamentals, as I said before, with a cost income ratio that continues to get better, and including depreciations and excluding one-offs it's gone down 2.3 percentage points. And we've got an ROE of 35.8 and provisioning is as it stands. And this is our capital base now, and as you can see core capital has gone up a little bit against the previous quarter, although I should say that really at the moment we're seeing a growth in assets which are growing fast and this growth is over 19% and this growth, luckily, leads us to see our operating profit grow too. And if you look at it in comparative terms, you can see that the growth that we've been reporting has been constant over several years and that strong growth can be seen here over the last four years.

  • So as is said at the beginning, for the Group as a whole, profits have gone up very strongly based on the most recurrent business in the operating profit driven by strong revenue generation which improves all the fundamental ratios both in terms of asset quality and also in terms of cost income and yield. So from that viewpoint we can now analyze, as we do every quarter, each one of the different business areas.

  • So let's start with Retail Banking in Spain and Portugal. As you'll see, Retail Banking is presenting very strong volumes and these volumes moreover, are very much targeted at market niches that we think are very high potential areas, above all, small businesses and consumer finance. And you'll be seeing that in Retail Banking in Spain and Portugal once again, sales productivity of our staff, and our cross-selling are improving a lot, which really boosts our figures. So Retail Banking in Spain and Portugal is showing historic records for both core and ordinary revenues. I said before, I was saying that if we look at volumes, they're very, very high and growing. In lending, you can see the figures here, we've got over 18% growth. With mortgages, there's a slight drop, whilst consumer and cards take over more protagonism and are growing faster and faster. In customer funds, we've got very similar growth figures to those we presented last quarter.

  • When we talk about consumer and cards and this expansion that we've got in consumer finance and in cards, mainly this is driven by a strategy that we already laid down a year ago. A year ago we came to the conclusion that there was a very important niche there to be filled and we thought that because if we compare Spain, and you can do this from many different angles, but if we compare what's happening here in Spain in terms of per capita consumer lending with other European countries, it's very clear that there's a lot of room for growth. So we launched various new initiatives for different kinds of loans that are really leading to this kind of growth and expansion, and we think that we shall probably be keeping up this growth over the next few quarters. So, since April we've seen 70,000 new operations with these new initiatives, so strong growth and growth in niches that in the future probably will be the highest yield niches, basically with small businesses and consumer finance and cards.

  • Looking at spreads, on the left you can see that in the third quarter, in Retail Banking in Spain and Portugal we've improved our customer spread, as we have been since the end of last year, and if you look at net interest income over average total assets, normally in the third quarter there's a big seasonal impact, so what's relevant here is to look at the domestic sector. Well there, definitely the NII over ATAs, is stable, and that's what we reckon will be happening over the next few quarters as well.

  • But quite apart from volume we're also seeing high growth in other revenues. In revenues from services which have been going up 11.2%. If we then break down this 11.2% growth figure we can see that what is really driving it is not so much traditional banking activities, but more cross-selling activities, and here, I can give you two examples. First of all, life insurance. At the moment we're seeing very high growth in insurance policies for life insurance, and that's very relevant if you look at the market share we have, but anyway over the first nine months we've seen growth in the number of premiums issued of over 21%. And also very significant, just to see the commercial muscle we have shall we say, is what's happening with managed portfolios. At the moment we've got 55,400 portfolios under management and we think that this is a high value added product, which enables us to boost the volumes with over EUR3.12 billion under management.

  • So these are relevant issues which are worthwhile highlighting. There's some background noise as well, which I always like to talk about with you, because we want to improve the commercial productivity that we have, because it's vital for the future, to be able to sell properly. So if we look at the number of products being sold by each of our employees, sales by employees has gone up a lot since 2004; 42% as you can see there. And, as I said, we're obsessed by increasing this kind of sales productivity, and we'll talk about that as well, when we talk about Wholesale Banking. So that's what really drives cross-selling and that generates revenues from services and from fee income.

  • So we're doing well in Retail Banking. We're keeping good control over spreads and our risk management is very much in line with what we've been reporting to you in previous quarters. You can see the NPL ratio at 0.64% whilst coverage grows and you can see that above all, our generic provisions are growing 82% and funds 78% of provisions as you can see on the right of the slide, are generic. And that's improved our fundamentals yet more. Our cost income ratio has improved to 45.9%, despite the fact that we've opened 125 new branches, well, 75 under the BBVA brand and then the rest are under the Dinero Express brand. And by the end of the year, we think that we should manage to roll out the expansion plan we laid down with -- in 2004 to have 350 new branches. We said that over the next three years, at that time, which will come to an end this December, we will be opening 350 branches. Well we've done that and above all, we've opened branches in Madrid and along the Mediterranean coast, and Dinero Express, by the end of the year, will have 100 branches which was the target that we laid down at the same time.

  • Anyway, the return on equity in Retail Banking in Spain and Portugal is showing itself to be very healthy at 34.9% and that brings us to the growth rates of all the retail -- sorry, all the revenue items for this banking area. And as we'll be seeing in all the other charts as well, we're comparing the growth we're reporting today with the growth rates that we reported to the market a year ago. Operating profit has gone up 12.8% and with the structure we have on the income statement means that we only have to include provisions after the operating profit to get to the net attributable profit and an enormous amount of those are generic anyway. So we can say that the performance of this area is very much in line with what we've been doing in the past, and what we must really highlight is the enormous productivity we have in selling.

  • Wholesale businesses now. Well there, as you'll be seeing, we've performed very well in lending, very well as well, in customer funds, and so that means that revenues are doing well. And I want to divide out Wholesale Banking in Spain from global businesses, so that I can explain to you that despite the fact that we're growing a lot in wholesale business here in Spain, we honestly do believe that we have a lot of upside in the future, because we think with SMEs in Spain we can expect to get some positive surprises to report to you over the next few quarters.

  • But anyway, I'd like to start talking about activity and volumes. And you can see that here for lending and for customer funds with the figures for the different units, in September we've reported growth of about 21% nearly, both in Spain in SMEs and businesses, and in global businesses. And you can see that Corporate Business Banking has been growing at about 17%, whilst global business has been growing at about 49%. This is a figure which we've been reporting over the last two quarters. In customer funds as well, the kind of growth that you can see is very positive, despite the fact that our pricing policy is very strict and we think we're right to have such a strict policy, and we think that it explains why we have these kinds of figures for net interest income over ATAs which is Spain has performed very positively, and has been doing so since the end of last year. However, I was saying that when we talk about this kind of growth in Spain and what's happening to SMEs and other businesses in Spain, although what we're doing is important, nonetheless we think that this a niche that in the future, should grow fast. We think the market has a lot of upside and also we think that the BBVA franchise is very well positioned to take advantage of this growing market.

  • So now, I'd like to show you a couple of slides to explain what I'm talking about. If we analyze things and see what the analysts are writing about, the possibilities for growth of SMEs in Spain, all the different consultants and analysts are giving different figures. This is just an example here on the right of one study, but really all of the studies are giving similar figures. The dots might be slightly to the left or slightly to the right, but in Spain definitely, SMEs have high potential for growth and way above that of the rest of Europe. So on the left you can see how many new SMEs are being created in Spain every year, and over the last four years you can see there's been a fast pace of growth and it's getting faster. And so in this kind of scenario BBVA have clear cut possibilities to take advantage of all the expansion for two reasons. First of all that we're well positioned to start with, and secondly we've got a very good strategy.

  • What about our positioning? Well our penetration is very high precisely in this market and I want to make that very clear. When we talk about SMEs in Spain, BBVA is definitely the leading player with 33.3% penetration. The runner up isn't even a bank, it's a savings bank which has 27.7%. This penetration means that we're well positioned to take up the upside in this market, but apart from this kind of penetration, we've also got this obsession, as I like to say, to improve our marketing and sales productivity. This strategy has been pursued consistently since December 2004 and so we've increased the number of products sold per sales employee since December 2004 by 22%.

  • Risk [pime] which is the project we have to sell derivative products throughout the SME network here shows how well we're doing in this area with growth in new business of 59% and that means that we're also seeing a lot of growth in fee income. So in corporate and business banking we're seeing excellent growth with an excellent price policy and a lot of upside for the future.

  • In global businesses for another quarter, we can give you very good results. Here you can see what's been happening to the ordinary revenues from global businesses which have grown 21.4%. Here I want to highlight a couple of things. First of all the recurrency of these results in global businesses. We've talked about this several times. Between 75 and 80% of our revenues are ordinary profit and directly related to customer-oriented banking. And I think we've already said this to you before, but in global businesses our strategy for the last two years has been to expand our customer base, and recently with the Asian plant which we have talked about to you and with the Sydney branch opening up -- or the Sydney office rather opening up yesterday, we think that we have a sound base to go on opening more business up in Asia.

  • So in ordinary revenues from global businesses we've got a good improvement. We're also doing very well in CBB and also strict control of assets with NPLs very close to zero, and coverage is excellent with nearly all of the provisions being generic. And our coverage is now at 722% which means that we improve our cost income ratio which is below 25% now, and our return on equity in this unit is 31.8%. The figures of growth in the revenue items compared to what we had last year show again that we've got strong growth in all the different business units and that we're growing faster than we were 12 months ago. So as I was saying before, wholesale business again has given us very good results and once again we are seeing that it has a strong capacity to grow further.

  • South America is our third division and I'd say there, there are some relevant issues to highlight. First of all I wanted to talk a bit about what's happened over the last year in South America -- in Latin America in general in terms of political risk. And then I want to talk to you about the expansion figures, both in terms of volumes and of revenues in South America. So first of all I said that I wanted to talk a little bit about what we were saying a year ago. As you remember we were all a little bit worried, or some people were a little bit worried about the fact that there were 12 months coming up with a whole lot of election campaigns, above all presidential elections in all of the Latin American countries. 12 months later what we've seen is that the region is becoming more and more stable. That's been proven by the performance of the different markets.

  • Of course you can see this in many different ways, but here we can see what's happened to the [MB] over the last 12 months and as I was saying, for us, Latin America is becoming a region that we consider more and more stable. And so in this scenario of stability in political risk, in South America we're also getting good news about our activity. So here you can see what's happening to our lending figures which is growing at over 30%, and also customer funds also growing at 23.3%.

  • More important still is our capacity to turn growth in volumes into revenues. And so here you can see that the ordinary revenues are growing at nearly 31% and the structure of these ordinary revenues, country by country, is very coherent, very consistent and well diversified. I think that's a strong point in our organization as you can see on the right of this screen.

  • Here too, if we look at asset quality we've got more good news. The NPL ratio is at 292 and going down and our loan loss provisions are only really growing in generic provisions with coverage at 120%. More good news as well with respect to efficiency and profitability. Our cost income ratio in South America for the first time has gone down below 50%; we've now hit 49%, whilst return on equity is 35.4%. So all in all that gives us an income statement that a year ago already looked pretty strong in terms of the growth on all the different items, but these items are growing even faster now as you can see on the screen.

  • So South America, once again we've confirmed its capacity to grow constantly which we had been announcing to you before in advance, and we are growing as the market grows.

  • Now I'd like to talk about our fourth big unit or division, Mexico and the USA. In Mexico and the USA once again we've got excellent news with respect to structural issues and earnings. And here again I hope you'll allow me when we analyze activity, above all in lending, to talk a little bit about our capacity to maintain this kind of pace of growth, because I think it's very important for us to appreciate the upside in the markets that we're serving in Mexico. So here I should say that Mexico, with Bancomer's policy for having very tight price control, despite drops in interest rate, has managed to boost its ratio or net interest income over ATAs and do better and better.

  • And so if we start with activity, here you can see what's happened in lending and customer funds, basically very much in line with what we've been reporting over the last few quarters. And now I'd like to highlight how the SMEs are doing. I talked about this last quarter, but it's an underlying tendency I think, and SMEs are growing at about 30%. This is the third segment that's going to have a boom in Mexico over the next few quarters. Meanwhile, if we look at customer funds, there 14.6% growth in current and savings accounts, is extraordinarily important for us because it's a very profitable business.

  • This activity is compatible with an improvement in our net interest income over ATAs which you can see on the left of this slide, and with growth in our net interest income in Bancomer, despite the drop in interest rates which you can see on the graph on the right of the slide. So as we've been saying to you before, the balance sheet mix is very important because it favors our performance and helps us to grow our net interest income despite the drop in the interest rates, with the better mix, with more business with customers and with excellent decisions from the Bancomer ALCO committee in Mexico.

  • Of course Mexico is very, very important for us with excellent results, but there's still a long way to go there. We could talk about that a lot, but I just want to give you two very clear cut examples. One has to do with mortgages and the other has to do with SMEs; on the left we're talking about bank mortgages. I think it's important to understand the size of this market in Mexico and what's been happening in the past and what we're expecting it to do in the future. So here what we're comparing is the balance of bank mortgages in billion constant pesos, the volume of bank mortgages in 1994 and the volume that banks now have in 2006.

  • And I should remind you as well that over the next 20 years, we're expecting demand of 20 million new homes, that's a million a year. And that's why we like to say that the mortgage business in Mexico has a lot of upside and we think that the kind of growth that we're seeing at the moment will probably continue in the future. So in this fast growing market, Bancomer is very well positioned with market share of 35%, thanks to Bancomer's reputation and the decisions that we took in the past to acquire Hipotecaria Nacional.

  • And just as mortgages are growing, well SMEs definitely are too. There we're talking about a very fast growing market. So on the right of this slide, we wanted to show you a comparison between the lending volume we have in SMEs in Spain and the lending volumes we have in Mexico in the same segment. And here you can see that it's a spectacular difference and really, Mexico has SME lending of about the same as what we have in the regional area of Madrid here in Spain, when we're talking about SMEs. So here, we definitely see a lot of potential for future growth. Because, if you think about it, the percentage of customers that are using bank loans, or the SMEs that are using bank loans, it's still very low, as you can see on the right of this slide. Only 13% of customers are borrowing from banks for their SMEs and that's why we have such low balances and that's why we're so optimistic that in the future these balances will be swelling considerably.

  • This kind of growth, which we're seeing in Mexico in Bancomer, and the forecast for future growth is compatible with very strict risk management. And on the left of this slide, you can see that in Mexico we've got a NPL ratio of 2.16% and our coverage is very high.

  • If we look at the charges, which then go to provisions, against our income statement, I think we've been saying this over several quarters now, but you'll remember that the consumer finance of a mortgage we're provisioning on the basis of expected losses. And on the basis of expected losses we're generating higher generic loan loss provisions. The provisioning of Bancomer in Mexico, compared to a year ago, has gone up, but if we look at the structure of the loan loss provisions, we can see that the weighting has changed. Now specific provisions account for just over 50% and specific provisions now are lower than they were a year ago, having gone down from 63% to 61%. So it's the generic provisions that have really gone up and they've gone up precisely because our consumer and mortgage portfolios, and others, have gone up so extraordinarily fast. And that's the reason why 18% of the loan loss provisions of Bancomer a year ago were generic for consumer finance, but now we've got 29%. And that's the reasons why generic consumer provisions a year ago, were over 270 million and now it's over 400 for the same portfolio -- for consumer finance in Mexico, based always on expected losses.

  • So in Mexico we're seeing excellent performance and excellent forecasts for the future with very good risk management and very prudent provisioning. In the United States meanwhile, we're still are running according to plan and focusing on getting approval for the acquisitions we made in Texas. And yesterday, we got excellent news, which was that the Fed had approved the acquisition of Texas Bancshares and that was why -- sorry, it was Texas Regional Bancshares, yes. And here you can see the figures of our high growth; after a year ago we had already had pretty high growth, it's even higher now in all the difference items on the income statement, which makes us very optimistic.

  • So I can conclude there. So all in all what we are reporting are excellent results we think. As I said at the beginning, we think that we are very strong in terms of profit, the -- we're using a lot of recurrent business. It's our operating revenues that is driving this profit and we're generating revenues faster and faster, and that is something that we're seeing in all the different business units and so, you've seen the figures. And all of them are performing in a very positive manner.

  • Retail Banking Spain and Portugal is growing in a very focused way, looking always at the most profitable sectors. Wholesale businesses managing its volumes very well and has excellent forecasts for future growth. South America is becoming more and more stable as a region and also has high potential for growth in activity and in earnings, and in Mexico and the USA, we are just confirming what we predicted we would do in past quarters.

  • So if we look to the future now, having told you what we've already done, I have to say that we feel very optimistic, very optimistic in terms of growth. We think that we're in strongly growing markets and our franchises are very strong in these markets. We think that our growth model is very predictable and with that kind of growth model in these very strong growing markets, we know that there are niches that will give us excellent results. We've talked about consumer finance and SMEs in Spain and the mortgage business in Mexico, but we could have talked about mortgages in Columbia as well.

  • At the same time, our policy is to expand into other markets. This is an intelligent policy because we always want to have a competitive edge and we've seen that, as we moved into the American market and now we are moving into the Asian market. So if we look to the future, what we see is growth; growth in the Group that can turn growth into earnings and that's not only because our yield -- our return on equity is 35%, but also if we look at return on assets, there too we can see that this Group's capacity is to boost its ROA consistently as we have been doing over the last year. And again, we can also manage to improve our cost income ratio, and not only optimistic about growth and our capacity to turn growth into earning, but also, I think, if we look at our balance sheet, we can see that how sound it is in financial terms and you can see that in many different ways.

  • You can look at our NPL ratio and our coverage ratio to understand why I say it, but also our asset structure; 96% of our assets are in countries which are investment grade, and if you look at our lending portfolio, about 50% is secured. And I think that if you look at the soundness of our financial fundamentals, we have very good grounds for optimism regarding the future because these results are being presented by a management team that's highly focused with an excellent plan that they can roll out.

  • And we're not going to rest on our laurels. We know that things can be improved and that is precisely why, at the beginning of the year, we launched the transformation plan. And that has led to a growth in our commercial productivity, and then in June as well, we changed the way our networks sell in Spain, so a highly focused management team with very clear cut, ambitious targets and we know that there's room for improvement. We are improving and we also want to increase shareholder value because we think that's very, very important, and we've always been obsessed by shareholder value and that's the way to align our interests with the interests of our shareholders. And we do that in all ways, including in our payout policy.

  • So I think that's about it from me and we can now open the floor for questions. Many thanks.

  • Operator

  • Ladies and gentlemen, we will now begin our question and answer session. [OPERATOR INSTRUCTIONS].

  • Unidentified Company Representative

  • [interpreted] Good morning, we'll start the questions and answers here in the room. Please give your names and say where you're from before you ask a question please. And use the microphone.

  • Unidentified Audience Member

  • [interpreted] For the fourth quarter, bearing in mind the adjustment for --

  • Unidentified Company Representative

  • [interpreted] Could you repeat the question please because the webcast -- nobody on the webcast could hear you?

  • Unidentified Audience Member

  • [interpreted] [Inaudible] [Garrido] Ahorro Corporation. It's a question about the tax rate that you've applied in the third quarter compared to the second, and what you estimate for the fourth quarter given the tax adjustments you will be making. What about profits? Can you adjust it via extraordinaries and one-offs? Just to give me an idea.

  • And then a question about specific provisions. This is the first quarter they've gone up and they've gone up 15%, so where are those initial needs coming from?

  • And then could you say something about the cost of pre-retirement for middle management here in Spain? Thank you.

  • Jose Ignacio Goirigolzarri - President & COO

  • [interpreted] I can answer the last two and you can deal with the tax rate. About the cost of pre-retirement, as we said, until the end of the year, we can't give you a specific figure. We did initially talk about the number of jobs not the number of people that we thought could be cut for middle management because of the organizational changes we made in the summer. We did talk about 750 jobs, but in terms of the number of people, we'd rather not say anything because obviously we're still dealing with that issue and it's quite a delicate one and once we have more details we'll give them to you.

  • About the volume of specific provisions and NPLs. To tell the truth at Group level, about these doubtful loans, it's a very small amount. And as far as asset quality is concerned, we haven't noticed any negative changes in any of our units. Having said that, we are clearly at an excellent level and for example in Mexico and Spain with an increase in consumer lending, it would be reasonable to think that the number of doubtful loans in those markets will be higher than what we've had in the past. But, of course, they will be offset by the yield. But when we look at the evolution of doubtful loans, we haven't seen anything special, but we have to remember that there is a lot of growth. We also have to remember that the volume of doubtful loans -- the only place where there's been any variation has been in Spain because in the third quarter in Spain that always happens. It's a seasonal thing, but there's nothing specific.

  • I'd like to say that we can't get any better than this; our NPLs couldn't really get any better.

  • Manuel Gonzalez Cid - CFO

  • [interpreted] Now about the tax rate. The tax rate that we're considering for the whole of the year is approximately 27%. Of course, that's independently of any operations and the result of other shareholdings which don't always have the 35% corporate tax rate.

  • Now on the second part of your question, you know there is a bill before parliament to amend corporate tax. It still yet hasn't been approved. Secondly, from what we know about this corporate tax reform, the news is very positive. The tax rate will be reduced to 30% in two years compared to the current 35% and that means two things. First of all better net results for our activities in Spain, so all our earnings in Spain will grow because of this in 2007 and 2008 and that has great current value for the Group. And it also means we have to update all our deferred taxes. We have about 6 billion in assets and 2 billion in liabilities and it's difficult to quantify all of this until the bill has actually become law. But we don't think there will be any significant impact and it won't really change the Group's figures, nor will it have an impact on our dividend policy.

  • Unidentified Company Representative

  • [interpreted] More questions here in the room?

  • Luis Pena - Analyst

  • [interpreted] Luis Peña and I have two questions. The first one is about the mortgage market. We have started to see a slowdown in prices recently so what are your estimates for mortgage growth for the next two years? What are your base calculations for Spain?

  • And then I have a question that foreign investors keep asking us; it's about recent corporate operations in Spain that Spanish banks are funding. And it seems our investors perceive that there is a lot of risk here that these seem to be unsecured loans. So what about the risk and return ratio here because our foreign investors seem to be a bit concerned about this? Thank you.

  • Jose Ignacio Goirigolzarri - President & COO

  • [interpreted] The first question which is about the mortgage market, I genuinely believe that, well as far as house prices and the mortgage market are concerned, that figures often confuse us, but it does seem that the most recent figures on the housing market do confirm a very positive scenario; that there is this very reasonable slowdown. And so I think we have the best of both worlds because there's this slowdown which is something we've been anticipating and which we'd already noticed in the first half of the year. In June and July things were not so clear because it looked as though prices were going up again, but now there does seem to be this definite slowdown. And for those of us who are involved in the mortgage market, I actually think this is a positive piece of news.

  • The growth that we've anticipated for next year in mortgages is 14 to 15% so definitely slower than last year and lower than what we have today because today we have about 19 to 20%, so there is this very smooth slowdown. We think that by the end of next year, we'll be talking about this 14 to 15%. We think this is -- it's like a controlled slow down in our opinion; that was our main hypothesis and it still is. Then these different corporate operations, I think that, well, market participants all have their own strategy and make their own decisions. When we analyze the decisions that we made as a bank I think that all the operations in which we've participated are -- make perfect sense as far as risks are concerned. So we're certainly not stretching our risk policy and we have very liquid collateral in all of the operations that we've done. More questions? Javier?

  • Javier Bernat - Analyst

  • [interpreted] Javier Bernat, Caja Madrid Bolsa. I have a question about -- what about net profit with constant consolidation perimeter? And then about allocated assets this year? I think you went over that quite quickly. What did you say?

  • Jose Ignacio Goirigolzarri - President & COO

  • [interpreted] It's other real estate owned.

  • Javier Bernat - Analyst

  • [interpreted] And then SMEs?

  • Jose Ignacio Goirigolzarri - President & COO

  • [interpreted] The NPL rate 0.32, our own corporate banking went up to 0.38. I still think that's very, very low.

  • Javier Bernat - Analyst

  • [interpreted] I thought the average for the banking sector is double that so could you clarify that please?

  • And then my last question is about the dividend. I think you said it would increase by -- or the interim dividend would be up 15% did you say?

  • Jose Ignacio Goirigolzarri - President & COO

  • [interpreted] Well the Board's the only one that can say anything about that. I don't know whether Manolo would like to take that one. As far as dividends are concerned I think we have a very sensible policy; we have an interim dividend of 15% and the final dividend will depend on our results. I think we're very predictable in all of this, you know what our policies are in terms of core capital and our payout policy and so with our earnings estimate we make the decision, but I think we're very predictable and the payout will be very similar to what we had last year. And at the end of the day it will all depend on the Board's decision, well actually the AGM because the Board has to take it to the AGM. I think Manolo should answer the other.

  • Manuel Gonzalez Cid - CFO

  • [interpreted] Okay about the perimeter; there are lots of small issues about the change in perimeter. Andorra in 2005 for nine months of the year, and for operating margin fees Andorra was quite high, and then this year we only have one quarter of Andorra, the first one. We had Granahorrar that came in, in December so that was very little; this year it's almost [whole way]. Then Forum in Chile which we now have; Laredo came in, in April last year; this year it's the whole year. BNL of course, the equity method there; we had Repsol dividend etc. and this year we don't. So if you take it all into account the Group is growing in operating margin year after year without the one-offs by 23%. Without -- if we eliminated all those perimeter changes it would be growing 24.2%, so the perimeter changes have reduced our growth rate by one percentage point. So we would have higher growth without these changes in the perimeter basically because of Andorra.

  • Then in the -- what you said about the assets, it's 268, there's no change between June and September in the prospectus, even coverage, even provisions, it's perfectly stable at 50%, so I don't see anything unusual there, unless, I don't know if you've seen anything else. You've answered the SME question I think.

  • Javier Bernat - Analyst

  • [interpreted] There was the NPL ratio and SMEs.

  • Jose Ignacio Goirigolzarri - President & COO

  • [interpreted] It's very low compared to the banking sector in general. We have an excellent rating system in our SME portfolio and on the 20F report, Javier, if you want, we have the rating distribution of our lending -- our SME lending portfolio, so we're very short in terms of risk, and the expected loss in SMEs is very, very low because of the risk [terms]. So we have this fantastic rating system and then, of course, we have huge generic provisions to cover any change in trend which we don't expect.

  • Any more questions from here in the room? Great. Okay then we'll go on to the conference call. Are there any questions on the conference call?

  • Antonio Ramirez - Analyst

  • [interpreted] Yes, I'm Antonio Ramirez from Merrill Lynch. I want to go back to a previous question about the funding of certain corporate operations in Spain. I'd like you to clarify the time horizon for these because in a previous one, for example, [Fedoreal] it was a very big bridge loan which in two or three months became a syndicated loan which was actually oversubscribed, highly oversubscribed, so the banks that participated in the initial loan reduced their risk quite significantly. So what is your strategy vis-à-vis the holder ratio in this kind of operation and what time horizon are we talking about because I guess there is very high risk there? And then what about the return, what sort of return are you getting? Because I don't suppose they are limited to the loan itself, but rather trading income and fees from underrating. That's my first question.

  • My second question is about Mexico. You have very good results for another quarter and I'd like to know how sustainable those results are? You did mention the potential in SMEs and mortgages for example in Mexico, does that mean that we can expect an increase in lending of 20 to 25% over the next few years such as we've seen in the last two years? And as far as margins are concerned, will the asset composition give rise to more improvement in the next few quarters? Could you tell us something therefore about margin sustainability and volumes in Mexico? Thank you.

  • Jose Ignacio Goirigolzarri - President & COO

  • [interpreted] Thank you, okay. I begin with your first question. These questions are always very difficult because this is an issue of customer relations and so I have to be very careful. When we talk about operations I can talk about the BBVA operations not anyone else's. There are two things that you mentioned in the question that I think are very relevant. Obviously the return on these operations, the yield on these operations, is not just a question of spread. These are usually structured loans and so you have fees and of course, for your advice and your support, for covering the operation. And then of course, you've got the interest rates. So there are different fee levels involved and then the interest rate spread is probably the least relevant part of the profit you make on this kind of operation. Because these are structured loans, therefore they involve fees and they usually have -- usually get further income from the hedging, and there's not really much else I can say there.

  • And then volumes, given limitations here, but the typical BBVA operations are ones in which you have a bridge loan and then sooner or later, four, five, six, seven months later, you then syndicate the loan and you share it with the market and you spread out the risks. That's the standard operation; that's the kind of thing we do, we don't really do anything else. So I'm sure you'll understand the limitations I have when I talk about these operations, but I think you can see that, well, there's standard set up of bridge loan, syndication, the bank keeps the percentage it wants, and then the whole issue of setting up the operation, the placement of the syndicated loan, we get -- we earn fees which are much higher than the mere interest rate spread.

  • Now Mexico; I have no limitations about talking about Mexico. When I look at the future for Mexico I could have given you consumer lending figures as examples too. I'm really trying to answer a question. When BBVA entered Bancomer, when we bought our 30% stake there, I had to do the road show to present the purchase of that 30% stake. And on the road show people always asked why we had bought that stake in Bancomer because they considered that Mexican banks could not increase their lending and therefore it was difficult to be profitable there. But now, four or five years later when I go on road shows, people never ask that any more, they all ask about maintaining these huge growth rates in the lending portfolio, and we're only four or five years on.

  • And I think the two questions are both logical, but we have to realise that it was logical to ask those questions in the year 2000, because the portfolio was coming down in Mexican banking. It also was good to ask whether that growth can now be maintained. I just think people have to realise that the starting point was so low that, in order to try and reassure you, we included the slide in the presentation. We never have much time to give many explanations; I've said I think there'll be great growth. The example of mortgages and SMEs I believe are extremely visual to explain the way we feel. The growth rates in Bancomer are 20, 25%.

  • There's good GDP growth in Mexico and I think therefore, that in the medium term this growth is sustainable, that's our opinion. That's what we're anticipating in the Bancomer's portfolio. In the medium term this cruise speed of 20, 25% with all the justifications I gave previously, I think it's more than reasonable. And then improving the asset mix, well that has a logical end. I remember a year ago, when we talked about the interest rate reductions in Mexico and I said that I wasn't concerned because there was going to be a change in the mix, and that will start, of course, to slow down.

  • And looking towards next year, 2007 I think that improvement, because of the change in mix, will really reach its limit, but it will also be very stable. So in the medium term, I think growth will come more through activity rather than through a change in mix. When you look at the net interest income from Bancomer I think that's self-explanatory; growth will be focused on increased activity. We're not expecting to see big drops in net interest income over ATAs in the near future. I think that things will sort of reach ahead next year.

  • Any more questions?

  • Unidentified Company Representative

  • [interpreted] Next question from Arturo de Frias, Dresdner Kleinwort.

  • Arturo de Frias - Analyst

  • [interpreted] Hello, good morning. I was also going to ask about Mexico's margins because I found them really impressive, but you've already answered those questions, so you're expecting them to increase, but stabilize next year.

  • So I have another question. It's more about the medium term, and the sustained increase in earnings in BBVA with the current Group composition. I've been looking at one of your slides, number five, and there you compare quarterly earnings excluding the one-offs, and you show the third quarter of 2006 is the second best after the second quarter, which was absolutely fantastic. I think that in the third quarter 2006 there are 100 million of the capital gains from Gamesa; I think you've got them in Wholesale Banking under the equity method. So if I excluded the 100 million, the net profits from the third quarter 2006, the profits for this quarter would be 1 billion. And if I compare that to what you've generated in recent quarters, first of all it's lower than the second quarter which is absolutely fabulous, but it would also be on a par with the first quarter, below the fourth quarter 2005, and very much in line with the second quarter of 2005.

  • So the quarterly variations, BBVA's growth profile hasn't improved in this third quarter. It seems that it's flattening out a bit, which wouldn't be a problem because your growth has been so great in the last few quarters. What is your estimate for profit growth in the mid-term? You've come from I think 25 in the first nine months of 2005, you said 25; it's now 21 in 2006 and it seems that the growth momentum is flattening out a bit. Will we be getting 15 for 2007? Well, I hope not.

  • Jose Ignacio Goirigolzarri - President & COO

  • [interpreted] Talking about the quarters it's not very easy to make comparisons at Group level, it's easier to do it at business unit level. You probably know better than I do that the second and fourth quarters are peaks for us because of dividends. But apart from the dividends when you analyze the Gamesa operation we had a very similar figure in the fourth quarter last year too. We have a volume of results in what we call Wholesale Banking except for global business which includes our equity stakes, not in big companies like Telfonica or Iberdrola, but our classical traditional equity stakes, and where -- and it's our private equity funds as well.

  • So we have a series of investments there which, from a real estate point of view and a portfolio point of view, are being rotated in a very traditional fashion. If you look at the last two or three years those investments are giving us EUR200 million and that is a recurrent figure. But we have for the future for the next couple of years when I see what we have, what we are investing in and how we rotate the portfolio, then for me and for the people in charge of them I think that is just a standard part of the business flows of this Bank. That's what we've budgeted for 2007 and 2008 and we'll be talking about that as we discuss the budget in the next few months.

  • When you look at the operations, we've made real estate and non-real estate in the last three years; they're all in line with that flow. Some quarters we may have a higher one and it may grab your attention, but if we look at the last three years, that's been more or less a constant level, and in the next two or three years we will also continue at that level given the maturity and rotation of our portfolios. So we think these figures are totally recurrent part of our traditional business and for the next couple of years we do believe that this will continue to be the case for growth.

  • At the end of the presentation I've tried to share my feelings with you. When I look to the future I think that we have very high growth capacity. When I look at the past and I see the increase in net interest income in the first, second and third quarter and when I take into account the exchange rate impact, and the first quarter it was 7%, in the second, third now it's zero, when I look at that in terms of constant euros then the growth is very sustained and very similar to what we had in the first quarter. So I haven't seen any fall in constant euro terms. And when I look to next year, well, we haven't gone through the budget yet, but personally, I wouldn't like to see much lower growth than what we have now. My colleagues and I have this to discuss next year and I certainly wouldn't like to see figures that are much lower.

  • Any more questions? No more questions from the conference call in Spanish, so we now go on to conference call in English.

  • Operator

  • We have one question. It comes from Mr. George Karamanos from KBW. Please go ahead.

  • George Karamanos - Analyst

  • Yes, thank you. Just one question regarding Texas Regional and certainly in Bancshares I understand there will be accounted for next year. But from what I understand, this quarter their NII figures were a lot lower than what the market was expecting and that could be sustainable. And I was wondering whether it was a surprise to you and versus the original budget that you have said whether you would be looking at some adjustments on the back these results? Thank you.

  • Unidentified Company Representative

  • [interpreted] Those are questions from George Karamanos from KBW and it is about the third quarter results of Texas Regional. It will only be consolidated as of 2007, but these companies' third quarter results show weaker net interest income. What is our view on this?

  • Jose Ignacio Goirigolzarri - President & COO

  • [As in this data] because as we have mentioned several times the flattening of yields curves in the US market are affecting net interest income generation of these banks. This has nothing to do with recurrent generation of business of the Bank, and is not to do with the flattening of the yield curve and the positions in the asset and liability -- from the point of view of asset and liability management in the Bank. The important thing is that we have approved the transaction in three months; in our [quoted] transaction Laredo cost us six months in order to close. I think this is reflecting the experience and the strong consideration of the federal authorities of the Bank in the way they are really dealing with this authorization process which you know are extremely complicated and long in United States.

  • The second thing I think is important I think in this transaction is the positioning we have taken in the US dollar. We have been buying dollars during this time preparing the acquisition. We have now US$1.2 billion prepared to pay the acquisition on leverage rate of [1285]. That means EUR25 million of less goodwill that we are going to have in this transaction because of that position of US dollars taking advantage of the movements in the foreign exchange market. Of course this transaction is not accounted as trading income in profit and loss account because it's absolutely a hedging position to cover the acquisition of the US dollars to pay the transaction. So we are very happy with the transaction. We have been very successful in the way we have implemented the acquisition of the currency to make the transaction and we have tremendous plans in order to integrate all these banks in United States. Thank you very much.

  • Manuel Gonzalez Cid - CFO

  • And we believe that we are going to have a closing --

  • Jose Ignacio Goirigolzarri - President & COO

  • Yes, probably at mid November, mid November.

  • Operator

  • There are no more questions.

  • Unidentified Company Representative

  • [interpreted] English conference call. Okay, we can now go on to the e-mail questions. Ignacio [Ceretos] asked about profits for 2007. Can we give a qualitative view per division?

  • Jose Ignacio Goirigolzarri - President & COO

  • [interpreted] Yes, of course, although as I said before we haven't even started the budget process yet and we don't like to give targets for earnings. But from a qualitative point of view, I think that in 2007 I think we will have good news in all of the units beginning with Retail Banking in Spain. I think we have good news in terms of spreads; I think that is very important. In Retail Banking spreads have been coming down for three years in BBVA and in the Spanish banking sector. And if we look at half year versus half year it's still there although it's quite stable. The outlook is that next year this drop in spreads will not occur and that means that the increase in volume -- increased activity will mean higher operating profits. I think that is the outlook for Retail Banking in Spain and Portugal next year.

  • We are also working to improve the efficiency of our network, as we said in previous meetings and as we said this Summer, with the project we have underway which is on schedule; that's the change in our network. In Wholesale Banking both in Spain because of the reasons I've given and also in terms of market potential, we are very optimistic about next year and the spread issue is also important here, more so even then in Retail Banking. And then In Global business; there's a definite growth trend there and with good market operations, because of a high number of client operations and this is all I think very consistent. I don't think we'll be able to repeat the growth figures that we've achieved this year, next year, but I still think we'll have very high growth figures in Wholesale Banking.

  • In South America, I don't think that the significant changes in the basic trends compared to this year; in the US will be integration, and the acid test, which I think will be very successful, will be integrating with two new Texan banks. And in Mexico, basically, what we said before, the growth that I mentioned and maybe the increase in profits will not be as high as this year, but will still be very high and very much in line with what I said before about increased lending activity in Mexico.

  • Unidentified Company Representative

  • [interpreted] I have a question from [Torre Passman] from ING. Do we think the slowdown of the US economy could have any impact on growth in Mexico? And then what about lending quality in South America and Mexico?

  • Jose Ignacio Goirigolzarri - President & COO

  • [interpreted] Okay, starting with the second question, lending quality. I think I've basically covered that one. As far as underlying quality in Mexico and Latin America is concerned it's very good. The figures bear that out, and when we do a more in depth analysis about that quality, I think that -- well, we've no reason to be concerned about the future. Having said that, as I said in recent presentations and I'll use Mexico as an example for this, in Mexico we've achieved significant growth in consumer lending and credit cards, and for reasons well known to all of us the NPL ratio is higher than for other activities. It also has much higher spreads than in other activities. We've had great growth in consumer lending and credit cards for the last two years, so it would be logical to see an increase in NPLs. Will this have an impact on provisions? No, because as I've already explained, the volume of provisions that we charge to Mexico's income statement correspond to expected losses, and that means a big increase in generic provisions.

  • About the slowdown of the US economy and any impact on Mexico. We don't think that the US economy is slowing down that much; we think it's a more orderly slowdown. We don't think this is the beginning of a recession, and the United States is not one and the same thing. The Texan economy is very, very strong; it's not at all sluggish. Growth expectations for Texas for 2007 are 1, 1.5 points ahead of the US economy. In general 6% available income, that's job creation, real estate sales are high so Texas is very different from say, California or Florida.

  • Having said, and now focusing on Mexico; Mexico's economy I think, is one of the most interesting in the region right now. Mexico's growth expectations for next year are very high. This is because of domestic demand. It's not growth that's imported from the US, so Mexico's growth expectations are based on domestic spending, private consumer spending, and the Mexican economy has started to depend a lot less on the US economy, so we don't there'll be any significant impact on the Mexican economy. If you look at Mexico's indicators for the last twelve months, there are no -- there's no negative news. Everything is positive. Maybe the only negative thing is inflation, which went up temporarily, but that's a one-off thing, so we don't see anything dangerous there at all.

  • Unidentified Company Representative

  • [interpreted] I have the same question from two analysts, about the Group's current structure. Do we look more at the distribution of economic capital or profits? What is more important for us? [Wes Caddow] asks whether -- are we at our optimum point with less than 5% in non-investment grade countries?

  • Jose Ignacio Goirigolzarri - President & COO

  • [interpreted] Well we look at everything; we have to look at the distribution of economic capital and the return on it. Personally, when we look at the risk profile of the Group for the future well, economic capital is extremely significant because that is really what indicates how much risk you've accepted in each business. For some time now, here at the Bank, we decided to manage -- we decided on value based management, and we decided that we would take into account economic capital and expected losses. And I think we deliver such good results to the market in such a disciplined way, because we have such a disciplined approach to generating value and managing economic capital that depends on the risk profile of that business unit, and the kind of activities it's involved in. So those are variables that we don't deal with in conceptual terms, but rather on a daily basis, and every month in our business review.

  • I think that economic capital is the basic benchmark for risk, but to generate value you need capital, you need growth, so you have to keep one eye on the economic capital and the other one on the revenue structure, profit and growth. The BBVA structure, when you look at it with both those eyes, in my opinion we have struck an excellent balance between profitability, growth and financial solidity. So we are happy; we feel comfortable with the Bank's risk profile and the split between risk and growth. That doesn't mean that we wouldn't change the current structure, but we certainly feel comfortable with it right now.

  • Unidentified Company Representative

  • [interpreted] I have some questions from Pablo Beldarrain about costs in retail banking and why the increase? And then there's one from [inaudible] that's been answered, and another one about the evolution of Bancomer fees that seem to have slowed down somewhat, so could you comment on that?

  • Jose Ignacio Goirigolzarri - President & COO

  • [interpreted] Okay, well I'll start and then Manolo can talk. Talking about personnel expenses in Retail Banking there; I think they're lower than they were in the second and they're probably about the same as in the fourth [50]. In Retail Banking I talked about that, and there we're going through this process of growing the number of branches, and that obviously has an impact on expenses at the end of the day. As I said before, if you look at Dinero Express, which is included in these accounts and BBVA, we're going to have 125 new offices this year, and as I said before as well, before the end of the year, we are going to grow with another 50 branches in Retail Banking and some 20 for Dinero Express. And I've also said that with that we really should have completely rolled out the expansion plan that we announced in 2004. So personnel expenditure in Retail Banking is definitely related to all of these expenses.

  • Looking ahead to 2007, I'd say that personnel expenses, well, general expenses really, will be diluted over the -- at the beginning of the year. There might be a bigger impact, because obviously, opening branches costs money and that puts pressure on your expenses, but as that growth slows down, probably by the end of the year, the figures, well, they're slightly above inflation this year, so they should be slightly below inflation by the end of next year.

  • Manuel Gonzalez Cid - CFO

  • [interpreted] And then I wanted to say something about fee income in Bancomer. Basically, Pablo, if you look at all the information that you were sent annexed to the presentation you've got an awful lot of information, all the different cascades, year by year, quarter by quarter, and all the balance sheets for all the business units. Probably haven't had time to see them yet, but you can see that the drop in fee income actually reflects what's happening to the [affore] that Bancomer has; it's not the banking group. So if you look at the cascade for Mexico as a country you do see a drop in fee income. It's not a very big drop, but it is a slight drop in the fourth as opposed to the second quarter. No, in the third quarter compared to the second quarter, but if you look at the banking group, there it was 2 million and that has to do with seasonal impact of it being the third quarter.

  • There's really no change in the underlying pattern of the traditional fee income structure there, but there has been a policy amongst the management team, of bringing down fees and opening out more distribution networks in order to boost market share at a time when the [affores] aren't really making very high returns in Mexico, and the third quarter really shows what's going to happen in future, because these decisions were reached in June or July.

  • Jose Ignacio Goirigolzarri - President & COO

  • [interpreted] So, many thanks for your questions, and thank you for your attention and see you next quarter. Bye.

  • Operator

  • Ladies and gentlemen, this concludes our conference call. Thank you very much for attending. Bye bye.

  • Editor

  • Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.