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Unidentified Company Representative
Good morning everyone and welcome to the presentation of results for the whole year 2006 here at BBVA. As always, we're going to start with the presentation from the Chief Operating Officer.
After that, we'll take questions, starting with people who are actually physically present here in this room, then we'll take questions over the conference call, and then we'll take questions through the webcast. And to make the process a bit easier, Isabelle will be reading them for us so that we can answer them one by one. Then, as always, those of you who are in this room, are invited to coffee. Many thanks. And those of you who aren't here can be told it was coffee with biscuits.
Jose Ignacio Goirigolzarri - President and COO
Good morning everyone. It's a great pleasure for us to be here again presenting the results, especially this time because in this presentation, we want to tell you all about the year 2006. So as we usually do, first of all we'll give you an overview of the Group, after which we'll give you a more detailed analysis of each of the business areas, which comprise our organization.
Let's start with item 1, the Group results for 2006. Once again, we're presenting record profits in the BBVA Group. Here you can see how the attributable profit in the Group has been performing from 2002 to 2006. In 2006 attributable profit was EUR4.7 billion. Earnings per share has been growing by 23.9% over the year. The analysis of these results, as we told you last quarter, will be done excluding one off items, and then afterwards we'll give you an analysis of those one off items themselves. But, anyway, the next few screens that I'm going to show you don't include any kind of one off item. So this attributable profit that we showed you, growing very buoyantly, is being driven by revenues, above all, on the most recurrent side of the income statement and the most recurrent side of revenues.
Core revenues in 2006 have grown 16.3%, as you can see. But of special relevance it's not -- we shouldn't just look at the 16.3% growth, we should look at what's been happening quarter-by-quarter. You can see that on the right of the screen, and this is something we'll see later on in the presentation too, on various occasions, that the fourth quarter, which is what we're presenting, has been very expensive. Core revenues, compared to the third quarter in 2006, have gone up 7.6%. Apart from that growth in revenues, the cost income ratio has continued to improve in the BBVA Group. We ended the year 2006 with a cost income ratio, including depreciation, of 44%.
And more notable still, quarter-by-quarter over the last eight quarters, we've been seeing our cost income ratio improving. As a consequence of this, we're reporting an operating profit which has grown 22.5%. In current euros and constant euros, the growth is very similar really, because the exchange rate impact on the year as a whole has been practically zero. But, as I was saying, regardless of this 22.5% year-on-year growth, we should also look at the composition of the quarter-on-quarter growth in the operating profit in the fourth quarter. As I said before, it's been very expensive and we're reporting an operating profit that's grown against the third quarter by 11.7%.
And then we have to look at the asset quality and our provisioning policy. The NPL ratio has got to 0.83, basically the same level as in June 2006 when we got to 0.82. We will be analyzing this area by area, division by division, but basically, in the year 2006, we have probably touched bottom in the NPL ratio. However, as we'll say later as well, we're pretty optimistic about what's going to be happening there in the future.
On the left of the screen, you can see what's been happening to our loan loss provisions and funds against our income statement. So there are two issues here. First of all, the 73% of total funds and 71% of provisions are generic, and the main growth, in the allocations to these funds, have been made in Mexico as a consequence of an enormous growth in lending in Bancomer.
All of this consequently has given us a growth of 20.3% in our attributable profit without one offs and, over this quarter -- sorry, in the last quarter, the net attributable profit went up 14.2%. We managed to get that while keeping the right levels of capital adequacy, which you can see here. Core capital is now 6.2% and the BIS Ratio 12%.
I also think it's very positive to notice that this excellent performance, for the Group as a whole, has been reflected in each of the business units, as you'll be seeing later when we give you an in-depth analysis. Nonetheless, this is an initial snapshot. Growth in the operating profit, in all four areas, as you can see, has been very good.
I was saying that this growth in the profit items and revenues, above all, and the operating profit, basically, has come about in a year in which we've carried out various one off transactions some of which have been very important for the composition of our business portfolio. As you well know, we sold off non-strategic holdings in BNL, Andorra, and Repsol which gave us capital gains of EUR1.15 billion. We've invested in markets that we think have high growth potential, the USA and Asia. We've put in EUR3 billion into these markets and we've had a capital increase at the end of last year, which I'm sure you will remember.
Apart from that, the income statement for the fourth quarter was impacted by two issues. First of all, we took certain decisions as a consequence of the change brought about by the restructuring of our branch network here in Spain, which we announced to you in the third quarter, which has led us to decide to roll out an extraordinary plan of early retirements with a net charge of EUR544 million to our income statement. So we're talking about a process which we will be giving early retirement to many of our staff to cover two issues. First of all, we've been reducing 811 jobs. And, secondly, there are 1,000 early retirements, which are mainly intended to give us renewed staff profile. And doing all of this, given the cost patterns that we hope to establish in the future, we think that the impact will be seen in 2007 and 2008, although we haven't put them into the budget yet, which is why we think we will see an enormous improvement in our branch network cost income ratio, which we think will probably be below 35% by 2008.
And then another thing that you know is that the legislation has changed on our tax structure. It's a positive change because, in the future, we will be paying lower corporation tax but, as a consequence of that, we have, as we've already announced, had to make an extraordinary charge to our attributable profit. And there was an impact of 100 million on capital and reserves.
So all the one off items that we've seen this year can be concentrated, in terms of their economic impact, in this screen. So as you can see, in the second and fourth quarter, we saw most of the transactions in the second quarter. We've got the Repsol, BNL and Andorra divestments, which generated extraordinary net profit of 1.5 million. And this fourth quarter, we've got the charge for early retirement, which we were talking about in net terms before, EUR544 million. And then the impact of the change of the corporate income tax with the extraordinary charge we made, plus the impact on our tax bill of the expenses generated by the early retirement charges.
So in the fourth quarter, we've got an extraordinary charge of EUR1 billion in very round terms. And so, at the end of the year, the one off items have had an impact of only EUR156 million on our P&L account. So this is the published account. You've seen our management accounts before. And in the rest of the presentation, we'll be looking at the management accounts, but this is the public account of the earnings in 2006. And in the fourth quarter, we've got attributable profit which, without taking into account any one off items, gives attributable profit of EUR1.2 billion, which is the highest we've ever achieved in this Group.
So I've given you an overall view of the Group as a whole. It's been a year of expansion. And 2006, in its final quarter, really outperformed our own expectations, but now we can look at each of the different business areas, starting with retail banking in Spain and Portugal, as we usually do.
When we analyze the year as whole and we look at the highlights of the year, highlights in qualitative terms that is, things that happened in 2006, I think there are probably five that stand out. First of all, I think that we should look at the innovation of products and our innovation policy in consumer products and deposits which have given rise to enormous growth, as we will see later on. In particular, I think we have to focus on the world of consumer lending with three new products, the different loans and easy-loan, a loan against pay packets, and a loan for SMEs, generating a lot of revenues in 2006, which is approximately one third of total billing in consumer lending last year. And these three products that I mentioned have also generated 130,000 transactions.
Then, secondly, I think that we should talk about the growth in asset management products and customer portfolios. Here, I don't only want to refer to the fact that, for example, we've launched the first FT fund, but also there's another aspect. Normally we don't have time to talk about it, but I think it's worthwhile to mention it today, namely, the success we're having in the distribution of managed portfolios throughout our branch network. At the moment, we have portfolios managed by the branch network with over 59,000 such portfolios being managed by our branches over the year, and 33,000 of them are new. So we're talking about assets of EUR3.3 billion under management. And, if we add them to the 11 million in assets under management in Patrimonios, then we'll be talking about EUR15 billion, which is about 20% of the assets under management that we have in mutual funds.
Thirdly, I think we've made a lot of progress in our commercial policies working on market segmentation. And many of the things that we've done in 2006, I think, have had a big impact on our outlook for 2007. Basically, I want to highlight two segments here. First of all, young people. This is something we want to focus on; increasing our market share amongst young people. And then also immigrants. There, as you know, we launched a project which we called Dinero Express, with a distribution network which was independent of the BBVA brand. Now we are very satisfied to announce that, in terms of what we are doing with immigrants, we have got 500,000 customers, and today our market share is 19% in this sector.
Then fourthly, I think it's important to inform you that we have completed the branch network expansion plan that we announced three years ago when we said we were going to increase the number of branches by 500 new branches in very specific places that we have thought needed to be boosted. We have already done that over the last three years, and now we think we have completed the role out of the expansion program. And from now on, what we have to do is to look at the numbers; make sure that we have the right number of offices opening and closing to keep up with market needs.
We also have to talk about the simplification of the organizational structure. Because of branch network restructuring that we talked about in the last presentation, I think we should talk not just about how we are coming closer to the market, which I think we have, but also we have to talk about the fact that we've improved our cost income ratio across the board.
So as a consequence of the program, we've brought down the number of jobs in our intermediate structure by 16%. That will generate a lot of efficiency over the next few years. Consequently 2006, in qualitative terms, has been a very good year for retail banking in Spain and Portugal. And in quantitative terms as well, I think there are important aspects to look at. If we look at the growth of business volumes, you've got the figures here, we're growing in lending at about 18%, with a slowdown which we had announced, which you can see in mortgage lending everywhere, and with a big upsurge in consumer and cards, for reasons I have already explained.
Meanwhile, in customer funds, the quarter has frankly been very expensive, and we are giving gross figures of about 10%. However, although volumes are important, the main news this quarter is what's been happening in customers spread and net interest income over average total assets as a consequence of our pricing policy which we have been informing you about over the last few quarterly presentations, because as interest rates are changing, it is fundamental to reflect those changes in the pricing policy. You can see that customer spread has gone from 2.92 to 3.08 and our NII over average total assets has gone up by 3 basis points in the final quarter of the year. As a consequence of greater volumes and this performance in spread, and as a consequence of our pricing policy, we are talking about a net interest income which has gone up 9.2% over the year as a whole.
More important still, we have to look at the underlying speed, what we call the cruising speed. And on the right of this slide, you can see that this cruising speed has gone from lower to higher over the year. What we're comparing here is the growth rate on the net interest income quarter-by-quarter. And you can see that we have started the year with a growth of 7%, and we've ended the year with a growth of 12.7%. That is another reason why we have to say that this fourth quarter has been very expensive, and in particular it's been very expensive for retail banking in Spain and Portugal. We've got a 12.7% growth in net interest income quarter-by-quarter. But then there are other revenue streams as well which have to mention. They have grown 11.9% over the year, and their composition is very significant I think. Low capacity for cross selling in this group means that growth in insurance, generated revenues, and in revenues coming from market operations. But also the income from banking transactions has been growing at 9.1% and that's a very positive figure.
As you can imagine, this high growth in revenues means that efficiency has been improved. As you can see here, the cost income ratio is now 45.4% and the operating profit has been growing 14.4%. In terms of our asset quality, here you can see that there has been a slight growth in our NPL ratio in 2006. As I've said, we have probably seen these NPL ratios hit rock bottom, but for 2007, we only expect them to go up very slightly and there definitely will not be any cause for concern. They are definitely under control because our provisioning should show growth of below 10% next year.
And so attributable profit was 14% -- went up 14%, and return on equity went up 1% reaching 35.6%. All in all, here you can see the P&L for retail banking in Spain and Portugal, and here we are campaigning -- comparing the percentages that we have for this year with those that we were presenting last year. As you can see, in all the different profit items, we have got growth which is higher than 2005. And if you compare these growth figures with what we were presenting in the third quarter of 2006, you can see there too, that the fourth quarter last year was especially expensive and positive for retail banking in Spain and Portugal.
So we can now move onto wholesale businesses. In wholesale businesses I think there are some significant items that we should mention. The highlights of what we've been doing throughout 2006 first of all.
Business is becoming increasingly international. If we analyze the growth in global customers and see how much of that growth comes from customers outside Spain, we can see that that number is increasing. Operating profits of global customers outside Spain has gone up by 54% and has accounted for 35% of the -- sorry, 58% of the total operating profit there. And in markets, we've seen a lot of expansion outside Spain, especially in equity.
Secondly, talking about wholesale businesses, although obviously there's a relationship between wholesale and retail and SME banking, nonetheless I think we should come back to something that we have told you about in other quarters; the capacity to sell derivatives through our branch network which has been especially focused on SMEs. And there are a couple of things I want to say here.
Talking about derivatives for small and medium sized enterprises, especially medium sized enterprises, we've got a [Riskdeme] project, and in 2006, 2,300 customers have benefited from the distribution of our market derivatives. That means a growth of 35%, with a growth in management fees of 77%. And then, in October last year, we also launched a project which we decided to call [Stockdeme]. It's the same idea, but it was focused at smaller companies; small enterprises. So from October to December we've generated 4,700 customers for these kinds of products. We think that this is a line that is giving us excellent results and can take us a lot further in the future.
Then thirdly, in 2006, we have also maintained our leadership in trade, finance and project finance in the international markets. In both products, we are ranked third in the world.
Very relevant as well our overall transformation project in corporate and business banking and institutions. Earlier on, we were talking about the reduction of the intermediate jobs in retail banking in Spain and Portugal. Here we have bigger numbers. The projects that we defined that we defined in June in BCB meant that we could cut back 20% in terms of numbers of jobs, and we hope that this 20% will become 30% by the beginning in 2007 in the first two quarters.
This is very important, and I wanted to mention it, because it will give rise to an improvement in the cost income ratio over the next few months and the next few years with the lightening up of this structure, just as it did in retail banking in Spain and Portugal.
So with those highlights as our point of reference, we can now drill down into the results of wholesale businesses. And here we are going to distinguish clearly between SMEs and corporations in Spain and Portugal or Iberia, and the global businesses, where we include global customers and also all the markets activity.
In SME and corporate banking, corporate and business banking here in Spain, you can see what's been happening on the left in lending and customer funds. But I want to focus your attention on the right-hand side of the screen, because here too, as in retail banking in Spain and Portugal, the pricing policy has been absolutely decisive for us. You can observe that the customer spread has improved again in the fourth quarter going from 3.31% to 4.43%. And you can also see that net interest income over ATAs has shown a lot of stability compared to drops that we've reported in the past. This is very relevant. Also in BCB in Spain, we are reporting strong growth, not just in net interest income, but also in other revenues.
Other revenues come from net fee income, from the selling of new products especially insurance, and then other revenues which come from the Riskdeme and Stockdeme projects that I mentioned before, which explain our net trading income going up at 73.6%. All in all, in 2006, these segments have increased in their core profits by 14.2%. 2006 has been a magnificent year for the world of corporate and business banking here in Spain. Operating profit has grown 20%, and attributable profit 20%.
I hope you will allow me to say that, in the world of business, we are seeing a change in the model of banking. Because it is so important, in this slide, I want to show how we see the future, what the income statement will look like and what our returns will look like in the future.
Looking back, first of all in time to the year 2003, and we decided to use 2003 because we did not have economic capital stabilized enough to calculate it properly, but if look at what has happened in the past and what's happening now in terms of our returns on equity, in this business area, I think that we have a clear summary of what's happening here.
At the beginning of the decade, we had growth in the volume of our business, but there was a drop in the net interest income over ATAs. So although given the growth in volume we could keep up the returns, we had to use more capital and that had a negative impact on return on equity. So in 2004, we laid down a new objective to improve the creation of value in these segments. And at the moment, we're in a situation in which our activity levels are going up and up, a strong drive there, and then with our pricing policy, we are managing to maintain our net interest income over average total assets. And also we're getting a lot of income from selling derivatives so that ROE over the last few years has been going up and definitely there has been a change in the tendency, as you can see in this upturn on the slide, and so with the improvements in the cost income ratio, we have grounds for optimism for the future.
The fact that this has occurred is very important, because BBVA in Spain has a leadership position significantly ahead of its peers, as you can see on the right of this slide. So in BCB, 2006 has been very buoyant, high returns and high creation of value.
In global businesses, as we have said in other quarterly presentations, well for the last three years really, but definitely over 2006 in the different quarters we have been talking about this, we've seen businesses giving us a growth in revenues that has been significant. So in markets, our ordinary revenues have grown 27.3%, and in the corporate business amongst global customers, we are getting 22.9% growth. As we've said on several occasions, revenues from markets basically have to do with our customer franchise. 72% of the markets' unit revenues come from this customer franchise. If we add to this a good control of costs, we can say that including depreciation, the cost income ratio is 25.2%, whilst operating profit has grown 30%. In asset quality, there is not that much to say. NPL ratios have gone down and will probably go down again in 2007. We are talking about coverage ratios of over 700%, which means that the left-hand side of the screen isn't very significant.
All in all, in wholesale businesses, we are showing an attributable profit which is growing well with return on equity which has leapt up to 31.8% in 2006. So all in all, this is the summary of our activity in wholesale businesses in 2006. And here you can see how at the end of 2006, we are reporting the figures you can see on the screen, and the performance for 2007 looks good too. You will remember there has been a shift between different items on the income statement. So if we look at the margins, what really matters is to look at everything below operating profit. But as you can observe, wholesale businesses have had a great year in 2006, and the fourth quarter has been in very expensive and the expansion has been significant.
Just as we said that 2006 was good for retail banking with great cruising speed, the same we can say for wholesale banking.
Thirdly, I would like to talk more about South America, and I would like to talk about it in qualitative terms, and talk about certain landmarks. The first one refers to macroeconomic stability in the region and the reality of economic continuism. I think this is a very relevant fact because a year ago when we were presenting 2005's results, we had quite a large number of elections pending. One year later, I think we can safely say that the macroeconomic situation is stable.
And then banking penetration is another important factor. We usually mention this about Mexico, and we don't really mention any other countries in South America, but the number of people with bank accounts is definitely on the increase in Banco Frances in Argentina, the number of customers has grown by 14.8%. In BBVA Chile, 12.5%. In Peru, 16.5%. In Banco Continental and in Venezuela, Banco Provincial, 11.8%. So throughout 2005, the number of customers of our banking franchise has gone up by over 1.5 million people. We now have over 9 million customers there, and I think that's very significant in itself.
2006 in South America, just as in Spain, has seen a big increase in bank insurance, which I think is proof of the commercial clout of our networks. The premiums sold through our banks in Latin American have grown by over 25%. And I would also like to talk about the excellent integration of Granahorrar in Colombia. I talked about this yesterday with the heads of business units.
I think that this will be a case of excellence for BBVA, because in operating terms, results have been great and the integration has increased market share. In one year we've increased our market share in Colombia and we've also reduced costs. In fact, we reduced them 10% more than we had expected in our business case. And in South America, we have a very well balanced net attributable profit from the different countries. Five countries will make EUR5 million, and I think that's a very significant fact. So in South America, with increased banking penetration, our activity figures are of course very high.
In lending, growth is almost 30%, and in customer funds in excess of 20%. That means an improvement in cost to income which is very notable, and a big increase in operating profit for the third consecutive year. It's in excess of 25%.
As far as risk is concerned, here you can see the NPL rate coverage rates. By 2007, we think the NPL rate will increase very, very slightly, but it won't be significant, and 55% of funds, 60% of provisions are generic. I think that proves that 2006 was a year of growth in South America. Attributable profit grew by 37%, and return on equity is 31.8%. So that's the income statement for South America.
And as I said previously, with growth throughout what was a very big year for us as you can see from the slide, in 2005 we -- our operating profit grew 30% this year. It's grown 37%. So once again, South America has been a source of good news.
And I'd like to end now by talking about Mexico and the USA. I'll start by giving you the highlights of 2006. When we mention Mexico, I think the first thing we should mention is the incredible increase in our customer base in Bancomer because of increased banking penetration. We already said this in 2005, and we're repeating it in 2006. In the last two years, Bancomer's customer base has grown by 4,100,000 customers. In 2006, it increased by 1,900,000. And in 2007 the number of clients with payrolls domiciled has increased by 700,000. I think that really speaks for itself. It says a lot about the banking penetration rate in Mexico.
2006 was an important year for consolidating our leadership in consumer finance and mortgages. In car finance, our market share is now 42%. In mortgages, and I said this was a very important year because in 2005 we bought Hipotecaria Nacional. We can now say that Bancomer has 41% of mortgage turnover in Mexico.
And thirdly, in qualitative terms, the increase in marketing productivity and the efficiency of our branch network, is very significant, given the growth in the customer base that we have been achieving. That of course means having to invest. And in 2006, we have a further 1,300 ATMs, although we're still maintaining very strict cost controls. Our branch network has a very relevant role because there are different distribution channels because so many of our Bancomer transactions are done without the tellers being involved. Of course, our expansion plan continued with Texas Regional and State National Bank, which was finally completed just a couple of weeks ago. So given those qualitative highlights, I'd now like to share the most relevant figures with you.
Here we have results, lending and Bancomer still -- continue with a lot of impetus, because of course increased banking penetration. And then in corporates, we grew 32.4%. And there's another relevant figure behind that. Our corporate customer base with loans has increased by 32% in 2006, so that's banking penetration not just for individuals, but also for corporates. And in customer funds, the last quarter was very, very big in current accounts. And we've also got some good news, because the increase in volume has also meant that net interest income has grown slightly in terms of ATAs. And you can see on the right that, despite the dip in interest rates, Bancomer's net interest income is still increasing -- grew by 33.7% in the fourth quarter.
So there's been growth in revenues and therefore improved cost to income, including depreciation. In Mexico it was 35.8%, and operating profit increased by 41.3%.
Now to talk about provisions, loan loss provisions, I'd like to show you some slides. I'd like to remind you, as I have on previous occasions in 2005 and 2006, that both in consumer loans, credit cards, we are provisioning in terms of expected losses. The second thing we should remember is how the lending structure of Bancomer has changed in recent years; that's here on the left. Here we've structured our lending. There's a difference between SMEs, government, corporate, individuals, etc. And you can see how consumer lending is increasing and mortgages too. Vis-à-vis the future, we believe that mortgage lending will be increasing.
This lending structure, based on expected losses, has a big impact on loan loss provisions, as you can see on the right. You can see that Bancomer's loan loss provisions have gone from 1.5 to 1.75. Generics have increased, specifics gone down, and really it's mainly for -- provisions for consumer lending. The expected losses that we are charging to our consumer lending portfolio in Bancomer is 6.6%, 6.7%. And that is what explains the evolution in our provisions.
Also what we can see here, because when you link provisions 2006 to 2005, you can see a variation, a difference in total of 379. And two thirds of that are differences in generic provisions, which means an increase in the coverage rate, despite the fact that this year NPLs fell. As far as 2007 is concerned, and given the increase in lending, we expect an increase in NPLs, but certainly below 3%. As a result of all that, this is the income statement for 2006 for Bancomer plus the USA and compared to 2005. So it's been a year of growth following another year of growth.
I'd like to refer to United States. As you know, we are working with three business lines; Puerto Rico, which is traditional in this Group, then remittances, and then our Texas franchise. And we have two projects under development for our Hispanic customers, basically Mexican customers, and then credit cards. When we look at the US, I'd like to concentrate on what we've been doing in Texas, although the Puerto Rico market which is very complicated, very complicated conditions, we've performed very well. A 12.7% increase in operating profit. General good figures.
But anyway, I'd like to talk about Texas right now. 2006 was the first year that we'd managed Laredo, and we have a very good feeling about our capacity to improve the profits of this US bank. When we see what's gone on in Laredo with deposits, we're growing at 15.6%, 15.7%, when the market is growing 7 to 8%. We've made a big effort at financial promotion, and once we introduced mortgages, we've doubled the turnover for mortgages in Laredo and the balance has increased by 26% in consumer lending. Our efforts at promotion had an immediate impact, and turnover increased by 44%. And that's been compatible with a 10% cost reduction, and our cost to income has gone from 68 to 60% and that reassures us. We know we're on the right way forward. We've built up two lines which will give us good results in the future.
Synergy between Mexico and Texas. First of all, we're the only bank that give turnkey mortgages to US citizens to buy homes in Mexico, and that of course is a high income group so we think that's quite significant, and in 2007, are expecting EUR100 million in that activity, which we believe, will increase a lot in the future.
Then foreign trade. We have a joint venture between Bancomer and Laredo, with a specialized office in Houston, and another one actually inside Laredo. And import/export funding is definitely increasing. In fact, we've doubled it. And, as I said before, that reassures us about our capacity to improve our market models for these segments. So we feel very positive about integrating the two new banks that I just mentioned before, because we have a joint franchise of about 15 billion in assets, 156 branches, 4,000 employees, and it is the fourth biggest bank in Texas, or the biggest regional bank. So as I said, 2007 is the year of integration for Texas, and we're tackling that in the feeling that we can still improve this franchise.
And now I'd like to give the conclusions. As I said previously, from an organic point of view, 2006 has been another excellent year for the BBVA, and with a wonderful fourth quarter, that's true of Spanish and Portuguese retail banking, wholesale banking, and Mexico and South America. And as we've already said, 2006 was specifically relevant because we had very, very strong non-organic growth, because we invested in markets that we believe will generate huge value for the Group. So as far as the future in concerned, the board is going to propose an increase in dividend; a 20% increase for 2006, which means a payout of 46.9%.
I also think it's important to put 2006 into perspective of the last four years for BBVA, which I think we can summarize in this slide. Attributable profit has increased 2.7 times, and the dividend per share 1.8. So in the last four years, our annual accumulate growth has been 25.5%. That's in EPS, and return on equity's been 20 -- 36%, and return on assets 1.22%. And really, that has been 2006 for us.
What about 2007? We think that our growth levers will continue along the same path. We have management priorities that are summarized here. We think that for Spain and Portugal, 2007 will be a good year in terms of results. We're saying that because the new structure of distribution networks, designed last year, will be fully functioning, we think we'll be strengthening revenues. There'll be greater efficiency, and very good spreads. Because of the new distribution network structure, we're expecting much, much better efficiency.
In global businesses, we think 2007 will mean growth. All of us who've worked on the international consolidation of our franchise, are expecting great results again for 2007.
We have a big challenge, and that's developing our partnership with Citic both in Hong Kong and in China. We also feel that in Mexico, we have to continue growing. We believe that bank penetration will continue. We'll continue to increase our lending activity to SMEs and there'll be a consolidation of mortgage growth. In the US, this is of course, 2007 is the year for integration. As I said, we feel very positive about what we've achieved in 2006. And then in South America we have two big projects that's pushing the bank penetration in low to medium income groups. And secondly, we really want to focus on becoming the benchmark for SME banking.
So that's the outlook. Those are our priorities for 2007, which is a very special year for us because, as you know, in fact you might not know, but it will be our 150th anniversary. So thank you very much for your attention. We can now go on to the questions. Thank you.
Operator
Good morning, ladies and gentlemen. We will now begin our question and answer session. [OPERATOR INSTRUCTIONS].
Jose Ignacio Goirigolzarri - President and COO
Okay then. We'll do what we always do. First of all, we'll take questions from this room and then we'll be receiving questions over the conference call, and finally, we'll take questions over the Internet. So any questions here in the room? Please say who you are before you ask your question. Javier?
Javier Bernat - Analyst
Javier Bernat from Caja Madrid Bolsa. First of all, I want to ask about Asia. Do you think that you'll need to make further investments in that region in order to complete the agreements already signed with Citic Bank?
And then Portugal. Do you think that this might be a good time to start expanding your network in Portugal again, since it is a neighbor country to Spain?
And then finally, perhaps it's jumping the gun, but is it possible there will be any extraordinary dividend next year because of it being the 150th anniversary? Do you have any special plans to celebrate?
Jose Ignacio Goirigolzarri - President and COO
A special plan to present wonderful results, definitely and to maintain the current tendencies of always having these good results. Apart from that, there's nothing special, just hard work and good results to celebrate our 150th anniversary.
So to answer your three questions. First of all, well, regarding our investments, as Manuel said in the webcast when he was explaining our investments in Citic, you'll remember that really there are two different periods for the investment. First of all, we'll be investing about 1 billion and, in the second, we'll invest a further billion basically. Would you like to talk about it, Manuel, later?
Manuel Gonzalez Cid - CFO
Well, yes.
Jose Ignacio Goirigolzarri - President and COO
With respect to Portugal, we hadn't got any plans. Well, in Portugal, we have a strategic plan which we drew up in order to develop our budget a bit further, and we've got a strategic plan, but it has much more to do with our position in very specific segments which we think we can exploit more because we have a competitive advantage that we're not currently really taking up. But we're not really thinking of increasing the number of branches. We are thinking that we'll be attending SMEs with more branches, but those branches will come from the generalist branches that we already have, so they'll be specializing more rather than opening new ones.
Manuel Gonzalez Cid - CFO
Yes, Javier, I just wanted to remind you a bit what I already said when we were talking about the China operations. It's really the same as before. We took out 4.9%, nearly 5% of the bank in China, 15% of the bank in Hong Kong. So it will be an investment of about EUR970 million all in all. So there will be slight profit because of the exchange rate having changed since we announced the operation.
At the moment the investment in Hong Kong is already giving us unrealized capital gains of about EUR67 million. The second part of the investment will be when we exercise the second option we have for another 5% in China. So the group can decide to execute its option or not. And it would be exercised for 12 months after the IPO for the bank in China, Citic that is. So we wouldn't probably be talking about this happening in 2007. It's more likely to be 2008, so we'd be talking about another investment, if we exercise our option, of about EUR400, EUR500 million.
In the case of Hong Kong, once we've closed the deal which should be about March 2007, over 12 months we will have to define a way that we will establish this partnership to run the business in the rest of the region.
In international corporate banking, in investment banking, in credit finance, project finance, etc, one of the strategic matters for us as the COO said in 2007, is to expand our international customer base in wholesale businesses. So when we redefine our strategy, we might decide on new investments or not. But they probably won't be more than EUR400, EUR500 million anyway. So really as the situation hasn't changed that much and we don't expect to have any further investments than those already announced.
More questions?
Unidentified Audience Member
[Inaudible] Could you go over the core capital? Tell us where it stands at the end of the year? Because I think you've integrated Texas regional, but other operations in Asia and the Texas, the other Texas bank won't be reported until January. I think there's some reductions from September to December. So could you explain why that happened and at 6.2% the core capital is slightly lower than we'd expected after the capital issue? And then the cost income ratio target below 35% which you've given for 2008.
In slide 14, you're talking about the branch network here in Spain. Will that be after the reorganization of the different areas. after the restructuring which you have already announced? Exactly what comes into this branch network here in Spain?
And then the contribution of Mexico, 35% you said. Well, and US, but mainly Mexico. Now if we add South America, that gives us 45%. What's the geographical distribution that you expect to see in the Groups earnings two, three years hence? Should we expect to see a 50/50 split between Spain and Latin America? Will there be more diversification in Latin America? Because Mexico's accounting for a bigger and bigger chunk of your business? What should we expect? More in Europe and Asia perhaps? Could you talk about the distribution of your business over the world?
Jose Ignacio Goirigolzarri - President and COO
Yes Manuel, maybe you should answer about Mexico and the cost income ratio.
Manuel Gonzalez Cid - CFO
Sorry. Core capital. Well basically we have the consolidation of Texas regional in November, which means an increase in the goodwill for Texas regional basically, about 1.3 billion. And then the differences. Well you have to add together an awful lot of different factors and sometimes we have a bit to talk about decimal points dividends. The hypothesis at the moment is that what we'll be proposing to the AGM is a 20% growth compared a growth in dividends which was 15% for interim dividends so far. That has another impact.
There is also a small exchange rate impact for the end of the year which is slightly higher than expected as a consequence of the fact that although risk weighted assets have gone down because of that impact, the net of the impact on reserves means that there's a further reduction in some basis points on this item. And then other smaller effects that all come together, holdings, minority holdings and such like, that in terms of generating capital over the year we can say that the hypothesis is very similar to what we've said; small variations in basis points. But we are saying that the generation of organic capital has been 13 basis points, so retained earnings after dividends versus risk weighted assets there in investment, divestment, the net outcome was 19 basis points negative against our forecast 44 basis points in positive because in the BNL Repsol and Andorra divestments, and more negative impact from Texas regional which I already explained. And other small operations like buying the consumer franchise in Chile, buying the minority holdings in Nair, and [inaudible] the renting company in Italy. So that's minus 63 so -- no 73.
And then we've got the early retirement program which is an extraordinary project and that has an impact on costs, and then the tax yield. Those things account for about 45 basis points as we already said. And then you've also got other effects, currency impact, 2, 3 basis points, and all of that gives you the 5.6 and 6.2. But there's been no change in our plans or the way that we are approaching the underlying part of our core capital ratio which has to do with risk weighted assets and our policy there.
In cost income, what we are including there is, as you said, is the new organization which we defined in December. So we'd be talking about our retail businesses in Spain, and including in that, small and medium sized enterprises. And we are also thinking that in order to improve efficiency, it's not enough to just change the organization, although we do think that that will have a positive impact, but it probably won't be as big as what we are talking about, the main improvement comes from the change that we carried out in July. We announced that that was important change, a relevant change, and now we are beginning to see the results. But I still think that there's a lot of upside in the first two quarters of 2007. The first -- sorry in both of the half years in 2007, to go on improving our cost income ratio in our distribution network.
And then Mexico, I always like to start when we talk about these matters by reminding people that given that the rest of the businesses outside Mexico are all growing magnificently, it's fantastic news that Mexico is growing even more, increasing its chunk of our business, but if Mexico were increasing its volume and we were getting poor results, then it wouldn't be such good news.
If we analyze the performance of the different business areas in the BBVA for the next four, five years, I think the change in relative weighting of the different areas won't be that relevant. There's not going to be a significant qualitative change vis-à-vis the current situation, because really the rest of the units, the rest of our business areas, are and will have relevant growth as well.
So given the structure that we've now got, we've talked about it quite a bit I think, we feel pretty comfortable. And I'd go even further. I think that as time goes by, things are really becoming clearer. We are seeing that Mexico is a country that shows very high stability, not just in economic terms, as its economy that's really well, but also in social and political terms we see things consolidating and we can think how we saw things a year ago. And we saw that coming then. And now we have even more grounds for optimism. And if we look at the structure of our portfolio, again there we feel very comfortable. And of course, as we always say, there might be opportunities, and we always have an eye open to see how we could increase our portfolio, and that would be wonderful. But if we did it, it wouldn't be because we needed to, or because of any physiological stress at all.
More questions? Chris?
Luis Pena - Analyst
Luis Pena from M&B Capital Advisors. I've got two questions about Spain and one about Mexico. In Spain, I think it's significant to see that you want to improve your cost income ratio, but could you give us more details about your cost profile? What should we expect in Spain in 2007 in terms of costs? So that's my first question for Spain.
The other has to do with the NPL ratio. You have talked about this in passing, that you're expecting it to go up, but not a lot, in the second half of the year. We have seen it go up very slightly. So could you identify the segments that have driven that rise?
The third question has to do with Mexico. A lot of investors are worried about what might happen to the exchange rate between the peso and the euro over 2007. So I wanted to know what your forecasts are? What kind of forecasts are you using for the euro/dollar exchange rate? I know that you have to hedge these positions, so could you give us more specific details about what you're hedging and what we should expect in that exchange rate position?
Jose Ignacio Goirigolzarri - President and COO
Thank you, Luis. With respect to the peso/euro rate and our hedging I think probably Manuel should talk about that, if you don't mind. And then your first two questions for improving efficiency first of all. As we've said, the first thing that we have to look at is how to improve these improvements; we'll see them after the first quarter of 2007. Improvement in the cost income ratio has remained pretty stable in 2006. We've basically been preparing the ground with our special early retirement plan.
But talking about 2007 now. Well, we're expecting the distribution network here in Spain to have cost rises close to zero. And we think that that is a pattern that we can maintain in 2007 and 2008 without including special one-off projects which might come up. I'm talking about more recurrent activities.
And then the NPL ratio. Really if you look at what it's been doing, when you're talking about -- looking to the second digit in the decimal point, it's really pretty irrelevant, and I think that we ought to set this in its context. The growth that we're reporting in absolute terms is very low. It's related basically to private customers, so to personal customers, personal banking customers. We're talking about products with much higher spreads however than traditional consumer lending. And in the business case for launching these products, as you can imagine, we accept that we have to take on more risk in the NPL ratio. But if we look at what that ratio might be on lending in 2006, we've probably hit minimums. So we have to go up a little bit in 2007 probably, but we're not worried about it at all. And anyway, I should say that when we're talking about our provisioning, we think that the volumes we have will grow below the level of lending. So we'll be talking about single digit growth.
And then Mexico, Manuel?
Manuel Gonzalez Cid - CFO
I think, Luis, that at the moment the track record of the last four years speaks for itself. We've been very active in hedging our exchange rate for earnings and for assets under management, so our track record's good. Because over this time we don't want to look backwards rather than forwards, but the dollar has been below 1.10, whilst it's gone to 1.36 at some times. And the peso has also been within a broad range although not as broad as the euro/dollar.
And in Mexico there's high liquidity, and in Latin America, and you can see the liquidity in the euro/dollar market. And if you want to hedge using the average expected exchange rates, you can cover your attributable profit quite easily. It's easy to get hedging there. So we don't want to cover all the different items on the income statement; we only want to hedge what matters to us and to our shareholders.
So the franchises we have abroad, if earnings are generated in local currency we have to be sure that that will be reflected in euros. So if we generate 30% then in Mexico we want to cover it so that at least it's 25%, 27%. It's a very sophisticated policy to cover not just the budget, but all year-on-year changes.
And so for example 2006, we hedged assets under management in the region at 38%, trying to minimize the cost given the risk expectations that we had. So we could save on reserves what we would have lost without hedging of about EUR200 million with a cost of about 70.
In earnings we got a positive earnings from all our hedging of EUR28 million, which more than offsets what's happened over the year.
For 2007, we will roll out the same kind of policies. We'll continue to hedge what we consider to be abnormal variations in our assets which can vary 10, 15%, but we won't allow the variations to be greater. And we'll be actively hedging our earnings where a significant part of our net attributable profit is already hedged for 2007. Then we'll continue hedging policy during the year.
But now we're already beginning to think more about 2008 than 2007 quite honestly. And it's really important to anticipate market trends here. I think that we can feel a lot of peace of mind about the impact of any exchange rate movements on our bottom line.
Jose Ignacio Goirigolzarri - President and COO
Any more questions from the room? Right, let's move over to the conference call then.
Operator
We have one question from Arturo de Frias from Dresdner Kleinwort.
Arturo de Frias - Analyst
Actually my question's already been answered, thank you very much.
Operator
Oh well, that's good. Any more questions from the conference call? Okay, then I'll go on to the webcast.
One from [Ignola Kovari] from [Abaco] Financial Funds. Given that the ROE and retail banking is 35% and customer spreads are on the up, what is the competitive situation in Spain right now? Should we be ready for more price pressures?
Jose Ignacio Goirigolzarri - President and COO
Well, what I believe, and what I've always said, is that a market and -- well it's pricing policies, should adapt to market conditions. That's true for a single bank and for the market as a whole. What I mean is that when we've seen price wars, it's been because there was a possibility for them. In lending, there hasn't been any pressure recently because with the customer spreads, our competitors and the market understood that we'd really reached the limit.
In the past there has been this pressure in term deposits, but that's because certain competitors had a desperate need for liquidity. And if we see a generalized market improvement in customer spreads, then in my opinion in the medium term, I don't think we're going to see net interest income over ATAs growing that much. And then of course pricing pressure I don't think could get any tighter in 2007.
Operator
I have two questions from [Diego Baron]. What is the net result of the two consolidations, and what about the underlying capital gains of our industrial portfolio?
Jose Ignacio Goirigolzarri - President and COO
Okay, the unrealized capital gains of our industrial portfolio. Okay, well all our listed -- as far as all our listed investments or holdings are concerned, it's 4 billion before tax. And the impact of consolidations, I think Manuel has that.
Manuel Gonzalez Cid - CFO
I suppose your question is because of what our performance would have been with a like-for-like business. Okay, so if we discount what we bought in 2005 and 2006 and eliminate the one off, we'd be growing more. For example attributable profit would be 22%, and net profit 23.8%, and operating profit 23.8%. So better for us we've got Laredo, exit from Andorra, then Texas. That's contributed two months to the bottom line and then the Chilean consumer lending company, then Granahorrar. That's been there for the whole of 2006. But then of course there's BNL, Repsol that we sold. Then the exit from Andorra which actually has had a big impact on fee income. And all that together means that the net impact of those changes has been slightly negative on profits and operating profits for 2006. So without consolidation, etc., the results would have been actually been better.
Operator
I have a couple of questions from Christoffer Malmer from Goldman Sachs. The first question is what do we expect about cost to income in Mexico which is already 36%. And the other question is about leadership in trade and project finance where about the competitive pressure, has there has been any change in the environment?
Jose Ignacio Goirigolzarri - President and COO
Okay, cost to income ratio in Mexico, I think that in 2007 it will improve. Not because in 2007, revenues will increase above costs, although of course we can't expect the quantum leaps we've experienced in the last three years. But it will improve still.
Project finance and trade finance. Well we are very, very focused on our business, and I think we're reaping the results of a lot of groundwork over many years with our clients, and clients in those activities, that I think will be really taking off in the next few years. That's infrastructure throughout the Americas, that's both north and south. We are convinced that, especially in project finance, we have to get very good results in 2007 and 2008 and in trade finance. Finance I think the fact that we're present in Asia, and if we do well in our joint venture with Citic, I am sure that we will then see an even bigger improvement there.
Operator
I have several questions from Matthew [inaudible] from JP Morgan. Some of them have been answered, like the impact of early retirement. But there's another question about net interest income in Spain and the future quarters. And all the other questions have been answered.
Jose Ignacio Goirigolzarri - President and COO
I think that net interest income, or at least its profile in Spain, as we've already said, responds as usual to the combination volumes and prices, and this time the most relevant factor is, I believe, net interest income over eight years. It's quite stable for Spain and that's in average terms. So activity volumes will be reflected in income statements and the so-called cruising speed of the last quarter of 2006 is probably a good reference point, a good benchmark for 2007. Definitely double digit for 2007.
Operator
I have a question from Carlos Berastain from Deutsche Bank. It's question about provisions in Mexico which have gone up significantly in 2006. What about 2007?
Jose Ignacio Goirigolzarri - President and COO
Okay, for 2007, we're basically expecting what we already said for 2006. I'd like to repeat that. The level of provisions we have in Mexico is absolutely linked to lending volume and lending structure, and it's important for that idea to be clear. With consumer lending and credit cards on the increase. then provisions will have to increase. Obviously if consumer lending and credit cards come down, then provisions will be lower. But in 2007, the volume of provisions that we had in the fourth quarter of 2006 I think is a pretty good benchmark for 2007 estimates, given our growth in our portfolio. The level of provisions in individual customers is, I think, quite an accurate reflection of what we expect for 2007.
Operator
I have several questions from Morgan Stanley. Some have already been answered, so I'll just read out the unanswered ones. Have you noticed any slowdown in lending to corporate, small companies or businesses?
There's another question about bank commerce costs. What about cost increases in 2007?
And then another two questions about Mexico. Expected increase in consumer lending for 2007. 30 or 40% growth perhaps?
And the last question is about net interest income adjusted in terms of corporate sector dividends. What are your expectations for 2007?
Jose Ignacio Goirigolzarri - President and COO
Okay, well some for Manuel and some for me. The first question, growth in businesses and small businesses. Well yes there has been a certain slowdown, I think more because of pricing policies and businesses that we redefined our strategy regarding small businesses. In 2004 and 2005, we got very good growth and have still kept that up. So we aren't seeing a decrease in demand in our growth areas; 19%; so I can't say there's been any sluggishness. Certainly demand is certainly very healthy in SMEs although I think that's been because of our pricing policy and in businesses because of the statistical affect.
Bank commerce costs. In 2007 and probably in 2008, if the increase in the number of customers and transactions continue at the current rate, we'll still be investing there, but bank commerce costs in 2007 will be similar to what they've been in 2006, as will their progression so you can't expect a different pattern in 2007 from 2006. And then consumer lending and bank commerce, we are expecting 25 to 30% growth because these are very relevant absolute figures.
Then the question on the financial margin and net of corporate centered dividends, the best estimate we can give now is a tiny, tiny decrease given average interest rates expectations in 2007 for the euro balance sheet. The Group's financial structure is improving. There's been a capital enlargement and we don't have the perimeter impact of Andorra any more, although it does have a more negative impact on fee income but we're expecting slightly worse [structures] very slightly because of the funding of corporate center assets.
Operator
Okay, several questions from Christopher Bridget, and one specifically about sustainability of the momentum of net interest income in Spain and other margins, and sustainability of return on equity in wholesale businesses.
Jose Ignacio Goirigolzarri - President and COO
Okay, sustainability of net interest income over ATAs. Well, I think I mentioned this before. We've really I think reached achieved stability. In 2007 in Spain, I think we'll see the same figures for net interest income over eight years as in 2006. That's our outlook; I mean 1 basis point, upper 1 basis point down.
And return on equity of wholesale business, I presume you mean global business, we think that for 2007 we can maintain similar levels to the current ones to be averaged, say of 2005 to 2006, because 2006 has been so spectacular in terms of ROE increases. We think that cruise speed would be the average of 2005 and 2006.
Operator
I've got some more questions that I would like to be answered. Firstly, expectations of growth in provisioning and in lending in South America first of all, and then more specifically a question about the outlook for the growth of the mortgage loan book in Spain in 2007.
Jose Ignacio Goirigolzarri - President and COO
Well South America, there for provisioning in 2005 had very low provisions. We had a lot of recoveries in 2005. In 2006, we had a lot of recoveries at the beginning of the year, but then things leveled out during the year and our provisions leveled out. And if we look at 2007, we expect the volume of provisions to be closely linked to what happened to our portfolio in South America. There's a high correlation between the provisioning level and the portfolio as such. And then your other question, I'm sorry I missed it.
With respect to the extension of the mortgage loan book in 2007, we think that probably we'll see the slowdown continuing that we've been observing over the last three quarters. We think that over the next few quarters in 2007 that slowdown will continue. So by the end of 2007, we expect to be about 15, 14% probably.
Operator
There are a couple of questions from Thomas [inaudible] about one of our provisions already answered, and another about the growth expected for 2007.
Jose Ignacio Goirigolzarri - President and COO
I'll read. He says that we have said that the different businesses have different cruising speeds. So is it reasonable, he says, to expect profits to continue to grow fast in 2007? He talks about specific figures but perhaps you can refer to this.
Well as you say, we don't give guidance about what is going to be happening for the Group in its operating profit and attributable profit. What we are saying however is that the core elements for growth in the Group, we give you the reasons why the Group has been growing over the last four years, and growing strongly as well, and we think that with the same levers with that track record we can continue into 2007 with similar levels. We're not giving any guidance, but we're pretty optimistic about 2007 because, as I have said, we think that the key elements are in place and we will maintain the kind of growth we've had before. So we're optimistic, as I've said about all the different franchises, specific numbers. However, it can't be given because we have a long-standing policy of not giving guidance. It was in 2002 we decided we didn't want to give guidance so we can't give figures.
No more questions? In that case, many thanks. This is going to be a fantastic year it's our 150th anniversary here in BBVA as well. Thank you.
Editor
Speaker statements on this transcript were interpreted on the conference call by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.