Banco Bilbao Vizcaya Argentaria SA (BBVA) 2007 Q2 法說會逐字稿

(interpreted) Good morning, everyone. We are now going to start to give the results for the first half year of 2007 for the BBVA Group. And, as always, we want to say there's not going to be any change in the way we organize things. First of all, we'll have the presentation from our COO, Mr. Goirigolzarri, and then we'll have a Q&A session. [Isabel Goiri] is here, who's in charge of Investor Relations, and she'll be chairing the session and taking the questions, first of all, from the room here and then taking the questions from the conference call. And then, finally, we're taking questions over e-mail through the webcast. And, as always, for those of you who've actually come here physically, we're delighted to invite you to the coffee afterwards. So, many thanks.

(interpreted) And a very good morning to everyone. First of all, I'd like to welcome you and thank you for being here at this event, whether you're here in real terms or virtual terms. We're presenting the results for the first semester here in the Group. As usual, the indices we're going to be giving will, first of all, look at the results of the Group, and then we'll have a more exhaustive analysis of all the different business areas into which our organization is structured.

So let's start with the overall Group earnings. As you'll see later, we are presenting a record quarter. It's record in terms of all the different lines on the income statement, including attributable profit. They show the highest volumes that we've ever recorded in any one quarter in this Group.

So let's start by looking at what's been happening to net attributable profit. That is our usual, because I think it's easier to distinguish between net attributable profit with and without one-off items. The published figure, as you can see, is EUR3.37 billion, which is a growth of 1.1% against the same period the year before. But, if we focus on the recurrent profit without one-offs, and, from now on, all my analysis will be without one-offs, you can see that the attributable profit this semester has gone up 20.4%.

The earnings per share are growing at 14.9%. As I said earlier, what we're showing is the biggest net attributable profit ever recorded in any one quarter in the Group. This attributable profit is fed from the income statement items, with very strong growth in business activity. Volumes for the Group are growing, as you can see, at 22.5%, and that's leading to a growth in ordinary revenues that, at the moment, stand at 18.2%.

It's quite important to see how this organization works by comparing that figure for the ordinary revenue with the figure that we gave a year ago and also the figure that we gave two years ago, because I think that really shows how strong this organization is and the kind of drive we're moving forward with. We're keeping good control over our activity and our revenues. But, at the same time, we're managing to contain costs.

And, here, you've got two parts of the information we want to give you. On the left, you can see the evolution of our cost/income ratio. Once again, it's gone down; we stand at 41.6%. And then, on the left, you've got some information that I know the market likes to receive now. It's what, in English, is called the Jaws. So we're now using the first quarter of 2006 as the point of reference. So we say that that is baseline 100 for revenues and for expenses. And, that way, we can see what's been happening over time as the Jaws gradually open, especially over the last two quarters. From the first quarter of 2006, our revenues have gotten up 19% and our expenses only 6%. As you can imagine, all of that means that we see a good growth in our operating profit, which has been growing at 20.2%. In local currencies, it's growing at 25%. So, for this semester, the impact of the exchange rate accounts for 5 points. Last year, as we said, local currencies were going at 25%, in current euros, at 20%.

It's also very important to see how this 20% is structured. So, there on the right, that's what you see, the breakdown, which we'll be going into in more detail later. All the business units-- All the business areas are contributing to this growth, with very strong growth.

And then in risks. No new news. We are managing to manage risk well. Our NPL ratio, as you can see, is pretty well constant over the entire year. And, in our provisions, which is what you see on the left of the screen, you can see the structure of our loan loss provisions on the balance sheet. Really, what's growing most are the generic provisioning, which we now count as 73.8% of all provisions. And, in fact, we've made further charges, which is greater than the increase in our doubtful loans.

And we've got a very good capital level, as well. So we're actively managing our balance sheet, as you would imagine. And I think this is our strong point in the Group. So our capital base, as you can see, is showing 6.2% core capital. All this activity with all these revenues and this control over our costs, as we also can control risk quality means that we're getting a return on equity of 31% - 31.5%, in fact. You compare that 31.5% with the figure that we got last year, 35%, that includes by the capital increase that we made last November. You can also tell here that, in the first quarter this year, we were reporting an ROE of 30.5%, and now the return on equity is 31.5%.

That's only natural, because, as you can see on the right of the slide, return on assets is continuing on the up. At the moment, it's 1.28%, and our return on risk-weighted assets, you can see at the bottom, increasing 6 basis points against the first half of last year.

So our track record of growth is very solid and continuous. So you can see the figures for the last four years here, starting in the first half of 2004. And we're showing how, on an ongoing basis, we've been reporting growth of over 20% in our net attributable profit. And, in the first half of the year, we're reporting EUR2.62 billion, which is a growth of 20.4%. I think I've already given you those figures.

If, instead of talking about the books and the accounts, we talk about value creation, these are the results. Our recurrent economic profit, and this is different from the non-recurrent economic profit-- The recurrent economic profit is something which, I'm sure you can understand, because it's recurrent. But, here, we're not including any capital gains from our portfolios. So the total economic product in the first half of the year, as you can see, is EUR2.85 billion. But, without capital gains from the portfolios, it would be EUR1.64 billion, which compares very favorably against the recurrent economic profit we were reporting a year ago, which gives us a risk-adjusted return on capital in the first half of the year of 33.6%.

So those are the main figures for the Group as a whole. They're the figures that explain why I said at the beginning that we've had very strong activity this half year, controlling costs whilst increasing revenues, therefore getting better cost/income ratios with very good control over risk management, getting record earnings.

So now let's look at our different business areas, and I'd like to start it with Spain and Portugal. As you'll be seeing, Spain and Portugal have had a magnificent half year, because, everything that I said about the Group as a whole can also be applied, and perhaps even more so, to our business in Spain and Portugal, where we are seeing an increase in activity as our business volumes grows at 15%. And, there on the right of the slide, you can see the growth figures for the main items. In the annexes, you've got a more exhaustive breakdown of what performance looked like, consuming going up 19%, SMEs growing very strong, and mortgages slightly flowing down, something that we've been recording for some quarters now, at 17.8% growth. That's slower than before.

But, more than anything, we have to look at our price management, which is something we're focusing on in all the units in Spain. On the left, you can see our customer spread in SME banking and in commercial banking, in retail banking. And it's improving quarter on quarter, which means that, at the moment, our net interest income over average total assets is basically at the same level that we had a year ago. That means that all activity goes straight to the bottom line, which means that we can report the kind of growth we are reporting in net interest income and ordinary revenues. And, as we've done in the Group as a whole, we wanted to show you a comparison. Looking at net interest income, we can see the growth in Spain and Portugal against-- two years ago against last year, and you can see. And you can see how growth has been speeding up in this first half of the year. Net interest income is growing at 13.7%, and our ordinary revenues, as you can see, are growing twice as fast as they were two years ago, at 12.5%. But, as I said when I was talking about the Group, we're not just managing revenues in terms of activity and pricing, but we are also focusing on efficiency. So everything that we have been reporting to you in the past is now bearing fruit in our income statement.

Coming back to the famous Jaws, you can see on the left, starting with a baseline 100 in the first quarter of last year, that the Jaws are opening up quite spectacularly, especially over the last two quarters. Really, revenues at 100 in the first quarter of 2006 are now over 117, whilst costs, which were 100 in the first quarter of 2006, are hardly at 102 now, which means that our operating profit is also growing at a very fast and ever-faster speed of 20.6% whilst our cost/income ratio, as you would imagine with these figures, is going on dropping; that is, improving, as you can see on the slide.

Our asset quality is good, keeping our NPL ratios at about the same level as we've been presenting for several quarters now. And, our loan loss provisions are growing at 1.5%. At the beginning of the year, we talked to you about the fact that our endowments to loan loss provisions were about 8% or 9% quantity, because this 1.5% is probably especially low. Nonetheless, we are maintaining the same idea we had that, by the end of the year, our loan loss provisions in Spain should grow in single digit growth of about 8% or 9%. I'll remind you that 82% of our provisions in Spain are generic.

As a consequence of all of that, net attributable profit has leapt up by 28.3% in Spain and Portugal. Consequently, we confirm what we were already talking about at the end of last year - that there was going to be a clear change in our return on equity and our activity in Spain with a big leap forward as the return on equity reaches 36.8% in Spain and Portugal. So I think you'll probably agree with me that the results in Spain and Portugal this semester-- or this quarter, especially, and also in the semester, show very sound foundations with very strong growth. And they can guarantee a sound platform for moving forward into the future.

Talking about global businesses, which is the second area I wanted to talk about, what you'll be seeing here is how we are presenting very, very good results, based once again on activity and on good price management in global corporate customers and the development of our franchise with consistent revenues in markets. If you'll allow me, I'll start with global customers, our corporate customers.

Here, you can see two things that I think are pretty significant; first of all, what I was saying before - very strong growth in our activity in lending and in customer funds. And, secondly, an excellent price management with a sound platform for the future and net interest income over average total assets is improving, now reaching 1.42%. And that's what lies behind the ordinary revenues, which are growing at 28.9% in global customers and investment banking.

With respect to global markets and distribution, there, too, we're reporting very good figures. We've got good news as a consequence of the fact that we're growing in ordinary revenues, as you can see, at nearly 30%. On the left of the slide, I wanted to share some information with you. It's something we haven't talked about very much in the past in graphic terms. When we analyze the different lines on the income statement for markets and distribution, given the expansion in the kinds of activities we're doing with structured products in equity and lending, there is a slight shift in the different lines when we put them onto the books. The cost of funding is in net interest income. That's how it's booked. Whilst capital gains are put under net trading income, which means that there's a slight shift here from the net interest income over to NTI. And that's pretty relevant, as you can see on the left when it comes to understanding the figures that we're reporting for this unit because it also has an influence on the way we report things for the Group as a whole. In fact, quite importantly, if we didn't take this effect into account, our net interest income wouldn't be growing at 13.9% for the Group but, rather, would be growing at 16%, if we netted out the figures. But what really matters here is to understand that ordinary revenues in markets and distribution are growing at nearly 30%.

And that makes it possible to fund all our expansion projects. Growth in expenses, which you can see there, are due, all of them, to our expansion plans, our plans to grow. And I think we've been reporting on those for some time now. If we exclude the growth plans, then we are keeping a tight control on our expenses, growing at 3.8%. But this way of offsetting strong revenue growth means that our efficiency looks very good, 28.1% cost/income ratio, with an operating profit, as you can see, that's also growing at over 30%. So that's the income statement for global businesses. You can see ordinary revenues are going up, as is operating profit and less so than net attributable profit, because, last year, we had a one-off transaction which we booked onto the balance sheet a bit earlier.

Now we can go on to the third big unit. Sound results, then, in Spain and Portugal; very sound results in global businesses.

And in Mexico and the USA, if you wish, we'll do what we usually do, which is to talk, first of all, about Mexico and then refer to the United States. Above all, we'll be analyzing what's going on with the Compass deal.

Talking about Mexico, however, this half year has shown strong activity in terms of lending and customer resources, but especially lending. What's especially significant is the way that our lending is structured - the way that our lending is growing in an increasingly material way, with mortgages becoming more and more important as part of the whole. Lending in Mexico, then, as you can see here, has reached 24.5%. And you can see that consumer and cards are going up 32%, SMEs at 21%, and mortgages at 54%. This is something that we've been talking about for some time - the fact that mortgages have been growing increasingly fast. And you can see that very clearly on the right of the screen. On the right of the screen, we're talking about the flows - about the structure of the growth in our balances in the second quarter of last year and the second quarter of this year. And you can see that, when we look at the growth figures, mortgages are over 50% of the growth, as we've been saying they would for some months now. And you can see that SMEs are also becoming an increasingly important part of our growth, as we've been saying they would for some months now. And consumer lending is growing very fast but not quite as fast as the others. So, with that and with the customer funding performance we've got, our customer spread is pretty well constant and has remained there for several quarters now.

And then, in provisioning-- Excuse me. No.

Before I talk about provisioning, I want to say that, as a consequence of everything I've been saying, our net interest income is performing as you see here. With everything I've said, with our pricing policy, net interest income is growing at 23.3%. And, if you look at the quarter on quarter figures, you can see that the second quarter has shown some peculiarities, mainly because of the back book that we have, which is inflation linked, and to some markets' activities. So because of the nonrecurrent items-- the figures are slightly skewed. Nonetheless, we're still growing in this interest income at 23.3%.

I think we've also got other good news, because we can see that we are doing very well in risk management. Our NPL ratio is well below the figures that we have given to you. But it's especially relevant to look at the bit on the left. As I was saying before, at the end of last year, we said that the fourth quarter was going to be a kind of proxy for the provisioning level for Bancomer throughout the year 2007. And that's exactly the case. Probably the second quarter is slightly lower because we've had a one-off recovery. But the provisions in Bancomer over the next few quarters will be between EUR210 and EUR220 million, which means that, in terms of year on year comparison, we'll end with very slight growth in provisions towards the end of the year because we'll be comparing against the point of reference that we already reported to you last year. I should remind you that 55% of the funds that we're provisioning in Mexico are generic provisions. All of this gives us growth in operating profit of nearly 25%.

Efficiency is continuing to improve and is now at 34.8%, whilst attributable profit is growing at 23% and return on equity has already reached 54.3%. Consequently, in Mexico, we can say that the quarter has shown how the business is going to perform in the future, high growth in lending and a more mature structure of growth on the accounts, which will probably be maintained over the next few quarters.

Finally, talking about this area, I want to talk about what's happening with Compass. At the moment, we have received all the clearance we needed from the regulators. We got the approval from the Federal Reserve, and also our protocols have been approved. The Bank of Spain has, in fact, given us the go-ahead. We've had the EGM for BBVA. And, on August 8, Compass will be holding its general meeting. So we hope to be able to close the Compass deal in September, bringing forward the date initially reported.

Since we've been talking about Mexico and then the United States, I wanted to give you the joint results for Mexico and the United States in this first half year.

So now I'd like to move on to the fourth main business area. Spain and Portugal are very strong, global businesses with a lot of activity, results in Mexico and the United States very good results, and South America is the final touch I wanted to cover.

So South America-- for example, when we were drawing up our budget, where we see that Latin America is actually a lot stronger than we thought it would be six months ago and from all points of view. It's a lot stronger in terms of activity. Business is growing. And we're seeing very logical growth because of market maturity. And we're also seeing very good growth not just in savings accounts and current accounts, which has big impact on the bottom line, but also mutual funds. And that increased activity means better returns. We have 25.7% more in operating profit, and our cost to income ratio is improving. It's now 45.8%.

And, with NPLs, we have good news. It's continuing to come down. I've basically said we're at a very low level, given those market characteristics. We could expect a slight increase in the next few months. But I want you to know that we feel very, very much at ease with lending risk in South America. And you might be surprised to see the year on year growth in loan loss provisions, not in overall terms, though. But, if you analyze our growth, you'll see that this is all because of generic provisions. So South America is a source of great news for us in terms of net attributable profit because it's increased by 23%.

Now brings me to the end of my presentation before we go on to the Q&A. To conclude, I think it's important to stress that this is another great quarter in our very great recent track record. I think it's also important to point out that we have strong income growth and both operating profit and attributable profit with record-making figures for us.

I'd also like to remind you that, about six weeks ago, we launched an innovation and transformation plan, which will guarantee the continuation of our record-breaking track record. I'm not going to go over the plan with you now, but I'd like to remind you of some of its goals. The goals are very ambitious in terms of volumes and increasing our customer base and also in terms of efficiency. By 2010, in Spain, we hope to have 1 million young customers and 500,000 immigrants. In Mexico, we aim to go from 14 million to 18 million customers. And we also want to multiply our portfolio of consumer loans by 2.5. And we hope to triple the number of mortgages in Mexico by 2010. In South America, we also have very ambitious targets. The customer base, which is now at 8.7 million - we want to increase that to 12 million. And, in consumer lending and credit cards, where we expect explosive growth, because we want to triple that too. That will, of course, mean improvements in productivity. Our marketing productivity should increase by 15% in the next three years, and that will, of course, have an impact on our cost to income ratio. Our target is to get it below 35% by 2010.

To share all the details of this plan with you and to talk to you about our strategy in each of our business units, we will be holding an Investor's Day on November 15. And we'll be sending you information on the venue and the agenda as soon as we have it. So, on November 15, we'll have our first Investor's Day.

I'd like to thank you for your attention, and I'll be here with Manuel Gonzalez Cid to answer your questions. Thank you very much.

(interpreted) Good morning. We can now start the Q&A session. We'll start with questions here in the room. Please give your names before you ask your question.

(interpreted) Javier Bernat from Caja Madrid. I'd like you to say something about your strategy for opening new branches. What are you anticipating for the near future? And, then--

I'm sorry. There seems to be a problem with the microphone. Okay. So I'll repeat that when I can.

The other issue is about core capital. Is it still 5.5% or 5.6%? Will it still be there after the Compass operation? And what about recovery?

I'm also quite surprised about business deposits in Spain, because they've grown in excess of 30%. I don't think that can be sustainable in the medium term, surely. Why do you think it's been so buoyant now, and how much longer do you think that can continue?

And then, could we have a comment about loan to value issued in Mexico? What about mortgage arrears in Mexico? What sort of mortgages are you granting? What percentage is for first homes or main homes? Okay. Thank you.

[interpreted] To start with the first question on our distribution channel in Spain, as I'm sure you remember, three and a half years ago, we launched a plan to locate our branches in new markets in Spain. And that plan basically was completed at the end of 2006. And we realized that we more or less had the right number of branches, and the number of traditional branches will be stable in 2007. However, that doesn't mean we won't be relocating branches, but the actual number of branches will be stable. That is part of the strategy we defined. The plan has been completed. We're very happy with our market coverage, and we think that our strategy for the future should be focused on relocating branches rather than opening additional ones.

For the core capital question, we hope to have 5.5% to 5.6% core capital in December following the Compass operation, but Manuel can talk a little bit more about that.

Term deposits, it's true, are growing a lot, and we've been growing there for quite some time now. As a bank, our commercial policy has been different from that of our competitors for some time. And we thought it was good to get people to move to term deposits because of liquidity and return, because we were expecting an interest rate hike. And that has certainly helped us improve spreads, as you will have seen.

Looking towards the future, 30% growth is probably not something we can repeat, because it's a statistical feature. But term deposits are still a very big part of our product range. Really, what we're seeing now is the results, or the fruit, of what we sowed some time ago.

In Mexico, all our mortgage lending is for first homes - for owner/occupiers. However, I think Manuel should be the one to give you the details.

[interpreted] Our Mexican mortgage portfolio, then. Of the EUR206 million in loan loss provisions in a standalone quarter, as you have seen from the presentation for the second quarter, is only EUR10 million for mortgages. So I think that gives you some idea of the quality of our mortgage portfolio. Its arrears are very, very low. It's about 1%. And it's really from older portfolios, say, from mortgages granted from the last two or three years. Expected losses for those portfolios are decreasing consistently, and we have expected losses well below 3% or 4%. The quality of our mortgage portfolio is extremely high.

The mortgage market in Mexico is almost virgin territory. And when we bought Hipotecaria Nacional, this was part of our strategy, and the results are incredibly positive. We're reaching customer segments that Bancomer would never have reached alone. We are definitely getting into new territory. And, of course, the housing market there is very buoyant. There are 1 million new houses being built. And you have to remember what Mexico's population [permit] is like. It has a very, very young population. And a lot of young people will be joining the labor market in the next few years, and there will be huge demand for housing. That is the situation in Mexico.

I'd just like to add something to what José Ignacio said about core capital. We are generating capital right now by organic growth, about 8 basis points worth. And I think you'll be able to see it on the core capital slide. If you analyze the Group's balance sheet, you'll see an improvement in our active management. I think we've had record securitization in the first half of the year. It's been a record for the Spanish market. We are improving the capital structure of our banks at international level. We have leveraged the capital base through the issue of preference shares and subordinate debt. I think you'll have seen that. And our core capital in the second quarter has-- Well, we've seen an increase in risk-weighted assets in the standalone second quarter linked to changes in our IT system because of [BOS 02]. That's also a part of regulatory capital in BOS 01. So we're getting RWAs which we actually think-- Our risk-weighted assets are actually underestimated. So we actually think we've been incredibly conservative, because we think we need more time. But we feel very comfortable with the 5.5% or 5.6% core capital for the end of year once the whole Compass operation has gone through. I think that, for the balance sheet for market cap for liquidity management, there's definitely an improvement in year on year terms.

(interpreted) Any more questions here from this room? If there aren't-- Yes.

(interpreted) Could you say what part of the exchange rate impact has been upset with more NTI and corporate activity? And maybe you're going to wait until November to announce this. But could you perhaps talk about the synergies and the whole integration process with Compass and the other banks in Texas? What can we expect from that part of the globe in the future?

[interpreted] If you wish, we can start with synergies, and then, Manuel, you can talk about the exchange rate impact.

So, synergies with Compass. Well, according to the information we have now, which is obviously better than the information that we had when we announced the operation to the market, I would be able to say that, once we close the deal, we have to finalize the numbers. But, at the moment, the way we see it is that the kind of synergies that we'll be reporting to you on revenues and costs compared to-- will be very much in line with the ones that we announced when we announced the whole deal. So we are pretty sure now, more and more sure, that we'll be able to comply with the figures that we announced to the market.

And then the exchange rate.

Well, as we told you would happen, in May second quarter, the impact hasn't been as great as it was in the first quarter year on year, looking at average exchange rates, which is what impacts on our income statement. At the moment, our coverage of the expected earnings for 2007 as a whole is 54%. In Mexico, we're hedging at 50%, and that means that the exchange rate impact for the quarter for the Group as a whole, just by doing a year on year comparison of the bottom line, would be about EUR80 million, which is 50%, offset by more corporate activities. So, in corporate activities, we include the cost of hedging, which is intended to provide maximum stability to our core capital ratios to protect our core capital from any change in the exchange rate. The optimum coverage would be 32%-- I'm sorry-- the hedging. And the costs in NTI, which is booked to corporate activities, is EUR10 million. So we're protecting our net worth, and we're charging the hedging that we use for that to our income statement.

(interpreted) Any more questions? Fine. We can now take some questions over the telephone. Any questions over the telephone?

(interpreted) Yes. We have an initial question from Arturo de Frias from Dresdner Capital. Go ahead, please.

(interpreted) I've got several questions. The first one has to do with your ROE of 7%. Amazing! It' clearly based on your operating profit but, also, on provisions. So I wanted to ask you a little bit about provisions. I was looking at the loan loss ratios that you've been reporting quarter on quarter, and, obviously, there's some seasonality between the first and second quarter. But, nonetheless, if you look at first quarter last year, there's a drop of about 7 basis points, whilst, in the second quarter of last year, we see another 7 basis points drop. Do you think that this drop in your provisioning ratios is recurrent? Is it sustainable? And what kind of impact will it have on ROE? And then the end of my question would be-- Well, this is a very impressive figure. Do you think you'll get this kind of return on equity next year as well?

And then Compass. Yesterday, we heard some bad news from the U.S. Countrywide gave a profit warning, and I think they've cut back their expectations by about 20%. I think the CEO was talking about the mortgage market or the housing market not recovering until 2009. So you're going to be consolidating Compass, I think, in the fourth quarter, you said. Is there any way that you can protect yourselves a bit against a worsening situation? Are you going to have provisioning in Compass? Before you consolidate it, are you going to boost the provisioning levels? How are you going to protect yourself against this deterioration in the mortgage and real estate market?

And then I want more details, first, about mortgages in Mexico. What percentage are they on the loan book as a whole at the moment? And how much could they account for with such strong growth in the mortgage market there? What level do you think they ought to be? Should they be one-third of the total loan book or half or what? What kind of impact will that have in your spread-- well, on your profit levels? Of course, the interest rate on mortgages is quite significantly below the kind of returns you get on cards. But you were talking about hedging for 2007. What have you done for 2008? I'd imagine you've already got some seven months covered, even, if not, twelve. Could you talk about the average rates you're getting on your hedging deals?

[interpreted] So, starting with Spain and then talking about provisioning here in Spain, I've already said rather quickly that, if you analyze the level of provisions we've got and you compare what we did in the first half of last year with what we've done in the first half of this year, growth is 1.5%. And I was saying that this 1.5% doesn't really show the real cruising speed that we've got. As announced at the beginning of the year, that speed would be single digit growth of 8% or 9%. And we can say the same now. But, in the second quarter, we had a credit of EUR19 million because of selling our non-performing loan portfolio, which goes to that. But, nonetheless, we think that our provisioning level over the year will probably grow at about 8% or 9% against the levels we had last year, according to the current regulations, the current standards governing us.

And then Compass. They're presenting their results either today or tomorrow. Yes, it's today - this afternoon. They're presenting their earnings today. And I think that the situation in which Compass finds itself with respect, above all, to the impact of the general economic situation in the U.S., looks quite clear, because we're talking about a very specific region. Many of the things you're hearing about problems in the real estate market in the United States aren't really so applicable to the area in which Compass is operating. But I should also say that Texas Regional and State National are reporting results, which are already incorporated into the figures we presented to you, which are basically in line with the business case that we drew up six or seven months back. When Compass report their earnings, then we'll be able to talk about that more in detail.

And then mortgages in Mexico. Quite apart from all the percentages that Manuel will be talking about now, I wanted to say that what's really important here is to look a bit at how things have evolved over time - to see the coherence of what we've been saying for some time now. I think it's very important. And I hope you'll excuse me if I take some time to talk about this and go back some way to three years ago, when we said we knew there was a lot of concern about what might happen to lending - above all, consumer lending in Mexico. We said the first to come out to work in consumer lending would do well. And we said that that would be us, and we did. And then we said SMEs would see very high percentage growth, and that was true - 35% growth. And we also said last year-- well, two years back, in fact, we said it, and that was why we bought Hipotecaria Nacional-- that mortgages in Mexico were going to boom, because in the 20 next years, potential demand will come for a million new homes each year. So we wanted to be there in that market, and that's precisely what's happening.

What we're seeing in the mortgage market in Mexico is just the beginning, I think. We'll probably see even higher growth imbalances, which will have an important impact on our balance sheet in Bancomer that's very good in terms of the structure of our balance sheet, really shoring it up, making it very sound. And it will confer stability to the very asset quality that we have on our balance sheet. And that will have two effects. First of all, as you can imagine, spreads are lower. Consequently, customer spreads will be pinched by that. Unexpected losses, at the same time, are much lower than on the consumer portfolio, so that will be reflected in our provisions. What will happen with all of that? The outcome, I'm sure, will be very positive and very important for the medium and long term future of the Company - of the Group as a whole.

(Inaudible). Manuel can go into more details.

[interpreted] Thank you, Jose Ignacio. Very kind of you. Arturo, the weight of mortgages on the balance sheet in Bancomer is 30% at the moment - in the second quarter for this year, that is, which compares against 24.4% in the same period last year. So, in mortgages, as you'd imagine with the kind of systematic growth that we are seeing of about 50%, are becoming a more and more important chunk in the whole structure of the loan book in Bancomer. Moreover, the consumer and cards portfolio, which was about 30% or 31% last year, is now 31.9%. So consumer and lending portfolio, although it's growing enormously, it's not growing as fast as it did at the beginning of the process that Jose Ignacio was talking about before. Nonetheless, it's still becoming a more important part of the loan book in Bancomer.

So that's really, I think, your question about the different weight of the different items on the loan book.

And then coverage and hedging for 2008 - hedging for 2008. Well, obviously, we can't give you exact data about this because that forms part of our market strategy. But I can say that we feel very comfortable. Hedging is already over 20% of expected earnings for 2008, and we're still operating. And, given that we feel very comfortable about everything, we can now optimize hedging costs. And I can remind you that the main thing is the spread on interest rates. And between the American and European market, it's about 4 points on forward rates. We feel very comfortable, then. Even in unthinkable scenarios, the depreciation of the dollar, for example, the maximum impact on core capital from that with the level of optimization of hedging that we've got, and with the kind of hedging costs we're getting, would only be about 7 basis points in core capital. And, here, I'm talking of $1 reaching EUR1.5, which is most unlikely at the moment. And I should also say that, right now, our underlying position is short on dollars, with the acquisition of Compass. And I think that that's worth noting. You can do the calculations to look at the exchange rate when we announce the deal and the current exchange rate, the exchange rate now. Actually, what's happened has been that the price of acquiring Compass has gone down. As Jose Ignacio was saying, it's important to look at what's happening to the market. Obviously, there's a problem in the real estate market. But the economy as a whole is performing pretty well. And our estimate suggests that the data will show core growth in GDP, which will probably be higher than the kind of growth we achieved in previous years. That's quite important when we talk about our timing. As we take over Compass, it consolidates its figures in very important states within the United States of America. We hope that, for next year, the American economy will grow faster than this year and, probably, faster than the European economy. That's what we're calculating for the moment, although it's not always easy to know what will happen in the future.

[interpreted] I've got a quick question I wanted to add about Mexico. The tradeoff between profit and lower expected losses - how do you think that should look? Would you get stable ROE, or will ROE grow in the midterm?

I think the tradeoff you're referring to won't be seen with any abrupt changes. If you analyze what's happening in Bancomer and what will happen in the next two or three years, we should take into account that, this quarter, one thing that didn't grow, which will probably grow the next few quarters, is corporate and government because of low demand. But you shouldn't think that we're going to have any sudden change in our structure at all. We're talking about stocks; we're talking about all activities growing very fast. But, at the end of the day, in the medium term/long term, because I don't think that this is a short term issue-- In the medium term/long term, if we look at the return on equity, we can't expect it to have any negative impact. I'm not going to be so bold as to say right now that it's going to be positive, because I think we've got a magnificent management of all our consumer portfolio. But I don't think that it will be negative and will be neutral or positive.

[interpreted] Many thanks.

(interpreted) Any more questions over the telephone? We have got another question from Antonio Ramirez.

(interpreted) I've got two questions. The first has to do with the competitive environment in Spain. Basically, in a context where we're seeing a slowdown in the mortgage market, do you think that institutions that have depended more on mortgages will feel the pinch, especially the savings banks? And will that make them more aggressive in pricing of other kinds of loans? And the same with respect to customer funds. So far, deposits have made a positive contribution to the expansion of customer spreads. In a context in which wholesale borrowing could become more expensive for the Spanish banks in the future, do you think that there could be more pressure as everybody goes after liquidity and the cost of deposits goes up? That's my first question.

My second question has to do with the way you see the process of consolidation in Europe. I think, two years ago, you said that BBVA didn't believe in M&As in Europe and that, in this kind of process, the big players could buy up smaller players. Have you seen any changes in this environment over the last few months with ABN AMRO and such like UniCredito or Societe Generale also talking at the moment about possibilities of what could happen in the future? If there are M&As, what could BBVA be doing in them?

[interpreted] Right. With respect to the competitive structure of the Spanish market, I didn't think that things had changed very much. And the pressure from competitors in Spain hasn't changed very much, I think, and I think I've told you this before. And I've told it to many of your colleagues, as well. Over the last few quarters, when we heard about price wars, especially in lending, I always said, and I continue to say, that I don't see that there's that much competitive pressure, apart from the inevitable kind of pressure you have in a market like this. For several quarters, I've been saying that, if there's any competitive pressure, it would be in term deposits. And, basically, that kind of pressure would come from the savings banks, some of them more than others. But, looking towards the future, I would say that I don't see that things would change that much. There's not that much pressure on prices for lending. But we will continue to have pressure on term deposits and customer funds as people search for liquidity. So I'd say that, over the next two quarters, the underlying drive in the competitive forces here in Spain will fundamentally continue to be the same kind of forces that we've seen at play over the last two quarters. Some things might become clearer, but I think the main competitive pressure will be on customer funds rather than lending. In lending, we've got the slowdown in certain segments, whilst others are speeding up in their growth. And I think that it's liquidity that really matters most for some kinds of banks, who will have to manage their loan portfolio and their customer funds more actively, which is why I think the pressure will be more on customer funds than on lending.

And as for M&As, really, we-- I want to make this very clear. A couple of years ago, we didn't say that we didn't want to be involved. We said that we didn't want any kind of merger between equals. And I think if you look at the kind of mergers that have happened over recent times and might happen, none of them have been mergers between equals. We haven't seen any mergers between equals. This kind of consolidation in Europe, and we've said this before and continue to say it, forms part of a process that, in the medium to long term, was inevitable. It's a process which actually has taken some time coming, and we think that it will continue but perhaps quite slowly. There are various deals out there, and they will be very important in this consolidation. Well, that's quite clear. Is there any sprint to speed up the numbers of mergers and acquisitions? I'd say not really. And we continue to say we don't want mergers between equals. And, by that, what we mean is what we always have meant with equals, and right now I don't think the market would accept those kinds of transactions anyway.

(interpreted) Any more questions over the telephone?

There are no more questions from the Spanish conference call. We'll now go out to the (inaudible). We have one question from Mr. [Chris Marr] from Goldman Sachs. Please go ahead with your question.

I had a few questions. First of all, I'm just wondering if you could quantify the effects of nonrecurring items or the nonrecurring nature that you mentioned on slide 31 related to the net interest income in Mexico and if there's any further quantification we can get on that.

Secondly, I was wondering if you would like to make any comments in relation to the announcement of the change to your shareholder base announced yesterday - if you would like to make any comments at all on that.

And, thirdly and finally, I just noticed that, now, in the first half of this year, domestic Spain and Portugal is now growing at a higher rate in terms of net attributable profit than Mexico and the U.S. I was wondering - Is this something that you would expect to continue? Do you think this is quite an unusual situation? Or how do you see the relative growth contribution from Spain versus Mexico going forward? Thank you.

[interpreted] You can answer the first question, and I will answer the following ones.

[interpreted] In terms of the quantification of the impact of the net interest income in Mexico on the second quarter, the three effects that we are commenting that we consider nonrecurrent account EUR40 million in the (inaudible) quarter of 2007. The most important of these effects is [UDIS] , which is a special adjusted inflation index to which is referring that certain assets of Bancomer, especially all mortgages portfolios. As we have had in May and June negative inflation in Mexico, that net interest income generated by these portfolios has come down in the quarter EUR27 million. So this is an effect that we consider looking to the trends which is not going to be recurring. This is the quantification, and this is the explanation of the most important effect. The important thing is that the underlying-- the relation of margin is very sound. And, as Jose Ignacio has insisted during the Q&A, our net interest income is growing very much in line of our total loan book in Mexico.

[interpreted] Okay. Going to the second quarter on our new shareholder, Mr. [Hovice], I would like to share with you four or five ideas which I believe are very important. First, Mr. Hovice's move has been very, very transparent. Second, he has said that he has a position for the long term. He's not speculative. It is not speculative. Third, he has said that is a financial position. Fourth, he has said that he doesn't want to be involved in the management. And, fifth, and more important, the reason why he's investing in the long term in BBVA is because he believes in the products of BBVA, and he believes that BBVA is going to be able to create a great quantity of value in the future. So, with this idea, we welcome very much Mr. Hovice.

And, on the third question, which is the question referring to the balance among the different areas in BBVA. Well, I believe that the situation that we have now is a very balanced situation. I mean, I believe that the most important thing that we have now is that all our areas, or all our business units, are having a very, very important growth. And I believe that this is a very nice situation. So we are not concerned about the changes in the structure or the contribution of the different areas. We were not concerned a couple of years ago. We were not concerned last year. And, especially, we are not concerned now, because I believe that all of them are contributing and contributing very healthy to the results to the P&L of the Group.

(spoken in Spanish)

Thank you very much for that.

There are no more questions.

(interpreted) In that case, we can go on to the webcast questions. The first is from [Christi Ansolar from Dexia Asset Management].

You have EUR200 million for the Micro Credit Foundation. That's a one-off. Does that mean there will be no further money transferred to the Foundation?

[interpreted] Well, this is a mandate from the AGM. It approved EUR200 million to Micro Finance Foundation. And we're not considering any further contributions from (inaudible).

What are you expecting in terms of the mortgage market for the next quarters?

[interpreted] Well, we see that, in Spain in our bank, we're actually seeing a very dynamic trend when we look at the spreads. And, if we consider net interest income for the next two quarters, we think the situation will continue to be very buoyant and, in fact, will go up. We are not expecting any dips in net interest income. So we don't think there will be huge growth.

[interpreted] I would just really stress what's already been said. For quite some time now, we've been saying the same thing. And I think that is important in terms of just how we are really in control of trends and really on the ball. For some time now, we've been saying that net interest income in Spain would have to increase in line with lending volumes, and that is really what Jose Ignacio has said. And this will continue. So we think there will be a progressive improvement in net interest income.

Well, I actually think you're very optimistic.

[interpreted] I have three questions from [Eba Securities' Mario Novus]. The first is about NPLs this quarter. What about evolution in terms of our estimates? Mexico-- There's a question about mortgages. Do we think consumer lending has really reached its ceiling? And then a question about Compass. If you close the operation the third quarter, will we have a full fourth quarter of Compass included in BBVA's results?

[interpreted] Okay. Manuel can answer the first question about Mexico.

[interpreted] What I would say is that the growth in consumer lending in Mexico and in SMEs - it's really spectacular. There's definitely no slowdown or halt there. There is, of course, a statistical base. And for several quarters now we've talked about Mexico and growth in Mexico. And we've talked in terms of absolute values and not percentages. You can't talk about percentages of 70%. I think that we will still have growth in consumer lending and mortgages and SMEs. But, for consumer lending and talking about a slowdown, it's a slowdown in percentage terms, not in absolute values. I'd like to make that perfectly clear.

[interpreted] But the Compass operation--?

[interpreted] Yes. We may have consolidated Compass by the fourth quarter. And I'll hand over to Manuel.

[interpreted] In the prospectus, you have all the information on NPLs. In the standalone quarter, we've had [EUR1.49 million. So it was EUR100 million] more than in the first quarter. Nothing relevant in year on year terms-- Sorry-- not year on year-- going back to the first quarter. So, basically, that's slightly more in the second quarter than in the first quarter. That's what explains that increase. But, if you look at the size of our portfolios, you'll see that it's not relevant at all.

And net entries-- Net NPL entries, the three areas are Mexico, South America, Spain and Portugal. In Spain and Portugal, there's been a net variation of EUR36 million, Mexico - EUR53 million, South America - EUR36 million again. So as we actually said, our NPLs were at historically low levels. It was difficult to see them getting lower. And as Jose Ignacio talked about South America with the kind of growth we are achieving, a slight increase in NPLs is to be expected. But this is very much in line with what we were expecting. I think it's important to point out that, in our reporting, that's also in the prospectus and has been since last quarter. We are talking about economic capital and economic profit. And, as Jose Ignacio said in the presentation, we think this gives you an economic measurement over and above accounting entries and figures for provisions. It really is giving you risk-adjusted returns and economic capital figures, which is more accurate.

[interpreted] We have one more question now about the slowdown in fee income in Mexico in the second quarter. "What's the reason for this?"

[interpreted] Well, really, there are two reasons. First of all, we're very, very big growth in the first quarter, and I said we would start to see a slowdown. In Mexico as a country, really the main impact there is (inaudible). I think we've said this on more than one occasion. At the end of last year, we made a decision to safeguard our (inaudible) market share in Mexico. That meant readjusting our fees, and that is having a year on year impact in these quarters and probably will be in the third and fourth quarter or maybe third quarter. But then, in the fourth quarter and first quarter of next year, it will be back to normal. When we talk about fees, I'd like to remind you that reasonable cruising speed for fees in Mexico would be 10%, not 15% or 16%. And we are sticking to what we said.

[interpreted] I have another question. "Could you please explain what you said about having a short position in dollars because of having bought Compass, because I thought it was being (inaudible)? That's the question."

[interpreted] Well, we are paying 52% in shares, but the other 48% is from cash. So in that part of the transaction, we put a short position in dollars. And I think it's interesting to point out as well that we have been managing things, buying options in order to take advantage of movements in the value of the dollar. So, economically, we will benefit with less goodwill and our cash position when we buy Compass because of the exchange rate performance.

[interpreted] The question is, Do we expect a one-off charge for restructuring after having bought Compass?

No.

[interpreted] Two questions, one from [Diego Baron] from Fortis and another from Santander Mr. (Inaudible) about NPL performance in Spain. I think you've answered these questions already.

Also, the same question from Carlos Grande, which has also been answered.

A question from Diego Baron about the growth of the loan portfolio in Mexico for the second half of the year.

[interpreted] Well, I think that the kind of levels we've currently got in lending, volumes growing at about 25% year on year is probably a pretty good proxy for the next couple of quarters, something similar to that.

[interpreted] A question whether we can explain the net interest income and NTI in global markets and distribution. There's another analyst with the same question, asking for more details about the kinds of operations that you've got in that unit.

[interpreted] Manuel, if you want to take this one.

[interpreted] Right. Net interest income and NTI end markets in global businesses. As Jose Ignacio said, this brings down the net interest income for the Group as a whole. People look at the Group as a whole, and they say that the net interest income isn't doing so well, whilst net trading income is higher than they would expect as a consequence of this way of reporting things. But we have to look at the operating profit, because that nets out the two things. Markets and global businesses are improving capacities in structured projects and equities. And, in their operations, they're adding structures to their products. And these kinds of structures mean underlying positions that have to be funded. And that funding is booked to the net interest income. Whilst the underlying position increases in interest rate, products, and equities, the cost of funding the exposure increases. And that's why we've got that negative impact on net interest income. The outcome of this way of operating is that the structures' mark to market goes up, and the derivatives mark to market go up. And that is reflected in NTI, the net trading income. Consequently, the net impact of this way of operating is seen, really, in the ordinary revenues best, where everything becomes neutralized. And that was what we were trying to say in the presentation, because you can't associate this to lower quality. In the end, it's quite the opposite. If you look at our earnings in global businesses, and specifically in the markets unit, you can see that there's a quite strong level of recurrency. Moreover, we're seeing ongoing growth. For example, if you look at what's being done in distribution of structures and hedging and SME banking, we are seeing a lot of success there. So that way of operating focuses on our business with customers. We could say that it's a very recurrent business and the market is showing-- and I think, here in Spain, people recognize this-- that we have a lot of talent or a lot of skills in this area, and it's very important for us.

[interpreted] A question from Mr. [Savanaugh] from Santander about wholesale funding. He asks if you're seeing symptoms of this kind of funding drying up and if that's having an impact on the spreads in wholesale funding, and would that be a problem for the Group?

[interpreted] Right. We don't think that there is any problem there at all. All we're seeing is that, in general, spreads are going up slightly in the market as a whole. If you look at issues here in Spain, you can see a slight rise, more basis points, but we don't think that's a symptom of any serious liquidity problems at all. In general, the positions in the Spanish system are pretty sound. There's not that much exposure, so we think that's fine. So we're very comfortable. We don't see any problems in liquidity. And, moreover, we have very active management of our balance sheet with a whole lot of different, diverse formulae, which mean that our position is quite liquid and very suitable for the kind of environment we've booked. You can look at the balance sheet to see the figures. And it is more liquid. We're growing more in customer funds. We're doing more securitization operations. So what's important, as Jose Ignacio said before, is that we are anticipating the trends, and we are leaders as well, both in raising more deposits-- you can see that the term deposits are growing very, very fast-- and we're intensively using securitization to actively manage our balance sheet. We don't consider that there's any liquidity problem at all in the Spanish market.

[interpreted] Two questions from [Seth Uraner] from Merrill Lynch, which I think have been answered about net trading income and what's happening in Spain. Another question about M&As that's also been answered.

So the last two questions have to do, first of all, with some concern in the market about slowdown of growth in Spain. "How does the BBVA see growth on its lending to 2010?" And then a question about Latin America. "Do we think that now's the time to go back to Brazil?"

[interpreted] Well, to answer your first question, I think that, if you look at the core driving factors of our activity here in Spain, our main scenario has been and will continue to be that there will be slowdown in the kind of growth rates we've been reporting on our loan book; and, very specifically, our mortgage portfolio. So that's the main scenario we had. And it's proving to have been the reality, and that's why we're reporting the figures we are today. In the first semester, the figures for activity in lending are very positive. There's no drop at all in the kind of growth we've got on the lending portfolio as a whole, because mortgage slowdown is offset by higher growth in other areas. But we maintain this core scenario that there will be some slowdown, which will probably take place over the next few quarters. And it seems to us, as we've said before, that this is everything. What kind of levels are we expecting? Well, not dramatically lower at all. We said at the beginning of the year that the growth on our loan book in Spain would be about 15%. And, probably, at the end of the year, our figures will be slightly higher than that. And that's a good trend. And it's quite a good proxy of what we can expect for 2008 and 2009. We're seeing buoyant growth, 2.5% or 3% growth in GDP. So our lending portfolio should probably show double digit-- two digit growth, maybe at low levels, nearer to 10 than to 20.

And then Brazil. Well, that's a very attractive market at the moment. We, first of all, do have a holding of 5% in (inaudible). And that means that we've also got several cooperation agreements related to that. And we've also got a unit of wholesale banking, which has been very active there. That's our plan, then, for the next few months and the next few quarters.

[interpreted] There are no more questions, so I give the floor to Jose Ignacio.

[interpreted] If you'll allow me, taking into account that all the people in the northern hemisphere, at least, are now going off on holiday. I thought I'd like to give you a kind of summary of how we see this first half of the year and how the Group is expecting to see the next few quarters to pan out from now until the end of the year.

I think it's important to stand back sometimes and look at the position of the Group. And we should say in those kinds of terms that we have definitely done well in terms of our financial fundamentals. We're doing all the hard work we should do to shore up our balance sheet, to have enough liquidity on it, to have more customer funds, and to improve the quality of our assets and our NPL ratio and our coverage ratio. They're all improving. So, once again, we're presenting another quarter. You saw the graph before of the different quarterly figures. And, consistently, we've been presenting excellent earnings with excellent growth rates and in comparative terms, as well, against our peers.

Looking forward to the next few months and the next few quarters, we're optimistic. First of all, because our current franchises seem to be very powerful-- We've got great franchises. They're well managed. And they will continue to bring in consistently good earnings in the next few quarters. Moreover, ahead of us, we have a challenge which is also an opportunity, which is to extend our perimeter with the Compass deal and then with the Citi deal. And, as I see it, I think that, when you go on holiday, you tend to stand back and look at the Group. And you can say that it's operating on a very sound basis, and its outlook, because of the kind of franchise we've got at the moment, and with the kind of franchise that we'll have in the future with the new incorporations, we've got very sound fundamentals.

But that's not enough for us. We're not going to rest on our laurels. And that's why a month and a half ago we launched our transformation and innovation plan, because we think that we can further improve our management capacity to generate more revenues and also improve our efficiency, applying more technology to our processes. And that's our vision of the Group at the moment.

What we want to do with you on the Investors' Day is to explain how that all works, because, normally, when we give you the presentations of results, we just don't have time to go any deeper into certain areas or the strategy that we have in certain areas. And I think it would be very valuable for all of us if you understood these strategies and why I am as optimistic as I just said was, because this optimism is based on very specific plans, which we are free to disclose to you. And that was why we set up November 15 as the first Investors' Day that we want to hold.

So, many thanks to all of you and those of you are lucky enough to be off on holiday now, have happy holidays.