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Unidentified Company Representative
(interpreted) Good morning everyone.
We are now going to start with the presentation of the BBVA Group results for the third quarter of 2007.
Jose Ignacio Goirigolzarri, our Chief Operating Officer, will be giving you the presentation and then we will take questions, first of all from the room and then over webcast, and then over the conference call.
And as always, those of you who are here with us in the room are invited to a coffee afterwards.
Many thanks.
Jose Ignacio Goirigolzarri - President & COO
(interpreted) Fine.
Good morning everyone.
First of all, many thanks for giving us your time and for paying attention to what we have to say.
The structure of my presentation will follow the usual format.
First of all we'll analyze the Group results all in all, then we will look at all the different business areas going into more detail.
Quite honestly, this quarter which we're presenting to you now, as you well know, has been played out against a very complex backdrop and it's a delight for me to be able to say that despite that we are presenting very sound results.
Sound because we have sound activity, also this activity is reflected in revenues; we continue to improve our cost income revenue.
And they're sound results because, once again, we're showing our skills in risk management, and moreover, the bottom line of our income statement is based on a high degree of recurrency.
Moreover, we've incorporated Compass this quarter.
It's totally incorporated onto the balance sheet and then, in our income statement, we've been reporting it for three weeks.
So having said that, I repeat, we've had sound results.
If we accept the one-off results, as we usually do, our attributable profit is growing 20.1% and that means that our earnings per share is growing at 14.6%.
If we include the one-off transactions then the attributable profit would be EUR4.75 billion.
I was saying that this sound growth in attributable profit is based on high activity which knocks on directly to revenues.
Here you can see at a Group level our lending is growing 24.4% and our customer funds over 20%.
That means our net interest income, as you can see on the right, has been performing very well.
Not just year-on-year, but also quarter-on-quarter when we compare it against the second quarter of 2007.
All of this means that the ordinary revenues have been growing 13.5% this year year-to-date.
With an improvement as well in our efficiency, we've improved our cost-income ratio enormously and that means that our operating profit is growing at 18.2%.
Obviously, I'm talking in current euros; in local currency, the operating profit will be growing at 22.9%.
The exchange rate impact, well, it depends on the different lines, but it's between 4% and 5%.
Anyway, this strong growth in our operating profit has been accompanied by excellent risk management, managing credit risk and liquidity risk.
I'll talk about that later though.
Talking first about credit risk, on the right of this screen you can see what's been happening to the NPL ratio which continues to rise very, very slowly whilst our coverage ratio is very much in line with the lending profile that we have and our provisioning reflecting that growth.
74% of our loan loss provisions at the moment are generic.
And I was also saying that we're managing the credit risk along with other kinds of exposure like liquidity risk.
In a situation like the current one, this Group has once again proven that it knows how to manage its risk including liquidity risk.
As you know, we don't have any exposure to conduit vehicles, but I think it's especially relevant to say that the first part of the year we brought in a lot more liquidity on an opportunistic basis.
We made issues for EUR32 million, of which EUR15 million were in securitization transactions, which means that we now have a very comfortable situation in terms of liquidity.
And I think that's a competitive advantage of enormous relevance for the months and quarters we have ahead of us.
If we look at the capital base, our core capital, as we announced, as a consequence of the Compass transaction is now, as you can see, at 5.4%.
So we're generating strong revenues, improving efficiency, very sound risk management, and very sound returns as well.
So here we've shown various different ratios to understand our performance showing how we are generating returns in the Group.
Specifically, talking about economic profit, which is recurrent economic profit, that is we're not incorporating the changes caused by capital gains on our portfolios.
So this recurrent economic profit has also been growing very fast, as you can see on the screen.
Our recurrent risk-weighted assets has been growing 2% and return on equity 31%.
So this is the published income statement without one-offs.
That's what we're presenting to the market with attributable profit at 20.1% in local currency, as you can see that, and as I said before this growth would be 24.8%.
So those are very sound results for the Group as a whole.
If you'll allow me I'll now give you a more detailed analysis, as I always try to do, of all the different business areas that make up our total organization.
So let's start with Spain and Portugal.
In Spain and Portugal, I think, once again, we're presenting a very sound quarter.
It's sound in terms of revenue generation, we are seeing a very good improvement in efficiency because of the transformation plan that we started to roll out last year, and we are also seeing that the rollout is working very well and attributable profit is growing above 20%.
In Spain and Portugal we're presenting the most brilliant income statements we've been able to present in the last several years.
So here you can see what's been happening to activity in lending and in customer funds.
You can see that the lending has been growing slightly slower than before in accordance with what we'd already announced to you.
This slowdown is due largely, as we said a year ago would happen, to what's been happening in mortgages.
However, it's been very strong in SMEs.
In customer funds, as we've been saying before, we've mainly been focusing on balance sheet assets, and there we're growing very fast especially in term accounts, with a growth of over 30% in net interest income over average total assets; you can see the ratio.
Basically it's maintaining itself at more or less the same level because of our pricing policy, which is being very well managed throughout the branch network, which gives us a growing net interest income, which this quarter has already come to stand at 14.4%, which then speeds up the revenue base that we have for the Group.
So we can see that core revenues are performing very well.
We can analyze them in year-on-year terms or in quarter-on-quarter terms and the performance is impressive either way.
Revenues have been growing, as I said before and, at the same time, we're improving our efficiency.
You remember that last year, we reorganized branch distribution structure, which has had a lot of very important impacts.
General administration expenses on the Spanish branch networks are growing pretty well flat, at 0.1%, whilst the revenues we're getting from this area are growing and all the investment we're making here is what accounts for the expenses that are growing.
That means that our operating profit is growing at more than 20%.
Our asset quality is shown here.
NPL ratio is pretty well doing the same as it was last year, very, very slightly going up a few basis points every quarter.
Then allocations to loan loss provisioning, which I think is very significant, has been growing 1.9%.
84% of our NPL provisions that we have on our balance sheet in this business area, are generic provisions.
So all in all, net attributable profit growing at 28.4% and return on equity has leapt up to 37%.
All of that means that our income statement stands, as you can see here on the screen, and in the final column, you can see that the growth rates are very strong in each of the income items.
All in all, in Spain and Portugal, this quarter has been very, very strong after a very, very strong second quarter, which we already reported to you before the summer.
Now we can talk about global businesses.
Theoretically, global businesses should have been most influenced or affected by what's been happening in the environment, but global businesses is presenting some very sound results.
Very sound in terms of corporate and investment banking and very sound, and this is especially important I think, in terms of markets.
When we talk about Global customers, and here we're including investment banking, we still are growing in activity, as we have been over the last two years.
This growth in lending is 21.3%.
As you can see, that is immediately reflected in revenues.
Ordinary revenues are growing at 21.3% as well.
But perhaps more significant still is to talk about global markets and distribution.
Really for several quarters now, we've been saying that the results of our global markets unit are recurrent.
We've been saying that for some time because they are earnings coming from our relationships with our customers.
And that's something which is now proven at times of special stress in the market.
Here you can see what's been happening to our ordinary revenues over the last quarters.
And here, you can see that in the third quarter, we've got ordinary revenues which are very strong.
That's a consequence, I repeat, of the fact that more than 70% of our revenues come from customer relations, from our customer franchise.
And that has meant that they are especially resistant to a market situation in which there's so much more stress.
Consequently, we've got growth in global businesses, both in terms of customers and in terms of markets, which gives us growth in costs and also growth in incomes.
That's what you can see here.
I wanted to show growth in costs in order to talk about what it means.
In global businesses, we've got very high growth in revenues, but also in spending.
If we look at how costs are growing in growth projects and then the underlying part of the growth in costs, the underlying part of the growth is very well under control, with growth of about 4.4%, as you can see in the screen.
In global businesses, once again then, we're presenting growth on the operating profit, which is well above 20%, with an NPL ratio which hardly exists in global businesses.
You can see the income statement here and the drop that we get between operating profit and pre tax profit is due to some specific operations we've done with Tecnicas, Reunidas and Gamesa, which we did last year, which are now affecting the comparison.
But, in terms of recurrency, as you can see, the results are very, very good.
I now get on to our third big business area, which incorporates Mexico and the United States.
First of all, I talk about Mexico and then I'd like to make a few references to what's happening in the United States, with the incorporation of Compass to our consolidated financial statements.
So let's start with Mexico.
Here, I want to say that this quarter our activity has been very expansive.
Activity in Mexico in the third quarter and in all segments has been very strong.
As a consequence of that, what we're seeing is strong growth in our operating profit.
I also wanted to say that in Mexico, once again, for several quarters we've been talking about this, we have got risks under control and our provisions are based on expected losses, which means that we feel very comfortable with respect to the future.
Let me explain what's behind what I've just said.
Talking about strong growth, Mexico, as I was saying, has reported a rise in lending above all, and also in customer funds, especially in current accounts.
And that's had a very big impact on its income statement.
Focusing on lending, on the right of the screen, you can see what kind of growth rates we've got in the different components of lending.
See consumer and cards and mortgages, which are growing very well.
But above all, I want you to focus your attention on SMEs and for customer funds what's been happening in current accounts.
I was talking about SMEs separately because this is something we've been telling you about for some time, saying that it was going to grow very fast.
Well it is growing fast indeed and that growth is speeding up.
Sound activity means sound revenues both in terms of net interest income, which is over 20% again, and in terms of net fee income, which has been growing faster than 15%.
All of that further improves our cost income ratio in Mexico, where Bancomer can report a cost income ratio below 35%.
As I announced at the beginning, this is accompanied by excellent credit risk management, and I want to explain why I'm saying that.
First of all, I think that if we look at the NPL ratio, we can see the excellence of this management, and if we look at what's happening to loan loss provisioning as well.
If we analyze the income statement in Mexico, we can see year-on-year growth is very high in our allocations to provisions.
But if we look at what's happening quarter-on-quarter, there we can see that, for the last four quarters, we've been at very similar levels.
We expect that, in the future, our provisions will increase again very much in line with the increase that we will be recording on our loan book.
Over the last few quarters, we've been helped by the change in our business mix, which requires less provisioning because of what's been happening to mortgages.
All of that means that Bancomer has seen its operating profit grow over 21% and its net attributable profit grow, as you can see, at 18.4%.
The differences between Mexico Bancomer and Mexico country are basically related to the Afore there, the insurance company.
So strong results and a good outlook for the fourth quarter, in terms of activity, which will be reflected in the bottom line.
Moreover, as I said at the beginning, really this quarter has been very important for us, because we have completed the acquisition of Compass.
This deal was closed on September 7.
The effective purchase price, as you can see here, was EUR6.663 billion.
The capital issue that we made was of EUR3.287 billion, the goodwill was EUR4.66 billion, and the impact on our core capital was 91 basis points.
The structure of Compass, if we look at its lending and customer funds, can be seen on the screen.
As you can see in Compass, we've got more lending than we've got customer funds.
Now that's very complementary to the other three banks that we have in Texas where really, we see quite the opposite situation.
They have far more customer funds than lending, which means our liquidity situation in this American franchise is very comfortable.
What steps have we taken?
You see on September 7 we closed the deal, but we've also merged the holdings of the banks.
We've reorganized the structure so we now have a single organization for all the four banks we have in the south of the United States.
The banks will be legally merged in December, and the integration of the banks onto a single platform will start on February 22, and then in July.
And then we will end the entire integration process for this franchise in the southern United States in October 2008.
This franchise is described here; you can see the most relevant numbers here.
You can see how many customers we have, over 2.34 million, and you can see we have 656 branches and over 14,000 employees.
You can see our assets and our cost control, with a cost/income ratio is starting at 64.8%.
As you can imagine, we'll have to improve on that, and we think we will because the synergies from the integration.
Our asset quality is shown there, with the figures, and our returns on equity at 22.1%.
Of course, on investors' day we'll talk far more about the details relating to Compass and the outlook it has for the future, and our action plan for the next few quarters.
I wanted to say here and now, that on the basis of the information we currently have, we feel very comfortable regarding the expected results, and the results that we had already given to the market on the basis of our previous information.
So here you can see the income statement for Mexico and the United States.
Consequently the United States has that big news, the final incorporation of Compass.
Mexico has a very strong quarter with very sound activity.
Now we come to the final big business area for the BBVA, South America, which once again is reporting a quarter with good news.
With all this process of stress in the markets, which we've been living through, the emerging markets, especially Latin America, have managed to avoid the negative impact of the stressed liquidity situation, which means that our macroeconomic situation in South America is very positive.
Consequently, our franchises are growing very strongly in activity.
Here you can see that lending has been growing at over 35%, whilst our customer funds are growing over 24%.
And on the right you can see that in customer funds, current and savings accounts are growing very well.
This is very relevant in terms of improving our net interest income.
If we look at the structure of lending there, it's very much based on consumer and cards, and less so on mortgages in terms of growth.
When we see the structure of growth, we can't help but think of what happened in Mexico three years back; it looks very similar.
And as lending growth, we see how this growth is reflected in revenues.
Our net interest income is growing over 30%, and net fee income nearly at 20%.
As a consequence of this, operating profit is over EUR1 billion, growing at 28.3%, because in terms of efficiency, our franchise in South America has been improving its performance very significantly, with a cost/income ratio of 45.9%, with provisions 57%.
We didn't think that the NPL ratio would go on dropping; at some stage, it must flatten out.
But we're definitely very much in control of risks there, 57% of our provisions are generic.
So all in all, in South America, we're contributing an attributable profit which has grown 23.6%.
It's very consistent and very well structured, and very well diversified, both in terms of countries and in terms of the different businesses in which we're operating.
Because we're not just in banking businesses, but also in insurance and pensions, where we're getting excellent results.
All in all, return on equity for South America went up to 35.3%, and the income statement can be seen here.
Very strong growth in all the different income lines.
Consequently South America is reporting another very good quarter with very positive results.
And now, I'd like to come to the conclusions before moving on to the Q&A.
I think you remember that at the last presentation of results, before the summer, we were saying that we were going off on holiday in the northern hemisphere with our homework already done, and we did.
We'd done our homework before we went on holiday, and we've shown a great capacity to adapt to a far more complex environment than we were expecting.
We've been able to adapt in several different ways.
First of all, because the results we're presenting are still very, very sound, as I said at the beginning of the presentation.
Secondly, we're still presenting very sound financials, in terms of capital ratios and in terms of liquidity.
Thirdly, we've managed to make sure that our market franchises are working very well on the basis of customer business, which is where our revenues come from.
And then fourthly, we are continuing to improve our efficiency and our cost/income ratio.
So I think we have proven against a difficult backdrop that BBVA has very strong growth, very consistent growth, accompanied with a very low risk profile.
And that has been manifested yet again this quarter.
Thank you for your attention.
And now Manuel Gonzalez Cid will try to answer any questions that you would like to ask.
Operator
(interpreted) Thank you.
Ladies and gentlemen, the Q&A session starts now.
(OPERATOR INSTRUCTIONS).
Okay, we'll start the questions in the room first.
Luis, please could you give your names and where you're from.
Luis Pena - Analyst
(interpreted) Good morning, Luis Pena, and I have several questions.
My first one is about the first consolidation of Compass.
Obviously you've made the most of the dollar slide, and the price has been better, but your impact on your capital adequacy is in line with estimates.
Is that because goodwill has been higher because of additional adjustments?
Could you explain why there's higher goodwill?
That's my first question.
My second question is about the sustainability of Spain and Portugal's results, because your operating results are, what, 20% and net 28%.
What kind of outlook can you give us for net interest income, costs and provisions, because they haven't gone up much in the last nine months?
Could you say something about next year?
And my third question is about Compass.
I know it's early days yet, but what sort of like-for-like growth can we expect for 2008, given the current state of the US market?
Jose Ignacio Goirigolzarri - President & COO
(interpreted) Okay, well, I'll answer your second question about Compass, and Manolo can deal with consolidation.
Talking about the evolution of Spain and Portugal, we are presenting really magnificent results.
We haven't had 28% growth in attributable profit, and operating profit of more than 20% for quite some years now.
What I think we need to look at are, well, there are two or three things.
First of all, our activity is sliding; we'd already announced this.
It's basically in line with expectations.
What we said to you in the first quarter was we were actually quite surprised by the amount of activity in Spain, and we were expecting it to slide down.
So that slide is occurring now; it's in line with our expectations.
I think it will continue throughout the next two or three quarters more or less in the same way, so we'll have lower activity in the next few quarters.
However, as far as net interest income over ATAs is concerned, maybe one point up, one point down; I think we'll be at similar levels.
That means that activity will mean revenues.
As far as costs are concerned, our network costs, I think we've come up with the goods, and in the next few quarters, we do have the capacity to maintain costs, with very low increases in costs in Spain and Portugal.
For provisions, you're right.
That 1.9% is abnormally low.
At the beginning of the year, we said that our provisions would be single digit, or maybe 9%, 10%, and I think that's the best cruise speed rather than 1.9%.
However, when you put this all together, I think that for the next few quarters as far as our P&L is concerned, Spain and Portugal will show very good growth in all margins.
Now to talk about Compass.
As I said previously, everything about Compass and the estimates that we want to share with you for the next quarters have, well, we want to keep all of this 'til investors' day rather than give these off the cuff comments.
But I think that Compass, and rather than Compass itself, but rather our US franchise, should have outstanding performance, basically because the markets where we are present are high growth markets compared to the rest of the US.
Secondly, because we've reconfirmed that Compass is a really powerful franchise.
And thirdly, with the time we've been involved in the pre-integration process, we feel very comfortable vis-a-vis the estimates we gave you when we made the announcement.
I'd prefer not to talk about specific growth for next year right now; I'd prefer to leave that for investors' day.
But we certainly feel very comfortable with the information we've received so far, and I think Manolo can talk about the consolidation of Compass.
Manuel Gonzalez Cid - CFO
(interpreted) Well, the issue here is the push down accounting that has to take place in the US based on a 1989 regulation, and it covers acquisitions with a change in control in excess of 90% of voting capital.
It's pretty difficult to understand, but basically it means the following.
If you need any more information, our investor relations team can do that for you.
Because the company actually comes to life, or came to life, when we closed the deal.
So on September 7, Compass had to start a different form of accounting associated to Compass' contribution in a consolidation, so it's Compass' contribution to the BBVA Group.
So we have Compass up to September 7, and then Compass post September 7.
It's intuitive, but it's a really important point.
As a result of that push down accounting, the assets and liabilities of the acquired bank have to have a value as of the date of acquisition, and then that has to be adjusted to the price paid by a purchaser.
And the Compass price is in terms of, well, debt instruments, cash, etc.
All of that has to be taken into account, the difference between the purchase price and the value of assets and liability, which is classified as an intangible asset on the books of the acquired bank, and that then becomes part of the goodwill.
And that explains why the goodwill is higher than you would have been led to expect from the other figures.
It's EUR525 million according to an independent expert.
I also need to say that the regulations give you one year to make the final assessment of goodwill.
And we've just started, so you shouldn't take that figure as being written in stone.
But the fine-tuning of the goodwill could suffer variations.
The regulation gives us a year to do that because it's not that easy.
So EUR525 million intangible asset figure is a figure given by an independent expert.
It can't be written off, although the intangible assets can be amortized on the income statement.
We have our US franchise and Compass and other banks, so our four banks in Texas.
We'll follow US GAAP so there won't be standardization there.
All those OECD countries where there is the right regulation and supervision do not have to standardize, so we'll be using US GAAP there.
However, for some management issues, we have applied our local criteria.
And so we have the US regulations which give you an eight year amortization period.
This is quite important, because when you see Compass' profits, you have to remember that its contribution to the Group is cash, and therefore those write-offs of intangibles in the three weeks of consolidation amount to some EUR30 million.
One way or another, it's not considered cash item, so the real contribution to profits would require adding those write-offs of intangibles.
In terms of standardizing criteria, the only one we've applied is that of doubtful loans.
We think that's the best in terms of management.
We think that Spanish regulations enable you to classify as doubtful any customer that has anything unpaid despite having other items.
In the US, there are other classifications, non-performing loans, standard loans, unsecured loans, which have different definitions, and we have opted to use the Spanish criteria for that.
Instead of considering them doubtful through operations and guarantees under the US system, we consider them doubtful under the Spanish system in terms of each customer, because we think that's a better classification system.
So basically, that's it as far as the technical accounting issues of Compass consolidation.
Unidentified Company Representative
(interpreted) Okay, more questions?
Okay, let's go on to the conference call.
Are there any conference call questions?
Are there any conference call questions?
Conference call question?
Operator
(interpreted) Good morning.
Yes, we do have a question, from Arturo de Frias from Dresdner Capital.
Please go ahead.
Arturo de Frias - Analyst
(interpreted) Hello.
Good morning.
And it's Dresdner Kleinwort, by the way.
Okay, I'd like to say congratulations on these results which are really very strong.
It's refreshing to see that so many banks have had to make multimillion euro provisions.
You've actually made money where you have to.
My typical question, every quarter we talk about the dollar.
Every quarter you say that you're well hedged, and you seem to be right.
But every quarter the dollar falls, I don't know how much percent; it's more than [140%] now.
What are your expectations?
What is your hedging like?
Because you do have more dollar exposure now.
I have a second question, which is about lending in Spain, or liabilities in Spain.
I've heard market commentators say that there has been a bit of a war with regards to customer funds.
One of the saving banks seems to be quite aggressive because they had lack of liquidity, and that's difficult to compete with.
I've seen that in the third quarter your resident liabilities have fallen.
Is that because you don't want to pay high prices to attract funds?
Or is there another reason for that?
Then, I have a third question; that's about your global banking NTI.
You were very clear that, you said that this will be recurrent, but I was quite impressed to see that despite everything that's gone on this summer, you still make profits on NTI of EUR200 million.
Do you think you can maintain that in the long term?
And finally, what about housing developers, national, international?
The news is increasingly alarming, and we've heard comments from developers talking about crisis, about the fact that new houses are not selling as well, and that 2008, 2009 can be worse.
What is your view of the property market, the mortgage market, and what would your reaction be vis-a-vis those extremely negative and worrying comments?
Jose Ignacio Goirigolzarri - President & COO
(interpreted) Well, first of all, Arturo, thank you very much for your congratulations.
Well, the dollar question is for Manolo.
Manuel Gonzalez Cid - CFO
(interpreted) Yes, I get the worst of it.
Jose Ignacio Goirigolzarri - President & COO
(interpreted) And I'd like to take you to the other questions, and of course, Manolo's quite willing to participate.
First of all, I'd like to clarify the figures.
I think that when we talk about the resident sector we mix in quite a lot of things, and perhaps you're more interested in the evolution of Spain and Portugal, which is in the prospectus.
When you analyze the situation of Spain and Portugal, as I said previously, in terms of balance sheet assets, we're growing at 12.9%.
And for customer funds as a whole, we're also growing well.
A few quarters ago, we said to the market that we were changing our commercial policies, and I think this was about a year ago now, or more.
Yes, it was summer last year.
We said that our commercial policies would be directed at strengthening our position in term deposits, and we've done that.
We've been very systematic, and that is why we have much higher growth in term deposits than in mutual funds.
I think that was a good decision.
Secondly, I'd like to say that the pressure on the price of funding is nothing new.
For the last few quarters, we've said that there has been a pressure there, that it was logical and we were expecting it to continue, and that's true.
What we are trying to do is to be very selective about our price management.
I think we have a good combination of volume and price.
Because of that, we're getting good volume growth, even increased market share the last few months whilst managing to maintain net interest income over average total assets.
Instead of that ratio, if you look at customer spread, today, a year ago in Spain and Portugal, we've had really good growth, but net interest income over ATAs is stable.
As far as the future is concerned, I think we'll be keeping the same policy.
As far as the market is concerned, well, I think we'll suffer the same pressure from competitors.
It's been going on for a few months and it will continue, so I don't expect any significant changes there.
I think our network will show that it has this commercial clout that is capable of generating volume with great price management.
Then I think your next question was about our global business.
I wouldn't -- well, first of all, I should say that I wouldn't look at NTI, I would look at ordinary margin.
Because if you look at our income statement for global banking, there are some accounting slides that give us net interest income which is negative and yet high NTI.
That's an accounting issue.
I think you have to look at ordinary profit; that's the most important yardstick there and I did try to show that in the slides.
When you have a look at that ordinary profit, you can see that the third quarter, given the circumstances, has been very good.
That's a result of our ongoing policy, which we've always informed you about.
The thing is, I don't think you ever see the results until there's stress in the market, but it's thanks to our customer franchise.
More than 70% of our revenues come from a customers' franchise and you shouldn't just think of corporate clients there.
I think we did say that we were developing a series of derivative distribution channels, and our first target was SMEs in Spain.
We're getting annual earnings there of EUR200 million, and currently, we're starting to see the maturity of that same practice in commercial banking, and we'll start to see it in Bancomer as well.
Obviously, we have to take care of our customers' needs and activities, but I think that these earnings will be recurrent in the future.
Mortgages, independently of what is being said out there, I would like to say that what is happening, vis-a-vis the evolution of balances, is not very different from what we were seeing at the beginning of the year.
We said that there would be this slide; well, I think I even said it last year.
Actually, the first semester of last year, it didn't occur, but we said that the mortgage business was going to start to slide.
I think we said that's why we wanted to focus on consumer lending and the business sector.
And we think that that is now true.
Logically, that downward slide is affecting balances and I think we'll see more of that in the next few quarters.
So that's one thing.
And when we hear people talk of the Spanish property market and the Spanish mortgage market, Spain is not a market; there are very different markets in Spain.
There are markets which are suffering more pressure than others.
The residential market, that's first home, is suffering less than the second home market, and more than 90% of our portfolio is main home.
From a property point of view there is a definite sluggishness, our balances are not growing as much, but we're not seeing things plummet.
So basically that's what we can say about the future.
And now Manolo can talk about the dollar.
Manuel Gonzalez Cid - CFO
(interpreted) Basically, Arturo, once again we have a very active exchange rate hedging policy.
If you look at our core capital and our earnings at times of high volatility, you can see that our earnings hardly vary.
Obviously there's the impact of all lines that we can't hedge, but the Group's profit has the pattern that it has.
Now I know you never believe us, but we really have hedged.
In the prospectus there is extra information, but we have results from hedging with regards to NPI of more than EUR40 million, which offsets a significant part of the exchange range impact both on the dollar and other Latin American currencies.
You have to remember some Latin American currencies such as in Columbia where exchange rates have been really good, Latin American currencies have actually done quite well against the dollar.
They've been quite resistant and so we haven't done too badly then.
Our hedging rate now, we have almost total net worth hedging as far as the dollar is concerned and very high hedging, although I don't want to give more figures because this is part of the chef's magic recipe, but very high dollar hedging, higher than we have for the Bank's net worth as a whole.
The dollar market is liquid enough and deep enough, so I don't know if my opinion is important there, but if we have to make risk decisions for 12 months or 18 months we do have to have a view.
And our view is that in the very short term the dollar could go even further, it could dip even further, but in the second half of 2008 we're expecting it to rally against the euro.
Given circumstances it might have an impact on Europe and it might change European economic policy especially that of the ECB; that's our view.
Having said that, that could change in three hours' time because things change very quickly.
I am very happy, and I think the Group too, because in the last five years we've had a very systematic hedging policy that's come up with the goods.
It really has done what it's supposed to do and it's easy to hedge 100%, but that costs a lot of money.
So the fact that we've got our percentages right, the fact that we've got our currencies right, is important.
We have very active management of that and I think the results speak for themselves.
Arturo de Frias - Analyst
(interpreted) Just to clarify something, the EUR40 million you mentioned are they from the third quarter?
Manuel Gonzalez Cid - CFO
(interpreted) From the third quarter, most of the EUR40 million came from the third quarter, but that's the year-to-date figure.
That's because some of our exposures.
When we took our dollar position, because we're concerned about the Mexican peso and euro via the dollar, we don't consider that to be hedging in accounting terms according to Spanish GAAP; it's considered speculation.
So there's a mark-to-market and we can't do that with the mark-to-market of our hedging exposure, so we have to have quite a lot of hedging of Latin American currencies as well as dollar/euro.
It's basically Mexico/euro that's not considered as hedging, so the dollar movement there has given us a very positive mark-to-market for that quarter, but no the EUR40 million for year-to-date.
Thank you.
Jose Ignacio Goirigolzarri - President & COO
(interpreted) Okay well continue with the conference call.
Operator
The next question comes from Mr.
Kato Mukuru from Citigroup.
Please go ahead with your question.
Kato Mukuru - Analyst
Hello good morning gentlemen and Isobel, I just had a couple of questions.
First question I would say is on securitizations, how much did you do in the third quarter '07?
And also on that subject with regards to your risk-weighted asset growth outlook, what impact would a very tough securitization market for Spanish collateral have on risk-weighted asset growth?
how much would it cause your risk-weighted asset growth to increase by, I'm trying to get sensitivity there?
And also on Spain I would say, what would you say if I were to describe your Spanish results as very much peak earnings?
Clearly what you have here, you have margin stability, gradually declining growth and lower provisions.
What would you say if we were to say the risk clearly therefore on the downside or do you see '08 actually as even being a better year?
In Mexico I was wondering if you could give us the difference in your customer spreads from mortgages, SMEs and consumer?
The reason why I ask this is I want to know -- I wanted to get a sense of whether there is a risk to your margins from the mix effect i.e.
more lower margin mortgages, I just want to get a sense of how big that is?
On Compass I had a question as to regards to, if you look at your peer group that you've presented in previous presentations, earnings -- consensus earnings estimates for them are down about 9% since your acquisition was announced.
And one of your closest peers, CNB for example, earnings consensus estimates are down 5%.
How then hasn't your view with regard to Compass' earnings abilities in '08 not fallen, particularly when you consider that you've got more than 30% of your book related to real estate market in the US, a market where the outlook has certainly deteriorated since your acquisition?
And also final question, I promise, is on loan loss provisions.
My estimate, and I calculate it as loan loss provisions divided by average gross lending, your loan loss provision charges in Spain are up 30 bps, global business about 35 bps, Mexico 218 bps and LatAm 105 bps.
Could you tell us how these numbers compare to normalized levels because our intuition is as your exceptionally benign credit -- you're enjoying an exceptionally benign credit environment, so I want to get a sense where normalized levels could get to?
Thank you.
Unidentified Company Representative
(interpreted) Okay well I'll summarize the questions.
I'll summarize three because I think you actually had six questions so we'll have to take them in chunks.
Securitizations, could we say something about securitizations in the third quarter of 2007 and the year as a whole?
The second question linked to securitizations is to what extent, because the securitization market is very dry will it have an impact on risk-weighted assets?
Third question, well actually we'll answer these two first because then there are two about Spanish market.
Jose Ignacio Goirigolzarri - President & COO
(interpreted) Should I answer in Spanish or English?
Thank you very much Kato for your very many questions.
First of all talking about securitization operations.
I haven't got all the information to hand and I don't remember it off the top of my memory, but I can give you the date of the impact on risk-weighted assets.
We were the biggest securitizer of euros in the first part of the year and the third biggest in Europe, including the English banks.
We're not usually even in the ranking list because we're not very active usually in securitization.
It wasn't really until the second half of 2006 that we began with a lot of securitization activity and from January to July we made EUR15.1 billion in cash which we placed on the market.
We've been issuing our MBS, that's mortgage backed securities which are linked to our mortgage portfolio.
We did the biggest issue ever made in Europe on one ticket, EUR5 billion this year with loans to values which were very high.
We've securitized our own mortgage portfolio to start with and also we were using the flexible mortgage which is quite [competitive] with leasing, consumer, car and SME finance.
So we've securitized all kinds of portfolios.
So we've been very opportunistic as our COO said earlier on.
And that wasn't because we really anticipated what would happen to the credit markets as of August, unfortunately.
Nonetheless, we did anticipate that the market in securitizations would change and at that time it was very benign and the price conditions were very good for us.
The issue prices net of capital costs were very low and we were also anticipating the hardening of the conditions towards the end of the year.
We thought they had become tighter, because we saw that there were a lot of European banks that were going to need to go out onto the market to gather funds.
And then the ABN Amro deal was obviously going to put a lot of pressure on the capital markets in Europe and the new issues for the time.
Because although the story's only starting really now, obviously we knew that the cash side of the deal was going to increase, which would put pressure on the market of issues, of senior debt, and securitization, and [we had] two transactions as well.
So we had a special plan drawn up in our Group.
We didn't need to put out EUR32 million in cash in medium to long term straightaway, but with the special plan, as of August we'd been one of the few European banks that systematically been a net lender on the inter-bank markets, and has given us enormous possibilities to stay off the markets, outside the market for as long as we want, way beyond 2008 indeed.
So we don't have to get involved in the markets if we don't want to.
In risk-weighted assets, the securitization transactions concentrated in the first and second quarter were EUR5.6 billion less risk-weighted assets because of securitization in the first quarter, EUR4.8 billion in the second, EUR1.8 billion in the third when obviously, we'd already done a lot and the credit conditions were beginning to become tighter.
We didn't need to do securitization to limit the risk-weighted assets on our euro balance sheet because as you can see, on the euro balance sheet we're seeing the moderation in the growth so there our growth model on the euro balance sheet won't be based so much on risk-weighted asset growth.
So we're not particularly concerned by the situation on the securitization market right now, because we've got many other markets which are open to us which we haven't used.
We haven't used our capacity to put out warrants, covered bonds, where we can make much bigger issues.
We haven't got any senior debt issues at the moment, and we don't even need to at the moment.
So we've got a lot of markets which are open to us which we can use, so we don't have to try and limit our risk-weighted assets on our euro balance sheet.
Moreover, the way that we've been freeing capital through the securitization from transactions under Basel II means that our regulatory capital requirements are going down, so we're not at all worried by the situation.
We do want to use these mechanisms however, when risk-weighted assets are growing very fast with the very impressive asset quality on our portfolios as in Latin America and Mexico where we want to set up a model for actively managing our balance sheet through securitization or other kinds of transactions.
Unidentified Company Representative
(interpreted) The next two questions had to do with what's happening, first of all in Spain.
He says that 2007 could be considered to be the peak of the cycle if we look at margins, provisions, NPLs.
Is that the case, or do you think that in 2008, the business will continue as buoyant as it has been?
And then he asked another question about Mexico.
He asked us to talk about spreads in the different customer products and to what degree in mortgages there's a risk that the mix effect could be negative.
Jose Ignacio Goirigolzarri - President & COO
(interpreted) Well thank you very much for the questions.
Just as Manolo said, we're delighted to have so many.
So first of all in Spain.
Spreads, can you talk about that Manolo, and then I'll give you a general overview of Mexico?
Manuel Gonzalez Cid - CFO
(interpreted) I think that if we look at the income statement, as I said before, we can say that at the moment our situation is magnificent.
I think that in terms of our operating profit and in terms of attributable profit, and in other income lines, we're doing very well, so that's the snapshot.
If you then look ahead to the future, as I said before, it would seem that our activity levels, and we've said this to you before on several occasions, our activity levels will gradually level off or even go down which will have a logical impact on the kind of revenue volumes that we will be reporting.
The good news is that in net interest income over ATAs, there seems to be no deterioration whatsoever so future growth, we think, will directly be reflected in growth in revenues.
And, in [costs too] as well we will continue to try to improve our performance ahead to 2008, keeping costs down and very much under control.
When we look ahead over the next few quarters, I think that business in Spain and Portugal will continue to give us good news with strong growth.
Maybe not up in the 20%s, maybe not, maybe in the teens, but definitely in the comfortable double-digit zone, which makes me feel very comfortable when I talk about the future here in Spain.
Probably, we've got very strong growth and it might slow down, but nonetheless I think we've got several quarters ahead of us with strong growth continuing in Spain.
Jose Ignacio Goirigolzarri - President & COO
(interpreted) And then Mexico, and of course, Manolo will talk about the spreads giving all the details.
But I think that we talk about what's happening in Mexico and the performance of our loan book; we must always take into account that there's a lot behind this.
It's not just the impact on the net interest income, you also have to look at the impact on provisions.
When we are adding our mortgage business, we're talking about customer spreads, we've much lower expected losses and the provisioning is different.
So you have to have an overall view of what's happening.
And in overall terms, I think the fact that mortgage activity and SME activity is taking over from consumer and card finance in Mexico is good news for us, for two reasons.
First of all, because all in all, returns will be very much at the same level as in the past, but we will have greater recurrency for the future.
Yes, well basically, the margin, the returns on our mortgage loan book, and I'm talking about the mix here, everything that is mortgage business, the developer loans, house consumer loans, there we're growing.
When we talk about consumer, we're talking 589 basis points as an average.
So the return on the consumer book is also based on the mix we currently have.
And I should remind you that for several quarters now, in Mexico, we've been seeing a much more growth on cards and consumer finance for Bancomer customers, that is customers that we have already got experience with after having brought them in through [Financia].
But not so much in operations that [Financia] is doing with customers that aren't Bancomer customers and therefore that we don't know so well, where we've slowed down the growth rate where traditionally the risks were higher.
So 270 basis points in mortgages and 589 basis points in the consumer mix that we currently have.
Unidentified Company Representative
(interpreted) Okay, the last two questions.
One had to do with Compass.
You said that since you announced the deal, there's been a drop in 9% in the listing of some our peers in their earnings per share.
So what's going to happen he says, above all, given the high exposure that Compass to the American residential sector.
The final question had to do with provisions, the risk premium that we have in the different business units and how we think it might perform.
High/low performance compared to the cycle?
In Spain, 30 basis points.
Looking at provisions and annualizing them, dividing them by numbers, global business is 35 basis points, Mexico 280 basis points and South America 105 basis points.
Do those figures sound reasonable?
Manuel Gonzalez Cid - CFO
(interpreted) Starting with Compass, if we look at what's happened in the past, the trends in earnings per share of the regional banks in the USA in the third quarter, those that have already published their results so far, quite honestly I'd say that it's worse than the minus seven figure that you gave.
There's been a combination of problems with provisions and also losses on some credit products, despite the fact that these banks, theoretically, weren't exposed as much as some of bigger banks were to this market.
If we talk about Citigroup, the Bank of America, JP Morgan, Wells Fargo etc., there we talk about drops of 32% on both fronts since the second quarter of 2007.
So that fact that Compass has managed to maintain its earnings pretty well with flat growth in a year when it's been subject to a lot of distraction because the takeover operation itself takes up a lot of time and distracts people from their everyday work.
And that reflects how strong Compass' footprint is.
When we talk about the USA at the moment, given the current situation, everybody tends to think, well, the US is about to go into recession, a big recession.
But you shouldn't forget that 80% of our franchise at the moment in the United States is in Texas and Alabama.
The other 20% is divided between the north of Florida, the big cities in Arizona, and then Colorado.
So that's our franchise.
We're not in California which is suffering a lot, and if you look at the banks that are really suffering, they have a lot of exposure in California.
We're not in the south of Florida either, which is another area with a lot of pressure on it at the moment, especially with the real estate market going through a lot of problems.
We're not on the East Coast, nor are we in Michigan or Illinois, which are other States that are being affected by what's happening in the real estate market.
Basically, we're in the big cities in Arizona and there our performance, compared to our peers, is spectacularly better.
Finance is really suffering there, but we're not and we hope that continues.
As for Texas and Alabama, there it's really important to think that the real estate market and commercial real estate there are slowing down in the rest of the United States, but not in the same way at all.
Look at the statistics for the region, you can see the drop in home sales and the home prices.
But if you compare the average prices there against the average prices in the other States that really are under pressure, you can see that the market there is quite different.
In fact, some of the markets in Texas in commercial real estate are showing growth and positive upward trends in prices even.
Obviously the growth, however, will be limited there in Texas.
And in Arizona, sorry, and in Alabama, but especially in Texas we're seeing that they are exporting, it's an exporting State and its industry is very, very strong.
If we look at the exchange rate of the dollar at the moment and the mix of the growth in the US, which is based on real estate and consumption in most of the US, but nowadays industry is taking over as it exports more and with a weaker dollar Texas, which is a net exporter, a biggest exporting State, is exporting much more, and its economy is linked to the industrial cycle.
So, the contagion of the financial markets is not so important, and with the lower exchange rate, its industry is reactivated.
So that's the situation.
Having said that, of course, we are looking at everything very carefully and we'll be discussing this in greater detail on our investors' day.
But we think that Compass' footprint in the United States gives us a guarantee under these rather difficult circumstances.
We are definitely going to suffer far less than the rest of the United States.
And then you also asked about real estate.
And there, when we talk about exposure to real estate, you have to understand that we are saying that exposure to developer loans is just 25%.
So that's the part of the portfolio we have to be most careful about.
But if we look at how much of the portfolio is in the areas that could be impacted by the problems, then the effect should be quite limited.
34.6% is for SMEs, consumer and cards is 17% and then 10.9% for purchaser loans and then 13% for personal [mortgage].
So when you're talking about commercial real estate exposure, there we're perhaps confusing exposure to consumer real estate with the kind of real estate collateral which the loans that have nothing to do with the real estate market.
They're for SMEs and for people who are putting up collateral, their houses as collateral.
And then loan loss provisioning.
Here in Spain, we think our provisions are pretty normalized.
There will be a change if NPLs go on moving upwards, which is something that they have been doing for some time, as Jose Ignacio was reporting earlier on.
Well, with that, we have to have more specific provisions and fewer generics.
In Spain, we've got EUR3 billion in generic provisions and more than EUR6 billion for the Group as a whole.
That's generic provisioning.
Consequently, if there's any impairment in the quality of our assets, then these generic provisions are quite sufficient.
In global businesses, we don't have non-performing loans, we just have provisions associated to the growth in our loan book -- in our portfolio, sorry.
In Mexico, we've got a very conservative policy, and in December last year our loan loss provisions in Mexico we said were going to remain pretty well constant quarter-on-quarter.
Now you can see, quarter by quarter, how we've been absolutely right.
We have done exactly what Jose Ignacio said we would be doing.
Next year, if the portfolio continues to grow fast in Mexico and consumer credit continues to grow, because it is growing very strongly, with 30% of the total Bancomer portfolio there.
Obviously, we will see portfolios growing, but not like they did between 2005 and 2006 or even 2007, which was when there was a change in the standards applied such that we were provisioning on the basis of expected loss as of then.
So now, we think our provisioning levels are conservative; with the change in our mix, the risk premium should go down.
As mortgages go up as a chunk of our total business, obviously, our risk premiums of over 300 basis points won't remain at that level.
As Jose Ignacio just said, South America looks rather like Mexico did a few years back; the profile for growth there is high upside.
I know you never listen to what I say, but just look at the figures.
South America is just about third in its growth rate, so we'll need more provisioning there, as we did in Mexico when we had such high growth.
At the moment, NPL rates aren't going up.
Things are doing so well that we're growing incredibly fast without seeing any increase in NPLs in South America.
And I'd say that pretty well explains our provisions and our outlook for provisions next year.
Jose Ignacio Goirigolzarri - President & COO
(interpreted) I'd just like to make a comment about Compass and our US franchise, because apart from what Manolo has described in pretty much detail, for us 2008 and 2009, but especially 2008, will be a year of integration.
Really, of course, we want to maintain activity and we want earnings, but we have to generate synergies and that depends more on us than on the environment.
Unidentified Company Representative
(interpreted) Any more questions from the conference?
Operator
Yes, the next question comes from Mr.
Chris Malmer from Goldman Sachs.
Mr.
Malmer, please go ahead with your question.
Chris Malmer - Analyst
Thank you very much.
Hi, this is Chris Malmer from Goldmans.
Just a few questions, first of all a technical one.
I calculate, based on your disclosure, that the Compass net profit in the third quarter was around about $110 million, so very similar to what they reported in Q2.
I just wondered if you could give any indication whether that is in the right kind of range for the Compass profit?
A second question and follow-up on the development of deposits in Spain.
If I look at your relevant business indicators on page 30 of the press release where you show the deposits at just around EUR91 billion in Spain and Portugal.
I can see that, compared to the previous quarter, the financial services deposits are actually down and it's the corporate and business banking deposits that are growing.
Now some of your competitors have said during the last quarter that they have seen a significant increase in demand for the commercial paper to domestic corporates, the pagares, and I was just wondering whether your increase in deposits is mainly attributable to this type of customer funds rather than traditional time and demand deposits to retail clients?
Third and final question; you're clearly stating a very high rate of growth in your business and your outlook is very optimistic, and you're growing well above the sector average in terms of your EPS and net profit.
Now the share price does not seem to fully reflect that kind of growth rate, in fact the valuation suggests that you're actually cheaper than the average European bank.
Would you, under any circumstances, consider using some of your unrealized gains, which I understand now amounts to more than EUR3 billion to, for example, buy back your own shares as an indication of this what is seemingly a very attractive investment opportunity as you highlight yourselves?
I was wondering if that is at all a consideration under any circumstances.
Thank you.
Unidentified Company Representative
(interpreted) I'll summarize the three questions.
If we look at Compass' performance in the third quarter I calculate $110 million very similar, in fact, to the second quarter figures.
Can you confirm that?
The second question is about deposits in Spain because quarter-after-quarter the more retail side seems to be falling whereas corporates seem to be on the increase and BCB.
Is that because there are more pagares commercial paper or what?
And then the third question is that we have great outlook and yet the share price is quite cheap.
We seem to be selling cheaper than our European peers.
Are we considering a buyback using the capital gains from your industrial portfolio?
Manuel Gonzalez Cid - CFO
(interpreted) Thank you Chris.
As far as Compass is concerned the $110 million is yes, a reasonable estimate and the cash contribution is higher because of what I said about the writing off of intangible assets.
So that would be my answer to that part of the question.
Then the other two questions, talking about customer funds in Spain, starting with corporates.
When you analyze the commercial banking funds, with say between the second and third quarter, there's a big seasonal impact, because in commercial banking in Spain the third quarter always drops.
And so it's better to look at it in annual terms as far as customer funds are concerned.
BCB is being a lot more active in funding and lending; I talked about this downwards slide in activity before.
That's true for commercial banking, but it's not the case for BCB.
And so the increase in customer funds is very much concentrated in BCB as has been the case for several quarters, at least for the last four.
Your last question about our share price.
I think that our share price, given the negative environment in markets, I think there's been a sort of discriminate reaction.
I actually think that October's performance means that people are now starting to see the differences between one bank and another and I am sure, and I agree with you, that with the results we're presenting today both in terms of growth and profits and low risk [profit], the market has to value that and enhance the value of our stock.
Having said that, our industrial holding, or the unrealized capital gains, well, first of all, I think this is not a theory.
We have a divestment track record which is extremely clear and in strategic terms we've explained how these are not strategic investments for us.
Our strategy is to concentrate on our banking business.
Given current conditions we are comfortable with the industrial portfolio that we have.
Jose Ignacio Goirigolzarri - President & COO
(interpreted) Any more questions from the conference call?
Operator
There are no more questions.
Unidentified Company Representative
(interpreted) Okay now we can go on to the questions that we've received by e-mail.
Antonio Ramirez asks about the agreements with CITIC.
Can we give an upgrade on negotiations and what about the new CITIC Securities and Bear Stearns agreement?
Jose Ignacio Goirigolzarri - President & COO
(interpreted) Our agreement with CITIC, well there's nothing new to report.
As you know in mainland China we have a 5% stake which could be taken up to 10%, but not before March 2008.
And the agreement made with their subsidiary in Hong Kong, I think you might remember that we have until the end of the year to specify the joint venture that we mentioned to you.
The CITIC Securities and Bear Stearns operation; well CITIC Securities is a minority undertaking for the CITIC Group and obviously it's a very powerful Group, but it has no impact on our agreement whatsoever.
Unidentified Company Representative
(interpreted) Antonio Ramirez has another question.
Do we expect any impact on the growth of funds because of tax reform?
Manuel Gonzalez Cid - CFO
(interpreted) With the information that we have right now I'd say no, but we have to wait and see how things go.
Unidentified Company Representative
(interpreted) Then from Lehman Brothers we have three questions; one hasn't been answered yet, that is about the core capital of 6% for 2008.
Manuel Gonzalez Cid - CFO
(interpreted) I'd just like to make one comment on that.
That 5.4% means that we can end the year at 5.5% which was our initial estimate and it's 5.4% now because we closed the transaction September not October.
As far as the 6% in the second quarter of 2008 is concerned, we're not worried.
Anything above 5.5% is fine by us even in the current context with the level of capital gains we have, we have no problem.
In general the regulators, not just in Spain, but regulators are reviewing the Basel II agreement because they're going to be stricter on some questions.
So we're not really sure what the Basel II regulation for core capital will be, but I wouldn't get obsessed by the number six.
I think we have to start talking about Tier 1 rather that core regulatory capital and our current levels our capital adequacy, our liquidity etc., means that 5.4% is a very comfortable level for us.
Unidentified Company Representative
(interpreted) Then we have three questions from Merrill Lynch which have already been answered.
Several questions from [Mariano Cormenar] of Santander, most have been answered, but what about the outlook for the Mexican economy and will if suffer from a slow down in the US?
And then another question, will provisions in Mexico have to increase?
Jose Ignacio Goirigolzarri - President & COO
(interpreted) Okay, well a negative economic situation in the US will logically have an impact on Mexico, there's no doubt about that.
Having said that there are two or three issues worth mentioning.
First of all, the strongest correlation of Mexican GDP is not in global terms that of the evolution of US GDP, but rather of US industrial GDP, that's the first important point.
Because when you read about the outlook for the US economy, it doesn't seem as though industrial GDP is the problem.
That's my first comment.
Secondly, when you analyze the influence of the US on Mexico over the last few years, there's quite a big difference now, and that's the thrust of Mexican domestic demand.
So it can grow independently because of this very domestic demand.
Obviously, if in the future the US economy does slow down, but it won't be as bad as it has been in the past for Mexico.
And then we have to remember that in banking terms in financial terms, Mexico has its own momentum.
Obviously there is influence from the real economy, but you can see that from what's happened in recent years.
If you look at the last four or five years you see GDP growth in Mexico and the increase in business volume measured in whatever terms you like, in lending terms, the increase is more than 20%.
That's quite logical because bank penetration in Mexico used to be a theory, now it's a reality.
Of course the financial system will be influenced by the real economy, but we have to stress the individual momentum of the Mexican financial system itself.
On the subject of provisions, as you know we announced this a few quarters ago.
We are provisioning on the basis of expected losses adjusted to the cycle.
So as far as the future is concerned, provisions will evolve alongside our portfolio in our portfolio mix.
But we're not expecting any further increase in provisions over and above that amount because it's been adjusted to the cycle for the last few quarters.
Unidentified Company Representative
(interpreted) I have the same the same question from two analysts Ignacio Cerezo from JP Morgan and then from UBS.
It's about the writeback, the EUR70 million in Mexico, could you say something about that?
Jose Ignacio Goirigolzarri - President & COO
(interpreted) Basically the fundamental issue there is a freeing up of provisions for fiscal contingencies which didn't actually occur and that's why we're able to free up that capital.
Unidentified Company Representative
(interpreted) Then I have several questions that have already been answered.
Then another from Ignacio Cerezo from JP Morgan, can we give a qualitative viewpoint about each of our divisions in 2008 given the change in the environment?
Jose Ignacio Goirigolzarri - President & COO
(interpreted) Well to tell the truth when we talk about investors' day on November 15 and November 16, we will be going into a lot more detail about the situation of the different business units, because it's difficult to go into any depth at a presentation like this.
I think that investors' day is a great opportunity for that, because we'll have a lot more time and a lot more details.
Having said that, if you want me to say something very quickly, well I've already given my opinion Spain.
Global business, I think I've talked enough about that now.
In Mexico I've said that we think that independently of the economic situation in the US, there we're on the crest of a growth wave right now, and in the next few years that has to mean great growth along similar lines to what we have now in profit.
And in Latin America we are expecting 2008 to be pretty much like 2007.
I'm sure my colleagues will be able to explain it much better on investors' day.
Unidentified Company Representative
(interpreted) And then a question from Diego Barron about Compass, but it's been answered.
And then another one, about unrealized capital gains in our industrial portfolio?
Any estimate for that?
Manuel Gonzalez Cid - CFO
(interpreted) Well the unrealized capital gains in the Group's portfolio is not just at corporate level, but through our real estate undertakings is EUR5.4 billion in unrealized capital gains.
They've actually increased quite significantly by some EUR800 million from the second to the third quarter.
Basically all our portfolios at corporate level and our associated undertakings have done really well, and currently we have more unrealized capital gains than we had in December, despite having sold Iberdrola.
That's all I can say for now.
Of course, we have unrealized capital gains from Bradesco and our operations in China, because they're quite high, Telefonica; those are the most relevant names, plus what we have in our wholesale banking sector.
So in terms of global banking and corporate we haven't really done anything there.
Unidentified Company Representative
(interpreted) And then we have a question from David Fernandez from La Caixa and it's actually been answered.
Just about do we feel happy with 5.4% core capital and that's been answered.
The last question, and it is about the Group's geographic diversification.
As a group we have a lot of influence from Spain and Mexico.
What about a slowdown in the US?
Does that you mean want to increase geographic diversification within Europe?
Jose Ignacio Goirigolzarri - President & COO
(interpreted) When we talk about geographic diversification I think that after the Compass operation, you can accuse us of a lot of things, but lack of geographic diversification wouldn't be one of them, given our situation in Spain.
Compass means that US is now similar to Latin America in size; it's 10% US, 10% Latin America, our Mexican, Spanish franchise, our BCB franchise, Asia, our foothold in Asia, our agreement with CITIC.
I think that lack of geographic diversification is not an accusation that could be made against us and we are very focused on the regions where we are present and we must be focused on unlocking the profit from our footprint.
We have a challenge and that is to integrate the four Texan banks and that's really exciting for us.
That's our current obsession and we won't go beyond that.
As we said before, we're very happy with 5.4% core capital, we have a very healthy balance sheet.
And given the huge increase in activity in Mexico, despite the comment about Mexico slowing down.
Mexico continues to grow and then, of course, South America is doing really well.
Thank you very much.
Just to finalize, I'd like to say thank you for spending this time with us, please come to investors' days on November 15 and November 16.
The aim there is to really share a lot more details with you about our strategies in our different business areas and to give you as much information as possible about the future development of the Group.
I think that that is the main aim of investors' day and, as I said, you're very much welcome to attend.
Thank you very much and see you the next time.
Editor
Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an interpreter present on the live call.
The interpreter was provided by the Company sponsoring this Event.