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Unidentified Company Representative
(interpreted) Okay, if we're ready.
Good morning everyone.
[As you know we'll] be presenting the results for the whole year 2007 and Jose Ignacio Goirigolzarri our Chief Operating Officer as usual will be giving the presentation.
After that we will have a Q&A session starting with the questions coming from the room here and then Isabel Goiri will be taking the questions over the webcast, and then we'll have questions over the conference call.
So those of you who've actually come here to listen in the room, welcome, and you're welcome to come and have coffee afterwards.
Those of you who are listening over the web can hear us live, but you won't be able to have the coffee.
Jose Ignacio Goirigolzarri - President and COO
(interpreted) Well, good morning everyone and many thanks for your attention and for your time.
We are presenting the results today for all of the year 2007 and, as usual, first of all, I'll tell you how I'm going to be structuring the presentation.
It's the same structure we've been using over the last few years so that it's easier for you to be able to track our results at Group level and then at the level of all the different business areas.
As you know, you probably know better than I do, 2007 has been a year with very complex environment, especially in the second half of the year.
So I'm especially satisfied today to be able to report some excellent results.
These excellent results are based on high quality which originates right from the very top of the income statement with the most recurrent revenues.
You can see this quality in the excellent quality of risk management and that's true of all of the different areas as well.
That means that we're facing 2008 starting off on the right foot, already with a competitive advantage.
And I'll be explaining more details about why I say this during the presentation.
So 2007, in a complex environment, we have seen our earnings going up.
And you can see what's happened over the last five years, and you can see that we've got very robust growth.
These are the final end of the year profits which you can see here.
So this is the income statement for all of the Group including one-offs which gives us a growth of 18.7% in operating profit and the attributable profit, which you've already seen, of EUR6,126 million, a growth of 29.4%.
As I nearly always do in the presentations, as of now I'll be analyzing our income statement without one-offs.
So without one-offs, as I was saying, we start off with very high quality good growth on the very top line of the income statement.
So if we look at net interest income, our operations in the Group internationally have grown 22% at constant exchange rates.
In current rates that would be 16.7% growth.
On the right you can see what's been happening to our net interest income.
There too, just for your information, we incorporated the volume in the fourth quarter without considering Compass as well, just so you can see the difference.
This excellent net interest income has fed into excellent recurrent revenues growing 13%, or 18% at constant exchange rates.
As you can see, the exchange rate impact will represent about 5 points as you go down the income statement.
And you can also see the excellent rise in the fourth quarter of our core revenues, and you've got the figures there with and without Compass.
This growth in revenues, along with very good control of our expenses, has improved our efficiency again.
Without Compass that would be 42.4%, our cost-income ratio and with Compass it would be 43.2% And that brings us to the most recurrent part of our income statement with the operating profit growing at 16%.
In terms of risk management, above all credit risk, on the right you can see over the last few quarters our NPL ratio has been evolving.
I wanted to say that we have a lot of extra provisions with a coverage ratio of 224.8%.
The growth of the provisions which are charged to the income statement are very much in line with the growth in our loan books, about 28%.
I should remind you as well that 76% of the provision funds that we have on our balance sheet are generic provisions.
So that's the lending risk.
But when we talk about liquidity and capital we have very comfortable figures there too.
For several quarters we've been talking about our situation in terms of liquidity risk, and we've been telling you consistently that we have no exposure to conduit vehicles.
We've told you that we have no exposure to subprime.
And we've also been telling you for some time that right at the beginning of 2007 in the first half we went out and raised a lot of liquidity with a lot of issues, which mean that we're very comfortable now and we can stay out of the capital markets, if we need to, until well into 2009.
Looking at our core capital here, on the right of the slide you can see what's been happening.
The core capital we have now is 5.3%.
And calculating core capital we include, or we deduct, the proposed dividend, which I'll be referring to later.
When we analyze what's happened in our core capital over the year, during 2007 that is, all the impacts on core capital have been the consequence of the evolution of our business, because we haven't made any write-downs or special charges.
So I also wanted to tell you that this situation in our core capital is compatible with a BIS of 10.7% and a very comfortable Tier 1 as well.
That makes us feel very comfortable because we have good generic provisions of over EUR5.6 million and we've got capital gains, which at the end of 2006, sorry 2007, despite the sale of Iberdrola, were higher than the capital gains that we had at the end of 2006, and because we're expecting to generate capital organically in 2008.
So with all of that we can now look at the net attributable profits without one-offs, which has grown at 22.8% in the Group.
In current euros that figure would be 18%.
And on the right you can see the net attributable profit excluding one-offs, quarter-by-quarter throughout 2007.
So really we can say that we are continuing to be a very profitable Group.
And here you can see our returns on asset, on risk weighted -- sorry on assets, on risk weighted assets, on equity, and on return on capital.
And on the right you can see our economic profit which we call recurrent because we don't incorporate what's happening to capital gains on our portfolios.
So between 2006 and 2007 you can see a significant increase.
So all-in-all 2007 has been a complex year but we've generated strong earnings and we've also demonstrated our excellent risk management skills for all the risks on our balance sheet.
So consequently we've been able to anticipate what would happen in the market throughout 2007 and already we've done the same in 2006.
I've talked about some of these aspects already and others I'll refer to later, but as a consequence of all of this we're going to be making a proposal to the AGM to increase dividends by 15.1%.
So the final dividend for 2007 will be EUR0.277.
That means raising the total for 2007 by 15%.
In terms of payout it's a 44.36% payout; without one-offs that would be 50%.
Very much in line with the policy that we have been pursuing and discussing with you over the last few years.
I'm not going to talk too much about this transparency, you already had it in your documents, but here you can see an overall view of what's happened to our earnings without one-offs in 2007.
So having talked about the Group as a whole as I usually do in these presentations, I will now go on to analyze each of the business areas making up the BBVA Group.
So I'm going to start with Spain and Portugal.
If I had to give you a summary of the results that Spain and Portugal got in 2007 I'd start by saying that really this unit has really managed the slowdown in its activity on the market very well.
We'll see that when we look at the year-on-year growth, has shown excellent price management as well.
And I have to say as well that they've managed to have strict cost control, working with the transformation plan which still has a lot of upside to give us in the next few years.
And I'd have to say as well that with the right kind of risk management we are presenting the strongest earnings ever reported in this area.
Now let's see what's behind these statements.
Here you can see what's been happening to our business volumes.
There is a slowdown in lending as you know, especially in mortgage lending.
And in total lending, you can see on the second to last line, there is this slowdown which we'd already discussed with you before.
I remember a year ago in the presentation of results for 2006 when we were analyzing the forecast for 2007, we talked about growth of about 13%, 14% and customer funds growing 12%.
But perhaps even more significant than this is the right-hand side of the transparency, the spread.
Our customer spread has grown systematically continuously over the last four quarters.
And if we look at net interest income over average total assets this quarter it's gone up 3 basis points.
As I've said several times, when you can really see management skill and pricing policy working is when there's a change in interest rates because in a stable situation it's very difficult to spot who's good and who's bad.
And when there's a lot of volatility in interest rates, that's when you see who knows how to do their job, who knows how to run a distribution network.
And definitely our pricing policy in Spain and Portugal has proven itself to be excellent.
So culminating these business volumes and price policy we get a net interest income growing at 14.6%, and you can see that quarter-by-quarter development on the right.
Other revenues have been growing at 7.8%.
Continuing in fee income to grow as they have done over previous years whilst NTI has slowed down its growth slightly which has to do with less activity in selling market derivatives.
Cost control now, here you can see the operational leverage here on the left.
I'd like to remind you that a year ago we told you that we had finished the expansion of our branch networks.
And we also told you that there were two changes in the organization of the structure in Spain and Portugal, and that's reflected in the growth in expenses of 2.8%.
So that would be pretty well flat growth in Spain though, a growth of only 0.4% in the Spanish branch networks.
And we think we can improve the cost-income ratio by implementing and rolling out the transformation plan that we've already announced to you at the investors' day.
So you could look at the cost-income ratio here on the right which for Spain and Portugal as a whole is 37.6%.
Looking now at asset quality, we can see that the NPL ratio is slowly creeping up.
But in loan-loss provisioning we have done what we said we'd do at the beginning of last year.
We've got single digit growth, 7.5% more loan-loss provisioning.
And we should remind you that 85% of the loan-loss provisions for Spain and Portugal are generic; and the coverage ratio anyway is over 230%.
So in Spain and Portugal that means that our operating profit has grown 18.8% and net attributable profit growing at nearly 25%.
And that's the reason why our return on equity for the second year running has gone up significantly, surging to 36.4%.
So I'd say that Spain and Portugal, as you can imagine, has noticed the slowdown in activity throughout the Spanish and Portuguese markets but has managed its volumes and its price policy with good cost income and excellent risk management.
Now Global Businesses is the second big business area that I wanted to talk about.
And if the second part of 2007 was complex for all of us, I think it was especially complex for Global Businesses.
So despite this complex backdrop we've still got very good results to report for Global Businesses.
I hope you'll let me distinguish between what's happened in terms of results with our big global customers and investment banking and then what's happened in global markets.
Talking about global customers and investment banking here you can see what's happened in the year as a whole with robust growth in lending, which is probably the most important here, of 17.7%.
Although more relevant still perhaps is to focus on the right of this transparency.
Before I was talking about the pricing policy and the repricing in the network, when I was talking about Spain and Portugal.
But we have to say the same when we talk about global customers because there too the core revenues over ATAs has performed very well throughout the year.
That's why with this combination of volumes and good pricing we've seen a growth in ordinary revenues of 22.3%.
Not talking about global customers now but talking about the other main part of Global Businesses, which is markets.
In global markets and distribution we have seen excellent results with ordinary revenues going up 29.4%.
In the last quarter things have been a bit weaker in terms of ordinary revenues because there's been less customer activity.
I think that's very important to point out because, at the end of the day, the basic origin of the revenues generated in global markets is our relationship with our customers, which gives us a lot of recurrency in our revenues.
When we put all the activities under the umbrella of Global Business together we can see that the operating profit has grown 18.8% over the year.
We've got magnificent cost-income ratio, we have hardly any NPLs at all and the coverage ratio really isn't important here.
Return on equity, as you can see, is 33% for this area.
And if we analyze year-on-year the drop from ordinary revenues to net attributable profit is because of a one-off that was very important and very intelligent in 2006 with Tecnicas Reunidas.
Which is why the year-on-year comparison changes so much going down from ordinary revenues to net attributable profit.
So, as I said at the beginning, when we're talking about Global Businesses, despite the very complex backdrop to their activity, they've shown their capacity to get recurrent earnings and have shown how important this is to continue focusing on customer relationships.
And that is really the very crux of the business in this business area.
Now the third business area is Mexico and the USA.
Starting with Mexico, there are a few things I wanted to say.
Activity in the fourth quarter has been excellent in Mexico with growth in business volumes which, along with cost control, which is quite complex when you're growing as fast as we are in Mexico, but with intelligent cost control that means we've further improved cost-income ratio.
And if you look at credit risk, there too we've got very good news.
In the United States this was the first quarter, really, that we've consolidated a complete quarter with Compass.
And I'll be referring to all of that from now on, but let's start with Mexico.
Here you can see the kind of growth we've got in lending and customer funds.
In the last quarter we've had very good results in Mexico in all activities, but probably especially good in consumer and card business.
You can see the [growth] figures on the right of this transparency.
What's important in [site] accounts, current accounts, we're growing 12.7%.
That's very relevant when we're looking at the kind of returns we get in our Bancomer business.
As a consequence of all of this, net interest income has performed as you can see on the right, growing 18.6% over the year.
It seems to me important, and we'll talk about this when we talk about provisions, to be aware of the change in mix that we're seeing as Mexico grows.
That's both on the balance sheet and on the structure of our lending, as you can see here when you look at the growth that we're reporting in the different lending lines.
You remember that a year ago growth was focused on consumer and cards business, but now the growth would be in all the different items.
But in percentage terms more important in other areas than in cards and consumer lending.
That's important because the change of the mix has been offset by a very good pricing policy.
The change of mix will continue to roll out throughout 2008 especially in the first two quarters.
But I think that's really important for the future health of Bancomer so that it will able to go on reporting recurrent earnings, because definitely the change in the mix has improved our risk policy.
So along with the high volumes we've reported in Bancomer, it's not always simple to know what's happening in Bancomer because it's growing so fast.
But definitely there's very intelligent cost management going on there which means that our cost-income ratio in 2007 reached 34.6%, another further improvement on a ratio that was already pretty good in 2006.
Meanwhile the operating profit for Bancomer grew 21.3% in the banking business.
In lending risk we should look both on the right of the slide to see the NPL ratio.
The results here have been very good, though there was a one-off which was a sale from our portfolio, a divestment, but nonetheless it's very much in line with what we forecast with a coverage ratio of 254.6%.
But I want to focus mainly on the left-hand side of this transparency.
I'll remind you that in 2006 the market was quite concerned about what was happening with Bancomer's provisions, and we explained the method we were using for provisions.
I remember a year ago, when I was telling you what the final results were for 2006, I said that the level of provisions we'd had in the fourth quarter was basically going to be the benchmark for the rest of 2007, and that was the case.
As a consequence of the change in the mix that I referred to before, the change in the mix which will continue to roll out throughout 2008.
And so in 2008 we will see that the provisions will simply reflect growth in the loan book.
As a consequence of all this we can report the operating profit in Bancomer, which grew at 21.3% in Mexico as a country including insurance and pensions, you can see that would be 20%.
And its net attributable profit grew 21%.
Consequently we can say that Bancomer had a very good fourth quarter and an excellent year in 2007, yet again.
In the United States, well, you've got all the information on the United States in your documents.
So I want to try and take the pulse of the market and just discuss four issues that I think will enable you to work out what is going on and what we are really thinking about when we talk about the USA.
First of all our business activity.
This is what's happened in our banks here.
We're including the three Texan banks we've got, plus Texas, so this is what's happened in lending and customer funds.
Annualized quarterly growth has been 8.1% in lending and 5.2% in customer funds.
So we're growing at 8.1% and at 5.2% in lending and customer funds.
And then in terms of our earnings, it's really important to distinguish between the results of Compass, which we'll talk about later, from the results of the three banks in which we have been involved in the management because we bought them before 2006.
So these are the results from the Texan banks, with operating profit growing at 8.9% and attributable profit growing at 21.4%.
I think that's very important to take into account.
What about Compass' contribution to the year as a whole?
Here you can see the figures for operating profit and net attributable profit without the depreciation of intangibles, which you can see there too.
Operating profit has gone up to $265 million and net attributable profit, before the depreciation of intangibles, $145 million.
If we analyze the credit quality that Compass has, what can we say?
Well, we have now done an exhaustive analysis of its entire loan book and we have repeated that analysis in the last quarter.
And we can say that it is a very well-endowed portfolio and looks very good for next year.
Provisions to gross lending in Compass, as you can see, is at a ratio of 1.78% which compares very well with the top 20 US banks.
So we're absolutely convinced that what we've been saying was true.
When we were talking about the US before we said that we could do things there.
But when we're talking about the US we're talking about the markets where BBVA is operating.
And there we think we have a unique footprint and we think that the quality of the franchise, which we've referred to a lot, means that we have an even bigger advantage in the current environment.
So here you have the income statement which is in your documents already so I won't focus on it any more.
And I'll go on to South America where, once again, we've got some very good news for 2007.
For several years now we've been reporting good news from South America.
Attributable profit in South America over the last two years has nearly doubled.
It's true that we're benefiting from a macroeconomic situation which is excellent.
Because of that we've got growth in lending which is quite outstanding as you can see, with lending growing, customer funds growing, business volumes growing in general which means that ordinary revenues have grown at about 22%.
What I said about Bancomer can also be said about South America in terms of very intelligent cost management which has improved our cost-income ratio significantly.
It's improved significantly in 2007 and it's made it possible for us to grow our operating profit there over 33%.
Moreover you've got this in the documents.
I'd like to tell you about the growth which was sustained throughout all the different countries that we're operating in, in South America.
And in risk management good news as well, the NPL ratio has gone down again in the final quarter of the year.
This can't go on forever because we've probably hit rock bottom and with the kind of growth we've got in the future this will have to start to rise again.
But nonetheless we are showing that risk management in South America is excellent with coverage of 145.6%.
What does that mean?
Well it means that net attributable profit grew at over 29% with the return on equity of 32.8%.
Consequently South America has also reported a 2007 which after 2006 was still very good indeed.
Now if you'll allow me I'll go on to my conclusions.
And I'd like to start where I began the presentation, it's really what I said at the beginning.
I think you'll agree after having seen all this information about what I said, that we've got excellent results to report now against a very complex backdrop especially the environment of the second half of the year.
This is the combination of things we've talked about with you, a clear strategic focus and capacity to roll out our strategy with growing earnings quarter-on-quarter.
We've demonstrated our capacity to create value even in complex environments.
As a consequence of all of that and the way that we see the Bank when we see the situation in 2008, we're going to propose to the AGM that we increase the dividend by 15%.
So I'm convinced that you will be wondering by now what's going to happen in 2008.
Well, we'll have to wait and see, won't we?
But nonetheless I wanted to share a few ideas with you about what might happen and at least how BBVA is positioned for 2008.
In 2008 there is definitely going to be a very tricky environment to deal with.
But we think here in BBVA that we're in a situation of competitive advantage as we enter into this year.
Now what makes us different?
How come I can say this?
I think I can clearly justify what I'm saying.
Two things make us different, our position as a Group and our position then in each of our business areas.
In global terms, talking about the Group as a whole, we have a magnificent starting point.
I've already told you what our liquidity situation is and how sound our capital ratios are.
And we've seen that performance and the excellence of our balance sheet risk management.
We've got splendid earnings, we've got sound fundamentals and we've got an excellent business which is very profitable and very efficient with very good cost-income ratios.
I've told you in the investors' day that our organization has been honed for several years now to be more and more focused on creating value, aligning the interests of the managers with the interests of the shareholders.
So we are starting off on the right foot as we move into 2008, which gives us a tremendous competitive advantage as we can look to the future, concentrating on the business we do and how to improve what we already do, without having to worry about managing a crisis.
So that sets us apart from our peers as a Group, but the same is true in all the different business areas too.
Let me explain this, first of all in Spain and Portugal.
Our competitive advantage is very clear because we have a very strong balance sheet, in terms of provisions, in terms of capital adequacy and in terms, and I want to emphasize this, of liquidity.
And secondly, because in the environment of 2008 repricing is going to be fundamental.
So price management will be very important, and there I think we have an excellent opportunity.
We've already proven in the fourth quarter how well our managers deal with these repricing opportunities.
We've been working on efficiency now for several years.
We've already reaped the fruits of our work, but we now have the transformation plan which will be rolled out over the next three years to get even more upside than we've got so far.
We talked about this in the investor day.
And in Spain and Portugal then, I think, we have a clear-cut competitive edge.
In Global Businesses we also have a competitive edge.
In Global Businesses as I said before, we should distinguish between global customers and markets.
In global customers and investment banking our strategy is focused on our customer relationship.
It's really important that we should be the first or at the most the second bank of our customers, because being the preferred bank we can give excellent service and that's how we get good results and recurrent results.
In Spain 79% of SMEs have BBVA as the first or second bank of choice.
In Mexico it's a very high figure too, which gives us high recurrency in our earnings.
When we're talking about markets now, and we've been talking about this for several quarters, revenues are related directly to our customer franchise, which means very high recurrency.
And in lending and market risk apart from the information you've already got in your documents, I think that in such a complex environment as we've had over the last few months the proof of the pudding is in the eating; and you can see that we have proven our capacities to manage things well.
Now in Mexico, I think everybody at this stage will agree with me, we've seen that we can outperform our peers consistently.
I'm talking about Bancomer.
It's not just a matter of bringing in new customers, banking the unbanked.
Bancomer does much more than that.
It has a competitive edge in banking with individuals and with high net worth individuals above all, with a very important branch network for wealth management.
And we've also been investing a lot in SME business in the last few years.
So Bancomer stands apart in all the different segments that it's working in.
And its risk control and its cost control has also set it apart from its peers.
The same could be said of the USA.
If we look at the USA, BBVA and its franchise in the USA, I think that it looks very different from the average US bank for at least three reasons.
First of all because our positioning is unique; we're in markets which are doing especially well and we have a high quality franchise.
And in terms of credit risk management, as we've said before and as I showed you with data, we are doing very well.
Moreover in 2008 we have enormous upside with the synergies that we will be getting as we do the integration.
Then in South America it's true that we're benefiting from macroeconomic stability and the positive outlook in general.
But there too we're rolling out our own low cost models for the unbanked segment.
We've got our own model in SMEs as well.
And we've already demonstrated, and you've seen it in the data that we were publishing today, that we can strictly manage both risks and costs.
So all-in-all, and now I'm coming to an end, I think that when we analyze 2008 the environment might be tricky, but BBVA's situation will be based on a competitive edge, both in terms of our starting point, in terms of our business model.
We're a group that is very focused on retail banking, it's something we know how to do, and when we talk about global banking and wholesale banking, there too we're very customer focused.
Our business model comes up with results, it's efficient, it generates returns, as you've seen.
Talking about our risks, and this is really important, our risks are very closely measured and tracked and disclosed.
So we're very transparent in our risk profile and we have a strict control over risks.
And that means that the growth in our earnings is based on two key characteristics.
First of all, high recurrency, as we've demonstrated, and secondly, low volatility.
This combination we think is very successful in generating value and that's why we think we can say that we think that BBVA is the best investment alternative in this environment.
So many thanks for your attention.
Now Manolo and I would be happy to answer any questions you might have.
Isabel Goiri - Director of Investor Relations
(interpreted) Good morning.
We'll now go on to the Q&A.
First of all we'll take the questions from the room.
Javier Bernat from Caja Madrid Bolsa.
Javier Bernat - Analyst
(interpreted) I'm really interested in getting an update of what's going on with CITIC, especially after the news in the press that you wouldn't be going ahead with the investment this year.
I'd also like to know about your strategy for increasing branches in Spain and in Latin America, Mexico and the US.
Will you be reducing the number of branches?
Will you be maintaining them?
Or are you considering increasing them?
And then I have a third question about net interest income over average total assets in Spain.
It is better, it's 16% in standalone quarters, that's the last quarter.
But to what extent -- well, because the other banks that have published earnings so far have shown lower spreads, is this comparable or have you included some of this in the corporate sector?
Or how do you explain that?
Jose Ignacio Goirigolzarri - President and COO
(interpreted) Thank you very much, Javier.
OK, Manolo, I'll answer the first two and you can answer the third one.
OK, CITIC, there aren't any changes there.
The agreements that we reached with CITIC mean that we are even more in unison than we were before.
We have delayed the implementation of the investment, but really for technical reasons because of legal intricacies that require more time, so we need a few more months.
But there are no changes, there's just a three-month delay for technical reasons.
About our branch policy, I think it was good that you talked about the different markets, Mexico and the US and Spain and South America.
I think we did talk about this a year ago.
We said that we believed that we had enough branches here in Spain and that we wouldn't open any more branches in Spain.
And I think that makes us different from some of our competitors.
And really we still think the same.
We're optimizing now, we may close some and open some, but the overall figure will not change significantly in the next two years.
In Mexico the situation is slightly different.
The business model we have there requires fewer branches because the way we do our distribution in Mexico is different.
Really we're trying to respond to the fact that more people are having bank accounts.
I think we opened 75 branches in 2007 and in 2008 we'll probably do the same thing.
And the same will be true of 2009, because many more people are opening bank accounts in Mexico.
And really what we're doing is extending our ATM network.
In South America growth is marginal; and in the US we have to integrate and that's what we're focusing on.
Your third question, which was on net interest income over ATAs is for Manolo.
Manuel Gonzalez Cid - CFO
(interpreted) Well, it's a very interesting question.
When Jose Ignacio says that we are different and we're in a different position, I think we have to realize that this is true.
The fact that we have anticipated a lot of today's events has given us a tremendous advantage.
Our net interest income has improved in Spain and Portugal.
And that is because of both assets and liabilities because of our portfolio mix, and in consumer lending where we grew a lot in 2007 and gained market share from our competitors, and also in SMEs where we've also been growing.
So our mix has been a lot more profitable because it was less mortgage focused and more focused on consumer lending and SMEs.
Those portfolios achieved much quicker repricing at higher rates than, say, our mortgage portfolios.
And we'll still benefit from that in the first quarters of 2008, even with the current -- or the recent cut in the 12-month Euribor rate.
With customer funds we've grown a lot in term deposits and not just now, but in fact since June 2006, so even before the most recent interest rate hikes took place in Europe.
So we had very good figures in term deposits because we grew before others.
And we've very good profits there, that has given us a very good comfortable liquidity position, so we don't have to pay a high price to attract customer funds like other Spanish competitors.
And even if we absorb a negative mix impact in the structure of deposits, where term deposits are winning out over current accounts and we're replacing wholesale funding by customer funding.
And that, I think, makes us feel quite reassured about financial margins.
If you look at customer spread for residents you can see that in the prospectus we're doing really well.
We've done several repricing moves and that always covers the cost of liquidity and the cost of lending in current circumstances, and out network is acting accordingly.
Jose Ignacio did talk about our price management capacities in today's environment and I think we've proved that.
That is why our financial margin is improving and that is why I think we're in a very different position from other banks and savings banks in Spain.
And that's for Spain and Portugal, but it's also in our Global Businesses' section too.
Giovanni Catarini - Analyst
(interpreted) Good morning, [Giovanni Catarini] from Execution.
I have two questions.
First of all I'd like to have some more details about liquidity management.
Obviously you're in a very solid position and I've noticed a change in your interbank balance this quarter and also in deposits, or public sector deposits.
I would like some more details there.
Then I have a more general question.
Do you think that the current financial crisis could give you an acquisition possibility?
Maybe one that had been unforeseen?
Do you have any specific plan about -- for growth in Brazil?
Any possible, say alliances with Bradesco?
Jose Ignacio Goirigolzarri - President and COO
(interpreted) Well, Manolo if you want to deal with liquidity and I'll deal with the other one, I'll give you the difficult one for obvious reasons.
Manuel Gonzalez Cid - CFO
(interpreted) Yes, well, okay, the boss always goes first but okay.
Okay, liquidity management, this is something we've talked about systematically for some time now.
I think here that being consistent is important and the market must acknowledge that there are certain management styles.
We gave the presentation of the second quarter in 2007 and Jose Ignacio said, okay, we're all going off on holiday because we've done our homework.
I think you can even listen to it because it was webcast, we did our homework for capital, for funding and for liquidity.
Between January and July 2007 we issued EUR33 million in medium- and long-term funding in conditions that would be unthinkable now.
I think, that senior debt, that's five-year debt, for a bank with our rating would be 80-odd basis points; and we did it below 11 basis points.
That was before the Summer.
And then EUR15 billion in cash securitization, some of the biggest in Europe, I think there was EUR5 billion in RMBS, and it was oversubscribed at unthinkable rates today.
The securitizations that we issued at 15 basis points at the beginning of the year, we could probably buy them back at 80 or 90 basis points.
And the underlying risk situation has not varied.
And you can see in [deals in our] securitizations and how other Spanish banks are doing it.
And I think you can see that for yourself that there's quite a big difference.
In those EUR33 billion quite a large amount was Tier 1 and Tier 2; EUR1 billion in Bancomer, so that's a big figure; and much -- a lot before the Summer crisis occurred.
And we did that because we saw that in 2007 the international capital markets could get complicated.
Of course we didn't think it would be as bad as it is, but we did think that there would be some turmoil and that there could be liquidity issues later on.
So we made sure we had plenty liquidity early on which means that we are -- we feel extremely comfortable and reassured and we don't have to take any desperate measures to attract deposits or anything else.
I'd also like to remind you that at the end of 2006 we had a very big capital issue operation, which the market didn't really understand that well at the time.
But we knew that we were going to need capital and that conditions could get worse throughout 2007.
And in Compass, well, we've funded a big part of the operation in shares in order to maintain our Tier 1 capital and core capital levels at the right level for our risk structure.
In fact I think we're more than comfortable there.
When you look at the core capital of say European banks, even some of our Spanish competitors, the structure is just not the same.
The risk is just not the same.
And you need to think about capital gains and you need to think about the provisions that we have.
That situation means that, given what has happened, wherein we have a very clear competitive advantage and we can work as though there were normal market conditions, we can continue to lend money, we can continue to do business.
And that I think, gives us a great competitive advantage when other banks are in a lot more complicated situation.
I think you've received information about the European banking sector this morning and the kind of crisis management that's taken place.
We've hardly used any of the obvious liquidity lines such as mortgage bonds.
We've used hybrid capital mixes, we've used senior debt.
Jose Ignacio Goirigolzarri - President and COO
(interpreted) And your second question, Giovanni, as far as the financial competitive market is concerned, I think we're still in need of visibility.
We're not really sure where this is all going to end.
But I think everything we've said on the investors' day is still true now.
At investors' day we said that we believed we had a winning combination of franchises and markets, and that means that we are convinced that we have a great capacity to generate earnings.
We told you then that we have transformation and innovation plans that really will make us stand out and that will really take our profits forward.
We talked about our obsession in the US which is to integrate our US banks and that that was our only aim.
I think we were very explicit about that.
We said there would be no more operations in the US until we prove that we can generate value there, and I think we really made that clear.
We also talked about China then.
We answered Javier's question this morning by saying that we are still going ahead with the CITIC operation, there's just a three-month delay.
And everything that we told you on investors' day is still true today.
And as far as Brazil is concerned we have no specific plans.
Okay any more questions from here in the room.
Okay let's go on to the conference call.
Please go ahead.
Operator
(interpreted) We have a question from Arturo de Frias from Dresdner, please go ahead.
Arturo de Frias - Analyst
(interpreted) Good morning.
Well, it's a pleasure to see this especially when you consider what's happening to everybody else.
I'd like to ask you about your view of Spain for 2008.
Because I get the feeling that in the fourth quarter and the run up to Christmas there was a pretty big slowdown in property transactions.
And I suppose that that will have an impact in the next three, four, five or six months in mortgage generation.
That would be my first question.
Are you seeing a big drop, say 15% to 20% drop in new mortgages?
Are you seeing it already, are you expecting it in the first and second quarter?
That's my first question.
And what about, well, construction and lending to companies?
I saw that Caja Madrid yesterday apparently thinks it's going to grow by more than 20% in lending to companies.
And that seems huge to me especially when the macroeconomic backdrop definitely seems to be one of sluggishness.
Do you think that companies will still be growing at 20% in current circumstances?
All my questions today are about Spain.
What about NPLs in the fourth quarter?
It did go up, which I think that was to be expected because you were at minimum levels prior to that.
I think we all expected it to go up, but in the fourth quarter it did go up probably more than in previous quarters.
So I'd like to know what sort of delta you're expecting for the next few quarters with NPLs of 0.76.
Or do you expect to see it closer to 1 or above 1?
What's your view there?
And then one more question if you'll allow me.
This is about the slowdown in the economy and mortgages, and that would be about fee income.
Your fee income has been quite flat or hasn't grown very much in the last few quarters.
What do you think will happen in 2008?
What about asset management because of the weakness of equity markets?
What's your impression about the increase in fee income for 2008?
Thank you very much.
Jose Ignacio Goirigolzarri - President and COO
(interpreted) Thank you, Arturo.
Well, that was a whole bundle of questions and you basically want a whole review of Spain.
Okay, I'll try and answer all your questions especially about activity in Spain.
I think that the current situation is a clear slowdown.
There was a slide where I showed our annual growth in Spain and Portugal; and there is a definite slowdown and that will continue.
We are imagining slowdown to the extent -- well, it will continue throughout 2008.
Just as a year ago we said that our lending volumes would be between 13% to 15% and it has in fact been 13% and a bit, if you were to ask me about lending increase by the end of 2008 I'd say 9%, 10%.
So there is definitely this downwards trend.
This sluggishness will definitely take place in mortgages.
Be careful though, because there are two things I'd like to make clear about mortgages.
First of all the stock -- mortgage stock has -- it's quite big; so it won't have such a big impact there.
But when we talk about mortgages we have to consider their contribution to our financial margin which is actually quite small.
For consumer lending and SMEs, that too will slow down I think to about 9%.
If you were to ask me whether SMEs will grow 20% in 2008, well, in BBVA no, that's not the outlook that we have.
The SMEs are actually performing better than individuals but we don't expect more than 10% or 11%.
However that amount of growth coupled with our repricing capacity which will give us net interest income over eight years, which will be more or less flat, that's not bad for 2008.
When you analyze our fee income the only slowdown we've had there has been with mutual funds, basically because of our marketing policy.
Because insurance fees are doing really well and everything that is market derivative -- marketing of products has been going well.
So we're not expecting bad news there.
NPLs, well rather than talk about NPLs I prefer to talk about provisions, I like to talk about the P&L.
I think it's obvious that the NPL ratio will get worse and that is going to continue on from the fourth quarter in 2007.
But I'd like you to have a look at our provisions.
85% of our provisions are generic which is a very big buffer.
So that is our opinion of 2008 in Spain.
A definite slowdown, a definite worsening of the NPL ratio.
But we are fortunate to have a very high volume of generic provisions; and except for mutual funds our fee income will be more or less similar to what it was in 2007.
And then there's one thing I would like to point out and that is our capacity to improve our cost-to-income ratio and that's not a theory.
Everything that we're seeing about costs in our networks, it is 0.4%.
And that's not something that we pulled out of the hat in the fourth quarter, that's something that we said a year ago.
We talked about the transformation plan at investors' day and that has to improve our cost--to income ratio.
And I think that really does make us different.
Arturo de Frias - Analyst
(interpreted) Thank you very much.
Jose Ignacio Goirigolzarri - President and COO
(interpreted) Any more questions from the conference call?
No, not in Spanish.
Let's go on to a question in English.
Operator
The next question comes from Mr.
Paul Tucker from Egerton Capital, please go ahead with your question.
Paul Tucker - Analyst
Yes, thank you very much can you hear me?
Can you hear me?
Okay well I'll assume you can.
Just on the -- maybe going back to Spain and Portugal to the asset liability management or I should say to the spread.
Can you just maybe dig a little deeper into that because that was a very good performance on the customer spread and I'm just wondering how much of that we could put down to a move in your pricing which is reasonably sustainable and how much of that may be just due to fortunate or well timed asset liability management?
So in other words if we enter now in more stable and predictable rate environment do you think that increasing your spread can be maintained or even extended?
And then secondly, just on Mexico, I think your economist at Bancomer cut the growth outlook for Mexico to, if memory serves me well, to about 2.4% and I just wonder whether that becomes an input to your budget and your planning and whether you have any change of thoughts in terms of how things may develop over '08 there?
Unidentified Speaker
Okay well I'll just repeat the questions in English now.
This is just about the good increase in spreads.
Has this just been due to fortunate management technique or is it more systematic?
And the second question is about Mexico because our economist there lowered estimates for Mexico's growth.
Does that mean we'll have to revise our budget?
Jose Ignacio Goirigolzarri - President and COO
(interpreted) Got a question which is a question which is related to Mexico.
Well it's true our chief economist was sharing with the market.
I think that was two or three days ago, the change of our forecast talking about Mexico.
The change, as you have seen, has not been dramatic really and the impact of this change of our forecast in our objectives is not going to be relevant.
Let me [repeat], we firmly believe that our lending portfolio in the year '08 in Mexico is going to have a growth rate around, between 20% and 25%.
And the reason for that is because we believe that the bank [realization] process and the process, well the bank [realization] in a general meaning, that we are seeing in Mexico, we are seeing a bank [realization] process in the individuals.
But we are going -- we are seeing a bank [realization] process in SMEs as well.
It's going to give us the (inaudible) in order to have an increase between 20% and 25% that is our forecast now.
And talking about the customer spread in Spain, well the customer spread in Spain is not related to our asset and liability management.
The customer spread is just customer spread.
And the [motion] of this customer spread is very related to our ability to re-price our assets.
And at the same time we have been very defensive in the pricing policy of our [term] deposits.
We believe that next year our customer spreads is going to have some increase.
And in terms of net interest margin, as I said before, we are expecting a flat [evolution] basically.
Paul Tucker - Analyst
Thank you very much.
Isabel Goiri - Director of Investor Relations
(interpreted) Any more questions?
Operator
(OPERATOR INSTRUCTIONS).
There are no more questions.
Isabel Goiri - Director of Investor Relations
(interpreted) Okay I'll now go on to the questions that have come in via Internet.
The first one, or first two are from Antonio Ramirez, one about CITIC, that's already been answered.
And the second is about the sensitivity of Mexico's results to the slowdown.
Well, you've actually answered that question too, so that's the end of that.
The next question, John-Paul Crutchley from Merrill Lynch.
And the question is about the Group's capacity to generate -- continued capacity to generate growth with a low level of capital.
Will we be selling off non-core assets?
The second question is about the most recent situation in NPLs in Compass?
And the third question is about the positioning of our US balance sheet vis-a-vis the recent interest rate cuts there?
Jose Ignacio Goirigolzarri - President and COO
(interpreted) Okay, I'll answer the first one and you can answer the others, Manolo.
Okay, low capital levels, I don't agree that we have a low capital level.
We've talked about this in the presentation and I think I've stressed the idea, and Manolo stressed the idea, our core capital is 5.3% as I pointed out.
And we have included the dividend payout there and that's a[base of 10.7% and that takes into account several issues, the kind of business that we have, and that's not a theory, we can prove it with what's happened in the last few months.
We have had no impact on capital for non-organic reasons, that's over and above growth in our own assets, and given the volume of generic provisions that we have, EUR5.7 billion EUR4.3 billion above the volume of non-performing assets.
And then on capital gains.
And fourthly, the capacity we have to generate organic growth, which I think was very clear in the last quarter.
At current circumstances I think show that in 2008 we do not have a low capital level, we're very comfortable with the level that we have.
It will -- our core capital and base ratio will increase very naturally and organically in the next few quarters.
I'll hand over for the Compass issues to Manolo.
Manuel Gonzalez Cid - CFO
(interpreted) Yes, just to add what Jose Ignacio said, I think that the type of business that we have is really important here, the way that we manage risks and our exposure.
We have a retail business and [with] the biggest consumer shop we've seen over the last 25 years, which is what we've got now, the amount of capital that BBVA has consumed has been zero compared to other international peers, that's quite something.
And apart from everything Jose Ignacio said in his presentation, about write-downs, the fact that we don't have [SIVs] etc.
We have got recurrent earnings, very high transparency in our risk management in our levels of core capital.
You might think that 5.3 core capital is low but it's hardly comparable to the core capital that other European banks or US banks or even Spanish banks are reporting.
It's more than a number, you see, it's a ratio, it's based on the risks and unexpected losses that institutions might have.
And we think that our capital right now is just right, even high, as Jose Ignacio said.
We've got the unrealized capital gains we've got and we've got a lot of provisions as well, so just look at the numbers.
We've got exposure where capital consumption would come mainly from credit risk generated in the retail business, basically.
And in our case we've got provisions for 7.76 million, and of those most are generic and so that's very important to take into account because generic provisioning has gone up and up 1.9 billion more provisions than we had the previous year.
So to set that against its context, just to give you an example which I think's interesting, so you can understand exactly what we're talking about -- a bank in the US which is much bigger than us, which has come out pretty well from the shock we've seen in the international financial markets, especially for some business models; JP Morgan for example, they have provisions of $10 billion compared to BBVA's $11.4 billion.
And their balance sheet is twice as big as us and their business model is different from us in much of their activity.
So when we talk about the capital figures we have to understand what the context is, 5.3 is not just any old figure, 5.3 or 5.5 in other banks might be quite different from our 5.3, as you've been able to see this morning.
And then your other questions -- NPL in Compass?
Well, the figures for the NPL in Compass are in the documents you've got, but I can give you some details right now.
The new entries are stabilizing, in the first month since Compass has been in the Group we haven't got new entries or new arrears, 17 million in the quarter, that's all.
And as Jose Ignacio said, we've done an in-depth review of the entire loan book and quite honestly, we now feel that there's a lot of piece of mind there.
So NPL in the United States can be seen in Jacksonville in Florida, and that's probably where the problems are concentrated.
But we're more and more convinced that the situation is very different in different parts of the US.
In the US there are areas like Florida or California and some of the States in the North or on the East Coast that are suffering a lot of shock in their real estate markets, but elsewhere, where there haven't been such high price rises in real estate, we can see that there's much better performance.
In Texas and Alabama for example you've got two States that really are performing very well in terms of their real estate markets.
You've seen some of the Texan banks' results which have been published, they have very good figures.
And the way that their loan books are growing is quite different from what's happening in other banks that are working more in the North or in Florida or elsewhere where the real estate market is more tricky, shall we say?
So, the kind of business that we have is very important and where we are is very important.
Then the balance sheet, the ordinary loan book, when we're doing our asset and liability management, is being done in the US, it's bigger there than in Mexico; we're talking about some $12 billion.
And now that loan book is covering interest rates, or is hedging interest rates and it's got a lot of unrealized capital gains right now, as you can imagine.
And the capital gains are growing faster and faster.
We have to manage the convex side of our positions, thinking about the second and third year impact of the maintenance of very low interest rates.
But our situation, quite honestly, is very good, very sound in terms of interest rate risk.
Isabel Goiri - Director of Investor Relations
(interpreted) I have a question from (inaudible) from Fidelity about the quality of the Compass loan book, you've already answered that.
And Jagoba Garcia from Fox-Pitt asks about what's happening with the negative growth of net interest income for the Corporate Center?
What might happen there in the future?
Jose Ignacio Goirigolzarri - President and COO
(interpreted) Well basically, if you look there's a negative growth and that's quite traditional now in the Corporate Center's net interest income in the third and fourth quarter which is due to two issues.
First of all, the cost of funding the acquisition of Compass which -- that, that wasn't funded by the capital increase.
And then we have the rising interest rates which had an impact on the euro balance sheet.
That means you're funding a higher interest rate on [only the part] of the balance sheet that's not distributed over the business areas.
And at the same time the other impact which has to do with asset liability management is that, as you will remember, in 2006 -- well, in 2005 and especially in 2006 we had an ordinary loan book to hedge interest [rates] on our euro book, which we reduced before the interest rates went up in the euro area.
Obviously there was a margin there we no longer have.
But on the underlying business, in Spain and Portugal, the earnings are going up and that's the way that we can hedge that margin.
So in the current environment, obviously, we have once again been buying portfolio in order to hedge our euro balance sheet.
Isabel Goiri - Director of Investor Relations
(interpreted) A question from Carlos Berastain about changes in the composition of the business; the business mix.
We can answer that from my department.
And then [Pierre-Alexandre Pechmeze] asks a question, from Oddo Securities.
Whether we have CDOs with any kind of protection from [monoliners]?
Jose Ignacio Goirigolzarri - President and COO
(interpreted) No, no.
The answer is no.
Isabel Goiri - Director of Investor Relations
(interpreted) Kato Mukuru from Citi asks whether we're considering selling off Telefonica shares to improve our capital situation?
And what kind of unrealized capital gains we might have on that position, or indeed on that portfolio as a whole?
Jose Ignacio Goirigolzarri - President and COO
(interpreted) No, we're not going to talk about the capital situation again because it would just be repeating what we've already said.
Namely, that we don't think that our situation in terms of capital is particularly worrying.
So, as Manolo said, our situation is very comfortable in terms of capital ratios, and that's the situation.
That's all I can say, really.
And with respect to capital gains and how much capital gains we had at the end of 2007, it was EUR5.5 million.
Isabel Goiri - Director of Investor Relations
(interpreted) I've got two questions from [Hernandez].
A couple have been answered already.
Whether we're still interested in Italy?
That would be the question that hasn't been answered.
Jose Ignacio Goirigolzarri - President and COO
(interpreted) Well, I think we've really answered that question, when Giovanni asked whether we had changed our strategy or not, that we had disclosed to the market at the investor day.
Well no, we haven't changed our strategy and what we said there is still applicable, not just to Brazil but also to Italy.
Our focus is the focus that we told you about and have been telling you about for some time.
Isabel Goiri - Director of Investor Relations
(interpreted) More questions about the NPL in Spain and Compass and then another question about Mexico.
Could we say something about the sale of the portfolio and the importance of NPL going up in general in Mexico?
Jose Ignacio Goirigolzarri - President and COO
(interpreted) Divestments on our portfolio is for a customer's portfolio.
The competitors as well, they make some and lose some.
And as on that swings and roundabouts, there was a portfolio that we had which went to a competitor and it had the high level of NPL.
But it didn't have that big an impact on the overall ratio, I think it was something like 10 basis points, no more.
So when I talked about a better quality of lending in Mexico, I talked about that to explain the drop.
But with respect to the improvement of our management, our structural management, I think I can repeat what I said, that it's done very well.
Isabel Goiri - Director of Investor Relations
(interpreted) I have another question which has been answered.
Diego Barron, from Fortis has several questions.
Only one hasn't been answered.
It has to do with dollar hedging in 2008.
That's about it, yes.
Jose Ignacio Goirigolzarri - President and COO
(interpreted) Currently, we started the year because we do our hedging on the average expected forward rate and we have very high dollar hedging.
And the year has just begun.
We've covered a large part of our dollar earnings and our assets in dollars.
And of course, we have to do that at a good price, so we've got very high hedging right now, just as we did in 2007.
[Sorry, Isabel.]
Talking about that Mexican portfolio, this has had no impact on our volume of provisions and everything that I said about our market commitments in terms of volume of provisions in Mexico and the structural improvement of our risk management is still 100% applicable.
Isabel Goiri - Director of Investor Relations
(interpreted) We have a question here about what level of growth of risk weighted assets are we expecting for 2008.
How would you compare it to the growth of the portfolio in general in 2008?
Manuel Gonzalez Cid - CFO
(interpreted) Risk weighted assets have grown in recurrent terms about 12 billion per quarter -- between 8 billion and 12 billion per quarter and we expect that, that will slow down slightly especially from the Spanish side and because of the type of growth.
But we will still see double-digit growth of risk weighted assets.
Although, that slight slowdown, because we had rates of say, 18% or 19% to a low rate will improve our capacity for generating organic capital, as Jose Ignacio said just a few minutes ago.
Isabel Goiri - Director of Investor Relations
(interpreted) Now we have a question from Santiago Lopez from Credit Suisse that's already been answered.
Then there's another question from -- a new question from Fox-Pitt, and that is, the fall in revenues from markets in the last quarter -- what do you expect for 2008 and what was the reason for it?
Jose Ignacio Goirigolzarri - President and COO
(interpreted) Right, I'd like to ratify what I've already said.
And that's why I drew your attention to the cause of the fall in income from markets.
That's because our customer franchise has had less revenues because our customers have been away from the market.
What will happen in 2008?
Well, that will depend on the attitudes and behavior of customers.
In January our customers are being extremely active and so January is a great month for markets.
Isabel Goiri - Director of Investor Relations
(interpreted) Then [Sebastian Gitone] from [PDL].
Jose Ignacio said that your distribution model in Mexico will be different to that in Spain.
Could you give some more details?
What will implications of that have for pricing policy?
Jose Ignacio Goirigolzarri - President and COO
(interpreted) Well it's not that it will be different -- it is different.
You have to remember that Mexico has less of a -- few people have bank accounts.
And when you look to the future, given the evolution of distribution capacity in Mexico and the technology available compared to the 1970s which was when we extended our branch network in Spain, obviously the mix is different.
And of course, we have to benefit from that change in mix.
I was considering it more from a strategic point of view rather than tactical one.
The impact on the risk pricing policy shouldn't vary, just from one model to another.
Isabel Goiri - Director of Investor Relations
(interpreted) No more questions.
Manuel Gonzalez Cid - CFO
(interpreted) I'd like to add something, just one more minute of your time before we say goodbye.
A lot of you know this, but I want to say this formally, and we don't have much time.
We'll change the camera, now and focus on somebody else.
I'd like to say that Isabel Goiri, our Head of Investor Relations has been promoted, thanks to her fantastic work here in the last five years, and she's our new CFO in the US.
So, Isabel is going to be Manuel Gonzalez Cid in the US.
And she'll report directly to Gary Hegel who was the original CFO there too.
So this is the new CFO club.
I'd like to say that, well obviously, I'd like to thank Isabel for the fantastic work she's done.
You know that our Investor Relations department was voted number one in Europe last year and that is thanks to the Investor Relations team.
And I'd like to introduce you to our new Head of Investor Relations.
This is Isabel's last time with us, this is Carmen (inaudible), so maybe you could change the camera, the camera could focus on Carmen.
She's from our research department.
She's worked at several international, well, she's worked at two international institutions and joined the bank in 1998 and she's been our chief economist for world financial systems and the Spanish property market.
So she is a great expert in those two subjects.
I think you're all rather interested in those subjects too.
She'll be on the road show with us and she'll be head of our fantastic Investor Relations team now.
So, you might need a little bit patience for the first few months, I hope you don't treat her badly.
But if you -- if things work out the way they did with Isabel it will be a great win/win situation for all of us.
Okay, thank you very much for being with us.
Congratulations to Isabel and to Carmen, and we'll see you back here with more good news in three months 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.