Banco Bilbao Vizcaya Argentaria SA (BBVA) 2008 Q2 法說會逐字稿

Good morning, everyone.

As you know, we're now going to be presenting the results for the second quarter.

Jose Ignacio Goirigolzarri, our President and COO, will be giving us a presentation first, after which we will be taking questions, first of all from the room here and then we're taking questions that come over the conference call.

And then, finally, we'll take questions from the webcast, as we always used to do.

Anyone who's actually here can go to a coffee with us afterwards, but it won't be in the room next door because we've got the photography exhibition there, so we'll have to go up to the floor above.

Many thanks.

I now give the floor to Jose Ignacio.

Good morning, everyone.

First of all, many thanks for being here today with us.

And I'd like to rectify something, although this is in no way a precedent.

Manolo said that you're going to be invited to coffee here and you could have a little coffee with us on the first floor.

But actually, you can have a big coffee with us on the first floor as well, if you want.

Sorry about that, Manolo.

You don't normally get things wrong.

But I think we can now present our results.

This is a presentation which will be divided, as we always do, to give you a global view and a standardized view, so that you can make a comparative analysis more easily.

So we'll start with an overview of the Group and then we'll analyze each of the business units into which the Group is structured.

So, in global terms, the first half results, although it's up to you to judge this, seem to me, at least, to be yet again a way of setting the BBVA apart from its competitors and its peers, in a half-year in which the environment, as you well know, has been frankly rather complex.

And yet we're being set apart.

Now, why's that?

There are three reasons.

First of all, because we're growing very strongly in earnings.

Secondly, we have really a sound balance sheet, a very powerful balance sheet.

And thirdly, we're delivering on the strategic initiatives that we announced on our Investment Day.

So let's start with the income statement.

You can see that we've got a very strong growth rate in our revenues and we're continuing to significantly improve our cost/income ratio.

Look at our strong balance sheet.

We'll continue to give you data on the excellent liquidity position we have, our very sound capital position and the very sound asset management that we're carrying out.

As I said, we're delivering on our strategic initiatives that we announced to you at Investors' Day.

There I wanted to refer to two aspects.

First of all, our transformation and innovation plan.

And then, secondly, what's going on with our agreement with Citic Group in China.

So what's behind my statement?

You can see it here, if you look at what's been happening to our attributable profit, without one-offs, in all the different quarters up to now.

Yet again, this quarter, we are hitting a record attributable profit.

The growth, as you can see, is 11.6%.

And in constant euros, that's in local currencies, it's an even bigger growth, which would be 17.4%.

I think it's especially significant to say that this growth in the attributable profit stems from the very first line in the income statement, because we're generating revenues.

Yet again, this quarter, we're generating revenues so that our net interest income has grown 23.2% and our ordinary revenues are growing at 21.2%.

Therefore, yet again, we can say that our revenues are the foundations of the growth in our operating profit and our attributable profit.

This growth in revenues is being made compatible with a very outstanding control on costs.

Here you can see the quarter-on-quarter figures.

They're on the left of the slide.

And you can see that, quarter on quarter, our expenses are going down as a consequence of this very strong generation of revenues.

Alongside this cost control, our cost/income ratio has improved yet again and now stands at 40.1%.

And we are continuing to improve on an ongoing track which will take us to the target that we gave you, which is to bring us to below 35% by 2010.

So, with that happening in revenues and that happening in expenses, the growth of our operating profit, without one-offs, is 12.8%.

I think we should also point out that this growth can be seen in each and every one of the different areas.

I'm not going to talk very much about this slide because later on we'll be talking about each of the areas in much more detail.

But nonetheless, the generation of earnings and of recurrent revenues, above all, can be seen in all the different areas of our Group.

Alongside that, we are also actively managing our asset quality.

On the left, you can see something, and you probably want to see this over time, what's been happening to our NPL ratio.

In June, our NPL ratio is 1.15% for the Group as a whole, with a coverage ratio of 166%.

You can compare that and see how well it compares against the ratios reported for NPL and coverage by our European peers.

More important still, behind this NPL ratio we've got a very sound balance sheet because we have high loan loss provisions of EUR7.8b, of which 74% are generic.

In fact, in this quarter once again we've increased our generic provisions.

So alongside that performance in earnings, we've also got a very strong balance sheet, as I was just saying, which is not only based on our loan loss provisioning which I've already talked about, but also the fact that we have a very strong capital position.

Our core capital is 6.3%, yet again, and our Tier I is 7.7%.

And I should remind you, as it says here, that our unrealized capital gains and our surplus generic provisions over expected losses are also very healthy figures, as you can see here.

On the right, you can see a comparison against our European peers, the big European banks.

We wanted to give you this comparison on the basis of a very simple ratio, the ratio that at the end of the day says what our tangible equity is and how that compares against the assets we have.

And as you can see, our situation is a very powerful one.

And the same could be said of our liquidity position.

We've already informed you on other occasions about the fact that we have a very strong liquidity position because we managed to anticipate what was going to happen last year.

You also know that we are not involved in anything using conduits or SIVs or anything like that.

So here we've given a comparison against our European peers, to give you a more clear idea about where we stand.

And our wholesale funding requirements are very different from those of our European peers, for two reasons.

First of all, because of the size of our balance sheet, the pure size of the assets that we have.

And secondly, because we're much smaller in relative terms, so the ratio between the deposits and the total assets actually means that we're at the very top of the ranking table compared against our European peers.

So, very sound liquidity position.

At the end of the day, what we are presenting is results without one-offs, which you can see here.

Operating profit, 12.8% growth.

And in constant euros or local currencies, which is what really explains the clout we have when we're generating these kinds of profits, then that figure would be 18.8%.

And attributable profit growing 11.6%.

And if we give that in local currencies, the figure would be 17.4% growth in attributable profit.

So, we can say that we're a profitable group and yet again we're creating value, as we do on a recurrent basis.

Here, you can see what's happening to economic profit, to RARoC and our basic returns.

And that's why last month our Board decided to make a 10% increase to the interim dividend to be paid out against the first quarter.

So, as you can see here, and as I said at the beginning, we're presenting results for the Group as a whole which are tremendously strong, based on the generation of revenues whilst improving efficiency, on the basis of a very sound and very powerful balance sheet.

But apart from that, as I said at the beginning, we are also delivering the results of the strategic initiatives that we informed you about a year ago.

A year ago, we were talking about our transformation and innovation plan.

And a year ago we were saying that really what we were seeing was an extraordinary change in our environment, in terms of what our customers were demanding of us on the one hand and then what IT makes possible on the other.

And we said that was going to have an impact, or already was having an impact, on all the elements in the value chain.

And we said that that was why we were going to be launching these plans of transformation and innovation.

And we've had very many initiatives.

The latest one was Tu cuentas, which was providing a personal account manager which would come up with very strong personalized suggestions for our customers.

But apart from the innovation plan, I also wanted to talk about our transformation plan.

Our transformation plan has an impact on all the different units in the Group.

And next quarter, when we present the third quarter results, I'd like to give you a more detailed analysis of what's been happening in the transformation plan, how it's being rolled out in all the different business areas in the Group.

But today, I'm just going to focus on Spain and Portugal.

For some time, we've been reporting the measures that we've been taking up over the last few quarters to you.

We were talking about the internal reorganization, about how we were going to reduce the intermediate structures, how we were going to really change our distribution network in order, first of all, to be able to improve the quality of our service and our customer care, and secondly bring down the cost base that we have in Spain and Portugal.

What I can tell you today, and as you'll see as we continue, we've got an additional charge because of early retirements of EUR470m.

After tax, that would be considerably less, just EUR329m, which gives us very high returns.

So, net annualized savings is EUR43m and net present value for the first six months would be very positive, EUR372m.

The other aspect that I wanted to talk about with respect to our strategic plan was that, well, two months ago we announced an initial understanding with Citic which would increase our holding both in the mainland bank and in the Hong Kong bank.

And I can remind you of these figures, which Manolo gave you over a conference call.

This is an operation which is going to be accretive right from the very first year.

We think that this is of extraordinary importance for all of us.

Whatever the case, these are the charges and the credits which have to be made for one-offs, what we had last year in the first half of 2007 and the ones that we've booked to the first half of 2008.

As you can see, along with the contribution of the Bradesco divestment which brought us in capital gains of EUR727m, we've also got a charge for early retirements of EUR470m before tax.

That's very important, to say before tax.

Which means that there's a significant change in our attributable profit figure between what we had in the first half and the second half of the year, so that the published accounts that we have with one-offs look like this.

However, we always like to talk with you with respect to our more recurrent business and what's happening to our performance without one-offs.

So, that's what's happening in the Group.

And I think it really shows how strongly we're growing and how very sound our balance sheet is, and I hope that now you'll allow me to give you an analysis of each of the business units.

We're going to start with Spain and Portugal.

In Spain and Portugal, the Spanish market above all is showing quite a fast slowdown, rather faster than we'd expected.

But given this slowdown, I think the BBVA Group is really managing things in a way that sets it apart.

We're being set apart because of the very tidy way we're managing the slowdown, focusing very clearly on our pricing policy.

We're being set apart because we're focusing on improving efficiency and we're focusing on managing risks.

Here, once again, I want to give you the reasons why I feel able to make these statements, what's happening to our business volumes.

Here, you can see the year-on-year growth figures for the most important items.

Lending is growing 7.1% and customer funds on our balance sheet 9.3%.

And our market shares look very positive, although that's not a priority for us in absolute terms because our first priority is to manage pricing.

And in price management I'd say that our Group here in Spain and Portugal is showing excellent performance, both in terms of customer spreads and in terms of net interest income over average total assets.

And that pricing policy is really what explains why our net interest income is growing, as you can see here, at 12.7%.

This performance in our net interest income, which is doing comparatively very well along with our fee income, gives us ordinary revenues growing 8.9% in Spain and Portugal.

But here we have to compare what's happening to our revenues and compare what's happening to our expenses.

As I said before, our expenses are growing negatively, at the moment 1.4% in Spain and Portugal from 0.4% -- they will be 0.4% for our retail networks in Spain.

And that figure will continue to go down over the next few quarters and that really supports what we've been saying, that our efficiency is improving.

Our cost/income ratio was already 31.6% (sic - see presentation) and this makes it possible for us to have an operating profit growing at 13%.

I'm sorry, that figure was 35.6% for the cost/income ratio.

And now you can see what's happening to our NPLs.

In order to be able to see how we compare against other Spanish businesses, we're talking about domestic businesses here with a rate of 1.1% (sic - see presentation), although here you've also got the coverage ratio for Spain and Portugal as a whole.

In terms of impairment losses, there we've got an increase of 22.8%.

Here, I'd like to explain first of all that the volume of our generic funds, our generic provisions, that is, and say that here in Spain our generic provisions for domestic businesses have had a positive endowment.

So in the second quarter we've been allocating EUR90m of generic funds which will now be included in the impairment losses item.

So, understanding all these factors, here in Spain and Portugal we're seeing our attributable profit go up 15.5%, whilst we improve our return on equity, which was yesterday at 37.3%.

So, this is the income statement, with the whole cascade of the different items for Spain and Portugal.

As I was saying before, it seems to me that Spain and Portugal are doing an excellent job in terms of the way they're managing the slowdown in business volumes whilst having an excellent management of pricing and improving cost/income ratio on an ongoing basis, whilst managing asset quality very well against the current rather gloomy backdrop that we have here.

Now, I move on to Wholesale Banking and Asset Management.

And there, yet again, this quarter we're presenting excellent results, recurrent revenues, even in an environment which as you know is especially negative for this kind of business.

In this environment, however, we've got good news, both in terms of our large customers and what's going on in markets or treasury -- our treasury department.

In global customers and investment banking, we are showing very strong growth because we're taking advantage of the situation in the market and our very sound balance sheet to grow very selectively with customers that are going to generate cross-selling because of their geographical positioning.

This growth in lending means that we have also got a growth in net interest income, which is what you can see here.

Looking at global markets, yet again, this quarter I've got good news.

And that, for me, is a point of great satisfaction because it justifies what we've been saying to you for some time now, that our global markets and distribution business is very close to customers.

70% of our revenues come from customer relationships, which means that we've got very recurrent revenues, which in turn means that the risks that we are taking on board are much lower than those of our competitors.

Anyway, as you can see here, the ordinary revenues are growing quarter on quarter -- no, half-year on half-year, sorry, 28.9%, after having grown 28.4% half-year on half-year last year.

So, a great six months for this area.

Operating profit going up 17.3%, including the global businesses portfolio that we have in the Americas which is booked to this area internally, and net attributable profit is growing 25.5%.

This means we've improved our efficiency, with the cost/income ratio getting better, our return on equity going down 2.5 percentage points.

So, here's the overall income statement.

As I've said, revenues are going up, with the operating profit growing 17.3% and attributable profit growing at 25.5%.

Consequently, as I was saying before, I think it's been a great half-year for our Wholesale Banking and Asset Management area, excellent news, above all because of the capacity to generate recurrent earnings in this area, which is based on our strategic vision of the market.

Now, Mexico.

I think there are two things we have to bear in mind when we talk about Mexico.

First of all, what's happening to the Mexican economy.

The Mexican economy in the first two quarters has performed very well and has shown that it really is decoupling from what's going on in the US economy.

Then, secondly, the positioning of Bancomer.

Bancomer is the leader in the market in Mexico, for its balance sheet and for its earnings.

So, yet again, this quarter, as you will be seeing when you look at the results and then the results of our peers, Bancomer is outperforming the rest of the market.

It's really taking advantage of the good economic situation to boost its volumes whilst controlling its costs and setting itself apart from its peers with respect to its asset quality.

Let me explain what's behind these statements, then.

First of all, when we look at business volumes, you can see that lending is growing over 27% whilst customer funds are growing at 15.7%.

So, really, this is very strong growth.

And in the case of lending, we're continuing to change our loan book mix, which is something we announced to you some quarters back.

And as we said when we talked about this mix change, it would mean and it has meant that we've improved our customer spreads and our net interest income over ATAs, which means that the net interest income for Bancomer has grown 15.9% with core revenues growing 13.5%.

However, I was saying to you that apart from the fact that revenues are really growing buoyantly in Bancomer because we have good volumes and good pricing, at the same time, if you look at expenses, Bancomer, despite the fact that it's bringing in a tremendous amount of new customers and new business, is still managing to control its costs and will continue to do so over forthcoming quarters.

And on the right, you can see what's happening in year-on-year terms with respect to its expenses.

And with that combination of revenues and expenses, once again, we're improving our efficiency.

This cost/income ratio is now 31.7% and that means that we can grow our operating profit at 24.3%, as you can see here on the left.

In terms of risks, here you can see what's happening to the NPL ratio.

It's been very stable over the last four quarters.

Our coverage ratio is 227%.

And our impairment losses, which is really provisions and which, as we've said in the past, are very much in line with the kind of growth we're seeing in our net interest income.

And another thing that I want to make very clear is that really, if you compare the performance of the asset quality that Bancomer has against its peers there, if you look at its asset quality, Bancomer's is definitely very much better.

Which gives us an attributable profit growing over 20% in the Bank itself but also in pensions and insurance, which means that our income statement looks like the one you can see on the screen.

It's a magnificent income statement, with operating profit growing 24.3% and net attributable profit growing slightly above 20%.

Consequently, in Mexico we can say the economic situation is a lot better than some people expected.

The economic situation is being taken advantage of by Bancomer, to generate revenues and at the same time roll out the measures to improve efficiency and improve asset quality, something that we announced to you some time back that we were going to do.

Now, we can talk about the United States.

In the United States, I'd like to remind you of two elements that make us rather different from other banks.

First of all, the excellent position of the BBVA Group in the United States, the way that the performance of the markets that we're operating in is so different from that of others.

In macroeconomic terms as well, if you look at the levels of growth of the markets that we are operating in from Compass, you can see that they are outperforming the average for the US significantly.

And we're a different case from other banks because we're talking about integration here where we are managing to get a lot of synergies that we expected to get and that we announced to the market and you'll see that we have managing to do them.

And we're growing in activity with higher business volumes that make us very satisfied.

But let's start with our strategic positioning.

As you know, as we've often said when talking to you, we've got 50%, approximately, of our portfolio in Texas, slightly over 50%.

That's right.

And if we add Texas and Alabama, we'd be talking about 75% of our portfolio.

Well, in Texas, especially in Texas, but in the markets that we are operating in, in general, if we look at the macroeconomic performance indicators.

And as you can see on the slide, the performance is much better than that of the rest of the US, or the US average.

Look at housing prices in Texas.

They're not dropping at all.

In fact, in year-on-year change terms, they're increasing.

And the same would be true in Alabama.

And that's something that the market's now recognized.

If you compare what's happening to the listed price of Texan banks or the Texan industrial companies against the average indices in the US, as you can imagine, the market distinguishes between the macroeconomic performance which is so much better in Texas.

But anyway, let's start at the beginning.

As you well know, we've got our integration plan and we're now rolling it out and we're on time.

We are sticking to the deadlines with very strong discipline.

We've finished the migration of the first bank's platform.

We'll be migrating the second bank, which will be TSB, on August 31.

And in November, as we already said, we'll have completely finished the integration process.

We'll have all four banks on one single platform, which will generate synergies, as it already has done.

I'll remind you that when we presented the deal and we talked about our potential to generate synergies, we were talking about $300m.

We were talking about $100m in the first year.

And as you can see, we've managed to do better than what we'd expected in the first five months.

And we've also decided that in the second half of the year and the beginning of the following year we'll be getting an umbrella brand, which will be BBVA Compass.

Apart from the integration, I was also saying that we're seeing that we are able to generate business volumes on an upward scale.

Here, you can see what's happened to our growth figures for lending and for customer funds lending.

As you can see on the screen, it's coming in with very high quality assets, much better than the back book which we had in Compass, which is generating a margin.

Here, you can see what's happening to ordinary revenues and what's happening to our total costs, excluding the depreciation of intangibles, taking into account we've had some extraordinary charges which we were expecting to have because of the merger and integration costs.

Our operating profit in Compass is continuing to grow and our efficiency is mirrored in the cost/income ratio, which is coming to levels which are much more in keeping with the averages in the Group as a whole.

In risks, you can see what's happening here, what's happening to our NPL ratio.

And here, I want to distinguish between what's happening to the NPL ratio with and without Jacksonville.

Jacksonville, as you know, is an issue that we talked about with you.

We always informed you what was going on from the very moment we brought Compass onto our books and we are focusing on that very clearly as an issue separate from everything else.

Without that, the growth in the coverage ratio would give us 116% excluding Jacksonville, and we know exactly what's going on there.

And the ROE that we're getting would be close to 25%.

So, to explain why I was able to say everything I've said so far, I think we have to analyze each one of the different quarters.

And here you can see that in the second quarter we're generating ordinary revenues which are much better than previous quarters.

And general costs are under control, especially if you take into account what's happening to the merger and integration costs which were already planned for.

I have to repeat that.

And in terms of synergies as well, we are definitely coming up with the goods we were expecting to get, which is why our operating profit is growing as it is.

And with loan loss provisions growing, as I explained before, we get a net attributable profit which really indicates the cruising speed which we announced to you some months back that we would get.

As a point of reference, for the third and fourth quarter we think that the loan loss provisions are going to be at very similar levels to what we've been reporting in this second quarter.

We don't think there will be any big increases in our loan loss provisions.

And our policy is to have very proactive management, to keep on analyzing all the different Compass loan books to see exactly what's going on and we do know what's going on.

So, we're rolling out the plans as we said we would and we're managing to benefit from the fact that the markets where we're operating are outperforming other American markets.

So, now, I come to the fifth big unit in the Group, South America.

As you know, South America has a very favorable economic environment.

And more and more people are using banking services now and our Bank has realized this and is taking advantage of the phenomenon, which means that our business volumes are growing very strongly with significant improvements in our efficiency here in South America.

And at the same time, we're controlling the quality of our assets.

Here, you can see how dynamic our activity is.

We're continuing to increase our lending and our customer funds.

This is quite significant if you look at the year-on-year growth figures, which means that we're generating revenues.

And as you can see here, our net interest income is now growing at over 36%, generating recurrent revenues.

And if we analyze the different businesses that we have there, and above all the different countries where we're operating, you can see that this recurrent generation of earnings is very consistent, very coherent, across the board in all the different countries.

As I was saying, the growth in revenues means that yet again this quarter we're reporting an improvement in the cost/income ratio and that feeds into an operating profit which is growing at 31.8%.

If we look at NPL ratios now, there you can say that it's pretty stable, although we have told you in the past that it wouldn't be strange to see a certain rise in the next few quarters, given the kind of growth that we've got.

But this is the situation right now, so that our net attributable profit, as you can see, is growing at 17.6%, very much influenced there by tax considerations.

So, this is the income statement for South America.

Operating profit growing 31.8%, influenced by tax issues, so we go from 31.8% down to 17.6% in net attributable profit.

But we talked about that because there was some tax yields that we had in several countries which, over the last couple of quarters, have come to an end, which we've used them up.

Which is why our pre-tax profit is 27.1% and our net profit, that's after tax, is 21.4%.

So we've got good news from South America and we're very optimistic about what's going to be happening over the next few quarters.

We now come to our conclusions and here I want to continue to put across the same message I was at the beginning of the presentation.

I think our results show that our situation is quite different from other banks.

In Spain and Portugal our management is marvelous, as there's a slowdown throughout the Spanish economy, both in terms of our business volumes and in terms of the way that we're managing pricing and in terms of our efficiency in cost/income ratio, and in terms of the way that we are outperforming our peers in terms of asset quality.

In Wholesale Banking and Asset Management, yet again, this quarter we've shown that what we were talking about in terms of the recurrency of our business is not mere theory.

It's practice.

And each quarter we're seeing how we can continue to grow against a very complex backdrop.

In Mexico we've got good results, first of all because the Mexican economy, as I said before, is showing itself to be very resistant indeed.

With the Mexican economy performing so well, in Bancomer we are able to generate business volumes, revenues, improve our cost/income ratio and be in a situation which really sets us apart from any other banks in terms of asset quality.

In the United States, we're presenting results which are much better than those of the industry as a whole.

And that will continue to be the case, because of the structure of the markets in which our franchise is operating and because of the integration process that we're rolling out.

Then, in South America, we still have very buoyant revenues.

We are maintaining our capacity to take advantage of a very positive macroeconomic situation and at the same time we're improving efficiency.

And here too we're showing that the quality of our assets can continue to get better and better and far better than that of our peers.

So, our results that we're presenting are really recurrent because of our corporate positioning and because of our business model.

Our business model is focused on customers and relationship banking.

That's the case in our retail banking arm, which is the biggest part of our portfolio, but also in our global businesses as well.

So, along with the recurrency of our revenues, we still have our transformation plan to improve our efficiency.

We are the Group with the best efficiency ratio in Europe and we are obsessed.

We want to reach this 35% that we said we'd reach for 2010.

This combination, then, of efficiency and profitability is accompanied by our risk management, which really sets us apart.

Our risks are very well-known.

We know exactly what they are, where they are.

We've informed the market of them.

And unlike our peers, we are being very clear about everything and our level of provisioning means that our financial soundness is outstanding.

So, the BBVA Group has and will continue to have a differential capacity to generate value and also to present recurrent earnings.

And that's why we decided last month to increase our interim dividend.

So, that's about it.

Many thanks for your attention and if you wish, as Manolo said before, we can now go on and take questions.

If you wish to ask a question on the conference call (OPERATOR INSTRUCTIONS).

But we'll start with questions from here in the room first.

Carlos Garcia from ING.

I have a couple of questions about domestic business volume.

There's a slowdown in lending, I suppose that's quite normal because of demand, but also in deposits which have fallen 1% in the resident section.

I thought you would have done better because I thought you were a safe haven for customers who think about where to put their money.

Could you say something about business volume and what you expect for the future?

Then I'd like to ask about defaults, the EUR1.4b that you have for this quarter.

Is there a split there for these entries in arrears?

Okay.

Well, business volumes in Spain and Portugal, which is of course our domestic business, as you've seen, it's true.

There is a slowdown.

But there's a growth in lending of 7%.

And in terms of balance sheet resources, we've seen a 9% increase for Spain and Portugal.

And that has been accompanied by a differential performance in our mutual funds.

It's true that the net worth is coming down, but in terms of market share we're actually getting a big increase.

There's something that I would like to say to you and that is that, as far as our priorities are concerned, increasing market share is not our top priority.

We want to make the most of net interest income.

And therefore, we'll be very strict at managing our pricing policy.

Having said that, in terms of business volume over the last couple of months, as you'll have seen, we are keeping up our lending market share and we've even increased, as I said, in liquid assets and mutual funds.

For deposits and the trend there, and I think we've said several times in recent quarters, there is a market for which the pricing factor is important.

And we think that we are behaving very rationally.

That is why there's an improvement there in our spreads and in our net interest income over average total assets, and we're making that compatible with the maintenance of basic market share.

So I think this is a winning combination, especially in the current situation.

As to expectations for the next few quarters, in lending I think there will be this gradual slowdown but certainly we won't slip much more.

We've grown 7%.

I think we may see maybe 6% but never below that.

And the customer funds, I think that when we pull them all together, balance sheet, funds, mutual funds, I think we'll keep up the same percentage growth that we have right now.

And I'll hand over to Manuel for the other question.

On page 23 of the prospectus we have the table about entries in arrears.

And the June figures are now audited so, as we see, at the end of the year you often see an appearance of other headings.

This really sets us apart from our peers.

And we were saying that there are some charge downs which you can compare against last quarter and the fourth quarter the previous year.

There's nothing very special to report there, not a big change in terms of charge downs.

And there haven't been any big adjudications either, as you can see.

When we look at the assets that have been adjudicated, there's a small change there.

And again, the same is true with the available for sale properties that we have on our books.

So we can say that we're pretty clean.

If you look at the doubtfuls, this quarter it's EUR842m.

Approximately 600 and something would be associated to Spain and Portugal there, with the entries into arrears in Spain and Portugal.

And the rest would be from Mexico and the US, but the figures for them are much lower.

Okay.

And the next question from the room?

No more questions from here in the room?

So we'll go on to the conference call questions in Spanish, please.

It doesn't look like we have any conference call (technical difficulty).

Well, in that case, Antonio Ramirez has asked us about early retirements and the charges we've made there.

Does that complete those provisions and how many employees does that cover?

And Mario Lodos from Ibersecurities has asked the same question.

Well, when we talked about this at Investors' Day, we said then that for 2007, '8, '9 and '10 there would be charges of about EUR2b.

Last year was EUR100m.

We're going to speed up the plan now because the programs that we had drawn up are moving faster themselves.

So, perhaps, in the next few quarters we will see more chances for early retirement but always as part of the framework of our transformation plan.

I wouldn't like to give specific figures, but we'll be sticking to the framework we gave you on Investors' Day and that will be, sorry, EUR1b over the next few years up till 2010.

And everything is going faster than expected, so that's good news.

Well, the number of early retirements, I think rather than the number of early retirements it's, well, more interesting to have a look at headcount.

And if you look at the first semester for Spain and Portugal, we have 1,100 people less than we had before, so that obviously means lower costs.

We now go back to the conference call because apparently there had been a problem with the sound.

So we'll go to the questions in Spanish.

There's a question in Spanish from Giovanni from Execution.

I have a couple of questions about the cost of lending in Spain.

It's gone up to 49 basis points.

What can we expect for the next few quarters?

And is there a level beyond which people will look elsewhere?

And then, are you expecting any special provisions for the specific risks in Spain, either in Spain or Portugal, in Wholesale Banking?

And finally, this is a question about the cost of customer deposits in Spain.

That's increased slightly more than what you're making on lending.

Is there any sort of price war going on, in order to get more funding?

Well, no, it's true.

Mr.

Goirigolzarri is just saying that there is a sound problem, that they can't really hear the questions very well.

So the question is just being explained to him.

Okay.

Is the question clear now?

Okay.

For risk premium in Spain, as you will have seen, for Spain and Portugal in the first quarter we have a risk premium -- well, in the first semester, even, of 0.35%, so 35 basis points.

In the second semester we could get to 40 basis points.

I don't think we will, but somewhere between 35 and 40.

And for 2009, we -- there is no way that we see the risk premium for Spain and Portugal in excess of 45 basis points.

So, no huge changes there.

And do we have any special provisions?

The special provisions we have are our generic provisions.

We have a huge volume of generic provisions, as I said before.

In Spain, the volume of our generic funds has increased by EUR90m.

So, as part of the provisions that we've made this quarter, EUR90m went straight to generic provisions.

And we've increased the volume of our generic provisions in Spain.

Now, customer spread, I think it's better for you to have a look at customer spread in Spain and Portugal, because you're probably talking about the prospectus and I think that we give the overall figure for global business.

And as I did say before, global business is growing a lot more than our operations in Spain and Portugal.

This has been a deliberate choice.

We think now is the right time to position ourselves with clients that can guarantee returns because of their geographic position and because of cross-selling.

And that does tend to distort customer spread somewhat.

If we look at customer spread in Spain and Portugal, I think you'll see that it's been increasing for the last few quarters and net interest income over ATAs has also been increasing.

And when you compare it to our peers, I think our performance is really good.

Then, this funding war, what I would say is that this is nothing new.

For the last four or five quarters there's been significant pressure on pricing policy of funding by some banks.

We've made no secret of this with you.

And as I've often said in the past, we try and make the most of the price/volume split and our priority is to manage prices and not so much market share.

Although, of course, in the last few months we have seen an increase in market share but that is not our priority.

Our priority is net interest income.

And the next question from the conference call, please?

The next question is from Arturo de Frias from Dresdner.

Yes, good morning.

I have several questions.

The first one is I haven't asked you about the dollar for several quarters now, so here I am.

First of all, I'd like to know what policy you have right now, as far as hedging is concerned.

And what profits have you had from hedging in the first and second quarter?

And what is your outlook?

It seems that the dollar is quite happy with $1.50, $1.55, $1.60.

Are you going to be less cautious with your hedging now, in case the dollar goes back up, or do you think it will continue to depreciate?

Second question, still on the United States.

I'd like to ask you about your NPL ratio, this 90 basis points that you gave for the US.

You've explained very clearly that -- the areas where you are less at risk than other areas in the US.

But my question is whether these 90 basis points is what you're expecting for the next few quarters.

Could it get worse?

How do you see the property market there?

Then a third question, about developers in Spain.

After seeing some rather weak results last week from different operators, do you have any specific exposure?

It doesn't look like you have had so far, at least with the suspended payment processes we've seen in Spain, but do you have any portfolio risk that you're specifically concerned about as far as developers are concerned?

Then, two more questions.

Sorry, I don't want to take up too much of your time.

What about -- it's about cyclicity and Basel 2.

What about the impact of higher risk percentages, if the portfolio is impaired because of the risk-weighted assets?

If they increase by 5% or 10%, should there be a big increase in NPLs?

And then, I know you've just given the figures, but you don't think that you'll have a risk of owing 40 basis points in Spain and Portugal up to 2010.

Is the level above which you can use the generic provisions 55 basis points, which I think is something you've commented on in the past?

Thank you.

Well, I said 45.

I said I don't think it will go beyond 45 basis points for 2009.

It would be 40 basis points for 2008.

Perhaps I'll hand over to Manolo for the first question and then I'll deal with the others.

So I'll let Manolo talk about the dollar and Basel 2.

Okay.

Well, as far as using generic funding is concerned, in 2009, under new regulations that could happen.

That is why the stability of risk premiums is important for us in the future.

Now, the dollar.

Currently, our average hedging is 50% for results and another 50% for exchange rate risk impact on our net worth.

50% of that was in this first semester; that was EUR126m.

And the dollar hedging we have for results is very high.

It's almost 100%, certainly in excess of 90%.

The cyclicity of Basel 2 and risk-weighted assets, capital ratios.

This quarter, as you know, the Bank of Spain has approved our internal models and -- using the advanced method, by about 82% of the Group's lending exposure.

And those advanced models imply a severity hypothesis and also cyclical adjustments.

So, our consumption of risk-weighted assets, in terms of the advanced models, already take into account pretty serious negative situations.

So I think the pro-cyclicity of our risk-weighted assets will be very low because we have already calculated very conservative severity impacts.

We are, for example, calculating risk-weighted assets in the mortgage business of some 25%, when in the UK they have 13%, 14%, 15%.

Obviously, the difference is a series of very conservative hypotheses in terms of severity in cyclical adjustments, so that there would be a low level of pro-cyclicity.

Then, the two questions you asked about the US and developers in Spain.

In the US, well, basically, I think I've said everything.

Right now, it's true that our markets are performing better than the US as a whole.

We are making a constant and proactive analysis of the quality of our portfolio and I've given you the figures for that.

The risk premium has increased from the first to the second quarter.

The volume of provisions has also gone up from the first to the second quarter, as I said.

And the risk premium for the second quarter is slightly in excess of the 90 basis points that you mentioned, Arturo.

Of course, it depends whether you use averages or not, but I get 100 basis points.

And I think those 100 basis points are a good sort of benchmark for the third and fourth quarters.

That is our main scenario.

As I said during the presentation, with business volume that's growing in single digits, then we're growing as we have this second quarter in the US, which is our main scenario.

And we feel comfortable with that and we have very detailed analysis.

Developers in Spain.

If you'd allow me, I'd like to talk about recent events and suspended payments.

Instead of talking about exposures, I think we should talk about the different debts banks have in these sort of companies.

And I think there are two sorts of debt - those that the money was lent for corporate movements and those to fund development.

(Technical difficulty)

The kind of debt that people have taken out to fund their normal business tend to have much higher guarantees, so they're much more secured -- much better secured than other kinds of debt, sometimes 100% secured, as is the case that we have in many of the cases that have been mentioned in the press.

So we don't really have any exposure to the kind of borrowing which has been used just to backup corporate activities, M&As and suchlike.

So our position is quite different from that of other banks and I can say that we are in a quite comfortable position, really.

Shall we go on, then, with more questions?

Antonio Ramirez asks if we could give a breakdown of NPLs by segments.

And what will the situation look like at the end of 2008 and in 2009?

Well, I presume the question's about Spain, right?

Let's see, then.

Our NPLs in Mortgage business for homebuyers is 0.96% of consumer business.

It would be 3.5% in SMEs too.

And in corporate and institutional, it would be 0.59% and in developers 0.35%.

So those are the kind of NPL ratios that we have in the different businesses that we have here in Spain and Portugal.

We've got questions with respect to the real estate market.

Are we buying real estate assets?

And are we accepting them as security for refinancing loans?

We're talking about real estate.

I think that Manolo talked about that before.

In this quarter -- I can't quite remember exactly what the name of the item is.

But anyway, this quarter we haven't got anything to report there.

There's nothing really significant at all in adjudications or anything like that.

We've been asked for figures with respect to our exposure to developers in absolute terms and in book terms, here in Spain.

I think about EUR17b.

I think you know that better than me.

Yes, our exposure to that would be EUR17b.

I think all the Directors know that, especially our COO, as we are always asked that everywhere.

The total percentage of that over our total loan book here in Spain would be 8.3%.

And that exposure, then, to the total exposure we have to the whole mortgage business here in Spain.

As you know, most of what we have is to homebuyers directly.

So that would be 17.5%.

A lot of the exposure we have to developers is for first homes.

So they're developers who are developing first homes for the cities.

6.3% is for second homes, as we call them, which is really tourist homes.

And as you know, our market share in this risk is 5.63%.

And in this market, our policy has been very aware of the fact we had to bring down that market share.

You'll remember in 2004 it was 7.5%.

So since 2004, we've managed to bring down our market share systematically, so that we're not so exposed to that sector.

If you looked at the kind of mix we've got in the different kinds of development, only 9% is linked to land development.

91% is currently built or the developments that are being built and will shortly be finished.

We haven't got any exposure to big syndicated loans in this industry for acquisitions or any M&A debt, then.

And our exposure is very, very limited with respect to working capital or projects of that kind, for funding those kinds of projects.

(Technical difficulty).

And then, under other provisions, there's something about a release.

What does that refer to?

That was for country risk.

It was quite small.

It's really not relevant.

We had a generic release the previous quarter, so this is just country risk.

And the one we had was for contingents.

Somebody is asking about the adjustments we've presented.

What is the main driver behind that trend?

Well, that's very simple.

The evaluation adjustments correspond to two things - unrealized capital gains because of interest rate hikes and our interest rate risk portfolio.

That was in our euro balance sheet and Mexico and the US.

And then unrealized capital gains in equity, given market adjustments.

Eva Hernandez from Morgan Stanley has asked about Wholesale Banking.

Do we have any one-offs or extraordinaries there?

Is the trend there recurrent?

I think that the answer is definitely yes.

As you know, we usually have a portfolio of property in industrial holdings, which usually gives us quite constant capital gains.

And this quarter there hasn't really been anything special there, so the cruise speed that we're witnessing now is purely because it's recurrent business.

Do the -- does the trading income include any asset sales?

And then, another question, although you've answered that, whether the Bank of Spain had said anything about our internal models.

Well, the second question is yes.

And the first one?

Nothing that I remember.

Then, on global business, in which geographies and in what sectors are you seeing the increase in lending with global customers?

Well, we're seeing it in US companies with links in Latin America and European companies with links in Latin America.

All the growth we're achieving in global business is very selective growth.

We are aiming to make the most of market opportunities and boost our position with customers with two main characteristics - to generate cross-selling in the future and, secondly, we want them to be customers that give us a competitive advantage in terms of geographic coverage.

There were a couple of questions on Mexico.

One from Davide Serra.

Why is Mexico so strong right now?

And from Eduardo Garcia, about a EUR120m provision in Mexico this semester.

The EUR120m provision allocation, what's it all about?

Okay.

Manolo can answer that one and I can answer the first one.

As I said before about Mexico, there are two important issues - the Mexican economy and Bancomer itself.

The Mexican economy, as I think we told you all at the beginning of the year, we were very optimistic about the Mexican economy.

Of course, it would be affected by the US economy but we believed that the Mexican economy was going to be very resistant.

And we said that for several reasons and I think we've been proved right.

And that is why things are going so well in Mexico.

And also, people always correlate Mexican GDP to US GDP, when you have to correlate Mexican GDP to the US' industrial GDP.

Mexico has changed a lot in the last few years.

And unlike other crises suffered in the past, Mexico now has people in charge that can explain things, that put their money where their mouth is.

And really, Mexican domestic demand is very, very high.

It's hard, therefore, to extrapolate what happened in previous US recessions because the new Mexican economy will respond very differently.

That's what we said and I think we've been proved to be right.

Our research department was right.

That's one thing.

And then we have Bancomer.

In this environment, Bancomer has once again shown that its franchise really is different, its customer positioning, the way it has decided to get into different markets and the way it manages risks.

If you analyze the risk quality of Bancomer compared to its rivals, the difference is remarkable, the NPL ratio, the provisions.

And I think that is more than justified by decisions we made in the past.

The first decisions we made in Bancomer were to attack different markets.

We were the first to embark on consumer finance.

Then everybody else followed us.

We were the first with mortgages.

We bought Hipotecaria Nacional and everybody else copied us.

And the same is true with SMEs.

So, market positioning and being the first one there does give you a competitive advantage.

And also, in 2006, and I think we talked to you all about this, we decided to provision for our mortgage and lending portfolios in Mexico based on expected losses.

And I remember the market didn't understand it that well but it was definitely the right decision to make, for two reasons.

First of all, because it helped us to manage market proximity in a very different way.

When you work with expected losses and not incurred losses, your strategy is a lot more consistent and means it's a lot more valuable in the long term.

We have continued with expected losses and a lot of our competitors are allocating provisions based on incurred losses.

So that's one explanation.

The Mexican economy is growing.

Obviously, it has suffered some impact from the recession in the US but it's a lot more resistant than many people thought it would be.

Bank commerce management is very different, as is its position.

And that's because we were the first in many different marketplaces and because we decided to allocate provisions on the basis of expected losses.

Then the -- this question about the EUR120m provision in Mexico.

It's from the first quarter; it's not the second quarter.

There are only EUR20m from this quarter, for several different concepts.

The first quarter figure was EUR100m, where there was a bigger provision basically because of social benefits and because of the sale of Bancomer's historic buildings.

But there's nothing special there.

We have another two questions on Mexico about interest rates.

Javier Bernat and Diego Barron would like to know whether interest rates will continue to increase in Mexico and what impact this will have on your business.

In Mexico, as in many other emerging countries, the monetary authorities have a bit of a dilemma.

They see that there is a recession affecting some of the industrialized countries and then of course there is inflation and very strong domestic demand.

The Bank of Mexico has increased short-term interest rates by about 50 basis points to try and cool down inflation expectations.

I think there might be an additional interest rate hike in Mexico and that's the scenario we are considering.

Then, interest rate risk exposure in Mexico, well, our profits go up when interest rates go up.

There is very limited exposure.

And interest rate hikes have a slightly positive impact on our financial margin in Mexico.

There's a question now about the Citic operation, from BPI.

According to press information, there could be some problems with the delisting of the Hong Kong Bank.

Will that mean an increase in your bidding price or will that mean you'll have to put more money up?

Okay.

On the Citic operation, there are two things.

We haven't presented the bid, so Citic would be the one to answer that and not us.

And we're in a situation now in which we cannot say anything.

There's an information blackout.

There's a question about commercial real estate and developers in the US.

Are we concerned about that?

Has our portfolio there worsened or suffered any impairment?

Well, commercial real estate in the US, of course it's something that concerns us.

That's why I explained why we closely monitor our books there.

And I also said previously that in the second quarter we increased provisions and I explained that this will continue, in terms of volume and risk premium, in quarters three and four.

There will be similar volumes and similar risk premiums in quarters three and four as to what we've had in this second quarter.

I also think it's important to say that in Compass we're seeing an increase in business volumes because of the change in mix, given current market situations.

And as I said when I showed the slide, this change in mix which is more based on individual customers with much higher FICOs than we had before, because we've always had excellent FICOs.

And in the business world, we're also improving our ratings, as I showed you in the slide.

And from Insight Investment and Oddo, what about our interest in the UK and in Halifax Bank of Scotland?

Well, as we've said on more than one occasion, several quarters ago, in fact, now, we are very clear about our priorities and we haven't changed since then.

I'll just remind you of that in a minute's time.

We are absolutely focused on generating organic results within the Group and they are very consistent.

And our priority is our integration in the US, which I also talked about this morning.

And in August we'll be integrating a second bank and we have commitments to the market for synergies.

And those are our targets.

We want to come up with the goods in the United States.

That's where we're focusing 100%.

Then, we have a couple of questions from Ignacio Cerezo from JP Morgan and Mario Lodos from Ibersecurities about the impact of the whole Martinsa-Fadesa, Colonial on NPL -- on loan loss provisions.

Well, I don't have the figure.

I actually don't like talking about our exposure and our customer relations, but one of them is so big.

I have the Martinsa-Fadesa figures here.

I'd like to go back to something I said previously and that is customer exposure, whether it's property or not, are never homogenous.

And you have to distinguish the kind of exposure that different banks have with different customers.

Before, I made a clear distinction between lending or funding for corporate operations, or lending and funding to actually do business.

I explained that we were not involved in funding corporate operations and sometimes we are involved in funding the normal day-to-day business of the companies.

The funding we have in Martinsa-Fadesa was from Fadesa and it's not for corporate operations, EUR230m with mortgage guarantees and those are almost mature.

So I think, in terms of the severity, the difference between one kind of funding and the other, the difference is huge.

So we have EUR230m, all with mortgage guarantees.

Ignacio Cerezo wants to know why the core Tier I ratio hasn't increased compared to the first quarter.

Basically, the organic generation of core capital, which is still pretty significant, is being used to fund the early retirement charges.

So it consumes the generation of organic capital and that's why there's no increase in core Tier I.

Sergio Gamez from Merrill Lynch wants -- also asked about our capital ratios.

And what about the impact of the Chinese banks?

And what about funding in the long term?

Have we used the ECB?

What issues have we made?

Okay.

China, the second phase.

We've included the third phase -- first phase, not the second phase because it hasn't been completed yet.

That should be somewhere at the end of the third quarter, beginning of the fourth quarter, as we did explain.

So, the first phase, the first 15% of the bank in Hong Kong and 5% of the bank on Mainland China.

BBVA's funding situation is quite comfortable; it's quite different.

Our balance sheet is very manageable in size terms.

And we have many more customer funds than our European peer group and certainly our domestic peer Group, because in summer 2007 we were in a very comfortable position because we did our homework on time.

Jose Ignacio ended the whole presentation by saying that we'd done our homework properly.

We had EUR33m in mid-term funding and, well, we were in a much better position than anybody else.

So our position this year is quite comfortable, despite the fact we haven't had to go -- we haven't gone to the capital markets.

And we have lines of credit available for up to EUR50b, which goes far beyond our current needs.

We have EUR17b capacity to issue mortgage funds and we can use commercial paper programs, which we haven't used, but both in Spain, Europe and the US, obviously for quite modest figures.

EUR20m-odd in assets that we're not using but we could use.

And we go to the ECB's weekly auctions for about EUR3.5b, but only the weekly auctions.

We're not going to the monthly ones or the extraordinary ones or the quarterly ones.

So we're in a very comfortable position, I think, and we're definitely ahead -- head and shoulders above the rest.

And all issue markets are available to us - senior debt, Tier I, Tier II, everything.

BPI are also asking us about the average alpha and beta values in Spain.

Well, I had it written down because they've asked this question at all the other banks too.

Our average alpha is 1%, which is kind of maximum, and our average beta is 0.28%.

That's really based on the Bank of Spain's regulations for the whole Company, so this is BBVA Madrid plus Banco Credito Local, Uno-e and another one.

So that's 1% and 0.28% for the alpha and beta and that's using expected losses.

Our expected losses in this format, with this exposure in these companies, would be slightly below that average beta.

And the alpha is really at the maximum of generic provisions.

There are some questions here that have been answered.

Diego Barron is asking about the early retirement charges.

And the others are all requests for breakdowns that we can provide through Investor Relations at a later date, so I think that's it.

Thank you very much for your attention.

Thank you to those of you who are actually here in person.

And what I would like to say here, just as we did last year, that we've also done our homework this time and passed all our exams.

And some of us might even be lucky enough to go on holiday.

Speaker statements on this transcript were Interpreted on the conference call by an Interpreter present on the live call.

The Interpreter was provided by the Company sponsoring this Event.