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Unidentified Company Representative
(Interpreted) Good morning, everyone.
As always, we're going to go ahead, now, with the presentation of our results for the first half of 2009.
And, as we always do, our COO will give us a presentation, after which we'll be able to deal with any questions that you have in the same order we always follow.
First of all, questions will be taken from the room, here, for those of you who are actually here.
And then we'll take the questions over the conference call.
And then, finally, we'll take the questions that come over the webcast, which Carmen will read out to us here.
For those of you who've actually come here, as always, we've prepared coffee for you after the presentation if you wish to have coffee with us.
So, I can now give the floor to the COO.
Thank you.
Jose Ignacio Goirigolzarri - President and COO
Well, a very good day to everyone, and many thanks for your attention.
And many thanks for being here, those of you who are here, particularly to follow this presentation.
For this quarter two, we are presenting the results of the BBVA and I can say, in advance of the presentation, that we've got very sound results to announce.
I'm going to be structuring the presentation into four main areas.
First of all, I'd like to go into depth about why we're presenting earnings which are very clearly above expectations.
Secondly, I'd like to share some good news with you about what's happening to our risk quality.
And, then, thirdly, I'd like to talk a little bit about our strong organic generation of capital.
We've achieved that this whole half year but very especially in the second quarter of this half year.
And, then, finally, I want to talk about the fact that all of our franchises are in a stronger position, and I want to see how the different franchises are positioned, vis-a-vis our direct competitors, in each of the different markets that we work in, given the very complex situation that we're living through at a macroeconomic level.
Let's start with the first point, then.
We're talking about earnings which are above expectations and you can see that here, representing the highest level of earnings in all of our history.
Our attributable profit, as you can see here, was EUR1.56b and that means a growth of 5% against the same quarter of the previous year.
It also means a growth of 26% in quarter-on-quarter terms.
Since you all very well know that we haven't made any rights issues, this attributable profit goes directly into our earnings per share, and that means that, in the second quarter, earnings per share has gone up 5% too.
So, in the half-year as a whole, the earnings per share have gone down 4.1%.
Now, why are we presenting these strong earnings in our attributable profit?
Well, because down to the operating profit, we're seeing that all lines on the account are really strong, and that starts right from the very first line.
If you look at our net interest income, there we're growing, as you can see, quarter-on-quarter, and in year-on-year terms, as well, we're growing over 25%.
And if we compare ourselves against the first quarter of this year, we are also growing at nearly 10%.
If we, then, move from the net interest income to the gross income item on the account, you can see the consistency of the growth in our revenues.
And, as important as that, we've got very good quality.
As you can see, gross income is growing at nearly 8% but the structure between the recurrent and the non-recurrent part shows that we've got even better quality in this half-year than we did in the first half-year of last year.
This strength in revenues is accompanied by the results of our transformation plan that we launched at the end of 2007.
And this isn't just theory, this is what's really happening to our costs.
And, yet again, our costs have gone down, very clearly, and that means that, in a very complex macroeconomic situation, which is what we're all seeing at the moment, the BBVA Group, nonetheless, has managed to improve its cost income/income ratio, and to do so in an impressive manner, as you can see.
Without Compass, in fact, our cost/income ratio for the Group, as a whole, would be 37.2%.
The combination of strong revenues and improvement of efficiency gives us an operating income that looks like this, and that's the most important thing on the operating statement.
This is really the core thing to measure when we're trying to work out our real performance.
And you can see the quarter-on-quarter results in our operating income and you can see that, in the first half-year, if we compare ourselves against what was happening last year in the first half of 2008, we have grown 15%, or 18% in constant euros.
So, that's the first message that I wanted to put across very clearly in this presentation.
But when we analyze things below the line, when we go down from operating income and start to talk about risk, there, too, I think we've got very positive news.
These positive news are based on various different factors and we've covered five, here.
First of all, because we're showing a reduction in net additions to NPA, that's true for the Group as a whole but we'll see it happening in all the different business units, as well.
You can see the new entries to NPA, the net additions to NPA in the second quarter this year, we are below the levels that we had in the third quarter of last year.
And, here, there's an element that is working very well.
Everything that we've been investing in our recoveries infrastructure is bearing fruit, now.
And, there, you can see the performance of the ratio between recoveries and entries into NPA.
So, I think that's a very positive message.
The second message is to say that the reduction in net additions to NPA is being made compatible with the purchases of property, which has been very selective.
We were talking about EUR300m would probably be, more or less, the level of purchases of real estate assets.
And, this month, -- sorry, this quarter, they've been EUR178m, with a total stock of EUR1,028m.
So, there, we've got a provision of 25%, which is the reason why the net stock without provisions, at the moment, is roughly EUR1b.
This effort we've been making to have prudent provisions is something that we do every quarter but it's especially clear this quarter.
In fact, in this quarter, real estate assets have been provisioned with EUR195m and that's really the main reason why we have that leap between the first and the second quarter.
But, anyway, I want you to look at that yellow line on the graph.
With this prudent provisioning policy we are, nonetheless, able to ensure that the ratio between provisions and operating income has maintained itself constant.
We're putting 35% of our operating income into provisions and, over the different quarters, you can see that this ratio is remaining, more or less, flat, which means that we're controlling new entries to NPAs.
We've got good control over property purchases, a prudent provisioning policy and ample coverage with our provisions.
The coverage ratio is something that I've always said was a very broad-ranging kind of measurement, and it's a good idea to see what's behind that.
And the more NPA you have, the more you have to work very hard to bring down this level with the coverage.
And, so, what we're looking at, here, is the difference between our assets that have collateral, the ones that are in arrears that -- but that have collateral and those that don't have collateral.
When we analyze the ones that do have collateral, we're talking about EUR6b, basically.
The value of the collateral, the actual guarantee that's attached to these NPAs is EUR11.3b.
Now, this is a point that we're analyzing month by month in order to be able to get the current value of the collateral, which means that our assets without collateral amount to EUR5.69b, which are provisioned with more than EUR8b, so the coverage ratio is over 141%.
And I think that this is a snapshot which gives us much more information than just talking about the coverage ratio, in general.
So we've got coverage with collateral and with provisions.
And we think that this kind of coverage, with the collateral and with the provisions, is quite a comfortable level.
And, even so, we've got a very limited release of generic provisions, EUR300m in the fourth quarter last year and now EUR289m in the second quarter.
The total volume of generic provisions and substandard provisions is over EUR4.5b.
Consequently, apart from these results with a 15% growth in operating income, in risk, as well.
Obviously, we're noticing what's happening around us, we're affected by our environment, but we are in control of things, we're bringing down the net entries into NPAs and we're covering well with provisions and with collateral.
And, now, I come on to my third point, the strong organic generation of capital that this Group is presenting this quarter and last quarter.
Indeed, these are the results that we can show you without one-offs.
And, here, you can see what's been happening to the different percentages, so that you can see the changes in our cruising speed.
But these earnings -- behind these earnings and our business volumes, you can see that we are organically generating capital.
And I think it's very important to ensure that you understand that this first half-year we've generated EUR2.1b of core capital.
This EUR2.1b of core capital is an important matter for us.
It's very important, let's underline that, just as we did the growth in operating income.
And how are we managing to generate so much core capital?
Basically, there are three reasons.
First of all, we're getting strong earnings, well, you've already seen we've got very good earnings.
Secondly, our prudence when we redefined our payout policy.
And, thirdly, because we are being very active in managing our risk-weighted assets.
Now, what does this actually mean to generate EUR2.1b of core capital?
Well, you can see this in percentage terms now.
If, in the first quarter, we were presenting an organic generation of capital which was 20 basis points, this quarter it's now 50 basis points.
That's to say, in the half-year, as a whole, our core capital has gone up from 6.2% to 6.9%, and I think that there aren't many banks, worldwide, that can present this level of organic generation of capital.
Talking about banks worldwide, another thing we've done has been to analyze how they manage or measure their core capital.
And we've decided that, from now on, we ought to use the same standards as everyone else does.
So, standardizing our criteria, that 6.9% would be 7.1% and, from now on, that's going to be the kind of standard that we will apply in order to report this ratio.
We're in a complex economic environment, now, but look at the levels of returns that we're getting.
All these returns are improving, as well, all these ratios are improving.
Our return on assets was 1% and it's now 1.1%.
Our return on tangible equity has now gone up to 30.3%, so we've got very strong levels of returns.
So, good returns, good control of risks, generation of capital and, now, I want to analyze the different business areas in our organization.
And I want to emphasize the strength of our position which is getting stronger in all the different markets, taking into account what's happening in the potential markets.
So, looking at the different markets where we're presenting results which are always better than those of our peers, our local peers.
So, let's look at the five business areas and start with Spain and Portugal.
As you already know, given our reporting system in Spain and Portugal, we've taken out, and we always do, all the interest risk -- interest rate risks.
And we're growing at 5.4% and our operating income is growing at nearly 6%.
This is because of our repricing policy, which is something we've been doing for several quarters.
And, secondly, because we're controlling our costs, and that's very significant.
The reduction of costs is 6.5% in Spain & Portugal and I think that that is something we should also underline, and it's what makes us able to keep up our operating incomes in Spain and Portugal.
But we were talking about the Group, as a whole, and saying that we're seeing a drop in the net entries into NPA, and that's especially important in Spain and Portugal.
Here, you can see what's happened to net entries to NPA in Spain and Portugal over the last four quarters.
And you can see that, at the moment, we are at about EUR1b, more or less.
That's clearly below the levels we had in the third quarter of last year.
And I was also saying, before, that we were seeing the payoff of all the investments we had made in infrastructure to do recoveries Group-wide, but that's especially significant in Spain and Portugal because, there, the ratio of recoveries to new entries is consistently going up and improving.
But, more than that, if we compare ourselves against our peers and we do it on a like-for-like basis, and we've often said that, for us, purchasing real estate assets in term of economic logic is the same, really, as having NPAs.
But if we compare the way that we report our NPAs, including the purchase of property, it's quite different.
So, if we look at other properties, such as the levels of arrears in all the securitization portfolios which are data that are published, we come to the same conclusion.
We are definitely in a better position than our peers.
But that's not only true in terms of risks and NPA but also in terms of the way we present our earnings.
And, here, we've analyzed something which is something we always track very closely, internally, because it's a key indicator for us.
But we've been looking at what's happened to our market share for Spain, our businesses in Spain, compared to our main competitors.
And how do we define that market share?
Well, it's the market share of the net recurrent operating income after provisions, taking out the volatile items, like dividends and net trading income.
So, that net income figure in Spain has been performing, as you can see, here, on the graph, which means that our earnings in Spain and Portugal are not only sound and consistent but also compare very well against our peers.
Anyway, we're talking about a business unit that's giving us returns on equity, at the moment, of 36%.
And, now, I'd like go on to the second big business area, Wholesale Banking & Asset Management.
And, for several quarters, now, we've been showing excellent earnings.
Recurring earnings and also consistent earnings and, for yet another quarter, our earnings are recurrent and consistent.
So, if I may, I would like to start with our Private Investment Banking.
And, here, you can see a qualitative and quantitative change in our performance.
From a quantitative point of view, the operating income is excellent.
It's increased by 30.7%, but I'd also like to indicate the qualitative highlights.
If you may remember, a year ago we said that we were going to allocate capital to this unit because we thought that, in a competitive environment, this was a major opportunity for us.
So we said that we didn't want to allocate capital just to increase our book values, but also to improve our cross-selling and, in short, to improve our revenues from fees.
And this is something that we are achieving.
And, here, we can see the revenue structure that we had in the first quarter of last year and the revenue structure, this year, and we can see how the weight of other revenues, i.e.
fee income, is growing significantly.
So, from looking forward, Private & Investment Banking should produce good results, both qualitatively and this ratio should also improve.
With regard to Markets, we've got another good quarter in terms of operating income.
We have a growth of 29.4%.
And with regard to Asset Management, as we've said in other quarters, we've continued to increase our market share and we have become the leading manager in the country.
So, in short, here we have the income statement for Wholesale Banking & Asset Management.
And, quite honestly, it's quite difficult to interpret this income statement because, as you can see, it's been impacted by the industrial holdings.
For instance, if we take out Gamesa, which was capital gains that we earned in the first half of last year, then we'll be talking about attributable profit of 26.3%.
You have a breakdown of this in your dossier of all the different business units, so you can really see the excellent results that we're gaining from the different banking units in Wholesale Banking & Asset Management.
So, if I may, I would like to move on to Mexico.
We talked about Spain, we've talked about Wholesale Banking & Asset Management so, now, we're going to have a look at Mexico.
Talking of Mexico in this quarter is quite exciting because it's difficult to conceive such a complex environment as the one we've had in Mexico in this second quarter because, from an economic point of view, you know exactly what's happened to GDP in Mexico.
But, on top of that, we have an additional problem of the swine flu pandemia -- pandemic, which con -- was concentrated in the months of April and May in Mexico.
So, in this highly difficult environment, Bancomer is showing itself to be highly resistant.
The operating income of Bancomer, without VISA which was a major transaction, grows 13.3%.
Or if we add VISA, then the operating profit is increasing by 6.4%.
The reason for this is, basically, because the net interest income is resilient and it's resilient because, despite the fall in consumption in mortgages and SMEs that Bancomer is holding up.
But the second reason for this is because of our contention of our -- expenses of our costs.
In fact, in Mexico, so if we compare this first half with the same -- the first half of last year then, in such difficult circumstances, the attributable profit is falling by 13.3%.
Or if we take the VISA operation out of -- the transaction out, it's 5.9%.
And I haven't seen larger drops -- I don't see anything in the future to here -- from here to the end of the year, so I think it's important to mention, too, this because it tells us something about the resilience of Bancomer.
As I was saying, this has been a very difficult quarter for us and, of course, the impact of swine flu has been an enormous one.
This has been especially significant in the world of recoveries because, obviously, the call centers haven't been able to work.
They couldn't work in the last week of April and for much of May they couldn't work either.
And this comes through in our loan-loss provisioning.
We can also see it in the NPA ratio.
If their loan-loss ratio, which is the left side of this slide, here we have the monthly average we had in the first quarter.
It also includes the loan-loss provisioning for April, May and June, and we can clearly see the effect of swine flu.
In April/May it goes up and then in June it comes under control.
The NPA ratio in this context is 3.9%.
But we're also going to compare ourselves with our peers in Mexico from the point of view of risks and also from the point of view of the income statement.
Starting off with risks, this is something that we've seen in other presentations in different ways but, in short, this is like comparing the Bancomer risk premium with the risk premium of our main peers that we have in Mexico over cost of the risk.
And we can see that there's a clear difference and it's growing wider.
And this is one of the fundamental components that justifies this slide.
Here, we've done exactly the same analysis as we did in Spain, i.e.
to look at the market share that Bancomer has in comparison with its main peers in the recurring operating income without the net trading income.
So, we have dividends on one side and the net trading income on the other side.
So, we have the incredible market share that Bancomer has but we can also see how our market share is growing.
And what it is showing is that, in times of crisis, Bancomer is strengthening its already power -- strong position in Mexico.
So, here, in short, we have the income statement that we're presenting for Mexico and, once again, we're comparing the first and the second quarters and the performance of all the different margins.
And, as I said before, I can't see any deterioration in terms of fall of -- any significant fall in attributable profit and I don't think there will be any between now and the end of the year.
So, this brings us to the United States.
We've looked at Spain and its competitive position, we've looked at Wholesale Banking & Asset Management and the strength of our position in Mexico in the year to date, so we'll now move on to the United States.
I think there's excellent news from the United States that I would like to share with you, this is the right side, which is the operating income.
The operating income in the United States, despite the difficult economic conditions that we all know about, the operating income is growing consistently as we can see in the graph.
This happened in the first quarter and we see it, once again, in the second quarter.
And, basically, this is due to two things.
First of all, because we've focused our pricing, which we can see on the left, and we can also see the net interest income over average total assets.
This is a clear growth in line with the priorities we have for Compass.
And the second issue is price -- expense control or cost control, and this is fundamental for us to be able to contribute growing operating incomes from the point of view of net additions to NPAs.
Once again in the United States, we are keeping these under control and reducing the net additions.
And, once again, this is a consequence of the increase in recoveries over net additions to NPAs, as we can see in this slide.
It's true that this reduction in net additions to NPA is consistent with a level of provisioning which, in the second quarter, has been quite high, as we can see here.
But there's another piece of good news that I have for you and these are the percentages that we can see underneath the bar graphs on the left side of the slide.
These percentages show us the percentage of the operating income that we're devoting to provisions.
And, despite the fact that we've had large provisions in the second quarter, this percentage of 60.0%-odd, between 60% and 70%, has maintained -- has been maintained stable.
And this is what enables us to present positive attributable profits once again in the United States because, here, once again, the spread and here Compass is key to this are comparisons and the differences between Compass and its peers in the fundamentals are substantial, as we can see here.
From the point of view of the net trading income over average total assets, as we can see, they are also substantial and this is something that's going to be improved from the point of view of cost/income ratio.
And they're also substantial from the point of view of the ratio of provisions and operating income.
And, in fact, our peers have greater provisions than operating income, and we have maintained our operating income that is growing and absorbing the pressure on provisions and this is what we are going to continue to do in the months to come.
So, in short, here we have the income statement for the United States, which -- it makes more sense to compare this quarter-to-quarter rather than year-on-year because you've heard me say, more than once, that, after the summer, all over the world but especially in the US, life changes.
And this brings us to our final business area, which is South America.
And here, once again, the news is good.
First of all, because the macroeconomic situation is really holding up.
It's true that there is an impact on our business, especially on investment, on lending.
This has slowed down but, as we can see, we can see the lending volumes here.
And what is very important for the income statement and the profitability of our banks it's not having an impact on our on-balance sheet resources, which are growing at over 20% still.
This means that the revenues and the gross income is growing at 22% and that our operating income in South America is growing by 31%.
Efficiency in South America, and this is an old dream that many of us had for a long time, at the moment, is below 40%, the cost/income ratio.
And with regard to the cost of the risk, although there is a certain growth in this, and this will continue in the quarters to come, we are not seeing qualitative changes from the point of view of the quality of the risk, also from the point of view of the cost of the risk that we pay in the different countries.
So, in short, here we have the income statement for South America and -- where you can see the performance quarter-to-quarter.
If we compare the first quarter with the half-year of the same, you can see how we're really getting up to cruising speed.
And this brings me to the end of my presentation and, by way of conclusions, as the classics say, that you can't argue against facts.
So, by way of conclusions, I would like to present the four points that we started out with.
First of all, the earnings are above expectations, which show the clear consistence and clear recurrence.
And the recurrence of the earnings is something that stands -- makes us stand out from our peers.
And, here, the operating income is growing by 15%, or 18% in constant euros.
Moreover, it's concentrating the idea that, for the year as a whole, we'll see our operating income will be increasing by double-digits.
Second, good news on risks.
Of course we are feeling the impact of the economic -- the world economic crisis, of course we are.
But it's important to point out that, in terms of risk quality, first of all, we have this issue under control.
We've seen this from the point of view of the net additions to NPAs and also from the point of view of real estate purchases.
And also this is well covered, which we've also seen from the point of view of a more sophisticated analysis of the coverage ratio, and also from the point of view of the release of generics and the provision funds that we have.
Third point.
We're showing historic growth in organic capital.
70 basis points, EUR2b in capital in the first half of year, 20 point -- basis points in the first quarter and 50 in the second quarter.
And then the second franchises vary a little bit, depending on the individual economic environment.
But one common factor that they all have is that they are outperforming their peers.
And therefore, we are strengthening our position in all the markets we operate in.
So, thank you very much for your attention and we can now move on to the Q&A session.
For anybody who's listening from outside if you'd like to ask a question, please press 01 on your touchpad.
Carmen Hernansanz - Head of IR
(Interpreted) Good morning, everyone, and, as we always do, we can now take any questions that you might have, here, in the room.
Go ahead.
Luis Pena - Analyst
(Interpreted) Yes, good morning.
Luis Pena, and I've got three questions.
First of all, about capital.
You said that the core capital ratio using like-for-like criteria, comparing yourself against other European banks, would be 7.1%, I'd like to know if you can give us a bit more color on that.
What criteria are you going to be changing for the future?
So, what's the main change you're making to get core capital ratio that's 20 basis points above your peers?
And, then, according to what you said about the net entries into NPAs in the second quarter.
If you look at things, in general, there are seven people who think -- several people who think there's going to be a new wave of NPAs coming into the stocks in the second half, and there are others who think that, generally, things will flatten out or possibly even go down over the next few quarters.
How do you see this?
What do you think will happen?
And, then, the third thing is provisioning and what you have with all the adjudicated properties.
You said it was a 25.0% ratio and that would seem to be quite a big figure.
What criteria have you used for adjudications of properties?
And what do you think the maximum value could be for this item and what you've done for provisioning these kinds of assets?
Jose Ignacio Goirigolzarri - President and COO
(Interpreted) Would you like to pick up on the first point?
And I'll deal with the second two questions.
I'll start with the first point then, yes?
Unidentified Company Representative
(Interpreted) I thought you were going to start with the other two.
Unidentified Company Representative
(Interpreted) Basically, the change of criteria will have an impact on the software that has to be depreciated.
And, as the Basel IA -- the Basel circular says we're not going to do this so then this explains most of the 20 basis points.
There are some other things but they're not so important.
Unidentified Company Representative
(Interpreted) With regard to the other two questions, the net additions to NPAs in the second quarter, basically on a -- from Group-wide, I think they're in line with what we've been seeing.
I can't see any major increases or any major reductions.
Basically, the net additions to NPAs in the third and fourth quarter, I think, will be very similar to what we're seeing at the moment.
I can't really see any qualitative changes with regard to provisionings for the adjudicated properties.
We're taking a very prudent stance on this.
For the adjudicated properties or for buying assets and, in general, for analyzing all our collateral, we are being very stringent about the real market price at all times and, based on that, and with the prudent weighting that we always give it because of looking forward, we think this is a good idea and this is what has enabled us to establish this 25%.
I would just like to add, Luis, that if we look at the figures in relative terms, both with regard to adjudications and also purchases of real estate in general, are far below the figures reported by our Spanish peers, so we don't really have a very significant portfolio.
We're talking about a net of about EUR1b in properties and EUR500m in adjudications.
Carmen Hernansanz - Head of IR
(Interpreted).
Further questions?
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
No, when we talk about the real estate that we're buying, and we're talking about EUR1,927m, that's before the NPAs.
With regards to adjudications we have EUR240m net where we've already -- also added 25%.
So everything that is property, both with regard to preventative purchases and also adjudications in terms of the recoveries, amounts to EUR1,028m plus the EUR240m that we've mentioned.
That's the entire position in real estate.
Prior, afterwards, adding it all together, that's the total, the EUR1b, just over EUR1b.
And we're 25% provisioned.
Irma Garrido - Analyst
(Interpreted).
Good morning.
I'm Irma Garrido from the Corporacion.
Bearing in mind that you have almost the 80 basis points of core capital which was your objective for the year, maybe we could come back to the issue of your 30% payout for 2009, and maybe you can give us a forecast for future years.
Also with regard to provisions -- insolvency provisions, maybe you could tell us a little bit more about the prospects with the new regulations of the Bank of Spain and the implications that this will have for BBVA, because I think the coverage ratio that you would get from the calendar.
Or do you have any intention of making greater provisions?
You're talking about 76% -- sorry, 67%.
But you said this is a very complicated period.
And finally, with regard to net interest income in Spain and Mexico, what can we expect with regard to interest rates?
Thank you very much.
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
Well, starting then with your first question, we didn't have a target of 80 basis points.
That was just an estimate.
And really when we established that estimate of 80 basis points, which obviously we surpassed, that was when we were talking about a payout of 30%.
So we defined it there and then and said that our dividend policy was going to stand as it was at 30% payout, with cash for 2009.
And this will be our payout policy for 2009.
Then secondly, with respect to loan loss provisions and the impact of the new circular from the Bank of Spain, well, there too, the impact of the letter that we get from the Bank of Spain is not going to be very great in general.
If you have sound loan books and especially sound mortgage books, the impact is not going to be very great, and it's definitely not going to be great for us.
And as to what's happened to the net interest income in Spain and Portugal and in Mexico, there we can see that probably over the next few quarters there could be changes, but not very big ones in Spain and Portugal and in Mexico.
We think there'll be positive news there for the rest of the year.
Carmen Hernansanz - Head of IR
(Interpreted).
Any more questions here from the room?
Okay, then we can take the questions that are coming over the conference call.
We've got one so far in Spanish.
Operator
(Interpreted).
Yes, good morning.
Let's start with the questions from the conference call.
The first one comes from Arturo de Frias from Evolution.
Please go ahead.
Arturo de Frias - Analyst
(Interpreted).
Good morning.
I'd like to come back, if you'll allow me, to what you were saying about the dividends.
And really I've got the same question that my colleague put forward in slightly different terms just now.
When do you think you'll be able to increase the total payout back to the 50% level?
I think that was what my colleague really meant when she was asking her question.
It's very clear that your earnings are pretty stable, especially given the environment.
And you're showing sound performance, despite the problems with the recession.
Your Tier 1 figures are pretty good.
So I would say that actually the 30% payout was really an emergency decision, and probably it's not so necessary any more, and it might be very good news to say it was going to go back to 50%.
What would you need to happen to be able to announce to the market that you were going to go back to your 50% payout policy?
Another question about Mexico has to do with the cost of risk there.
I was doing some calculations.
The cost of risk has gone up a little bit against the previous quarter, in line with everything that you were talking about with the swine flu and the GDP going down.
I think about 5 -- 50 basis points.
So how high do you think it can go?
Do you think it will continue to increase at this pace?
Could it go up to 600, 650 basis points?
Or do you think that we've already peaked?
Then the third question would have to do with what's happening to your equity and your core Tier 1 capital ratio.
I was quite surprised, positively surprised, that is, to see such a strong increase in core Tier 1 and equity ratios for this second quarter and the first half as a whole.
Can you explain how you managed to get such a big increase in equity?
Obviously you've had strong earnings but has there been anything else happening with your reserves or adjustments in the way that you are valuing things?
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
Well, there hasn't really been anything special, but maybe if you take on the second then I'll --?
Manuel Gonzalez Cid - CFO
(Interpreted).
With regard to getting back to our 50% payout, one thing I would like to say, it is surprising because this is something you've been asking for several quarters.
So maybe we're going to need capital sometimes.
So what we did was we took a responsible measure to maximize organic creation of growth which shows that this Group, that in this context, can generate over EUR1b per quarter which is the capital that other international institutions are destroying each quarter.
So this is a major difference with regard to other -- our peers, is our capacity for organic generation of capital.
Basically what we did was our decision on payout was to accentuate this.
So when are we going to change our policy?
Obviously when we have greater visibility about the environment that we're facing because we're still seeing very weak growth globally, but especially with regard to the new regulation of the financial industry, because there are loads of internationals changing the regulations which are going to increase the capital requirements for the industry, without any doubt.
So until we have a clear view of what's going to happen there, we continue in this situation, we'll continue to accumulate capital.
We have a 30% payout, but we pay it out in cash.
And very few banks internationally are capable -- are paying dividends in the current environment in cash.
So we'll be one of the very few institutions that will continue to make the payout in cash.
I'd also like to remind you to put this -- all this into context, with regard to the like-for-like capital ratios, which is totally comparable with our peers, of 7.1% at the end of this first half, are obtained without the Group making any use, of course, or to go into the capital markets in very difficult market conditions and very low prices, as happened in the first quarter of the year and part of the second quarter.
And also without using any of our extraordinary sources for generating capital that the Group can call on.
And the reason I'm telling you this is because many of our international peers present capital ratios that appear to be better than ours without the organic capacity for generation and having used many of their mechanisms, their extraordinary mechanisms for generating capital.
Do you want me to --?
Okay, I'll move onto the second one before you come in.
With regard to the reasons that Arturo was asking about for generating this capital in this quarter, basically what we have here is capital generation which is associated to the withholding profit of 41 basis points.
Even with the 30% payout with the year-on-year -- the quarter-on-quarter payout, the RWA has dropped quarter to quarter as a consequence of an exchange rate difference in the dollar.
And our business has not increased very much.
And also this growth has been biased towards lower risk business and therefore there's a lower consumption of risk-weighted assets.
And then foreign currency and other things has also contributed 9 basis points.
So from the point of view of the structure of equity cover that has been set by the Bank, and this has made it possible to generate 50 basis points of capital.
But basically the core of all this is a combination of retained profits and the RWA behavior.
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
Yes, that's true.
And with regard to the payout, and I would repeat what Manuel has just said, Arturo, we were very cautious.
We looked forwards.
We defined our payout policy.
We are consistent, constant.
We are generating capital organically, so when the picture is clearer, but I would think that the 2009 has already been defined and we're not going to change our dividend policy in 2009.
With regard to the cost of risk, in Mexico, as I said in my presentation, we have been clearly influenced by the impact of swine flu.
For us the impact of swine flu, which I would remind you, which started in the last week in April which was fundamental for recovery and then continued in the first two weeks of May which was also essentially for recoveries.
So this had a clear impact on April and May.
In June in terms of performance of the NPA have stabled off.
And if you compare the cost of the risk in the first quarter with the second quarter, then obviously in the second quarter the cost of risk has increased.
But the average of the cost of the risk, the average for the quarter is just over the level of the fourth quarter.
That's for the first quarter.
I don't think it's going to grow any more in the rest of the year for Mexico.
Arturo de Frias - Analyst
(Interpreted).
Thank you very much.
Carmen Hernansanz - Head of IR
(Interpreted).
Next question from the conference call.
Operator
(Interpreted).
There are no further conference call questions in Spanish.
We'll move onto the questions.
The first question in the English conference call comes from Mr.
Antonio Ramirez from Keefe, Bruyette & Woods.
Please go ahead.
Antonio Ramirez - Analyst
Hello.
Good morning.
Antonio Ramirez from KBW.
I have basically four questions.
The first one is very, very quick to answer.
It relates to your hedge portfolio on the ALM, on the euro balance sheet.
So if you can please update us about the amounts you have built from that portfolio.
What's the average duration and what's the average yield of the portfolio?
And also if the hedge is implemented via this government bond portfolio or if you have complementary strategies.
I'm thinking basically on interest rate derivatives.
So that's the first question.
The second question refers to Mexico.
I think the results in Mexico are just fantastic considering what happened likely to the Mexican economy in the second quarter with people talking about GDP minus 10%.
So shall we consider this as the bottom?
How do you see the cycle developing in Mexico?
Do you expect recovery already in the third quarter and then in the fourth?
So how do you see the cycle playing for the economy in Mexico?
And then how Bancomer should benefit from that?
Clearly Bancomer has been extremely resilient.
So shall we expect Bancomer to start growing earnings again as the cycle improves?
So that's my second question, if you can elaborate on the Bancomer position in the Mexican economic cycle.
The third question refers to Spain.
In my memory, when BBV merged with Argentaria 10 years ago, the combined market share in credit was above 18%.
I think today your combined market share in Spain -- well, not combined, the Bank now has around 13% or even below 13% market share.
So we know who have been the winners in terms of market share in the last decade.
And we know they are in big trouble right now.
So can you elaborate how big you think is the opportunity for BBVA in the Spanish market, and not only in terms of volumes, also in terms of margins which is probably more important?
And also on the deposit side, we know some banks are desperately gathering deposits, some banks and savings banks.
BBVA seems to be getting them much cheaper.
So can you elaborate on the competitive environment in Spain and when you think you will take advantage of that more substantially?
And then my final question regards to the US and your strategy there.
We have seen banks falling and banks being intervened by the FDIC.
Do you think you will have a role to play in that process?
Some of the transactions we have seen look really attractive.
So what's the role for BBVA Compass in that situation?
What kind of opportunities you may have.
Thank you very much.
That's all.
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
Okay.
Do you want to talk about the hedging?
Manuel Gonzalez Cid - CFO
(Interpreted).
Yes.
Antonio, there hasn't been very -- any significant changes compared to what we were saying in the first quarter.
The ALCO positions, and basically here we're talking about treasury bonds there, had some positions in interest rate derivatives.
So basically it was bonds with an average life of about three years at the moment, with maturities which are more or less on the average part of the curve and they're contributing to our financial margin.
About 5% probably of our financial margin is associated with those positions, our ALCO positions.
And the positions we have in Mexico, in the United States and the euro balance and the Latin American balances are all positions that are well below 10% of the total assets that the Group has at the moment.
So that's what we've got in our interest rate hedging positions, which are really just trying to cover the position that we have with customer funds, especially customer funds that we have in current accounts and sight accounts, because these are growing significantly in all the balance sheets in the different business areas that we have.
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
Okay.
And with respect to your other three questions, let's start with Mexico.
I do agree with you, Antonio.
The earnings of Bancomer have been magnificent, and they are proving that the Bank is very resilient.
And, as I said before, I think that they will continue to show this resilience in the rest of the year as well.
As I said before, I can't foresee any drops in attributable profit any higher than we've already reported in the first half year.
Nonetheless, we're being very prudent with respect to the cycle in Mexico because the cycle there will depend on what happens in the United States to a large degree.
In the second half of the year, things will obviously be much better than the first half year.
And in 2010 we think that there will be a positive performance of Mexican GDP.
But talking about the cycle, I would say that a positive performance will probably come in 2010 in terms of GDP in Mexico.
And Bancomer is taking advantage of its current position as the downturn in the cycle, and it will continue to do so when there's an upturn in the cycle.
Now how can I say this?
I say this because, as always, it's a matter of anticipating what's going to happen next.
One of the reasons why Bancomer is able to report such positive performance is because it anticipated things.
We've talked about this quite a lot.
But I want to remind you that it was anticipating things in terms of strategy in Bancomer where we started to develop consumer credit and credit cards in 2003.
In 2004 we bought Hipotecaria Nacional and began to develop our mortgage business.
And at the end of 2004, beginning of 2005, we developed a network which was specializing in SMEs.
But our competitors at that time had no idea about these markets.
They weren't even thinking about them.
They were moving into the consumer and credit card business, really in 2006, maybe the end of 2006, but mostly 2007 and 2008.
And then they came in very aggressively.
But by that time we'd already got a foothold in the market.
And because of that anticipation, we can now report costs of risk which are much lower than those of our peers.
And because of our anticipation of what would happen, we now don't have to change our selling commission and say let's now try to sell cards.
Now let's stop selling cards.
Now let's sell consumer credit.
Now let's stop doing that.
No, we can be consistent in the way we sell our products.
And I think this is paying off.
We also have anticipated things in terms of cost performance.
The people in Bancomer saw that things were getting more complicated and that happened last year, and we decided to improve efficiency, our cost/income ratio.
But that wasn't something we decided today.
It was a year ago we decided to do things, such that at the end of 2009, the costs of 2009 in Mexico in Bancomer will actually be lower than they were in 2008.
This means that we will be able to move into the upturn in the economic cycle on the basis of the foundations that we've already established in a very orderly fashion in the past.
We don't suddenly go flip-flopping around the side and we'll do one thing and doing another.
No, we do things systematically.
And I think that this positions Bancomer very well.
It's done so in the downturn and it's going to do the same next year as well, because everything we're doing is done with an eye on what's happening in the crisis in the macro economy and we are aware that next year the GDP in Mexico should go up and we want to act accordingly.
With respect to Spain, regardless of what's happening in market shares, who's been the winners, who hasn't, well, talking about the competitive environment in which we're operating at the moment in Spain, I do think it's important to look at the competitive environment and see how radically it's changed over the last few years.
And it's going to continue changing radically over the next two years as well.
Given this situation, where do we stand?
Well, first of all, we are highly focused on returns, we've already seen that.
Very focused on risk, as we've seen in the presentation.
And with respect to our pricing policies, we don't want to be irrational at all.
We are not going to show any kind of irrational behavior.
Now what does that mean?
If we look at what's happened to market shares over the last six months, for example, if we analyze this in terms of lending and credit there, our market share's pretty stable.
And if we look at customer funds, there we have to distinguish between transactional customer funds and term deposits.
In transactional terms our market share is going up.
And that's very important.
We've gone up nearly 40 basis points in the last half year.
And that really reflects our good relationships with our customers.
But we're seeing term deposits go down as a market share because otherwise we were going to get involved in a very irrational market where pricing was irrational.
And we're going up as well in mutual funds.
What's my forecast?
Well, I would say that these improvements in market share in terms of most recurrent earnings over the next 18 months will also lend -- turn into improvements in business volumes.
Over the next few months I think that things will become clearer in terms of competitive environment.
I think our competitors will probably become a little more rational in their behavior.
And that will be very good news, for Spain, for the BBVA unit in Spain because we will be able to increase our market share.
I'm sure that will happen.
Having said that, for us at the moment, given the complex pricing situation, returns is what we look at first and market share comes second.
Over the next few months we'll continue to focus on returns.
But nonetheless, I'm still convinced that that will still be compatible with an improvement in market share in both lending and customer funds.
Now the United States you asked about as well.
In the United States we are seeing a lot of activity, as you well know better than I do probably.
And a lot is going on in [BAC] as well.
Our position in the United States, we are focusing very clearly on integration, trying to bring all the Compass policies into line with BBVA policy.
You've seen that.
And that's why we're focusing so much on repricing and costs.
And as a consequence of that, we're able to report growing operating income.
And that's our main priority.
Having said that, of course, as you can imagine, we do have to analyze any different alternatives that we might see, that might come out of possible changes in the BAC, but all the possibilities that might come up, we're not really talking about big investments.
We're talking about things that, when we're talking about capital allocation, it's really nothing very much.
So in the United States we're focusing on organic growth and things that are very similar to organic growth.
Carmen Hernansanz - Head of IR
(Interpreted).
Any more questions over the conference?
Operator
There are no more questions.
Thank you.
Carmen Hernansanz - Head of IR
(Interpreted).
Okay.
Now the webcast.
We've got questions from Antonio Ramirez, Javier Bernat, HSBC, (inaudible) and Carlos Berastain from Deutsche Bank regarding the ALCO portfolio and its contribution.
Carlos Berastain also has another three questions.
One has to do with provisions in Spain and Portugal.
He says is there any voluntary or cautionary provisioning?
And also he asks where we booked the provisions for the real estate assets we're talking about.
Additionally, he's got a question about the drop of EUR450m in goodwill over this quarter.
And Alfonso Gomez from Citi also asks about that, as does JP Morgan.
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
With regard to the EUR450m of goodwill, this is just the change in the exchange rate of the dollar in this quarter.
And this has led to a EUR450m drop in goodwill.
This is just the change of the exchange rate between the first and the second quarter.
And the first one, the other question about where we're booking these provisions?
Manuel Gonzalez Cid - CFO
(Interpreted).
The [UGOS] unit, which is what we call it in-house, which is special asset management unit, and is part of corporate assets and therefore the provision comes under corporate activities and it comes from other earnings, I think, provisions and other earnings.
And this is where the property or the real estate is booked.
This is one the major issues that comes under this heading.
The caution -- with regards to the cautionary provisions, we're always really cautious with regards to our provisioning.
Carmen Hernansanz - Head of IR
(Interpreted).
We have another question from Alfonso Gomez from Citi.
As there are a lot of questions with regard about the ALCO portfolio, Antonio Ramirez's question was very specific about that we're in a scenario of low interest rates that we've seen for some time now.
And basically the basic element is strong repricing, both in the front book and the back book.
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
First of all, the front book and then the back book.
In all the opportunities that this -- that we've had to do this, and basically this is because of the positive effect of the euro balance in times of low interest rates, which will obviously benefit all our positions.
So basically that's the underlying issue.
This is a commercial bank with a significant retail division, though we're also moving and growing on the wholesale side.
But we do have a high retail weight.
So obviously in times of low interest rates, this benefits the structural position of the balance that we have, the balance sheet that we have.
Carmen Hernansanz - Head of IR
(Interpreted).
We have another question from Alfonso Gomez where he asks where we can see the NPA ratio in Spain by the end of the year.
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
I don't usually like, as you know, to talk about what's going to happen to NPAs in advance.
But I can remember that last quarter you kept on insisting as well about what would happen to NPAs and I said that the ratio in Spain would be between 4% and 5% by the end of the year.
And when I talk about the NPA ratio in Spain, I'm talking not just about non-performing assets in the traditional terms, I'm also including real estate assets, not just loans, but also consumer credit.
And I think I can really uphold what I said about 4% to 5% for the end of the year.
In fact now I can say it more optimistically and in a louder voice even.
Carmen Hernansanz - Head of IR
(Interpreted).
From Citigroup, we've been asked if we can give more color on the sectors and geographical zones where we're seeing strong growth in recoveries.
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
In what?
Carmen Hernansanz - Head of IR
(Interpreted).
In recoveries.
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
Quite honestly, as we've seen, maybe with South America -- let's take this one point at a time.
If you analyze the different business units that we have, the different divisions, fortunately in wholesale banking and asset management, we can't really talk about an increase in recoveries because we have no NPAs.
Second, in South America, we're not really seeing any significant changes from what we've seen before.
And what we have seen is that recoveries, both in Spain and in the United States and in Mexico in terms of percentages are improving.
From the starting point of Mexico, I think in Mexico recoveries are concentrated in consumer finance and credit cards, of course, because if you look at the net additions to NPAs in Mexico, 70% of our net additions to NPA come from consumer finance and credit cards.
And I think this is good news because, despite the crisis, the GDP and all the rest of it, the percentage remains stable.
It's constant, which means that we're not seeing any growth in the net additions in NPAs from other segments.
So the recoveries we can see in consumer finance and credit cards, which is why we've been so sensitive to the swine flu because of the problem of the call centers we have.
With regard to the US, the recoveries are centered in commercial because we don't really have any NPA, individual NPA.
The NPA ratio that we have in the US with regard to households is really, really low.
It's below 2%.
Here in Spain, I think there's a combination of several different aspects.
Basically, on the one hand, we have individuals or households which is very important.
The recovery infrastructure is really working.
And that's where we really concentrate all our recoveries.
And then there's some in small businesses.
But more than anything else, it's in households.
And the concentration of recoveries in households, I think, is logical because we're seeing higher levels of additions to NPAs and it's not easy to generate efficient recovery infrastructures.
But at the moment they're working flat out and therefore we are obviously improving our recovery ratio over the net additions to NPAs.
Carmen Hernansanz - Head of IR
(Interpreted).
A question from Santiago Lopez.
How much loans have we restructured this year?
It's a question that's also put by Carlos Berastain from Deutsche Bank and also from [Eminence Capital], from Credit Suisse, Morgan Stanley and also from UBS.
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
Well I'm delighted to get this question.
Okay then, let's go for it.
First of all, I'm going to say that in this quarter there has been some restructuring, refinancing, however you want to call it.
Let's call it refinancing.
We've really had a low level of refinancing over this quarter because, as we said at the time, the main restructuring that needed to be done was done at the end of last year and in the first quarter of this year.
But above all, at the end of last year.
When we talk about refinancing and restructuring, I always like to remind you of our policy.
First of all, through refinancing and restructuring, we are not increasing our [NPOs].
We're doing restructuring and refinancing when we think that a company is a feasible, a viable enterprise.
And as bankers we have to support those companies that really are going to be viable enterprises for the future.
That's what we do.
And when we presented the first quarter earnings, I was very surprised when people asked me so much about the amount of restructuring and refinancing that BBVA was doing.
And at the time we decided to go out of our way to look at the information we have on the different international banks to see how much refinancing they're reporting.
And, once again, we realized that the criteria, if we want to make things transparent, are very different from one bank to the next.
And in the international banks, there are some that put a volume of restructuring, and others that say that they've had none at all.
There just seems to be a lack of standardization in the reporting standards.
But having said that, I can go one step further now.
It's obviously an element of concern.
But I want to point something out.
We have published our volume for refinancing or restructuring which you've read and which seems to worry you.
But I want to say that the core volume of restructuring for us is basically in Spain and basically in wholesale banking.
In wholesale banking and in big refinancing deals and medium-sized ones, well, and smaller ones as well, it's always done through a bank pool.
It's always done with a pool of banks.
I don't know any refinancing done with businesses that are just working with the BBVA.
It's always done by pooling things, including Spanish banks and foreign banks.
And we also decided to go out of our way to see what our market share is in the 20 biggest refinancing deals done in Spain.
And when we looked at these top 20, our market share was 6.4%.
And of the 10 biggest deals done for refinancing in Spain, our market share was 5.3%.
And on the basis of this, we can give you the information.
Now you can find out where the rest is to make that up to 100%.
And in the second quarter we haven't done any relevant refinancing deals.
Carmen Hernansanz - Head of IR
(Interpreted).
Next question from Natixis is could we give any guidance about the tendency of release -- further release of generic provisions?
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
Do you want to take this?
Manuel Gonzalez Cid - CFO
(Interpreted) Basically when we're talking about releasing generic provisions, this is an important information.
We're talking about what part of the generic funds is associated with offsetting specific provisions.
And basically our estimates for the rest of the year, we're talking about something very similar to what we're seeing at the moment of about EUR300m, EUR350m per quarter.
That's what we are forecasting.
Basically this would mean that we would have enough generic provisions to go into the market in 2011.
We've got enough to last.
So the position's a good one.
Without bearing in mind the new regulations to be put out by the Bank of Spain which will obviously will have an impact on the calendar for using these generic releases.
Carmen Hernansanz - Head of IR
(Interpreted).
UBS asks us about the hedging we're doing, and the margin is very small, we're talking about 6% if we bear in mind the growth we've seen in NPA.
Is this sustainable in our opinion?
So the coverage ratios that we're seeing, firstly with regard to coverage ratio, why aren't we increasing provisions more quickly because of the provisions profit ratio that we can show at the moment?
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
Looking at the coverage situation for the Group as a whole, first of all, we feel very comfortable.
What we have is the arithmetic impact.
NPAs are going up, the growth of NPAs, and also because of the regulation that we're subject to from the Bank of Spain, we had to recognize NPAs very fast.
And when there's a change in the cycle, we have to book those NPAs very soon.
But provisions are established on the basis of pre-established calendars, according to the regulations in Spain.
So there's always a certain time lag after the NPAs have shot up.
And what has to happen is that we will continue to set aside provisions.
And these provisions will increasingly reflect the real coverage ratios, and we're very comfortable about that.
The coverage ratios we have are excellent.
You've seen the presentation.
The amount of collateral we have for our NPAs, the value of the collateral that we have and the quality of the collateral, or where we don't have a lot of land in collateral, basically we're talking about residential housing and commercial properties and industrial properties which are being used, which is considered by the Bank of Spain to be high-quality collateral.
And that's what we're talking about for nearly all of the collateral we have against our NPAs.
And so we feel very comfortable.
And if you look at the NPAs we have without collateral and you put that in the context of our generic and specific provision levels, you can say they're well covered.
Our coverage ratios indeed for the Group as a whole compare very well against other European bank that would be comparable to us.
And we think that we are well provisioned.
If at any time we saw any change, but I don't know if things could change, and as long as we're allowed to under the current regulations, we might change things.
But at the moment we feel quite comfortable with what we've got.
Obviously I didn't explain things properly when I was talking about things on page 14.
I was trying to explain how good we have -- what good quality we have in coverage.
But it's really important to break things down, but maybe you didn't follow me.
But there are good examples.
If you look at banks that have all their NPAs in magnificent mortgages with 10% loan to value, then obviously the quality of the coverage will be quite different from the coverage where the main percentage is in something which is -- well, businesses that just aren't sound.
Obviously I haven't been very successful in putting the message across, but I'm going to continue to break down our NPA ratio in that way.
Carmen Hernansanz - Head of IR
(Interpreted).
Various questions from Morgan Stanley.
Some of them have been answered already.
The tendencies in the repricing of mortgages on net interest income and the financial margin in Spain.
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
From the point of view of the net interest income here in Spain, the first important point to point out, and I imagine the information is in the dossier, is that, and I repeat this idea that I all of our reporting, in all the business units, have excluded the interest rate risk.
So regardless or apart from this question, I think it's important to point out the net interest income over average total assets in Spain is performing very well.
Moreover, this quarter, the net interest income over average total assets is better than in the first quarter.
And we're showing the best NTI over average total assets for the last six quarters.
The reason for this basically is because of the repricing that we've done.
There isn't too much business volumes with regards to growth.
There's a very strong repricing which is offsetting the increasing of the non-performing assets, which is obviously having an impact on the net interest income over average total assets.
So bearing this in mind with what we're seeing, if you analyze, if we look forward to the end of the year, as I said before, we have a net interest income of around [5] at the moment.
I think there'll be a slight slip.
But in Spain we're talking about a net interest income that are positive if we compare net interest income 2009 with 2008.
There's a certain slowdown, if you like, but it is positive.
Carmen Hernansanz - Head of IR
(Interpreted).
Citigroup ask us when do we expect the peaks in NPAs in Spain, Mexico and Latin America?
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
The peaks?
Carmen Hernansanz - Head of IR
(Interpreted).
Maximum NPA ratio.
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
Good question.
Let's see.
I think it would be reasonable, if we're going to talk in the long term, it's rather complex to come up with figures, but the kind of visibility we've got at the moment in the cycle, I would say it will be reasonable to think that in Spain we'll probably see a peak maybe in 2010, the end of 2010.
And in United States and Mexico, probably quite a bit earlier.
Quite a bit earlier for two reasons, above all in Mexico.
Firstly, because of what's going to happen in the economic cycle and then because of the structure of NPAs there too, because in Mexico it's got much more to do with consumer lending.
And so it'll probably peak earlier, probably in the first part of next year, whereas in Spain it will probably take until the end of 2010, beginning of 2011.
Carmen Hernansanz - Head of IR
(Interpreted).
More questions from JP Morgan.
What impact has the depreciation of currencies had on your results?
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
Before 5 basis points positive.
You need to realize that there are several different effects that will affect RWAs, goodwill, etc., and this will affect the hedging that we have which are obviously aimed at protecting the sensitivity of the core capital to exchange rates.
But the net effect has been 5 basis points positive.
Carmen Hernansanz - Head of IR
(Interpreted).
And the second one concerning Mexico, where are we seeing the greatest risk in terms of risk -- quality of the risk?
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
I think that in terms of our asset quality, given the kind of loan book we've got, we're not really seeing it so much as just feeling it in consumer lending and credit cards.
And it will continue to be the case in the next few quarters.
But looking at the performance of our portfolio and our forecasts, we're very close to the peak of the severity of that problem there.
Carmen Hernansanz - Head of IR
(Interpreted).
And here, Javier Bernat asked about the weight of the consumer and cards portfolio for all of lending in Mexico.
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
24%, I think.
It's clearly dropped because the SMEs are going up to around 15% and the mortgages are about 12% and I think consumer credit is clearly -- is falling significantly.
Carmen Hernansanz - Head of IR
(Interpreted).
Javier Bernat from Caja Madrid asks if Telefonica is still available for sale.
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
Well, the way it's booked has nothing to do with our strategy because there's no change in our strategy.
And do we have any Tier 1 target?
There has been a change.
The capital gains are getting bigger and bigger.
Carmen Hernansanz - Head of IR
(Interpreted).
So we're also asked if we've got any tier 1 target.
This question I think has already been answered.
And what we think will happen to return on equity.
Will it go down?
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
I think that the return on equity at the moment may slip a little bit, but I don't think it's going to slip very much.
I think it's quite spectacular if we can talk about a situation in which in the current situation we've got a return on equity of 21.5%, it might slip a little bit, but I don't think it's going to slip very much.
Carmen Hernansanz - Head of IR
(Interpreted).
Javier Bernat also asks whether we're considering a potential purchase in Spain, the message that we're putting out with regard to market share.
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
About market shares, we're always talking about organic growth.
When we talk about opportunities, then we'll be talking about opportunities for organic growth because of the position we're in and everything that I talked about before.
We have no plans to make any purchases here in Spain.
Carmen Hernansanz - Head of IR
(Interpreted).
Laura Spotorno asks if we could talk about what might happen to revenues in wholesale and investment banking.
What kind of future tendencies do we foresee?
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
Quite honestly, if you analyze the performance that we're seeing, I would make a clear distinction between private and investment banking and markets.
In markets, obviously this is more complex to make a forecast, although in our case it's less complex for us because we need to bear in mind very often we've told you that, depending on the quarter, that around 70% of the revenues that we have in markets come from our customer relations.
It comes from the franchise.
So these are highly resilient and very recurrent.
So, from this point of view, if you look forward to forecast the operating income for markets in the coming quarters, the first quarter might have been especially good.
But quite honestly, if you look at the last eight quarters, recurrence is something we see over and over again.
And this is something we can carry forward as well.
With regard to the growth in private and investment banking, the growth in the operating income is record levels.
We're talking about year-on-year growth of over 20%.
And I think that this will slip down over the coming quarters, but I think we're always talking about double-digit growth, easy double-digit growth.
Carmen Hernansanz - Head of IR
(Interpreted).
And the final question, which is based on our comments with our criteria of maximum caution in real estate and in corporate activities, these criteria, are they one-off criteria, or is this going to be an ongoing feature?
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
Yes, I would say that for us, prudence means that we're purposely taking into account whatever's happening in the market.
The current situation, the level of provisions we have is based on the information that we have at the moment.
And it seems to us that that's a prudent level, so we feel very comfortable with it.
And as for the future, well, we will just have to adapt to the market.
One thing that is evident is that we're not seeing a lot of impairment or not foreseeing a lot of impairment.
But we're always prudent, all the time.
It's not just one-off.
It's quarter by quarter.
We are endowing our provisions with the levels that we need to be prudent.
And that's what we'll continue to do in the future.
Carmen Hernansanz - Head of IR
(Interpreted) Okay.
I think that you've now answered all the questions.
So I think that we can wrap things up.
Jose Ignacio Goirigolzarri - President and COO
(Interpreted).
Okay.
Many thanks.
And those of you who are going on holiday, happy holidays.
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.