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Carmen Hernansanz - Head, IR
(Interpreted).
Good morning, everyone.
We're delighted to present the third quarter earnings for the BBVA.
So, first of all, Angel Cano, our President and COO, will give you a general overview of the results for the Group.
And after that, Manuel Gonzalez, our CFO, will give more details about the main highlights of each business area.
And then Angel Cano will wrap up the presentation with some conclusions.
And, as of then, we will open the floor to Q&A session like we always do, first of all, as I say, letting you ask your questions here in the room.
And after that we'll take questions over the conference call.
Then, finally, we will give a summary of the questions that come through our webcast.
For those of you who have come here today to sit in the room to hear our results, you can come and have coffee with us in the next door room afterwards.
And I think, without further ado, I'll give the floor to Angel.
Angel Cano - President and COO
(Interpreted).
Good morning, everyone.
Welcome to this presentation of the BBVA results for the third quarter.
And as usual -- here we are.
Now we've done it.
I've found out how this works.
As you can see on the screen we're going to start talking about the most significant highlights of the period.
The operating income has gone up 13.5%, whilst attributable profit for the quarter was EUR1,380m, and we'll see later how that compares against the same quarter of the previous year.
Then in terms of our performance relative to our peers, our competitors, against which we are benchmarked for TSR, we've gained 250 basis points.
And when I'm talking about the period I'm talking about the first six months of the year, during which we can compare ourselves with the published results of all our peers.
Then looking forward to the future, what I want to highlight is a couple of concepts.
First of all, you know that in this period we've sold off various branches and some properties belonging to the Group and we've obtained some capital gains of EUR830m.
These capital gains have been fully put into higher generic provisioning.
Then looking at our core capital, over the quarter we've got an 8% core capital ratio.
Then, finally, in the same period in the United States we've added another entity to our franchise because we bought Guaranty Bank in September in the end.
So now let's have a look at the income statement and the main ratios in the format that you can see on the screen.
First of all, we'll look at our earnings.
Then we'll look at the main data related to risk concepts, and then we'll look at our capital strengths and returns.
Then, as Carmen said, at the end Manuel will be going over the main franchises within the Group.
So we have reached an attributable profit of EUR4.3b which is a drop of 3.3%.
Although, in constant terms we'd be going up 1.3%.
Consequently, what you're seeing is four points difference between the constant and the current rates.
In terms of the quarterly profit, as we said before, we hit EUR1.33b -- sorry, EUR1.38b.
And that compares very well against the previous quarter.
Although, if you recognized that we have to include the dividends of Telefonica, you can see that we'll be talking really about 1.2 in that quarter.
The earnings per share, although the profits had gone down, we'd see a drop of 3.3% there, but we should talk about the EUR1.12 per share.
Now let's go down the different concepts in the income statement, starting with net interest income.
As you can see, we had a figure of over EUR10b, going up nearly 20% year on year.
Once we're in constant terms, we can see these four points of difference which is impacted by the exchange rate.
And I'd say in general that, although there has been a slowdown in business volume growth in most of the franchises over this period, what we are seeing in general is an increase or an improvement in the net interest income over average total assets in all the areas and all the different lines.
In terms of our gross income, there, you can see we're growing 6.6% in current terms, more or less 10% in constant euros.
And, here, what we should highlight is a couple of issues.
First of all, last year we got capital gains coming from the VISA IPO which was more or less EUR235m.
And within this margin last year we had Gamesa booked at EUR2.2m, and then there were some other items that added into EUR50m.
And that's why we see that drop going down to 6.6% from the previous 20-something figure.
If we compare ourselves against our peer group, starting in first half of 2007 to have a three-year series, we can see that our performance has been year-on-year growth.
And we can see what's happened to our peer group, and you can see who they are, the 19 banks that we're comparing ourselves against in all the different countries; England, France, Germany etc.
And then operating costs.
That's definitely a strong point with us.
Quarter by quarter we have managed to bring down the total operating costs in the Group, and this quarter we've had a drop of 2.4%.
As you can imagine, the cost income ratio, consequently, remains below 40% because of the improvement in our operating costs.
It's now at 39.7%.
Or, more important still, that's nearly four percentage points improvement.
As you can imagine, if we go over the operating costs in all the different areas, Spain and Portugal has managed to really get good performance this year; 5.7% down.
And if we're comparing against the quarter in the previous year when we were already beginning to see operating costs going down, but, nonetheless, we're talking about these nine months where there's been a significant drop, Mexico has inflation of about 4.8%, is flat in operating costs.
Also Banking and Asset Management has gone down to below 5%.
The United States, with the integration of all the different businesses, nonetheless, is seeing a drop of over 10%.
And South America, with inflation of about 16%, is still seeing its operating costs going up less than 10%.
So it's really a six percentage drop in real terms -- in actual terms.
And looking at the operating income you can see it's grown 13.5%, influenced by certain deals that we haven't had this year, above all, in net trading income.
And that would be 18% in constant terms consequently.
And on the right you can see the jaws in the period and how they've opened up, above all, this year.
And our reference point here is September 2007.
As you can see here we've opened up 15 percentage points the difference between the growth income and the growth in costs.
And this performance of 13.5% in operating income can be seen in all the different areas.
Spain and Portugal growing 3.4%, Wholesale Banking and Asset Management 12.6%, Mexico over 7%, the United States, despite everything that's happening there, 14% up, and South America more than 31% up, once again beating quarterly records.
Before, in the first screen, I was talking about our performance taking into account the September -- sorry, the data to June, and then comparing ourselves against the 19 banks that we use as our peers.
We had a 5.1% market share of operating income in June 2007 and now that's 7.6%.
That's up 250 basis points.
On the right you can see something very interesting; a 15.1 percentage point growth in the difference.
But looking at the data of our peers you have to include all the write-offs and such like, so it's not that easy to compare.
But what we do think is more indicative of what we are really doing is the share of operating income that we've gained over the year.
And that's shown in this screen.
And, here, we are still leaders in both efficiency and our cost income ratio, at 39.4%, two points better than the next bank, and seven nearly for the other.
And so on average there are improvements up to 15 or more percentage points over our peers.
So we're definitely at the head of this table.
And the same with respect to operating income over total assets.
We are also ranked number one.
When we talk about risks, five points that I wanted to highlight.
First of all, what's happened with additions to NPA.
And what's happened to our coverage, taking into account the collateral we have as well.
Thirdly, what's happened to the cost of risk.
And then what's happened with respect to property purchases.
And then if we take into account the returns and the cost of risk, what type of ratios do we get?
I don't want to talk about a big drop in the new additions to NPAs, but they're definitely slowing down in net terms and stabilizing out.
In recoveries, after a peak in the second quarter, we've managed to maintain the level of recoveries that we are achieving with new additions to NPAs.
So more than 45% of the new additions to NPA are recovered within the same period.
In terms of provisions and coverage, earlier on I was saying at the beginning of the presentation that we've attained EUR830m in capital gains because of selling off properties.
And we've put that fully into endowing our generic provisions.
If we add up all the generic provisions that we've got in the Group, plus the substandard provisions that are for more specific things, we've got over EUR4.65b in total provisioning.
Then let's see what our provisions look like, taking into account collateral as well.
First of all, on the left you can see the comparison between those doubtful loans that are secured with tangible assets.
That's more than EUR12.6b, which gives us a coverage of 190%.
Then on the right you can see the loans that aren't secured.
And that would be EUR5.8b, for which we have, more or less, EUR8.45b in total provisions.
Adding together, we get that figure that you can see in the protocols of EUR12.6b.
And we were talking about additions into NPAs and saying that they were stable and on the way down.
And the cost of risk, meanwhile, is stable.
And what is happening to the NPA ratio in the Group?
As you can see, it's going down and has been over the last three quarters.
In the last quarter of last year and the first quarter of this year we were growing about 55 basis points, but now that's gone down to 25 basis points.
Getting to an NPA ratio for the Group of 3.4%.
The cost of risk is stable, then, slightly above 1%.
What about our property purchases, then?
In principle, you'd say that our performance is better than we were expecting at the beginning of the year.
So far this year we've incorporated onto our portfolio an extra EUR772m, above all, in land and residential housing, finished housing.
And then in the quarter we can see that we've only incorporated just over EUR100m onto our Property portfolio.
If we look at the total stock of properties, which would give us a coverage of 23%, that means we've got over EUR1b accumulated this year in stock.
And to finish with risk related matters, I wanted to show you what kind of adjusted risk return ratio we've got, discounting the credit risk.
If we compare ourselves against the first-half data of our peer group, in the first nine months we've reached 1.8%.
And, once again, we're far away from the average and far away from the median.
We've really outperformed our peers here.
And then, before I give the floor to Manuel to talk about the different business areas, what does our complete income statement look like from top to bottom?
Our net interest income is growing nearly 20%, as I said at the beginning of the presentation.
Our gross income, because of certain transactions that weren't repeated this year, Games, the VISA IPO etc., has been growing 6.6%.
Operating income, after the drop of 2.4% in costs, has grown 13.5%.
If we take out the provisioning for the period we'd be growing in attributable profit or, well, actually it would go down 3.3%, taking into account that last year, when we were talking about one-offs, we were talking about EUR180m net, taking into account the Bradesco transaction and the early retirement provisioning that we had to do.
In terms of our core capital, I said at the beginning that we had reached 8%.
It would be 8.04% if we were going to be very precise.
This 8% has been maintained, 1.1% of it came from organic generation of core capital.
Of which, just in the third quarter, we've got a further EUR1b added to our core capital in absolute terms.
And, apart from that, we've got the convertible Bonds' operation we did which is 70 basis points added to that.
The Tier 1 is now 9.4% and our total capital ratio stands at 13.4%.
In terms of returns, then, in June, once again, we're at the top of the ranking tables, whether we're looking at return on equity or tangible assets.
We compare very well against our peers, whether we are looking at the average or the median.
And to September we'd have an ROE which is very similar to what we had in June, 21.2%, or an ROTE close to 30%.
Earnings per share, that drop of 3.3% we saw earlier on in attributable profit.
If we looked at the series and compared ourselves against what our peers are doing, once again, Base 100 is in 2006 and we're growing 9% over this period of time, whilst the others, our peers, have 31%; less than they had in 2006 is what the median would have.
And on average that would be 20%.
And so definitely our earnings per share has been growing constantly, we could say, over this time.
Now, I think, Manuel, I can give you the floor and you can talk about the different business areas.
Manuel Gonzalez - CFO
(Interpreted).
Good morning, everybody.
I will go over, as Angel said, the performance of the different business areas in the Group.
And I will start off by saying that in this quarter we've strengthened the different franchises that the Group has.
And we will start with Spain and Portugal, as usual.
In Spain and Portugal, there are several keys to our success this quarter that are important to bear in mind.
First of all, the performance of the net trading income which, in a weak environment, this has grown by 13.1% and, basically, this is due to two factors.
One of them is the improvement in the spreads.
You can see this on the right at the top.
You have some of the data there with the different divisions within Spain and Portugal.
And we can see how there's an improvement in the spreads, which is a market improvement.
And this is happening in new operations, which is what we can see on the slide, but it's also happening in our balance stock.
And on the other hand, on the balance sheet resources we have a clear strategy consisting, first of all, of not migrating from funds to deposits.
We're being extremely cost with the cost of liabilities, especially term liabilities.
And, finally, we're focusing on growing our liquid resources and the ones with lower cost.
And, in fact, this year have increased by five percentage points in the division of Spain and Portugal.
So we've adjusted our prices and we're ahead of our rivals.
At the same time, as Angel said before, we're also controlling our costs, as Angel said.
This has been going on for some time now.
And at the moment, even if we compare ourselves with a period when we started to cut costs, we're seeing falls in cost in Spain in costs around 6%.
And, quite honestly, you will be hard pressed to find this with any of our peers here in Spain.
And this has generated growth in our operating income of 3.4%, with one additional element which I think is extremely important, and that is the stabilization of the net entries into NPA.
There's been a fall in 2% in the growth entries in NPA.
There's a slight fall, as you can see, but the levels are still higher than for the first quarter of this last year.
But bear in mind the third quarter, because of the seasonality of August in Spain, is always a poor quarter in terms of recoveries and entries in NPA.
So these results are very satisfactory if we bear in mind what happens in what is traditionally a bad quarter for us.
So NPAs are stabling off as we have announced.
Everything is performing more or less as we said and recoveries are improving from the figures we've seen in previous quarters.
And this means that at the moment, if we measure our NPA ratio with our peer groups and look at the policies of buying properties and stuff, I think it's important to have a broad definition of the NPA ratio.
So if we use the broad term, so if we have NPA plus the property purchases, with the information that we have at the moment the Bank has the best risk quality that you will find anywhere in Spain at the moment.
And we're ahead of our nearest competitor by 80 basis points.
We were in June, which is the latest figures that we have.
That is if we use this broader definition of the NPA, which I really think gives you a better idea of the quality of the risk in the sector.
And as a consequence of all of this, and I don't think this is a minor issue at all, the Bank at the moment on the six main rivals here in Spain, I'm not talking about the entire industry, I'm just talking about the six Spanish leading financial institutes, we have a market share in recurring operating income after provisioning, which is a good measure of looking at our results, of 43.5%.
This is very important with regard to the trend because, if we look at a year ago, we were 20 percentage points lower.
But over the last year we have generated this 20 point advantage.
And this means that things are going as expected.
In other words, that the Bank, in comparison with its peers, the Bank has a fantastic opportunity and we've seized this opportunity.
Moving on now, you have all the accounts here.
So moving on to Wholesale Banking and Asset Management.
The first thing I would like to mention here -- and, here, I'm going to focus my presentation only on the Banking side of this business.
In Corporate and Investment Banking I think the results are quite enlightening.
You can see two or three striking issues, which is the management effort that's been made in this area.
First of all, the improvement in the margins over gross income which have increased substantially throughout 2009, and this is true also of the third quarter.
We're at the same level of gross income of 243 over the average portfolio, which is a very high percentage if we bear in mind that, at the end of the year, it was 174.
And this shows you the re-pricing effort and cross-selling effort that we're doing on our customer base and the area of Corporate and Investment Banking, and the management effort that is being made to improve our business margins.
By the same token, if we look at the income side, this means we're growing 24% in income, in [completions] by 53%, which shows how the business is changing in this area where the fees or other income now represent 41% of all revenues, i.e., six percentage points more than it was a year ago.
And this has given our tight cost structure, wherein another effort has been made, and this means that the operating profit for Corporate and Investment Banking is growing by -- the operating income is growing by over 29%.
Moving on now to global markets, we've got an operating income that's growing by 13.9% over last year, and last year was a good year.
So we're growing -- we've got double-digit growth in comparison with a good year.
And the reason for this is a growth in our revenues in geographic areas where traditionally the Bank had very little presence or didn't generate any revenues.
And at the moment, if we look at the growth in revenues from global markets outside of Spain, in Europe and Asia we're talking about growth of 70%, which accounts for 30% of the total revenues in Europe and Asia, including Spain, and approximately 15% of the total revenue for this area including America.
So we can see how Wholesale Banking is penetrating in other territories.
It's moving out of its traditional core interest.
And, finally, on the Asset Management side, as we can see here, we are maintaining the leadership in the sector here in Spain with a market share of practically 20 percentage points, which has improved continuously since the crisis began due to our strategies and management policy, that hasn't changed because there's no policy of migration to deposits from funds and we've maintained recurrent management of our customer basis.
So it's been an excellent result and excellent results from the Wholesale Banking and Asset Management.
Moving on to Mexico now, I think this slide clearly shows what the year has been and the last quarter in Mexico, in other words, in a scenario of maximum stress with a lot of complications, with falls in GDP year to date of around 7%, and with a profound change in our portfolio mix that has been going on for some time, but just this year has led to a fall in consumers in four percentage points, and also in credit cards within the full lending side in Mexico.
So these are the results with an operating income, without bearing in mind the one-offs of the VISA IPO of last year, of 11%.
And costs which shows we can further reduce costs.
And, as you can see, costs are flat and we're around zero.
And at the same time there's an improvement in our market share of recurrent operating income by almost six percentage points, just last year, in comparison with our main peers in Mexico.
And another piece of good news that is important for us, especially looking forward, and that is the stabilizing of provisioning -- quarterly provisionings in Mexico, which is a sign that we are coming out of the worst part of the crisis in Mexico.
And this highlights that the franchising we have in Mexico that has a capacity for generating recurrent incomes, even in very complex situations, such as we've seen in Mexico recently.
And the reasons for this performance can be seen on this slide.
With a portfolio that has suffered a 14% drop in Consumer Finance and Credit Cards but has grown 11% in Mortgages, or 5% in SMEs and Corporate Banking etc.
They've all grown.
And also a major effort has been made to improve the spreads, and with growth in customer deposits.
And even on site -- savings accounts there were reduced costs of 18% and term deposits grew 9.4%, despite the low market share that we have in Mexico.
And this means that the operating income has grown by 7.1%.
If we exclude the one-offs of the VISA IPO, then this growth would be up to 11%.
As I said at the beginning with regard to Mexico, the NPA and provisionings, there's some good news for you as well.
The Bank is not just maintaining a far lower cost of risk than our peers because of the different provisioning strategies and the sustained growth that we've shown.
But also at the time the provisioning is stabling off, and we're talking about an average of EUR360m.
And we've got EUR364m this year, in comparison with EUR373m in the last quarter.
And this is actually a sign that we're over the worst in provisioning.
So we can now look forward to a scenario of significant change in the way the economy performs.
As a consequence of all of this, we can see -- as we can see throughout the Group, but especially in risk, the growth in NPA ratios are slowing down.
It slipped 11 basis points just this quarter.
And I think what is more important than this -- and that we have two quarters.
We didn't say anything in the second quarter.
We're announcing this now.
But for two quarters there's been a reduction in the fall of NPA ratio in Consumer Finance and Credit Cards.
And this has been the main driver, or the basic explanation, of this improvement or stabilization of the NPA ratio.
So I think the results are excellent in Mexico in that context, and very positive signs looking forward.
And as we said, here in Spain this means that 50% of our recurring income of -- in the five leading banks in the country.
And this has been systematically increased throughout the crisis.
So this also shows the strength of Bancomer in the Mexican market, and this is translating into the fact that we are harnessing this opportunity and generating income for us.
We move on now to the United States, where it's been a very good quarter with some landmarks.
Basically the main one is taking over Guaranty that we haven't had the chance to talk to you about in detail, although you do have all the information.
What I would like to highlight here is that our purchase of Guaranty is another sign of our progressive and focused strategy of penetrating a series of markets that we consider to be critical and strategic for our future in the US.
And now we have a franchise with a critical mass in an area of the United States that is even greater than the economy of France, for instance, just to give you an idea.
And with a critical mass which means that we can generate synergies and we are more competitive in the local market in an area where, from the point of view of population growth and the prospects of future economic developments, is going to be highly strategic for us.
I just remind you that, just talking about Texas alone, this is the leading export state in the US, through which 50% of all the US exports come out of Texas.
So, as I was saying, one of the landmarks of this quarter has been our purchase of Guaranty.
As you know, the major figures you can see here on the screen, we're talking about a Bank with $10b in loans, 1,700 employees, 164 branches.
And maybe I could just highlight the fact that this is one of the largest purchases that we've done, the first assisted by the FDIC and the first one that's been assisted by the FDIC in collaboration with a foreign bank, which shows that BBVA is gradually building its franchise to compete with the American banks.
And we can compete with them, and we are showing ourselves that we are at the top end of the management table.
From the point of view of results in the current environment in the US, one important point here.
And that is the possibility of generating cost synergies and cost-saving synergies, and the chance to reduce the cost of risk in the future.
In the current market context I think these results clearly show that the Compass is very -- as our COO said, they're rapidly integrating with all the banks that we have in the region and, looking forward, we have the guaranteed project we should hope to bring on board very quickly.
And this will reduce costs by 10% and, basically, this will drive results far better than our peers can.
And this will enable us to add to the growth of revenues and the management of the margins, which will show us a growth in our operating income of nearly 14%, which puts us at the top of the table.
Guaranty is contributing EUR7m to the operating income.
We've only been working with them for one month, so they're still being integrated.
So these figures haven't really been affected by Guaranty yet.
We will see that later on in the future.
But this will grow.
So all this growth in the net operating income comes without Guaranty.
Also in the United States, in the case of Compass, we're seeing a stabilization of entries into NPA and with recovery levels that are around 50%, which is very high.
This is also being.
We've seen this throughout the Group, but it's also shown here in this area of the United States, the efforts they are making within the economic context.
So if we're efficient in recoveries in this context, this is vital to us.
And basically our recovery rates are very, very high and the net entries to NPAs in comparison are very stable.
And superior performance; we're outperforming our peers.
The net interest income that Compass is earning [us] is 3.68%.
If we compare that with our peer group, which we can see this at the bottom of the slide, of 3.21% on average.
And this efficiency is improving; it's now 58.9%.
It's a long way from the cost efficiency ratio that we have for the whole Group.
But if we compare them with other US banks, then it is good and with a net operating income that are generally uniform and in line with the industry.
But if we just talk about Compass we're talking about a growth of 21%, when the average for the peer group is either flat or there's a slight fall of about 1%.
So the management over there is starting to show how we're outperforming our peers, as we see in other geographic areas.
And, finally, and I will close with this before Angel concludes the presentation, I would just like to mention South America.
And I think that this is an area that deserves growing attention.
These are the results of the growth we're seeing in South America for the year as a whole.
We're growing in the gross income of 23% (sic - see presentation) and the net operating income 32% and the attributable profit of 27% growth.
So these growth rates are really remarkable.
This is real growth in the context of a crisis.
But we're not just getting these growth rates.
But if we look at the trends where these growth rates are taking off, they're accelerating.
We're showing almost 10 points more of growth in the operating income in comparison with 2007.
So we're talking about historic growth rates which shows the capacity for growth and the value of our Latin American franchise.
And with significant advances in the area of efficiency, we're below 40%, which is something we've never managed before in South America.
And efficiency levels are very close in line with the Group as a whole.
And the cost of risk, we can see on the right, which is very stable, with no major increase in NPAs to really point out.
All of this is happening with these excellent results and excellent growth, all of this is happening not just in the area of our Banks in the region but also in pension and insurance.
If we look on the right here, we will see how pensions and insurance in South America is doubling the results in comparison with last year to this date, which is another sign of growth.
And, obviously, this area is generating excellent results.
So, in short, we like to talk about South America as a second Bancomer, if you like, because the market considers us with a presence, a very strong presence in Spain and in Mexico, but they don't pay too much attention to the Wholesale franchise that I've just shown you with such impressive results.
And they pay very little result to our franchise in Latin America that, in terms of size, is almost the same size as Mexico.
You can see the figures here which speak for themselves in terms of assets, in customer loans, deposits and also in terms of profit before minorities.
Obviously, South America is very similar and uniform in -- very similar in size and in terms of generating revenues as Mexico is.
I think we've gone over the main business areas and I can show you that the results for this quarter are very good, very strong.
Angel Cano - President and COO
(Interpreted).
Thank you very much, Manuel.
And so, to wrap up, it's lovely to be able to present these kinds of numbers in these presentations.
Because in all the lines on the income statement, on all the lines, returns on capital, everything else, we compare very favorably against our peers with this Group of 19 banks worldwide.
If we look at the numbers, EUR4.5b (sic - see presentation) in attributable earnings, or minus 3.3% compared against last year which, in constant terms, would be 1.3% positive growth.
For the quarter we've got results of EUR1.3b, comparing very well against last year in the same quarter.
If we take out the Telefonica dividend, as I said before, we'd be going up about 10%.
Earnings per share are more or less at the same levels as in 2008.
Operating income growing 13.5%.
Across the board, throughout all the business areas in the Group, the cost of risk is stable as well.
Our NPA ratio is doing very well and not growing as fast as it has been over the last few quarters.
And then if we look at each of the business areas, as you saw, in all cases we are beating our own records in operating income everywhere.
And in terms of our fundamentals, our returns, our capital ratios, we've hit 8% in this period in core capital, generating 110 basis points of this capital through organic growth over the last nine months.
It's very clear any capital gains that come in are put into increasing our generic provisions for the Group and, with these kinds of numbers, as you can imagine, we are in the leadership position in terms of our cost income ratio and our return to our profitability.
So, thank you.
Now Manuel and I would be delighted to answer your questions.
Carmen Hernansanz - Head, IR
(Interpreted).
Okay, then let's go on with the Q&A.
And we'll start with the questions from the room, and then afterwards people on the conference call can press zero, one if they've got questions.
Daragh Quinn - Analyst
(Interpreted).
I'm Daragh Quinn from Nomura.
I've got several questions.
The first has to do with your strategy, or potential strategy for M&As.
I think you are talking about a more ambitious stage now, or that's what you've talked about at the press conference when you changed your senior management.
So what kind of changes can we expect in your strategy?
Should we expect changes with respect to your size or with respect to your geographical focus?
And then about your core capital.
I can understand that you are comfortable with the core capital ratio of 8%.
Should we expect that this year there will be an increase in your payout of dividends, or would that happen next year?
And the third question has to do with costs.
I think there's a reduction of 2.5% over the first nine months.
Is there any further potential for more improvement there?
And then I'd like more color on recoveries.
Is there a level of breaking down the restructuring of loans which have come out of NPAs, or what percentage of your recoveries are restructured NPAs?
Thank you.
Angel Cano - President and COO
(Interpreted).
I'll answer the first three questions, and then Manuel will take the fourth question.
With regard to strategy, we're not going to change the strategy that we have been using to date.
Our focus is clearly what we've just said on the United States.
As you know, we are paying close attention to the transactions or the operations that can come out of the FDIC.
We're integrating Guaranty, which should take us through to February, when it should be fully integrated.
And from there on we should be generating the synergies that we think that we will be able to generate.
And I would say that we're not going to make any change in strategy from the point of view of growth.
Maybe our ambition now would be to speed up the organic and internal management for the strategy that we are currently using, but in each business area.
We want the Group to support this as much as possible so that the area -- each business area has more independence, obviously, with greater supervision from the head office.
So, as you can see, there is basically no special change, or there shouldn't be any special change in strategy.
You talked about 8% core capital.
Obviously, with this capital ratio we do feel very comfortable.
People would love to have 8% core capital.
From the point of view of dividends, we did announce a 30% payout, but just in cash, and not many banks can make a payout that way on the international market.
And then until about next Spring and we start talking about the 2010 dividend, we're not going to make any change in our dividend policy.
Costs you said, with a drop in 2.4% in this period, and whether this is going to be -- go even further.
I would say we've got to go as further as we can.
We do think we can cut costs further but, as we have to date, we need to separate the everyday operation of the Bank where we think there is still more room for cutting costs.
We need to separate that from the transformation of the Bank where we need to invest in projects of growth and technology and things.
But we need to prioritize what we spend our money on.
We'll focus on reducing costs in the business as usual on the operating side where we do think there's room for maneuver but, above all, by continuing to invest in new projects and in questions related to the transformation of the Group as a whole.
Manuel, would you like to take the fourth question?
Manuel Gonzalez - CFO
(Interpreted).
In answer to your final question, as I said, the Group does not have a policy of using refinancing or restructuring as a mechanism for reducing NPAs.
So there is no kind of recovery that is associated with restructuring or refinancing NPAs.
I think that's the first important point.
The second point that I would like to make, 76% of all our recoveries in Spain are associated with cash; they're cash recoveries.
And I think this is another important point because, obviously, if you're going to restructure recoveries, this is totally irrelevant.
And the other 23% are either we buy -- we purchase assets or the adjudication of -- or legal adjudication of assets.
But 77% of these recoveries are cash recoveries.
Carmen Hernansanz - Head, IR
(Interpreted).
Further questions from the floor?
Irma Garrido - Analyst
(Interpreted).
Good morning.
I have been delighted with the standardized cost of risk, i.e., excluding the one-off provisions of 1.14% that we saw in the third quarter.
Can we extrapolate this?
What can we expect from 2010?
And also could you tell us something about the trends of generics and when do you expect this to run out?
And what kind of cost of risk are we facing for next year?
On the other hand, the different -- the spread of customers in euros has increased.
At the residential sector there's a strong fall compared with the last quarter.
So maybe you could tell us a little bit about your forecasts for the years to come?
With regard to Compass's NPA ratio, if we take Guaranty out of the equation, what would it be at September 30?
Those are all my questions.
Thank you very much.
Angel Cano - President and COO
(Interpreted).
Okay, I'll answer the first question, and then Manuel can deal with the other two.
The stable cost of risk which we've seen over the last three quarters is related to what's been happening with gross additions to NPAs in the Group.
So over the last two quarters we've been stable at about 1.4.
And our forecast is that it should remain pretty well flat.
We haven't got any more information right now, nothing that would lead us to think either that it would go up or go down very much.
But we prefer to look at things quarter by quarter and we are glad to see this ongoing stability.
And then in terms of generic provisioning, you ask when we think this will come to an end.
Well, once again, we don't have any different information that would lead us to think that we would get to 11.
Our latest estimate is that at the end of 2010 we should continue with these kinds of improvements going onto 2011, which means that our generic provisioning will definitely not be used up in 2010.
And so that's what we can see at the moment.
And then the difference in euros.
In terms of customer spread in euros, as is explained on page nine in your document, you can see that a reduction in our return on investment of 73 basis points and a reduction in the cost of liabilities of 37 basis points.
So what's going on there is basically the re-pricing of our Mortgage book at lower rates, which has an impact of the returns on our assets which goes down, and it can go down faster than what we could generate at the current customer funds' rates that we have.
But, as you know, the margins that we get on our lending books in different parts of the Group, in Spain and elsewhere, there, we are getting a lot of re-pricing which means that this effect of the reduction of our customer spreads is closely linked to the re-pricing of our Mortgage book, without narrowing customer spreads at all.
Quite the opposite, in fact.
What's happening is that, over average total assets, it's being maintained stable in all the domestic units.
And in the Wholesale part of our Business it's even going up in terms of what is over the average total assets.
And in the NPA ratio, in Compass without Guaranty, I can't bring the figure to mind, but I know that it's slightly higher than last quarter.
It's going down in the US because of Guaranty coming in with its loan books and with no kinds of bad loans, but without it, it would be slightly higher than it was last quarter for the Group as a whole.
I think it's 3.9 in Compass for the period.
And, as Manuel said, it's slightly higher than the previous quarter, if that's the right figure.
But we can give you that figure later if you want.
Carmen Hernansanz - Head, IR
(Interpreted).
Any more questions here in the room?
If we don't, then we can take questions over the conference call, pressing zero, one on your keypad.
Operator
(Interpreted).
We have a question from Arturo de Frias from Evolution.
Please go ahead.
Arturo de Frias - Analyst
(Interpreted).
I wanted to ask you various questions.
Two of them have to do with Spain.
Irma has just asked something similar, but I want to come back to the whole issue looking forward to 2010.
Looking at the total financial margin over average total assets, I'm doing a calculation which is very approximate.
But it's gone down slightly over the quarter; two basis points I think it is.
And this is pretty similar to what's happening in other Spanish banks.
And many of them are saying that 2010 is going to be a difficult year, more difficult even than this year, because this year you've got the advantage of the re-pricing on your Mortgage book and such like.
And how do you see what's going to happen to net interest income in Spain?
Do you think that it could flatten out and stabilize, given the cost of deposits, or do you think it would drop off as is happening with other banks?
And then my second question, which has to do with the market share in Spain.
I think it's pretty obvious that a lot of your peers are going to disappear very soon, or at least they won't be as many in number.
And that could open up some important opportunities for you.
I don't think that at any time you're thinking of buying up networks of savings banks in Spain, but I do wonder whether it would be possible for you to increase your competitive edge or gain market share, taking advantage of the weakness of your peers.
Is that the case?
Are you thinking of growing substantially above the sector average in terms of lending during 2010?
So that's my second question.
And then the third question I have is related to China.
I'm quite surprised that you haven't mentioned China at all throughout your presentation.
And there you've invested a quite respectable sum already.
So I'd like to know what you vision of the area is.
How does Spain now fit in with your strategy?
Personally, I've never seen a very clear-cut fit of China within your business mix, but I'd like you to talk a little bit about that and give me some color on the situation at present, and how it does fit into your strategy.
Angel Cano - President and COO
(Interpreted).
Thank you, Arturo.
Manuel, maybe you could start?
Manuel Gonzalez - CFO
(Interpreted).
Okay, I'll start.
Good morning, Arturo.
From regard to the trading income, net interest income in 2010, we are just finishing off our budgets and, as you know, we do this every three years.
So we're looking at 2010, 2011, 2012 and our forecast for that.
With regard to 2010, and we haven't finished this, in a few weeks we should have a better idea about this, but the impression we get at the moment is quite a positive one.
We think that we can protect our net interest income in 2010 in Spain for several different reasons.
We believe that there will be a progressive improvement, or less impairment in business as we move forward with regard to the loans side of the business.
We think that we'll be able to attract more customer business form the market without using any specially aggressive pricing strategies, though I'm sure that there is going to be a price war with our peers.
And we've seen that the re-pricing in the Mortgage book has stabilized through the first and second quarter.
And then the third quarter of 2012, which is very important to us, the short part of the curve which maintains major spreads, and at the moment we have coverage to guarantee these spreads with a view to 2010.
And also, if there is any spike in the interest rates, the growth in site deposits should give us the chance to improve our net interest income.
So for all these reasons we believe that we can stabilize the domestic part of our net interest income in 2010.
Angel Cano - President and COO
(Interpreted).
Okay, Arturo, the second question you asked about what we're going to do in the future, bearing in mind the market in Spain and the situation of the banks and savings banks.
As always, we're going to try and grow organically as much as possible to attract new customers and we're going to do this here in Spain the way we always have.
Maybe we might focus even more but, as you said, we're not really focused on buying networks of branches.
And certainly, of the seven territories that we have in Spain, we certainly keep a close eye on the way they generate new customers.
It's as simple as that.
Our hopes are pinned on that and we think that we can clearly gain market share in 2010 and moving forward.
You also mentioned China.
I was asked whether I was going to change the strategy or the size of our investments in China.
But China for us, from a strategic point of view and in the long term -- and this is something we've always said.
We've always stressed the long-term aspect.
We think that this is where there are going to be fantastic opportunities for growth in the coming years.
This is in the long term, but in the way -- along the way, we have forged two allies with CITIC, our Chinese ally, and now we're working on a plan to continue actively growing on the Wholesale side.
We've got good markets from global markets and our objective here, and that is to drive greater growth in the Wholesale side.
Just to give you an understanding of our Group strategy, don't forget that one of the reasons that South America is so healthy is because of its close ties with Asia.
So we're getting the indirect impact of that.
So we've got two focuses.
The indirect one through South America and then the direct one because of the plans we have for more organic than inorganic growth in China, and to forge new alliances that will be of interest to all the parties concerned.
Arturo de Frias - Analyst
(Interpreted).
One question -- or coming back on what you've just said, and another one that I forgot about.
When do you think that China will become a material part of your results?
Are we talking about 2012, 2015?
When do you think China is going to make an impact on your bottom line?
And the question that I forgot, do you have any facts and figures, any statistics that you could share with us on how the credit in Spain with developers, retail, or mortgages that have been refinanced in recent quarters?
Are you seeing a growth in NPA ratio?
Do you have any figures to give us an idea that refinancings are as successful?
Could you come back to us on this?
Angel Cano - President and COO
(Interpreted).
I was going to refer to a crystal ball, but maybe I won't, Arturo.
Asia, well, China.
When are we expecting that we say long term?
What is long term?
But it's longer than three years.
We have to go step by step, though.
I'd say the incorporating results as of this year, more the next year and more still the following year.
But as for when it's going to be a relevant chunk of our earnings, I think it's too early to say right now.
And then the question about restructuring, you should take into account that we're talking about all the restructuring which is done which has been very recent so that it's very new.
So, obviously, right now we can only say normal.
When we talk about refinancing or restructuring we have to look at what underlies all of this, the fundamentals behind the company that we are refinancing.
So if we were to think that we're talking about companies that have a tricky financial situation, then maybe with them we'd have a different kind of agreement.
But under this item there are no negative data.
And I think that what really matters is to renegotiate with companies that have sound fundamentals, in the long term at least.
Thank you very much, Arturo.
Thank you.
Carmen Hernansanz - Head, IR
(Interpreted).
Let's go on then with more questions, then, across the conference call.
Operator
(Interpreted).
There are no more questions from the conference call in Spanish.
Operator
Our first question comes from Mr.
Jernej Omahen.
Please go ahead.
Jernej Omahen - Analyst
Yes.
Hi, there.
It's Jernej here from Goldman Sachs.
Can you hear me?
I hope you can.
Anyway, so I have four questions.
The first one is on page 25 of your presentation, where I think you very nicely show that there was 110 basis points of organic capital generation during the first nine months of the year.
I was just wondering, given the convertible -- the EUR2b of converts' increase the core Tier 1 ratio by 70 basis points, why did BBVA feel the necessity to actually issue these converts?
Why not wait for two or three quarters and actually get there organically?
So I would just like to understand that better.
That's question one.
Question number two is on page 20 of the presentation, when you very clearly show the volume of property purchases.
And I would just like to understand what proportion of the property purchases and, as well as of the stock, is in land, and what proportion is in completed buildings?
And I think the last question I have is on the gross additions to non-performing loans.
They stood at roughly EUR3.6b in the third quarter, and I think that's more or less unchanged on the first and the second quarter.
And I wonder whether you would agree that this number should be looked at as a fair forward-looking indicator as to where credit quality is currently going, or whether you think that is not the case?
And maybe the fourth question, if you have a chance, I was just looking at the net interest income from Corporate activities, and I think it's down from EUR190m in Q2 to EUR110m in Q3.
I'm assuming that's the impact of the deposit hedge.
And if you were able to highlight if that is indeed the case and, secondly, where you think the progression of this line is going to be over the next quarters?
That's all from my side.
Thanks a lot.
Angel Cano - President and COO
Manuel is going to answer you the first and the fourth question and I'll answer you the second and the third.
Manuel Gonzalez - CFO
(Interpreted).
With respect to your first question, looking at the convertibles that we issued.
Why?
Well, obviously, we decided to make this issue of convertibles, given the flexibility that we can get from that.
First of all, we've got a convertible Bond that, for our customers who have taken up this product, is a very positive product because it minimizes the price risks associated to the distribution of a product of this kind throughout a retail customer base.
So we think that it's a very attractive product for our customers.
And, in fact, the placement has seen a tremendous success.
We could have placed substantially more Bonds than we finally did.
In fact, we went to the maximum that we had expected to manage to place.
and in terms of the way the Bank sees it, well, it gives us enormous flexibility in the way we manage our capital.
Because what we're doing is to generate capital very fast so that we boost our capital ratio to fantastic levels, whoever you compare us against internationally, without generating any dilutions for our shareholders.
And we also have the option, after a year and all the following four years, to convert the capital into ordinary stock at any time, at the discretion of the Bank itself.
So right now BBVA has EUR2b out there available if it's necessary to use them to boost our core capital at any time.
And so from now they are already capital for us, but we are not generating any dilution for our shareholders.
So that's the logic behind this issue of convertible Bonds.
In a context in which the whole issue of capital, I think you'd all agree is probably the thing that people are talking about most when they talk about banks.
And at the moment we are going through a process of seeing how regulations are being developed, but we don't know what the regulations are going to look like in the end.
All we know is that there will be higher capital requirements and we know that with our retail basis we're going to be much more impacted than others, with the tougher standards that we all have.
So what we're doing is anticipating what the standards might be when we know that the capital requirements will be really tough.
And then, at the same time, as Angel said before, we are paying out cash dividends, which means that the return for our shareholders is pretty reasonable compared to any comparative matrix you might wish to use.
We're shoring up our capital ratios and, alongside that, we're still paying out an attractive dividend to our shareholders.
So we're very proud of our capital management throughout this crisis.
We're the only Bank worldwide that hasn't had to increase its capital or accept any aid from the public sector during this time.
And I think that really shows just how strong the Group's balance sheet is.
Angel Cano - President and COO
Then the second question, I think, was about the type of properties that we are bringing onto our books in Spain.
I don't know if I'm right, but I think about 80% is land.
Did I say that in the presentation?
80% is land.
And then, of the rest, about 15% is finished housing.
So there's just 5% outstanding that isn't finished.
So we're talking about properties that can be managed for sale, either land or buildings.
And I think you were asking as well about the NPA ratio, what we're expecting to happen to it over the next few quarters.
And there I'd say there was a screen saying a reduction of the growth in the NPA ratio over the last few quarters.
We were reducing the rate, with growth of only 25 basis points, whereas, before it was 55 at the end of last year or the beginning of this year.
So we're seeing growth is flattening out and stabilization is really what we are seeing, in fact, going down sometimes.
And there was another transparency showing Spain and Portugal, and Manuel was talking about this, where we saw the difference compared to the next competitor of more than 80 basis points if we looked at the incorporation of the properties we had bought.
From here over the next few quarters we can expect to maintain that kind of advantage that we have over our competitors in general.
And I can try to give you a number, but it will depend on the macro economic scenario in all the different countries.
But I think we could be talking about cost of risk being stable or new additions pretty well stable, and NPA continuing to outperform our peers.
Coming back to your list of questions, I want to deal with your last one about the net interest income for the difference between the third and the second quarter.
As you can see in the third quarter, quarter on quarter, at Group level there's a reduction of EUR150m.
EUR73m is just because of the exchange rate, so the reduction in real terms -- in actual terms will be EUR79m.
And that reduction is totally associated to the updating of the type of assets we have on our Mortgage books in Spain.
The process of re-pricing of our Mortgage book, which is generating this reduction in the net interest income.
So it's focused on Corporate activities, which is where we have the interest risk rate on our euro balance sheet booked.
So that stabilization is there with the figure, which is dropping off at very similar levels to the exchange rate.
So shall we go on with the next question?
Was there another question in --?
Operator
The next question comes from Mr.
Matteo Ramenghi from UBS.
Please go ahead.
Matteo Ramenghi - Analyst
Yes, good morning to everyone.
I have three quick questions left.
First, if I understand well, from the third quarter the EUR2b mandatory convertible is included in core Tier 1.
However, the result in increase in share count is not factored in yet and it will be only upon conversion.
Second, going back to the sale and leaseback of real estate, I was wondering if you disclosed the yield and impact on the costs from the transaction.
Apologies if you gave this information already and I missed it.
Third, on asset quality, we welcome the fact that the NPL coverage was kept flat in the quarter, at 68% at Group level.
Clearly, you took advantage from using the capital gains.
However, I was wondering if you could comment on the level of coverage and if this is a coverage that you feel comfortable with and for you may want to maintain more or less at this level going forwards.
Many thanks.
Manuel Gonzalez - CFO
(Interpreted).
Matteo, (spoken in Italian).
Getting onto your quick questions, concerning the convertible, basically, the convertible Bonds, this is included in core capital because it is capital.
So it is capital, it's deployed it's available, but it's not generating any increase in shares, certainly for a year.
And they will only do so depending on how the Group converts these Bonds into shares if it needs to.
And it will last for five years.
So this has no impact on earning per share and there's no immediate dilution of the share for shareholders.
Obviously, it's a mandatory instrument and the conversion will take place when it matures.
With regard to the sales and leaseback, we're talking about approximately EUR100m a year as the cost of rents that we didn't have and we now will.
But it's not very significant at all.
And finally, with regard to the coverage, 70% -- 68% of the NPAs without the Group, and this is a very favorable comparison if we look at what we know about our international peers.
And certainly in the domestic market, this coverage, we're talking about 4.6b in generic non-standard -- sub-standard provisions that will be available for covering any possible increase in the specific regulatory provisions that we are required to hold.
And we think that it's a very strong coverage rate, given the collateral situation that we have at the moment.
And also the structure of the quality of the NPA that we have that I mentioned before, whatever kind of reduction in the prices of the collaterals that you want to use.
Coverage has improved in Spain because of the leaseback going into generic provisions.
But, here, I would like to say something about coverage, because in the end coverage is a very instrumental issue.
We have standards and rules with regard to making entries into NPAs.
So this is done very quickly and at a time in the cycle this is done very objectively.
There's no subjectivity, or very little subjectivity with regards to booking NPAs.
And the provisions' requirements are also established very objectively.
And depending on the kind of NPA we're talking about, we have one calendar or another one.
So if we're not talking about the Mortgage book -- the top quality Mortgage book, we have to have 100% coverage in the case of Spain within 24 months of the NPA if it hasn't been recovered.
So in a time of a cycle like this one, where obviously the NPAs are going to increase and the provisions will grow with it but at a slower rate.
And obviously this means we would need further provisioning requirements, but this is an instrumental issue under the current rules.
But if we look at other portfolios, such as Credit Cards in Mexico, we have to have 100% provisioning in 12 months.
So the calendaring for provisioning is very much quicker.
And this is really what we're looking at.
I would just like to add page 18 of the presentation, where we were going over the EUR12.5b that broke down into those that were secured loans and those that were unsecured loans.
And, if you remember, we had some EUR6.6b in doubtful and secured loans, which was 190% coverage with the guarantees that we have.
So we're talking about another EUR5.8b in doubtfuls, but with unsecured loans, where they were covered with 144% coverage.
Another figure that I didn't mention when we were talking about NPA ratios, whether they were secured or unsecured, what is true is the EUR770m that we've spent in the first nine months of the year compared very favorably with the purchases that had been made in the industry, with whom we are talking about EUR2b or EUR3b from each of our major rivals.
Carmen Hernansanz - Head, IR
(Interpreted).
So as there are no more conference call questions we'll move onto the webcast questions, many of which have already been answered.
So let's start maybe with the issue of capital.
We are asked by Citigroup and also Caja Madrid what are our targets in terms of capital ratio -- of core capital and Tier 1, Tier 2.
We're also asked how much organic capital do we intend to generate in the next 12 to 18 months.
And then, with regard to capital ratios, but with regard to the denominator, we're asked if we're still seeing falls in the weight risked -- risk-weighted assets moving forwards.
And we are also asked how many NPLs have we incorporated with Guaranty in the first quarter.
Angel Cano - President and COO
(Interpreted).
What Manuel was talking about before was that in 2010 the regulations will change, and we think that there will be more strict capital requirements.
We will have to have more capital required of us.
But we don't think that will have a significant impact on us.
Thinking about getting a lot more or a lot less, well, it's better to be prudent and wait until the regulations are published and then we'll see.
And, as Manuel said, that way it won't have an impact on the dividend policy or our capital ratios.
What are we seeing?
Well, the figures, I think, show it.
It's difficult to foresee the future, but we are seeing organic growth in capital -- in core capital coming from organic growth, about 20 basis points under normal conditions.
And we're doing even better than that at the moment.
So I don't think I can give you any better information than that.
And are you going to talk about risk-weighted assets?
Manuel Gonzalez - CFO
(Interpreted).
As we saw in our quarter-on-quarter growth, risk-weighted assets are pretty well stable.
They're dropping off at 1.1%, absorbing the Guaranty operation which has an impact on our risk-weighted assets of $2.4b.
And I think, with that, I've answered your third question.
What is making our RWAs go down?
Well, the lesser growth of our lending books and the change in mix towards lower risk assets which is impacting our whole loan book.
Do we think that will continue in the future?
We think that growth throughout the rest of the year will be pretty low in risk-weighted assets.
And for 2010 we're expecting to see a progressive recovery of levels of our business volumes there, which will mean progressive speeding up of the growth of our risk-weighted assets.
What level of organic capital generation are we expecting over the next 18 months, were you saying?
Maintaining the current policy with respect to our payout, as Angel just said, we're expecting to get organic growth of about 20 basis points per quarter, which we think is a reasonable estimate.
If the risk-weighted assets grow less, that figure might be higher.
But we're envisaging this upward increase of RWAs over the year.
Carmen Hernansanz (Interpreted).
We've got a couple of questions here.
One has been partially answered.
Whether we are going to generate more capital gains in 2010 to put into generic provisioning.
And whether our coverage -- well, if we have to increase our coverage would we be considering any partial IPOs of any of our franchises in this case?
That was one of the questions.
The second is if we could give more color on the write-offs this quarter and where we've seen the growth, because the figures have gone up from EUR819m to EUR1,089m.
What's the reason for that?
Angel Cano - President and COO
(Interpreted).
As you were saying, Carmen, we've answered the question on the capital gains.
As we said, our idea is for any capital gains that are generated, and not due to IPOs because we haven't got any plans for the next god knows how many quarters, they're all going to go to additional provisions as we have this quarter.
And with regard to the write-offs, the mark-downs, those EUR200m for this quarter, which is a modest growth, and this is associated with Spain and the United States.
In the case of Spain, this is the policy that we have established of marking down any NPAs that are covered 100% by provisions and in this period where we don't have to mark them down, according to the regulations.
So we're talking about approximately EUR100m in Spain, and in the US we have another $100m, and this is because of the policy we have, the provisioning policy that we follow in the United States which we call partial mark-downs.
These are loans of 100 with provisions of 20, so we have mark down 20 and we have a loan on the balance sheet of 80.
But at all times the loan is on the balance sheet and at the best estimate of the underlying asset that the loan is covering.
And that's what we are seeing in the United States.
And this is our policy of partial charge-offs.
In the other regions that don't use the same policy, but this is the general rule in the United States, and this also means that coverage in the United States is obviously lower, because you lower the provisions and you lower the point of the loan, Manuel has just said, so the resulting coverage is also going to be lower.
But this is a procedure that is generally accepted in the United States that affects everybody, our rivals over there as well.
It's established by the Fed.
Carmen Hernansanz - Head, IR
(Interpreted).
We have three questions dealing with the performance of refinancing or restructuring.
I think they've already been answered, but maybe you could give us more information on this.
Basically, there are no further questions, or nothing further to add for this.
So we'll move on to another question from Santiago Lopez, who is talking about trends in the margin on a Group level rather than just Spain.
He asks how can we explain the growth in the margin -- 19% growth in the margin with a loan book with falling margins.
And how do we expect the net interest income to perform in 2010, and what impact will the ALCO portfolio have on it?
Manuel Gonzalez - CFO
(Interpreted).
The ALCO portfolio basically is used to hedge deposits at cost level which, with the resident sector in Spain, would be EUR24b approximately with the portfolio which, right now, would be about EUR35b.
And that's generating 5.86% in net interest -- of the net interest income of the Group.
And that doesn't explain the very strong growth that we're seeing in the net interest income, which is associated to some margins that are growing.
You should remember what we saw in the presentation about the process of re-pricing and how it works.
One thing is the spread, which can narrow because of the re-pricing of the assets in the domestic business in Spain.
But then the margins we're getting on transactions -- new transactions and the new conditions that we are getting on the existing stock are all going up.
And that's really what's behind this growth in our net interest income, along with the structure of growth that we have on the liability side of the account with customer funds.
Talking about the reasons that we've already discussed, some of them are extrapolable (sic) to the rest of the geographical areas.
And we think net interest income in 2010 could grow.
At the moment what we're seeing, as we review things for the budget, is better expectations of growth in business volumes in some geographical areas as 2010 unfolds.
There are some areas, we think, where we could have growth at the end of the year in double digits compared to rather flat levels, even negative levels, that we are reporting at the moment.
We should think about Mexico, for example.
We're talking about a drop there of GDP of 6.8% in the first half and we're talking about forecasts for growth in 2010 of more than 3% growth in the GDP.
So that will be reflected, as you can imagine, in better business volumes.
And the same will be happening in other areas of our business.
For example, corporations and businesses, there, we're seeing de-leveraging and structuring of debt and the companies that can go out onto the capital markets are doing so now.
But that process will begin to generate new investment with more demand for credit, so the combination of margins -- higher margins, the recovery of business volumes on our loan book and customer funds moving towards lower cost customer funds should improve our net interest income and mean that we get positive growth in 2010.
Carmen Hernansanz - Head, IR
(Interpreted).
We've got various questions about Mexico from various different analysts.
And basically they're wondering what kind of recovery we're expecting in Mexico in this context.
What do we think will happen in terms of business volumes, NPA and returns, and the cost of risk.
Angel Cano - President and COO
(Interpreted).
Manuel has just said what we all like to hear, is that we're over the worst in Mexico.
And the fall we're going to see in 2009, most of this has already happened, or a large percentage of this happened in the first quarter, the 6.8%.
And Manuel said, and if we look at the year as a whole, I think they will continue to fall a little bit more, but the forecasts are for improvements to the end of the year.
And in our opinion over the next 10 or 12 days we will present the results for Mexico.
But what we're seeing is growth of around 3% for Mexico, which consolidates the sort of growth that we're seeing in business and mortgages.
Unlike other countries, in Mexico the stock of unsold houses is almost zero.
At the beginning of 2010 new housing will have to be built, so the mortgage sector should -- we're going to see a growth in our business in 2010.
And I would also say that also in business and government customers we're going to continue to change our mix, moving away from Credit Cards into 2010.
And basically this will lead us to increase our net interest income during this period.
I can't tell you exactly how much at the moment because we're reviewing budget at the moment and we are asking for guidance for this region, for 2010.
But I would say that in Mexico we're going to see good news in 2010 for business volumes, in the mix of the activities especially, and we're going to see good numbers in attracting customer funds in liquid funds with regard to term funds.
So I think in Mexico the news should be good in 2010.
Yes, on NPAs and the cost of risk, the level of provisions, as you saw from the presentation, it's around EUR360m and is stable, with a reduction in the NPA ratio.
And Manuel said -- explained how we provisioned for Credit Cards.
In 12 cards -- in 12 months you have to have 100% provisions.
And we've seen an increase of two percentage points in the NPA.
So we're talking about a cost of risk and a provisions level that is really stable for Mexico for us.
And obviously what we're expecting are reductions in the volume of provisions and in the cost of risk in the future.
Carmen Hernansanz - Head, IR
(Interpreted).
We have three questions about division of the Wholesale Banking.
The first of it concerns the positive performance we're seeing in revenues.
And Fidentis asks whether we see any signs of slowdown in the short term, or do you think this is going to be sound growth that will be maintained.
The second question.
Can we explain the losses in net trading income?
Are we going to see this in the future.
And the third question is can you tell us a little bit more about the generic release of provisions, the buyback of generic provisions in this quarter?
Angel Cano - President and COO
(Interpreted).
With respect to your first question, the Wholesale business is a business that our Group has based, above all, on our customers, which means that the revenues don't come through commercial or credit spreads.
The difference between lending and borrowing, it's more a matter of our global business with our customers.
So the mix of revenues between net interest income and the rest has changed towards fee income because of all the operations we're generating with our customers worldwide.
You already saw when I showed you the presentation what's been happening on the credit side.
We're increasing revenues by more than 24% over the period.
You mentioned -- well, I'd say continuing with this strategy which is very customer orientated would mean we'll have more recurrent revenues and we'll generate revenues over the next two quarters and we are expecting growth there.
With respect to losses, well, if we look at the line in the NTI there could be losses there.
But we should see how they fit into the net interest income, what that means and how it compares to the NTI.
Because basically the way that markets work means you have to take into account both figures.
So it's more relevant to look at the revenues line for both the net trading income and the net interest income.
Right now, the net trading income on its own doesn't give you relevant information in this case.
And then the third question.
Yes, you can talk about that.
Manuel Gonzalez - CFO
(Interpreted).
Yes, the release of generic provision studies.
That's associated to the reduction in business volumes against the last quarter.
So it's closely linked to the reduction of business volumes and less growth in lending.
And that's why we're releasing generic provisions in Wholesale Banking.
And also the exchange rate, because the dollar is weakening, and that means that EUR85 million less is needed, but that's just because of the exchange rate.
Carmen Hernansanz - Head, IR
(Interpreted).
And we're also asked about what is happening to the asset quality in the US with respect to the provisions.
And Alfonso Gomez of Citigroup has a question.
He asks to what degree Guaranty will contribute to the provisions.
Manuel Gonzalez - CFO
(Interpreted).
As we said in the case of Guaranty, that this has practically no impact because it's only been with us for a month during this quarter.
From the point of view of asset quality, we've seen that the additions to NPAs in Compass, these are fairly stable in net terms.
With regard to provisions, this is the more aggressive policy that we have implemented with regard to partial charge-offs.
And at the moment the net charge-off ratio that we have in Compass, excluding a tiny contribution from Guaranty, is 198 -- 1.98%.
And if we list this in comparison with the peer group, where the average is 2.59%.
In the case of Compass, I'm talking about 1.98%.
In the case of BB&T, we're talking about 70%.
So it's lower than Compass.
In the case of Regence, we're talking 2.14%, which is slightly above Compass.
And at Bank of America, we're talking about 1.81%.
And in the case of Frost, and a major bank in Texas, we're talking about 0.46%.
And that's why we have higher provisions at the moment.
Angel Cano - President and COO
(Interpreted).
To give you more intuitive figures, about three quarters of Compass' operating income goes to provisions.
Our peers, mentioned by Manuel just now, or the average are provisioning over 100% of their operating income or their net interest income to provisions.
I'm sure you will have seen some recent articles where the State is putting -- or the government is putting pressure on accounts and credit portfolios in all the banks in The States.
Carmen Hernansanz - Head, IR
(Interpreted).
We can finish with a final question from [Ignacio Cerezo] concerning the release of generic provisions in Spain.
How much generic provisions have we released in Spain and how much have we got at the end of September?
Angel Cano - President and COO
(Interpreted).
Well, I think we've answered this, at least partially.
EUR2.2b is the balance in Spain.
Of that EUR4.6b that we had in the presentation, EUR2.2b are purely generic.
We freed up [EUR400m] in the third quarter, a little bit more.
Well, it's gone down a little bit more than in our third quarters but, as Manuel said, that's linked to business volumes and the exchange rates.
Carmen Hernansanz - Head, IR
(Interpreted).
Okay, then, I think you've pretty well answered all the questions.
If there are any more questions, you know that you just have to get in contact with us in Investor Relations.
Now thank you very much for having listened to us, and anyone who's here can have a cup of coffee with us.
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.