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Angel Cano - Chief Operating Officer and President
Good morning, everyone.
Welcome to this presentation of the first quarter 2014 results of BBVA.
We are going to change things a bit and instead of letting the Investor Relations people introduce me, I'm going to introduce our Strategy and Finance team who are with us today.
First of all, the new CFO, Jaime Saenz de Tejada, and also the new Director of Investor Relations, Luisa Gomez Bravo.
You'll be seeing Luisa later on because she is going to be dealing with all the questions that will be coming in.
I also want to take advantage of the fact that I was starting today's presentation by making special mention of Manuel Gonzalez Cid, Tomas Blasco for all their help over the last few years, especially Manuel.
He has worked so hard as CFO, having to deal with me and work very closely with me through these very complex difficult years of financial crisis we've had.
So without further ado, I'll move on to the presentation of earnings as such.
But first of all, I wanted to highlight that you are going to find an after tax profit before corporate transactions, thinking that this quarter, as you'll be seeing, we haven't got any capital gains from corporate transactions whereas a year ago we were seeing capital gains from the sale of the pension business in Mexico and part of the insurance business in Spain, which we had to record to the first quarter of last year.
So this quarter we don't have anything like that, no capital gains from any corporate transactions.
So as I was saying, this after tax profit, which is net income, has been growing at about 19% and that's after absorbing the impact of the exchange rate, which has been pretty significant, as you'll see in the presentation, this first quarter.
In constant terms, the growth has been excellent, with this income growing over 70%.
There are three main drivers, positive performance of all the income lines in constant terms; the net interest income and fee, gross income, operating income, excellent cost control, as you know, all of last year.
Each quarter, we saw a gradual improvement in the cost profile against the previous year.
This first quarter, the costs are now growing below income and revenues, and it's mainly in the developing countries -- or the developed countries that you see the costs going down 2.5%.
In places like Spain, as we'll see later, we are seeing that they are falling off at near 8%.
And then the third driver, which is also very important, is something that we've been waiting for for a long time, which is what's happening to the cost of risk.
The risk premium has to do a lot with the additions to NPLs.
So this year it has fallen 18 basis points against last year and we are definitely seeing the tendency that we were expecting to see and that we are expecting to continue throughout the rest of the year.
We can now move on, as we always do, to the wheel with the keys -- the key highlights.
So we have to start talking about our earnings as such.
Already from the first quarter we are seeing the new cycle of growing revenues.
I said that profit is growing at 19% -- 19.7%, being driven forward by those three factors, income, costs, and the risk premium as I said -- improvement in the risk indicators as I said as well.
We are confirming the positive performance of these indicators.
In general, we are seeing this in a lot of different countries and now in Spain as well, and we are able to confirm that Spain is definitely seeing better cost of risk.
There is a drop of gross additions to NPAs compared against the first quarter of last year.
It was the lowest entries we've had, 25% down then.
These falls again in Spain are even greater, close to 35% drop in Spain and a drop in the risk premium as well of 18 basis points.
And that's what makes it possible to start to see the NPLs dropping in absolute terms.
In core capital, we are still actively managing our capital ratios.
We've launched two issues, one Tier I and the other Tier II, each of EUR1.5 billion.
The idea is to go on shoring of our capital ratios.
At the end of the quarter, our capital ratio under the requirements, the legal requirements with phased-in CRD is now 10.8%.
And as we'll see later, there is a requirement under Basel III fully loaded which would give us a 9.9% ratio.
And as for our leverage, that's at about 6%.
Looking at our financial structure, we've got lower costs, taking advantage of windows on the markets this quarter, with an issue of EUR1 billion for senior 5-year bonds.
The main thing to take home is the improvement of 177 basis points in the cost of this issue compared to the issue we made just 1 year ago.
I was saying that our main income lines are impacted and will continue to be impacted throughout the year by the exchange rate, maybe not so much as the impact that we usually see at the beginning of the year.
In the first quarter of 2014, we saw that when we have to book the entire impact of the exchange rates performance of the previous year.
So there won't be such big impacts throughout the rest of the quarters in the year.
But to understand what's happening to the different income lines, in constant terms we can see that net interest income and fee income is growing 6.7%.
And if we look at the tendencies, in most countries, as we'll see later, this line is showing positive growth over the different quarters and that's including Spain now, as we'll see later.
Including net trading income, gross income is growing at 5%.
And maybe at the end of this quarter we are seeing a certain rebalancing between the contribution coming from the developed economies and the emerging economies.
Earlier on, I said that cost was one of the drivers for better performance this quarter, and that's no surprise for us because it is the outcome of all the plans for cost saving and management that we've been launching last year.
We are talking about cost growing at 4% in constant terms and already growing below revenues and a good balance between the developed and emerging economies.
In the developed countries, we are seeing falls of 2.4% this quarter with a better evolution of income than costs, with income growing and costs going down.
That's the best you could possibly get.
And in the emerging economies, there too costs are growing below income.
So that's good news in both of these environments.
And with these, operating income is growing 6% year-on-year.
And here, this is something we talked about last quarter.
This quarter, we are seeing that the returns, the net -- sorry, the operating income over average total assets is growing much better than our peers, more than 2 times more than the rest of our peer group in Europe.
I was saying that the third driver that we were -- I know something we were expecting is what's happening with provisions.
It's not so much loan loss provisions.
It's the real estate provisions really.
But both of them are helping us along.
We are seeing that the new endowments to the provisions are going down, which means that our profit are going up at over 70% in constant terms.
And after absorbing the impact of the exchange rates of the quarter we are growing at about 19%.
Looking at the risk indicators, earlier on I said that there was a drop of net additions of 25% quarter-on-quarter.
This means that we've got a positive performance in the balance of NPAs.
But for the Group as a whole, for real estate, as you can see, we've got a drop from the peak in September of EUR1.1 billion and also excluding real estate, where we see an improvement of EUR400 million from the peak in September last year.
And what does that mean?
Well, we've got stabilization of the net additions and our coverage ratio, and a significant improvement in the cost of risk that we'll be seeing throughout the rest of the year as well.
In capital, 10.8% core capital under the phased-in, 9.9% under fully loaded Basel III, and 5.8% is our leverage ratio, which had also talked about the stress tests that we've recently gone through in the USA.
We came out well in both the quantitative and the qualitative tests, which is what we think are most important internally -- with this proactive management of the two issues of EUR1.5 billion in the quarter of Tier I and Tier II capital, which means that we are able to face this year with very comfortable capital buffers as we go through the stress tests that we are going to be undergoing in the next few months, whose results will be published at the end of the year.
So to sum up, profit after minorities is EUR624 million, with that EUR744 million before corporate transactions, which is growing 19%.
And most important is the positive trend that we are observing in most of the countries where we operate, and in our global P&L as well over the different quarters.
Our focus of attention throughout the year will be the exchange rate impact on most of the different lines with significant differences between constant and absolute figures.
Costs are going to be very important as well in helping us to grow our profit and we are seeing more and more visibility in the P&L for our group as a whole.
Okay, we can now move on to the different business areas.
And as usual, we'll start with the developed world and we are looking at banking activity in Spain.
And what we are seeing here is a fall in lending of 8.4%.
If we look at longer series, we'll see how this fall is slowing down and I'll even go as far as saying that the stock at the beginning of this quarter has grown just over 1% in comparison with the stock at the close of 2013.
Customer funds are going fine, as I said, and the financial structure and this balance shows positive performance.
If we look at the net interest income and fees, this falls by 9.5%.
And then this is -- the plus fees -- the positive thing is that we have three quarters where we have grown the net interest income quarter-on-quarter if we compare it with the last quarter of last year.
And the final piece of information is that we shouldn't forget the impact of the fact that the floor clause has gone from the mortgages on the net interest income.
This is as of the 9th of May last year.
And without this effect, the net interest income, instead of falling, would have increased by 1%.
If we add in the financial operations, then gross income increases by 5%.
And it's true that this quarter we have used low interest incomes and also to manage our portfolios and that's why we've reached this 5.5% additional growth at the gross income level.
Spain is the best area, has shown the best performance in costs because of all the plans that we've launched in recent quarters here.
It's almost 8% fall in costs, which enables us to show over EUR1 billion in operating income in the quarter, which is 17% growth.
Another positive figure that has helped this performance of the net interest income in recent income, especially between 1T and 4T, we've increased the customer spread by 21 basis points supported on the material reduction in the cost of deposits here in Spain.
So the risk indicators now, as you can see, the NPAs have stabled off.
The gross entries, even if we compare this with one of the best quarters of last year, it's still falling, as I said before, at around 35%.
The risk premium in Spain has fallen 31 basis points in comparison with the average of last year and the NPAs and coverage ratio are stable for the third consecutive quarters, which gives us an income statement in Spain of EUR386 million to the Group plus good performance on each of the different lines.
And it's not just the year-on-year performance of these margins, but if we look at 3T, 4T and Q1 of this year, we can see the trend and it's excellent.
So we will see that the contribution from Spain will get back to normal and will approach the current contribution that we are seeing of the operating income in the Group as a whole.
Okay, real estate business in Spain now.
Just one slide on this, which will summarize the main magnitudes here.
We are talking about a net exposure of around EUR14 billion.
This has fallen from the peak by 21%.
The NPA ratio has also fallen.
There has been a reduction in this quarter, 127 basis points in the NPA.
And with regard to the business activity, the sales that we have made are close to 5,000 units in the quarter and this is approximately 27% more than last year.
Sales prices are very close to the net book value.
And what we are seeing on average in Spain is a gradual stabilization of the falls in prices.
We're starting to see some regions where prices are starting to pick up and other regions where there is still a slight slip in prices.
So what we are seeing here is a clear recovery in demand.
But this is not uniform throughout the country, I repeat, but on average there is clear positive performance.
Because of the updates and the appraisals that we do for each period for results, this will have an impact in provisions in the unit and this has led us to present these EUR231 million in negative earnings, which means that altogether as a whole just adding the results from the banking activity this quarter, shows positive earnings.
The United States now; this is the first of many quarters that I can remember in which all the margins are starting to grow.
There are two drivers here.
On the one hand, we have the positive performance of business activity both on the lending side except for the customer funds because of the high liquidity levels we have.
But the business here is starting to perform positive, and this is showing through in the different margins.
It's true that we continue to see slowing down reductions in the customer spreads because of the lower pricing of our assets, but this has meant that the main margins are growing.
The net interest income plus commissions is growing by 6%.
And what's important to see here is the behavior of last quarter, so that we can see the trend that is picking up.
The gross income has grown by nearly 7% and the operating income as with -- the revenues have outgrown cost is growing by over 10%.
If we look at the risk indicators, these merely confirm the trends that we have seen in recent quarters.
The NPA ratio is now 1%, which is clearly the lowest of all the regions.
The coverage ratio continues to grow.
We are talking about 160%.
And the risk premium is around 0.2% and 0.3% over recent quarters.
And this gives us an income statement in the United States of over EUR100 million, which is growing just over 16%, and with positive performance from each of the margins in the income statement.
So we will increasingly see how this performance will approach the growth in business, so I think we can look forward to better growth as we move through the year.
Moving on now to the emerging world, and as always, I will start with the rest of Europe and Asia.
Here we have Portugal, the rest of CIB, both in Asia and Europe, and the different offices that we have in Europe where we don't have any retail presence.
And of course, this also includes our main asset, the main business, which comes from our 25% investment in Garanti.
What we are seeing in Garanti in the first quarter of this year is lending that is growing at very positive rate, very similar and somewhat better than United States but at lower rates than we've seen in recent quarters.
We are talking around closer to 20% than 25% that we saw last year, after a third and fourth quarter in which the cost of funding had an enormous impact on customer spreads and we [saw] a clear step between the second and the third quarter.
In the first quarter of 2014, this is higher than the third and fourth quarters of last year.
And the second important point is that the customer spreads is now above T3 and T4 of last year.
But we are comparing this with the first quarter, which was the best of last year's basically with regard to customer spreads.
But T2 was also good.
So I think we will see that the negative figures in the margins will start picking up as we move through the year.
Despite the political instability we've seen in Turkey in the first part of this year and in the end of 2013, the macro prospects are good.
We are talking about an economy that has a potential growth in its economy of around 5%.
And with an enormous -- about two-thirds of the population is under 35, which gives it enormous potential, and we have the most profitable and the best managed bank in the country, in a country where there is a long way to go with regard to banking the unbanked.
So from the point of view of opportunities, Turkey clearly has enormous potential for us.
If we look at the Eurasia income statement, including all the other business plus Turkey that I've mentioned, these contribute approximately the same to earning as the United States, EUR105 million.
The margins, as I said, have been impacted by the difficult comparative of the T1 of 2014 with the best quarter of 2013.
But as I think we will see that all of this stabling off in the Group's earnings as we move forward.
So, moving on now to Mexico, Mexico continues to be just as dynamic as we saw at the close of last year, with double-digit growth both on the lending side and in customer funds.
And this is filtering through quite quickly to the different lines and the income statement.
We are seeing the net interest income plus fees growing by over 14%.
And within this line, as we will see when we look at the full income statement, we have the net interest income which is growing by over 17%, which is clearly higher than the banking activity.
But what's also important to understand that this all includes not just the retail and the corporate banking, but also the markets and the ALCO, which have behaved better in net interest income and less in the net trading income.
So what we need to do is to look at the gross income all together, which is growing by over 10%, which is very similar to what we are seeing in the growth in business.
The operating income has grown by over 12%, (inaudible) the gross revenues, and this is due to good cost management.
And we are keeping the growth in revenues, which continues to outperform the cost.
There is no novelties in the risk income -- the improvement in the cover ratio and the NPA ratio for the franchise in Mexico, which takes us to a Mexican contribution to the bottom line of EUR453 million, growing at around 15% with very positive performance, as we can see in the slide, right from the net interest income right the way down to the operating income.
And finally, South America, excuse me -- once again, in South America, we can see enormous diversification within the region, as we've said on other occasions.
Sorry, I just choked on that.
The volatility from Venezuela, although Venezuela is going fine in constant terms, but is highly volatile with regard to exchange rates.
But in general, business activity throughout South America is growing at an average of around 25%.
And if we include Venezuela -- and you can see this information in the quarterly brochure -- we are talking closer to 20%.
But once again this filtered down quite quickly to the main margins, the net interest fees, gross income and operating -- we are seeing excellent performance in the activity, the spread management and even the cost management, which are also growing here less than the revenues.
So this enables us to see this performance in the margins over-and-over again.
The risk indicators, once again there is no news.
There is no change in the trends.
They are stable both in NPA and the coverage ratio, and also the risk premium, which depending on the quarter varies between 1.3% and 1.5%, which takes us to contribution to the Group of EUR244 million, which is 16% increase year-on-year.
And as we can see, the performance on all quarters is good.
And once again, okay, just to give you an image, if we take out the volatility of Venezuela, we are seeing very positive growth, which are closer then to 20% than 25% or 30%.
But earnings are growing year-on-year by over 12%.
And this clearly shows us the positive effect on the one hand of the complete diversification of the Group, but particularly within this Group, within South America, which generates stability in the income statement.
So those are the income statements.
So maybe as a quick summary, net income ex-corporate activities has grown by close to 19% also after absorbing the exchange rate effect because otherwise we would have grown by over 70%.
There are no capital gains from corporate operations this quarter, which makes it difficult to compare this quarter with the previous year.
The main drivers for all of this, first of all, the main margins, this positive quarterly trend and positive growth quarter-on-quarter and the positive earnings and results that we are seeing from controlling cost management and also the confirmation of the risk indicators, the risk premium on the one hand and the NPAs with sharp falls in gross entries to NPAs, basically in Spain where this is even greater.
So I will now hand over to Luisa Gomez Bravo, who will run the Q&A session.
Luisa Gomez Bravo - Director of IR
Thank you, and hello and good morning everybody.
What we will do is to move straight on to the Q&A session.
And as we've done previously, in order to optimize the time -- with the time we have is we will put these together into different groups.
So any questions that can't be answered here will be answered by Investor Relations teams today.
So we will start with the currency block.
We have several questions here, David Vaamonde from MainFirst, Antonio Ramirez, Rohith Chandra from Barclays and from Deutsche Bank and Mario Ropero from Fidentiis.
We have four questions here.
The first one, could we give a bit more color about the impact of currency from Argentina.
The effect of cover of hedging in these countries.
The third issue is what's our general hedging policy.
And the fourth question is how do we consider the situation in the coming quarters.
Unidentified Company Representative
Well, Jaime, you can break the ice and talk about Venezuela and Argentina mainly when we are talking about currency issues.
Jaime Saenz de Tejada - CFO
Well, the impact we've got from the exchange rate over the quarter between the average rate from the first quarter of 2014 and the closing rate at the end of 2013 in Venezuela in attributable profit was EUR44 million.
The impact of hedging in that country was 24.
So we've been able to neutralize about one-third of the impact on our P&L.
The negative impact on the attributable profit again in Argentina was EUR7 million and in this case the positive impact of hedging has been 7 -- 16, sorry.
So the hedging in Argentina was higher than what we had in Venezuela.
The impact in terms of capital in both countries was practically zero.
The impact of the devaluation is offset by the risk-weighted assets and so the total impact on capital was neutral.
Our hedging policy in general, as we've often said to the market, seeks to cover about 30% to 50% of the expected profit for the year.
The final level of hedging will depend obviously on the cost, the exchange rate that we are talking about at each time.
Unidentified Company Representative
And looking at the capital ratios, we are trying there to minimize the impact of volatility on our core capital.
So what we usually do is to hedge about 50% of the capital investment that we have in our subsidiaries and then the rest is offset by the performance of our risk-weighted assets.
So from now on what are we thinking about doing in both countries?
Well, the contribution of Venezuela to the year-end profit should fall by about -- well, one-third, maybe a bit more, against the previous year in 2013.
And in Argentina, maybe it will be about 20% approximately lower than what it was last year.
Well, in the presentation I already said that the tendency isn't going to be the same everywhere or the same over the different quarters.
It's mathematical really.
Every time we go from one year to another year we start from zero with our average exchange rate.
But when the exchange rate, as happened in 2013, has been moving with the depreciation of currencies, that means in one single quarter we have to book this mathematical calculation in one go.
So the rest of the quarters unless there's a really negative performance such as what happened in the second half of the year last year, we'll see that the tendency is much more stable because it stabled out of -- so it will stable out over the next few quarters as well.
Jaime, said that of course Venezuela is a case apart.
But there we have to see what might happen to the currency over the year.
But we usually say that with the hedging we have against the consolidated books in ALCO are sometimes done at corporate level or sometimes done at local level if there aren't deep enough markets, which is the case in Venezuela and Argentina, where the markets aren't very deep.
And in Venezuela --
Luisa Gomez Bravo - Director of IR
Francisco Riquel from [Ani Mazuno] and also from Deutsche Bank and Nomura and from Sun and Credit Suisse we have questions.
Are we going to change the exchange rate once we have two in Venezuela over the next few months?
Unidentified Company Representative
No.
Based on the information that we currently have, as you know, SICAD I is the exchange rate used in Venezuela for international investments.
So this is the one that we consider to be the appropriate one to apply both to the profits that we make in the year and also to all the retained profits and the capital.
The average exchange rate for SICAD I is [11.30] compared with [62.63] that we had last year.
The SICAD II not accessible for foreigners or for local banks.
We're only intermediaries in their system.
What's more, Jaime, what we are doing is to apply the main book entries and the increases that we are being told by the auditors and the supervisors, because they are the ones who tell us the exchange rate that we have to use.
And what we do is the SICAD I, which has stabilized at 11.3 that you just said.
Luisa Gomez Bravo - Director of IR
So we'll now move on to the block on digital banking and Raoul Leonard from Deutsche Bank has asked three questions.
The first one is, we've just announced a change in our organic program and what changes can we expect from this?
And the second question is, could we give an update on our digital strategy.
And the third question is, do we expect to see further transactions in the future in digital banking?
Unidentified Company Representative
Okay.
Well, first of all, when we analyze what has been happening in industries that wanted to transform themselves over the last few years, there are two things that you can see.
Some create factories alongside their traditional business, in which case the results that we've seen and that you know is that they don't manage to really transform their conventional business.
Everybody I think understands the lack of efficiency in traditional banking.
We know how complex transactions are.
The processes are long.
Work flows are long.
It's quite complex to give the right service to customers.
So with the new digital organization the idea is to have a global focus, reducing our number of people.
So we have top people but not so many -- but with more people with their feet on the ground close to customers.
We are combining the traditional business development in the different countries with this digital factory which is global.
So we'll have much more efficient distribution models which will be much more productive.
Some of you might say this isn't exactly digital.
But for us what we mean by digital is that the business will be done as efficiently and productively as possible so that the customer will benefit.
Not just in terms of the customers that come in through digital touch points, but it's the traditional ones too because the transformation will mean that everything can be done from one place locally.
And there will be a digital offering which will include both digital products and the traditional products.
So it's much more simple for customers so they have a better experience and a seamless experience whatever touch point they use.
And that's what we are aiming at.
What does it mean?
It means that we are especially focusing on Spain where the business is more advanced so we offer more functions and more products.
And the USA, which par excellence is the most digitalized country -- although actually in terms of the way they do banking, it has got one of the most obsolete banking systems in the world.
So there is a lot of upside to digitalization there.
So we are focusing on those two countries -- maybe in Mexico and South America.
What we have to do is to create something more similar to what they have done in other industries, having a digital factory.
Some are coming in a little bit later because of the customers' needs -- they are different -- and they expect a different kind of service.
It's the US and in Spain then where we are expecting to make this real leap forward in terms of quality.
Additional information for you; in order to move through this process of rapid digital transformation you have to have sufficient infrastructure in order to make sure that everybody can make most efficient use of all the different channels.
We started in 2007 when we took the decision and we've been implementing our policy gradually over years.
And now we got a technology platform with the right architecture for Spain and for the USA.
And parallel to that, we have been working very hard above all in Mexico, but also in other South American countries.
But we've got the architecture and we've got the platform.
So what's the next thing we have to do?
We have to add on the different channels so that people will have the same touch points in all the different countries in order to access that platform.
With this architecture we integrate information.
We have an architecture.
That means that -- and consultants have said that this is the case.
We really are modular in the way we do business, which means we could export modules from our platform to all the different countries in order to transform these countries organization much quickly -- more quickly in order to incorporate all the new channels.
So we'll have a seamless experience for our customers and the easy exporting of the modules that we've already got within the architecture that we have already deployed in the Group.
And so now we will be able to develop digital businesses such as Simple.
As we saw in the first quarter, the Simple business is not so much a business that's going to generate short-term profits.
Rather, it is good for us because it gives us best practices in developing products and processes and work flows in order to give better service to our customers.
Simple has been around for a year and a half, but it has already got more than 100,000 customers.
In 2013, it has managed or administered over $1.7 billion in transactions.
It hasn't done any marketing in all that time, but it has generated its business by word of mouth because customers have brought in other customers.
So what we want to do is to pass on these best practices to the rest of the Group, starting with the United States of course.
We are on the lookout all the time to see potential digital investments out there.
But our main objective is to speed up the transmission process as we move from conventional to digital banking.
That doesn't mean that we in 5 years are going to have zero banking branch offices.
We will have branches but with a more productive branch network which will work much more efficiently.
So we will see how all of this rolls out over the next few quarters in our future presentations.
Luisa Gomez Bravo - Director of IR
So let's move on to capital liquidity and ALCO; starting off with capital.
Raoul Leonard asks three questions.
He is from Deutsche Bank.
Can we give information of what's happening to risk-weighted assets and capital in terms of dividend policy?
How many scrip dividends can we expect to have in 2014 and what kind of mix will there be between scrip and cash in 2015?
Apart from that, Mario Ropero from Fidentiis asks about capital too.
What is the outlook for the fully loaded ratio by the end of 2014?
Unidentified Company Representative
Do you want to start on capital?
Fine.
Unidentified Company Representative
First of all, I'm going to talk in terms of phased-in.
Basel III has fallen 3 basis points in the quarter to [10.78].
The positive contribution from the earnings ex-dividends offset the impact of the risk-weighted assets ex the impact of currencies.
The exchange rates impact has been zero.
It has been totally offset, as I said before, with risk-weighted assets.
In terms of fully loaded it has fallen by 9 basis points to 9.9.
And in this case, this has been helped by the capital gains from available for sale portfolio.
With regard to our dividend policy this year, we've already said that our intention is to move towards cash dividends that will represent about 35% or 40% payout.
So what we are trying to do is to gradually eliminate the scrip dividends.
But the mix between scrip and cash for this year is something that has not been defined and obviously this will depend on the performance we see from the income statement, although our intention would be two cash and two scrip dividend issues.
With regard to fully loaded, at the end of this year, 2014, our objective for fully loaded is 10% and our intention is to maintain this objective of 10% in years to come as well.
Okay?
So that's the end of 2014.
Luisa Gomez Bravo - Director of IR
With regard to ALCO and liquidity, Antonio Ramirez from KBW, Britta Schmidt from Autonomous and from Mediobanca ask three questions.
The first is, can you give the details about the debt portfolio.
In the case of Spain the average term and the average yield, and can you explain the performance in comparison with 2013, the last quarter?
And finally, the contribution of trading and the sale of bonds here in Spain to the income statement.
Unidentified Company Representative
Let's see if I can remember all the questions.
Let's see.
First of all, with respect to the portfolio, it has been pretty stable over the last few quarters.
It is true that in the first quarter of the year we've seen a slight rise.
We are talking about EUR33 billion.
That's about EUR2 billion up on what it was at the end of last year.
The terms are 3.5.
That's the average duration.
It has gone up a little bit as a consequence of the fall in the rates that we are seeing above all on sovereign debt here in Spain, which is about 90% something of our total exposure here.
The contribution of net trading income here in this portfolio was pretty relevant this quarter, over EUR200 million.
And that comes together with magnificent performance of our markets area this first quarter.
I don't know, have I missed anything out?
Well, EUR231 million was the contribution of the ALCO portfolio.
And I could also say that there has been a big fall in spreads on all the portfolios, which has enabled us to bring forward some of the profits that we have for the rest of the year so that we can control in advance what's going to be happening throughout the rest of the year in terms of what we are doing from ALCO.
And we can give more details to people during the day from Investor Relations.
Luisa Gomez Bravo - Director of IR
Regulatory issues -- we've got questions here from Credit Suisse about capital, but I think you've already answered them with what you've said here.
And then the regulatory issues, Barclays, Autonomous and Santander have questions.
What's our opinion about the different stress test scenarios in the European Central Bank?
How do we think that might have an impact on BBVA with respect to our future profits?
Unidentified Company Representative
We are really not surprised initially that tougher scenarios than we saw with Oliver and Wyman in last year.
On this occasion, what we've seen is how they are factored in the stress supported by the economies particularly Spain.
And this is deterioration of 6.1%, which is quite a lot more than in the case of Oliver and Wyman.
But we are seeing that this year is more stressful than last year.
We've also seen a reasonable balance at the different geographic areas.
Maybe the -- we get a reasonably limited impact depending on which area we are talking about.
The impact in the US is lower than in Spain and the impact on Mexico is very similar to the United States and lower even than Spain.
In other areas where we operate, in Latin America, for instance, in Chile and Peru, there's practically no -- there will be practically no impact in the next 3 years.
So from our point of view, and after preliminary studies, and as I said in the presentation, our comfortable capital position means that we can face the impacts from these this year very comfortably.
I think it's going to be a stringent year.
It will give us credibility in the financial system in Europe in general, and I think we are well in line with what's happening in last years, not just with regard to economic growth, but also the performance we are going to see in real estate prices.
The countries that haven't burst their bubbles over the last 3 years, this year they will.
And the countries that have had -- have been harder hit such as Spain and Italy, the effect will be far more limited.
So in the case of BBVA, our comfortable capital position, the diversification of our footprint outside of Spain in the United States, Colombia, Peru will enable us to face the coming year very comfortably.
Maybe Turkey, which is another area which has been hit fairly hard, but we only have a 25% share there, which means that the impact will be very limited on our earnings this year.
Luisa Gomez Bravo - Director of IR
Okay.
We'll now move on to the different business units, starting with South America.
Ignacio Cerezo from Credit Suisse and Britta Schmidt from Autonomous ask what can we expect in terms of profits from South America for 2014?
Unidentified Company Representative
Well, South America in principle is showing growth, which is going up progressively in all of our franchises except for Venezuela.
And even Argentina is going to show quite stable performance over the next few quarters as far as we can see.
So of the seven countries, six are going to show tendentially positive performances.
As Jaime said, in Venezuela, what we expect to see is a reduction of its contribution to the bottom line for the Group and to the region.
Although for us we won't be expecting bad news from there because it means that we are below 5% in terms of what the contribution of Venezuela to the Group is in a region where volatility is greater.
So more stability and predictability of the earnings from this region except for Venezuela, where the contribution will be lower and will lower over the years.
At the end of the year, we might expect it to be slightly below or down EUR150 million, EUR160 million.
And that's related to the impact of the exchange rate depending on whether it's SICAD I or SICAD II over the year.
And so what we wanted to have is the stability that we will get from the rest of region, the positive dynamic growth of business volumes in all the different countries where we are gaining market share both in lending and borrowing.
And also customer spreads are improving.
Luisa Gomez Bravo - Director of IR
And regarding Venezuela, we've got several questions.
And going from more general to more specific on our book position, Sabadell asks if it makes sense for us to go on being present in a country that has such big macro problems.
Unidentified Company Representative
This is a franchise that's possibly the best thing in the country.
This franchise is highly dynamic in its business activities.
The financial structure, if we bear in mind the situation, is enviable with regard to the liquidity ratio, which is around 55% in loan to deposits.
If we look at it from the point of view of businesses, there's enormous improvements in the customer experience and the services we are providing to customers.
So for now we certainly have no plans to move out of the country.
I would repeat, the team, the bank is fantastic, and it wouldn't make sense to leave the country at the moment.
We have booked our stake in line with the appraisal that has been made by the business in Venezuela.
And looking forward, as I said, we can see volatility.
But this is volatility in a well-managed business.
Capital, as Jaime said, without affecting the Group's capital ratios because of the risk-weighted assets in Venezuela.
So the best thing here is to wait and see because we could see some deterioration in the economy before we see it picking up again.
We will continue to wait and see and on the way -- in the meantime we will work within this franchise, as we do throughout the rest of the Group.
Luisa Gomez Bravo - Director of IR
More specifically in Venezuela issues of the book value.
Mario Ropero from Fidentiis asks if we can expect any write-off in the book value of our investments in Venezuela and maybe we can give him an update on the book value in Venezuela.
Raoul Leonard from Deutsche Bank asks if we can give him an update of the hyperinflation and how we treat this from an accounting point of view.
Do we make any correction in our balance in the first quarter of 2014?
Unidentified Company Representative
Of course, there are adjustments made for inflation.
It's required by accounting regulations everywhere where inflation is very high.
In the specific case of Venezuela, inflation this quarter was about 10%.
And that's slightly higher than what we had in the first quarter of last year, when it was about 7 point something.
Consequently, the negative entry that was booked was higher than what we had last year.
In this case it was EUR81 billion.
Unidentified Company Representative
The book value?
Unidentified Company Representative
It was 36 last year.
Unidentified Company Representative
Yes.
And EUR81 million?
Unidentified Company Representative
EUR81 million.
Well, I was right about EUR81 million, wasn't I?
Yes.
And then with respect to the book value of the telephonic -- no, not the telephonic stake, the Venezuela one, EUR1.1 billion approximately.
Obviously, that's factoring in the negative entry because of the impact of the exchange rate, which in the year was slightly over EUR500 [million].
And then after that, write-offs, impairments and such -- well, we think, as Angel said, that the value of our franchise is intact and consequently we don't feel any need to do anything over and above what we are already doing, always being compliant with the accounting regulations.
Luisa Gomez Bravo - Director of IR
Okay, then let's move on to Mexico.
There are quite a lot of questions about Mexico.
Let's put them in order.
From MainFirst and from Citi and Deutsche Bank and Nomura, Mediobanca, and Barclays, we've got questions basically about how we see the performance of the Mexican economy.
It would seem to be weaker than expected at the moment and if this continues what kind of expectations do we have for growth in our loan book, and in our profit this year from Mexico?
And what do we think about the net interest income with respect to the growth in the loan book, and above all in SME and corporate lending?
And what we think will happen in the net interest income going forward, will it stabilize?
Unidentified Company Representative
In the first quarter in Mexico I think we are going to see slower growth than we were expecting at the end of last year.
BBVA Research for 2014 as a whole had growth of 3.4%, which is true that this is below the expectations of the Mexican government, which is 3.9%, almost 4%.
So we think that in the next few weeks or months there's going to be a correction made to that estimate and it's going to be downgraded to about 3%.
We'll have to see what happens.
What we are seeing in the first quarter -- we need to look at the investment plans especially in infrastructure in the public sector.
As we saw last year after taking on the seven structural reforms, these had to be transposed to decree specific regulations.
And this is the process that we are going to see in the first part of this year and this is where we are at the moment.
So maybe what we are seeing is to transfer a part of the growth that we thought we would see now further forward into 2015.
We don't think that the -- if we put together 2014 and 2015, we are just going to have the same sum.
But it's going to come later.
And in 2014 we are still seeing growth of around 3%.
And I repeat, all of this is very -- it's too early really to say.
We'll have to see the numbers that come out in the next few weeks and months with regard to the main macro magnitudes in Mexico.
So what are we seeing in the business activity?
As I said in the presentation, we are seeing no major change in our business.
We think we will continue to grow throughout the year at around 10%, between 10% and 11% for the rest of the year.
And the margins will probably be in line with this 10% rather than the 17% that we saw.
But it's also true that the market activities and the ALCO area is more positive than expected.
By the end of the year, I think we'll probably see a growth in profit.
There will be double-digit that we saw in the first quarter.
I'm not sure whether it will be 10%, 14%.
But it's going to be around there for the year as a whole.
So sound contribution from Mexico with no surprises that I can see for the next few quarters.
So I think the question is, is whether it's going to take longer or less time.
But either way it's going to be positive.
Luisa Gomez Bravo - Director of IR
And more specifically, Antonio Ramirez from KBW asks why are fees so weak in Mexico.
And we also have questions about provisions in Mexico.
Andrea Filtri from Mediobanca asks for our general outlook for provisions for 2014.
And more specifically, from Citi we have a question about quarter-on-quarter behavior of provisions and is this due to SME and corporate lending in the quarter.
Unidentified Company Representative
Let's have a look at our fee income then.
There is no change of tendency.
We budgeted a lower growth in fee income than in net interest income, which is going to make the biggest contribution during the year.
But we can perhaps give you more specific data through our Investor Relation teams in the rest of the day.
As for provisions, well, here we are doing better than budget for the year as a whole we think, depending on the kind of portfolio we are talking about.
The contribution of cards and consumer lending is greater than elsewhere.
And that means that if it's stable over the different quarters, we will have risk premiums of between [3.3], [3.2], [3.5].
But we are not expecting any kind of big change over and above what I've already said.
Or there might be some one-off changes, one decimal point up or down over one quarter to the next.
But for the first quarter of 2014 we've seen a performance of EUR20 million better than budget, so there is no surprise there.
The risk indicators were shown in the presentation.
When we bring forward the most relevant impacts that we could get from real estate from last year, the NPAs have been going down and the balances of NPAs as well as the net additions have been going down.
And the better customer spread means that the risk premium is higher and the risk adjusted yield is better than in other countries.
So in Mexico, things are in line with what we are expecting.
The different income lines are related to our business volumes and our cost of risk and the risk premium is what we said it was in the presentation.
As for fee income, there's nothing relevant apart from the fact that the first and fourth quarter of last year we saw excellent performance in investment banking fee income.
Our expectations this year is that we will probably grow fee income in line with inflation over the rest of the year.
Luisa Gomez Bravo - Director of IR
Okay.
Finally, with Mexico, from Deutsche Bank we asked a question which says that the tax rates has gone up 24% in the quarter.
So the question is what kind of guidance can we give on the tax rate in Mexico over the year as a whole
Unidentified Company Representative
First of all, for the Group as a whole, the taxes that we are paying -- the tax rate has increased by 2% or 3%.
It's true that if you think of the Group going forward, over time, we always expect normal tax rate of between 24.5%, 25%, 27%, 28% depending on the quarter, but it also depends on the contribution from America in comparison with Spain, where tax rates are higher.
From Mexico, specifically, we have no important information that will have an impact on the tax rates there.
What I would say, on average throughout the year we are going to -- things aren't going to change and for the Group as a whole I think what we can expect a tax rate of between 25%, 26%, 27% for the year as a whole.
What we will see is higher tax rates than last year.
But in areas such as Colombia the positive tax effects that we've reaped there because we've bought savings there, so we don't -- we have no more positive tax ones, so we're facing the normal tax rate.
And this is one of the reasons why we will see a slight slip up in tax rates in 2014 for the Group as a whole.
Luisa Gomez Bravo - Director of IR
Fine.
So let's move on to questions about earnings here in Spain, starting with all the questions dealing with lending, margins, customer spreads.
Citi, Rohith Chandra from Barclays, Andres Williams from Mediobanca, Carlos Peixoto from BPI ask the following questions about lending here in Spain.
Can we give more information about which segments are going to increase in lending and can we also give an update on our views on the flow of new lending especially mortgages and do we expect growth in lending in 2014.
What impacts on lending spreads are we going to see for the year.
And moreover if we can give a bit of some guidance about the quarterly performance of net interest income here in Spain.
Will this be leveraged by the cost of deposits or lending?
And also can we talk a little bit about the impact of the second quarter on the net interest income because we are selling sovereign debt in the first quarter?
Unidentified Company Representative
I think that we have the advantage; that Jaime has just left Spain or this area of Spain, so he must have all these figures very top of mind.
So share your knowledge.
Jaime Saenz de Tejada - CFO
Okay, I'll put on my other hat, shall I?
Well, I've always said that Spain is a highly indebted economy.
So looking forward we will have to deleverage.
We still got a level of private borrowing of about a 137% and that is a big overhang.
Cutting back this overhang should be made compatible with the new projects and giving people access to credit.
And that's the position we've always maintained in BBVA.
Regarding the specific performance this quarter, we've seen a rise of about 1.5% mainly because of growth that we've seen in corporate and institutional lending.
There we've seen pretty positive performance throughout the first quarter.
That's not the case in SMEs, where we see a slower fall, but nonetheless a fall.
And in the front book new business, in some segments this has been growing quite significantly since last summer.
And in the first quarter we've seen that growth speeding up with growth in consumer lending new business of about 25%, 28% and in mortgage new business again 25% growth and amongst the self-employed about 10% rise in new business.
So our front book is definitely suggesting very positive performance as we look forward as domestic demand begins to recover here in Spain.
As for customer spread and what's happening to prices for both lending and customer deposits, we've seen a 4 basis point rise in lending.
So that continues the good trend we had from fourth quarter, where we also saw a rise about 3 basis points the yield on lending compared to the third quarter.
It's true that we are seeing greater pressure on spreads with the new business that we are bringing in.
So that's higher than the -- for the stock as a whole.
So we can expect to have a positive dynamic going forward, although it will be slower than it has been, although the drops that we are seeing in the sovereign risk premium knocks on into everything that has to do with public sector debt.
There is much more supply for corporates and the spreads on the front book are higher and that is also happening now with individuals, the loans that we make to individuals.
The main positive surprise we've had this quarter where the figure was above our target for the whole year was what has happened to the price of customer funds.
We have been in [March] giving below 1%, and that's meant that we've been able to bring forward 3 months the target achievement.
And both impacts have improved our customer spread in the quarter by 21 basis points.
I think that obviously the lower price of deposits is not sustainable if we look forward, but nonetheless there's still quite a bit of upside for improvement in terms of the prices of the maturing deposits as they mature on our back book.
So our feeling is that this profile of the very positive growth in the net interest income that we've been seeing from the third quarter of last year will continue over the next few quarters.
So what we are talking about is about net interest income similar to what we had last year for the year-end.
As Angel said, because of the impact of the floor clauses, that's about EUR150 million.
And without that impact, then net interest income in Spain would have gone up by about 1.5%.
And we have to digest that additional EUR75 million from the floor clauses over the next few quarters and then the impact of ceiling debt on the net interest income in the second quarter.
It's true that we have got some capital gains from the first quarter with that net trading income that we talked about when answering a previous question.
We've also recomposed the portfolio.
So we are expecting a more or less stable contribution from this portfolio over the year.
The yield is going down slightly, but our back book is maturing bit-by-bit and part of the yield change is offset by the lower cost of funding this portfolio.
So for 2014, I would say as a whole, the contribution will be stable to the net interest income.
Earlier on you said when you were talking about net interest income over the year in Spain that we are including the contribution of ALCO interest rate on the euro portfolio contribution.
So with respect to this question, the expectation for the year-end is that there will be flat performance or slightly positive improvement up against the previous year and that includes what's happening with that portfolio.
So there's really nothing relevant even from the ALCO.
So we expect growth to increase over the year of the net interest income.
So by the end of the year we'll be around zero, between minus 1 and plus 1 over the year as a whole.
Luisa Gomez Bravo - Director of IR
And then more specifically, although I think you have covered this slightly.
From Fidentiis, from [Ani Mazuno] and from Barclays we have questions about the cost of the front and back book of term deposits in Spain.
From Citi we have a question about the upside or the downside on the [depos].
And from Citi we have a question about lending to SMEs over the first quarter of 2014.
Then finally ending up with Spain, from Fidentiis, in line with what we have said, we have a question about what we expect ROE to be over the next few quarters in Spain.
Unidentified Company Representative
Okay.
Once again, if I forget any of them, you can remind me about them.
The back book for depos is 1.7%; that's depos plus promissory notes is 1.7%.
And the front book, as we say, is around 0.9%.
The total cost of deposits is about [1.4%] approximately.
So going forward there is still some upside there.
We have improved the cost of deposits by 17 basis points this quarter and going forward I think there will be less upside.
But obviously this will depend on many different factors, of course what the competition does, what our peers do, but less than 1%.
I think we can start to find some resistance.
We'll have to test the market I suppose.
Moving on then to investments in SMEs and corporates.
This is something that's -- lending to them.
This is still not growing.
In our estimates the 8% fall that we've seen in recent quarters, what we are going to do is to try and converge and flatten it out for this year.
This is probably quite an ambitious objective, but that's certainly what we are trying to do.
And then in the final question, the last one, what can we expect for Spain.
I would say it will be stable, but I don't think 2014 is going to be a normal year.
But I think we should be -- the ROE should be just over the cost of capital.
It should be around 10% and we may find an ROE of around 12% once things start to get back to normal.
But this will be closer to 2015 and even more so in 2016, especially bringing the risk premium back to normal levels.
Luisa Gomez Bravo - Director of IR
The risk premium -- as we've got very little time left, I'll try to put the questions together in groups.
KPW and HSBC ask about the gross entries to NPAs and the recovery in Spain and how we compare this with Q4.
And maybe we can start with that.
But maybe you can give us some information about this issue and what we expect in the coming quarters in gross entries to NPA and recoveries in Spain.
Santander and BPI ask if we can tell us about our expectations for NPAs in Spain, when is this going to reach a peak and when are we going to see the refinancing cured.
And at anytime in 2014 or 2015, 2016, are we going to see a recovery in provisions.
And finally, with regard to risks in Spain, Autonomous, Fidentiis, Mediobanca and JP Capital Markets, all ask questions asking for guidance with regard to the risk premiums in Spain for 2014 and 2015, are we going to maintain that for 2015?
Unidentified Company Representative
Once again if I forget anything, please tell me.
Maybe I'll start by answering the first question.
We maintain the guidance, our guidance for banking assets plus develop (inaudible) 1% for 2014.
This is converging to below 1% for 2015.
The performance for the quarter falls within this guidance.
The risk premium was 1.11.
So without any changes there really.
And what are the underpinnings of this significant improvement in the risk premium which had gone over 1.5 last year?
Well, basically it comes from the reduction of the gross additions to NPLs that Angel was talking about before here in the Spanish banking system.
But more important still is that we also have to include the real estate performance.
Compared to the last quarter of last year the net additions in real estate are down 40% and that's about half of what we had in the first quarter of 2013.
Recoveries, there we are seeing excellent performance with re-performing loans.
So it's pretty well on budget.
It's very important here to be aware that a very big percentage of all these non-performing assets have to do with what we call subjective non-performing assets that actually are up-to-date in payment.
More than 40% of the NPA balance is up-to-date in payment.
And that's relevant especially so when we are talking about mortgages.
There the figures would be about 47% up-to-date in payment.
So in a very natural way, very naturally without any haste we can expect to see a certain reduction in the total balance of NPAs as a consequence of the cures that have been set in place.
So we'll have to wait till the end of the year really to see the outcome of the cures.
That will be more noticeable towards the end of the year then at the beginning, yes.
For some time now we have been saying that the NPA ratio performance will depend a lot on the denominator as well.
And you know what the expectations are.
But we don't know exactly what will happen.
But in the first quarter the denominator has done well apart from the NPA ratio as a whole -- sorry, the NPA volume as a whole, which has given us that slight drop in the NPA ratio in our banking business and the 3 basis points on the real estate assets, yes.
For the quarter, individual is down 1.5%.
That's the general figure, about 1.5%.
But in SMEs maybe it's more stable.
This is more one plus one.
It's more nominal you could say.
And then SMEs is really impacted by real estate, which is where things are getting done most.
But we can expect the balance of NPAs to flatten out.
And if the plans that are scheduled in the different countries are rolled out -- a lot of them are up-to-date in payment.
So by the end of the year we'll see more significant falls in the NPA balance and over the next few quarters we can expect this to continue.
Luisa Gomez Bravo - Director of IR
And talking about real estate, I have some questions about the area as a whole from Santander.
And from Autonomous we have questions about the news on the creation of an internal bad bank.
What impact would we expect this to have on the management of these kinds of assets and the workout strategies that we have underway.
From Autonomous we have a question, are we thinking of selling off packages of assets at the current market prices.
And finally from Macquarie we have a question about the sales of real estate in both units and million euros.
Unidentified Company Representative
Do you want me to take the first question?
So the first question.
A few weeks ago when we made the changes in incentives basically for the digital bank we made an additional change.
Apart from Jaime's job, the person who replaced Jaime -- and this is the fourth movement which is to concentrate the problematic assets in the corporate area and this include real estate assets.
We're not setting up a bad bank.
What we are doing is to concentrate the attention, the focus, the management of all these assets in a single unit.
So real estate what we are trying to do is to harness the synergies of managing assets of this kind in this way, because then the next question if we are talking about blocks of assets, this can affect real estate assets, but the kind of -- it can also affect the kind of credit that will go to SMEs.
Once we concentrate all of this in a single unit, then I'm sure we'll be far more productive and more responsive in order to get assets of this kind off of our books.
When we are talking about real estate, where the negative contribution is made to the Group this year, we are seeing this right from the first quarter of this year that this negative component is going to be smaller and smaller.
So their performance is going to improve.
They are going to be efficient, productive and profit based.
Jaime before mentioned that we are moving forward slowly but surely and I'm sure there's going to be a high business turnover to reduce these balances as much as possible.
But obviously we are certainly not going to destroy any value.
So we are not going to take any decisions quickly just based on the balance sheet rather than on return on our investment.
We have to be very careful when we are reducing our exposure, for instance, of real estate.
As I said in the presentation, since 2011 we've reduced our exposure by 21%.
We've got a fantastic team.
They are working really, really well.
And going forward we are going to maintain our current business volumes and occasionally we will see some blocks taken off our balances without destroying value for BBVA.
As Angel has just said, the second question that was asked, the wholesale strategy to reduce our real estate risks is always there in the back of our mind.
It will depend on the moment if we can maximize the value.
What we are going to do -- and we can -- it's going to be through the retail structure.
We are selling very close to the net book value.
So it's not having any major impact on the balance sheet.
The total sales has been about 5,000 units this quarter.
This includes the units that were sold within our books, which was just over 3,000, and the units that we sell through promoters.
Those have been 1,900, almost 2000.
These 5,000 units is about 25% more than we sold in the first quarter of 2013.
With regard to the amount, I think it has been very much more.
It's 61% higher than we could sell in the first quarter of last year, because there has been a whole series of assets that could be considered as one-off ones, especially here in Madrid, which has pushed the price up.
Luisa Gomez Bravo - Director of IR
Okay, that puts an end to real estate.
So we can move on to Eurasia.
We have some questions here dealing with the balance and the earnings of Garanti and some strategic questions.
So maybe we could start with the question from Deutsche Bank.
Do we have any update on potential shocks, i.e., risks, lending risks or assets moving forward?
I'm not sure whether this refers to the stress test, but do we have any update on potential impacts in the area of asset quality moving forward?
Sabadell, we have a question from Sabadell.
Are we considering any impairment in our Garanti stake?
JP Capital Markets and Mediobanca ask a double question, one concerning about the trends in earnings in Garanti and another is a strategic question concerning our stake in Garanti in 2014.
Can we expect an increase in our stake and can you give us an update on our purchase option?
Unidentified Company Representative
With respect to the first question first, with what you said, we have our risks people who are always tracking what's going on with very close contact with the people in Turkey.
There is no unexpectable surprises around the corner.
We know what the risks are.
They are pretty stable in the case of Garanti in general as well.
Excellent performance compared to our peers there.
But the system as a whole isn't doing badly in terms of credit risk.
So we don't see any indicators when we look at net additions, for example, to NPA or anything that might suggest that our NPA ratio would go up or that our risks were going up for the year as a whole in Garanti.
But anyway, as I said before, the first quarter for Turkey has been a quarter where we've outperformed our expectations, taking into account the guidance given by the CEO of Guaranty to the market.
Now, given the numbers from the first quarter we can say we are doing better than expected for the year as a whole.
However, it is rather early to be sure of consolidating the improvement against budget or against the guidance.
So we just really have to wait and see for another couple of quarters.
With the results of the local elections, we can expect markets to relax more, recognizing prices, more stability in the exchange rates.
The exchange rate with most tension was in third and fourth quarter of 2012 -- 2013.
But with the local elections in Turkey things should stabilize more in Turkey as a whole at macro level.
We are not expecting to see any negative impacts on the basis of the information we currently have over the next few quarters.
So that should be added to the fact that we don't have any information that leads us to think that we should have to book any impairment in anyway.
I mean if it does, obviously we will always follow the accounting standards.
But we don't foresee that happening.
Unidentified Company Representative
In strategic terms how are we going to increase our stake there?
Unidentified Company Representative
Well, you know what the windows are, March 2016, when we can exercise the option.
And in the presentation I said that our commitment to Turkey continues to be as deep as it always has been.
Maybe with respect to the last quarter last year we can talk about more stability in the final weeks.
That's also related to the outcome of the elections.
We'll go on analyzing our strategy there to decide what the best timing is to increase our stake.
We are not in a hurry.
In the short-term we are not going to feel under pressure to make a decision either way, with more stability, above all political stability looking forward.
Because in the macro economy you've heard the data from Turkey.
We see that there is a high potential for growth and the demographic pyramid is very positive for the economy looking forward.
The banking industry is doing well, more and more consolidation.
There's no new information I can give you because I think you are very well informed about what's happening there anyway.
So obviously we have to be prudent and wait and see.
We feel that at the moment it's all quite clear.
In other webcasts we've talked about the fact that August is going to be a key moment in Turkey because that's when they will be holding their presidential elections.
Then we'll get additional information which will help us in our decision making.
Luisa Gomez Bravo - Director of IR
We can now come to the final question, which has to do with the United States.
From Fidentiis we have a question about net interest income in the USA in 2014 year-on-year.
Unidentified Company Representative
The net interest income what we expect for 2014.
In the presentation I gave you some clues to all of this.
If you look the lending was growing by over 14%, but the net interest income is closer to [5%].
It's true that last year we saw how business volumes were on 10%, 11% and 12%, this gradual growth.
Without wrecking the balanced diversification that we are creating within the US portfolio, if you remember 5 years ago CRE was an enormous weight in lending in the United States and this has been offset and re-balanced and we now have a totally normal balance and we've even grown that sector for the first quarter with positive growth now.
And this growth will gradually pick up throughout the year.
It will not -- in 2014 we are not going to see the -- lending is not going to grow as much.
I think we'll see that in 2015.
So in 2014 we'll increasingly see smaller falls in the customer spreads and particularly the yield from new loans that are being granted, which is still below the price of the stock.
But I will repeat, with the slowdown and the fall in customer spreads, which enabled us to increase the margins and our business volumes, it's going to be between 5% and 10% in growth in the course of the year and this will filtered down to the operating income, because -- although the amortisation of the technological platforms will show growth in costs, these will grow far less than earnings.
So we will see greater growth in the operating income throughout the year.
But this is the first quarter and in the coming quarters where I'm sure we are going to see a consolidation of our expectations before we see the material increase maybe in 2015, maybe in the second half of 2015.
I think we'll see this increase in interest rates that we think will happen, and this will have a positive effect in our American business because of the positioning of our balance sheet.
Luisa Gomez Bravo - Director of IR
Thank you very much, Angel and Jaime.
With this final question, we will close the presentation of the results for the first quarter.
Any questions that have -- we haven't been able to answer in this session plus the questions that come in from now on, we will answer in the course of the day.
They all will be answered by Investor Relations team.
Thank you very much.
Unidentified Company Representative
I like to thank everybody and I'll see you next quarter with good news and better news.
Thank you very much.
Editor
Statements in English on this transcript were spoken by an interpreter present on the live call.
The interpreter was provided by the Company sponsoring this Event.