Banco Bilbao Vizcaya Argentaria SA (BBVA) 2014 Q2 法說會逐字稿

Good morning everyone, and welcome to the second quarter result presentation of BBVA for 2014. I am Luisa Gomez Bravo, Head of Investor Relations for the Group. And joining us today on the call will be Angel Cano, President and COO of the Group; and Jaime Saenz de Tejada, BBVA's CFO.

As usual, we're running on a tight schedule and we do need to end the call by 11:00 AM. Therefore I apologize if we're not able to answer all the questions that are coming in. We will definitely try our best, but if not you can count on the IR team to resolve any of those questions or any new ones after the call.

So without any further ado, Angel, please.

Thank you, Luisa. Good morning everyone, and thank you for joining us on our audio webcast of results for the second quarter of 2014.

As you will see during the presentation, the second quarter has confirmed the main trends that were mentioned during the presentation of the previous quarter's results, namely a good performance of recurring revenue, net interest income plus fee income, which has increased year on year by 11.6%, excluding the FX effect.

Second, costs are under control. Third a decline in loan loss provisions. And finally no significant FX impacts, effects in the second quarter, although first quarter negative impact [still drag] year-on-year results.

These factors have once again led to strong growth excluding corporate operations, although unrelated to this quarter figures, I would like to comment briefly on the Catalunya Banc transaction announced last week by Jaime and Luisa.

I am delighted with the outcome of the process and would like to thank all the teams involved for their effort. BBVA is allocating capital to this geography because we have capabilities to generate returns. At the moment, when the Spanish economic cycle is changing, we are acquiring a healthy institution boosting market shares in both Spain and Catalunya where BBVA will be the largest and second-largest in the market respectively, and most importantly, it adds 1.5 million customers to the Group.

The terms and conditions of the deal allow us to generate stakeholders' value with attractive returns and as well with manageable capital impacts, and risk is limited. The transaction contains adequate guarantees, conservative assumptions of expected loss from the credit portfolio, and low execution risk.

Moving on to the presentation, let me start as we usually do, summing up the highlights of the quarter in terms of earnings, risk, solvency, and liquidity. From the point of view of earnings, as we said before, the trends of the previous quarter remain unchanged, delivering strong growth in net income excluding corporate operations.

So this is the main -- this is the main feature of earnings. The second, moving on to risk management, we have again here good news. The figures show a strong improvement in risk indicators. Net entries to NPAs have declined by 76%, and cost of risk has decreased by 17 basis points year on year.

In terms of solvency, BBVA continued to manage its capital actively. The Group ends the quarter with a phased-in Basel III core capital of 11.6% and a fully-loaded ratio of 10.0%. These are strong levels far above the minimum required.

Lastly, in terms of liquidity we maintain an adequate financing structure. Furthermore, as of June, BBVA compliance with LCR regulatory requirements is more than 100%.

And now let me move on to a more detailed analysis of the Group's P&L accounts. Revenue evolution was explained this quarter by specific factors such as the lower net trading income, higher dividends, and the impact of hyperinflation in Venezuela. That is why we are talking about the overall performance of revenue in terms of gross income, highlighting their recurrence and resilience.

As you can see in this slide, gross income in current terms decreases 2.8% year on year. As I already mentioned, the main FX impact occurred in this -- in the first quarter. So in the quarter-on-quarter figures, we see a 5.3% growth in current euros.

In the second quarter of this year, we received dividends from Telefonica and from CNCB. These offset the lower contribution from net trading income in the quarter after having taken advantage of market opportunities in the first quarter of the year.

There was also a remarkable adjustment for Venezuelan hyperinflation in the second quarter of 2014.

As you can see in the next slide, the growth of operating expenses continued to slow down in year-on-year terms. In current euros, minus of 5.4% decrease and over the last five quarters, it has been steadily decreasing and is lower than the growth of gross income.

As a result of the above revenues and expenses, you can see in the next slide the Group's operating income growing at 11.2% at constant euros. This allows BBVA to maintain its leadership in terms of profitability. Impairment losses on financial assets have fallen significantly compared to the average quarterly level in 2013 consolidating the first quarter's trend.

The main reasons behind this decline are the lower level of NPA entries and an increase in the volume of recoveries basically in Spain. As a result, the Group's cost of risk during the quarter was 1.2% as you can see in this slide.

And as a result of the above, the first half attributable profit came to EUR1.3 billion, down to 54%. Net income excluding corporate operations has increased 11.7% in current euros.

To sum up, the main components of the Group's income statement were as follows. First, net interest income of over EUR7 billion. This was due to well-managed customer spreads in all regions, buoyant activity in almost all the markets despite delivery in -- on the floor clauses in mortgage loans in Spain.

Second, gross income came to EUR10.4 billion, growing at 6%. Third, the higher income and the cost controls led to an operating income of more than EUR5 billion, up 8.7% in constant euros.

And finally, the excellent performance of impairment losses allowed us to end the first half of the year with an income before tax of EUR2.1 billion.

So as the main messages today I would like to underline first of all the good performance of recurring revenues. The second important item [of course] is the negative impact of FX.

The third one is cost controls. And finally the lower impairment losses as the short-term driver of the P&L account.

Turning now to risk management, the positive trends seen in the previous quarter have continued. The Group's NPA ratio ended June at 4.5%. The main reason behind this number is the declining of the non-performing portfolio in Spain, and now stands at EUR16.7 billion.

In addition, there was good news concerning the coverage ratio as you see on the slide. And net NPA entries were down 76%.

Regarding capital, the Group once again ends the quarter with strong and resilient capital ratios. The phased-in Basel III core capital ratio is 11.6%, and the fully-loaded ratio is 10%, whilst maintaining a high leverage ratio. You will find more detail regarding capital in the annex of this presentation.

And now as usual we examine the key drivers in our different business areas. Let me start with banking activity in Spain.

The main point here is that we maintained the positive trends observed in the first quarter of this year, namely the improvement in customer spreads, decline in NPA entries, cost reduction, and that loan demand is starting to increase in several segments. These positive developments need to be viewed in the context of steady recovery in Spain, which is confirmed by the main economic indicators.

Looking more closely at business activity, we see that regarding lending the deleveraging process continues, although at slower pace, minus 1.1% in the quarter. Customer funds grew double-digit year on year, and at the same time balance sheet funds, with an increase -- sorry, kept pace with an increase of 13.1%.

In terms of net interest income plus fees, decline in the second quarter of 2014 by 1.7%, affected by the removal of mortgage floor clauses. Excluding this impact, this item rose 4.9% despite reduction in the loan portfolio and the low interest rate environment.

The main reason behind this trend was successful price management, mainly driven by deposits. This has led to wider customer spreads in recent months. The quarter-on-quarter trend is positive 3.1%, boosted by asset management revenues, credit cards, and wholesale banking business.

Turning now to gross income, it increased 2.3% to EUR1.6 billion influenced by the positive impact of net trading income in the first quarter of the year. Operating expenses continued to decrease 7.4% year on year. As a result, operating income increased 10.7%.

In terms of asset quality, the next slide shows that the positive trends are maintained. The NPA ratio declined slightly during the quarter, and the coverage ratio increased 3 points.

The stock of NPAs is also decreasing, and net entries to NPAs are negative for the first time during the crisis. Moreover, there was a positive impact on the income statement caused by the risk premium which fell 2.9%.

If we look at the first-half income statement we can see the following trends. The area generated EUR1.9 billion in net interest income. As you know, this revenue was affected by the removal of floor clauses and by the positive development of customer spreads.

Gross income was up 3.9% to nearly EUR3.4 billion in the first half supported by net trading income. Operating income rose 14% due to -- due mainly to costs which continued to decrease.

And finally, income before tax was driven by a significant decrease in impairment loses to levels clearly below the average in 2013. The increase in provisions, another result, is explained by the ongoing transformation process that the Group has been carrying out.

In particular, during the first half of 2014 we completed a project that we call internally [Bungwat] aimed at eliminating full-time back-office jobs at retail branches, and reducing administrative tasks by centralizing them in our external operating hub.

Moreover, we have closed 94 branches, finishing the integration of Unnim. And as many of you already know we are reducing as well our Corporate Center costs at local and Group level.

Now let's look at real estate activity in Spain. Net exposure decline is accelerating as expected. It dropped 11.5% from its peak in December 2012. We continue to see a positive trend in total sales effort. The volume in the first half increased 15.6%.

Moreover, the latest market trends appear favorable. Prices are gradually stabilizing, and demand is slowly recovering.

The decrease in asset impairment helped to reduce the negative result to EUR216 million. This negative results have declined 24.5% quarter on quarter.

You will find a useful summary of real estate figures and risk indicators in the annex.

Now let's move on to the next business area. In the US, business activity is once again positive. Lending has increased 13%, and customer funds are up 8%. However, net interest income plus fees grew below activity levels due to the pressure on spreads and the low interest rate environment.

There was a slight increase in gross income, up 0.2%. Operating expenses grew by 4.7% as a result of new loan production offices and digital projects. As a result operating income fell 8.7%.

With regard to risk indicators, strong increase in lending has not impacted asset quality. In fact, risk indicators continue to show excellent performance. NPAs continue to fall, while entries kept stable at minimal levels.

The US income statement on the next slide shows the figures for the first half of the year. Net interest income growth was up 3.4%. A strong business activity and the marketing effort were partially offset by the pressure on the spreads, and low interest rates as I mentioned before.

Gross income grew at similar rate, and exceeded EUR1 billion. Costs rose 4.9% affected by the already mentioned opening of loan production offices, and implementation of digital projects. As a result the operating income was almost stable, rising at just 0.2%. Income before tax declined 7.9%.

And finally, net income remained almost unchanged at EUR196 million.

Lastly, I would like to highlight that Compass has ranked number 1 out of the top 25 US retail banks in the prestigious American Banker's annual reputation survey.

At this point we turn to the emerging markets. I begin with the Eurasia business area. The income statement is mainly explained by the performance of Garanti and by the CNCB dividend which was EUR139 million before tax.

After the turmoil in previous quarters, Garanti's income statement for the second quarter of this year indicates better trends thanks to the more stable environment.

During this quarter, we saw higher rates in lending activity, strong revenue on fee performance, lower levels of loan loss provisions, good performance in risk management, and lower FX impact during the quarter.

The better evolution of all these items impacted positively on the operating income that rose 11.6% and a net income that increased over 16%.

Now let's take a quick look at Eurasia as a whole in the first half. As you can see on the slide, the results are significantly higher than the same period of last year. Net profit is up over 15% to EUR362 million.

This income statement improvement can be explained by Garanti's better performance, by the contribution of the wholesale business, and as well by the receipt of CNCB dividend.

In conclusion, the area continues to make a solid contribution to the Group.

Now it's the turn of Mexico. During the first half of the year, Mexico has continued to show very positive trends in spite of a slower macroeconomic scenario and the reduction of interest rates.

The latest economic indicator suggest better dynamics for the second half of this year. Looking into activity in greater detail, loans are growing at over 10% year on year supported by the favorable performance of consumer finance and commercial loans. Regarding customer funds, the focus has remained on attracting lower cost deposits which increased year on year by 12%.

With regard to net interest income plus fees, up 11.8% thanks to growth in activity and the management of prices. And fees, which increased by 5.8% due to credit cards and CIB fees. Gross income showed double-digit growth at over 10% and was impacted by higher net trading income and smaller contribution from the insurance business.

Operating expenses were below gross income, boosting operating income growth to 12.2% year on year, and 2.7% quarter on quarter.

The risk indicators remain stable. Proactive risk management puts BBVA ahead of its main competitors in Mexico in terms of the quality of the NPA portfolio and loan loss provisions. The increase in risk premium which reached 3.7% in June should, according to our year-end outlook, moderate in the second half of the year and we expect it to close at 3.5%.

Double-digit top line growth translates to the bottom line with net attributable profit growing about 12%, particularly positive the cost management considering the investment that we are carrying out resulting in positive [jobs].

Well, we are about to end this presentation with South America. In terms of activity we are keeping up the positive momentum shown earlier this year, both in lending and customer funds.

Lending was up 24.6%, thanks once again to credit card business and commercial dynamics. Customer funds grew at a similar pace boosted by transactional funds and lower costs. When looking at the evolution of the P&L we have to remind the adjustment for hyperinflation in Venezuela.

The net impact of this adjustment is offsetting the operating income. You can see the Venezuelan P&L in the annex. Net interest income and fee income grew by 36.8% or 21.3% ex-Venezuela to EUR1.3 billion thanks to outstanding recurring revenue related to the previously mentioned buoyant business activity and to appropriate price management.

Gross income increased over 24%. High inflation in some of the countries, I'm talking about Venezuela and Argentina, and various expansion and transformation plans in the region explained the increase in operating expenses over 26%.

Operating income was up 22.3% to EUR643 million or up 24% ex-Venezuela. The impact of Venezuela inflation becomes more visible if you consider the quarter-on-quarter comparison, which excluding Venezuela increases by 10.8%.

Let's move onto risk management in this business area. The NPL ratio declined in the quarter to 2.1% and the coverage ratio increased to 138%. This division continues to show dynamic activity rates combined with high credit quality.

Lastly, let's review the main messages in this period. As in our last presentation, this slide shows growth figures including and excluding Venezuela to remove the distortion generated by hyperinflation on each income line.

Net interest income reached EUR2 billion benefiting from buoyant activity and good price management. You can see the strong impact of hyperinflation of Venezuela on this top line.

Operating income reached EUR1.3 billion, up by 25% or 21% -- up 21% excluding Venezuela where most of the hyperinflation impact is diluted. Therefore net income rose almost 18% in the first half to EUR483 million.

Thank you very much for joining us, and now I hand the call over to Luisa to start the Q&A.

Thank you Angel. We will move on now to the Q&A session of the call. If you like, we'll start with the broader themes and then we'll move on to the geographies.

In terms of broader themes, moving -- starting with regulation, Arturo de Frias from Santander is asking if we can talk about our recent views of how the AQR is evolving, especially regarding real estate valuation, and if it has been more demanding than the (inaudible) exercise that we did in the past.

I think as you are all already aware, the AQR phase has already been done with. KPMG, our auditor, has finished its work and has sent the info over to Frankfurt. As you also know, we do not know yet and will not know until November the final results. Our expectations are that no significant impact will take place regarding the AQR.

Thank you. Regarding liquidity and ALCO, Mario Ropero from Fidentiis asks about the ALCO portfolio size, average duration, average yield, Spanish sovereign bonds, how has it evolved in the quarter?

The total size of the ALCO portfolio is EUR35.7 billion. It has increased only EUR1 billion from the first quarter. The total sovereign exposure is EUR33 billion, which has increased over this -- over the first quarter by also EUR1 billion.

Average duration is 2.75 and the yield is around 3%.

Thank you. Couple of questions on strategy, regarding consolidation in Spain. Juan Carlos Calvo from Espiritu Santo and Andrea Filtri from Mediobanca are asking us if after the acquisition of Catalunya Banc, if we are interested in participating in the potential sale of Barclays in Spain? And if we are satisfied with our present market share or if we are looking to do any other corporate movement?

Well, first of all, we are very satisfied with the Catalunya Banc acquisition; gives us a differential share in this region, one of the region with the highest potential growth in this country.

So we are reaching 24% on average of market share in the region. And we are going to be the first -- largest in terms of market share in Spain as well. So from this competitive point of view, we are really satisfied with the acquisition.

We are buying, as Jaime and Luisa announced last week, a healthy institution, where over the last couple of years they were working very hard on fixing and cleaning up most of the bad assets and bad business they had in the balance sheet.

So for us it's -- as I said before, it's a really good acquisition. So in terms of Barclays, as you know, we are analyzing as every opportunity in all of the markets where we have presence. We analyze in-depth, and as always right now we are not ready to talk about any corporate operation.

Maybe just talking a little bit about the restructuring process in Spain, our opinion is we are at the very end of this process. So maybe we -- the country has completed 95%-98% of the total restructuring process. And just now we have in front of us just the normal competitive landscape in terms of the normal business.

Thank you. Moving on to capital, a few questions there. Luis Pena from [Jotabe] Capital is asking whether our core capital phased in is increasing by EUR278 million in second quarter, quarter over quarter. Can we explain why the generation of core capital is below the EUR700 million of net income generation in second quarter 2014?

Should I just -- I'll ask all the questions and then you can answer them.

Whatever you prefer.

Yes, because some of them are related. Andrea Filtri from Mediobanca -- so that's the first question from Luis Pena. Andrea Filtri from Mediobanca is asking whether we are planning any specific actions to prop core capital fully-loaded ratio up post our CaixaBank acquisition?

And Raoul Leonard asks why the Basel III phase-in has risen significantly in the quarter. RWA movement was limited, so what else is happening? And in this regard, also Britta Schmidt from Autonomous is asking about the restatement of RWAs versus the Basel III reported figures in first quarter? And also what was the FX impact on the capital? So four or five questions there.

Okay. I'll try to answer them in order. If I forget any, please remind me at the end. First of all, regarding the evolution of core capital in the quarter. It has -- on a phase-in basis, it has increased by 4 basis points.

It is true that results have generated 21 basis, but we've paid an all cash dividend this second quarter that drains 13 basis points. The FX impact has generated 6 basis points in core capital, but mainly by the [prelim] valuation adjustment has drained an additional 10 basis points.

So on a phased-in basis, only 4 basis points have been generated. On a fully-loaded basis the impact on -- the [prelim] valuation impact is offset by the capital gains in the available for sale portfolio. So on a fully-loaded basis we've generated 11 basis points during the quarter.

Second question regarding any capital plans, regarding the Caixa acquisition, the Catalunya Caixa acquisition, we feel that the impact is very manageable, is between 55 basis points and 60 basis points. And we feel very comfortable that we have enough tools at our disposals to offset in very few quarters this impact. So no immediate plans here.

Regarding the restatement of the phase-in, it is true that we have restated the phase-in core as of March; the reason being Bank of Spain has issued new guidelines in order to make core capital comparisons with Europe much more standard.

So goodwill on the phase-in period will be phase-in, applying the similar haircuts and other deductions, 20% each year. That has allowed us to increase our core by 149 basis points.

The fact that the tier 1 cap comes into place means that 78 basis points have been generated by the phase-in of the goodwill. This implies that if in the future we issue additional tier 1, it will generate core capital.

As you all know, this does not affect the fully-loaded ratio and only affects the phase-in period. This also affects the thresholds and deductions mainly in the insurance company and other subsidiaries, plus a little bit risk-weighted assets, but this is a minor change. And I think I've answered all questions.

Yes. Thank you. We move on now to Spain, first talking about the banking business and then perhaps a few questions on asset quality. So regarding the banking business, a lot of you are asking about the evolution of net interest income.

Alvaro Serrano from Morgan Stanley, Daragh Quinn from Nomura, Rohit Chandra from Barclays, Mario Ropero from Fidentiis, Raoul Leonard from Deutsche, Marta Sanchez from KBW, Mario Lodos from Sabadell, David Vaamonde from MainFirst all are asking about the evolution of net interest income.

It was flat quarter over quarter when competitors are reporting net interest income figures going up. Can you give us some color on what's holding back NII other than loan contraction? And what are your expectations for the second half of the year and 2015? And specifically, can you talk a little bit about what is performance of customer spread?

Okay. It is true that NII quarter on quarter has remained pretty much flat. It has only increased by 0.2%. As I think we've already stated in the past, we are going to experience significant movement of income from the NII line to the fee income line.

I think we've shared that with the market already. That's true for deposits. Some deposits will migrate to funds. And that's also true for part of the corporate business.

Some volume in -- especially in the corporate sector will move to the commission line thanks to our strength in the capital market franchise that we have. So for us the better way to analyze underlying business evolution in Spain is to take into account the fee income line.

NII plus fee and commissions are increasing fairly significantly quarter on quarter, total of 3%, and to us that's the better proxy for business evolution in Spain.

It is true that we're still not seeing volume growth. But what we're also -- but what is also true is that new production is increasing fairly significantly, not only in the consumer portfolio, but now also in the SME portfolio and that's also true for the mortgage book.

Year-to-date figures are down by only 1%. So our expectations for volume increase in 2015 remain in place.

Customer spreads, we've restated (inaudible) especially on the deposit cost have increased by 6 basis points this quarter. That's driven by an asset spread contraction of 4 basis points, but more than offset by the deposit cost reduction of 11 basis points.

So we've seen during the year a total deposit cost reduction of 32 basis points that -- it's partially offset by the 7 basis points spread contraction that we've seen on the asset side.

Going forward, the guidance that we're giving is for NII to be flattish at best in Spain, mainly driven again by a reduction in the deposit cost going forward.

Okay. I think the question that Luis Pena from [Jotabe] Capital and Arturo de Frias from Santander asked about the trends in net interest income have already been answered. They were specifically asking about volume and spread evolution in the next quarters. I think the guidance of net income interest income flat over the year basically is the answer.

Juan Carlos Calvo from Espiritu Santo, Mario Ropero from Fidentiis, Raoul Leonard from Deutsche, Alvaro Serrano from Morgan Stanley, and Benjie Creelan from Macquarie are asking about dilution of deposits costs in Spain, front versus back book, and do you believe that the front book will continue to go down, re-price downwards in the following quarters?

Deposit cost will continue to go down. As you know at the end of the first quarter, total deposit production was below 100 basis points when the total stock was at 1.7%. This second quarter total deposit production is below 90 basis points and the total stock is at 1.6%.

It's not easy to have a clear view of how low deposit production can go, but it is true that we remain positive that going forward further room is available.

The second half of the year we will face significant maturities. So it will be the most important contributor to NII still in the second half of the year.

And Mario Ropero from Fidentiis is asking specifically also about yields on the asset side, the number that we've given, can we give a little bit of more color on to that?

Segment-wise I would imagine, right?

Uh-huh.

Okay, as I mentioned before, we've seen a 5 basis points asset spread contraction in the quarter. By segment the mortgage portfolio has remained -- the front book has remained pretty much flat at -- as was the case in the first half of the year.

That has been also true in the corporate book, okay, stopping the reduction that -- the reduction trend that we've seen in the two previous quarters. And that is also true in the institutional, in the public sector portfolio although it has been affected by one-off transactions.

What continues to remain in place, it's slowly -- slow, but still persistent reduction in the spreads of the SME portfolio. It hasn't been too significant, but it remains in place for a second quarter -- for also for the second quarter.

Okay. Arturo Frias from Santander is asking a more general question about credit trends or volume trends of lending in Spain, when do we see growth kicking in, in mortgages, SMEs, corporates? Do we see further spread compression from competitive dynamics and from the impact of [TLTROs]?

As we've already stated in the first quarter guidance, we expect total loans to reduce -- to be lower at the end of this year. Still the Bank will continue to gain market share in this deleveraging market.

We hope to be able to remain flat in 2015, maybe to grow a little bit, and volume will only be significant after 2016.

In terms of loan production, as I said already, we're seeing increases in the mortgage portfolio around 5% increase, in the consumer book around 34%-35%, and increases also in the SME portfolio around 15%. So loan production is increasing quarter over quarter. So we remain fairly positive on volume-wise.

The fact that internal demand is growing faster than what we expected; today we've seen new guidance by the government. Second quarter GDP will grow between 0.5% and 0.6%.

The government is already looking for 1.5% GDP growth rate this year, mainly driven again by internal demand moving towards the 2%-2.5% number in 2005 (sic), allow us to remain very positive that we could perfectly see surprises to the upside.

In terms of spreads and also taking into account the impact of the LTRO, we do expect some normalization of spreads in certain segments, so we do expect some additional competitive pressures going forward.

Okay. And specifically regarding TLTROs, Robert Noble from RBC, Arturo Frias from Santander, and [Alex Koagne] from Natixis are asking how much TLTRO money are we intending to take in the first two ECB operations?

We still haven't made a final decision. We are allowed to obtain EUR5.6 billion, either the 18 of September or the 18 of December.

Our initial expectation is to get the funds. We currently have no outstanding on the LTRO. We've paid everything back. But we still haven't made a final decision on whether we're going to ask for it in September or in December.

Okay. And also regarding liquidity in the European context, Carlos Peixoto from BPI is asking if we could please update on refinancing schedules, current ECB exposure and amount of ECB-eligible assets. I think that we can send you the details after the call, so that we can send them directly to you.

Going on to fees, in Spain, Daragh Quinn from Nomura is asking what drove the increase in fees in Spain in second quarter and what is the outlook?

I think I partially answered without giving the actual number in a previous question. Quarter on quarter, increase in fees and commissions has been 10%. Insurance products, pension and investment funds, structure deposits, fees from the CIB business, especially on the capital market side, are busting fees and commission growth.

Our expectations are for these levers to remain in place going forward and we -- as we are significantly improving our pipelines.

Okay. And about restructuring cost Luis Pena from Jotabe Capital, Alvaro Serrano from Morgan Stanley, Britta Schmidt from Autonomous, and Marta Sanchez from KBW are asking about the restructuring cost included in the P&L in the second quarter of about EUR250 million, why has that grown so much versus previous quarters and will that continue going forward?

Okay, restructuring cost has increased slightly in Spain this quarter. Two different reasons; first of all, additional restructuring at the Corporate Center and in the business especially after the end of a project that we had in Spain to reduce back-office functions in the branch network.

That was a plan that has lasted for over two-three years that we finished in May. That completely eliminated full-time back-office jobs in branches and now all back-office is centralized in [Opeblues] in Malaga.

On top of that, we closed 94 branches, two-thirds of them coming from the Unnim acquisition to -� that did involve additional costs.

Just maybe, Jaime, what we've done in the first half of the year is bringing forward part of these provisions because we've speeded up this restructuring process trying to end it up as soon as possible and just trying to make the most of this restructuring process.

Okay, thank you. Regarding asset quality in Spain [and permit] charges, Mario Ropero from Fidentiis and Daragh Quinn from Nomura and Britta Schmidt from Autonomous are asking about the update of our guidance regarding cost of risk in Spain including real estate loans. It seems -- it looks like it's going to end up below a 100 basis points. Can you update your guidance?

What I can update is the numbers. It is true that cost of risk taking into account loan loss provision for real estate is down to 1.02% in the first half of 2014 going down from 1.11% in the first quarter. Our guidance was for the cost of risk within the 110 basis points and 120 basis points range.

It is clear that with these first half numbers we will definitely be on the lower end of that guidance.

Thank you. Real estate now. Benjie Creelan-Sandford from Macquarie asks regarding the gross stock of [foreclosed] assets in Spain. He sees that it continues to increase despite sales and he is asking us when do we expect this portfolio to begin to consistently decrease.

It is true that they've increased, but just slightly. What I think is more significant is that the total exposure, the total net exposure in real estate is maintaining -- it's maintaining its -- the good trend that started in the first quarter.

Total exposure decreased by an additional EUR400 million in this second quarter repeating the number of the first quarter. Total sales increased 16% over 2013, reaching almost 11,500 units.

In terms of euros, those numbers were up 38% because as you remember we sold certain singular buildings in the first quarter. So the trend remains positive and the underline remains intact.

Okay. And also regarding real estate, Britta Schmidt from Autonomous is asking us about the sales volume of foreclosed assets. She would like to know what the volume of foreclosed assets, the sales are in million euros in first quarter and second quarter. I think it was best that we send you the details after the call with the numbers which I don't have at hand right now.

Well, I guess I answered that. It was EUR910 --

-- for foreclosed --

-- in the first half, foreclosed assets.

Okay, moving onto Mexico, reforms. Arturo de Frias, Santander is asking us to give an update regarding Mexican forecast in terms of the reforms that need to take place and are taking place through congress. There were several parliamentary extraordinary sessions coming up in July and August and can we update what will happen there.

So the schedule for the approval of the secondary ruling which is the case right now on the structural reforms is underway, maybe starting with telecommunications reform. The approval of secondary ruling is already accomplished.

This reform is expected to reduce price over time, thanks to a higher degree of competition in the industry and boost investments in Mexico.

The other really important one, the energy reform, the secondary ruling has been partially approved right now, meaning that private investors are now allowed to invest in this industry, of course in association with semi-official entities such as Pemex for example. The whole set of secondary rules is expected to be passed in the first days of August.

So maybe the most positive impacts are going to come from this second reforms -- the second reform, sorry, and maybe could be even higher than initially we anticipated -- by BBVA, I mean the impact research.

Maybe the other important part of your question is to answer the impact on GDP growth, and according to our BBVA research department, all the structural reforms will have a global positive impact of between 1% and 1.5% in potential GDP growth, and to be materialized in the next two-three years' time.

Thank you. Robert Noble from Royal Bank of Canada asks regarding the impact on BBVA from the recent competition review on the financial sector in Mexico.

The [commissione] Federal de Competencia Economica has very recently issued its report. We are not surprised by the results. They've issued 36 different nonbinding recommendations trying in general to incentivize consumer mobility and access in better conditions to the current financial infrastructure, meaning mainly ATMs.

Further, a report will be issued after this summer. Currently, we would expect maybe additional pressures on transparency, on the -- on fees and commissions structure, and also interest rates. And -- but in general no surprises and concussions are aligned with our expectations.

Thank you. Regarding lending, Mario Ropero from Fidentiis asks us to comment on guidance for the year on lending growth. Do we expect double-digit growth still?

Yes, we remain positive in Mexico. We maintain our guidance mainly driven by the same segments that we're already growing in, in the first quarter, meaning the consumer portfolio and the SME book.

And regarding net income, Britta Schmidt from Autonomous asks about our expectations for net income growth in Mexico for 2014. Also an update on guidance, do we still expect an improvement in second half of the year and to what extent?

Yes, our guidance remains intact. It is true that as we shared with all of you the beginning of the year was a little bit slower than what we expected in terms of GDP. That forced us to reduce our GDP growth expectations for the year to 2.5%.

But as Angel just said, secondary loss are pretty much done and over with and we expect much better second-half of the year. So guidance remains intact.

And what I think, Jaime, as well is we are going to see the similar look and feel of the -- of its income statement. As I said during the presentation of the first half of this year, double-digit top line growth is translated into the bottom line with net income growth over 12% at the end of this first half, and this (inaudible) going to be more or less the same at the end of the year.

Thank you. Now regarding asset quality, a few questions. There's actually two questions which are pretty much related, so I'm going to ask them together.

[Owel Kruf] from Redburn, Robert Noble from Royal Bank of Canada, Mario Ropero from Fidentiis, Raoul Leonard from Deutsche and Carlos Peixoto from BPI are asking why the Mexican cost of risk grew 10% quarter over quarter. Can you please comment on the asset quality trends in Mexico? And Daragh Quinn from Nomura and Alvaro Serrano from Morgan Stanley specifically ask what is behind the increase in loan loss provisions in Mexico and what is the outlook for the second half of the year?

It is true that cost of risk in this second quarter has increased in Mexico from 3.5% to 3.7%; the reason being the slower start of the year has increased a little bit the cost of risk on the credit card portfolio. And also we have the one-off impact of the run-off of the Walmart portfolio in the finance book.

The last reason is the very significant increase in the consumer portfolio that I've just mentioned before. Our internal models are very strict, and we provisioned a lot in the first few months whenever a transaction is given. Going forward our guidance remains intact and we will converge to the 3.5% cost of risk that we've mentioned in the first quarter.

Okay. Moving now to South America, the -- I am thinking to start -- how about we start with Venezuela, okay? A few questions here. I'll read them -- they're related, so I'll read the questions regarding Venezuela and then move on to the rest of South America.

Venezuela; Owel Kruf from Redburn, Robert Noble from RBC; please comment on the risk of moving the exchange rate to Sicad 2, P&L and capital impacts. Raoul Leonard from Deutsche Bank asks about our outlook for Venezuela for the rest of this year. Should we expect any drastic FX adjustments?

Benjie Creelan-Sandford from Macquarie is asking given the hyperinflationary pressures and risks in Venezuela, are you happy to continue growing the asset-base here? Would you consider limiting the growth of that business?

And Mario Ropero from Fidentiis and Sofie Peterzens from J.P. Morgan specifically ask about what has been the impact of hyperinflation in Venezuela and what are expectations going forward? So a few questions there on Venezuela.

Maybe just one generic answer, Jaime, and you can give then some more details afterwards. Maybe what we are seeing in Venezuela in the second quarter is a really limited net income contribution. Just talking by heart it's maybe EUR50 million in the quarter.

So what we are doing is reducing first of all its contribution to a total net income than -- now is under 5%. So this is the first comment.

The second one is the capital impact of where devaluation process in the next quarters is going to be again limited because of the reduction in the consumer capital consumption because the reduction of the risk-weighted assets as you can -- as you could see in the first quarter of this year after the first devaluation process.

This is the second one. And the third -- and maybe the third one is we are trying to take advantage of our business activity, just self-financing with their own resources. So we are not moving some other resources from the Group.

So from that point of view we are trying to -- we are -- continue working very hard on improving this franchise in Venezuela whereas we are in the process of reducing its contribution to the Group and limiting and trying to have limited impacts in capital.

Yes, trying to give a little bit more light to the quarter results in Venezuela. The total FX impact that the Group has experienced coming from Venezuela in this first half of the year has been EUR51 million in net attributable.

We've been able to compensate through local hedges EUR23 million. This means that the incremental impact that we've seen in this second quarter has been very minor. As you remember, in the first quarter of the year the impact was EUR44 million. So very, very limited impact on FX charges in this second quarter.

In terms of hyperinflation, things have been different. First quarter inflation was 10% -- a little bit over 10% while second quarter inflation it's over 16%. So the total impact in net attributable of hyperinflation has almost doubled in this second quarter to EUR93 million from EUR47 million in the first quarter.

As Angel has said and we've always stated, we have a wonderful bank in Venezuela, very close to its clients, with a very low loan to deposit ratio, extremely cost of risk, offering very good service quality and that's what we are working and trying to achieve every single day. Impact in core capital is completely minimized by our long US dollar positions locally.

And if Sicad 2 is eventually applied we will pass through the P&L the -- necessarily impairment and that is as much as I can say. As you know, we apply Sicad 1 -- is the only exchange rate that banks are allowed to use as Sicad 2 is not open for banks.

Maybe just one last detail; when I talked about this less than 5% contribution to the Group from Venezuela net income, maybe what we are expecting for the end of the year is a 50%-60% reduction in its contribution compared with previous year.

Okay, thank you. Argentina; Daragh Quinn from Nomura, Robert Noble from RBC, Britta Schmidt from Autonomous, Andrea Filtri from Mediobanca, David Vaamonde from MainFirst are asking about the potential impact on our Bank from a theoretical or potential default in Argentina.

Our total position in Argentinean bonds in the Group is a little bit under EUR150 billion so -- EUR150 million, yes. So it's completely immaterial. 95% of it, it's in Banco Frances. So the direct impact of an incident with the holdouts will not materially affect us.

It is true that if a agreement is not reached today, Argentina will probably face additional pressures, maybe in terms of devaluation and additional devaluation maybe in terms of GDP growth, maybe in -- that will affect our activity and potentially our cost of risk.

Our expectation is for an agreement to be reached because it is beneficial for everybody. We must realize that Argentina has been taking very significant steps in the last few quarters to normalize relations with the financial community, Paris Club, the agreement with Repsol and a lot of orthodox decisions locally.

We've received the first dividend payment in two years this second quarter after we comply with the 75% capital buffer above minimums. And we have received the approval from the Central Bank and the dividends were paid. So normalization is taking place in Argentina and we look forward to an agreement with the holdouts.

Okay, so maybe ending up, South America with a few general questions on the region from Mario Ropero from Fidentiis. He would like to ask about the evolution of net interest income which he says it's much higher than the evolution of business volumes. Is it sustainable, this growth in net interest income? And also he asks about the high growth of loan loss provisions and what are we expecting there since NPL ratios are still dropping?

The NII line in South America is growing very significantly. Volumes are still increasing by between around 24%. That's true for loans and that's also true for deposits.

And the NII line is growing at 17% -- at 38%, sorry. But that is affected by hyperinflation. So to us, a better proxy of the underlying evolution, its operating margin, okay, and operating margin is growing exactly at 25% which is the average growth of business, meaning loans and deposits.

In terms of cost of risk, the news in the regions are good. We don't see any significant changes and they are increasing as volume grows. So no alerts there.

Thank you. We'll move onto Eurasia next. Robert Noble from RBC asks about Turkey and net interest income has been surprisingly resilient given the move in interest rates. Is any negative impact expected in the second half?

No, on the contrary I think Garanti's management has managed very well the increase in local interest rates, and now interest rates are going down and we expect further reductions going forward that will be positive for NII growth.

So no surprises there. Volumes are increasing better than expected. So nothing that could -� we don't see anything in the horizon that would affect our growth.

It's true that we have presidential elections in August, but I think the market is expecting a stability after the results.

Thank you. And Carlo Di Grandi from HSBC asks about Eurasia coming in very stronger than consensus and HSBC estimates. Is this a new run-rate, main drivers of this result? I think obviously Turkey has been one of them.

Turkey is clearly the most significant driver plus the dividends coming from CNCB that -- it is true came up significantly above consensus. We received EUR139 million when consensus was around EUR90 million. So yes, from Eurasia very positive news.

And the US; Santiago Lopez from Exane BNP; are you going to buy another bank in the USA?

No.

Okay. Then going onto Corporate Center; Mario Ropero from Fidentiis, Raoul Leonard from Deutsche Bank; can you comment on the positive evolution of net interest income in the Corporate Center? Why?

Okay, I think we'll get back to you with the details of the line of positive margin. Maybe what we can do is comment a little bit on the guidance for the year of the Corporate Center.

Right, I think it's important to understand that there is a lot of issues affecting the Corporate Center. The guidance for the year, it's for the Corporate Center to drain around EUR1 billion. It's a number that's very close to what we've seen last year.

Okay. Maybe to end up with a few general questions regarding the Group that have also come in on the P&L side and also on the balance sheet side. Benjie Creelan-Sandford from Macquarie asks whether there was a sharp reduction in the negative impact of valuation adjustments in shareholder equity this quarter? What drove that?

Yes, it was during the quarter there has been a positive impact from devaluation of the available for sale assets as I said before that was 11 basis points. Okay.

And regarding P&L for the Group Luis Pena from Jotabe Capital asks whether net attributable of EUR1.3 billion in first half, the run-rate for the year is EUR2.6 billion which is notably below consensus. How do you see results coming in, in the second half of the year?

First of all, what we expect for the second half of the year is a similar trend. First of all from operating income just trying to talk from -- talk about these two lines of the income statement; one is the operating income which is for us the most important in terms of trying to guess the trend for the rest of the quarters.

So what we expect is a continuous positive trend in the next two quarters of this year. So our expectation is having more than double in the second half.

And in looking at the bottom line, our expectation obviously is to continue with the trend of what we have seen in the first half of this year, but increasing quarter by quarter until the end of this year when we are going to compare with a much lower volume of net income if you remember when we made the Chinese adjustment. So our expectation is to continue working very -- inline with expectations.

Thank you. Another question from Luis Pena from Jotabe Capital regarding the tax rates for this semester, tax rate is at 27%, should we assume the same rate for the year-end for the whole year 2014?

No, it will normalize to reach around the 25% level.

Okay. I think a general question from Owel Kruf, Redburn, regarding margins -- we've talked a little bit about this region by region. Margins seem to be mixed up in Spain, down in Mexico, US and LATAM experienced well, and Argentina.

Evolution in the next quarters, I think we've already given guidance in each of the regions, and if you need anything else we'll give it to you after the call. Raoul Leonard from Deutsche Bank; NPL coverage ratio and cost of risk outlook for the Group.

The Group's NPL coverage ratio rose to 62% in the quarter. What level are you comfortable with going forward? Should we expect this to rise towards 70%? Has your guidance for cost of risk for the full-year 2014 estimates and the full-year 2015 changed at all?

No, I think we haven't changed the guidance yet. We remain I guess fairly conservative. We feel very comfortable with the current 62% coverage ratio and we don't feel that additional provisions are required.

Well, thank you very much. We haven't received any further questions. I would like to thank all of you for being on the call. Thank you, Angel. Thank you, Jaime.

As always our team remains available for any further questions, anything that we need to clarify or provide more information on.

Also I take advantage of the opportunity to ask you for feedback on the changes we've done to the format of the presentation. So we've added new information on the annexes, we've obviously changed the format which you have seen. So feel free to please provide us feedback on what you think of the new format. And that's all for the day. Thank you.

Thank you.

Yes, thank you very much.