Banco Bilbao Vizcaya Argentaria SA (BBVA) 2014 Q3 法說會逐字稿

Good morning everyone and welcome to the third quarter result presentation of BBVA Group. I am Luisa Gomez Bravo, Head of IR. And joining me today are, as in previous occasions, Angel Cano, President and COO of the Group, and Jaime Saenz de Tejada, CFO of the Group.

Angel will begin with the result presentation and then we will move straight through to the Q&A. As you know, we are usually very stretched for time so we will try to group all the questions that come in as efficiently as possible. And I apologize in advance if I am not able to cover all of them. In any event, as you know, the IR team will be available throughout the day to answer any of the remaining questions that cannot be answered during the call at this moment in time. So Angel, please.

Thank you, Luisa. Good morning everyone and thank you for joining us. As you will see during the presentation, the main trends shown the previous quarters had been confirmed in this quarter. More specifically the earnings growth cycle continues. There has been net interest income growth in all markets, supporting the good performance of recurring revenues. Costs are under control and there is lower cost of risk. There have been no significant FX impacts in this quarter, although the first quarter's negative impact still drags on the year-on-year results. These factors have once again led to a strong earnings growth.

In addition to this in this quarter, I would like to highlight two significant points. The first one is the recent AQR and stress test results which have shown that we are very well-positioned in both the base and the adverse scenarios. I will explain in more detail in the first slide. And the second is the Group's progress in the digital transformation process we are engaged in. In particular, we are implementing in the short term two action lines. The first one is the evolution towards a new highly productive distribution model in Spain and, second, the organizational and cultural change required to make this transformation happen.

I'll elaborate further on these two topics. In addition, I would like to state that from now on we will start reporting the digital transformation as a new management driver in our fundamental framework.

Regarding the comprehensive assessment, let me emphasize it has been a very demanding exercise. It will mark a new beginning for banks in the euro zone with the ECB as the sole supervisor and a level playing field across Europe. Spanish banks have passed the ECB test with high marks. We now stand out clearly at the top of countries' rankings in the euro area. Results confirm the healthy balance sheet and solvency position of the Spanish financial system after the restructuring process.

Regarding BBVA let me start pointing out that our conclusions are referenced to the BBVA's peer group. This comparison shows our capital strength, the adverse scenarios and also our leadership position in the most relevant rankings. First and foremost the fully loaded ratios in the adverse scenario of the stress test. These ratios are the only ones truly comparable across countries in Europe and BBVA clearly stands out as one of the strongest. It is one of only three banks in the peer group that exceeds 8% of the 2016 core capital under the adverse scenario.

BBVA resilience is also evident when you compare the adjustment to core capital between the adverse and base scenario. BBVA together with two large peers are the only three banks of the peer group that generate earnings in the adverse scenario. Under the AQR scope, BBVA has excess NPL coverage for the selected portfolios.

We can also highlight that the assessment recognizes BBVA's prudent management policy as stated by its leading leverage ratio in the peer group, taking into account BBVA's high risk-weighted asset density. In summary, we are very happy, I would say very proud with the result, our standing position.

Moving on to the presentation, let me start as we usually do with the main highlights of the quarter in terms of earnings, risk, solvency, liquidity, and for the first time, digital transformation. From the point of view of earnings, as I said before, we have very good news in the top line. Net interest income has supported recurring revenues, thanks to its strong growth, up 7.8%. All geographies showed positive growth rates.

Moving on to risk management, the figures of this quarter showed once again an improvement in risk indicators. The NPA ratio decreased by 30 basis points year on year while the coverage ratio increased up to 64%. In terms of solvency, as I mentioned before, the AQR and the stress test results have shown the strength of BBVA's capital position. In fact, the Group has ended the quarter with a phased-in Basel III core capital of 11.7%. In liquidity, we keep an adequate and sound funding structure. I would like to highlight that the Group has financial independent subsidiaries in each of which our liquidity position is comfortable.

And finally regarding the new digital transformation strategy, the idea here is to share with you on a recurring basis updates on our progress as well as the most relevant KPIs. When we talk about the transformation, we are not only talking about online banking. It is a much more holistic approach. In particular, there are five key elements of this transformation that we follow regularly as part of our strategy. The first is the development of infrastructures in terms of IT platforms and data processing centers which are reliable, scalable and safe. And this is at BBVA already completed.

The second is the definition and the progressive implementation of a highly productive distribution model based on customer convenience. This affects all channels, the branch network, ATMs and of course online banking. Third, the importance of having higher processes and adapting the product offering to the consumer's needs. It involves redesigning the whole production chain.

Regarding the fourth element, it is crucial to be permanently at the forefront of the transformation that is taking place. And in order to do that, understand what is happening in this digital world on real time. For this purpose, we must develop new digital businesses as well as invest in leading startups such as Simple in the US.

And finally, the fifth, developing a new corporate culture, fostering agility, error tolerance, entrepreneurship and collaboration, incorporating new digital talent and creating new organizational structures. But at the end of the day, going digital is a mean to end, adding more customers that are more engaged and more profitable. And our ultimate goal is to be leaders in customer satisfaction across our global footprint. Although we are working on all the elements mentioned in this slide, I would like to spend a few minutes talking about two specific lines of action, the new distribution model in Spain and the cultural and organizational changes affecting the whole Group.

Regarding the new distribution model transformation in Spain, let me highlight. It's an ongoing effort that evolves according to our client's needs and to the pace of delivery of our digital projects. Since 2013, we've accelerated this process in Spain, a market with strong pressure on profitability and high Internet penetration, in order to achieve results quickly.

The main focus is to improve customer experience, so the precise execution of our plan will be subject to service quality. We are working on two main areas, the first one is changing the physical network, moving towards a more defined hub-and-spoke model, redesigning what our employees do at branches in order to increase productivity and maximize customer engagement by offering them new ways to interact with their bank. And the second, optimizing servicing, reducing cost of servicing at the branches. At the same time we are working on the organizational and cultural change at Group level.

In terms of organizational structures, we are focused on streamlining and removing overlaps. We want to facilitate both decision making and project implementation to become a leading organization with clear accountability. In addition, we are working on reducing the support services and structural costs in the whole Group by carrying out the specific initiatives affecting the corporate centre and all the countries.

In 2015, these initiates are expected to achieve annual cost savings of between EUR160 million to EUR180 million. And in addition to what we've recognized so far, we should expect investments of between EUR270 million to EUR290 million which will go through the P&L in the fourth quarter. In the coming years, we will continue to deliver cost efficiencies, depending on our client needs and without affecting quality standards.

And now let me move on to a more detailed analysis of the Group's P&L accounts. Regarding revenues, we can highlight the growth of net interest income, driving recurring revenues to excellent levels, growing at 16% in constant euros. As you can see in the slide, gross income in current terms increasing 1% or 8% excluding FX effect.

Bear in mind that Telefonica and CNCB dividends affect the quarterly comparison. Operating expenses continued to slow down in accumulated terms, decreasing 4% in current euros and maintaining the positive jaws trend of the year. We have a differentiated cost management approach between developed -- the developed and the emerging world. In the developed countries, we are working on cost reduction and in the emerging world we are investing to take advantage of growth opportunities. Also, as you all know, we operate in two economies with high inflation, Venezuela and Argentina.

As a result of the above revenues and expenses you can see in the next slide the Group's operating income growing at 11% at constant euros. Impairment losses on financial assets have fallen significantly compared to the average quarterly level in 2013, consolidating the year trend. As a result, the Group's cost of risk during the quarter is 1.2%. The net attributable profit increased to EUR1.9 billion, net income excluding corporate operations has increased 43% in current euros.

To sum up, the main components of the Group's income statement were as follows. There has been top line growth due to well-managed customer spreads despite the impact of the floor clauses removal, delivering in low interest rates in Spain.

The gross income quarterly comparison has been affected by Telefonica and CNCB dividends. And finally, cost control, an excellent performance of impairment losses has allowed us to end the first month -- the first nine months of the year with an income before taxes of EUR3.1 billion. Nevertheless, negative first quarter FX impact still drags on the year-on-year result in current euros.

Turning now to risk management, the positive trend seen in the previous quarter have continued. The Group's NPA ratio ended September at 4.3%. The main reason is the declining of the non-performing portfolio is Spain. In addition, good news for the coverage ratio which increases to 64%.

Regarding capital, the Group once again ends the quarter with strong and resilient capital ratios. The phased-in Basel III core capital ratio is 11.7% and the fully loaded ratio is 10.1% at the end of this period. We continue to be the bank with the highest leverage ratio among our European peers.

And now, as usual, we examine the key drivers in our different business areas. We begin, as every quarter, with banking activity in Spain. Looking more closely at business volumes we see that regarding lending, the de-leveraging process continues although at a slower pace due to new production growth in particular in corporates, SMEs and consumer lending. Customer funds continue growing at double digit rates. Good news in both balance and off-balance customer funds growth.

Here, let me highlight that investment funds are growing over 30% year on year. We see positive spread evolution defending asset deals and an excellent performance of deposit repricing, even better than we anticipated. We expect this positive trend to continue in the next quarter. This results in net interest income plus fees increasing by 11%.

Turning now to gross income, the positive impact on net trading income in this -- in the second quarter affects comparison in all P&L lines below. The fact that Spain is the geography that has advanced more rapidly in the transformation process has meant excellent cost management, achieving a 6% decline year on year.

As regards risk, the positive underlying trends remain and the risk indicators show outstanding risk management. We can highlight that gross entries continue to decrease in all the portfolios but are affected by one-offs in the large corporate portfolio. Moreover, the risk premium continues to improve and remains below 1%. Here we maintain our guidance.

If we look at the income statement, we can see a very good performance in all P&L lines. Net interest income, almost flat as anticipated. Gross income was up 3% to nearly EUR5 billion, supported by net trading income.

Operating income rose 12%, mainly due to price management and cost reduction. Moreover, if we add the significant decrease in loan loss provisions, the net income of the area reaches over EUR800 million.

Now let's look at real estate activity in Spain. The initial data on prices show the price adjustment in the market is coming to an end. So we are closely monitoring the pace of the sales process, tracking demand recovery. Our strategy is to reduce exposure while maximizing value. Therefore we'll continue to see sales increasing year on year but probably at a slower pace, optimizing the impact on the P&L.

As expected, real estate losses have continued to come down, 29%, reducing the negative result on the bottom line to EUR600 million year-to-date. 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, USA, one of the most challenging areas for the Group. In the US, we are poised for growth. Business activity is focusing on gaining scale and client coverage, preparing to sustain future growth and ready to benefit from rising rates.

However, net interest income plus fees grew 2% below activity levels due to the continued pressure on spreads. We need to work hard on operating expenses control. This quarter's growth is due to the opening of new loan production offices, compliance expenses linked to regulatory requirements and new digital projects. As a result, operating income fell 10%.

With regard to risk indicators, the strong increase in lending has not impacted asset quality. In fact, risk indicators continue to show excellent performance.

The income statement in the next slide shows the figures. Net interest income growth was up 3% and gross income grew at a similar rate. Operating income reached EUR471 million, and net attributable income closed over EUR300 million. I would like to highlight that in this quarter BBVA Compass successfully completed a $1 billion debt offering.

In summary, this franchise has evolved considerably over the years and is well-prepared for the coming challenges.

Now let's turn to our emerging markets. I'll begin with the Eurasia business area and in particular with the currency. Geopolitical uncertainties remain, as you know very well, mainly due to the increasing tensions at the border that may still result in FX volatility. During this quarter, lending activity continues to show a strong growth beating expectations. Net interest income growth is driven by the continued effort to reduce cost of funds, in particular deposits.

Commissions grow at a good pace on top of the strong growth already achieved in 2013 and we continue to see sound asset quality. The better evolution of all these items had a positive impact on the P&L from the top where net interest income plus fees grows 11% to the bottom line which is up almost 20%.

Now let's take a quick look at the Eurasia as a whole in the first nine month of the year. As you can see in this slide, the results are significantly higher than the same period last year. Net profit was up 24% to EUR471 million, the improvement can be explained by lower loan loss provisions, good performance in the rest of Europe and accounting of CNCB's dividends. All in all, Eurasia continues to make a solid contribution to the Group.

Now we turn to Mexico. Looking into activity in more detail, loans are growing over 9%, gaining market share in profitable segments such as SMEs up 27%, consumer up 18% and corporate and government up 15%. The strength of our franchise becomes evident when looking at the evolution of customer funds, up 14%, both in demand deposits and of balance sheet. There has been a positive trend regarding net interest income plus fees, up 10%. This top line growth is translated to all the P&L lines. Gross income grew at 12%, operating expenses grew below gross income boosting operating income growth to 13%.

Risk indicators remain stable due to its anticipation BBVA of performance peers in terms of the quality of the NPA portfolio and the volume of loan loss provisions. The coverage ratio closed at 112% and the NPA ratio is 3.2%, a reduction of 14 basis points quarter on quarter. The risk premium moderates this quarter to 3.3% as expected.

To sum up, I'll give you a brief review of Mexico's figures that show once again an outstanding performance, the top line growing over 14% which feeds down to the bottom line with net attributable profit growing at 11%. Remarkable cost management considering the investments we are carrying out maintaining positive jaws as a result.

Bancomer continues to improve its service quality and there were all client experience of our millions of customers. We have already refurbished 600 branches, and this quarter we've launched the ultra-high network team with dedicated managers. Mexico after Spain is the area that has advanced the most in this transformation process, it has made significant progress towards a highly productive distribution network as well. This has a corresponding impact on costs while maintaining positive jaws.

In summary, Mexico continues to be leader in efficiency and profitability.

Well, we are coming to the end of this presentation with South America. In terms of activity, we are keeping up the positive momentum shown earlier this year with growth rates above 20%. When looking at evolution of the P&L, bear in mind the adjustment for hyperinflation in Venezuela. The net impact of this adjustment is offset in the operating income line. You have further information about the Venezuelan P&L in the annex.

On a year-on-year basis, all lines showed double-digit growth. For instance, operating income was up 22% or excluding Venezuela 20%.

Now, let's move on to risk management in this business area. The NPA ratio maintains the 2.1% levels we saw last quarter, while the coverage ratio fell to 135%. The risk premium is up towards what we believe are normalized levels, reflecting changes in the portfolio mix. This division continues to show dynamic activity rates combined with high credit quality.

As in our last presentation, this slide shows growth figures including and excluding Venezuela in order to remove the distortion generated by hyperinflation in each of the income lines. Let's start with operating income where most of the hyperinflation impact is diluted. It has reached over EUR2 billion, up by almost 24% or 21% -- up 21% excluding Venezuela. Net attributable profit rose almost 15% to EUR755 million. South America integrates different challenges which require basically two different management approaches. On one hand in Argentina and Venezuela, although we still see political and economic uncertainties, we remain confident in a normalization in the long run. Until then, we'll continue managing our local franchises in the best possible manner as we have been doing so far.

The second is regarding the Andean Region where we are investing to capture the future growth. In these countries, we are witnessing strong core revenues evolution. For example, today Peru is growing 9%, Colombia is up 12% and Chile over 20%.

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

Thank you very much, Angel. We will move on then straightaway to the Q&A. We will start with questions regarding AQR and stress test. We've had a few of them, starting with the question from Alex Koagne from Natixis. Is there any AQR impact on the provision line? Going forward should we expect any?

Maybe very quickly. First of all, the AQR is not an accounting exam, so what is important is to understand this point. Here there is a different methodology with the one we normally apply in the accounting. So here what we've seen is certain defect in some specific portfolio and certain excess of provisions in some others. The net-net is close to EUR1 billion excess of provisions at the end of this exam, but let me insist on that, nothing to do with accounting.

Do you want to add something, Jaime?

Yes, it's true. We are the only peer with excess provision in the AQR exam. And as Angel said, the majority of the portfolios have analyze, have access provisioning. Only two of them had a deficit. The deficit is pretty much 80% due to collective provisioning and only around EUR200 million based on sampling. Our estimate is that those EUR200 million will be fully recognized during 2014 if not pretty much done already.

Okay, we'll move on to Raoul Leonard's questions from Deutsche Bank on the AQR. I think we've answered this already. Your total credit exposure coverage ratio actually fell from 40.2% at the end of year 2013 to 38.4% post credit file review. This appears driven by over-provisioning on the corporate side, under-provisioning on the retail side. Will this result in provision releases in coming quarters? We've just, I think, answered that. We --

Yes, we don't have anything else to say, yes.

Okay, on the standalone AQR and stress test results for Catalunya Banc, Raoul states that they look quite benign. Has only the information from this change are due diligence assumptions around fair value adjustments for the deal? Put differently, have you been overly conservative in any of your targets presented in July?

I think that when we presented the transaction in July, we said specifically that we were trying to be conservative in the estimates that we were giving and I think that was true in general for every single line.

In particular, we specifically said that the fair value adjustment could suffer changes during the year and definitely we will take into account all new information that is provided to us in order to make the final adjustment.

Thank you. Stefan Nedialkov from Citi and [Francisco Raquel] from [Enemasuno] regarding also the AQR provisions and adjustments, did you take any in the third quarter, do you plan to take any on the fourth quarter, and, specifically, does it change your cost risk guidance?

I think I've already answered these. I think the majority of the impact in the sampling will be taken care of in 2014, and I would say that the majority has already been done as of the third quarter.

Cost of risk in Spain year-to-date is around 101, a little bit above 1% and it doesn't change our expectations for year end.

So maybe just before moving to the next chapter of questions, what's important to remind is a lot of information in this exam. So it's very important to understand which are the real comparable pieces of information. So the purpose of the presentation was to give you a summary of the real important ratios than are completely comparable among the most important peers in Europe. So the fully loaded ratio is really important. The sustainability and the resilience of the business model of BBVA as well, and that's maybe the most important reason behind the -- behind of being one of the three peers in Europe among the big peers having earnings during this scenario. So I think it's important to focus on the really comparable pieces of information and ratios in this exam.

Thank you. Moving on to regulation, Carlos Peixoto from BPI asks about TLAC, specifically could you please elaborate on your expectation on TLAC?

I think it's too early to answer this question because the final draft has not been finalized and we still have a year to go until the final regulation is issued. From the info that we have today, it's clear that in our case we are affected by the risk-weighted asset part as we already have a very strong, one of the highest of our peers on the leverage ratio side. I think we should wait in order to get the final legislation before sharing any further analysis.

Thank you. Raoul Leonard from Deutsche Bank and Juan Carlos Calvo from [Besh] ask about ECB as our new regulator. Specifically, what does it mean in practical terms? First regarding the current dividend restrictions from the Bank of Spain, will those be lifted? And second do we think that the Bank of Spain NPL provisioning calendar will be abandoned?

So the first one, the new era regarding this old supervisor. First of all, we are going to have for the next -- no, maybe two, three, four years to some people working not only in Frankfurt but as well in Spain and with the combination of both teams with one joined supervisor is going to be the way to deal with the new sole supervisor. So for then the most important priorities are two; the first one is to know all of us in-depth, in a very comprehensive way, and the second one is a long process of harmonizing above all the capital consumption, I'm talking about the risk-weighted density of ratios that they are really aware about the big difference among different banks in Europe.

So one is knowledge, what they call normally gut feelings, and the second one is the harmonization process. The second one is the dividend policy. You mentioned Luisa, Bank of Spain, from the next fall of November is going to be, I would say, a partner of this team, big team. So what they are -- what they stated over the last weeks is they are going to analyze again this recommendation rather than a policy in order to see if they want to maintain that policy or to change it in order with the rest of the policies in Europe. So this we don't have still any additional information about that. And the third one maybe Jaime some changes in the NPL policies, so accounting.

Well, I think in general what we will follow is international accounting standards, and those are the ones that more and more will be followed also in Spain.

Okay. Moving on to capital. Thank you. Carlos Peixoto from BPI asks if we could please elaborate on the evaluation of BIS III ratios during the third quarter and what was the fully-loaded core tier 1 ratio as of September?

Okay. The fully-loaded ratio as of September was 10.05%, an increase of 5 basis points during the quarter. That's 15 basis points coming from net earnings. And on the negative side, we have minus 5 basis points coming from DTAs and another 5 basis points coming from increase in risk-weighted assets. The rest are minor impacts.

The same for -- on a phase-in format, we increased our phase-in ratio by 12 basis points to 11.70%. Again, the same 15 basis points coming from net earnings. And in this case the risk-weighted asset increase was only 3 basis and no impact on DTAs.

Thank you. Stefan Nedialkov from City asks if we plan to issue more AT1 or tier 2 capital?

As you know, we have stated that we would like to fill both buckets. The tier 2 bucket is already filled. But of course we will continue issue additional tier 2 taking into account the different majorities, the (inaudible) and liability management exercise that can be done here.

On the AT1 side, we have only filled pretty much half of the bucket, so we still have room there to grow. As you all know, we did the first AT1 January last year and we did another one at the beginning of this year. So, yes, it's our stated intention to issue probably an additional tranche at the beginning of 2015.

Okay. Thank you. Raoul Leonard from Deutsche Bank asks about -- well, let's start with the AT1 question. Can you please tell us how you account for these now? What is the quarterly post-tax charge and is this included in your EPS calculation?

Okay, the AT1s do not affect the P&L and do not affect EPS, okay. They are treated as dividend, okay. So does not affect the numerator nor the denominator on the ratio.

Okay. On the dividend side, (inaudible) brought forward this interim dividend ex-date from January 2015 to December 2014 to maximize shareholder return in 2014 before proposed tax reforms kicking from January 2015. Will BBVA consider similarly moving forward its January 2015 dividend to 2014?

As you know, this is a Board decision and we never comment on Board decisions. But they will decide at the end of the year what they do with it.

Okay. And Britta Schmidt from Autonomous asks a couple of questions. DTAs, do you expect the ECB to take a tougher stance? And she also asks specifically about the other impacts from the fully-loaded core tier 1 mentioned on slide 38 of the presentation that we handed this morning.

Okay. I think we already answered the slide 38 in the previous question. That was a fully-loaded evolution of the quarter.

Regarding DTAs, I think that there is a lot, I guess, of misunderstanding on how DTAs are treated not only in Spain but also in many other jurisdictions. The DTAs that we are accounting, we are accounting as capital are guaranteed by the government. So we should be perfectly comfortable with them. And as you all know, they are not materially significant for our bank. So I think that the ECB should not have any questions on this. If it does, the impact on BBVA will not be material.

Thank you. And the last question on capital from Ignacio Cerezo from Credit Suisse, is adjusting for the acquisition of Catalunya Banc, your fully-loaded core tier 1 would stand at 9.5%. Do you consider that adequate and how much organic build-up do you think can be generated through 2015?

Okay. This consumption again is conservative. I think I have already answered the fair value adjustment question before. Having said that, we have stated that we will like to move to a 10% capital ratio on a fully-loaded basis. We definitely think that we have the capacity and the capability as we have demonstrated in the past to continue to generate organically capital. And I think we have additional levers at our disposal if that doesn't happen. So I think as the stress test has shown, we are an extremely resilient institution with pretty significant capacity in even the worst situations to generate capital on a fully-loaded basis.

Okay. Thank you. We move on now, if you like, to liquidity and ALCO portfolios. Alex Koagne from Natixis asks about TLTROs. Could you share your view on the participation to this operation? How are you going to use the fund? Is all the funding advantage passed through to customers?

I think there is no further information that we can share from what we've already shared in the past. In the September auction, we took EUR2.6 billion, 50% of the amount that we were allowed to. Our expectation -- our initial expectation is to draw the remaining at the end of the year in the December auction.

As we have also stated in the past, we do not expect a significant increase in loan demand by this particular measure. This will happen over time. We have stated that Spain as a whole will increase its total loan demand by roughly EUR50 billion in the next three years. So a loan demand will increase only slowly. In the short time, it will replace other funding sources.

Regarding transferring this lower cost to clients, I think that is already happening. We are seeing little bit of spread tightening in Spain, especially on the SME portfolio and on the mortgage book. So effectively some of this is already taking place.

Thank you. Moving to or -- on liquidity. Again, Carlos Peixoto from BPI asks about an update on our refinancing schedule, current ECB exposure and amount of ECB eligible assets.

Regarding refinancing, we have maturities this quarter of little bit under EUR5 billion. Total maturities in 2014 were a little bit under EUR15 billion. And we do not expect any additional public issuance in the remaining of the year. As you know, this year we have done four transaction, one senior, one cover, one AT1 and one tier 2, totaling roughly EUR5 billion and that was enough to cover all our financial needs as the balance sheet has continue to generate very good liquidity.

In terms of total exposure to the ECB, our TLTRO as I said is EUR2.6 billion. And we do have small amounts on the MRO that changes every week.

Regarding collateral, we have ample collateral. Today we have over EUR60 billion of collateral at our disposal to potentially draw additional ECB funds.

Okay, thank you. We move on now to the questions regarding ALCO. Carlos Peixoto from BPI, Alvaro Serrano of Morgan Stanley and Britta Schmidt from Autonomous asks the following questions.

What is currently the size of the Group's ALCO portfolio and what is the current sovereign holdings? And what was the contribution to net interest income? Also available for sale is up EUR6 billion quarter on quarter. Can you explain what is driving this? What is the size of the ALCO portfolio in Spain and the yield and duration of the portfolio?

Okay. If I don't answer every single question, please let me know, okay. The total size of the ALCO portfolio currently stands EUR37.8 billion, that's an increase of roughly EUR2 billion versus this second quarter. NII contribution is pretty much stable, it hasn't changed significantly in each quarter during the year. In terms of sovereign exposure, it stands at EUR36.3 billion, pretty much the same increase versus the second quarter as we have seen in the total ALCO exposure.

The available for sale increase has -- is mainly related to some forward sales that we have already done, and we wanted to replace some of those forward sales in order to continue to maintain the NII contribution from the portfolio, okay? And I think I have answered everything.

As you know, our -- the philosophy of our ALCO portfolio is to hedge duration and to hedge interest rates in our complete euro balance sheet, okay. That remains so. We must understand that consumer -- sorry, customer funds continue to increase. That's especially true for the check-in accounts, and it's the only way that we have to actually hedge that increase. When things change, ALCO will reflect that change in the business mix.

Okay, thank you very much, Jamie. We move on now to some questions regarding strategy or strategic issues. [Alice Quan] from Natixis and Juan Carlos Calvo from Besh ask what is your view about potential consolidation moves in Spain and/or the rest of Europe now that the stress test results are published and the change in supervisor is now the ECB.

Okay. As we expected before the release of the results in Europe and in particular in Spain, we didn't think it was going to be a trigger of further consolidation in the country. So for us with the covering information on the table right now, our steaming is basically the same. What we think is further consolidation will depend on different things or concepts. Like, for example, the further transformation in this industry needs to receive over time. So we believe you are not going to see any additional consolidation because of these results. And what is important to continue working on the transformation of this industry to raise the profitability ratios of every single financial entity not only in Spain but in Europe as well. So this is going to be most important reason over time to consolidate but not now.

Okay, thank you, Angel. Maybe you can also answer the next question. Britta Schmidt from Autonomous and [Sophie Pattersons] from JPMorgan ask what is the risk to BBVA from the irregularities detected at Catalunya Caixa? Are there sufficient reps and warranties in the SPA?

Of course, of course, these -- all the transactions that have been shared with the judiciary system are fully provisioned on Catalunya Caixa balance sheet and of course we do have sufficient reps and warranties, and these are issues that only affect (inaudible), okay, not BBVA.

And Jamie, the way of analyzing, due diligence we normally do is always done in a very comprehensive way, and what we know is all this potential risk issues from this kind of irregularities are fully provisioned in its balance sheet. We are very confident about their financials.

Thank you very much. We move on now to P&L, to the Group's P&L. The first question is from, well, [Victor Roma] from Goldman Sachs and Rohith Chandra-Rajan from Barclays ask what are the main drivers of operating cost increase? Is it mainly an exchange rate effect arising from appreciation of Mexican peso versus euro, for example?

Operating cost quarter on quarter increased by 4%. Out of that 4%, 1 full percentage point come from FX effect. As you know, emerging market currencies in general is strength during this third quarter, having a positive impact on Group's P&L. Another 1 full percentage point comes from Venezuela, okay, due to mainly in this case hyperinflation. The remaining impact is only 2%, and I think that is not significant. A small increase is in the US as Angel said during the presentation due to the simple acquisition, opening of loan production offices and increase in expenses due to regulatory investments that we had to do.

In the case of Mexico, we have the expansion plan and refurnishment of offices, the new head office plus investment in technology. I think they are -- the expense increase is within the guidance with no significant change. And the overall expenses in Spain only increased by 0.9%. It is true that we have an increase on the personnel expenses side but that's the typical bonus pool adjustment that we periodically do taking into account that results in Spain are behaving much better than what we initially expected.

Just let me add one more thing. Taking about emerging markets, as I mentioned during the presentation was important not to forget is we are managing the cost always having increases even in this region below the revenue trend. So and is what is happening over the all the year. And the other one is the guidance we gave you some quarters ago, this guidance remains the same line, is going to be very close to minus 5% at the end of the year or maybe even little bit better but around that figure regardless of what Jaime said before about the (inaudible), the guidance remains stable.

Okay, thank you. Raoul Leonard from Deutsche Bank asks the following, you have announced cost plans to reduce head office cost by 10% and revenues versus cost just to be positive in all regions going forward. In terms of details, do you expect to close domestic branches significantly? What is your medium-term Group cost income ratio guidance for 2016?

Okay. I think I have answered the cost side in the previous question. As you know we don't give guidance beyond 2014. Regarding domestic branches reduction, here first of all we've always said that we will adapt to whatever our client's needs are in order to maximize customer experience. If clients decide not to go to branches, we will of course follow them and reduce the number. This year we are down by over 90 in Spain. A good portion of them following the synergies stated on the Unnim acquisition.

So going forward, yes, we could potentially see additional decrease in the number of branches, but probably much more important is the format of those branches and what do we do inside them. I think that's the major change that we will see in the future more than the number itself. As you know, the average size of the -- of our branches in Spain is very small, okay, roughly 4.5 employees per branch. So it is not a cost driver as significant as in other geographies.

Thank you. Moving quickly on because we still have a few questions to go. Alvaro Serrano from Morgan Stanley and [Alfredo Alonso] from Kepler ask if we can explain what drives the EUR270 million to EUR290 million P&L charge expected for the fourth quarter as part of the digitalization process.

Well, this is part of the investment we need to do through our P&L account. But the next quarter in order to achieve the savings I mentioned in the presentation, so as part of the restructuring process and is above all to reduce the costs related to the headcounts in the branches as Jaime mentioned before in the headquarter as well, so is the investment we need to do from time to time in order to continue achieving additional savings.

Okay. Thank you. Alfredo Alonso from Kepler Cheuvreux asks what trading income should we expect in the coming quarters?

It's a wonderful question but impossible to answer. It is true that we've seen a slight decrease in the contribution of global markets in this third quarter. A lot is going to depend on volatility. If volatility remains high, I think we have -- remains higher, I think we should have opportunities to generate additional trading income. If it goes the other way, it will be much more challenging.

So just maybe here to add Jaime, our business model in CIB is based on our customer franchise. So it gives us a lot of flexibility and above all stability. So at the end of the day, when you qualify the revenues coming from CIB, corporate investment banking is really stable Brazilian revenues because of this business model.

Okay. Thank you. A couple of last questions on the Group side from Benjie Creelan-Sandford from Macquarie. There was a sharp improvement in negative valuation adjustments in equity this quarter. What was the reason for that?

And another question from Benjie is the return on tangible equity this quarter was below 7%. When do you think you will get back to double-digit returns? And looking two to three years out, what level of profitability do you expect to recover to?

Okay, I'll answer the first question. Yes, it's true, valuation adjustments were increased significantly to EUR1.3 billion. As I said before, the FX had a very positive contribution in this third quarter and that justifies roughly a billion of this amount, almost EUR1.1 billion. And then the rest are unrealized capital gains on the available for-sale portfolios. That includes the sovereign and non-sovereign debt plus our stakes in Telefonica and Citic.

So regarding the second questions, profitability ratios, long-term perspective. We are still with the same approach to this ratio. Our approach in -- over the last quarter is to get this double (inaudible) profitably in the next, over the next two, three years.

Thank you. Moving on to, straight up to Spain, one quick question on the macro side from Britta Schmidt from Autonomous. What does management think will be the end game in Catalunya? How worried are you about the 9N and its implications?

So every time we talk about politics it's really difficult to predict anything. So what we are seeing here is this big room to -- for the understanding among the different players in this game. And then what is very important is the -- what is very important is economics as always in every region and in every country. And this is going to be a part of this necessary understanding. They are going to -- they are working on it for the next weeks or months.

Yes, I think we've also shared this in the past. We need to work with this volatility in the environment. There will be tensions as we approach the 9th of November. But our central scenario is that something workable will be achieved between politicians. And that's our central scenario for this situation.

Yes. And maybe adding additional -- an additional piece of information regarding our operations, our daily business is these days, these weeks, these months it is completely normal. We are recovering some customers Catalunya Caixa lost during the process of being public. So for the customers, for our customers today parts of the needs they need to fill was to have the guarantee of a really -- of a real solvent player as BBVA is. So business activity normal right now.

Thank you, okay. Quite a number of questions on the P&L side and business volumes in Spain. I'll run through all of you who've asked more or less the questions on the top line.

Carlos Peixoto from BPI, Britta Schmidt from Autonomous, Alvaro Serrano from Morgan Stanley, Juan Carlos Calvo from Besh, Alfredo Alonso from Kepler, Rohith Chandra from Barclays, Mario Ropero from Fidentiis, Arturo de Frias from Santander, Stefan Nedialkov from Citi, Sofie Peterzens from JPMorgan, Francisco Raquel from Enemasuno, Andrea Filtri from Mediobanca, Javier Bernat from [Beka] and Robert Noble from RBC and Andres Williams from Mediobanca.

Obviously a lot of interest, a lot of interest on the expected trends in net interest income in Spain. Update on term deposit costs, what level do we think term deposits new business will price in at in the first quarter of 2015. Talking about loan growth, it was weak. Can you give us some color on demand and what the corporate book might do in particularly going forward?

Guidance on volumes growth, SME lending, are you seeing much pricing pressure on SME lending in Spain, and do you expect this to change after the December TLTRO? And how do corporate spreads on new production compare with the back book? So a little bit of net interest income evolution, volumes and spreads on the asset side.

Okay I think the third quarter shows pretty significant increase in NII in Spain. That stands at 3.6%. I think in general income performed well in Spain, taking into account that in the commission line we do have certain seasonality and commissions decrease in the third quarter.

Regarding NII dynamics, I think remain intact from what we've seen in the past. Price management is clearly the biggest driver of NII going forward. We've been able to increase our customer spread by an additional 10 basis points this quarter. We've shown a decrease in the cost of deposits of 13 basis points and a slight spread compression of only 3.

So clearly the third quarter showed continuous strength in the capacity of Spain to manage prices. As we have stated in the September meeting with analyst, we expect these to remain the biggest driver of NII growth going forward. We're seeing front book deposits cost down to 50 basis points, a very significant increase from the 80 somethings that we saw in the second quarter of this year, and the total cost of time deposit is still 140. So the room to go down remains fairly significant.

It is true, and as I said before, that we will continue to face a spread compression on asset side. As I said before, in this quarter, we've seen a spread compression on the SME book by roughly 30 basis points and for the first time slight compression on the mortgage portfolio. Front book mortgages are down 20 basis points from the 245, 43 at the end of second quarter to 222 at the end of the third. The rest of the portfolio, meaning large corporates, public sector and consumer showed a stability during the quarter. Going forward, these trends could continue a slight spread compression, but I think perfectly manageable taking into account the room that we still have to reduce funding cost.

Regarding volumes, I think we have seen a very significant increase during the year in customer funds, that has remained so. This quarter, as you know, the third quarter tends to be less robust than the second in terms of growth, but even that has shown a slight increase of almost EUR1 billion. And probably the key remains loan growth. We are guiding for loan growth to be down year on year roughly at 4%. We expect a slight decrease probably also next year maybe around, I don't know, maybe 1% or 1.5% decrease next year and it will start to grow probably in 2016. Those are the general expectations that we have as of today.

Okay. I'm a little bit conscious of time because we still have a lot of questions to go. So I'm going to try to be more precise or summarize a little bit better all the questions that we have by theme. So Britta Schmidt from Autonomous, Mario Ropero from Fidentiis, Francisco Raquel from Enemasuno, Stefan Nedialkov from Citi, Robert Noble from RBC and [Marta Sanchez] from KBW all ask about commissions. Fees in the third quarter in Spain look weaker than expected. What part is seasonality? What part is underlying trend regarding deleveraging? What do we expect for the year? What do we expect for next year?

I think I have answered. Commissions went down by roughly EUR30 million, exactly the same amount that went down last year in the third quarter from the second quarter. So I don't think there is any significant change in trend here.

Specific question regarding new regulation credit cards in Spain.

Yes, it will have an impact. To new regulations, pension funds limits and credit cards. We are talking here roughly a EUR20 million, EUR25 million yearly impact that we'll start to show specifically in 2015.

Thank you. Mario Ropero from Fidentiis and Alfredo Alonso from Kepler ask about personnel costs increasing when the headcount is actually falling, but I think we have answered this already. So we'll move on to Spain asset quality. Francisco Raquel from Enemasuno, Juan Carlos Calvo from Besh, Rohith Chandra-Rajan from Barclays and Stefan Nedialkov from Citi ask about more details on the additions to NPAs which have resulted in higher loan losses during the third quarter. Can we also explain the jump in write-offs during the third quarter and is this a one-off or does it change our cost risk guidance?

So first of all the NPL evolution in this quarter is not any different what we have seen. Over the last couple of quarter the trend is exactly the same going down over the quarters and here we only have some one-offs in the corporate portfolio. So apart from that, if we exclude the effect of this gross entries to the NPAs, nothing additional important. In terms of the cost of risk and in terms of the level of provisions during the quarter, the effect of all these names, specific names or specific one-offs is around EUR100 million. So when we talk about the guidance for cost of risk for the entire year, we remain in the low part of the guidance. So we think we are going to be just slightly over 100 basis points at the end of the year.

Yes, so as Angel has just said, we do not expect any particular increase in the cost of risk in the fourth quarter from the trend that we've seen in this first three quarters of the year.

Okay. I think actually you've answered Alfredo Alonso's, from Kepler's question about the contribution from one-offs to loan loss provisions and also a little bit of the questions or few of the questions from Carlos Peixoto from BPI, Sophie Pattersons from JPMorgan, Ignacio Cerezo from Credit Suisse and Alvaro Serrano from Morgan Stanley who were asking about the trends in NPLs, cost of risk guidance including real estate, we've answered that.

I think probably prospects about impairments in Spain versus guidance, that's also been answered I think. And I think this one may be which market sectors do you see asset quality pressure and where do you an improving trend?

Okay. I think we have a good news on impairments is -- this third quarter we do not know exactly if this trend is going to be maintained going forward but real estate impairments went down by a third this third quarter. Let's hope it's the beginning of a new trend. What was the question? Sorry.

Sorry. In which market sectors you see asset quality pressure and where do you see an improving trend?

I think we are seeing asset quality improvement in every single segment. The one that took more time to be reflected was on the SME side, which is perfectly understandable taking into account that this segment of the economy is completely driven by internal demand. As internal demand started to increase at the beginning of the year so was the improvement on NPL trends in these segment so improvements in all segments.

Thank you. One question on real estate which is basically an update which Carlos Peixoto from BPI and Britta Schmidt from Autonomous asks regarding asset sales during the quarter if we could provide the numbers in units and millions of euros that were sold during the quarter in -- on the -- on a the real estate portfolio.

Yes, yes. Okay. We saw pretty much the same number of units as we saw on the third quarter of 2013. We're talking 4,600. In terms of volume, it increased significantly. We sold EUR455 million in this third quarter of 2014 versus only EUR324 million last year.

Okay. Now we move on to Mexico. Francisco Raquel] from Enemasuno asks a broader question about Mexico macro, how do we think Mexico will be impacted by the lower oil prices and what type of impact could this have in our banking business.

Yes, it is true that the price of oil is important for Mexico fiscal balance and public expenditure. A $10 decrease in the Mexican basket implies an impact of minus 0.2% of GDP growth in the country. Our expectations is that the US growth dynamics, especially on the Sun Belt and especially in Texas we will be able to compensate any potential decreases in the price of oil. And the fact that reforms are being implemented on time and in a very aggressive fashion gives us a lot of comfort that the 3.5% GDP growth that we expect the country to have next year will be achieved.

Okay, quite a few of you have been asking about the top line growth in Mexico and also on cost in provisions, so I will just go straight through to the questions. Carlos Peixoto from BPI, Alvaro Serrano from Morgan Stanley, Alfredo Alonso from Kepler, Stefan Nedialkov from Citi, Ignacio Cerezo from Credit Suisse, Javier Bernat from Beka, Robert Noble from RBC and [Gowda Jangali] from Sanford Bernstein ask about the net interest income increase quarter on quarter in Mexico, what are our expectations here? Can we provide a little bit of color as to that increase? How much pressure in spreads are we seeing given the low rates in Mexico and overall expectations on net interest income and net interest margin on guidance and volumes growth for the quarter and for next year?

Again, we don't give guidance beyond 2014. And the guidance hasn't changed in Mexico for 2014. Volume growth, and that's true for loans and for customer funds, remain pretty much close to the double digit number that we have guided during the year, a slight decrease in customer funds this quarter. And with what we share, that NII will follow that business growth. So our guidance still remains the same.

Quarter on quarter NII increased by 2% and customer spreads and NIM was roughly the same as in the second quarter of 2014.

Okay. We're talking about snapshots now because we are running out of time. So snapshot on the costs in Mexico, the increase in the quarter and guidance and snapshot on other provisions in Mexico and cost of risk evolution.

I think I have answered costs already. Regarding cost of risk, down to 3.2, guidance remain the same, 3.5.

Okay, South America. Marta Sanchez from KBW asks about volume growth prospects in LATAM going forward. Concerns about macros trends in China slowdown, does it affect our Latin American prospects.

Snapshot again, volume growth around 25% if we include Venezuela. Without Venezuela roughly 16%. Remain strong. True that GDP numbers are being revised down in many countries. And that's especially true in Argentina and Venezuela going forward.

Alvaro Serrano of Morgan Stanley asks about book values of Argentina and Venezuela.

Argentina, EUR670 million. Venezuela, 1.387.

Okay. Mario Ropero from Fidentiis asks about if we can comment on the quarterly evolution of NII in Latin America and do we see any changes there from what we expected in the different countries, in constant terms what we're seeing there.

I think in general a slight spread compression in Latin America, during this quarter volume remains strong, no change in guidance.

Okay, Venezuela. Carlos Peixoto from BPI and Sophie Pattersons from JPMorgan asks about the amount of the hyper inflation adjustment that we booked this quarter, if we can let them know what the amount was for this quarter. Rohith Chandra from Barclays asks, if we see the earnings outlook in terms of underlined performance, how do we see the underlying performance of Venezuela and what are we seeing on hyperinflation and currency evolution. And Andrea Filtri from Mediobanca is asking about the impact on -- of Venezuela in the third quarter P&L which is basically more or less the same.

Okay, let me remind everybody that the guidance that we gave for net (inaudible) for Venezuela in current terms during the year was minus 50%. We are at minus 48% in this third quarter year to date versus last year. So we are exactly within the guidance. EBIT inflation adjustment in net attributable increased year-to-date by EUR110 million versus 2013. The total adjustments in net attributable was EUR212 million as of the end of the third quarter.

The US, Stefan Nedialkov from Citi is asking about the quarter-on-quarter increase in costs, how much of that was due to simple, and he is also asking about the outlook for loan growth in 2015 for Compass. And Andres Williams from Mediobanca is asking about the impact of a rate increase on BBVA's US business, so that's the rate increase impact and on the cost side and loan growth in 2015.

I think I have already answered the cost side. Loan growth should remain strong. It is growing at mid-teens, around 15%, almost 15%, that should remain strong going forward. We have a positive sensitivity to an increase on interest rates. Every 100 basis points increase in interest rates will increase our NII by roughly 6.5% in the US.

Okay. And last but not least corporate center, Alvaro Serrano from Morgan Stanley is asking about the EUR165 million other provision in the corporate center in the third quarter, what was that related to. I think it's part of the cost restructuring that we had. But anyway he is asking about the other provisions in the corporate center.

And Raoul Leonard from Deutsche Bank and Mario Ropero from Fidentiis are asking or stating another volatile quarter from gross income and jumping costs. Is the drag from the corporate center one-offs or structural? And I think again the dividends here also play a little bit of quarter-on-quarter difficult comparison.

And then Francisco Raquel from Enemasuno is asking in the second quarter conference call your guidance of losses in the corporate center of between EUR1 billion and EUR1.2 billion in the full year versus EUR1.2 billion losses reported in 9 months. Can you please update the guidance and the main drivers of NII losses for this unit?

Yes, I think the biggest deterioration in this quarter versus the last is the restructuring cost that also affects the corporate center. As Angel said, we are looking to decrease the corporate centers in general at 10% in every geography. Second, we do not have the Telefonica dividend in this third quarter versus the second. It is true that we are going to be a little bit above the range that we have shared with the market in the second quarter and it should be closer, a little bit above EUR1.3 billion, the impact on -- of the corporate center in this 2014.

Okay. Thank you very much. I think that concludes the Q&A session. I truly apologize for having run a little bit on the questions at the end and maybe not having been able to state all your names that were behind the questions. And again, the IR team is available throughout the day of course to answer any remaining questions that are outstanding. And once again, thank you Angel, thank you Jaime for the presentation.

Thank you all, following us.

Thank you.